NORTHWEST AIRLINES CORP - 10-K Annual Report

NORTHWEST AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

The aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 30, 2004 was $928 million.

As of January 30, 2004, there were 86,106,532 shares of the registrant's Common Stock outstanding.

Part III of this Form 10-K incorporates by reference certain information from the registrant's Proxy Statement for its Annual Meeting of Stockholders to be held on April 23, 2004.

Northwest Airlines Corporation ("NWA Corp." and, together with its subsidiaries, the "Company") is the indirect parent corporation of Northwest Airlines, Inc. ("Northwest"). Northwest operates the world's fourth largest airline, as measured by revenue passenger miles ("RPMs"), and is engaged in the business of transporting passengers and cargo. Northwest began operations in 1926. Northwest's business focuses on the development of a global airline network through its strategic assets that include:

Northwest has developed strategies that are designed to utilize these assets to the Company's competitive advantage.

The Company maintains a Web site at http://www.nwa.com. Information contained on the Company's website is not incorporated into this annual report on Form 10-K. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports and other information about the Company are available free of charge through its Web site at http://ir.nwa.com as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission.

See "Item 1. Business—Risk Factors Related to Northwest and the Airline Industry" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview" for a discussion of trends and factors affecting the Company and the airline industry. The Company is managed as one cohesive business unit. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 15—Segment Information".

Northwest operates substantial domestic and international route networks and directly serves more than 158 cities in 24 countries in North America, Asia and Europe.

Northwest operates its domestic system through its hubs at Detroit, Minneapolis/St. Paul and Memphis.

Detroit. Detroit is the ninth largest origination/destination hub in the U.S. Northwest and its Airlink carriers together serve over 143 cities from Detroit. For the six months ended June 30, 2003, they enplaned 58% of originating passengers from Detroit, while the next largest competitor enplaned 13%.

Minneapolis/St. Paul. Minneapolis/St. Paul is the eighth largest origination/destination hub in the U.S. Northwest and its Airlink carriers together serve over 156 cities from Minneapolis/St. Paul. For the six months ended June 30, 2003, they enplaned 65% of originating passengers from Minneapolis/St. Paul, while the next largest competitor enplaned 7%.

Memphis. Memphis is the nineteenth largest origination/destination hub in the U.S. Northwest and its Airlink carriers together serve 88 cities from Memphis. For the six months ended June 30, 2003, they enplaned 60% of originating passengers from Memphis, while the next largest competitor enplaned 16%.

Northwest operates international flights to the Pacific and/or the Atlantic regions from its Detroit, Minneapolis/St. Paul and Memphis hubs, as well as from gateway cities such as Boston, Honolulu, Los Angeles, New York, San Francisco and Seattle. International flights to the Pacific from Portland are scheduled to begin in June 2004.

Pacific. Northwest has served the Pacific market since 1947 and has one of the world's largest Pacific route networks. Northwest's Pacific operations are concentrated at Narita International Airport in Tokyo, where it has 358 permanent weekly takeoff and landing slots, the most for any non-Japanese carrier. As a result of a 1947 U.S.-Japan bilateral aviation agreement, Northwest has the right to operate unlimited frequencies between any point in the U.S. and Japan as well as extensive "fifth freedom" rights. "Fifth freedom" rights allow Northwest to operate service from any gateway in Japan to points beyond Japan and to carry Japanese originating passengers. Northwest and United Airlines, Inc. ("United") are the only U.S. passenger carriers that have "fifth freedom" rights from Japan. Northwest uses these slots and rights to operate a network linking seven U.S. gateways and twelve Asian destinations via Tokyo. The Asian destinations include Bangkok, Beijing, Busan, Guam, Hong Kong, Manila, Nagoya, Saipan, Seoul, Shanghai, Singapore and Taipei.

Atlantic. Northwest and KLM operate an extensive trans-Atlantic network pursuant to a commercial and operational joint venture. This joint venture benefits from having antitrust immunity, which allows for coordinated pricing, scheduling, product development and marketing. In 1992, the U.S. and the Netherlands entered into an "open-skies" bilateral aviation treaty, which authorizes the airlines of each country to provide international air transportation between any U.S.-Netherlands city pair and to operate connecting service to destinations in other countries. Northwest and KLM operate joint service between 17 cities in the U.S., Canada and Mexico and Amsterdam, and between Amsterdam and India. Codesharing between Northwest and KLM has been implemented on flights to 57 European, six Middle Eastern, nine African, three Asian and approximately 173 U.S. cities. Codesharing is an agreement whereby an airline's flights can be marketed under the two-letter designator code of another airline, thereby allowing the two carriers to provide joint service with one aircraft. After September 2007, a three-year notice is required to terminate the joint venture.

See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 15—Segment Information" for a discussion of Northwest's operations by geographic region.

In addition to its trans-Atlantic alliance with KLM, Northwest has strengthened its network through other alliance partnerships. Long-term alliances are the most effective way for Northwest to enter markets that it would not be able to serve alone. Alliance relationships can include codesharing, reciprocal frequent flyer programs, "through" luggage check-in, reciprocal airport lounge access, joint marketing, sharing of airport facilities and joint procurement of certain goods and services. Northwest

and its alliance partners currently provide a global network to over 750 cities in 120 countries on six continents.

In August 2002, the Company announced that it had signed a cooperative marketing agreement with Continental and Delta. This agreement is designed to connect the three carriers' domestic and international networks and provide for codesharing, reciprocity of frequent flyer programs, airport club use and other cooperative activities. Northwest, Continental and Delta received approval of the agreement from the U.S. Department of Justice ("DOJ") and the Department of Transportation ("DOT") in the first quarter of 2003. The three airlines began implementing the agreement in June 2003 by offering access to each other's airport lounges and commencing codeshare service. Beginning in July 2003, frequent flyer members of the three airlines were able to use a single award to book and redeem miles for itineraries that include any combination of Northwest, Continental and Delta operated flights. In the fourth quarter of 2003, Northwest and Delta expanded their codesharing to 650 daily domestic flights operated by each carrier, the maximum permitted by the DOT as of that time. In June 2004, the next phase may be implemented by adding code sharing on another 650 daily domestic flights. The combined network has increased Northwest's presence in the South, East and Mountain West regions of the U.S., as well as in Latin America.

In September 2003, KLM announced that it would enter into an agreement with Air France to form a strategic business partnership, which would create Europe's largest airline group and unite the two carriers under the same corporate holding company. In February 2004, the European Union antitrust investigators gave their conditional approval of this merger. The KLM-Northwest trans-Atlantic joint venture will remain in place pursuant to their alliance agreement. It is anticipated that KLM will join the SkyTeam global alliance (of which Air France and Delta are the founding members) in the spring of 2004. Northwest also expects to join the SkyTeam alliance in 2004.

Northwest also has domestic frequent flyer and codesharing agreements with several other airlines including Alaska/Horizon Airlines, Hawaiian Airlines, America West Airlines and American Eagle.

In the Pacific, Northwest has frequent flyer agreements with Malaysia Airlines, Japan Airlines, Jet Airways of India, Garuda Indonesia, Cebu Pacific Airlines and Pacific Island Aviation.

In addition to its extensive relationship with KLM in the Atlantic, Northwest has reciprocal frequent flyer programs with Air Alps Aviation, KLM cityhopper and KLM exel, Air Europa, Kenya Airways and Malev Hungarian Airlines.

Northwest has exclusive marketing agreements with two regional carriers: Pinnacle Airlines and Mesaba. Under the agreements, these regional carriers operate their flights under the Northwest "NW" code and operate as Northwest Airlink. The purpose of these marketing agreements is to provide service to small cities and more frequent service to larger cities, increasing connecting traffic at Northwest's domestic hubs. The agreements with Pinnacle Airlines and Mesaba are capacity purchase arrangements. Under these arrangements, Northwest controls the scheduling, pricing, reservations, ticketing and seat inventories for Pinnacle Airlines and Mesaba flights. Northwest is generally entitled to all ticket, cargo and mail revenues associated with these flights. The regional carriers are paid based on operations for certain expenses and receive reimbursement for other expenses.

Pinnacle Airlines. Pinnacle Airlines offers scheduled passenger service to over 80 cities. In 2003, 25 Bombardier Canadian Regional Jet ("CRJ") aircraft were leased to Pinnacle Airlines, bringing the total number of CRJ aircraft in Pinnacle Airlines' operations to 76. All of the CRJ aircraft are leased from Northwest. Northwest has agreed to lease an additional 53 CRJs to increase Pinnacle Airlines' fleet to 129 CRJs by December 31, 2005.

As of September 30, 2003, Northwest had contributed 88.6% of the common stock of Pinnacle Airlines Corp., the holding company of Pinnacle Airlines, to the Company's pension plans in lieu of required cash contributions pursuant to an exemption granted by the U.S. Department of Labor ("DOL"). On November 24, 2003, the Pinnacle Airlines Corp. shares held by the plans were sold in an initial public offering ("IPO"), with the proceeds being retained by the plans. The Company continues to hold the remaining 11.4% interest in Pinnacle Airlines Corp. At the time of the offering, the Company and Pinnacle Airlines agreed to extend the term of the airlines services agreement ("ASA") through December 2017.

Mesaba. Mesaba offers scheduled passenger service to 112 cities. The Company owns 27.8% of the common stock of MAIR Holdings, Inc. ("MAIR"), the holding company of Mesaba. The Company also has approximately four million warrants to acquire additional MAIR common stock, of which 22% were in-the-money as of December 31, 2003. Mesaba operates a fleet of 99 regional jet and turbo-prop aircraft, which includes 35 AVRO RJ85 aircraft and 49 SAAB 340 aircraft leased or subleased from Northwest.

See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 13—Related Party Transactions" regarding the Company's transactions with Pinnacle Airlines and Mesaba.

The Company is the largest cargo carrier among U.S. passenger airlines based on revenue and the only one to operate a dedicated freighter fleet. In 2003, cargo accounted for 7.9% of the Company's operating revenues, with approximately 77% of its cargo revenues resulting from cargo originating in or destined for Asia. Through its cargo hubs in Anchorage and Tokyo, the Company serves most major air freight markets between the U.S. and Asia with a fleet of 12 Boeing 747-200 freighter aircraft. In addition to revenues earned from the dedicated freighter fleet, the Company also generates cargo revenues in domestic and international markets through the use of excess cargo space on its passenger aircraft.

Northwest is able to participate in the high yield, small package "express" business by providing airlift for cargo integrators in its extensive network across the Pacific. In 2001, the Company entered into a five-year capacity purchase agreement with DHL Worldwide Express ("DHL") for daily freighter service from DHL's U.S. hub operations in Cincinnati to various points in Asia. In 2000, Northwest and Japan Airlines entered into a cargo alliance under which Northwest and Japan Airlines codeshare on certain routes between the U.S. and Japan.

MLT Inc. MLT Inc. ("MLT"), an indirect wholly owned subsidiary of NWA Corp., is among the largest vacation wholesale companies in the United States. MLT develops and markets Worry-Free Vacations that include air transportation, hotel accommodations and car rentals. In addition to its Worry-Free Vacations charter programs, MLT markets and supports Northwest's WorldVacations travel packages to destinations throughout the U.S., Canada, Mexico, the Caribbean, Europe and Asia, primarily on Northwest. These vacation programs, in addition to providing a competitive and quality tour product, increase the sale of Northwest services and promote and support new and existing Northwest destinations. In 2003, MLT had $451 million in revenues.

Orbitz. Orbitz, Inc. ("Orbitz") allows travelers to purchase airline, hotel, car rental and other travel related services online. The Orbitz website provides a comprehensive selection of online airfares, including Internet-only fares and other travel information and customer features. On December 16, 2003, Orbitz and its airline owners (Northwest, Continental, Delta, United and American Airlines, Inc. ("American")) sold approximately 12 million Orbitz shares through an initial public offering, which

included 9.7% of Northwest's total holdings. The Company continues to hold approximately 12% of the outstanding shares representing a 17% voting interest in Orbitz.

WORLDSPAN. WORLDSPAN L.P. ("WorldSpan") operates and markets a global computer reservations and passenger processing system ("CRS"). A CRS is used by travel agents, corporate accounts and Internet customers to make airline, hotel, car and other travel reservations and to issue airline tickets. On June 30, 2003, the Company together with the other owners (American and Delta) sold WorldSpan to Travel Transaction Processing Corporation, an entity formed by Citigroup Venture Capital Equity Partners L.P. and Teachers' Merchant Bank. In the sale, the Company sold its 33.7% partnership interest in WorldSpan. Northwest has agreed to continue to purchase internal reservation services from WorldSpan.

Frequent Flyer Program. Northwest operates a frequent flyer marketing program known as "WorldPerks", under which mileage credits are earned by flying on Northwest or its alliance partners and by using the services of participating credit card issuing banks, hotels, phone companies, car rental firms and other partners. Northwest sells mileage credits to the other companies participating in the program. WorldPerks is designed to retain and increase frequent traveler loyalty by offering incentives for their continued patronage.

Under the WorldPerks program, miles earned are accumulated in an account for each member and do not expire. Mileage credits can be redeemed for free or upgraded travel on Northwest and other participating airlines or for other travel industry awards. WorldPerks is structured as a three-tier elite incentive and reward program.

General. The Airline Deregulation Act of 1978, as amended, eliminated domestic economic regulation of passenger and freight air transportation in many regards. Nevertheless, the industry remains regulated in a number of areas. The DOT has jurisdiction over international route authorities and various consumer protection matters, such as advertising, denied boarding compensation and baggage liability. Northwest is subject to regulations of the DOT and the Federal Aviation Administration ("FAA") because it holds certificates of public convenience and necessity, air carrier operating certificates and other authority granted by those agencies. The FAA regulates flight operations, including air space control and aircraft standards, maintenance, ground facilities, transportation of hazardous materials and other technical matters. The DOJ has jurisdiction over airline competition matters, including mergers and acquisitions, under the federal antitrust laws. The Transportation Security Administration ("TSA") regulates airline and airport security. Other federal agencies have jurisdiction over postal operations, use of radio facilities by aircraft and certain other aspects of Northwest's operations.

