Attached files
file | filename |
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EX-31.2 - EX-31.2 - NORTHWEST AIRLINES CORP | g20952exv31w2.htm |
EX-31.1 - EX-31.1 - NORTHWEST AIRLINES CORP | g20952exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2009
Commission File Number: 1-15285
NORTHWEST AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 41-1905580 | |
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) | |
organization) | ||
2700 Lone Oak Parkway, Eagan, Minnesota | 55121 | |
(Address of principal executive offices) | (Zip Code) |
(612) 726-2111
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the 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 o No þ
Note: The registrant is no longer subject to the filing requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934 and is now a voluntary filer.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a Smaller reporting company) |
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes þ No o
The registrant is a wholly owned subsidiary of Delta Air Lines, Inc., a Delaware corporation,
and there is no market for the registrants common stock, par value $0.01 per share. As of
September 30, 2009, there were 1,000 shares of the registrants Common Stock outstanding.
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form
10-Q and is therefore filing this Form with the reduced disclosure format permitted by General
Instruction H(2).
TABLE OF CONTENTS
Table of Contents
Unless otherwise indicated, Northwest Airlines Corporation and our wholly-owned subsidiaries
are collectively referred to as Northwest, we, us, and our.
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q (or otherwise made by us or on our behalf) that are not
historical facts, including statements about our estimates, expectations, beliefs, intentions,
projections or strategies for the future, may be forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from historical experience or
our present expectations. For examples of such risks and uncertainties, please see the cautionary
statements contained in Part II, Item 1A. Risk Factors in this Form 10-Q. All forward-looking
statements speak only as of the date made, and we undertake no obligation to publicly update or
revise any forward-looking statements to reflect events or circumstances that may arise after the
date of this report.
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NORTHWEST AIRLINES CORPORATION
Consolidated Balance Sheets
(Unaudited)
(Unaudited)
September 30, | December 31, | |||||||
(in millions, except share data) | 2009 | 2008 | ||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 2,413 | $ | 2,068 | ||||
Short-term investments |
21 | 49 | ||||||
Restricted cash and cash equivalents |
217 | 196 | ||||||
Accounts receivable, net of an allowance for uncollectible accounts of $2 and $6 at September
30, 2009
and December 31, 2008, respectively |
710 | 729 | ||||||
Hedge margin receivable |
| 526 | ||||||
Expendable parts and supplies inventories, net of an allowance for obsolescence of $18 and $3 at September 30, 2009 and December 31, 2008, respectively |
154 | 152 | ||||||
Deferred income taxes, net |
49 | 131 | ||||||
Prepaid expenses and other |
257 | 232 | ||||||
Total current assets |
3,821 | 4,083 | ||||||
Property and Equipment, Net: |
||||||||
Property and equipment, net of accumulated depreciation and amortization of $404 and $71 at
September 30, 2009 and December 31, 2008, respectively |
8,248 | 8,683 | ||||||
Other Assets: |
||||||||
Goodwill |
4,619 | 4,572 | ||||||
Identifiable intangibles, net of accumulated amortization of $30 and $8 at September 30, 2009
and December 31, 2008, respectively |
2,665 | 2,694 | ||||||
Other noncurrent assets |
141 | 236 | ||||||
Total other assets |
7,425 | 7,502 | ||||||
Total assets |
$ | 19,494 | $ | 20,268 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Current maturities of long-term debt and capital leases |
$ | 387 | $ | 383 | ||||
Air traffic liability |
1,271 | 1,521 | ||||||
Accounts payable |
845 | 903 | ||||||
Frequent flyer deferred revenue |
474 | 522 | ||||||
Accrued salaries and related benefits |
383 | 455 | ||||||
Hedge derivatives liability |
68 | 561 | ||||||
Taxes payable |
218 | 199 | ||||||
Note payable to parent |
600 | 200 | ||||||
Other accrued liabilities |
229 | 112 | ||||||
Total current liabilities |
4,475 | 4,856 | ||||||
Noncurrent Liabilities: |
||||||||
Long-term debt and capital leases |
4,299 | 5,382 | ||||||
Pension, postretirement and related benefits |
5,674 | 5,476 | ||||||
Frequent flyer deferred revenue |
1,424 | 1,500 | ||||||
Deferred income taxes, net |
1,001 | 1,094 | ||||||
Other noncurrent liabilities |
451 | 533 | ||||||
Total noncurrent liabilities |
12,849 | 13,985 | ||||||
Commitments and Contingencies |
||||||||
Stockholders Equity: |
||||||||
Common stock at $0.01 par value; 1,000 shares issued at September 30, 2009
and December 31, 2008, respectively |
| | ||||||
Additional paid-in capital |
4,564 | 3,605 | ||||||
Accumulated deficit |
(838 | ) | (539 | ) | ||||
Accumulated other comprehensive loss |
(1,556 | ) | (1,639 | ) | ||||
Total stockholders equity |
2,170 | 1,427 | ||||||
Total liabilities and stockholders equity |
$ | 19,494 | $ | 20,268 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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NORTHWEST AIRLINES CORPORATION
Consolidated Statements of Operations
(Unaudited)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions, except per share data) | Post-Merger | Pre-Merger | Post-Merger | Pre-Merger | ||||||||||||
Operating Revenue: |
||||||||||||||||
Passenger: |
||||||||||||||||
Mainline |
$ | 1,898 | $ | 2,801 | $ | 5,494 | $ | 7,741 | ||||||||
Regional carriers |
492 | 550 | 1,397 | 1,462 | ||||||||||||
Total passenger revenue |
2,390 | 3,351 | 6,891 | 9,203 | ||||||||||||
Cargo |
99 | 202 | 275 | 612 | ||||||||||||
Other, net |
363 | 260 | 906 | 721 | ||||||||||||
Total operating revenue |
2,852 | 3,813 | 8,072 | 10,536 | ||||||||||||
Operating Expense: |
||||||||||||||||
Salaries and related costs |
764 | 706 | 2,245 | 2,182 | ||||||||||||
Aircraft fuel and related taxes |
670 | 1,946 | 1,855 | 4,246 | ||||||||||||
Contract carrier arrangements |
246 | 275 | 658 | 820 | ||||||||||||
Contracted services |
183 | 198 | 549 | 611 | ||||||||||||
Passenger commissions and other
selling expenses |
146 | 226 | 445 | 665 | ||||||||||||
Aircraft maintenance materials and
outside repairs |
130 | 168 | 438 | 563 | ||||||||||||
Landing fees and other rents |
125 | 144 | 404 | 416 | ||||||||||||
Depreciation and amortization |
136 | 122 | 389 | 1,015 | ||||||||||||
Passenger service |
76 | 65 | 191 | 190 | ||||||||||||
Aircraft rent |
60 | 57 | 178 | 167 | ||||||||||||
Impairment of goodwill and other
intangible assets |
| | | 3,841 | ||||||||||||
Restructuring and merger-related items |
32 | 1 | 116 | 1 | ||||||||||||
Other |
100 | 123 | 307 | 389 | ||||||||||||
Total operating expense |
2,668 | 4,031 | 7,775 | 15,106 | ||||||||||||
Operating Income (Loss) |
184 | (218 | ) | 297 | (4,570 | ) | ||||||||||
Other (Expense) Income: |
||||||||||||||||
Interest expense |
(187 | ) | (112 | ) | (549 | ) | (334 | ) | ||||||||
Interest income |
2 | 21 | 9 | 81 | ||||||||||||
Loss on extinguishment of debt |
(83 | ) | | (83 | ) | | ||||||||||
Miscellaneous, net |
9 | (5 | ) | 32 | (221 | ) | ||||||||||
Total other expense, net |
(259 | ) | (96 | ) | (591 | ) | (474 | ) | ||||||||
Loss Before Income Taxes |
(75 | ) | (314 | ) | (294 | ) | (5,044 | ) | ||||||||
Income Tax (Provision) Benefit |
(2 | ) | (3 | ) | (5 | ) | 211 | |||||||||
Net Loss |
$ | (77 | ) | $ | (317 | ) | $ | (299 | ) | $ | (4,833 | ) | ||||
Basic and Diluted Loss per Share |
N/A | $ | (1.20 | ) | N/A | $ | (18.35 | ) | ||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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NORTHWEST
AIRLINES CORPORATION
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
(in millions) | Post-Merger | Pre-Merger | ||||||
Net cash provided by operating activities |
$ | 357 | $ | 451 | ||||
Cash Flows From Investing Activities: |
||||||||
Property and equipment additions, including advance payments, net |
110 | (1,014 | ) | |||||
Proceeds from sales of flight equipment |
77 | 16 | ||||||
Redemption of short-term investments |
28 | 55 | ||||||
Redesignation of cash equivalents to short-term investments |
| (246 | ) | |||||
(Increase) decrease in restricted cash and cash equivalents |
(101 | ) | 292 | |||||
Investment in affiliated companies |
| (213 | ) | |||||
Other, net |
| 20 | ||||||
Net cash provided by (used in) investing activities |
114 | (1,090 | ) | |||||
Cash Flows From Financing Activities: |
||||||||
Payments on long-term debt and capital lease obligations |
(1,350 | ) | (365 | ) | ||||
Capital contribution from parent |
897 | | ||||||
Proceeds from intercompany loan |
400 | | ||||||
Proceeds from long-term obligations |
| 873 | ||||||
(Payments) proceeds of short-term obligations, net |
(73 | ) | 115 | |||||
Payments of deferred financing costs |
| (114 | ) | |||||
Net cash (used in) provided by financing activities |
(126 | ) | 509 | |||||
Net Increase (Decrease) in Cash and Cash Equivalents |
345 | (130 | ) | |||||
Cash and cash equivalents at beginning of period |
2,068 | 2,939 | ||||||
Cash and cash equivalents at end of period |
$ | 2,413 | $ | 2,809 | ||||
Non-cash transactions: |
||||||||
Flight equipment |
$ | 48 | $ | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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NORTHWEST
AIRLINES CORPORATION
Notes to the Condensed Consolidated Financial Statements
September 30, 2009
(Unaudited)
September 30, 2009
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
for interim financial information. Consistent with these requirements, this Form 10-Q does not
include all the information required by GAAP for complete financial statements. As a result, this
Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying
Notes in our Form 10-K.
On October 29, 2008 (the Closing Date), a wholly-owned subsidiary of Delta Air Lines, Inc.
(Delta) merged (the Merger) with and into Northwest Airlines Corporation. On the Closing Date,
(1) Northwest Airlines Corporation and its wholly-owned subsidiaries, including Northwest Airlines,
Inc. (collectively, Northwest), became wholly-owned subsidiaries of Delta and (2) each share of
Northwest common stock outstanding on the Closing Date or issuable under Northwests Plan of
Reorganization (as defined in Note 8) was converted into the right to receive 1.25 shares of Delta
common stock.
