UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2005

 

Commission file number 0-23642

 

NORTHWEST AIRLINES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

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

 

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

 

As of March 31, 2005, there were 87,148,458 shares of the registrant’s Common Stock outstanding.

 

 

Northwest Airlines Corporation
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements.
		Condensed Consolidated Statements of Operations - Three months ended March 31, 2005 and 2004
		Condensed Consolidated Balance Sheets - March 31, 2005 and December 31, 2004
		Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2005 and 2004
		Notes to Condensed Consolidated Financial Statements
		The Computations of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Requirements are attached hereto and filed as Exhibits 12.1 and 12.2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.
	Item 4.	Controls and Procedures.
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings.
	Item 6.	Exhibits.
SIGNATURE
EXHIBIT INDEX

 

2

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Northwest Airlines Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three Months Ended
		March 31
(Unaudited, in millions except per share amounts)		2005			2004
Operating Revenues
Passenger		$	2,035		$	1,963
Regional carrier revenues		276			217
Cargo		206			183
Other		281			240
Total operating revenues		2,798			2,603
Operating Expenses
Salaries, wages and benefits		955			937
Aircraft fuel and taxes		630			450
Selling and marketing		205			175
Other rentals and landing fees		156			146
Aircraft maintenance materials and repairs		144			111
Depreciation and amortization		138			141
Aircraft rentals		104			114
Regional carrier expenses		356			256
Other		402			381
Total operating expenses		3,090			2,711
Operating Income (Loss)		(292		)	(108		)
Other Income (Expense)
Interest expense, net		(151		)	(132		)
Investment income		16			13
Other, net		(18		)	4
Total other income (expense)		(153		)	(115		)
Income (Loss) Before Income Taxes		(445		)	(223		)
Income tax expense (benefit)		5			—
Net Income (Loss)		(450		)	(223		)
Preferred stock requirements		(8		)	(7		)
Net Income (Loss) Applicable to Common Stockholders		$	(458	)	$	(230	)
Earnings (loss) per common share:
Basic and Diluted		$	(5.28	)	$	(2.67	)
Average shares used in computation:
Basic and Diluted		87			86
See accompanying notes.

 

3

 

Northwest Airlines Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31			December 31
(Unaudited, in millions)		2005			2004
Assets
Current Assets
Cash and cash equivalents		$	518		$	707
Unrestricted short-term investments		1,614			1,752
Restricted short-term investments		173			152
Accounts receivable, net		521			460
Flight equipment spare parts, net		134			125
Prepaid expenses and other		572			382
Total current assets		3,532			3,578
Property and Equipment
Flight equipment, net		7,316			7,355
Other property and equipment, net		755			769
Total property and equipment		8,071			8,124
Flight Equipment Under Capital Leases, net		144			146
Other Assets
Intangible pension asset		671			671
International routes		634			634
Investments in affiliated companies		59			55
Other		710			834
Total other assets		2,074			2,194
Total Assets		$	13,821		$	14,042
Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities
Air traffic liability		$	1,792		$	1,468
Accounts payable and other liabilities		2,364			2,280
Current maturities of long-term debt and capital lease obligations		580			749
Total current liabilities		4,736			4,497
Long-Term Debt		7,607			7,715
Long-Term Obligations Under Capital Leases		305			308
Deferred Credits and Other Liabilities
Long-term pension and postretirement health care benefits		3,635			3,593
Other		811			753
Total deferred credits and other liabilities		4,446			4,346
Preferred Redeemable Stock		270			263
Common Stockholders’ Equity (Deficit)
Common stock		1			1
Additional paid-in capital		1,476			1,471
Accumulated deficit		(2,458		)	(1,999		)
Accumulated other comprehensive income (loss)		(1,550		)	(1,547		)
Treasury stock		(1,012		)	(1,013		)
Total common stockholders’ equity (deficit)		(3,543		)	(3,087		)
Total Liabilities and Stockholders’ Equity (Deficit)		$	13,821		$	14,042
See accompanying notes.