International Service. Northwest operates its international routes under route certificates and other authorities issued by the DOT. Many of Northwest's international route certificates are permanent and do not require renewal by the DOT. Certain other international route certificates and other authorities are temporary and subject to periodic renewal. Northwest requests renewals of these certificates and other authorities when and as appropriate. The DOT typically renews temporary authorities on routes when the authorized carrier is providing a reasonable level of service. With respect to foreign air transportation, the DOT must approve agreements between air carriers, including codesharing agreements, and may grant antitrust immunity for those agreements in some situations.

Northwest's rights to operate to foreign countries, including Japan, China and other countries in Asia and Europe, are governed by aviation agreements between the U.S. and the respective foreign countries. Many aviation agreements permit an unlimited number of carriers to operate between the U.S. and the relevant foreign country, while others limit the number of carriers and flights on a given

international route. From time to time, the U.S. or its foreign country counterpart may seek to renegotiate or cancel an aviation agreement. In the event an aviation agreement is amended or canceled, such a change could adversely affect Northwest's ability to maintain or expand air service to the relevant foreign country.

Operations to and from foreign countries are subject to the applicable laws and regulations of those countries. There are restrictions on the number and timing of operations at certain international airports served by Northwest, including Tokyo. Additionally, slots for international flights are subject to certain restrictions on use and transfer.

Airport Security. The TSA regulates civil aviation security under the Aviation and Transportation Security Act ("Aviation Security Act"). This law federalized substantially all aspects of civil aviation security and requires, among other things, the implementation of certain security measures by airlines and airports, such as the requirement that all passenger bags be screened for explosives. Since the events of September 11, 2001, Congress has mandated, and the TSA has implemented, numerous security procedures that have imposed and will continue to impose additional compliance responsibilities and costs on airlines. Funding for airline and airport security under the law is provided in part by a $2.50 per segment passenger security fee, subject to a limit of $10 per roundtrip. However, the Company is responsible for costs in excess of this fee, which through September 2004 cannot exceed the Company's 2000 passenger security screening expense level.

On April 16, 2003, the President signed into law the Emergency Wartime Supplemental Appropriations Act ("Wartime Act"). The Wartime Act included, among other items, a $2.30 billion cash reimbursement to U.S. airlines for security fees previously remitted to the TSA and $100 million for reimbursement of the costs of aircraft cockpit door reinforcement incurred since the 2001 terrorist attacks. The Company received $209 million for reimbursement of security fees in May 2003, which was recorded as other income, and $11 million for direct costs of cockpit door reinforcement, which was recorded as a reduction to the previously capitalized property account. Retention of these funds requires compliance with provisions in the Wartime Act, including certain limitations on executive compensation. The Wartime Act also suspended collection of security fees for the period from June 1, 2003 through September 30, 2003, after which these fees were reinstated.

Airport Access. Four of the nation's airports, Chicago O'Hare, New York (La Guardia and Kennedy International) and Washington, D.C. (Ronald Reagan National), have been designated by the FAA as "high density traffic airports", and the number of takeoffs and landings at such airports ("slots") have been limited during certain peak demand time periods. Currently, the FAA permits the buying, selling, trading or leasing of these slots, subject to certain restrictions. Legislation passed in March 2000 resulted in the elimination of slot restrictions at Chicago O'Hare on July 1, 2002 and will do so at New York (LaGuardia and Kennedy International) on January 1, 2007. The Company believes these changes will not have a material adverse impact on its operations or operating results.

Labor. The Railway Labor Act ("RLA") governs the labor relations of employers and employees engaged in the airline industry. Comprehensive provisions are set forth in the RLA establishing the right of airline employees to organize and bargain collectively along craft or class lines and imposing a duty upon air carriers and their employees to exert every reasonable effort to make and maintain collective bargaining agreements. The RLA contains detailed procedures that must be exhausted before a lawful work stoppage may occur. Pursuant to the RLA, Northwest has collective bargaining agreements with seven domestic unions representing 11 separate employee groups. In addition, Northwest has agreements with four unions representing its employees in countries throughout Asia. These agreements are not subject to the RLA, although Northwest is subject to local labor laws.

Noise Abatement. The Airport Noise and Capacity Act of 1990 ("ANCA") recognizes the right of airport operators with special noise problems to implement local noise abatement procedures as long as

such procedures do not interfere unreasonably with the interstate and foreign commerce of the national air transportation system. As a result of litigation and pressure from airport area residents, airport operators have taken local actions over the years to reduce aircraft noise. These actions include restrictions on night operations, restrictions on frequency of aircraft operations and various other procedures for noise abatement. While Northwest has sufficient operational and scheduling flexibility to accommodate current local noise restrictions, its operations could be adversely affected if locally imposed regulations become more restrictive or widespread.

Under the direction of the International Civil Aviation Organization ("ICAO"), world governments, including the U.S., have under consideration creation of a more stringent aircraft noise certification standard than that contained in the ANCA. A new ICAO noise standard was adopted in 2001 that established more stringent noise requirements for newly manufactured aircraft after January 1, 2006. As adopted, the new rule is not accompanied by a mandatory phase-out of in-service Chapter 3 aircraft, including certain aircraft operated by Northwest. FAA reauthorization legislation, known as "Vision 100—Century of Aviation Reauthorization Act" and signed into law by the President on December 12, 2003, requires the FAA, by April 1, 2005, to issue regulations implementing Chapter 4 noise standards consistent with ICAO recommendations. The FAA has issued a proposed rule that would implement such standards.

Safety. The FAA has jurisdiction over aircraft maintenance and operations, including equipment, dispatch, communications, training, flight personnel and other matters affecting air safety. To ensure compliance with its regulations, the FAA requires all U.S. airlines to obtain operating, airworthiness and other certificates, which are subject to suspension or revocation for cause.

Under FAA regulations, the Company has established, and the FAA has approved, a maintenance program for each type of aircraft operated by the Company. The program provides for the ongoing maintenance of the Company's aircraft, ranging from frequent routine inspections to major overhauls. The Company's aircraft require various levels of maintenance or "checks" and periodically undergo complete overhauls. Maintenance programs are monitored closely by the FAA, with FAA representatives routinely present at the Company's maintenance facilities. The FAA issues Airworthiness Directives ("ADs"), which mandate changes to an air carrier's maintenance program. These ADs (which include requirements for structural modifications to certain aircraft) are issued to ensure that the nation's transport aircraft fleet remains airworthy. The Company is currently, and expects to remain, in compliance with all applicable requirements under all ADs and the FAA approved maintenance program for each fleet type.

A combination of FAA and Occupational Safety and Health Administration regulations on both the federal and state levels apply to all of Northwest's ground-based operations in the United States.

Environmental. The Company is subject to regulation under various environmental laws and regulations, including the Clean Air Act, the Clean Water Act and Comprehensive Environmental Response, Compensation and Liability Act of 1980. In addition, many state and local governments have adopted environmental laws and regulations to which the Company's operations are subject. Environmental laws and regulations are administered by numerous federal and state agencies.

In February 1998, the Environmental Protection Agency ("EPA") and the FAA signed a Memorandum of Agreement ("MOA") to develop a voluntary process with the airline industry to reduce aircraft engine emissions. The MOA includes a proposal for a voluntary engine retrofit program to reduce such emissions. As a result of the MOA, air carriers, the EPA, the FAA and local and state regulators have had discussions regarding the scope and content of a voluntary emissions reduction program. To date, these discussions have not resulted in an agreed upon program.

Northwest, along with other airlines, has been identified as a potentially responsible party at various environmental sites. Management believes that Northwest's share of liability for the cost of the remediation of these sites, if any, will not have a material adverse effect on the Company's financial statements.

Civil Reserve Air Fleet Program. Northwest renewed its participation in the Civil Reserve Air Fleet Program ("CRAF"), pursuant to which Northwest has agreed to make available, during the period beginning October 1, 2003 and ending September 30, 2004, 28 Boeing 747-200/400 passenger aircraft, 21 DC10-30 passenger aircraft, five Airbus A330-300 passenger aircraft and 12 Boeing 747-200 freighter aircraft for use by the U.S. military under certain stages of readiness related to national emergencies. The program is a standby arrangement that allows the U.S. Department of Defense Air Mobility Command, headquartered at Scott Air Force Base in Illinois, to call on some or all of these 66 contractually committed Northwest aircraft and their crews to supplement military airlift capabilities.

On February 8, 2003, the U.S. Secretary of Defense authorized a "Stage 1" mobilization of the Civil Reserve Air Fleet, the lowest activation level. As a result of that activation, Northwest made available four Boeing 747-200 passenger aircraft for use by the military. No Northwest cargo aircraft were used during the activation. The Stage 1 activation was formally terminated on June 17, 2003.

The airline industry is intensely competitive. Our competitors include other major domestic airlines as well as foreign, regional and new entrant airlines, some of which have more financial resources or lower cost structures than ours. In most of our markets we compete with at least one of these carriers. Our revenues are sensitive to numerous factors, and the actions of other carriers in the areas of pricing, scheduling and promotions can have a substantial adverse impact on overall industry revenues. Such factors may become even more significant in periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to achieve near-term survival rather than long-term viability.

Industry revenues have declined significantly and we continue to experience significant operating losses.

Since 2001, the U.S. airline industry overall has suffered a substantial reduction in revenues, both on an absolute basis and relative to historical trends. Our annual operating revenue has declined in each of the last three years and our 2003 operating revenue was over $1.7 billion less than it was in 2000. As a result, we have incurred significant operating losses, and absent unusual items, our pre-tax losses over that period have totaled nearly $2.2 billion. We do not anticipate that the revenue environment for us will materially improve in 2004. Due to the discretionary nature of business and personal travel spending, U.S. airline revenues are heavily influenced by the strength of the U.S. economy, other regional world economies and corporate profitability. The revenue decline has been due in part to the U.S. economic cycle. However, permanent structural differences in the industry revenue environment have also taken place. These differences are the result of a number of factors.

The rapid growth of low cost airlines has had a profound impact on industry revenues. Using the advantage of low unit costs, driven in large part by lower labor costs, these carriers are able to operate profitably while offering substantially lower fares. By targeting such fares at business passengers in particular, these carriers are shifting demand away from the larger, more established airlines. These low cost carriers now transport more than 25% of all domestic U.S. passengers, compared to less than 10% a decade ago. They now compete for, and thus influence industry pricing on, approximately 75% of all domestic U.S. passenger ticket sales, versus less than 20% a decade ago. Moreover, as a result of their better financial performance, low cost carriers have the resources necessary to continue to increase their market share. Industry revenue could be reduced substantially in the event one or more large

network carriers decides it is a better long-term strategy to adopt a broad pricing structure similar to those employed by low cost carriers rather than give up additional market share.

Internet travel Web sites have driven significant distribution cost savings for airlines, but have also allowed consumers to become more efficient at finding lower fare alternatives than in the past by providing them with more powerful pricing information. The increased price consciousness of both business and leisure travelers, as well as the growth in new distribution channels, has further motivated airlines to price aggressively to gain fare and market share advantages. These factors will increase over time as Internet ticket sales increase.

Airlines are among the most heavily taxed of all U.S. companies. Taxes and fees can add up to approximately 25% of what a passenger pays for an average roundtrip domestic airline ticket, a percentage even greater than that for alcohol and tobacco products. These taxes and fees have grown significantly in the past decade. We believe that every dollar of tax or fee increase imposed on airline passengers roughly translates into a dollar of reduced airline revenue.

The attacks of September 11, 2001 materially impacted air travel and, with concerns about further terrorist attacks unlikely to abate any time soon, continue to have a negative effect on travel demand. Additionally, security procedures introduced at airports since the attacks have increased the inconvenience of flying, both in reality and in perception, and thus have further reduced demand.

Global events further exacerbated the decline in airline industry revenue in 2003. The war in Iraq and its aftermath and the outbreak of Severe Acute Respiratory Syndrome ("SARS") have materially affected airline bookings and continue to negatively impact air travel, particularly on international routes. Another outbreak of SARS or other influenza-type illness, if it were to persist for an extended period, could materially affect the airline industry by reducing revenues and impacting travel behavior, especially on routes to and from certain Asian destinations.

Due to industry seasonality, operating results for any interim periods are not necessarily indicative of those for the entire year.

The airline industry is seasonal in nature. Due to seasonal fluctuations, our operating results for any interim period are not necessarily indicative of those for the entire year. Our second and third quarter operating results have historically been more favorable due to increased leisure travel on domestic and international routes during the summer months.

Since September 11, 2001 several air carriers have sought to reorganize under Chapter 11 of the United States Bankruptcy Code, including United Airlines, Inc., the second largest domestic air carrier. Successful completion of such reorganizations could present us with competitors having reduced levels of indebtedness and significantly lower operating costs derived from labor, supply and financing contracts that were renegotiated under the protections of the Bankruptcy Code. In addition, air carriers involved in reorganizations historically have undertaken substantial fare discounting in order to maintain cash flows and to enhance continued customer loyalty. Such fare discounting could further lower yields for all carriers.

Labor has always been a critical issue for major airlines. Most major airlines are heavily unionized, and we are no exception, with more than 90% of our employees represented by unions. Many older airlines, including us, conducted contract negotiations with the unions over several decades in a regulated airline environment in which there was little competition and costs were passed through to passengers. This has resulted in wage scales that are significantly higher, productivity that is much lower, and defined benefit retirement plans that are much more generous than those found at low cost

carriers. In addition, over time, airline unions have negotiated restrictive scope clauses that can severely limit an airline's ability to pursue market-driven adjustments.

The rapid growth of low cost carriers in recent years has made labor an even bigger issue for older airlines. Less encumbered by legacy collective bargaining agreements and more able to establish costs based on market factors, the low cost carriers have unit labor costs that are up to 50% below those for older, pre-deregulation airlines. Given that labor is our largest cost by a wide margin, representing roughly 40% of total operating expenses, a labor advantage of up to 50% translates to a significant overall cost advantage. This is particularly powerful in a business where the product is largely viewed as a commodity and pricing information has rapidly become transparent to customers via the Internet.