As a result of the application of purchase accounting, the Condensed Consolidated Financial
Statements on or after October 30, 2008 are not comparable to the Condensed Consolidated Financial
Statements prior to that date. References to Post-Merger refer to Northwest on or after October
30, 2008, after giving effect to the application of purchase accounting. References to Pre-Merger
refer to Northwest prior to October 30, 2008.
Our Condensed Consolidated Financial Statements include the accounts of Northwest Airlines
Corporation and our wholly-owned subsidiaries. To the extent that an asset, liability, revenue or
expense is directly associated with Northwest, it is reflected as such in the accompanying
Condensed Consolidated Financial Statements. Certain other revenue and expense have been allocated
from Delta to Northwest based on key business activity drivers in accordance with Deltas cost
allocation policy. Management believes such allocations are reasonable; however, they may not be
equivalent to the actual revenue and expense that would have been recognized had we been operating
as an independent, publicly-traded company for the periods presented subsequent to the Closing
Date.
We have marketing alliances with other airlines to enhance our access to domestic and
international markets. These arrangements can include codesharing, reciprocal frequent flyer
program benefits, shared or reciprocal access to passenger lounges, joint promotions, common use of
airport gates and ticket counters, ticket office co-location and other marketing agreements. We
have received anti-trust immunity for certain of our marketing arrangements, which enables us to
offer a more integrated route network and develop common sales, marketing and discount programs for
customers. Some of our marketing arrangements provide for the sharing of revenues and expenses.
Revenues and expenses associated with collaborative arrangements are presented on a gross basis in
the applicable line items in our Consolidated Statements of Operations.
Management believes that the accompanying unaudited Condensed Consolidated Financial
Statements reflect all adjustments, including adjustments required by purchase accounting, normal
recurring items and restructuring and merger-related items, considered necessary for a fair
statement of results for the interim periods presented.
Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel
prices, changes in global economic conditions and other factors, operating results for the three
and nine months ended September 30, 2009 are not necessarily indicative of operating results for
the entire year.
We have reclassified certain prior period amounts in our Condensed Consolidated Financial
Statements to be consistent with our current period presentation.
We have evaluated the financial statements for subsequent events through the date of the
filing of this Form 10-Q.
New Accounting Standards
In March 2008, the Financial Accounting Standards Board (the FASB) issued Disclosures about
Derivative Instruments and Hedging Activitiesan amendment to FASB Statement No. 133. The standard
changes the disclosure requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (1) how and why an entity uses derivative
instruments, (2) how derivative instruments and related hedged items are accounted for, and (3) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. This standard is effective for fiscal years and interim periods. We
adopted this standard on January 1, 2009.
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In April 2009, the FASB issued Interim Disclosures about Fair Value of Financial
Instruments. The standard amends required disclosures about fair value of financial instruments in
interim financial statements as well as in annual financial statements. We adopted this standard
effective April 1, 2009.
NOTE 2. FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants.
Accordingly, fair value is a market-based measurement that is determined based on assumptions that
market participants would use in pricing an asset or liability. A three-tier fair value hierarchy
is used to prioritize the inputs used in measuring fair value as follows:
| Level 1. Observable inputs such as quoted prices in active markets; | ||
| Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and | ||
| Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Significant | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
September 30, | Markets | Inputs | Inputs | |||||||||||||
(in millions) | 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Cash equivalents |
$ | 2,289 | $ | 2,289 | $ | | $ | | ||||||||
Short-term investments |
21 | | | 21 | ||||||||||||
Restricted cash equivalents |
217 | 217 | | | ||||||||||||
Long-term investments |
5 | | | 5 | ||||||||||||
Hedge derivatives liability, net |
(117 | ) | | (52 | ) | (65 | ) | |||||||||
We record our cash equivalents and short-term investments at estimated fair value. The
estimated fair values of other financial instruments, including derivative instruments, are
determined using available market information and valuation methodologies, primarily discounted
cash flow analyses.
Valuation techniques for assets and liabilities in the Level 3 fair value hierarchy are based
on the income approach using (1) a discounted cash flow model for investments and (2) a market and
income approach using a discounted cash flow model for interest rate hedges.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant
Unobservable Inputs (Level 3)
Hedge Derivatives | ||||
(in millions) | Liability, Net | |||
Balance at December 31, 2008 |
$ | (549 | ) | |
Change in fair value included in earnings |
(77 | ) | ||
Change in fair value included in other comprehensive income |
91 | |||
Purchases and settlements, net |
470 | |||
Balance at September 30, 2009 |
$ | (65 | ) | |
Losses included in earnings above for the nine months ended September 30, 2009 are
recorded on our Consolidated Statements of Operations as follows:
Aircraft Fuel Expense and | Other (Expense) | |||||||
(in millions) | Related Taxes | Income | ||||||
Total losses included in earnings |
$ | (76 | ) | $ | (1) | |||
Change in
unrealized losses relating to liabilities still held at September 30, 2009 |
$ | | $ | (1) | ||||
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Fair Value of Debt
Market risk associated with our fixed and variable rate long-term debt relates to the
potential reduction in fair value and negative impact to future earnings, respectively, from an
increase in interest rates. The following table presents information about the fair value of our
debt at September 30, 2009 and December 31, 2008:
September 30, | December 31, | |||||||
(in millions) | 2009 | 2008 | ||||||
Total debt at par value |
$ | 5,917 | $ | 7,353 | ||||
Unamortized discount, net |
(1,320 | ) | (1,678 | ) | ||||
Net carrying amount |
$ | 4,597 | $ | 5,675 | ||||
Fair value (1) |
$ | 5,563 | $ | 5,195 | ||||
(1) | The aggregate fair value of our debt was based primarily on reported market values and recently completed market transactions. |
NOTE 3. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Aircraft Fuel Price Risk
Our results of operations are materially impacted by changes in aircraft fuel prices, interest
rates and foreign currency exchange rates. In an effort to manage our exposure to these risks, we
periodically enter into various derivative instruments, including fuel, interest rate and foreign
currency hedges. We recognize all derivative instruments as either assets or liabilities at fair
value on our Consolidated Balance Sheets and recognize certain changes in the fair value of
derivative instruments on our Consolidated Statements of Operations.
We also participate in a fuel hedge program sponsored by Delta, whereby Delta enters into fuel
hedges to manage the price risk of fuel costs associated with our and
Deltas estimated consolidated fuel
consumption. In association with the terms of this program, Delta
records the fair value of all related fuel hedges on its Consolidated Balance Sheets, and a
pro-rata percentage of the hedge gains or losses are allocated to us based on fuel consumption and
recorded on our Consolidated Statements of Operations.
We perform, at least quarterly, both a prospective and retrospective assessment of the
effectiveness of our hedge contracts, including assessing the possibility of counterparty default.
If we determine that a derivative is no longer expected to be highly effective, we discontinue
hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge in
earnings. As a result of our effectiveness assessment at September 30, 2009, we believe our hedge
contracts will continue to be highly effective in offsetting changes in cash flow attributable to
the hedged risk.
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Cash flow hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective
portion of the gain or loss on the derivative is reported as a component of accumulated other
comprehensive income and reclassified into earnings in the same period during which the hedged
transaction affects earnings. The effective portion of the derivative represents the change in fair
value of the hedge that offsets the change in fair value of the hedged item. To the extent the
change in the fair value of the hedge does not perfectly offset the change in the fair value of the
hedged item, the ineffective portion of the hedge is immediately recognized in other (expense)
income on our Consolidated Statements of Operations. The following table summarizes the accounting
treatment and classification of our cash flow hedges on our Condensed Consolidated Financial
Statements:
Impact of Unrealized Gains and Losses | ||||||
Consolidated | Consolidated | |||||
Balance Sheets | Income Statements | |||||
Derivative Instrument(1) | Hedged Risk | Effective Portion | Ineffective Portion | |||
Designated as cash flow hedges: |
||||||
Fuel hedges consisting of crude oil,
heating oil, and jet fuel swaps,
collars and call
options(2)
|
Volatility in jet fuel prices |
Effective portion of hedge is recorded in accumulated other comprehensive income | Excess, if any, over effective portion of hedge is recorded in other (expense) income | |||
Interest rate swaps and call options
|
Changes in interest rates |
Entire hedge is recorded in accumulated other comprehensive income | Expect hedge to fully offset hedged risk; no ineffectiveness recorded | |||
Foreign currency forwards and collars
|
Fluctuations in foreign currency exchange rates |
Entire hedge is recorded in accumulated other comprehensive income | Expect hedge to fully offset hedged risk; no ineffectiveness recorded | |||
Not designated as hedges: |
||||||
Fuel contracts consisting of crude
oil, heating oil and jet fuel
extendable swaps and three-way
collars |
Volatility in jet fuel prices |
Entire amount of change in fair value of hedge is recorded in aircraft fuel expense and related taxes | ||||
(1) | In the Merger, Delta assumed our outstanding hedge contracts, which include fuel, interest rate and foreign currency cash flow hedges. On the Closing Date, Delta designated certain of these contracts as hedges. The remaining derivative contracts did not qualify for hedge accounting and settled as of June 30, 2009. | |
(2) | Ineffectiveness on our fuel hedge option contracts is calculated using a perfectly effective hypothetical derivative, which acts as a proxy for the fair value of the change in expected cash flows from the purchase of aircraft fuel. |
8
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Hedge Position
The following tables reflect the estimated fair value gain (loss) position of our hedge
contracts at September 30, 2009 and December 31, 2008:
September 30, 2009 | ||||||||||||||||||||||||||||
Other | Hedge | Other | ||||||||||||||||||||||||||
Notional | Maturity | Noncurrent | Accounts | Derivatives | Noncurrent | Hedge Margin | ||||||||||||||||||||||
(in millions, unless otherwise stated) | Balance | Date | Assets | Payable | Liability | Liabilities | Receivable | |||||||||||||||||||||
Designated as hedges |
||||||||||||||||||||||||||||
Interest rate swaps and caps designated as cash flow hedges |
$ | 1,597 | December 2009 - May 2019 |
2 | | (39 | ) | (27 | ) | |||||||||||||||||||
Foreign currency exchange forwards and collars |
63.7 billion Japanese Yen, 257 million Canadian Dollars | October 2009 - July 2012 |
| | (28 | ) | (25 | ) | ||||||||||||||||||||