 

4

 

Northwest Airlines Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Three Months Ended
		March 31
(Unaudited, in millions)		2005			2004
Cash Flows from Operating Activities
Net loss		$	(450	)	$	(223	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		138			141
Pension and other postretirement benefit contributions less than expense		49			114
Changes in certain assets and liabilities		140			174
Other, net		6			(8		)
Net cash provided by (used in) operating activities		(117		)	198
Cash Flows from Investment Activities
Capital expenditures		(50		)	(43		)
Purchase of short-term investments		(230		)	(215		)
Proceeds from sales of short-term investments		360			124
Proceeds from sale of Pinnacle note receivable		102			—
Other, net		4			12
Net cash provided by (used in) investing activities		186			(122		)
Cash Flows from Financing Activities
Proceeds from long-term debt		16			298
Payments of long-term debt and capital lease obligations		(273		)	(245		)
Other, net		(1		)	(5		)
Net cash provided by (used in) financing activities		(258		)	48
Increase (Decrease) in Cash and Cash Equivalents		(189		)	124
Cash and cash equivalents at beginning of period		707			1,146
Cash and cash equivalents at end of period		$	518		$	1,270
Cash and cash equivalents and unrestricted short-term investments at end of period		$	2,132		$	2,936
Supplemental Cash Flow Information:
Interest paid		$	137		$	101
Investing and Financing Activities Not Affecting Cash:
Manufacturer financing of aircraft, aircraft predelivery deposits and other non-cash transactions		$	56		$	108
See accompanying notes.

 

5

 

Northwest Airlines Corporation

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — Basis of Presentation

 

      The condensed consolidated financial statements of Northwest Airlines Corporation (“NWA Corp.”), a holding company whose principal indirect operating subsidiary is Northwest Airlines, Inc. (“Northwest”), include the accounts of NWA Corp. and all consolidated subsidiaries (collectively, the “Company”).  The condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes included in the Company’s audited consolidated financial statements, which are provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.  The Company’s accounting and reporting policies are summarized in “Note 1 — Summary of Significant Accounting Policies” in the Annual Report on Form 10-K for 2004.

 

      The Company maintains a Web site at http://www.nwa.com.  Information contained on the Company’s website is not incorporated into this Quarterly Report on Form 10-Q.  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 this Web site at http://ir.nwa.com as soon as reasonably practicable after those reports are electronically filed with or furnished to the SEC.

 

      In the opinion of management, the interim financial statements reflect adjustments, consisting of normal recurring accruals, unless otherwise noted, which are necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated.  Certain prior period amounts have been reclassified to conform to the current period financial statement presentation.

 

      The Company’s results of operations for interim periods are not necessarily indicative of the results for an entire year due to seasonal factors as well as competitive and general economic conditions.  The Company’s second and third quarter operating results have historically been more favorable due to increased leisure travel on domestic and international routes during the spring and summer months.

 

Note 2 — Recent Accounting Pronouncements

 

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), Share-Based Payment (“SFAS No. 123R”).  In addition to requiring supplemental disclosures, SFAS No. 123R eliminates the option to apply the intrinsic value measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) to stock compensation awards issued to employees.  Furthermore, the Company is required to recognize compensation cost for the portion of outstanding awards previously accounted for under the provisions of APB No. 25 for which the requisite service had not been rendered as of the adoption date for this Statement.  The Statement also requires companies to estimate forfeitures of stock compensation awards as of the grant date of the award.  Because the Company voluntarily adopted the fair value method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), effective January 1, 2003, the unvested awards still accounted for under the provisions of APB No. 25, and therefore subject to the provisions of SFAS No. 123R, are minimal.  Additionally, the overall impact of estimating the remaining forfeitures for awards outstanding as of the adoption date is insignificant.  Therefore, the impact of adopting SFAS No. 123R will be immaterial.  SFAS No. 123R is effective for the fiscal quarter beginning January 1, 2006, although early adoption is permitted.