Low cost carriers have used their cost advantage to offer significantly lower unrestricted fares than older airlines, thus shifting a considerable share of lucrative business passengers to their flights. The combination of lower costs and an increasing mix of business passengers allows low cost carriers to be profitable and thrive at the same time that older, pre-deregulation airlines suffer financially. Moreover, the current cost advantage of low cost carriers is not likely to be diminished by a large growth in their costs. Having seen the failures of new entrant airlines from the past, they have been diligent in keeping their labor costs contained. New entrant airlines have an abundant supply of qualified employees available at significantly lower wages and benefits and with less stringent work rules than us.

The labor cost disparity versus low cost carriers forced US Airways, United Airlines and American Airlines to restructure their labor costs through negotiations with their unions in the past year. The successful lowering of labor costs at these airlines has placed even more pressure on us. Not only do low cost carriers have labor cost advantages compared to us, most of our largest competitors now do as well. We have been in discussions with our labor groups over the past year, seeking to obtain competitive wage scales, work rules and benefit plans. The experiences of US Airways, United Airlines and American Airlines demonstrate that, despite widespread recognition that a fundamental cost problem exists and thousands of jobs are threatened, achieving negotiated labor cost reductions is difficult and can come with high risk. US Airways and United Airlines were only able to achieve labor cost savings through bankruptcy reorganizations. Accordingly, we cannot predict the outcome of our labor negotiations at this time.

As of December 31, 2003, we had approximately 39,100 full-time equivalent employees, of whom approximately 2,100 were foreign nationals working primarily in Asia. Collective bargaining agreements provide standards for wages, hours of work, working conditions, settlement of disputes and other matters. The major agreements with domestic employees became amendable or will become amendable as follows:

Employee Group	Approximate Number of Full-time Equivalent Employees Covered	Union	Amendable Date
Pilots	5,100	Air Line Pilots Association, International ("ALPA")	9/13/03
Agents and Clerks	8,800	International Association of Machinists & Aerospace Workers ("IAM")	2/25/03
Equipment Service Employees and Stock Clerks	6,000	International Association of Machinists & Aerospace Workers ("IAM")	2/25/03
Flight Attendants	8,500	Professional Flight Attendants Association ("PFAA")	5/30/05
Mechanics and Related Employees	5,700	Aircraft Mechanics Fraternal Association ("AMFA")	5/11/05

On July 23, 2003, we commenced negotiations with the ALPA on a new contract. We have also entered into mediation with the IAM under the supervision of the National Mediation Board as we seek agreement on a new contract.

Changes in government regulations could increase our operating costs and limit our ability to conduct our business.

Airlines are subject to extensive regulatory requirements in the U.S. and internationally. In the last several years, Congress has passed laws, and the FAA has issued a number of maintenance directives and other operating regulations, that impose substantial costs on airlines. Additional laws, regulations, taxes and airport charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce revenues. Congress and the DOT have also proposed regulating airlines' responses to their competitors' activities. The ability of U.S. carriers to operate international routes is subject to change because the applicable arrangements between the U.S. and foreign governments may be amended from time to time, or because appropriate slots or facilities may not be available. We cannot give assurance that laws or regulations enacted in the future will not adversely affect the industry.

Because fuel costs are a significant portion of our operating costs (14.5% for 2003), substantial changes in fuel costs would materially affect our operating results. Fuel prices continue to be susceptible to, among other factors, political unrest in various parts of the world, Organization of Petroleum Exporting Countries ("OPEC") policy, the rapid growth of economies such as China, the levels of inventory carried by industries, the amounts of reserves built by governments, disruptions to production and refining facilities and weather. These and other factors that affect the global supply and demand for aircraft fuel may affect our financial performance, which can be highly sensitive to fuel prices. A one-cent change in the cost of a gallon of fuel (based on 2003 consumption) would impact operating expenses by approximately $1.5 million per month. Changes in fuel prices may have a greater impact on us than some of our competitors because of the composition of our fleet. From time to time, we hedge some of our future fuel purchases to protect against potential spikes in price. However, these hedging strategies may not always be effective.

Our insurance costs have increased substantially and further increases could harm our business.

Following September 11, 2001, aviation insurers significantly increased airline insurance premiums and reduced the maximum amount of coverage available to airlines for certain types of claims. Our total aviation and property insurance expenses were $66 million higher in 2003 than in 2000. As a result of the Air Transportation Safety and System Stabilization Act ("Airline Stabilization Act"), the U.S. Homeland Security Act and the U.S. Emergency Wartime Supplemental Appropriations Act, the U.S. federal government assumes most war risk coverage. However, this coverage is scheduled to expire on August 31, 2004. While the government may again extend the deadline for providing excess war risk coverage, there is no assurance that any extension will occur, or if it does, how long the extension will last. Should the government stop providing excess war risk coverage to the airline industry, it is expected that the premiums charged by aviation insurers for this coverage would be substantially higher than the premiums currently charged by the government. Aviation insurers could further increase insurance premiums in the event of a new terrorist attack or other events adversely affecting the airline industry. Significant increases in insurance premiums could negatively impact our financial condition and results of operations.

Our indebtedness and other obligations, including pension funding liabilities, are substantial.

We have substantial levels of indebtedness. As of December 31, 2003, we had long-term debt and capital lease obligations, including current maturities, of $8.29 billion. Of this indebtedness, 44% bears interest at floating rates. The amount of long-term debt that matures in 2004 is $668 million.

Additionally, $1.49 billion matures in 2005, $781 million in 2006, $732 million in 2007 and $515 million in 2008. As of December 31, 2003, the principal portion of future minimum lease payments under capital leases was $64 million for 2004, $40 million for 2005, $29 million for 2006, $33 million for 2007 and $28 million for 2008. These levels of indebtedness do not include the obligation to redeem $236 million of convertible preferred stock. We also have significant obligations related to operating leases that do not appear on the consolidated balance sheets. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 4—Leases". The amount of our indebtedness could limit our ability to obtain additional financing or adversely affect our future financing costs, either of which could negatively affect our ability to operate our business or make future capital expenditures. Our ability to service our indebtedness and obligations could be adversely affected by many factors, including general economic conditions and other factors beyond our control.

We also have noncontributory pension plans covering our pilots, other contract employees and salaried employees. Funding obligations under these plans are governed by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As of December 31, 2003, our pension plans were underfunded by $3.75 billion, as calculated in accordance with SFAS No. 87, Employers' Accounting for Pensions. Absent asset returns exceeding plan assumptions, we will have to satisfy the underfunded amounts of the plans through cash contributions over time. The timing and amount of funding requirements depend upon a number of factors, including interest rates, asset returns, potential changes in pension legislation, our decision to make voluntary prepayments, applications for and receipt of waivers to reschedule contributions and changes to pension plan benefits.

In 2003, we recorded expenses for our qualified pension plans of approximately $491 million, including $58 million related to a curtailment charge in the contract plan due to workforce reductions. We anticipate 2004 expenses for these plans will not differ materially from the amount of such expenses incurred in 2003, excluding the curtailment charge.

Our calendar year 2004 cash pension contributions are dependent on several factors. On December 23, 2003, we asked the Internal Revenue Service ("IRS") for permission to reschedule some of our plan year 2004 pension contributions, which includes amounts due in both 2004 and 2005, for the contract and salaried employees' pension plans. Separately, the U.S. Congress has under consideration certain legislative relief that could reduce 2004 contributions by increasing the discount rate used to determine funding, changing the current requirements for deficit reduction contributions, or both. Prior legislation increased the discount rate used by companies to determine funding requirements for the past two years. On that basis, expected contributions to our qualified pension plans in 2004 approximates $350 million. However, approval of our application to reschedule contributions and/or additional legislative relief could reduce our pension funding requirements for these plans to between $100 million and $350 million for the year. Should our request to reschedule contributions not be approved by the IRS and Congress provides no legislative relief, our qualified plan funding obligations in calendar year 2004 would approximate $515 million. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Pension Funding Obligations", for further discussion of our pension obligations.

We operate in a capital-intensive industry. Periodically, we are required to make significant capital expenditures for new aircraft, related equipment and facilities. There can be no assurance that sufficient financing will be available for all aircraft and other capital expenditures.

We conduct a significant portion of our operations in foreign locations. As a result, we have operating revenues and, to a lesser extent, operating expenses, as well as assets and liabilities, denominated in foreign currencies, principally the Japanese yen. Fluctuations in foreign currencies can significantly affect our operating performance and the value of our assets and liabilities located outside

of the United States. From time to time, we use financial instruments to hedge our exposure to the Japanese yen. However, these hedging strategies may not always be effective.

Certain of the statements made in "Item 1. Business", "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this annual report are forward-looking and are based upon information available to the Company on the date hereof. The Company, through its management, may also from time to time make oral forward-looking statements. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company. Any such statement is qualified by reference to the following cautionary statements.

The Company believes that the material risks and uncertainties that could affect the outlook of an airline operating in the global economy include, among others, the future level of air travel demand, the Company's future passenger traffic and yields, the airline pricing environment, increased costs for security, the cost and availability of aviation insurance coverage and war risk coverage, the general economic condition of the United States and other regions of the world, the price and availability of jet fuel, the aftermath of the war in Iraq, the possibility of additional terrorist attacks or the fear of such attacks, concerns about SARS or other influenza or contagious illnesses, labor negotiations both at other carriers and the Company, low cost carrier expansion, capacity decisions of other carriers, actions of the U.S. and foreign governments, foreign currency exchange rate fluctuation, inflation and other factors discussed herein. Additional information with respect to these factors and other events that could cause differences between forward-looking statements and future actual results is contained in "Risk Factors Related to Northwest and the Airline Industry" above.

Developments in any of these areas, as well as other risks and uncertainties detailed from time to time in the Company's Securities and Exchange Commission filings, could cause the Company's results to differ from results that have been or may be projected by or on behalf of the Company. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These statements deal with the Company's expectations about the future and are subject to a number of factors that could cause actual results to differ materially from the Company's expectations. All subsequent written or oral forward-looking statements attributable to the Company, or persons acting on behalf of the Company, are expressly qualified in their entirety by the factors described above.

As shown in the following table, Northwest operated a fleet of 430 aircraft at December 31, 2003, consisting of 368 narrow-body and 62 wide-body aircraft. Northwest's purchase commitments for aircraft as of December 31, 2003 are also provided.

The Company's DC9 aircraft have considerable remaining technological life, based upon the cycle life (capacity for number of landings) expected by the manufacturer and other factors. The Company also believes that these aircraft have significant economic value given the Company's route network,

maintenance programs and the lack of a commercially successful new 100-seat aircraft at this time. The Company estimates that its DC9 aircraft could fly on average more than nine additional years beyond 2003 based upon the manufacturer's expected cycle life for such aircraft and the projected annual utilization by Northwest.

See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 4—Leases" and "Note 10—Commitments" for further information related to the Company's aircraft leases and commitments.

Northwest leases the majority of its airport facilities. The lease terms cover periods up to 30 years and contain provisions for periodic adjustment of lease payments. At most airports that it serves, Northwest has entered into use agreements that provide for the non-exclusive use of runways, taxiways and other facilities. Landing fees under these agreements normally are based on the number of landings and weight of the aircraft.

In certain cases, the Company has constructed a facility on leased land which reverts to the lessor upon expiration of the lease. These facilities include cargo buildings in Boston, Los Angeles, New York (JFK), Seattle and Honolulu; support buildings at the Minneapolis/St. Paul International Airport; a line maintenance hangar in Seattle; and a two-bay DC10 hangar in Detroit.

The Company was responsible for managing and supervising the design and construction of the $1.2 billion passenger terminal at Detroit Metropolitan Wayne County Airport that was completed in February 2002. The new terminal offers 97 gates, 106 ticket-counter positions, 22 security check points, nearly 85 shops and restaurants, four WorldClubs, an 11,500-space parking facility, covered curbside drop-off areas and 18 luggage carousels. The terminal also offers international-to-domestic connections within the same facility. A new hotel in the terminal was completed in December 2002, and a two-bay 747 hangar was completed in October 2003.

In late 2003, an additional $175 million expansion began on Detroit Metropolitan Wayne County Airport's west concourse. The Company is responsible for managing and supervising the design and construction of this new expansion project. The project includes additional narrow-body and regional gates on Concourses B and C, related apron expansion including hydrant fueling, loading bridges and gate systems and additional moving walkways.

Minneapolis/St. Paul International Airport is undergoing a $2.7 billion construction program that began in 1998. The major components completed include a 50% increase in vehicle parking as well as an additional 15 mainline jet gates and 30 commuter gates. A new north/south runway, automated people movers and improvement of existing runways are scheduled to be completed in phases through 2010.

The Memphis-Shelby County Airport Authority has undertaken a $400 million airport renovation and expansion project. The airfield portion of the program provides nearly $300 million in airfield improvements, including a new 13,000-foot runway, which opened in late 2000. The majority of the $60 million terminal renovation was completed in 2000, including the redesign of eight gates to accommodate Northwest regional jet service, 15 additional regional jet gates, a new WorldClub and 11 new ticket counter positions. This program also includes $40 million in future vehicle parking expansion and roadwork modifications.

Northwest's primary offices are located at or near the Minneapolis/St. Paul International Airport. The Company owns a 160-acre site east of the airport where the Company's corporate offices are located. Additional owned buildings include reservations centers in Baltimore, Tampa and Chisholm,

Minnesota, and a data processing center in Eagan, Minnesota. The Company owns property in Tokyo, including a 1.3-acre site in downtown Tokyo and a 33-acre land parcel, 512-room hotel and flight kitchen located near Tokyo's Narita International Airport.

The Company leases reservations centers in or near Minneapolis/St. Paul and Seattle. Maintenance bases under operating leases are located in Minneapolis/St. Paul and Duluth, Minnesota. As of December 31, 2003, the Company operated 26 city ticket offices in North America. One of these city ticket offices was subsequently closed in January 2004 and the Company announced in February 2004 that it will be closing all of its remaining North America city ticket offices by March 2004.

In 2003, the Company closed its Detroit area reservations center and city ticket offices located in Livonia, Michigan. The Company owns the building and land formerly used as the reservations center and has entered into a purchase agreement to sell the property. The prospective buyer can terminate the agreement before the end of the inspection period. Call center activity performed at the Detroit facility was transferred to the Company's facilities in Baltimore, Chisholm, Minneapolis, Seattle and Tampa.