Total derivative instruments |
$ | 2 | $ | | $ | (67 | ) | $ | (52 | ) | $ | | ||||||||||||||||
December 31, 2008 | ||||||||||||||||||||||||
Hedge | Other | |||||||||||||||||||||||
Notional | Maturity | Accounts | Derivatives | Noncurrent | Hedge Margin | |||||||||||||||||||
(in millions, unless otherwise stated) | Balance | Date | Payable | Liability | Liabilities | Receivable | ||||||||||||||||||
Designated as hedges |
||||||||||||||||||||||||
Fuel hedge swaps, collars and call options |
173 million gallons - crude oil | January - June 2009 |
$ | | $ | (163 | ) | $ | | |||||||||||||||
Interest rate swaps and call options designated as cash flow hedges |
$ | 1,700 | December 2009 - May 2019 |
| (32 | ) | (63 | ) | ||||||||||||||||
Foreign currency exchange forwards and collars |
45.0 billion Japanese Yen | January - December 2009 | | (48 | ) | | ||||||||||||||||||
Total designated |
| (243 | ) | (63 | ) | |||||||||||||||||||
Not designated as hedges |
||||||||||||||||||||||||
Fuel hedge swaps and collars |
180 million gallons - crude oil, heating oil, jet fuel | January - June 2009 | (119 | ) | (318 | ) | | |||||||||||||||||
Total not designated |
(119 | ) | (318 | ) | | |||||||||||||||||||
Total derivative instruments |
$ | (119 | ) | $ | (561 | ) | $ | (63 | ) | $ | 526 | |||||||||||||
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Table of Contents
Hedge Gains (Losses)
Gains (losses) recorded on our Condensed Consolidated Financial Statements for the three
months ended September 30, 2009 and 2008 related to our designated hedge contracts are as follows:
Effective Portion Reclassified | ||||||||||||||||||||||||
Effective Portion Recognized in Other Comprehensive Loss |
from Accumulated Other Comprehensive Loss to Earnings |
Ineffective Portion Recognized in Other (Expense) Income |
||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | September 30, | ||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
(in millions) | Post-Merger | Pre-Merger | Post-Merger | Pre-Merger | Post-Merger | Pre-Merger | ||||||||||||||||||
Designated as hedges |
||||||||||||||||||||||||
Fuel hedge swaps, collars and call
options(1) |
$ | | $ | | $ | (4 | )(4) | $ | | $ | 3 | (4) | $ | | ||||||||||
Interest rate swaps and call options
designated as cash flow hedges(2) |
(16 | ) | (9 | ) | 1 | | | | ||||||||||||||||
Foreign currency exchange forwards
and collars(3) |
52 | 9 | | (4 | ) | | | |||||||||||||||||
Total designated |
$ | 36 | $ | | $ | (3 | ) | $ | (4 | ) | $ | 3 | $ | | ||||||||||
(1) | Gains and losses on fuel hedge contracts reclassified from accumulated other comprehensive loss are recorded in aircraft fuel and related taxes. | |
(2) | Gains and losses on interest rate swaps and call options reclassified from accumulated other comprehensive loss are recorded in interest expense. | |
(3) | Gains and losses on foreign currency exchange contracts reclassified from accumulated other comprehensive loss are recorded in passenger and cargo revenue. | |
(4) | Includes losses of $4 million and gains of $3 million recorded in aircraft fuel and related taxes and other (expense) income, respectively, related to hedge contracts allocated from Delta. |
Gains (losses) recorded on our Condensed Consolidated Financial Statements for the nine months
ended September 30, 2009 and 2008 related to our designated hedge contracts designated are as
follows:
Effective Portion Reclassified from | ||||||||||||||||||||||||
Effective Portion Recognized in Other Comprehensive Loss |
Accumulated Other Comprehensive Loss to Earnings |
Ineffective Portion Recognized in Other (Expense) Income |
||||||||||||||||||||||
Nine Months Ended | Nine Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 30, | September 30, | September 30, | ||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
(in millions) | Post-Merger | Pre-Merger | Post-Merger | Pre-Merger | Post-Merger | Pre-Merger | ||||||||||||||||||
Designated as hedges |
||||||||||||||||||||||||
Fuel hedge swaps, collars and call
options(1) |
$ | 71 | $ | | $ | (92 | )(4) | $ | | $ | 19 | (4) | $ | | ||||||||||
Interest rate swaps and call options
designated as cash flow hedges(2) |
31 | 11 | | | | | ||||||||||||||||||
Foreign currency exchange forwards
and collars(3) |
(16 | ) | 17 | 2 | (13 | ) | | | ||||||||||||||||
Total designated |
$ | 86 | $ | 28 | $ | (90 | ) | $ | (13 | ) | $ | 19 | $ | | ||||||||||
(1) | Gains and losses on fuel hedge contracts reclassified from accumulated other comprehensive loss are recorded in aircraft fuel and related taxes. | |
(2) | Gains and losses on interest rate swaps and call options reclassified from accumulated other comprehensive loss are recorded in interest expense. | |
(3) | Gains and losses on foreign currency exchange contracts reclassified from accumulated other comprehensive loss are recorded in passenger and cargo revenue. | |
(4) | Includes losses of $17 million and gains of $19 million recorded in aircraft fuel and related taxes and other (expense) income, respectively, related to hedge contracts allocated from Delta. |
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We recorded a loss of $473 million for the three months ended September 30, 2008 and losses of $15 million and $174 million for the nine months ended September 30, 2009 and 2008, respectively, to aircraft fuel and related taxes on our Consolidated
Statements of Operations for the nine months ended September 30, 2009 related to our derivative
contracts that were not designated as hedges. As of September 30, 2009, we expect to reclassify $11
million in unrealized gains recorded in accumulated other comprehensive loss on Deltas
Consolidated Balance Sheet into our Consolidated Statement of Operations during the next 12 months.
Credit Risk
To manage credit risk associated with our interest rate and foreign currency hedging programs,
counterparties are selected based on their credit ratings and exposure is limited to any one
counterparty. The market position of these programs and relative market position with each
counterparty are also monitored.
In accordance with our interest rate and foreign currency hedge agreements, which qualify as
cash flow hedges, the respective counterparties are not required to fund margin to us and we are
not required to fund margin to them.
Our accounts receivable are generated largely from the sale of passenger airline tickets and
cargo transportation services. The majority of these sales are processed through major credit card
companies, resulting in accounts receivable that may be subject to certain holdbacks by the credit
card processors.
We also have receivables from the sale of mileage credits under our WorldPerks Program to
participating airlines and non-airline businesses such as credit card companies, hotels and car
rental agencies. We believe the credit risk associated with these receivables is minimal and that
the allowance for uncollectible accounts that we have provided is appropriate.
NOTE 4. DEBT
In September 2009, Delta borrowed a total of $2.1 billion under three new financings: (1)
Senior Secured Credit Facilities; (2) Senior Secured Notes; and (3) Senior Second Lien Notes.
Delta used a portion of the net proceeds to repay in full the Bank Credit Facility due in 2010 in
the form of a capital contribution. Deltas new financing agreements are guaranteed by
substantially all of Deltas subsidiaries, including us, and are secured by our Pacific
route authorities and certain related assets.
The following table summarizes our debt at September 30, 2009 and December 31, 2008:
September 30, | December 31, | |||||||
(in millions) | 2009 | 2008 | ||||||
Bank Credit Facility due 2010 |
$ | | $ | 904 | ||||
Revolving Credit Facility due 2009 |
| | ||||||
Certificates due in installments from 2009 to 2022 |
1,602 | 1,735 | ||||||
Aircraft financings due in installments from 2009 to 2025 |
3,740 | 4,003 | ||||||
Other secured financings due in installments from 2009 to 2031 |
575 | 711 | ||||||
Total secured debt |
5,917 | 7,353 | ||||||
Unamortized discount(1) |
(1,320 | ) | (1,678 | ) | ||||
Total debt |
4,597 | 5,675 | ||||||
Less: current maturities |
(386 | ) | (382 | ) | ||||
Total long-term debt |
$ | 4,211 | $ | 5,293 | ||||
(1) | This item includes a reduction in the carrying value of debt as a result of purchase accounting related to the Merger, which will be amortized to interest expense over the remaining maturities of the respective debt. |
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Obligations Guaranteed by Northwest
Senior Secured Credit Facilities
In September 2009, Delta entered into a first-lien revolving credit facility in the aggregate
principal amount of $500 million (the Revolving Facility) and a first-lien term loan facility in
the aggregate principal amount of $250 million (the Term Facility and collectively with the
Revolving Facility, the Senior Secured Credit Facilities). The Senior Secured Credit Facilities
are guaranteed by substantially all of Deltas domestic
subsidiaries, including us and
certain of our subsidiaries (the Guarantors) and are secured by a first lien on our Pacific route
authorities and certain related assets (the Pacific Collateral). Lenders under the Senior
Secured Credit Facilities and holders of the Senior Secured Notes (as described below) will have
equal rights to payment and collateral.
Borrowings under the Term Facility will be repaid in an amount equal to 1% of the original
principal amount of the term loans annually (to be paid in equal quarterly installments), with the
balance of the term loans due and payable in September 2013. Borrowings under the Term Facility
bear interest at a variable rate equal to LIBOR or another index rate, in each case plus a
specified margin. As of September 30, 2009, the Term Facility had an interest rate of 8.8% per
annum.
In September 2009, Delta borrowed the entire amount of the Revolving Facility, which matures
in March 2013. Borrowings under the Revolving Facility can be prepaid without penalty and amounts
prepaid can be reborrowed. Borrowings under the Revolving Facility bear interest at a variable
rate equal to LIBOR or another index rate, in each case plus a specified margin. As of September
30, 2009, the Revolving Facility had an interest rate 9.4% per annum.
The Senior Secured Credit Facilities include affirmative, negative and financial covenants
that restrict Deltas ability to, among other things, incur additional secured indebtedness, make
investments, sell or otherwise dispose of assets if not in compliance with the collateral coverage
ratio tests, pay dividends or repurchase stock. These covenants may have a material adverse impact
on Deltas operations. The Senior Secured Credit Facilities also contain financial covenants that
require Delta to:
| maintain a minimum fixed charge coverage ratio (defined as the ratio of (1) earnings before interest, taxes, depreciation, amortization and aircraft rent, and subject to other adjustments to net income (EBITDAR) (excluding gains and losses arising under fuel hedging arrangements incurred prior to the closing date of the Senior Secured Credit Facilities) to (2) the sum of cash interest expense plus cash aircraft rent expense plus the interest portion of Deltas capitalized lease obligations) in each case for the twelve-month period ending as of the last day of each fiscal quarter of not less than 1.20 to 1; | ||
| maintain a minimum collateral coverage ratio (defined as the ratio of aggregate current market value of the collateral to the sum of the aggregate outstanding exposure under the Senior Secured Credit Facilities and certain obligations with equal rights to payment and collateral and the aggregate principal amount of the outstanding Senior Secured Notes) of 1.60:1; and | ||
| maintain unrestricted cash, cash equivalents and short-term investments of not less than $2 billion. |
The Senior Secured Credit Facilities also contain mandatory prepayment provisions that require
Delta in certain instances to prepay obligations under the Senior Secured Credit Facilities in
connection with dispositions of collateral. In addition, if the collateral coverage ratio is less
than 1.60:1, Delta must either provide additional collateral in the form of cash or additional
routes and slots to secure the obligations, or Delta must repay the loans under the Senior Secured
Credit Facilities by an amount necessary to comply with the collateral coverage ratio.