 

      In September 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share (“EITF 04-8”).  EITF 04-8 requires companies to include certain convertible debt and equity instruments that were previously excluded into their calculations of diluted earnings per share, and to restate the diluted earnings per share calculation for all periods during which time the applicable convertible instruments were outstanding.  The Company adopted the provisions of EITF 04-8 as of December 31, 2004.  As further discussed in “Note 4 — Earnings (Loss) Per Share Data”, 9.3 million and 9.8 million shares issuable upon conversion of the Company’s 6.625% and 7.625% senior convertible notes issued in May 2003 and November 2003, respectively, will be included in the Company’s diluted earnings per share calculation in periods when the Company reports net income applicable to common shareholders and the impact is dilutive.

 

 

6

 

Note 3 — Geographic Regions

 

      The Company is managed as one cohesive business unit, of which revenues are derived primarily from the commercial transportation of passengers and cargo.  Operating revenues from flight segments serving a foreign destination are classified into the Pacific or Atlantic regions, as appropriate.  The following table shows the operating revenues for each region (in millions):

 

		Three months ended
		March 31
		2005			2004
Domestic		$	1,931		$	1,796
Pacific, principally Japan		592			553
Atlantic		275			254
Total operating revenues		$	2,798		$	2,603

 

      The Company’s tangible assets consist primarily of flight equipment, which are utilized across geographic markets and therefore have not been allocated.

 

Note 4 — Earnings (Loss) Per Share Data

 

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

 

		Three months ended
		March 31
(In millions, except per share data)		2005			2004
Numerator:
Net income (loss)		$	(450	)	$	(223	)
Preferred stock requirements		(8		)	(7		)
Net income (loss) applicable to common stockholders		$	(458	)	$	(230	)
Denominator:
Weighted-average shares outstanding for basic earnings (loss) per share		86,729,563			86,114,328
Earnings (loss) per common share:
Net income (loss) before preferred stock requirements		$	(5.19	)	$	(2.59	)
Preferred stock requirements		(0.09		)	(0.08		)
Net income (loss) applicable to common stockholders		$	(5.28	)	$	(2.67	)

 

      For the three months ended March 31, 2005 and 2004, respectively, 19,418,282 and 19,972,830 incremental shares related to contingently convertible debt, the dilutive portion of employee stock options and unvested restricted shares under the treasury method and shares held in non-qualified rabbi trusts were not included in the diluted earnings per share calculation because the Company reported a net loss for these periods.  Incremental shares related to dilutive securities have an anti-dilutive impact on earnings per share when a net loss is reported and therefore are not included in the calculation.

 

      Because of the stated intent of the parties to settle the Series C Preferred Stock with cash rather than by the Company’s issuing additional common stock, 6,435,509 and 6,504,881 shares of Series C Common Stock equivalents are excluded from the effect of dilutive securities for the three months ended March 31, 2005 and 2004, respectively.

 

      The Company had total employee stock options and restricted shares outstanding of 9,413,809 and 6,500,603 as of March 31, 2005 and 2004, respectively.

 

7

 

Note 5 — Comprehensive Income (Loss)

 

      Comprehensive income (loss) consisted of the following (in millions):

 

		Three months ended
		March 31
		2005			2004
Net income (loss)		$	(450	)	$	(223	)
Change in unrealized gain/loss on available-for-sale securities		(3		)	1
Change in deferred gain/loss from hedging activities		3			(13		)
Foreign currency translation adjustments		(3		)	2
Comprehensive income (loss)		$	(453	)	$	(233	)

 

Note 6 — Income Taxes

 

Under the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”), the realization of the future tax benefits of a deferred tax asset is dependent on future taxable income against which such tax benefits can be applied.  All available evidence must be considered in the determination of whether sufficient future taxable income will exist.  Such evidence includes, but is not limited to, the company’s financial performance, the market environment in which the company operates, the utilization of past tax credits, and the length of relevant carryback and carryforward periods.  Sufficient negative evidence, such as cumulative net losses during a three-year period that includes the current year and the prior two years, may require that a valuation allowance be established with respect to existing and future deferred tax assets.  As a result, the Company was required to provide a valuation allowance on deferred tax assets recorded for losses beginning in the first quarter 2003.  The first quarter 2005 net loss was therefore not reduced by any tax benefit.  Additionally, it is more likely than not that future deferred tax assets will require a valuation allowance to be recorded to fully reserve against the uncertainty that those assets would be realized.

