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Secretary of Labor Thomas E. Perez

EBSA (Formerly PWBA) Federal Register Notice

Individual Exemption Involving the Northwest Airlines Pension Plan for Salaried Employees, the Northwest Airlines Pension Plan for Pilot Employees, and the Northwest Airlines Pension Plan for Contract Employees [01/17/2003]

[PDF Version]

Volume 68, Number 12, Page 2578-2590


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DEPARTMENT OF LABOR


Pension and Welfare Benefits Administration


[Application Numbers D-11137, 11138, and 11139]


 
Notice of Proposed Individual Exemption Involving the Northwest 
Airlines Pension Plan for Salaried Employees, the Northwest Airlines 
Pension Plan for Pilot Employees, and the Northwest Airlines Pension 
Plan for Contract Employees (Collectively, the Plans) Located in Eagan, 
MN


AGENCY: Pension and Welfare Benefits Administration, Department of 
Labor.


ACTION: Notice of proposed individual exemption.


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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed exemption from 
certain prohibited transaction restrictions of the Employee Retirement 
Income Security Act of 1974 (ERISA or the Act) and from certain taxes 
imposed by the Internal Revenue Code of 1986 (the Code). If granted, 
the proposed exemption would permit: (1) The in-kind contribution(s) of 
the common stock of either Pinnacle Airlines, Inc. or Pinnacle Airlines 
Corp. (Pinnacle Stock) to the Plans by Northwest Airlines, Inc. 
(Northwest), a party in interest with respect to such Plans; (2) the 
holding of the Pinnacle Stock by the Plans; (3) the sale of the 
Pinnacle Stock by the Plans to Northwest; and (4) the acquisition, 
holding, and exercise by the Plans of a put option (the Put Option) 
granted to the Plans by Northwest (the Exemption Transactions). If 
granted, the proposed exemption would affect participants and 
beneficiaries of, and fiduciaries with respect to, the Plans.


DATES: Written comments and requests for a public hearing should be 
received by the Department on or before March 3, 2003.


EFFECTIVE DATE: This exemption, if granted, will be effective as of 
January 15, 2003.


ADDRESSES: All written comments and requests for a public hearing 
(preferably, three copies) should be sent to the Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210, (Attention: Exemption Application Numbers D-
11137-39).
    Interested persons are also invited to submit comments and/or 
hearing request to the Department by the end of the scheduled comment 
period either by facsimile to (202) 219-0204 or by electronic mail to 
moffittb@pwba.dol.gov. The application pertaining to the proposed 
exemption and the comments received will be available for public 
inspection in the Public Disclosure Room of the Pension and Welfare 
Benefits Administration, U.S. Department of Labor, Room N-1513, 200 
Constitution Avenue, NW., Washington, DC 20210.


SUPPLEMENTARY INFORMATION: This document contains a notice of pendency 
before the Department of a proposed individual exemption from the 
restrictions of sections 406(a), 406(b)(1) and (b)(2), and 407(a) of 
the Act and from the sanctions resulting from the application of 
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) 
through (E) of the Code.


FOR FURTHER INFORMATION CONTACT: Wendy M. McColough or Christopher 
Motta, Office of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor, telephone (202) 693-8540. 
(This is not a toll-free number.)


Summary of Facts and Representations


    1. Northwest. Northwest (hereinafter, Northwest or the Applicant) 
is a Minnesota corporation with its principal headquarters in Eagan, 
Minnesota. Northwest is the principal operating company of the 
Northwest Airlines Corporation's controlled group and is the fourth 
largest airline in the world. Northwest Airlines Corporation (NWAC), 
the ultimate parent corporation, which indirectly owns 100 percent 
(100%) of the stock of Northwest, is publicly traded (NASDAQ symbol 
NWAC) and is a Delaware corporation. Northwest represents that all 
significant members of NWAC's controlled group are airline-related. The 
airline began service on October 1, 1926. Known primarily as an 
international airline prior to the era of deregulation, Northwest 
strengthened its domestic presence when the industry was deregulated. 
To achieve this, Northwest acquired Republic Airlines in 1986. Today, 
the Applicant states that Northwest has a 10 percent (10%) domestic 
market share. In 1989, Northwest created the first international 
airline alliance with KLM Royal Dutch Airlines (KLM), giving Northwest 
an international presence between the U.S. and Europe and points 
beyond. Northwest expanded its alliance strategy again in 1998 with 
Continental Airlines (Continental) by creating the first domestic, 
major airline alliance. This alliance was solidified with a new 25-year 
alliance agreement in 2001. In August 2002, Northwest and Continental 
announced that a ten-year cooperative marketing agreement had been 
reached with Delta Air Lines. This agreement is subject to U.S. 
government review and approval. NWAC was taken private in 1989. In 
March 1994, NWAC completed an initial public offering and again became 
a public company.
    2. Northwest is the sponsor of the Northwest Airlines Pension Plan 
for Salaried Employees (Salaried Plan), the Northwest Airlines Pension 
Plan for Pilot Employees (Pilots Plan), and the Northwest Airlines 
Pension Plan for Contract Employees (Contract Plan) with the authority, 
directly or through a committee of officers designated by it (The 
Northwest Airlines Pension Investment Committee), to appoint and remove 
trustees and investment managers. Northwest also retains the authority, 
subject to collective bargaining limitations, to amend and terminate 
the Plans and to transfer assets and liabilities to and from the Plans. 
Northwest is the plan administrator under the Plans and a