Senior Secured Notes
Also in September 2009, Delta issued $750 million of Senior Secured Notes (the Senior Secured
Notes). The Senior Secured Notes mature in September 2014 and have a fixed interest
rate of 9.5% per annum. Delta may redeem some or all of the Senior Secured Notes at any time on or
after September 15, 2011 at specified redemption prices. If Delta sells certain of its assets or
if they experience specific kinds of changes in control, they must offer to repurchase the Senior
Secured Notes.
Deltas obligations under the Senior Secured Notes are guaranteed by the Guarantors. The
Senior Secured Notes and related guarantees are secured on a senior basis equally and ratably with
the indebtedness incurred under Deltas Senior Secured Credit Facilities by security interests in
the Pacific Collateral.
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The Senior Secured Notes include covenants that, among other things, restrict Deltas ability
to sell assets, incur additional indebtedness, issue preferred stock, make investments or pay
dividends. In addition, in the event the collateral coverage ratio, which has the same definition
as in the Senior Secured Credit Facilities, is less than 1.60:1, Delta must pay additional interest on
the Senior Secured Notes at the rate of 2% per annum until the collateral coverage ratio equals at
least 1.60:1.
The Senior Secured Notes contain events of default customary for similar financings, including
cross-defaults to other material indebtedness. Upon the occurrence of an event of default, the
outstanding obligations under the Senior Secured Notes may be accelerated and become due and
payable immediately.
Senior Second Lien Notes
Also in September 2009, Delta issued $600 million of Senior Second Lien Notes (the Senior
Second Lien Notes). The Senior Second Lien Notes mature in March 2015 and have a fixed
interest rate of 12.25% per annum. Delta may redeem some or all of the Senior Second Lien Notes at
any time on or after March 15, 2012 at specified redemption prices. If Delta sells certain of its
assets or if they experience specific kinds of changes in control, they must offer to repurchase
the Senior Second Lien Notes.
Deltas obligations under the Senior Second Lien Notes are guaranteed by the Guarantors. The
Senior Second Lien Notes and related guarantees are secured on a junior basis by security interests
in the Pacific Collateral.
The Senior Second Lien Notes include covenants and default provisions that are substantially
similar to the ones described under Senior Secured Notes above. In addition, in the event (1)
the collateral coverage ratio (defined as the ratio of aggregate current market value of the
collateral to the sum of the aggregate outstanding exposure under the Senior Secured Credit
Facilities and certain obligations with equal rights to payment and collateral, the aggregate
principal amount of the outstanding Senior Secured Notes, and the aggregate principal amount of the
outstanding Senior Second Lien Notes and any other permitted junior indebtedness that is secured by
the collateral) is less than 1.00:1 or (2) Delta is required to pay additional interest on the Senior
Secured Notes, Delta must pay additional interest on the Senior Second Lien Notes at the rate of 2%
per annum until the later of (a) the collateral coverage ratio equals at least 1.00:1 or (b)
special interest on the Senior Secured Notes ceases to accrue.
Revolving Credit Facility
In September 2009, we amended the Revolving Credit Facility to, among other things, reduce its
borrowing limit from $500 million to $300 million and change its maturity date to December 30,
2009. Borrowings under the Revolving Credit Facility can be prepaid without penalty and amounts
prepaid can be reborrowed. Borrowings under the Revolving Credit Facility are guaranteed by certain
of our subsidiaries. The Revolving Credit Facility and related guarantees are secured by
substantially all of our unencumbered assets as of October 29, 2008.
The Revolving Credit Facility contains financial covenants that require us to maintain
(1) unrestricted cash, cash equivalents and short-term investments, together with the undrawn
amount of the Revolving Credit Facility (Cash Liquidity), of not less than $1.25 billion, (2) a
minimum collateral coverage threshold (defined as the appraised value of certain eligible
collateral) of not less than $625 million and (3) a minimum ratio of EBITDAR to consolidated fixed
charges.
The Revolving Credit Facility contains events of default customary for financings of its type,
including cross-defaults to other material indebtedness. Upon the occurrence of an event of
default, the outstanding obligations under the Revolving Credit Facility may be accelerated and
become due and payable immediately and our cash may become restricted. Additionally, if at any time
Cash Liquidity is less than $2.25 billion, the commitment of each lender under the Revolving Credit
Facility is reduced by 50%.
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Other Financing Agreements
Certificates. Pass-Through Trust Certificates and Enhanced Equipment Trust Certificates
(collectively, the Certificates) are secured by 89 aircraft. As of September 30 2009, the
Certificates had interest rates ranging from 1.0% to 9.2%.
Aircraft
Financing. We have $3.7 billion of loans secured by 155 aircraft, not including
aircraft securing the Certificates, which had interest rates ranging from 0.9% to 7.2% at September
30, 2009.
Other Secured Financings. Other secured financings primarily include (1) manufacturer term
loans, secured by spare parts, spare engines and aircraft, (2) real estate loans, (3) a
Metropolitan Airport Commission loan and (4) a receivables
securitization (the Accounts Receivable Financing Facility). The financings had
annual interest rates ranging from 1.5% to 8.8% at September 30, 2009.
In
November 2007, we entered into the Accounts Receivable
Financing Facility for up to $150 million. The facility matures in 364 days with annual renewal
provisions that could result in a final maturity date of November 29, 2012. As of December 31,
2008, $100 million was drawn under the facility. In
June 2009, the facility was amended to include Delta and its size
was reduced to $100 million. As of September 30, 2009, we had
$27 million was drawn under the facility.
Covenants
We were in compliance with all covenants in our financing agreements at September 30, 2009.
Future Maturities
The following table summarizes scheduled maturities of our debt, including current maturities,
at September 30, 2009:
Years Ending December 31,
(in millions) | Total | |||
Three months ending December 31, 2009 |
$ | 201 | ||
2010 |
520 | |||
2011 |
663 | |||
2012 |
485 | |||
2013 |
685 | |||
2014 |
571 | |||
Thereafter |
2,792 | |||
5,917 | ||||
Unamortized discount |
(1,320 | ) | ||
Total |
$ | 4,597 | ||
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NOTE 5. EMPLOYEE BENEFIT PLANS
Net Periodic Benefit Cost
Net periodic cost for the three months ended September 30, 2009 and 2008 includes the
following components:
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | Post-Merger | Pre-Merger | Post-Merger | Pre-Merger | ||||||||||||
Service cost |
$ | 2 | $ | 6 | $ | 3 | $ | 6 | ||||||||
Interest cost |
138 | 141 | 9 | 12 | ||||||||||||
Expected return on plan assets |
(80 | ) | (140 | ) | | | ||||||||||
Recognized net actuarial loss |
4 | | | | ||||||||||||
Special termination and settlements |
3 | | | | ||||||||||||
Net periodic cost |
$ | 67 | $ | 7 | $ | 12 | $ | 18 | ||||||||
Net periodic cost for the nine months ended September 30, 2009 and 2008 includes the following
components:
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | Post-Merger | Pre-Merger | Post-Merger | Pre-Merger | ||||||||||||
Service cost |
$ | 5 | $ | 17 | $ | 11 | $ | 19 | ||||||||
Interest cost |
414 | 423 | 28 | 36 | ||||||||||||
Expected return on plan assets |
(241 | ) | (420 | ) | | | ||||||||||
Recognized net actuarial loss |
13 | 1 | 1 | | ||||||||||||
Special termination and settlements |
8 | | 6 | | ||||||||||||
Net periodic cost |
$ | 199 | $ | 21 | $ | 46 | $ | 55 | ||||||||
NOTE 6. COMPREHENSIVE LOSS
The following table shows the components of accumulated other comprehensive loss for the nine
months ended September 30, 2009:
Unrecognized | Derivative | Marketable | Valuation | |||||||||||||||||
(in millions) | Pension Liability | Instruments | Equity Securities | Allowance | Total | |||||||||||||||
Balance at December 31, 2008 |
$ | (908 | ) | $ | (126 | ) | $ | (5 | ) | $ | (600 | ) | $ | (1,639 | ) | |||||
Pension adjustment |
(10 | ) | | | | (10 | ) | |||||||||||||
Changes in fair value |
| 13 | 7 | | 20 | |||||||||||||||
Reclassification to earnings |
| 73 | | | 73 | |||||||||||||||
Tax effect |
3 | (32 | ) | (2 | ) | 31 | | |||||||||||||
Balance at September 30, 2009 |
$ | (915 | ) | $ | (72 | ) | $ | | $ | (569 | ) | $ | (1,556 | ) | ||||||
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NOTE 7. RESTRUCTURING AND MERGER-RELATED ITEMS
The following table shows charges recorded in restructuring and merger-related items on our
Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and
2008:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Post-Merger | Pre-Merger | Post-Merger | Pre-Merger | |||||||||||||
Severance and related costs |
$ | 13 | $ | | $ | 41 | $ | | ||||||||
Merger-related items |
19 | 1 | 75 | 1 | ||||||||||||
Total restructuring and merger-related items |
$ | 32 | $ | 1 | $ | 116 | $ | 1 | ||||||||
Severance and related costs primarily relates to workforce reduction programs for U.S.
employees. During the three and nine months ended September 30, 2009, we recorded $13 million and
$41 million, respectively, associated with workforce reduction programs, including $6 million of
special termination benefits related to retiree healthcare during the nine months ended September
30, 2009. We expect any additional charges to be incurred in connection with these programs will be
immaterial.
Merger-related
items relate to costs associated with integrating our operations
into Delta, including costs related to information technology, employee relocation and training,
and re-branding of aircraft and stations.
The following table shows balances for restructuring charges as of September 30, 2009, and the
activity for the nine months then ended. The table also shows the balances for the restructuring
charges assumed in the Merger as of September 30, 2009, and the activity for the nine months then
ended.