Chase v. Northwest Airlines and Airline Reporting Corporation (U.S. D.C. Eastern District of Michigan, Civ. Action No. 96-74711). Northwest is a defendant in an antitrust class action filed in U.S. District Court for the Eastern District of Michigan in October 1996. The action purports to be brought on behalf of a class defined as all persons who purchased tickets on certain routes into Northwest's hubs at Detroit, Minneapolis/St. Paul and Memphis from October 11, 1992 to the present. The complaint alleges that Northwest's imposition of restrictions prohibiting the sale of "hidden city" tickets constitutes monopolization in violation of the Sherman Act. The complaint seeks injunctive relief, unspecified damages for the class, and costs and attorneys' fees. The attorneys for the plaintiff in Chase have also filed three additional class actions in the same court against other airlines and Northwest with parallel allegations similar to those in Chase, including allegations that the defendant airlines conspired to deter hidden city ticketing. These cases are: Keystone Business Machines, Inc. v. U.S. Airways and Northwest Airlines (U.S. D.C. Eastern District of Michigan, Civ. Action No. 99-72474), BLT Contracting, Inc. v. U.S. Airways, Northwest Airlines and the Airline Reporting Corporation (U.S. D.C. Eastern District of Michigan, Civ. Action No. 99-72988), and Volk and Nitrogenous Industries Corp. v. U.S. Airways, Northwest Airlines, Delta Air Lines, and the Airline Reporting Corporation (U.S. D.C. Eastern District of Michigan, Civ. Action No. 99-72987). All have been assigned to the Judge in the Chase case. Northwest believes these cases are without merit and intends to defend against them. In November 2000, the plaintiffs filed their class certification motion and defendants filed their summary judgment motion. On May 16, 2002, the Court entered an Order granting plaintiffs' motion for class certification and denying defendants' motion for summary judgment. The Court has not yet set a trial date.

Midwestern Machinery Co., Inc. v. Northwest Airlines, Inc. (U.S. D.C. District of Minnesota, Civ. Action No. 97-1438). In June 1997, Midwestern Machinery Co. and several individuals filed an antitrust class action against Northwest in the U.S. District Court for Minnesota. The complaint alleges that Northwest's acquisition of Republic Airlines in 1986 resulted in a substantial reduction in competition in violation of Section 7 of the Clayton Act. Northwest believes the lawsuit to be without merit and intends to defend against the claim. In February 2001, the Court granted the plaintiff's motion for class certification. On February 5, 2003, the Court entered an Order granting Northwest's motion for summary judgment and dismissing the case. The plaintiff's appeal of the Court's Order granting summary judgment is pending.

Hall v. United Air Lines, et al. (U.S. D.C. Eastern District of North Carolina, Civ. Action No. 7-00 CV-123-BR(1)). In October 1999, a purported class action was filed in State Court in North Carolina

by a North Carolina travel agent, on behalf of herself and similarly situated North Carolina travel agents, challenging actions by most major airlines, including Northwest, to reduce travel agent base commissions from 8 percent to 5 percent and alleging several state law theories of liability, including conspiracy. In June 2000, the plaintiff filed a voluntary dismissal and then filed a new case in federal court. The new case is a class action, now on behalf of a nation-wide class of travel agents, alleging an unlawful agreement among airlines to reduce commissions in violation of the Sherman Act, and is based on the same factual allegations. On November 13, 2001, the court granted the plaintiffs' motion to amend the complaint to include allegations that other commission reductions in 1997 and 1998 were the result of unlawful agreements among the airline defendants in violation of the Sherman Act. The complaint was subsequently amended again to allege that commission reductions in March 2002 were also the result of an unlawful agreement among the airline defendants. Northwest believes the case to be without merit and intends to defend against the claim. On September 17, 2002, the Court entered an Order granting plaintiffs' motion for class certification. On October 30, 2003, the Court granted the Defendants' motion for summary judgment. The plaintiffs' appeal of the Court's Order granting summary judgment is pending.

McCoy-Johnson v. Northwest Airlines (U.S. D.C. Western District of Tennessee, Civ. Action No. 2-99-CV-2994GV). In November 1999, a purported class action was filed against Northwest by a Northwest passenger in federal court alleging violations of Section 2 of the Sherman Act. The plaintiff alleges that Northwest has monopolized or attempted to monopolize air transportation on certain routes into and out of its three domestic hubs through a variety of exclusionary practices. The plaintiff purports to sue on behalf of all similarly situated passengers who purchased tickets on Northwest for travel on certain routes into or out of its three hubs since at least as early as April 1995. In March 2001, a second case, Rodney v. Northwest Airlines (U.S. D.C. Western District of Tennessee, Civ. Action No. 01-2167GV), was filed in the same court as a related case by the same counsel. The allegations in the Rodney case are substantially the same as those in the McCoy-Johnson case. In July 2001, the lawyers representing the plaintiffs in McCoy-Johnson and Rodneyfiled another companion lawsuit, Sax v. Northwest (U.S.D.C Western District of Tennessee, Civ. Action No. 01-2582GV). The allegations in the Sax case are substantially the same as those in the McCoy-Johnson and Rodney cases. Northwest believes these cases to be without merit and intends to defend against the claims. The plaintiffs' motion for class certification is pending.

Spirit Airlines v. Northwest Airlines (U.S. D.C. Eastern District of Michigan, Civ. Action No. 00-71535). In March 2000, Spirit Airlines filed a Sherman Act monopolization complaint against Northwest in the U.S. District Court for the Eastern District of Michigan alleging that Northwest had monopolized, or attempted to monopolize, air transportation service between Detroit and Philadelphia and between Detroit and Boston in 1996 by engaging in predatory pricing and other actions to exclude Spirit from those markets. Northwest believes the case to be without merit and intends to defend against the claim. On March 31, 2003, the Court granted Northwest's motion for summary judgment. Spirit's appeal of the Court's Order granting summary judgment is pending.

Force Majeure Arbitrations. Each of Northwest's collective bargaining agreements with its unions contains "force majeure" provisions, which provide that certain job protections, including layoff protections, are nullified in the event of a "force majeure". A "force majeure" is generally defined as the occurrence of certain events over which Northwest does not have control. Northwest has invoked the "force majeure" provisions of its collective bargaining agreements in laying off employees in response to three events: the terrorist attacks of September 11, 2001, the outbreak of war in Iraq in March 2003 and the SARS epidemic in 2003. Each of the IAM, International Brotherhood of Teamsters, Chauffeurs, Warehousemen & Helpers of America ("IBT") (which was recently decertified following a representation election in favor of the PFAA), ALPA and AMFA have filed one or more grievances over the invocation of the force majeure provisions on some or all of these occasions. These disputes are subject to arbitration and are in various stages of the grievance/arbitration process

provided for in the respective collective bargaining agreements. An arbitrator has denied both the IBT/PFAA and AMFA grievances with respect to the Company's invocation of "force majeure" in connection with the terrorist attacks of September 11, 2001. An adverse decision in any of the remaining grievances could result in substantial damages against the Company. The Company is vigorously defending these grievances. Although the ultimate outcome of these matters cannot be predicted with certainty, management believes it properly applied the terms of the various collective bargaining agreements and that the resolution of these matters will not have a material adverse effect on the Company's consolidated financial statements taken as a whole.

Series C Preferred Stock Litigation. In June 2003, the IBT and certain related parties commenced litigation against Northwest Airlines Corporation in New York state court, International Brotherhood of Teamsters, Local 2000 et al. v. Northwest Airlines Corporation (New York Sup. Ct., Case No. 601742/03). In August 2003, the IAM and a related party also commenced litigation against Northwest Airlines Corporation in New York state court, International Association of Machinists and Aerospace Workers et al. v. Northwest Airlines Corporation (New York Sup. Ct., Case No. 602476/03). Both lawsuits challenge the Company's decision not to purchase its Series C Preferred Stock during 2003 and seek to compel the Company to repurchase the Series C Preferred Stock that had been put to the Company. The Company announced on August 1, 2003, that the Board of Directors had determined that the Company could not legally repurchase the outstanding Series C Preferred Stock at that time because the Board was unable to determine that the Company had adequate surplus to repurchase the outstanding Series C Preferred Stock. The Company believes that the lawsuits are without merit. Discovery has commenced. A court decision that adequate statutory surplus is available for a stock repurchase at this time could result in the Company having to repurchase without deferral the outstanding Series C Preferred Stock (approximately $236 million as of December 31, 2003).

In addition, in the ordinary course of its business, the Company is party to various other legal actions which the Company believes are incidental to the operation of its business. The Company believes that the outcome of the proceedings to which it is currently a party (including those described above) will not have a material adverse effect on the Company's consolidated financial statements taken as a whole.

No matters were submitted to a vote of the Company's security holders during the fourth quarter of 2003.

Richard H. Anderson, age 48, has served as Chief Executive Officer of NWA Corp. and Northwest since April 2001 and was elected a director of both companies in September 2001. He has served in a number of executive positions since joining Northwest in 1990, including Executive Vice President and Chief Operating Officer from December 1998 to April 2001, Executive Vice President-Technical Operations and Airport Affairs from April 1998 to December 1998 and Senior Vice President-Technical Operations and Airport Affairs from January 1997 to April 1998. From 1994 to 1996, he served as Senior Vice President-Labor Relations, State Affairs and Law, and from 1990 to 1994 he served as Vice President-Deputy General Counsel. Prior to joining Northwest, Mr. Anderson was Staff Vice President and Deputy General Counsel of Continental Airlines. Mr. Anderson serves on the board of directors of Medtronic, Inc.

Douglas M. Steenland, age 52, has served as President of NWA Corp. and Northwest since April 2001 and was elected a director of both companies in September 2001. He has served in a number of executive positions since joining Northwest in 1991, including Executive Vice President and

Chief Corporate Officer from September 1999 to April 2001, Executive Vice President-Alliances, General Counsel and Secretary from January 1999 to September 1999, Executive Vice President, General Counsel and Secretary from June 1998 to January 1999, and Senior Vice President, General Counsel and Secretary from July 1994 to June 1998. Prior to joining Northwest, Mr. Steenland was a senior partner at the Washington, D.C. law firm of Verner, Liipfert, Bernhard, McPherson and Hand.

Bernard L. Han, age 39, has served as Executive Vice President and Chief Financial Officer of the Company since October 2002. Prior to rejoining the Company, Mr. Han served at America West Airlines, Inc. as Executive Vice President and Chief Financial Officer from September 2001 to October 2002, Senior Vice President—Marketing and Planning from May 1998 to September 2001 and Vice President Financial Planning & Analysis from January 1996 to May 1998. Between 1988 and 1995, Mr. Han held various finance and marketing positions at American Airlines and Northwest Airlines.

J. Timothy Griffin, age 52, has served as Executive Vice President-Marketing and Distribution of Northwest since January 1999. From June 1993 to January 1999, he served as Senior Vice President-Market Planning and Systems. Prior to joining Northwest in 1993, Mr. Griffin held senior positions with Continental Airlines and American Airlines. Mr. Griffin also serves on the board of directors of Pinnacle Airlines Corp. and Orbitz, Inc.

Philip C. Haan, age 48, has served as Executive Vice President-International, Sales and Information Services of Northwest since January 1999. From December 1995 to January 1999, he served as Senior Vice President-International Services. Mr. Haan formerly held positions of Vice President-Pricing and Area Marketing, Vice President-Inventory Sales and Systems and Vice President-Revenue Management. Prior to joining Northwest in 1991 he was with American Airlines for nine years.

Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's common stock is quoted on the Nasdaq National Market under the symbol NWAC. The table below shows the high and low sales prices for the Company's common stock during 2003 and 2002:

	2003		2002
Quarter	2003		2002
Quarter	High	Low	High	Low
1st	8.67	5.05	20.92	13.56
2nd	11.80	6.30	20.69	10.66
3rd	11.37	7.70	12.24	6.33
4th	15.21	9.56	8.87	4.71

Since 1989, NWA Corp. has not declared or paid any dividends on its common stock and does not currently intend to do so. Under the provisions of certain of the Company's bank credit agreements, NWA Corp.'s ability to pay dividends on or repurchase its common stock is restricted. Any future determination to pay cash dividends will be at the discretion of the Board of Directors, subject to applicable limitations under Delaware law, and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors.

The following table summarizes information as of December 31, 2003, relating to equity compensation plans of the Company pursuant to which options, restricted stock units or other rights to acquire shares may be granted in the future.

See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 7—Stock Options" for additional information regarding the Company's equity compensation plans.

		2003		2002		2001		2000		1999
		(In millions)
Passenger service operating expenses(a)		$	8,800	$	9,324	$	9,803	$	9,784	$	8,692
	747 Freighter operations		497		486		474		466		377
	MLT and Pinnacle, net of intercompany eliminations		452		490		464		404		334
	(Gain)/loss on assets and NBA transportation		26		35		32		17		16

Operating expenses		$	9,775	$	10,335	$	10,773	$	10,671	$	9,419

	2003			2002			2001			2000			1999
	(In millions)
Aircraft impairments	$	21		$	366		$	161		$	125		$	22
Curtailment charges		58			16			—			—			—
Severance expenses		20			17			116			—			—
Other		—			36			—			—			(27	)

	$	99		$	435		$	277		$	125		$	(5	)

Per Total ASM		0.11	¢		0.46	¢		0.28	¢		0.12	¢		(0.01)	¢

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NWA Corp. is a holding company whose principal indirect operating subsidiary is Northwest. The Consolidated Financial Statements include the accounts of NWA Corp. and all consolidated subsidiaries. Substantially all of the Company's results of operations are attributable to its principal indirect operating subsidiary, Northwest, which accounted for approximately 98% of the Company's 2003 consolidated operating revenues and expenses. The Company's results of operations also include other subsidiaries, of which MLT and Pinnacle Airlines have been the most significant. The following discussion pertains primarily to Northwest and, where indicated, MLT and Pinnacle Airlines.

The Company reported net income of $236 million for the year ended December 31, 2003, compared with a net loss of $798 million in 2002. Diluted earnings per share were $2.74 in 2003 compared with a loss per share of $9.32 in 2002. Operating loss was $265 million in 2003 compared with an operating loss of $846 million in 2002. Passenger revenues for the year ended December 31, 2003 decreased by $89 million compared to 2002, continuing their three year trend of decline.