[[Page 2579]]


named fiduciary for purposes of section 402(a) of ERISA for the Plans.
    In addition to Northwest, other fiduciaries include State Street 
Global Advisors, The Northwest Airlines Pension Investment Committee, 
investment managers hired by the Pension Investment Committee, Aon 
Fiduciary Counselors, Inc. as it relates to the transactions described 
in this proposal, certain employees of the Plan Sponsor, and the 
Retirement Board as it relates to the Pilots Plan. Northwest, as 
sponsor of the Plans, by and through the Pension Investment Committee 
appointed by it as named fiduciary, generally has discretion with 
respect to the investment of the Plans' assets. However, the discretion 
to value, acquire, hold and dispose of the Pinnacle Stock as described 
below, will be exercised by an independent fiduciary.
    3. The Plans. The Applicant provides the following description of 
the Plans:
    Contract Plan. The plan year for the Contract Plan is the calendar 
year. The Contract Plan was established effective January 1, 1970, 
pursuant to a series of collective bargaining agreements with several 
unions at various times during 1970. Nearly all the participants in 
this Plan are employees represented for collective bargaining purposes 
by several Northwest unions that have negotiated for participation in 
the Contract Plan. At this time, these unions include the Aircraft 
Technical Support Association (ATSA), Aircraft Mechanics Fraternal 
Association (AMFA), the International Association of Machinists and 
Aerospace Workers (IAM), International Brotherhood of Teamsters, 
Chauffeurs, Warehousemen and Helpers of America, Airline Division 
(IBT), Northwest Airlines Meteorologists Association (NAMA), and 
Transport Workers Union of America (TWUA). The number of employees 
participating in the Contract Plan as of January 1, 2002, was 53,911. 
The Applicant states that as of January 1, 2002, the Contract Plan had 
assets with a fair market value of $1.279 billion, and was underfunded 
by $741 million.
    Salaried Plan. The plan year for the Salaried Plan is the calendar 
year. The Salaried Plan was established in October 1946. All 
participants in this Plan currently accruing benefits are ``salaried'' 
or ``management'' employees. None of the employee participants in this 
Plan who are currently accruing benefits are represented for collective 
bargaining purposes by any union. The Salaried Plan is a cash balance 
plan. The number of employees participating in the Salaried Plan as of 
January 1, 2002, was 10,517. The Applicant states that as of January 1, 
2002, the Salaried Plan had assets with a fair market value of $349 
million, and was underfunded by $67 million.
    Pilots Plan. The plan year for the Pilots Plan is the calendar 
year. The Pilots Plan was established effective October 29, 1956. All 
participants in the Pilots Plan are employees represented for 
collective bargaining purposes by the Airline Pilots Association 
(ALPA). The number of employees participating in the Pilots Plan as of 
January 1, 2002, was 8,326. The Applicant states that as of January 1, 
2002, the Pilots Plan had assets with a fair market value of $2.753 
billion, and was underfunded by $248 million. Pursuant to collective 
bargaining agreements negotiated between the Pilot's union and 
Northwest, the Pilots Plan is currently prohibited from investing in 
employer stock; however, the Applicant anticipates that an agreement 
with ALPA will be reached to permit the contributions. Northwest 
represents that no contributions to the Pilots Plan will be made unless 
such an agreement is reached. The Applicant proposes that in the event 
that no agreement is reached to permit contributions of Pinnacle Stock 
to the Pilots Plan, the Master Trust will be modified to permit the 
holding of Pinnacle Stock for the benefit of the Contract Plan and 
Salaried Plan
    4. Contributions. The Applicant represents that Northwest has 