Liability | Liability | |||||||||||||||||||
Balance at | Additional | Purchase | Balance at | |||||||||||||||||
December 31, | Costs and | Accounting | September 30, | |||||||||||||||||
(in millions) | 2008 | Expenses | Adjustments | Payments | 2009 | |||||||||||||||
Severance
and related costs (1) |
$ | 47 | $ | 35 | $ | | $ | (39 | ) | $ | 43 | |||||||||
Facilities and other(1) |
32 | | 18 | (5 | ) | 45 | ||||||||||||||
Total |
$ | 79 | $ | 35 | $ | 18 | $ | (44 | ) | $ | 88 | |||||||||
(1) | The liability balance at December 31, 2008 represents liabilities recorded in connection with the Merger. |
We intend to ground the entire fleet of B-747-200F dedicated freighter aircraft by
December 31, 2009, due to its age and inefficiency. As a result, we reviewed the fleet and related
spare engines for impairment during the nine months ended September 30, 2009 and concluded that no
impairment existed.
NOTE 8. BANKRUPTCY CLAIMS RESOLUTION
In September 2005, Northwest and substantially all of its subsidiaries (the Northwest
Debtors) filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. On
May 31, 2007, the Northwest Debtors emerged from bankruptcy. The Northwest Debtors First Amended
Joint and Consolidated Plan of Reorganization (Plan of Reorganization) generally provides for the
distribution of Northwest common stock to the Northwest Debtors creditors, employees and others in
satisfaction of allowed general, unsecured claims.
Pursuant to terms of the Plan of Reorganization, 226 million shares of the Pre-Merger
companys common stock were issuable to holders of allowed general unsecured claims and eight
million shares were issuable to holders who also held a guaranty claim from the Northwest Debtors.
Once a claim is allowed, consistent with the claims resolution process as provided in the Plan of
Reorganization, the claimant is entitled to a distribution. Pursuant to the terms of the Merger
Agreement, each outstanding share of Northwest common stock (including shares issuable pursuant to
the Plan of Reorganization) was converted into and became exchangeable for 1.25 shares of Delta
common stock. An equivalent of 229 million shares of the Pre-Merger companys common stock (or 286
million Post-Merger shares of Delta common stock) have been issued and distributed through
September 30, 2009, in respect of valid unsecured and guaranty claims. In total, an equivalent of
five million remaining shares of the Pre-Merger companys new common stock (or six million
Post-Merger shares of Delta common stock) were held in reserve under the terms of the Plan of
Reorganization.
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We estimate that our unsecured claims to be allowed will not exceed $8.2 billion. Differences
between claim amounts filed and our estimates are being investigated and will be resolved in
connection with the claims resolution process. However, there will be no further financial impact
to us associated with the settlement of such unsecured claims, as the holders of all allowed
unsecured claims against the Pre-Merger company will receive, under the Plan of Reorganization,
Delta common stock based on the pro-rata amount of Northwest shares held in reserve. Secured claims
were deemed unimpaired under the Plan of Reorganization and were satisfied upon either
reinstatement of the obligations in the Pre-Merger company, surrendering the collateral to the
secured party, or by making full payment in cash.
NOTE 9. LOSS PER SHARE
On the Closing Date, we became a wholly-owned subsidiary of Delta and the shares of Northwest,
which traded under the symbol NWA, ceased trading on, and were delisted from, the New York Stock
Exchange. As a result, we are not presenting Post-Merger company loss per share data for the three
and nine months ended September 30, 2009.
We calculate basic loss per share by dividing the net loss attributable to common stockholders
by the weighted average number of common shares outstanding. Shares issuable upon the satisfaction
of certain conditions are considered outstanding and included in the computation of basic loss per
share. Accordingly, the calculation of basic loss per share for the three and nine months ended
September 30, 2008 assumes there was outstanding at the beginning of each of these periods all 234
million shares contemplated by the Plan of Reorganization to be distributed to holders of allowed
unsecured and guaranty claims.
The following table shows our computation of basic and diluted loss per share for the three
and nine months ended September 30, 2008:
Three Months Ended | Nine Months Ended | |||||||
September 30, | September 30, | |||||||
(in millions, except per share data) | 2008 | 2008 | ||||||
Basic and diluted: |
||||||||
Net loss |
$ | (317 | ) | $ | (4,833 | ) | ||
Weighted average shares outstanding(1) |
265 | 263 | ||||||
Basic and diluted loss per share |
$ | (1.20 | ) | $ | (18.35 | ) | ||
(1) | For the three and nine months ended September 30, 2008, we excluded from our loss per share calculations all common stock equivalents because their effect was anti-dilutive. These common stock equivalents totaled 12 million in restricted stock units and stock options. |
NOTE 10. RELATED PARTY TRANSACTIONS
Subsequent to the Merger, we entered into a $300 million intercompany credit facility with
Delta (the Delta Credit Facility). On February 4, 2009, we amended the size of the Delta Credit
Facility from $300 million to $750 million. On July 22, 2009, we amended the Delta Credit Facility
from $750 million to $2 billion. During the nine months ended September 30, 2009, we drew an
additional $400 million for a total of $600 million outstanding as of September 30, 2009. Interest
on unpaid principal is paid quarterly. We paid $4 million in interest in the nine months ended
September 30, 2009 and had an outstanding interest payable of $3 million as of that date.
Certain revenue and expense have been allocated from Delta to Northwest based on key business
activity drivers in accordance with Deltas cost allocation policy. Accordingly, the volume of
intercompany receivable and payable transactions has increased since December 31, 2008. The below
table reflects the balances of these intercompany transactions as of September 30, 2009 and
December 31, 2008:
September 30, | December 31, | |||||||
(in millions) | 2009 | 2008 | ||||||
Accounts receivable |
$ | 299 | $ | 42 | ||||
Accounts payable |
(284 | ) | (27 | ) | ||||
Note payable to parent |
(600 | ) | (200 | ) | ||||
Net payable |
$ | (585 | ) | $ | (185 | ) | ||
In October 2009, our WorldPerks
Program was merged into Deltas SkyMiles Program. WorldPerks miles were combined into the SkyMiles Program based on
a one-to-one ratio. As miles are redeemed, Delta will allocate the applicable revenue realized to Northwest in
accordance with its cost allocation policy.
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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
General Information
We provide scheduled air transportation for passengers and cargo throughout the United States
(U.S.) and the world. On October 29, 2008 (the Closing Date), we completed our merger (the
Merger) with a wholly-owned subsidiary of Delta Air Lines, Inc. (Delta), creating the worlds
largest airline. As a result of the Merger, Northwest and its subsidiaries, including Northwest
Airlines, Inc., became wholly-owned subsidiaries of Delta and the shares of Northwest, which traded
under the symbol NWA, ceased trading on, and were delisted from, the New York Stock Exchange.
As a result of the application of purchase accounting, the financial statements prior to the
Closing Date are not comparable with the financial statements for periods on or after the Closing
Date. References to Post-Merger refer to Northwest on or after the Closing Date, after giving
effect to the application of purchase accounting. References to Pre-Merger refer to Northwest
prior to the Closing Date.
Overview
For the September 2009 quarter, we reported a net loss of $77 million. This compares to a
September 2008 quarter net loss of $317 million, which included a $473 million loss related to our
derivative contracts.
Total operating revenue declined 25% to $2.9 billion in the September 2009 quarter compared to
the September 2008 quarter. Total passenger revenue declined 29% to $2.4 billion.
Operating expenses in the quarter decreased 34% to $2.7 billion, primarily related
to lower aircraft fuel and related costs in the September 2009 quarter.
At September 30, 2009, we had $2.4 billion in cash, cash equivalents and short-term
investments. In September 2009, Delta borrowed a total of $2.1 billion under three new financings.
Delta used a portion of the net proceeds to repay in full our approximately $900 million senior
secured exit financing facility due in 2010 in the form of a capital contribution. Deltas new
financing agreements are guaranteed by substantially all of Deltas subsidiaries, including
us, and are secured by our Pacific route authorities and certain related assets. In
addition, we had $300 million in an undrawn revolving credit facility.
Results of OperationsSeptember 2009 and 2008 Quarters
Operating Revenue
Mainline Passenger Revenue. Mainline passenger revenue decreased $903 million,
or 32%, primarily due to weakened demand for air travel from the global recession and related capacity reductions. Passenger revenue per available seat
mile (PRASM) decreased 28% as a result of a 27% decrease in
passenger mile yield. The decrease in passenger mile yield
reflects (1) a reduction in business demand and significantly reduced demand for international travel due to the global recession, (2) an overall decrease in
average fares due to competitive pricing pressures and (3) lower fuel surcharges due to the
year-over-year decline in fuel prices.
Regional carriers. Passenger revenue of regional carriers decreased $58 million to $492
million primarily due to a 19% decrease in passenger mile yield.
Cargo. Cargo revenue decreased $103 million to $99 million due to the effects of capacity
reductions, including the grounding of five dedicated freighter
B-747-200F aircraft since the Closing Date,
significantly reduced cargo yields, decreased international volume and lower fuel surcharges due to
the year-over-year decline in fuel prices.
Other, net. Other, net revenue increased $103 million to $363 million due primarily to
increased baggage handling fees.
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Operating Expense
Three Months Ended September 30, | Increase | Percent | ||||||||||||||
(in millions) | 2009 | 2008 | (Decrease) | Change | ||||||||||||
Operating Expense: |
||||||||||||||||
Salaries and related costs |
$ | 764 | $ | 706 | $ | 58 | 8 | % | ||||||||
Aircraft fuel and related taxes |
670 | 1,946 | (1,276 | ) | (66 | )% | ||||||||||
Contract carrier arrangements |
246 | 275 | (29 | ) | (11 | )% | ||||||||||
Contracted services |
183 | 198 | (15 | ) | (8 | )% | ||||||||||
Passenger commissions and other selling expenses |
146 | 226 | (80 | ) | (35 | )% | ||||||||||
Aircraft maintenance materials and outside repairs |
130 | 168 | (38 | ) | (23 | )% | ||||||||||
Landing fees and other rents |
125 | 144 | (19 | ) | (13 | )% | ||||||||||
Depreciation and amortization |
136 | 122 | 14 | 11 | % | |||||||||||
Passenger service |
76 | 65 | 11 | 17 | % | |||||||||||
Aircraft rent |
60 | 57 | 3 | 5 | % | |||||||||||
Restructuring and merger-related items |
32 | 1 | 31 | NM | ||||||||||||
Other |
100 | 123 | (23 | ) | (19 | )% | ||||||||||
Total operating expense |
$ | 2,668 | $ | 4,031 | $ | (1,363 | ) | (34 | )% | |||||||
Aircraft fuel and related taxes. Aircraft fuel and related taxes decreased $1.3 billion
primarily due to (1) $702 million associated with lower average fuel prices, (2) $105 million from a 6% decline in
fuel consumption due to capacity reductions and (3) a $469 million reduction in fuel hedge losses compared to the
September 2008 quarter.