Full year 2003 results included $801 million of net unusual pre-tax gains. Operating expenses included $99 million of unusual items related to employee severance, a pension curtailment charge and aircraft write-downs. Net unusual non-operating gains totaling $900 million were comprised of a $299 million gain from the initial public offering of 88.6% of the Company's investment in Pinnacle Airlines Corp., $209 million received under the Emergency Wartime Supplemental Appropriations Act as reimbursement for security fees previously paid to the TSA, a $199 million gain from the sale of the Company's investment in WorldSpan, a $148 million net gain related to the acquisition of the corporation which held the Company's Mandatorily Redeemable Preferred Security, a $39 million gain from the sale of its investment in Hotwire.com ("Hotwire"), an $11 million gain from the sale of a portion of its investment in Orbitz and a $5 million loss on the Company's debt exchange.

Full year 2002 results included $464 million in unusual pre-tax charges, principally comprised of $352 million attributable to the accelerated retirement of certain Boeing 747-200 and DC10-30 aircraft, $53 million of costs associated with the closure of several facilities, $32 million related to employee benefit costs and additional asset write-downs, and a $27 million partial write-down of the Company's receivable from the U.S. Government related to the grant under the Airline Stabilization Act. In addition, the 2002 effective tax rate reflected a $15 million provision for tax credits the Company expected to expire unused.

The airline industry is intensely competitive. Northwest's competitors include other major domestic airlines as well as foreign, regional and new entrant airlines, some of which have more financial resources or lower cost structures than Northwest. In most markets that Northwest serves, it competes with at least one of these carriers. Our revenues are sensitive to numerous factors, and the actions of other carriers in the areas of pricing, scheduling and promotions can have a substantial adverse impact on overall industry revenues. Such factors may become even more significant in periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to achieve near term survival rather than long term viability.

Since 2001, the U.S. airline industry overall has suffered a substantial reduction in revenues, both on an absolute basis and relative to historical trends. The Company's annual operating revenue has declined in each of the last three years and its 2003 operating revenue was over $1.7 billion less than it was in 2000. As a result, the Company has incurred significant operating losses, and absent unusual items, its pre-tax losses over that period have totaled nearly $2.2 billion. The Company does not

anticipate that the revenue environment will materially improve in 2004. Due to the discretionary nature of business and personal travel spending, U.S. airline revenues are heavily influenced by the strength of the U.S. economy, other regional world economies and corporate profitability. The revenue decline has been due in part to the U.S. economic cycle. However, permanent structural differences in the industry revenue environment have also taken place. These differences are the result of a number of factors.

Airlines are among the most heavily taxed of all U.S. companies. Taxes and fees can add up to approximately 25% of what a passenger pays for an average roundtrip domestic airline ticket, a percentage even greater than that for alcohol and tobacco products. These taxes and fees have grown significantly in the past decade. The Company believes that every dollar of tax or fee increase imposed on airline passengers roughly translates into a dollar of reduced airline revenue.

In response to the industry environment, the Company has taken aggressive steps to mitigate the impact on its results of operations and financial condition resulting from these adverse trends. In the past two years, these steps have included a significant decrease in scheduled capacity on an available seat mile basis, a reduction in work force of over 16,900 full time equivalent positions, deferral of certain aircraft orders, closure of maintenance facilities, flight crew bases, reservations and sales facilities and deferrals and cancellations of discretionary and other non-operationally critical spending. In all, eight rounds of cost savings have been initiated since the U.S. economy began weakening in early 2001, resulting in cost reductions totaling $1.6 billion.

Despite these and other significant steps to reduce costs, additional measures will be necessary in response to the fundamentally changed industry revenue environment. Wages, salaries and benefits made up 40% of the Company's 2003 operating expenses and will be the critical component of future cost reduction initiatives. The Company is in discussions with its labor unions in an effort to align wages, benefits and work rules with the new revenue environment and to remain competitive with airlines that have achieved permanent labor cost reductions through bankruptcy proceedings (United Airlines, US Airways) or the threat of bankruptcy (American Airlines). The Company cannot predict the outcome of these negotiations at this time.

Operating Revenues. Operating revenues increased 0.2% ($21 million). System passenger revenues decreased 1.6% ($124 million), excluding Pinnacle Airlines. The decrease in system passenger revenues was primarily attributable to a 4.9% decrease in traffic partially offset by a 3.5% increase in yields. Pinnacle Airlines passenger revenues, net of intercompany eliminations, increased 13.3% ($36 million) to $307 million due to increased capacity from 25 Bombardier CRJ aircraft added in 2003.

The following analysis by market is based on information reported to the DOT and excludes Pinnacle Airlines:

Cargo revenues increased 2.3% ($17 million) to $752 million due to a 4.1% increase in yield, partially offset by a 1.7% decline in cargo ton miles. Cargo revenues consist of freight and mail carried on passenger aircraft and the Company's 12 Boeing 747-200F dedicated freighters. Freight revenue increased 5.2% ($34 million) while mail revenue decreased 22.8% ($17 million). In the last half of 2003, the Company decided to stop carrying U.S. domestic mail as lower volumes and yields, partially due to restrictions imposed by the U.S. Government following September 11, 2001, caused this business to become unprofitable.

Other revenues, the principal components of which are MLT, other transportation fees and charter revenues, increased 12.8% ($93 million). This increase was primarily due to increased revenues from CRAF and other charter activities, frequent flyer partnership revenue, ticketing and handling fees, KLM joint venture settlements, the NBA transportation program and support services revenue.

Operating Expenses. Operating expenses decreased 5.4% ($560 million). The following table presents operating expenses for the year ended December 31, 2003 and describes significant variances from the year ended December 31, 2002:

Other Income and Expense. Other non-operating income increased by $857 million, primarily due to several unusual items: a $299 million gain from the sale of the Company's investment in Pinnacle Airlines Corp.; $209 million received under the Emergency Wartime Supplemental Appropriations Act

as reimbursement for security fees previously paid to the TSA; a $199 million gain from the sale of the Company's investment in WorldSpan; a $361 million gain related to a write-down of the Company's Mandatorily Redeemable Preferred Security, accompanied by an impairment charge of $213 million related to the property securing this obligation; a $39 million gain from the sale of the Company's investment in Hotwire; and an $11 million gain from the sale of a portion of the Company's investment in Orbitz. The Company also generated a higher return on short-term investments, which partially offset higher interest expense related to increased debt levels.

Tax Expense (Benefit). During 2003, the Company recognized a $30 million tax benefit related to losses recorded in the first quarter that fully offset its remaining $30 million net deferred tax liability. Given recent loss experience, current accounting rules do not allow the Company's balance sheet to reflect a net deferred tax asset. Therefore, a valuation allowance is provided against tax benefits, principally for net operating losses in excess of its previously remaining deferred tax liability. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 9—Income Taxes", for additional discussion of the Company's tax accounts.

Operating Revenues. Operating revenues decreased 4.2% ($416 million). System passenger revenues decreased 5.7% ($466 million), excluding Pinnacle Airlines. The decrease in system passenger revenues was primarily attributable to a 1.5% decrease in traffic and a 4.3% decline in yields. System passenger load factor increased 2.8 points to 77.1% for the year ended December 31, 2002. Pinnacle Airlines passenger revenues, net of intercompany eliminations, increased 36.9% ($73 million) to $271 million due to increased capacity from 21 Bombardier CRJ aircraft added in 2002 and higher rates under a new airline services agreement with Northwest that was effective March 1, 2002.

The following analysis by market is based on information reported to the DOT and excludes Pinnacle Airlines:

Cargo revenues increased 2.1% ($15 million) to $735 million due to a 2.8% increase in cargo ton miles partially offset by a 0.6% decline in revenue per ton mile. Cargo revenues consist of freight and mail carried on passenger aircraft and the Company's 12 747-200F dedicated freighters. Freight revenue increased 7.4% ($46 million), including approximately $27 million in the fourth quarter resulting from

the west coast dockworkers' lockout. However, this was partially offset by a 29.6% ($31 million) decrease in mail revenue, due largely to lower volumes resulting from U.S. Government restrictions imposed following September 11, 2001 on the transportation of packages larger than 16 ounces on passenger aircraft. Such restrictions were responsible, in part, for Northwest ultimately deciding in the second half of 2003 to discontinue U.S. domestic mail carriage as lower volumes and yields caused this business to become unprofitable.

Other revenues, the principal components of which are MLT, other transportation fees and charter revenues, decreased 5.1% ($39 million). This decline was primarily due to reduced revenues from MLT, KLM joint venture settlements, ticketing and handling fees and support services, partially offset by an increase in frequent flyer program partnership revenue.

Operating Expenses. Operating expenses decreased 4.1% ($438 million). The following table presents operating expenses for the year ended December 31, 2002 and describes significant variances from the year ending December 31, 2001:

Other Income and Expense. Other non-operating income decreased by $572 million, primarily due to $461 million recognized in 2001 under the Airline Stabilization Act, higher 2002 interest expense related to increased debt levels, and lower interest income as a result of lower interest rates. In the fourth quarter of 2002, the Company recorded a $27 million charge to write-down a portion of a receivable from the U.S. Government to reflect the final amount received in January 2003 under the Airline Stabilization Act. Interest expense increased 15.7% ($58 million) primarily due to the full year 2002 borrowings under the Company's revolving credit facilities and additional new financings. Higher earnings from affiliates during 2002 were partially offset by a $27 million gain from the sale of the Company's remaining shares of Continental recorded in 2001.

Tax Expense (Benefit). The tax benefit recorded in 2002 includes a provision of $15 million for tax credits that are expected to expire unused. The Company's net deferred tax liability declined from $843 million at December 31, 2001 to $30 million at December 31, 2002, primarily due to the increase in deferred tax assets relating to the Company's pension plans and the Company's 2002 losses. Given the Company's recent loss experience, current accounting rules do not allow its balance sheet to reflect a net tax asset position. As a result, when losses after December 31, 2002 generated deferred tax assets that fully offset the Company's then existing deferred tax liabilities, no tax benefit could be recognized with respect to further losses. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 9—Income Taxes", for additional discussion of the Company's tax accounts.

As of December 31, 2003, the Company had cash, cash equivalents and short-term investments of $2.883 billion. This amount included $126 million of restricted short-term investments, resulting in total unrestricted liquidity of $2.757 billion. As discussed later, the Company's secured credit facilities were fully drawn as of December 31, 2002 and had approximately $1 million available as of December 31, 2003.

Cash Flows. Liquidity increased by $660 million as of December 31, 2003, due primarily to $209 million security fee reimbursements received from the U.S. Government under the Emergency Wartime Supplemental Appropriations Act, a $218 million income tax refund, cash proceeds of $278 million from the sale of WorldSpan and the issuances of $150 million and $225 million of senior convertible notes, partially offset by $158 million in cash contributions to the pension plans, capital expenditures, net of financings, and other investing and financing activities.

Operating Activities. Cash provided by operating activities was $375 million in 2003 compared to cash used by operating activities of $284 million in 2002. This increase of $659 million was largely due to the $209 million of Emergency Wartime Supplemental Appropriations Act funds received in May 2003, net income tax receipts $93 million higher in 2003 than 2002 and the payment in

January 2002 of $216 million of aviation taxes originally due between September 11, 2001 and January 15, 2002.

The Company operates, like its competitors, with negative working capital, which totaled $297 million at December 31, 2003. This negative working capital position is primarily attributable to the Company's $1.27 billion air traffic liability, largely representing cash received from tickets that customers have not yet used.

Investing Activities. Investing activities consist primarily of the purchase of short-term investments, aircraft capital expenditures and other related costs. Other related costs include engine purchases, costs to commission aircraft before entering revenue service, deposits on ordered aircraft, facility improvements and ground equipment purchases.

Investing activities related to the acquisitions of aircraft consisted of the following for years ended December 31:

	2003	2002	2001
Airbus A319	14	24	13
Airbus A320	2	2	4
Airbus A330	5	—	—
Boeing 747-400	—	2	—
Boeing 757-200	—	3	5
Boeing 757-300	9	7	—

	30	38	22

Investing activities in 2003, other than aircraft purchases and short-term investments, include proceeds of $278 million from the sale of the Company's interest in WorldSpan, $255 million from the sale of 88.6% of the Company's interest in Pinnacle Airlines Corp., $40 million from the sale of the Company's interest in Hotwire and $13 million from the sale of a portion of its investment in Orbitz. Investing activities in 2002, other than aircraft purchases, include facilities and aircraft modification programs. Investing activities in 2001, other than aircraft purchases, include $582 million in proceeds from the sale of the Company's investment in Continental. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 13—Related Party Transactions", for additional discussion of the Company's investment in Continental.

Financing Activities. Financing activities in 2003 consist primarily of the issuance of $150 million of 6.625% convertible senior notes due in 2023, the issuance of $225 million of 7.625% convertible senior notes due in 2023, the payment of debt and capital lease obligations, and the financing of: (i) 11 Airbus A319, four Boeing 757-300 and three Airbus A330-300 aircraft with escrowed funds from an offering of pass-through trust certificates completed in 2002; and (ii) two Boeing 757-300, one Airbus A330-300, one Airbus A320 and one Airbus A319 aircraft with long-term debt.

In addition to the financed aircraft discussed above, the Company also took delivery of one Airbus A330-300, one Airbus A320, one Airbus A319, three Boeing 757-300 aircraft and 25 Bombardier CRJ200/440 regional jets during the twelve months ended December 31, 2003. The Airbus A300-300, A320 and A319 aircraft and the three Boeing 757-300 aircraft were acquired through non-cash transactions with manufacturers. The Bombardier CRJ aircraft were acquired and financed with long-term operating leases and subleased to Pinnacle Airlines.

On December 9, 2003, Northwest completed an offer to exchange outstanding unsecured notes ("Old Notes") due in 2004, 2005 and 2006, with interest rates ranging from 7.625% to 8.875%, for new 10.5% class D pass-through trust certificates ("Class D Certificates") representing a fractional undivided interest in the assets of a pass-through trust. The trust's assets consist of interests in

$551.8 million principal amount of notes primarily secured by aircraft financed under five series of Northwest pass-through certificates previously issued. Holders tendered approximately $59 million of Old Notes for $64 million of Class D Certificates.