remitted the full amount of all quarterly contributions when due, 
including the full amount of quarterly contributions due to the 
Contract Plan on April 15, July 15 and October 15, 2002. The last 
quarterly contribution to the Contract Plan for the 2002 plan year is 
due January 15, 2003.\1\ The ``catch-up'' contribution due in September 
2003 relates to the 2002 plan years of the Contract Plan and the 
Salaried Plan. The Applicant represents that the minimum funding rules 
require (and permit) such a make-up contribution when the quarterly 
contributions for a plan year as determined under Code section 412(m), 
if any, total less than the full minimum funding amount determined to 
be owed with respect to the plan year. \2\
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    \1\ According to the Applicant, under Code section 412(m)(4), 
Northwest owed no quarterly contributions during calendar year 2002 
to the Pilots Plan or Salaried Plan for the 2002 plan year. However, 
see below concerning a September 2003 ``catch-up'' contribution due 
to the Salaried Plan.
    \2\ See Code subsections 412(a) and (c)(10).
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    The Applicant represents that the contributions required to satisfy 
the Contract Plan's funding requirements for the 2002 plan year total 
approximately $314 million, of which $111 million already has been paid 
in three required quarterly contributions. For plan year 2002, an 
additional quarterly contribution of $41 million is due January 15, 
2003 and a final contribution of $162 million is due in September 2003. 
Additionally, a plan year 2002 contribution of $20 million is due to 
the Salaried Plan in September 2003 (the ``catch-up'' contributions). 
There are no 2002 plan year contributions due to the Pilots Plan. The 
Applicant states that contribution requirements for plan years 2003 and 
2004 cannot be forecast with certainty because Northwest does not yet 
have final numbers regarding its funding requirements for those plan 
years. Northwest's minimum funding obligations for plan year 2003 will 
not be finally determined until its actuary completes it actuarial 
valuation as of January 1, 2003, which will be completed in April or 
May of 2003. In addition, all of the asset returns for the Plans are 
not yet known. Northwest will provide the plan year 2003 information 
when they are finalized and publicly available. The Applicant 
represents, however, it is likely that all Plans will require 
contributions for the 2003 and 2004 plan years.
    5. The Master Trust. Contributions required to fund the Contract 
Plan, the Salaried Plan, and the Pilots Plan are made to and held under 
a single master trust, the Northwest Airlines, Inc. Master Trust for 
Defined Benefit Plans (the Master Trust). The Master Trust is 
structured so that each Plan has an undivided commingled interest in 
all of the trust fund assets. The Trustee of the Master Trust is State 
Street Bank and Trust Company. In addition to the Northwest Contract 
Plan, Pilots Plan and Salaried Plan, the Master Trust holds assets 
attributable to the Northwest Pension Plan for German Employees that 
currently has assets of approximately $300,000.00. No assets are held 
on behalf of any other plans in the Master Trust.
    6. Pinnacle Airlines, Inc. Pinnacle Airlines, Inc. (Pinnacle 
Airlines) is an indirect, wholly owned subsidiary of NWAC, and is a 
sister corporation of Northwest. Pinnacle Airlines recently changed its 
name from Express Airlines I, Inc., which was incorporated in 1985 in 
Georgia. It is a regional airline with principal hubs in Detroit, 
Michigan; Minneapolis, Minnesota; and Memphis, Tennessee. Pinnacle 
Airlines Corporation was incorporated in Delaware on January 10, 2002, 
to become a holding company of Pinnacle Airlines.
    Northwest requests exemptive relief for the in-kind contribution of 
Pinnacle


[[Page 2580]]