Contract carrier arrangements. Contract carrier arrangements decreased primarily due to lower
average fuel prices.
Passenger commission and other selling expenses. Passenger commissions and other selling
expenses decreased in connection with the decrease in passenger revenue.
Aircraft maintenance materials and outside repairs. Aircraft maintenance materials and outside
repairs decreased as a result of capacity reductions.
Restructuring and merger-related items. During the September 2009 quarter, we recorded a $19
million charge for merger-related items associated with integrating
our operations into Delta and a $13 million charge in connection with employee workforce reduction programs.
Other Expense (Income)
We recorded other expense, net of $259 million in the September 2009 quarter as compared to
other expense, net of $96 million in the September 2008 quarter. This increase is primarily due to
an $83 million non-cash loss for the write-off of the unamortized discount on the extinguishment of
our senior secured exit financing facility (the Bank Credit Facility) and an increase in debt
discount amortization recorded in interest expense as a result of purchase accounting.
Income Taxes
We recorded an income tax provision of $2 million and $3 million for the September 2009 and
2008 quarters, primarily related to international and state income taxes. We did not record an
income tax benefit as a result of our loss for the September 2009 and 2008 quarters. The deferred
tax asset resulting from those net operating losses are fully reserved by a valuation allowance.
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Results of OperationsNine Months Ended September 30, 2009 and 2008
Operating Revenue
Mainline Passenger Revenue. Mainline
passenger revenue decreased $2.2 billion, or 29%, primarily due to weakened
demand for air travel from the global recession, the effects of the H1N1
virus and related capacity reductions.
PRASM decreased 21% as a result of a 19% decrease in passenger mile yield. The decrease
in passenger mile yield reflects (1)
a reduction in business demand and significantly reduced demand for international travel due to the global recession,
(2)
an overall decrease in average fares due to competitive pricing pressures and (3) lower fuel
surcharges due to year-over-year decline in fuel prices.
Regional Carriers. Passenger revenue of regional carriers decreased by $65 million to $1.4
billion primarily due to a 20% decrease in passenger mile yield.
Cargo. Cargo revenue decreased $337 million to $275 million due to the effects of capacity
reductions, including the grounding of five dedicated freighter
B-747-200F aircraft since the Closing Date,
significantly reduced cargo yields, decreased international volume and lower fuel surcharges due to
the year-over-year decline in fuel prices.
Other, net. Other, net revenue increased $185 million to $906 million due primarily due to new
or increased administrative service charges and baggage handling fees.
Operating Expense
Nine Months Ended September 30, | Increase | Percent | ||||||||||||||
(in millions) | 2009 | 2008 | (Decrease) | Change | ||||||||||||
Operating Expense: |
||||||||||||||||
Salaries and related costs |
$ | 2,245 | $ | 2,182 | $ | 63 | 3 | % | ||||||||
Aircraft fuel and related taxes |
1,855 | 4,246 | (2,391 | ) | (56 | )% | ||||||||||
Contract carrier arrangements |
658 | 820 | (162 | ) | (20 | )% | ||||||||||
Contracted services |
549 | 611 | (62 | ) | (10 | )% | ||||||||||
Passenger commissions and other selling expenses |
445 | 665 | (220 | ) | (33 | )% | ||||||||||
Aircraft maintenance materials and outside repairs |
438 | 563 | (125 | ) | (22 | )% | ||||||||||
Landing fees and other rents |
404 | 416 | (12 | ) | (3 | )% | ||||||||||
Depreciation and amortization |
389 | 1,015 | (626 | ) | (62 | )% | ||||||||||
Passenger service |
191 | 190 | 1 | 1 | % | |||||||||||
Aircraft rent |
178 | 167 | 11 | 7 | % | |||||||||||
Impairment of goodwill and other intangible assets |
| 3,841 | (3,841 | ) | (100 | )% | ||||||||||
Restructuring and merger-related items |
116 | 1 | 115 | NM | ||||||||||||
Other |
307 | 389 | (82 | ) | (21 | )% | ||||||||||
Total operating expense |
$ | 7,775 | $ | 15,106 | $ | (7,331 | ) | (49 | )% | |||||||
Aircraft fuel and related taxes. Aircraft fuel and related taxes decreased $2.4 billion
primarily due to decreases of (1) $1.9 billion associated with lower average fuel prices, (2)
$394 million from a 10% decline in fuel consumption due to capacity reductions
and (3) a $67 million reduction in fuel hedge losses year-over-year.
Contract carrier arrangements. Contract carrier arrangements decreased primarily due to lower
average fuel prices.
Passenger commission and other selling expenses. Passenger commissions and other selling
expenses decreased in connection with the decrease in passenger revenue.
Aircraft maintenance materials and outside repairs. Aircraft maintenance materials and outside
repairs decreased as a result of capacity reductions.
Depreciation and amortization. Depreciation and amortization decreased as a result of $641
million in impairment related charges recorded in the nine months ended September 30, 2008,
primarily related to certain definite-lived intangible assets and aircraft.
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Impairment of goodwill and other intangible assets. During the March 2008 quarter, we
experienced a significant decline in market capitalization driven primarily by record high fuel
prices and overall airline industry conditions. In addition, the announcement of our intention to
merge with Delta established a stock exchange ratio based on the relative valuation of Northwest
and Delta. As a result of these indicators, we determined goodwill was impaired and recorded a
non-cash charge of $3.2 billion. We also recorded a non-cash charge of $598 million to reduce the
carrying value of certain indefinite-lived intangible assets based on their revised estimated fair
values.
Restructuring and merger-related items. During the nine months ended September 30, 2009, we
recorded a $75 million charge for merger-related items
associated with integrating our operations into Delta and a $41 million charge in connection with employee workforce reduction programs.
Other Expense (Income)
We recorded other expense, net of $591 million in the nine months ended September 30, 2009 as
compared to other expense, net of $474 million in the nine months ended September 30, 2008. The
increase is due to (1) the increase in debt discount amortization recorded in interest expense as a
result of purchase accounting, (2) an $83 million non-cash
loss for the write-off of the unamortized
discount on the extinguishment of the Bank Credit Facility and (3) a decrease in interest income
primarily from significantly reduced short-term interest rates, partially offset by the impairment
in 2008 of our $213 million minority ownership interest in Midwest Air Partners, LLC.
Income Taxes
We recorded an income tax provision of $5 million for the nine months ended September 30,
2009, primarily related to international and state income taxes. We did not record an income tax
benefit as a result of our loss for the nine months ended September 30, 2009. The deferred tax
asset resulting from such a net operating loss is fully reserved by a valuation allowance.
We recorded an income tax benefit of $211 million for the nine months ended September 30,
2008, primarily as a result of the impairment of our indefinite-lived intangible assets. The
impairment of goodwill did not result in an income tax benefit as goodwill is not deductible for
income tax purposes. We did not record an income tax benefit for the remainder of nine months ended
September 30, 2008. The deferred tax asset resulting from such a net operating loss is fully
reserved by a valuation allowance.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Omitted under the reduced disclosure format permitted by General Instruction H(2)(c) of Form
10-Q.
ITEM 4. Controls and Procedures.
Management, including the President and Chief Operating Officer and Senior Vice President &
Treasurer, performed an evaluation of our disclosure controls and procedures, which have been
designed to effectively identify and timely disclose important information. Management, including
the President and Chief Operating Officer and Senior Vice President & Treasurer, concluded that the
controls and procedures were effective as of September 30, 2009 to ensure that material information
was accumulated and communicated to management, including the President and Chief Operating Officer
and Senior Vice President & Treasurer, as appropriate to allow timely decisions regarding required
disclosure.
Except as set forth below, during the three months ended September 30, 2009, we made no change
in our internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
On October 29, 2008 we completed our Merger with Delta Air Lines, Inc. We are currently
integrating policies, processes, people, technology and operations for the combined company.
Management will continue to evaluate our internal control over financial reporting as we execute
Merger integration activities.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Northwest Airlines Corporation
Northwest Airlines Corporation
We have reviewed the condensed consolidated balance sheet of Northwest Airlines Corporation (the
Company) as of September 30, 2009 (Post-merger Successor), and the related condensed consolidated statements of operations
for the three-month and nine-month periods ended September 30,
2009 (Post-merger Successor) and 2008 (Pre-merger Successor), and the condensed
consolidated statements of cash flows for the nine-month periods
ended September 30, 2009 (Post-merger Successor) and 2008 (Pre-merger Successor).
These financial statements are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with standards of
the Public Company Accounting Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should be made to the
accompanying condensed consolidated financial statements referred to above for them to be in
conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Northwest Airlines Corporation
as of December 31, 2008 (Post-merger Successor) and the related consolidated statements of operations, stockholders
equity, and cash flows for the period from October 30, 2008 to
December 31, 2008 (Post-merger Successor), the period from January 1, 2008 to October 29, 2008 (Pre-merger Successor) and in our report dated March 2, 2009,
we expressed an unqualified opinion on those consolidated financial statements.
/s/ Ernst & Young LLP
Atlanta, Georgia
October 28, 2009
October 28, 2009
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Reference is made to Item 3. Legal Proceedings in our 2008 Form 10-K for a discussion of
other legal proceedings.
Northwest Airlines, Inc. v. Filipas, et al (U.S. Dist. Ct. Minnesota, Case 07-CIV-4803
(JNE/JJG)). On December 12, 2007, Northwest Airlines, Inc. filed a declaratory judgment action
against six of its employee pilots seeking a declaration that its recently implemented Target
Benefit Pension Plan (collectively bargained for with the Air Line Pilots Association) does not
violate any applicable prohibitions against age discrimination, including under ERISA. The court
has certified a defendant class of all employee pilots who will receive less under the new target
plan than they would have received under the predecessor plan that provided benefits to pilots on a
flat percentage or pro rata to pay basis. On January 26, 2009, the District Court granted
summary judgment in favor of Northwest on its claim as well as the defendants counterclaims.
Claims by the employee pilots against the Air Line Pilots Association remain pending in the case
and consequently no final order has been entered.
ITEM 1A. Risk Factors.
Risk Factors Relating to Northwest
Our business and results of operations are dependent on the price and availability of aircraft
fuel. High fuel costs or cost increases could have a materially adverse effect on our
operating results. Likewise, significant disruptions in the supply of aircraft fuel would
materially adversely affect our operations and operating results.