The exchange was accounted for as an extinguishment of debt under generally accepted accounting principles, with the Company recording an associated loss because the cash flows of the new debt instrument are greater than 110 percent of the original instruments' remaining cash flows. The loss recognized in the Consolidated Statements of Operations due to this exchange offer approximated $5 million.

During 2003, NWA Corp. completed two offerings of $375 million aggregate principle amount of convertible senior notes, both due in 2023. These notes were issued to qualified institutional buyers pursuant to Rule 144A and to non-U.S. persons pursuant to Regulation S, under the Securities Act of 1933. The first issuance of notes in May was for an aggregate principal amount of $150 million and bears interest at 6.625% (the "6.625% Notes"), which is payable in cash semi-annually through May 15, 2010. Thereafter, the principal amount of the notes will accrete semi-annually at a rate of 6.625% per year to maturity. The second issuance of notes in November was for an aggregate principal amount of $225 million and bears interest at 7.625% (the "7.625% Notes"), which is payable in cash semi-annually through November 15, 2008. Thereafter, the principal amount of the notes will accrete semi-annually at a rate of 7.625% per year to maturity. Each note was issued at a price of $1,000 and is convertible into NWA Corp. common stock. The 6.625% Notes and the 7.625% Notes were issued with conversion rates of 61.8047 and 43.6681 shares per $1,000 original principal amount of notes, respectively. These conversion rates equate to an initial conversion price of approximately $16.18 and $22.90 per share for the 6.625% Notes and the 7.625% Notes, respectively, subject to adjustment in certain circumstances. Both issuances of notes are guaranteed by Northwest.

Holders of the notes may convert their notes only if: (i) NWA Corp.'s common stock trades above a specified price threshold for a specified period; (ii) the trading price for the notes falls below certain thresholds; (iii) the notes have been called for redemption; or (iv) specific corporate transactions occur. NWA Corp. may elect to pay the repurchase price in cash or in shares of common stock, or a combination of both, subject to certain conditions. Should holders elect to require NWA Corp. to redeem the notes on any of the repurchase dates, it is the Company's present intention to satisfy the requirement in cash. NWA Corp. may redeem all or some of the notes for cash at any time on or after May 15, 2010 for the 6.625% Notes and on or after November 15, 2006 for the 7.625% Notes, at a redemption price in each case equal to the accreted principal amount plus accrued and unpaid interest, if any, to the redemption date.

Holders of the 6.625% Notes may require NWA Corp. to repurchase the notes on May 15, 2010, 2013 and 2018 at a price equal to the accreted principal amount plus accrued and unpaid interest, if any, on the repurchase date. Holders of the 7.625% Notes may require NWA Corp. to repurchase the notes on November 15, 2008, 2013 and 2018 at a price equal to the accreted principal amount plus accrued and unpaid interest, if any, on the repurchase date. In conjunction with the issuance of the 7.625% Notes, NWA Corp. entered into a call spread option transaction that was designed to limit the Company's exposure to potential dilution from conversion of the 7.625% Notes in the event that the market price per share of NWA Corp.'s common stock at the time of exercise is greater than the strike price of $22.90. This call spread option will be treated as an equity transaction under the Emerging Issues Task Force ("EITF") Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock. NWA Corp. plans to use the net proceeds from the offerings for working capital and general corporate purposes.

Financing activities in 2002 consisted primarily of the issuance of $300 million of 9.875% unsecured notes due in 2007, the payment of debt and capital lease obligations, and the financing of: (i) 18 Airbus A319, one Boeing 747-400, two Airbus A320 and three Boeing 757-300 aircraft with

escrowed funds from offerings of pass-through trust certificates completed in 2001; (ii) two Boeing 757-300 aircraft with escrowed funds from an offering of pass-through trust certificates completed in 2002; (iii) three Boeing 757-200, two Boeing 757-300 and six Airbus A319 aircraft with long-term bank debt; (iv) one Boeing 747-400 aircraft under a sale and leaseback; and the refinancing of three Boeing 747-400 aircraft purchased off capital lease.

In August 2002, Northwest completed an offering of $749 million of pass-through trust certificates to finance or refinance the acquisition of 11 new Airbus A319, six new Boeing 757-300 and three new Airbus A330-300 aircraft that were delivered between October 2002 and December 2003. The pre-funded portion of cash proceeds from the offerings of certificates were invested and held in escrow with a depositary bank. Such funds were not assets or direct obligations of, or guaranteed by, Northwest and are therefore not included in the Consolidated Financial Statements. As aircraft were delivered or refinanced, Northwest utilized the cash proceeds to finance the acquisition of these aircraft as secured debt financing for ownership. As of December 31, 2003, there were no unused offering proceeds held in escrow.

Financing activities in 2001 consisted primarily of the Company's borrowing in March and subsequent repayment in May of $1.10 billion under its revolving credit facilities, the borrowing on September 11, 2001, of $1.12 billion under its revolving credit facilities, of which $150 million was repaid in October 2001 as scheduled, the issuance of $300 million of 8.875% unsecured notes due 2006, $120 million received under airport facility revenue bonds and payment of debt and capital lease obligations. Financing activities also included the receipt of $678 million in financing for: (i) 13 Airbus A319 aircraft, seven of which were financed with funds from pass-through trust certificates and six with long-term bank debt; (ii) five Boeing 757-200 aircraft financed with long-term bank debt; and (iii) four Airbus A320 aircraft, three of which were financed with funds from pass-through trust certificates and one with long-term bank debt.

In June 2001, the Company completed an offering of $581 million of pass-through certificates at a blended fixed coupon rate of 7.18%. Proceeds from sales of the certificates were used to finance the acquisition of 14 aircraft consisting of nine new Airbus A319 aircraft, three new Boeing 757-300 aircraft and two new Boeing 747-400 aircraft delivered between March and December 2002. In July 2001, the Company completed an offering of $396 million of European pass-through certificates due in 2013 at a blended floating rate of three-month London Interbank Offered Rate ("LIBOR") plus 0.60% (1.77% as of December 31, 2003) to finance the acquisition of nine new Airbus A319 aircraft and five new Airbus A320 aircraft delivered between November 2001 and July 2002.

Contractual Obligations. The following table summarizes the Company's commitments to make long-term debt and lease payments, aircraft purchases and certain other obligations for the years ending December 31:

Off-Balance Sheet Arrangements. The Securities and Exchange Commission ("SEC") requires registrants to disclose "off-balance sheet arrangements". As defined by the SEC, an off-balance sheet arrangement includes any contractual obligation, agreement or transaction arrangement involving an unconsolidated entity under which a company 1) has made guarantees, 2) has a retained or a contingent interest in transferred assets, 3) has an obligation under derivative instruments classified as equity, or 4) has any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development services with the Company.

The Company has examined its contractual obligation structures potentially impacted by this disclosure requirement and has concluded that no arrangements of the types described in the first three categories exist that the Company believes may have a material current or future effect on its financial condition, liquidity or results of operations.

The Company has obligations arising out of variable interests in unconsolidated entities. The Company has adopted the provisions of the Financial Accounting Standards Board Interpretation No. 46 as of July 1, 2003 for certain variable interests based on the current guidance provided by the FASB. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 1—Summary of Significant Accounting Policies", for additional discussion of these variable interest arrangements.

Pension Funding Obligations. The Company also has noncontributory pension plans covering its pilots, other contract employees and salaried employees. Funding obligations under these plans are governed by ERISA. As of December 31, 2003, the Company's pension plans were underfunded by $3.75 billion, as calculated in accordance with SFAS No. 87, Employers' Accounting for Pensions. Absent asset returns exceeding plan assumptions, the Company will have to satisfy the underfunded amounts of its plans through cash contributions over time. The timing and amount of funding requirements depend upon a number of factors, including interest rates, asset returns, potential changes in pension legislation, the Company's decision to make voluntary prepayments, applications for and receipt of waivers to reschedule contributions and changes to pension plan benefits. Among other effects, those factors may result in contributions for a particular plan year being made across multiple calendar years.

On November 5, 2002, the Company submitted an application to the IRS for authorization to reschedule, over a five year period beginning in April 2004, the $454 million in 2003 plan year contributions under the pension plans for contract and salaried employees. In 2003, the IRS approved the application, subject to the Company's satisfaction of certain conditions imposed by the Pension Benefit Guaranty Corporation ("PBGC"), which the Company satisfied by granting the plans liens on certain assets of the Company (certain domestic slots, international routes, aircraft and engines). As a result, the value of the Company's remaining unencumbered assets is not material.

In November 2002, the Company submitted an application to the DOL to permit it to contribute common stock of Pinnacle Airlines Corp. to the pension plans in lieu of making certain required contributions in cash. In 2003, the DOL granted the Company's application for a prohibited transaction exemption. In 2003, pursuant to the exemption, the Company contributed approximately 6.3 million shares, or 42.0%, of Pinnacle Airlines Corp. common stock to the contract and salaried plans to satisfy approximately $163 million scheduled funding requirements for the 2002 plan year. The Company also contributed $60 million in cash to satisfy its remaining 2002 plan year scheduled funding requirements. Pursuant to an agreement with ALPA, the Company also made a voluntary contribution of $190 million to the pilots' pension plan, consisting of approximately 7.0 million shares, or 46.6%, of Pinnacle Airlines Corp. common stock. This voluntary contribution eliminated further ERISA required contributions to the pilots' plan until 2005. On November 24, 2003 the Pinnacles Airlines Corp. shares held by the plans were sold in an IPO. The offering generated $255 million in proceeds, requiring the Company to contribute an additional $98 million to the plans to make up the difference between the original valuations of the shares at the time of their contribution and the net IPO proceeds.

The Company's calendar year 2004 cash pension contributions are dependent on several factors. On December 23, 2003, the Company asked the IRS for permission to reschedule some of its plan year 2004 pension contributions, which includes amounts due in both 2004 and 2005, for the contract and salaried employees' pension plans. Separately, the U.S. Congress has under consideration certain legislative relief that could reduce 2004 contributions by increasing the discount rate used to determine funding, changing the current requirements for deficit reduction contributions, or both. Prior legislation increased the discount rate used by companies to determine funding requirements for the past two years. On that basis, expected contributions to the Company's qualified pension plans in 2004 approximates $350 million. However, approval of the Company's application to reschedule contributions and/or additional legislative relief could reduce its pension funding requirements for these plans to between $100 million and $350 million for the year. Should the Company's request to reschedule contributions not be approved by the IRS and Congress provides no legislative relief, its qualified plan funding obligations in calendar year 2004 would approximate $515 million.

Credit Ratings. At December 31, 2003, the Company's Standard & Poor's corporate credit rating and its senior unsecured credit rating were B+ and B-, respectively; its Moody's Investor Services senior implied rating and senior unsecured rating were B2 and Caa1, respectively; and its Fitch Ratings senior unsecured credit rating was B. The lowering of the Company's credit ratings could make it more difficult to issue debt, including the ability to utilize certain financing commitments related to future

aircraft deliveries, to renew outstanding letters of credit that back certain obligations and to obtain financial instruments used in its fuel and currency hedging. It could also increase the cost of these transactions. For information regarding the impact from the lowering of the credit rating on the Company's secured credit facility on April 10, 2003, see the related discussion below as well as "Item 8. Consolidated Financial Statements and Supplementary Data, Note 3—Long-Term Debt and Short-Term Borrowings".

Secured Credit Facilities. The Company's secured credit facilities at December 31, 2003, consisted of a $725 million revolving credit facility ($12 million of which has been utilized to establish letters of credit) available until October 2005, and a $250 million 364-day revolving credit facility available until October 2004 and renewable annually at the option of the lenders; however, to the extent any portion of the $250 million facility is not renewed for an additional 364-day period, the Company may borrow up to the entire non-renewed portion of the facility and such borrowings would then mature in October 2005. Borrowings under the credit agreement are secured by the Company's Pacific route system and certain aircraft. On March 28, 2003, Standard & Poor's downgraded the rating on the Company's secured credit facilities to B+ from BB-. On April 10, 2003, Moody's downgraded the rating on the Company's secured credit facilities to B1 from Ba3. With the change in credit rating and the measurement of certain collateral tests required under the Company's credit facilities, the interest rate applicable to borrowings under these secured credit facilities increased by 75 basis points. Borrowings under both revolving credit facilities bear interest at a variable rate equal to the three-month LIBOR plus 3.25% (4.37% at January 20, 2004). The credit agreement includes a covenant that requires the Company, beginning with the three month period ending June 30, 2004, to maintain at least a one-to-one ratio of earnings (adjusted to exclude the effects of interest, taxes, depreciation, amortization and aircraft rents) to fixed charges (comprising interest expense and aircraft rents). If the Company fails to meet this fixed charges coverage ratio, borrowings under the credit facility could be accelerated by the banks. While the Company currently believes that it will satisfy this requirement, compliance with the covenant depends upon many factors that could impact future revenues and expenses, some of which are beyond the Company's control. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 3—Long-Term Debt and Short-Term Borrowings", for additional discussion of these credit facilities.

Unsecured Debt Issued in January 2004. In January 2004, Northwest completed an offering of $300 million of unsecured notes due 2009. The notes have a coupon rate of 10%, 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 sale of the notes will be used for working capital and general corporate purposes. The notes are guaranteed by NWA Corp.

Shelf Registration Statement. As of December 31, 2003, the Company had an effective shelf registration statement for the issuance of $3.0 billion of unsecured debt and pass-through certificates. The $300 million unsecured debt issuance in January 2004 reduced this amount to $2.7 billion.

Receivables Financings. In January 2002, through NWA Funding LLC, the Company fully repaid $61 million outstanding under a receivables purchase agreement. Such repayment was required upon the occurrence of certain events, including exceeding a threshold of passenger refunds as a percentage of sales and the lowering of the Company's unsecured credit rating, both of which occurred following the events of September 11, 2001.