Stock. Shares of Pinnacle Stock are not registered or publicly traded 
as of the time of filing of this Application. Northwest currently 
anticipates that an initial public offering (IPO) of Pinnacle Airlines 
would occur sometime in 2003 or 2004. According to the Applicant, the 
IPO is expected to generate a premium price for shareholders as a 
result of efforts currently taking place under the joint direction and 
control of Northwest and Pinnacle Airlines' management to position 
Pinnacle Airlines as a premier regional air carrier in the United 
States.
    The Pinnacle Stock held by the Plans would be subject to 
registration rights under shareholder agreements or such other 
contracts as necessary to permit the Plans to participate in any future 
IPO of the Pinnacle Stock. It is expected that there will be certain 
restrictions on the Pinnacle Stock contributed to the Plans, including 
voting restrictions and limits on the ability of the Plans to dispose 
of the Pinnacle Stock, except pursuant to an IPO initiated by Northwest 
or by exercise of the Put Option. Any such restrictions will be 
negotiated with the Independent Fiduciary. At the time of an IPO, the 
Plans will participate pro rata on the same basis with other holders of 
Pinnacle Stock.
    Subject to negotiation of final terms with the Independent 
Fiduciary, Northwest proposes that the Plans be granted a Put Option 
with respect to the Pinnacle Stock, on the following terms:
    [sbull] The Put Option, with respect to each share of Pinnacle 
Stock, shall be exercisable at any time until the date after an IPO 
during which such share of Pinnacle Stock can be sold during any 90-day 
period under SEC Rule 144.\3\
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    \3\ Provision is made for the Put Option to extend after the IPO 
date in the event that less than 100 percent (100%) of Pinnacle 
Stock is offered in connection with the IPO.
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    [sbull] Northwest will provide quarterly notice to the Independent 
Fiduciary of its liquidity so that the Independent Fiduciary can take 
Northwest's liquidity into account in deciding whether to exercise the 
put.
    [sbull] In the event the Put Option is exercised, the price paid by 
Northwest (or its affiliate) to the Plans shall be determined as 
follows:
    (i) If the Put Option is exercised prior to the IPO date, the 
greater of the value of the stock at the time of the contribution or 
the fair market value determined by the Independent Fiduciary as of the 
exercise date, consistent with a valuation report prepared by a 
qualified independent appraiser;
    (ii) If the Put Option is exercised on the IPO date, the greater of 
the value of the stock at the time of contribution or the IPO price per 
share of Pinnacle Stock; or
    (iii) If the Put Option is exercised after the IPO date, the 
greater of the value of the stock at the time of the contribution or 
the average of the closing price for the Pinnacle Stock on the public 
market for the 10 trading days (or such other number if fewer than 10) 
preceding the exercise date.
    [sbull] The price of the Pinnacle Stock shall be determined as of 
the exercise date and shall be paid by Northwest (or its affiliate) to 
the Plans in full in cash on such terms and conditions as shall be 
negotiated with the Independent Fiduciary.
    7. Pinnacle Airlines Analysis. As a result of Northwest's request 
to contribute Pinnacle Stock to the Plans in lieu of cash, the Pension 
Benefit Guaranty Corporation (PBGC) recently contracted with Eclat 
Consulting, an independent firm with experience in the airline industry 
(Eclat), for an analysis of Pinnacle Airlines. The November 27, 2002 
Eclat analysis (Eclat Report) includes competitive, operational and 
financial elements essential to validating Pinnacle Airlines' current 
market viability as a Northwest regional partner and as a stand-alone 
airline as well as current U.S. market conditions relative to the 
marketability of a successful Pinnacle Airlines IPO. The Department has 
summarized the Eclat Report below. The Eclat Report is presented in 
sections that examine the regional airline industry, Pinnacle Airlines, 
and a brief financial review of Pinnacle Airlines and the stability of 
Northwest.
    Eclat Report Industry Analysis-- According to the report, as of 
September 2002, the ``Big 6'' U.S. majors (the Majors) have lost over 
$7 billion and now face the year's weakest quarter. They are facing 
dramatic increases in low-fare competition, overcapacity and a 
weakening business travel market. In contrast, the regional airline 
industry is flourishing as a result of being in ``the right place at 
the right time'' as the Majors are turning to their regional airline 
partners to operate regional jets to bring high yield passengers from 
small communities to their network systems. During the first eight 
months of 2002 the regional industry has grown only 3 percent (3%) in 
passenger enplanements, however, the group's Revenue Passenger Miles 
(RPM)(production) has realized growth of nearly 25 percent (25%), the 
Available Seat Miles (ASM)(output) growth of 20 percent (20%) and 
Regional Jet (RJ) usage has increased almost 6 percentage points of 
market share in the U.S. over the past year. The majority of regional 
partner airlines now operate on a ``fee-per-departure'' or ``block 
hour'' basis with a fixed operating margin, thus limiting risk during 
market downturns and guaranteeing operating profit.
    Eclat Report Pinnacle Airlines Analysis--According to the report, 
Pinnacle Airlines operates only as Northwest Airlink, a wholly owned 
subsidiary of NWAC and provides regional service on a fixed fee basis 
utilizing Saab 340 turboprops and Bombardier CRJ regional jets. The 
arrangement provides that 65 percent (65%) of the operational costs 
(fuel, maintenance, rentals, facilities, etc.) are passed through to 
Northwest for 100 percent (100%) reimbursement and 35 percent (35%) of 
costs are paid based on historical performance with a target operating 
margin of 13.0 percent (13.0%). Northwest has committed 95 regional jet 
aircraft financed by Bombardier, and the RJs currently on hand have 
doubled Pinnacle Airlines' size, seeing ASMs increase 68 percent (68%) 
in 2001 (vs. 2000) making it the second fastest growing regional 
airline. They operate 310 departures per day (12.4 percent (12.4%) of 
the Northwest system) and 15,000 seats per day (5.9 percent (5.9%) of 
the Northwest system).
    Pinnacle Airlines generates revenue in two distinct manners for 
Northwest. The first and smaller revenue generation comes from 
transporting passengers to and from spoke markets to one of Northwest's 
three hubs. This local, one-segment flying generates approximately $1.6 
million in weekly revenue for Northwest, or 2 percent (2%) of 
Northwest's domestic total. More importantly, the carrier brings 
connecting passengers from the spoke markets to the hub to connect onto 
the Northwest route network creating over $8 million in weekly revenue 
(8 percent (8%) of Northwest's domestic total) for Northwest. Combined, 
the regional carriers' value to the Northwest Domestic System is 
between $520 million and $540 million annually as the carrier exists 
today (Eclat Appendix 7).
    The Eclat Report states that the current and immediate value of 
Pinnacle Airlines is virtually removed if Northwest Airlines ceased to 
exist, as there are limited opportunities for other major carrier 
relationships. Without Northwest, Pinnacle Airlines has physical and 
cash assets of $121.6 million, $5.2 million in cash, $62.4 million in 
receivables and $54 million in aircraft spares and other property and 
equipment. Pinnacle Airlines'