Our operating results are significantly impacted by changes in the price and availability of
aircraft fuel. Fuel prices have increased substantially in the last five years and spiked at
record high levels in 2008 before falling dramatically during the latter part of 2008. In 2008,
our average fuel price per gallon rose 72% to $3.69, as compared to
an average price of $2.15 in
2007, which was 6% higher than our average price of $2.02 in 2006 and significantly higher than
fuel prices in the earlier part of this decade. Fuel costs represented 32% of our
operating expense in 2008 and 2007. Our average fuel price per gallon was $1.77 for
the first nine months of 2009, and fuel costs represented 26% of operating expense for that
period. Fuel costs have had a significant negative effect on our results of operations and
financial condition.
Our ability to pass along the increased costs of fuel to our customers is limited by the
competitive nature of the airline industry. We often have not been able to increase our fares to
offset the effect of increased fuel costs in the past and we may not be able to do so in the
future.
In addition, our aircraft fuel purchase contracts do not provide material protection against
price increases or assure the availability of our fuel supplies. We purchase most of our aircraft
fuel under contracts that establish the price based on various market indices. We also purchase
aircraft fuel on the spot market, from offshore sources and under contracts that permit the
refiners to set the price. In an effort to manage our exposure to changes in fuel prices, we use
derivative instruments, which are comprised of crude oil, heating oil and jet fuel swap, collar
and call option contracts, though we may not be able to successfully manage this exposure.
Depending on the type of hedging instrument used, our ability to benefit from declines in fuel
prices may be limited.
We are currently able to obtain adequate supplies of aircraft fuel, but it is impossible to
predict the future availability or price of aircraft fuel. Weather-related events, natural
disasters, political disruptions or wars involving oil-producing countries, changes in
governmental policy concerning aircraft fuel production, transportation or marketing, changes in
aircraft fuel production capacity, environmental concerns and other unpredictable events may
result in additional fuel supply shortages and fuel price increases in the future. Additional
increases in fuel costs or disruptions in fuel supplies could have additional negative effects on
us.
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The global economic recession has resulted in weaker demand for air travel and may create
challenges for us that could have a material adverse effect on our business and results of
operations.
As the effects of the global economic recession have been felt in our domestic and
international markets, we are experiencing significantly weaker demand for air travel. Our demand
began to slow during the December 2008 quarter and global economic conditions in 2009 are
substantially reducing U.S. airline industry revenues in 2009 compared to 2008. As a result, Delta
is reducing its consolidated capacity by 7 to 9% in 2009 compared to the combined capacity of
Delta and Northwest during 2008 (which reflects planned domestic and international capacity
reductions of 7 to 9%). Demand for air travel could remain weak or even continue to fall if the
global economic recession continues for an extended period, and overall demand could fall lower
than we are able prudently to reduce capacity. The weakness in the United States and international
economies is having a significant negative impact on our results of operations and could continue
to have a significant negative impact on our future results of operations.
The global financial crisis may have an impact on our business and financial condition in ways
that we currently cannot predict.
The credit crisis and related turmoil in the global financial system has had and may continue
to have an impact on our business and our financial condition. For example, our ability to access
the capital markets may be severely restricted at a time when we would like, or need, to do so,
which could have an impact on our flexibility to react to changing economic and business
conditions. In addition, the credit crisis could have an impact on our fuel hedging contracts or
our interest hedging contracts if counterparties are forced to file for bankruptcy or are
otherwise unable to perform their obligations.
The financial crisis and economic downturn have also resulted in broadly lower investment
asset returns and values, including in the defined benefit pension plans that we sponsor for
eligible employees and retirees. As of December 31, 2008, the defined benefit pension plans had an
estimated benefit obligation of approximately $8.8 billion and were funded through assets with a
value of approximately $3.9 billion. We estimate that our funding requirements for our defined
benefit pension plans, which are governed by the Employee Retirement Income Security Act (ERISA)
and have been frozen for future accruals, are approximately $60 million in 2009 and $300 million
in 2010. The significant increase in required funding is due primarily to the decline in the
investment markets in 2008, which negatively affected the value of our pension assets. Estimates
of pension plan funding requirements can vary materially from actual funding requirements because
the estimates are based on various assumptions concerning factors outside our control, including,
among other things, the market performance of assets; statutory requirements; and demographic data
for participants, including the number of participants and the rate of participant attrition.
Results that vary significantly from our assumptions could have a material impact on our future
funding obligations.
Our substantial indebtedness may limit our financial and operating activities and may
adversely affect our ability to incur additional debt to fund future needs.
We have substantial indebtedness, which could:
| require us to dedicate a substantial portion of cash flow from operations to the payment of principal, and interest on, indebtedness, thereby reducing the funds available for operations and future business opportunities; | ||
| make it more difficult for us to satisfy our payment and other obligations under our indebtedness; | ||
| limit our ability to borrow additional money for working capital, restructurings, capital expenditures, research and development, investments, acquisitions or other purposes, if needed, and increasing the cost of any of these borrowings; | ||
| make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events; | ||
| limit our ability to withstand competitive pressures; | ||
| reduce our flexibility in planning for or responding to changing business and economic conditions; and/or | ||
| limit our flexibility in responding to changing business and economic conditions, including increase competition and demand for new services, placing us at a disadvantage when compared to our competitors that have less debt, and making us more vulnerable than our competitors who have less debt to a downturn in our business, industry or the economy in general. |
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In addition, a substantial level of indebtedness, particularly because substantially all of
our assets are currently subject to liens, could limit our ability to obtain additional financing
on acceptable terms or at all for working capital, capital expenditures and general corporate
purposes. We have historically had substantial liquidity needs in the operation of our business.
These liquidity needs could vary significantly and may be affected by general economic conditions,
industry trends, performance and many other factors not within our control.
Our
revolving credit facility includes financial and other covenants that impose restrictions
on our financial and business operations.
Our revolving credit facility agreement contains financial covenants that require us to
maintain a minimum fixed charge coverage ratio, minimum unrestricted cash reserves and minimum
collateral coverage ratios. In addition, the credit facility contains other negative covenants
customary for such financings. If we fail to comply with these covenants and are unable to obtain
a waiver or amendment, an event of default would result. These covenants are subject to important
exceptions and qualifications.
The revolving credit facility agreement also contains other events of default customary for
such financings. If an event of default were to occur, the lenders could, among other things,
declare outstanding amounts due and payable, and our cash may become restricted. We cannot provide
assurance that we would have sufficient liquidity to repay or refinance the borrowings under the
credit facility if such amounts were accelerated upon an event of default. In addition, an event
of default or declaration of acceleration under the credit facility could also result in an event
of default under other of our financing agreements.
Employee strikes and other labor-related disruptions may adversely affect our operations.
Our business is labor intensive, utilizing large numbers of pilots, flight attendants and
other personnel. As of September 30, 2009, approximately 59% of our workforce was unionized.
Strikes or labor disputes with our unionized employees may adversely affect our ability to conduct
business. Relations between air carriers and labor unions in the United States are governed by the
Railway Labor Act, which provides that a collective bargaining agreement between an airline and a
labor union does not expire, but instead becomes amendable as of a stated date. The Railway Labor
Act generally prohibits strikes or other types of self-help actions both before and after a
collective bargaining agreement becomes amendable, unless and until the collective bargaining
processes required by the Railway Labor Act have been exhausted.
In addition, if we or our affiliates are unable to reach agreement with any of our unionized
work groups on future negotiations regarding the terms of their collective bargaining agreements
or if additional segments of our workforce become unionized, we may be subject to work
interruptions or stoppages, subject to the requirements of the Railway Labor Act. Likewise, if
third party regional carriers with whom we have contract carrier agreements are unable to reach
agreement with their unionized work groups on current or future negotiations regarding the terms
of their collective bargaining agreements, those carriers may be subject to work interruptions or
stoppages, subject to the requirements of the Railway Labor Act, which could have a negative
impact on our operations.
The ability to realize fully the anticipated benefits of our merger with Delta may depend on
the successful integration of the businesses of Delta and Northwest.
Our merger with Delta involved the combination of two companies which operated as independent
public companies prior to the merger. Delta is devoting significant attention and resources to
integrating business practices and operations in order to achieve the benefits of the merger,
including expected synergies. If we are unable to integrate our business practices and operations
in a manner that allows us to achieve the anticipated revenue and cost synergies, or if
achievement of such synergies takes longer or costs more than expected, the anticipated benefits
of the merger may not be realized fully or at all or may take longer to realize than expected. In
addition, it is possible that the integration process could result in the loss of key employees,
diversion of managements attention, the disruption or interruption of, or the loss of momentum in
our ongoing businesses or inconsistencies in standards, controls, procedures and policies, any of
which could adversely affect our ability to maintain relationships with customers and employees or
our ability to achieve the anticipated benefits of the merger, or could reduce our earnings or
otherwise adversely affect our business and financial results. Delta expects to incur total cash
costs of approximately $500 million over approximately three years to integrate the two airlines.
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Completion of the integration of the Delta and Northwest Airlines, Inc. workforces may present
significant challenges.
The successful integration of Delta and Northwest and achievement of the anticipated benefits
of the merger depend significantly on integrating Deltas and Northwest Airlines, Inc.s employee
groups and on maintaining productive employee relations. While integration of a number of the
workgroups (including pilots and aircraft maintenance technicians) is proceeding, completion of
the integration of certain workgroups (including flight attendants, airport employees and
reservations employees) of the two pre-merger airlines will require the resolution of potentially
difficult issues, including, but not limited to the process and timing for determining whether the
combined post-merger workgroups wish to have union representation. Unexpected delay, expense or
other challenges to integrating the workforces could impact the expected synergies from the
combination of Delta and Northwest and affect our financial performance.
Interruptions or disruptions in service at one of our hub airports could have a material
adverse impact on our operations.
Our business is heavily dependent on our operations at our hub airports in Detroit, Memphis,
Minneapolis/St. Paul, Amsterdam and Tokyo-Narita. Each of these hub operations includes flights
that gather and distribute traffic from markets in the geographic region surrounding the hub to
other major cities and to other hubs. A significant interruption or disruption in service at one
of our hubs could have a serious impact on our business, financial condition and results of
operations.
We are increasingly dependent on technology in our operations, and if our technology fails or
we are unable to continue to invest in new technology or integrate the systems and technologies of
Delta and Northwest, our business may be adversely affected.