 

Note 7 — Long-term Debt

 

      Maturities of long-term debt, excluding capital lease obligations, through December 31, 2009 are as follows (in millions):

 

 

(1)                             The above table reflects a refinancing of $148 million previously due in November 2005 under the $975 million term loan facility; see further discussion in “Note 10—Subsequent Events”.

(2)                             Includes $79 million and $567 million of aircraft related loan obligations maturing in 2006 and 2007, respectively, that may be extended for an additional nine years from their maturity dates at the Company’s election.

 

Holders of $225 million of the $375 million convertible unsecured notes due after 2009 may require NWA Corp. to repurchase such notes in 2008 (and holders of all the notes also have other dates after 2009, but prior to maturity, on which NWA Corp. can be required to repurchase such notes).

 

8

 

On November 23, 2004, the Company completed the restructuring of its $975 million revolving bank credit facility, which was scheduled to mature in October 2005, by entering into an Amended and Restated Credit and Guarantee Agreement with a consortium of lenders that amended and restructured the revolving credit facility into a term loan.  The term loan has an initial principal amount of $975 million and is comprised of two tranches bearing different interest rates and with different principal amortization periods.  The first tranche, in the principal amount of $575 million, bears interest at LIBOR plus 5¼% and is payable 25% at the end of the first year, 12½% at the end of each of the second and third years and 50% at the end of the fifth year.  The second tranche, in the principal amount of $400 million, bears interest at LIBOR plus 6¾% and is payable 1% at the end of each of the first five years and 95% at the end of the sixth year, on November 23, 2010.  The 25% of the first tranche and the 1% of the second tranche payable in 2005 (which together total $148 million) have been refinanced — see discussion in “Note 10—Subsequent Events”.

 

The term loan is secured by substantially the same collateral the Company pledged to secure the original revolving bank credit facility.  The Agreement contains a covenant requiring the Company to maintain unrestricted cash, cash equivalents and short term investments in an amount not less than $900 million at any time.  In addition, the Agreement contains a covenant that requires the Company to maintain specified ratios of earnings to fixed charges as follows:

 

Number of				Required
Months Covered		Period Ending		Coverage Ratio
Nine		December 31, 2004		0.50 to 1.0
Twelve		March 31, 2005		0.50 to 1.0
-		June 30, 2005 through March 31, 2006		Waived	(1)
Three		June 30, 2006		1.00 to 1.0
Six		September 30, 2006		1.05 to 1.0
Nine		December 31, 2006		1.15 to 1.0
Twelve		March 31, 2007		1.30 to 1.0
Twelve		June 30, 2007		1.45 to 1.0
Rolling twelve		September 30, 2007 and each quarter ending thereafter		1.50 to 1.0

(1)          On April 13, 2005, the Company obtained an amendment that waived the fixed charges coverage covenant associated with the term loan facility for the periods ending June 30, 2005 through March 31, 2006; see further discussion in “Note 10—Subsequent Events”.

 

For purposes of calculating this ratio, earnings are defined as operating income adjusted to exclude the effects of depreciation, amortization and aircraft rents and to include the effects of interest income and governmental reimbursements for losses resulting from developments affecting the aviation industry.  Earnings also exclude non-recurring non-cash charges (subject to the inclusion of any cash payments then or thereafter made with respect thereto) and are determined without giving effect to any acceleration of rental expense.  Fixed charges are defined as interest expense and aircraft rents (without giving effect to any acceleration of rental expense).  Although the Company was in compliance with the covenant on March 31, 2005, continued compliance depends on many factors, some of which are beyond the Company’s control, including the overall industry revenue environment and the level of fuel costs.  Thus, there can be no assurance that the Company will be able to satisfy these requirements through the expiration of the facility.

 

9

 

Note 8 — Fleet Information and Commitments

 

As shown in the following table, Northwest operated a fleet of 432 aircraft at March 31, 2005, consisting of 364 narrow-body and 68 wide-body aircraft.  Northwest’s purchase commitments for aircraft as of March 31, 2005 are also provided.