[[Page 2581]]


remaining intangible value would be dependent upon the other major 
network carriers' desire to add another hub to their network systems at 
Detroit, Memphis or Minneapolis. Currently, there are limited options 
for Pinnacle Airlines as all of the major networks have very strong 
ties with other regional operators.
    Eclat Report Financial Review of Pinnacle Airlines and Stability of 
Northwest--According to the report, Pinnacle Airlines is currently in 
sound financial shape with a current operating margin of 13.2 percent 
(13.2%), a profit margin of 8.9 percent (8.9%) and a return on equity 
(ROE) of 29.1 percent (29.1%). The revenue growth for Pinnacle Airlines 
has been strong over the period of 1998-2001 at a compound average 
annual rate of 28.0 percent (28.0%). In the first 9 months of 2002, 
this growth actually accelerated to 61.4 percent (61.4%) in a year-
over-year comparison.
    The Eclat Report concludes that through 2005 (the amendable date 
for the contract with Northwest), there is no reason to suspect that 
the company will not continue such strong revenue growth. ``Salaries, 
wages, and benefits'' only accounted for 21.5 percent (21.5%) of costs 
(the average is mid-thirties). As the company currently is constructed 
(prior to the expected IPO), their long-term debt load is virtually 
non-existent and their liquidity is superb. Current financial 
conditions clearly indicate an ability to cover any short-term 
obligations. However, if the company were to go public, the balance 
sheet will be fundamentally altered by the assumption of a $200 million 
note payable to Northwest. Such a note would raise the debt/equity 
ratio to 277 percent (277%) and would significantly limit Pinnacle 
Airlines' ability to borrow in the future and radically raise the cost 
of capital. Due to the guaranteed operating margin, however, even a 
note of this magnitude would not be difficult for the company to cover.
    In order to estimate the value of a Pinnacle Airlines IPO, Eclat 
created a model based on the Three-Stage Free Cash Flow to Equity 
(FCFE) valuation technique.\4\ The result of the FCFE model is that the 
estimated value of a Pinnacle Airlines IPO is approximately $221.6 
million if Eclat assumes that the growth in the first phase is 
approximately 14 percent (14%) and lasts for five years (Eclat Appendix 
9-1).\5\ Eclat believes this growth assumption is conservative when 
compared to Pinnacle Airlines' recent growth, but is based on only the 
``guaranteed'' portion (95 total RJs) of their agreement with 
Northwest. The five-year term assumption was a result of the fact that 
Northwest is able to renegotiate in 2008. This Eclat model was adjusted 
by Eclat based on differing high growth revenue assumptions and the 
impact of such adjustments dramatically lowered the value of the IPO. 
The value of equity for Pinnacle Airlines, assuming a high growth 
period revenue growth rate of 11 percent (11%), would be $147.7 million 
(Eclat Appendix 9-2). Assuming a high growth period revenue growth rate 
of 8 percent (8%), the value of equity for Pinnacle drops to $81 
million (Eclat Appendix 9-3).
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    \4\ This model is designed to value firms, like Pinnacle 
Airlines, that are expected to go through three phases of growth--an 
initial phase of high growth, a transitional period where the growth 
rate declines, and a steady-state period where growth is stable. 
Once these growth assumptions are made, the present value of 
expected free cash flow is calculated.
    \5\ During the second stage, the growth assumption is 10 percent 
(10%) and a term of three years. The 10 percent (10%) is consistent 
with the industry's long-term revenue average, and the three-year 
term is based on the belief that such strong growth will last for a 
total of 8 years from 2003. In the third and final stage, the model 
assumes that growth will continue to commence at a constant rate of 
5 percent (5%). This assumption brings the growth rate back in line 