We have become increasingly dependent on technology initiatives to reduce costs and to
enhance customer service in order to compete in the current business environment. For example, we
have made significant investments in websites, check-in kiosks and related
initiatives. The performance and reliability of the technology are critical to our ability to
attract and retain customers and our ability to compete effectively. These initiatives will
continue to require significant capital investments in our technology infrastructure to deliver
these expected benefits. If we are unable to make these investments, our business and operations
could be negatively affected. In addition, we may face challenges associated with integrating
complex systems and technologies that support the separate operations of Delta and Northwest. If
we are unable to manage these challenges effectively, our business and results of operations could
be negatively affected.
In addition, any internal technology error or failure or large scale external interruption in
technology infrastructure we depend on, such as power, telecommunications or the internet, may
disrupt our technology network. Any individual, sustained or repeated failure of technology could
impact our customer service and result in increased costs. Our technology systems and related data
may be vulnerable to a variety of sources of interruption due to events beyond our control,
including natural disasters, terrorist attacks, telecommunications failures, computer viruses,
hackers and other security issues. While we have in place, and continue to invest in, technology
security initiatives and disaster recovery plans, these measures may not be adequate or
implemented properly to prevent a business disruption and its adverse financial consequences to
our business.
If we experience losses of senior management personnel and other key employees, our operating
results could be adversely affected.
We are dependent on the experience and industry knowledge of our officers and other key
employees to execute our business plans. If we experience a substantial turnover in our leadership
and other key employees, our performance could be materially adversely impacted. Furthermore, we
may be unable to attract and retain additional qualified executives as needed in the future.
We are at risk of losses and adverse publicity stemming from any accident involving our
aircraft.
An aircraft crash or other accident could expose us to significant tort liability. The
insurance we carry to cover damages arising from any future accidents may be inadequate. In the
event that the insurance is not adequate, we may be forced to bear substantial losses from an
accident. In addition, any accident involving an aircraft that we operate or an aircraft that is
operated by an airline that is one of our codeshare partners could create a public perception that
our aircraft are not safe or reliable, which could harm our reputation, result in air travelers
being reluctant to fly on our aircraft and harm our business.
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Our ability to use net operating loss carryforwards to offset future taxable income for U.S.
federal income tax purposes is subject to limitation.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation
that undergoes an ownership change is subject to limitations on its ability to utilize its
pre-change net operating losses ("NOLs"), to offset future taxable income. In general, an
ownership change occurs if the aggregate stock ownership of certain stockholders (generally 5%
shareholders, applying certain look-through rules) increases by more than 50 percentage points
over such stockholders lowest percentage ownership during the testing period (generally three
years).
As of September 30, 2009, Delta reported a consolidated federal and state NOL carryforward of
approximately $16.5 billion. Both Delta and Northwest experienced an ownership change in 2007 as a
result of their respective plans of reorganization under Chapter 11 of the U.S. Bankruptcy Code.
As a result of the merger, Northwest experienced a subsequent ownership change. Delta also
experienced a subsequent ownership change on December 17, 2008 as a result of the merger, the
issuance of equity to employees in connection with the merger and other transactions involving the
sale of our common stock within the testing period.
The Delta and Northwest ownership changes resulting from the merger could limit the ability
to utilize pre-change NOLs that were not subject to limitation, and could further limit the
ability to utilize NOLs that were already subject to limitation. Limitations imposed on the
ability to use NOLs to offset future taxable income could cause U.S. federal income taxes to be
paid earlier than otherwise would be paid if such limitations were not in effect and could cause
such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar
rules and limitations may apply for state income tax purposes. NOLs generated subsequent to
December 17, 2008 are not limited.
Risk Factors Relating to the Airline Industry
The airline industry is highly competitive and, if we cannot successfully compete in the
marketplace, our business, financial condition and operating results will be materially
adversely affected.
We face significant competition with respect to routes, services and fares. Our domestic
routes are subject to competition from both new and established carriers, some of which have lower
costs than we do and provide service at low fares to destinations served by us. In particular, we
face significant competition at our hub airports either directly at those airports or at the hubs
of other airlines that are located in close proximity to our hubs. We also face competition in
smaller to medium-sized markets from regional jet operators.
Low-cost carriers, including Southwest, AirTran and JetBlue, have placed significant
competitive pressure on network carriers in the domestic market. In addition, other network
carriers have also significantly reduced their costs over the last several years. Our ability to
compete effectively depends, in part, on our ability to maintain a competitive cost structure. If
we cannot maintain our costs at a competitive level, then our business, financial condition and
operating results could be materially adversely affected. In light of increased jet fuel costs and
other issues in recent years, we expect consolidation to occur in the airline industry. As a
result of consolidation, we may face significant competition from larger carriers that may be able
to generate higher amounts of revenue and compete more efficiently.
In addition, we compete with foreign carriers, both on interior U.S. routes, due to marketing
and codesharing arrangements, and in international markets. Through marketing and codesharing
arrangements with U.S. carriers, foreign carriers have obtained access to interior U.S. passenger
traffic. Similarly, U.S. carriers have increased their ability to sell international
transportation, such as transatlantic services to and beyond European cities, through alliances
with international carriers. International marketing alliances formed by domestic and foreign
carriers, including the Star Alliance (among United Airlines, Lufthansa German Airlines and others
and which Continental has announced its intention to join in October 2009) and the oneworld
Alliance (among American Airlines, British Airways and others) have also significantly increased
competition in international markets. The adoption of liberalized Open Skies Aviation Agreements
with an increasing number of countries around the world, including in particular the Open Skies
agreement between the United States and the Member States of the European Union, has accelerated
this trend. Negotiations are under way between the United States and other countries, such as
Japan, regarding similar agreements with countries, which, if effectuated, could significantly
increase competition in these markets.
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The rapid spread of contagious illnesses can have a material adverse effect on our business
and results of operations.
The rapid spread of a contagious illness, such as the H1N1 flu virus, can have a material
adverse effect on the demand for worldwide air travel and therefore have a material adverse effect
on our business and results of operations. Further acceleration of the spread of H1N1 during the
flu season in the Northern Hemisphere could have a significant adverse impact on the demand for
air travel and as a result our financial results in addition to the impact that we experienced
during the spring of 2009. Moreover, our operations could be negatively affected if employees are
quarantined as the result of exposure to a contagious illness. Similarly, travel restrictions or
operational problems resulting from the rapid spread of contagious illnesses in any part of the
world in which we operate may have a materially adverse impact on our business and results of
operations.
Terrorist attacks or international hostilities may adversely affect our business, financial
condition and operating results.
The terrorist attacks of September 11, 2001 caused fundamental and permanent changes in the
airline industry, including substantial revenue declines and cost increases, which resulted in
industry-wide liquidity issues. Additional terrorist attacks or fear of such attacks, even if not
made directly on the airline industry, would negatively affect us and the airline industry. The
potential negative effects include increased security, insurance and other costs and lost revenue
from increased ticket refunds and decreased ticket sales. Our financial resources might not be
sufficient to absorb the adverse effects of any further terrorist attacks or other international
hostilities involving the United States.
The airline industry is subject to extensive government regulation, and new regulations may
increase our operating costs.
Airlines are subject to extensive regulatory and legal compliance requirements that result in
significant costs. For instance, the Federal Aviation Administration (FAA) from time to time
issues directives and other regulations relating to the maintenance and operation of aircraft that
necessitate significant expenditures. We expect to continue incurring expenses to comply with the
FAAs regulations.
Other laws, regulations, taxes and airport rates and charges have also been imposed from time
to time that significantly increase the cost of airline operations or reduce revenues. For
example, the Aviation and Transportation Security Act, which became law in November 2001, mandates
the federalization of certain airport security procedures and imposes additional security
requirements on airports and airlines, most of which are funded by a per ticket tax on passengers
and a tax on airlines. The federal government has on several occasions proposed a significant
increase in the per ticket tax. The proposed ticket tax increase, if implemented, could negatively
impact our revenues.
Proposals to address congestion issues at certain airports or in certain airspace,
particularly in the Northeast United States, have included concepts such as congestion-based
landing fees, slot auctions or other alternatives that could impose a significant cost on the
airlines operating in those airports or airspace and impact the ability of those airlines to
respond to competitive actions by other airlines. Furthermore, events related to extreme weather
delays have caused Congress and the U.S. Department of Transportation to consider proposals
related to airlines handling of lengthy flight delays during extreme weather conditions. The
enactment of such proposals could have a significant negative impact on our operations. In
addition, some states have also enacted or considered enacting such regulations.
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Future regulatory action concerning climate change and aircraft emissions could have a
significant effect on the airline industry. For example, the European Commission is seeking to
impose an emissions trading scheme applicable to all flights operating in the European Union,
including flights to and from the United States. Laws or regulations such as this emissions
trading scheme or other U.S. or foreign governmental actions may adversely affect our operations
and financial results.
We and other U.S. carriers are subject to domestic and foreign laws regarding privacy of
passenger and employee data that are not consistent in all countries in which we operate. In
addition to the heightened level of concern regarding privacy of passenger data in the United
States, certain European government agencies are initiating inquiries into airline privacy
practices. Compliance with these regulatory regimes is expected to result in additional operating
costs and could impact our operations and any future expansion.
Our insurance costs have increased substantially as a result of the September 11, 2001
terrorist attacks, and further increases in insurance costs or reductions in coverage could
have a material adverse impact on our business and operating results.
As a result of the terrorist attacks on September 11, 2001, aviation insurers significantly
reduced the maximum amount of insurance coverage available to commercial air carriers for
liability to persons (other than employees or passengers) for claims resulting from acts of
terrorism, war or similar events. At the same time, aviation insurers significantly increased the
premiums for such coverage and for aviation insurance in general. Since September 24, 2001, the
U.S. government has been providing U.S. airlines with war-risk insurance to cover losses,
including those resulting from terrorism, to passengers, third parties (ground damage) and the
aircraft hull. The coverage currently extends through August 31, 2010. The withdrawal of
government support of airline war-risk insurance would require us to obtain war-risk insurance
coverage commercially, if available. Such commercial insurance could have substantially less
desirable coverage than that currently provided by the U.S. government, may not be adequate to
protect our risk of loss from future acts of terrorism, may result in a material increase to our
operating expenses or may not be obtainable at all, resulting in an interruption to our
operations.
ITEM 6. Exhibits.
(a) | Exhibits: |
31.1 | Certification by Northwests President and Chief Operating Officer with respect to Northwests Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 | ||
31.2 | Certification by Northwests Senior Vice President & Treasurer with respect to Northwests Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 |
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized this 28th day of October 2009.
Northwest Airlines Corporation |
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By | /s/ Paul Jacobson | |||
Paul Jacobson | ||||
Senior Vice President & Treasurer (Principal Financial and Accounting Officer) |
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