 

										Temporarily		Total		Aircraft
		Seating				Capital		Operating		Not in		Aircraft		on Firm
Aircraft Type		Capacity		Owned		Lease		Lease		Service		in Service		Order
Passenger Aircraft
Airbus:
A319		124		60		—		12		—		72		9
A320		148		43		4		31		—		78		2
A330-200		243		7		—		—		—		7		5
A330-300		298		8		—		—		—		8		12
Boeing:
757-200		180-184		32		5		19		(5	)	51		—
757-300		224		16		—		—		—		16		—
747-200		353-430		4		—		3		(2	)	5		—
747-400		403		4		—		12		—		16		—
DC9		78-125		146		—		4		(3	)	147		—
DC10		273		14		—		8		(2	)	20		—
				334		9		89		(12	)	420		28
Freighter Aircraft
Boeing 747-200F				8		—		5		(1	)	12		—
Total Northwest Operated Aircraft				342		9		94		(13	)	432		28
Regional Aircraft
BAE AVRO RJ85		69		10		—		25		—		35		—
Bombardier CRJ-200/440		44-50		—		—		123		(3	)	120		31
SAAB 340		30-34		—		—		49		—		49		—
Total Airlink Operated Aircraft				10		—		197		(3	)	204		31
Total Aircraft				352		9		291		(16	)	636		59

 

(1)  On April 22, 2005, the Company announced that it had ordered 15 additional CRJ 200 aircraft for delivery between 2005 and 2006.  The Company has signed a non-binding letter of intent for these aircraft to be leased or subleased to and operated by Mesaba Aviation, Inc. (“Mesaba”), a subsidiary company of MAIR Holdings, Inc. (“MAIR”), and a Northwest Airlink carrier.  Under the terms of this letter of intent, Mesaba would also be given exclusive rights to operate an additional 20 CRJ aircraft should the Company elect to exercise additional options.  See further discussion in “Note 10—Subsequent Events”.  These aircraft are included in the table presented above.

 

      Committed expenditures for the 59 aircraft and related equipment on firm order, including estimated amounts for contractual price escalations and predelivery deposits, will be approximately $936 million for the remainder of 2005, $803 million in 2006, $877 million in 2007 and $90 million in 2008.  Consistent with prior practice, the Company intends to finance its aircraft deliveries through a combination of internally generated funds, debt and long-term lease financing.  Financing commitments available for use by the Company are in place for all of the aircraft on firm order and range from 80% - 100% of each aircraft’s purchase price.  The Company has the option and intends to finance the CRJ200/440 aircraft through long-term operating lease commitments from the manufacturer, and if the manufacturer does not provide the financing, the Company is not obligated to take delivery of the aircraft.  These aircraft will, in turn, be leased or subleased to and operated by a Northwest Airlink carrier.

 

10

 

The Company took delivery of two Airbus aircraft and six Bombardier CRJ aircraft during the three months ended March 31, 2005.  The Company entered into operating leases with respect to the six Bombardier CRJ aircraft and then subleased all of the aircraft to Pinnacle Airlines pursuant to the Company’s airline services agreement with Pinnacle Airlines.  In connection with the acquisition of these eight aircraft, the Company entered into long-term debt arrangements and operating leases.  Under such arrangements, the aggregate amount of debt incurred totaled $56 million and the minimum lease payments at the point of inception equaled $117 million.

 

Note 9 — Pension and Other Postretirement Benefits

 

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

 

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

 

		Three months ended March 31
		Pension Benefits						Other Benefits
		2005			2004			2005			2004
Service cost		$	64		$	63		$	9		$	7
Interest cost		137			134			14			13
Expected return on plan assets		(129		)	(124		)	—			—
Amortization of prior service cost		19			19			(3		)	(2		)
Recognized net actuarial loss and other events		36			20			7			6
Net periodic benefit cost		$	127		$	112		$	27		$	24

 

On April 10, 2004, the President signed into law the Pension Funding Equity Act (the “Pension Act”), which temporarily reduces the Company’s required pension contributions through two mechanisms: (1) certain companies were permitted to elect partial relief from the deficit reduction contribution requirements that otherwise would have applied in 2004 and 2005, an election the Company made; and (2) the applicable discount rate used to determine funding was increased to reflect yields on indices of high quality corporate bonds instead of 30-year U.S. Treasury rates.