In June 2002, a second Receivables Purchase Agreement was executed by Northwest, NWA Funding II, LLC ("NWFII"), a wholly-owned, non-consolidated subsidiary of the Company, and third party purchasers ("Purchasers"). The agreement was a 364-day, $100 million maximum revolving receivables purchase facility, renewable annually for five years at the option of the Purchasers, that allowed NWFII to sell variable undivided interests in accounts receivable acquired from Northwest to

the Purchasers. NWFII paid a yield to the Purchasers equal to the rate on A1/F1 commercial paper plus a program fee. The Receivables Purchase Agreement terminated in July 2003. The Purchasers then collected $65 million on outstanding receivables. Due to seasonal fluctuations in accounts receivable sold under the agreement, the Company estimates that termination of the program reduced its cash balance at December 31, 2003 by approximately $50 million.

The discussion and analysis of the Company's financial condition and results of operations are based upon the Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of the Consolidated Financial Statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, and could potentially reflect materially different results under different assumptions and conditions. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 1—Summary of Significant Accounting Policies", for additional discussion of the application of these estimates and other accounting policies. The Company's management discussed the development of the estimates and disclosures related to each of these matters with the audit committee of the Company's board of directors.

Asset Valuation and Impairments. The Company evaluates long-lived assets for potential impairments in compliance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company records impairment losses on long-lived assets when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets. The current fair market value is determined by independent appraisal, and the future net cash flows are based on assumptions such as asset utilization, expected remaining useful lives, future market trends and projected salvage values. Impairment charges are recorded in depreciation and amortization expense on the Company's Consolidated Statements of Operations. If there are subsequent changes in these estimates, or if actual results differ from these estimates, such changes could impact the Consolidated Financial Statements.

In June 2003, the Company recorded an aircraft impairment of $21 million as additional depreciation expense, primarily for Boeing 727-200 aircraft used in charter operations. In December 2003, the Company recorded an impairment charge of $213 million as other expense, which related to foreign real property that then secured certain debt obligations of the Company.

In December 2002, the Company revised its fleet plan, accelerating the retirement of 13 DC10-30 and nine Boeing 747-200 aircraft by an average of five and six years, respectively. The Company recorded impairment charges of $352 million associated with these aircraft, engines and related inventory as a result of the retirement acceleration. The Company's 2003 operating results were also impacted by an estimated $20 million of additional depreciation expense related to these aircraft, reflecting the combined effect of the reduced average lives, a decrease in net book values and lower salvage values. If the current fair market values and salvage values of the impaired aircraft were decreased by 10%, the aircraft impairment charge would have increased by $17 million and the 2003 depreciation expense would have decreased by $7 million. See "Item 8. Consolidated Financial

Statements and Supplementary Data, Note 1—Summary of Significant Accounting Policies", for additional discussion of impairment of long-lived assets.

Pension Liability and Expense. The Company has several noncontributory pension plans covering substantially all of its employees. The Company accounts for its defined benefit pension plans in accordance with SFAS No. 87, Employers' Accounting for Pensions, which requires that amounts recognized in financial statements be determined on an actuarial basis that includes estimates relating to expected return on plan assets, discount rate and employee compensation. Benefits associated with these plans are based primarily on years of service and, in some cases, employee compensation. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 12—Pension and Other Postretirement Health Care Benefits", for additional discussion of actuarial assumptions used in determining pension liability and expense.

A significant element in determining the Company's pension expense is the expected return on plan assets, which is based in part on historical results for similar allocations among asset classes. The difference between the expected return and the actual return on plan assets is deferred and, under certain circumstances, amortized over future years of service. Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense.

At December 31, 2002, the Company changed its assumed expected long-term rate of return on plan assets from 10.5% to 9.5%, which remained in place as of December 31, 2003. In developing the expected long-term rate of return assumption, the Company examines projected returns by asset category with its pension investment advisors. Projected returns are based primarily on broad, publicly traded equity and fixed-income indices, with minor adjustments to account for the value of active management the funds have provided historically. The Company's expected long-term rate of return on plan assets is based on a target asset allocation of 45% U.S. equities, 25% international equities, 15% long duration fixed income securities, 10% private market securities and 5% high yield fixed-income securities. This target asset allocation yields an expected weighted average return slightly in excess of 9.5% on an annual basis. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 12—Pension and Other Postretirement Health Care Benefits", for further information on the Company's investment policy for its defined benefit plans and actual investment mix by asset category as of December 31, 2003. The actual asset allocation is reviewed regularly and is periodically rebalanced to the targeted allocation.

The plan assets earned a rate of return substantially less than 9.5% in each of 2000, 2001 and 2002, but exceeded that rate in 2003, earning 28.2%. For the nine year period 1995 - 2003 in which the current asset allocation policy has been in place, the plan assets have generated annualized returns of 11.7%. Depending on future rates of return, the Company's average long-term historical rate of return may decline and could, in turn, cause the expected return on plan assets to be adjusted downward. If such adjustments become necessary, future pension expense would increase.

Plan assets for the Company's pension plans are managed by external investment management organizations. These advisors are prohibited by the investment policies of the plan from investing in Company securities, other than as part of a market index fund that could have a diminutive proportion of such securities.

The Company also determines the discount rate used to measure plan liabilities. The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company looks to rates of return on fixed-income investments of similar duration to the liabilities in the plans that hold high, investment grade ratings by recognized ratings agencies. By applying this methodology, the Company determined a discount rate of 6.25% to be appropriate at December 31, 2003, which is a reduction of 0.50% from the rate used at December 31, 2002.

For the year ended December 31, 2003, accounting for the changes related to the Company's pension plans resulted in a net increase to accumulated other comprehensive income of $19 million on a pre-tax basis. The positive impact on accumulated other comprehensive income was principally due to a 30.2% increase in the fair value of the plan assets, offset by a 12.0% rise in benefit obligations that was principally driven by the decrease in the discount rate to 6.25%. Holding all other factors constant, a change in the discount rate used to measure plan liabilities by 0.50% would have changed accumulated other comprehensive income by $480 million on a pre-tax basis.

For pension plans sponsored by the Company in which benefits depend, in part, on the future level of wages, the projected rate of future compensation increases is an important assumption that affects the amount of periodic pension expense recognized. The Company's expectations regarding future wage increases are based on several factors, including historical trends, contractual obligations under collective bargaining agreements, and prevailing market forces. As of December 31, 2003, the weighted average rate of future compensation increases assumed for the affected plans was 1.93% annually, which compares with 3.60% and 3.90% at December 31, 2002 and 2001, respectively. These changes are reflective of significant downward wage pressures in the U.S. airline industry resulting from the continued expansion of low cost carriers, which derive a large part of their cost advantage from lower labor rates, and significant wage savings achieved at several of the Company's major competitors during the past year.

For the year ended December 31, 2003, the Company recognized consolidated pre-tax pension expense of $491 million, up from $309 million in 2002. The amount for 2003 included $58 million related to a curtailment charge in the contract plan due to workforce reductions. Pension expense is expected to approximate $446 million in 2004. Holding all other factors constant, an increase/decrease in the expected long-term rate of return on plan assets by 0.5% would decrease/increase pension expense by approximately $27 million in 2004. Holding all other factors constant, an increase/decrease in the discount rate used to measure plan liabilities by 0.25% would decrease/increase pension expense by approximately $30 million in 2004. Holding all other factors constant, reducing the rate of future wage increases from 3.60% to 1.93% will decrease 2004 pension expense by approximately $54 million.

Revenue Recognition. Passenger ticket proceeds are recorded in the air traffic liability account at the time of sale and represent an obligation of the Company to provide air travel in the future. Revenue is recognized, and the air traffic liability is reduced, as passengers use these tickets for transportation. The Company performs monthly evaluations of this estimated liability and recognizes any adjustments in passenger revenues for that period. These adjustments relate primarily to ticket usage patterns, refunds, exchanges, inter-airline transactions, and other travel obligations for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price. While these factors generally follow predictable patterns that provide a reliable basis for estimating the air traffic liability, and the Company uses historical trends and averages in its estimates, significant changes in business conditions and/or passenger behavior that affect these estimates could have a significant impact on the Consolidated Financial Statements.

Frequent Flyer Accounting. The Company utilizes a number of estimates in accounting for its WorldPerks frequent flyer program. The Company accounts for the frequent flyer program obligations by recording a liability for the estimated incremental cost of flight awards expected to be redeemed. Customers are expected to redeem their mileage, and a liability is recorded, when their accounts accumulate the minimum number of miles needed to obtain one flight award. Additional assumptions are made, based on past general customer behavior, regarding the likelihood of customers using the miles for first-class upgrades or other premiums instead of flight awards, as well as the likelihood of customers never redeeming the miles. Estimated incremental costs are based on the system average cost per passenger for food and beverage, fuel, insurance, security, miscellaneous claims and WorldPerks distribution and administration expenses. If the average incremental cost of outstanding

awards were increased or decreased by 10%, the liability for the estimated incremental cost of flight awards expected to be redeemed would change by $12 million.

The number of estimated travel awards outstanding at December 31, 2003, 2002 and 2001 was approximately 7,180,000, 7,805,000 and 8,320,000, respectively. The estimated liability excludes accounts that have never attained the minimum travel award level, awards that are expected to be redeemed for upgrades, and the proportion not expected to be redeemed at all, but includes an estimate for partially earned awards on accounts that previously earned an award. Northwest recorded a liability for these estimated awards of $119 million, $127 million and $132 million at December 31, 2003, 2002 and 2001, respectively. The number of travel awards used for travel on Northwest during the years ended December 31, 2003, 2002 and 2001 was approximately 1,408,000, 1,459,000 and 1,398,000, respectively. These awards represented an estimated 7.5%, 7.8% and 7.5% of Northwest's total RPMs for each such year, respectively. Northwest believes displacement of revenue passengers is minimal based on the low ratio of WorldPerks award usage to revenue passenger miles and the Company's ability to manage frequent flyer inventory through seat allocations. In June 2002, the minimum program award miles was changed from 20,000 to 25,000 miles, which is primarily responsible for the decline in the number of estimated awards outstanding and the recorded liability since 2001.

The Company defers a portion of the revenue from the sale of mileage credits to participating partners such as credit card issuers, hotels, long-distance companies, car rental firms and other non-airline partners. The deferred revenue is recognized over the period in which the credits are expected to be redeemed for travel. The portion of revenue that is recognized at the time of sale represents amounts in excess of the fair value of the tickets to be redeemed.

Intangible Assets. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that companies test goodwill and indefinite lived intangible assets for impairment on an annual basis rather than amortize such assets. The Company adopted SFAS No. 142 as of January 1, 2002, and as a result no longer amortizes its indefinite lived intangible assets and goodwill. During the fourth quarter of 2002, the Company completed its impairment test of goodwill and found the fair value to be in excess of the carrying value. During the first quarter of 2003, an independent third party appraisal was conducted for the Company's annual impairment test of its international routes and found the fair value to be in excess of the carrying value.

The Company's indefinite lived intangible asset derives from the U.S.-Japan bilateral aviation agreement, which establishes rights to carry traffic between Japan and the U.S., and extensive "fifth freedom" rights between Japan and India, the South Pacific and other Asian destinations. "Fifth freedom" rights allow Northwest to operate service from any gateway in Japan to points beyond Japan and carry Japanese originating passengers. These rights have no termination date, and the Company has the supporting infrastructure (airport gates, slots and terminal facility leases) in place to operate air service to Japan and beyond from its U.S. hub airports indefinitely. Governmental policy and bilateral agreements between nations regulate international operating route authorities and alliances. The Company's carrying value of international route authorities was $634 million at December 31, 2003. Should any changes occur in policies, agreements, infrastructure or economic feasibility of air service to Japan, the Company will assess this asset for impairment and re-evaluate the economic life of these international routes. If the life is then determined to be finite, the Company would begin amortizing the asset.

Stock Based Compensation. As of December 31, 2003, the Company has stock option plans for officers and key employees of the Company. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 7—Stock Options", for additional discussion of stock options. The Company historically accounted for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.

Prior to January 1, 2003, no stock-based employee compensation expense related to options were reflected in the Consolidated Statements of Operations, as all options granted in 2002 or before have an exercise price equal to the market value of the underlying common stock on the date of grant.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 provides alternative methods of transition for companies that voluntarily change to the fair value based method of accounting for stock-based compensation. It also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and quarterly financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

Effective January 1, 2003, the Company adopted the fair value method of recording stock-based employee compensation prescribed by SFAS No. 123 and accounts for this change in accounting principle using the "prospective method" as described by SFAS No. 148. All employee stock option grants made on or after January 1, 2003 are recorded as compensation expense over the vesting period based on the fair value at the date the stock-based compensation is granted. The Company also adopted the disclosure provisions of SFAS No. 148 for the year ended December 31, 2002, and the related disclosures are included in "Item 8. Consolidated Financial Statements and Supplementary Data, Note 7—Stock Options".

On January 14, 2003, the Company completed an option exchange program, pursuant to which officers of the Company were able to exchange their stock options at a ratio of two old options for one newly issued option. The new options have a strike price of $8.31, the average of the high and low price of the Company's common stock on the award date of January 15, 2003. The compensation expense related to these new options will be amortized over a four-year vesting period using the fair value method of recording stock-based employee compensation. Certain other management employees of the Company were able to exchange their stock options for phantom units (instruments settled in cash at the time of vesting) at a ratio of three old options for one phantom unit. The compensation expense related to these phantom units will be recognized over the four-year vesting period, adjusted for the current period stock price, consistent with how phantom units have been expensed in the past.

On June 27, 2003, the Company completed an option exchange program for its pilots holding stock options or stock appreciation rights ("SARs") granted pursuant to the 1998 Pilots Stock Option Plan. This exchange program was adopted as part of a Letter of Agreement with ALPA to obtain approval of the Delta codeshare agreement from ALPA. Pilot participants were able to exchange all of their outstanding stock options or SARs for a designated number of replacement options or replacement SARs, respectively. Eligible participants were able to exchange their existing stock options and SARs at a ratio of two shares subject to an old award for one share subject to a newly issued award of the same type (although certain outstanding SARs were exchanged only for newly issued options). The exercise price of the new awards is the average of the high and low sales prices of the Company's common stock on the award date of July 31, 2003, or $9.185 per share. Compensation expense related to these new options will be amortized over a four-year vesting period using the fair value method of recording stock-based compensation. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 1—Summary of Significant Accounting Policies" and "Note 7—Stock Options", for additional discussion of these stock option exchange programs.