 

      Including the effect of the Pension Act, the Company’s 2005 calendar year cash contributions to qualified pension plans will approximate $420 million.  On January 14, 2005, the Company contributed $84 million to these plans.  Subsequently, on April 15, 2005, the Company contributed another $92 million to these plans, with the balance due during the remainder of 2005. Absent further legislative relief, authorization by the IRS to reschedule future contributions, contractual relief under the Company’s collective bargaining agreements, substantial changes in interest rates, or asset returns significantly above the 9.5% annual rate currently assumed, we expect our calendar year 2006 and 2007 cash contributions to be significantly higher than our 2005 cash contributions.

 

Note 10 — Subsequent Events

 

      On March 25, 2005, the Company announced that it was in discussions with the lenders to refinance $148 million due in November 2005 under the $975 million term loan facility.  This refinancing was completed on April 15, 2005, with the new $148 million tranche bearing interest at LIBOR plus 6.25% and payable in six years.  As part of these discussions, on April 13, 2005, the Company also obtained an amendment that waived the fixed charges coverage covenant associated with the term loan facility through March 31, 2006 as well as changed the next covenant measurement date from the quarter ending June 30, 2005 to the quarter ending June 30, 2006.  The Company was in compliance with the covenant requirements as of March 31, 2005.  However, the lenders provided this amendment principally in consideration of the sharp rise in fuel prices since the beginning of the year, which made it unlikely that the Company would remain in compliance absent the waiver.

 

11

 

 

      On April 22, 2005, the Company announced that it had ordered 15 additional CRJ-200 aircraft, with deliveries scheduled to commence in the third quarter of 2005.  The Company intends to finance these aircraft through long-term operating leases with the manufacturer.  The Company has signed a non-binding letter of intent for these aircraft to be leased or subleased to and operated by Mesaba Aviation, Inc. (“Mesaba”), a subsidiary company of MAIR Holdings, Inc. (“MAIR”), and a Northwest Airlink carrier.  Under the terms of this letter of intent, Mesaba would also be given exclusive rights to operate another 20 CRJs should the Company elect to exercise additional options.  The Company’s existing Avro RJ85 and Saab service agreements with Mesaba will be replaced with a new 10 year airline services agreement, subject to final approval by the parties, MAIR’s board of directors and any applicable regulatory approvals.  Upon execution of a definitive airline services agreement, MAIR will amend the currently outstanding warrants to the Company, resulting in warrants covering an aggregate of 4,112,500 shares of MAIR’s common stock at an exercise price of $8.74.

 

      On April 1, 2005, the Company completed an 8.5 billion yen (approximately $78 million) secured financing with Shinsei Bank, Limited, maturing on June 20, 2006 (“Shinsei” loan).   The loan proceeds were reduced by fees and expenses, pre-paid interest and a liquidity reserve.  This financing bears interest at the rate of 2.878% per annum with interest payable on March 20, 2006 and at maturity.  The financing is secured by certain of the Company’s properties in Tokyo.  Subsequently, on April 20, 2005, the Company completed a 2.5 billion yen (approximately $23 million) financing with Airline Funding, LLC (“Airline Funding” ), which will remain outstanding concurrently with the Shinsei loan until maturity on June 20, 2006.  The Airline Funding financing is secured by a second lien on properties in Tokyo with the first lien being held by Shinsei Bank, Limited.

 

12

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Northwest and other large network airlines continue to face significant financial challenges.  Industry trends that produced record losses over the past four years persist, with the growth of low cost carriers and expanded product distribution through the internet resulting in a revenue environment that is increasingly price sensitive.  These longer term developments, combined with the lingering effects of the September 11, 2001 terrorist attacks, the conflict in Iraq and the SARS epidemic, have reduced passenger yields to levels where Northwest and other airlines with traditional labor cost structures cannot be profitable on a sustained basis.  This already difficult financial environment was exacerbated during the first quarter of 2005 when Delta, another large network airline, adopted a simplified fare pricing strategy similar to those employed by low cost carriers.  Northwest and its competitors were thus impacted by additional downward pressure on revenues even as average fuel prices for the quarter reached record levels.

 

These challenges have left all of the major legacy airlines with no choice but to significantly reduce their labor costs by bringing wage rates and work rules in line with the new revenue environment.  United and US Airways obtained new labor contracts through Chapter 11 bankruptcy protection.  American and Delta each realized labor cost reductions in the face of an imminent bankruptcy filing.  Continental, which for many years has maintained labor costs well below its major competitors, was nonetheless forced to seek additional reductions from its workers, most of whom recently ratified new agreements that incorporate substantial cost savings.

 

Northwest has been among the most successful carriers in reducing non-labor expenses, executing a series of aggressive cost reduction efforts beginning in early 2001.  In addition, the Company achieved an important first step in restructuring its labor contracts in October 2004 when it reached a two year bridge agreement with its pilots to reduce wage and benefit costs.  Under the agreement, which was effective December 1, 2004, the pilots agreed to $265 million in annual wage, benefit and other contract changes and salaried and management employees took $35 million in annual salary and benefit reductions.  Northwest’s overall labor costs remain above its major competitors.  The Company is therefore seeking additional wage and work rule changes that would increase the total savings to $1.1 billion annually, inclusive of the $300 million in reductions obtained through the pilot and management actions.  In addition, it is asking the labor unions to agree to restructure their pension programs by freezing the current defined benefit plans and replacing them with defined contribution plans.  These changes are essential in order for Northwest to return to profitability.

 

Continued high fuel prices will result in significant losses for the Company absent the Company’s ability to lower its unit costs, increase its unit revenues or both, and, in the absence of such developments, will have a significant impact on the Company’s ability to maintain adequate liquidity.  Even as the Company has incurred substantial losses in recent years, it has successfully built liquidity through the sale of non-strategic assets or by obtaining new financing.  However, the limited amount of unencumbered assets available for these purposes and the Company’s current level of indebtedness are likely to impede our ability to generate additional cash through such means.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Northwest and the Current Status of the Airline Industry” in the Company’s December 31, 2004 Annual Report on Form 10-K for a detailed discussion of the factors that have caused the structural decline in industry revenue and the other financial and operational challenges the Company faces.

 

For the quarter ended March 31, 2005, the Company reported a net loss applicable to common stockholders of $458 million and an operating loss of $292 million, which compares with a net loss applicable to common stockholders of $230 million and an operating loss of $108 million for the quarter ended March 31, 2004.  Net loss per common share was $5.28 in the first quarter of 2005 versus a net loss per common share of $2.67 in the first quarter of 2004.

 

Included in the 2005 results for the March quarter was a loss of approximately $18 million on the sale of the Company’s Pinnacle Airlines note to Pinnacle Airlines Corp.  This loss represented the difference between the $120 million outstanding balance on the note at the time of the sale and the purchase price of $102 million, inclusive of accrued interest.  Additionally, Pinnacle Airlines Corp. agreed to pay down the $5 million that was outstanding under a $25 million revolving credit facility that it maintains with Northwest.

 

Substantially all of the Company’s results of operations are attributable to its principal indirect operating subsidiary, Northwest, and the following discussion pertains primarily to Northwest.  The Company’s results of operations include other subsidiaries, of which MLT Inc. (“MLT”) is the most significant.