In December 2003, the FASB revised SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. This revision requires disclosures in addition to those in the original statement about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The Company has adopted the provisions

of the revised SFAS No. 132 as of December 31, 2003, and has included the required disclosures in the footnotes to the Consolidated Financial Statements.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was passed by Congress and signed into law on December 8, 2003. The Act establishes a voluntary prescription drug benefit for eligible participants beginning January 1, 2006. The Act also provides for the government to pay a special subsidy equal to 28% of a retiree's covered prescription drug expenses between $250 and $5,000 (adjusted annually for the percentage increase in Medicare per capita prescription drug costs) to employers who sponsor retiree prescription drug plans. In accordance with FASB Staff Position 106-1, the Company has elected to defer including the effects of the Act in any measures of accumulated postretirement benefit obligations and net periodic postretirement benefit costs reflected in the Consolidated Financial Statements and accompanying notes. Specific authoritative guidance on accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. The Company estimates that the Act will not have a significant impact on postretirement liabilities and benefit costs.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". FIN 46 requires companies to determine whether a financing or other arrangement constitutes a "variable interest entity". If a company concludes that such an arrangement is a variable interest entity, the company must then evaluate whether it is the primary beneficiary. The primary beneficiary of a variable interest entity is required to consolidate the entity for financial statement purposes. Variable interest entities are those that: 1) have insufficient equity investment at risk to finance their activities without additional subordinated support or 2) lack essential characteristics of a controlling financial interest including, among others, the obligation to absorb expected losses, or the right to receive expected residual returns, of the entity. The primary beneficiary is the enterprise that is obligated to absorb the expected losses or has a right to receive the expected residual returns. FIN 46 was effective immediately for variable interest entities created, or in which the Company obtains an interest, after January 31, 2003. For all variable interest entities created on or before January 31, 2003, the FASB delayed the initial effective date of the provisions until the quarter ending December 31, 2003, but encouraged early adoption. The Company has adopted the provisions of FIN 46 as of July 1, 2003 for all variable interests based on then existing guidance provided by the FASB.

The Company formerly consolidated a financing entity (as described in Note 5—Mandatorily Redeemable Security) that issued a preferred security previously classified on the Company's consolidated financial statements as Mandatorily Redeemable Preferred Security of Subsidiary Which Holds Solely Non-Recourse Obligation of Company ("MRPS"). This subsidiary is a variable interest entity under the provisions of FIN 46, but the Company is not the primary beneficiary. Accordingly, as of July 1, 2003, the Company no longer consolidated the subsidiary but an amount equal to the MRPS ($553 million as of December 31, 2002), representing the Company's non-recourse obligation to the subsidiary, was recorded as Mandatorily Redeemable Security in the liability section of the Company's consolidated balance sheets. As a result of the Company purchasing the entity that holds the MRPS during the December 2003 quarter, the MRPS is no longer a liability on the consolidated balance sheets.

The Company has examined its other financing arrangements potentially impacted by the provisions of FIN 46 and has concluded that no additional arrangements of a material nature require consolidation. In its report on Form 10-Q for the quarter ended June 30, 2003, the Company described its preliminary conclusions regarding four aircraft leases that have historically been accounted for as operating leases for book purposes but as a loan for tax purposes. Based on an examination of the provisions of FIN 46 at that time, the Company reported that it would begin accounting for these leases as capital leases for book purposes and record a cumulative effect charge associated with this change in the quarter ending September 30, 2003. Subsequent interpretive guidance by the FASB resulted in a determination by the Company that the lessor is not a variable interest entity under the

provisions of FIN 46. Therefore, the Company will not consolidate these aircraft leases and will continue to account for them as operating leases.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how a company classifies and measures certain financial instruments and specifies that some financing arrangements with characteristics of both liabilities and equity must be classified as liabilities. Among the requirements of SFAS 150 is that all "Mandatorily Redeemable" securities be classified as liabilities. In the absence of applying FIN 46, this would have resulted in the Company reclassifying the Mandatorily Redeemable Security described above to a liability. Given the effects of FIN 46, however, the equivalent result already applied. The Company adopted SFAS 150 on July 1, 2003 and anticipates that this standard will have no other material impact on the Company's financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Disposal or Exit Activities. SFAS No. 146 requires that a liability for a cost associated with exit or disposal activities be recognized when the liability is incurred, rather than when an entity commits to an exit plan. The Company adopted SFAS No. 146 on January 1, 2003. This new statement changed the timing of liability and expense recognition related to exit or disposal activities, but not the ultimate amount of such expenses.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires certain guarantees to be recorded at fair value and to provide additional disclosures about each guarantee, or each group of similar guarantees. The Company adopted the disclosure provisions of FIN 45 as of December 31, 2002, and adopted the initial recognition and measurement provisions for all guarantees issued or modified after December 31, 2002. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 11—Contingencies", for the Company's disclosures concerning its guarantor obligations.

Labor Agreements. Approximately 90% of the Company's employees are members of collective bargaining units. The Company has entered into mediation with the International Association of Machinists and Aerospace Workers under the supervision of the National Mediation Board. The Company has also commenced RLA negotiations with the Air Line Pilots Association and is in discussion with the rest of its labor unions in an effort to align wages, benefits and work rules with the industry's new revenue environment and to remain competitive with other airlines achieving permanent cost reductions through bankruptcy proceedings or the threat of bankruptcy proceedings.

In June 2003, the Company's flight attendants authorized the PFAA to be their collective bargaining representative. Results of the election were subsequently certified by the National Mediation Board. The Company's collective bargaining agreement with the flight attendants now represented by PFAA becomes amendable May 30, 2005.

The Company's collective bargaining agreement with the IAM, representing Agents, Clerks, Equipment Service Employees and Stock Clerks, became amendable on February 25, 2003. Pursuant to the RLA, these agreements remain in effect while the Company and the IAM pursue agreements on new contracts. The Company and the IAM have entered into mediation under the supervision of the National Mediation Board as the parties seek agreement on a new contract. Since the parties did not reach tentative agreements by October 25, 2003, IAM represented employees received a one time lump sum payment equal to 2% of W-2 earnings over the prior 14 months, which approximated $20 million. On July 23, 2003, the Company and ALPA commenced negotiations on a new contract. These negotiations are on going.

Facilities Consolidation. In January 2004, the Company closed one of its city ticket offices and announced in February 2004 that it will be closing all of its remaining city ticket offices in North America by March 2004. The 76 employees affected by the closures will be able to transfer to one of the Company's five reservation centers. On September 25, 2003, the Company announced that it would close its Detroit area reservations center and city ticket office located in Livonia, Michigan. Call center activity performed at the Detroit facility was transferred to the Company's facilities in Baltimore, Chisholm, Minneapolis, Seattle and Tampa. The 570 contract employees at the Detroit reservations center were eligible to transfer to one of the Company's other operating reservations centers and approximately 160 employees elected to do so. The Detroit reservations center and city ticket office closed in December and 11 management positions were eliminated.

Alliances. Northwest has strengthened its network through alliance partnerships. Long-term alliances are the most effective way for Northwest to enter markets that it would not be able to serve alone. Alliance relationships can include codesharing, reciprocal frequent flyer programs, "through" luggage check-in, reciprocal airport lounge access, joint marketing, sharing of airport facilities and joint procurement of certain goods and services. Northwest and its alliance partners currently provide a global network to over 750 cities in 120 countries on six continents.

In August 2002, the Company announced that it had signed a cooperative marketing agreement with Continental and Delta. This agreement is designed to connect the three carriers' domestic and international networks and provide for codesharing, reciprocity of frequent flyer programs, airport club use and other cooperative activities. Northwest, Continental and Delta received approval of the agreement from the DOJ and the DOT in the first quarter of 2003. The three airlines began implementing the agreement in June 2003 by offering access to each other's airport lounges and by offering codeshare service. Beginning in July 2003, frequent flyer members of the three airlines have been able to book and redeem miles for itineraries that include any combination of Northwest, Continental and Delta operated flights by using a single award. In the fourth quarter of 2003, Northwest and Delta expanded their codesharing to 650 daily domestic flights operated by each carrier, the maximum permitted by the DOT as of that time. In June 2004, the next phase may be implemented by adding code sharing on another 650 daily domestic flights. The combined network has increased Northwest's presence in the South, East and Mountain West regions of the U.S., as well as in Latin America.

Northwest also has domestic frequent flyer and codesharing agreements with several other airlines including Alaska/Horizon Airlines, Hawaiian Airlines, America West Airlines and American Eagle.

In the Pacific, Northwest has frequent flyer agreements with Malaysia Airlines, Japan Airlines, Jet Airways of India, Garuda Indonesia, Cebu Pacific Airlines and Pacific Island Aviation.

The risks inherent in the Company's market-sensitive instruments and positions are the potential losses arising from adverse changes in the price of fuel, foreign currency exchange rates and interest rates, as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions management may take to mitigate its exposure to such changes. Actual results may differ from the outcomes estimated in the analysis due to factors beyond the Company's control. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 14—Risk Management and Financial Instruments", for related accounting policies and additional information.

Aircraft Fuel. The Company's earnings are affected by changes in the price and availability of aircraft fuel. From time to time, the Company manages the price risk of fuel costs by utilizing futures contracts traded on regulated futures exchanges, swap agreements and options. A hypothetical 10% increase in the December 31, 2003 cost per gallon of fuel, assuming projected 2004 fuel usage, would result in an increase to aircraft fuel expense of approximately $131 million in 2004, compared to an estimated $65 million (net of hedging) for 2003 measured at December 31, 2002. As of December 31, 2003, the Company had no fuel hedges in place compared to hedges on 71% and 60% of the 2003 first quarter and full year requirements, respectively, at December 31, 2002.

Foreign Currency. The Company is exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expenses. The Company's largest exposure comes from the Japanese yen. From time to time, the Company uses financial instruments to hedge its exposure to the Japanese yen. The result of a uniform 10% strengthening in the value of the U.S. dollar from December 31, 2003 levels relative to each of the currencies in which the Company's revenues and expenses are denominated would result in a decrease in operating income of approximately $58 million for the year ending December 31, 2004, compared to an estimated decrease of $68 million for 2003 measured at December 31, 2002. This sensitivity analysis was prepared based upon projected foreign currency-denominated revenues and expenses as of December 31, 2003 and 2002. The variance is due to the Company's foreign currency-denominated revenues exceeding its foreign currency-denominated expenses.

The Company also has foreign currency exposure as a result of changes to balance sheet items. The result of a 10% weakening in the value of the U.S. dollar would result in an decrease to other income of an estimated $1 million in 2004, caused by the remeasurement of net foreign currency-denominated assets as of December 31, 2003, compared with an estimated increase of $2 million caused by the remeasurement of net foreign currency denominated liabilities at December 31, 2002. This sensitivity analysis was prepared based upon projected foreign currency-denominated assets and liabilities as of December 31, 2003 and 2002.

In 2003, the Company's yen-denominated net cash inflow was approximately 19 billion yen (approximately $164 million) and its yen-denominated liabilities exceeded its yen-denominated assets by an average of 4 billion yen (approximately $32 million) compared with 23 billion yen (approximately $225 million) and 5 billion yen (approximately $38 million), respectively, in 2002. In general, each time the yen strengthens (weakens), the Company's operating income is favorably (unfavorably) impacted due to net yen-denominated revenues exceeding expenses and a non-operating foreign currency loss (gain) is recognized due to the remeasurement of net yen-denominated liabilities. The Company's operating income in 2003 was favorably impacted by approximately $26 million due to the average yen being stronger in 2003 compared to 2002 and unfavorably impacted in 2002 by approximately $85 million due to the average yen being weaker in 2002 compared to 2001. The average yen to U.S. dollar exchange rate for the years ending December 31, 2003, 2002 and 2001 was 117, 126 and 121, respectively. Including the impact of hedge activities, the average yen to U.S. dollar exchange rate for the years ending December 31, 2003, 2002 and 2001 was 117, 104 and 92, respectively. The Japanese

yen financial instruments utilized to hedge net yen-denominated cash flows resulted in gains of $1 million and $31 million in 2003 and 2002, respectively. As of December 31, 2003, the Company had entered into forward contracts to hedge approximately 22% and 6% of its anticipated 2004 and 2005 yen-denominated sales at an average rate of 114 and 106 yen per U.S. dollar, respectively. This compares to 22% of 2003 sales hedged as of December 31, 2002.

Interest. The Company's earnings are also affected by changes in interest rates due to the impact those changes have on its interest income from cash equivalents and short-term investments and its interest expense from floating rate debt instruments. If short-term interest rates increased by 100 basis points for a year, based on the Company's cash balance at December 31, 2003, the Company's interest income from cash equivalents and short-term investments would increase by approximately $29 million compared to an estimated $21 million based on the Company's cash balance at December 31, 2002. The Company's floating rate indebtedness was approximately 44% and 40% of its total long-term debt and capital lease obligations at December 31, 2003 and 2002, respectively. If long-term floating interest rates increased by 100 basis points during 2004 as measured at December 31, 2003, the Company's interest expense would increase by approximately $36 million, compared to an estimated $28 million for 2003 measured at December 31, 2002. These amounts are determined by considering the impact of the hypothetical interest rates on the Company's floating rate indebtedness, cash equivalent and short-term investment balances at December 31, 2003 and 2002.

Market risk for fixed-rate indebtedness is estimated as the potential decrease in fair value resulting from a hypothetical 100 basis point increase in interest rates and amounts to approximately $132 million during 2004 measured at December 31, 2003, compared to an estimated $113 million for 2003 measured at December 31, 2002. The fair values of the Company's indebtedness were estimated using estimated or quoted market prices and discounted future cash flows based on the Company's incremental borrowing rates for similar types of borrowing arrangements.

We have audited the accompanying consolidated balance sheets of Northwest Airlines Corporation as of December 31, 2003 and 2002, and the related consolidated statements of operations, common stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northwest Airlines Corporation at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets and effective January 1, 2003, changed its method of accounting for stock-based compensation.