 

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

 

		Three months ended
		March 31
		2005		2004		% Chg.
Scheduled service:
Available seat miles (ASM) (millions)		22,765		21,831		4.3
Revenue passenger miles (RPM) (millions)		18,168		16,705		8.8
Passenger load factor		79.8	%	76.5	%	3.3	pts.
Revenue passengers (millions)		13.5		12.5		7.9
Passenger revenue per RPM (yield)		11.20	¢	11.75	¢	(4.7	)
Passenger revenue per ASM (RASM)		8.94	¢	8.99	¢	(0.6	)
Total operating ASM (millions)		22,825		21,894		4.3
Passenger service operating expense per total ASM (2) (3)		10.97	¢	10.23	¢	7.2
Cargo ton miles (millions)		542		540		0.4
Cargo revenue per ton mile		38.10	¢	33.79	¢	12.8
Fuel gallons consumed (millions)		432		421		2.6
Average fuel cost per gallon, excluding taxes		137.91		100.16	¢	37.7
Number of operating aircraft at end of period		432		432		n/m
Full-time equivalent employees at end of period		39,105		39,230		(0.3	)

 

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

(2)          This financial measure excludes non-passenger service expenses.  The Company believes that providing financial measures directly related to passenger service operations allows investors to evaluate and compare the Company’s core operating results to those of the industry.

(3)          Passenger service operating expense excludes the following items unrelated to passenger service operations (in millions):

 

		Three months ended
		March 31
		2005			2004
Freighter operations		$	154		$	140
MLT Inc. - net of intercompany eliminations		64			60
Regional carriers		356			256
Other		12			15

 

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Results of Operations—Three months ended March 31, 2005 and 2004

 

      Operating Revenues.  Operating revenues increased 7.5% ($195 million), the result of higher system passenger, regional carrier, cargo and other revenues.

 

System passenger revenues increased 3.7% ($72 million).  The following analysis by region is based on information reported to the Department of Transportation and excludes regional carriers:

 

		System			Domestic			Pacific			Atlantic
2005
Passenger revenues (in millions)		$	2,035		$	1,356		$	455		$	224
Increase (Decrease) from 2004:
Passenger revenues (in millions)		$	72		$	(20	)	$	62		$	30
Percent		3.7		%	(1.4		)%	15.8		%	15.1		%
Scheduled service ASMs (capacity)		4.3		%	0.2		%	10.4		%	13.2		%
Scheduled service RPMs (traffic)		8.8		%	7.3		%	8.3		%	16.5		%
Passenger load factor		3.3		pts.	5.0		pts.	(1.7		) pts.	2.3		pts.
Yield		(4.7		)%	(8.1		)%	7.0		%	(1.1		)%
Passenger RASM		(0.6		)%	(1.6		)%	4.8		%	1.7		%

 

As indicated in the above table:

•                  Domestic passenger revenues decreased slightly, primarily due to significantly lower yields that were largely offset by higher traffic.

•                  Pacific passenger revenues showed a strong increase due to significantly improved yields and traffic on higher capacity.

•                  Atlantic passenger revenues increased substantially due to a sharp rise in traffic on significantly more capacity.

 

Regional carrier revenues increased 27.2% ($59 million) to $276 million, due primarily to the increased capacity from 33 additional Bombardier CRJ aircraft that have entered service since March 31, 2004.

 

Cargo revenues increased 12.6% ($23 million) to $206 million due to a 12.8% higher yield per ton mile.  Other revenue increased 17.1% ($41 million) as a result of increased rental revenue, higher ticket change fees and other non-transportation service fees.

 

Operating Expenses.  Operating expenses increased 14.0% ($379 million) for the three months ended March 31, 2005.  The following table and notes present operating expenses for the three months ended March 31, 2005 and 2004 and describe significant year-over-year variances:

 

		Three months ended						Increase
		March 31						(Decrease)			Percent
(in millions)		2005			2004			from 2004			Change		Note
Operating Expenses
Salaries, wages and benefits		$	955		$	937		$	18		1.9	%	A
Aircraft fuel and taxes		630			450			180			40.0		B
Selling and marketing		205			175			30			17.1		C
Other rentals and landing fees		156			146			10			6.8		D
Aircraft maintenance materials and repairs		144			111			33			29.7		E
Depreciation and amortization		138			141			(3		)	(2.1	)	F
Aircraft rentals		104			114			(10		)	(8.8	)	G
Regional carrier expenses		356			256			100			39.1		H
Other		402			381			21			5.5		I
Total operating expenses		$	3,090		$	2,711		$	379		14.0	%

 

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