with Pinnacle Airlines' growth in the years prior to their 
arrangement with Northwest. Other assumptions made in the model 
include Beta and Net Capital Expenditure growth. Pinnacle Airlines' 
Beta was based on a calculation off of industry average and is 
assumed to be .66 in the high growth period. According to Eclat, 
while this appears at first glance to be a very low figure, it is 
very much related to the terms of the fixed fee relationship with 
Northwest. According to the terms of the agreement, growth is 
virtually assured and therefore the company's stock is unlikely to 
fluctuate as wildly as the market in general. In the other two 
phases, the firm Beta is linked to the current industry average. The 
assumptions about net capital expenditure growth in all three phases 
are standard figures based on historical norms. When estimating the 
cost of equity for Pinnacle Airlines, a market risk premium of 5.3 
percent (5.3%) was assumed. This number is based on the historical 
risk premium found between stocks and treasury bonds published by 
the Federal Reserve Bank (in the United States from 1962-2000).
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    According to Eclat, Northwest has emerged as, perhaps, the most 
stable airline in the industry with minimal low fare carrier exposure 
and with the smallest losses of any carrier. Northwest reported a net 
loss of $46 million, with operating income of $8 million in the third 
quarter of 2002. Northwest ended the quarter with over $2.5 billion in 
cash and short-term receivables. Northwest is a global carrier with an 
alliance with KLM and its Amsterdam hub and a Northwest Tokyo Hub. The 
labor situation is stable with all of its unions currently under 
contract.
    8. Reasons for Entering into the Exemption Transactions. The 
Applicant represents that, for several years leading up to 2001, 
Northwest had been among the most profitable of the nation's major 
airlines. The Applicant notes Northwest's financial performance in 1998 
and 1999 was adversely affected by labor disruptions; however, 
Northwest's performance quickly recovered in 2000. However, the airline 
industry began to suffer a significant financial downturn in early 2001 
that was substantially worsened by the events of September 11, 2001, 
which in combination, have disproportionately affected the airline 
industry. Northwest states that industry losses in 2001 totaled $10 
billion, of which Northwest's share was $700 million.\6\ Northwest 
asserts that, because of the potential of a war with Iraq, which has 
dramatically increased fuel prices, as well as ongoing terrorism 
threats, the timing of an economic recovery for the airline industry is 
uncertain. Northwest concludes that to weather the current economic 
uncertainty, Northwest and other major airlines must maintain a high 
level of liquidity. The Applicant notes that Northwest is, by many 
measures, the best prepared among the industry to withstand this 
difficult period and expects to return to


[[Page 2582]]


profitability when the economy recovers. The Applicant represents that 
preservation of liquidity is one of the keys to maintaining a strong 
financial position in light of the current economic uncertainty, and 
Northwest has maintained one of the strongest liquidity positions in 
the industry. Northwest already has taken many aggressive, proactive 
actions to reduce costs and preserve liquidity.
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    \6\ These numbers are exclusive of federal funds received by the 
airlines as a result of the Air Transportation Safety and System 
Stabilization Act, Pub. L. No. 107-42 (September 21, 2001) (Airline 
Stabilization Act). In 2001, Northwest recognized $461 million of 
grant income from the United States Government that was recorded as 
non-operating income. The events of September 11, 2001 had an 
immediate and severe impact on the U.S. airline industry's passenger 
traffic and yields. Immediately following these events, the Federal 
Aviation Administration (FAA) ordered all aircraft operating in the 
U.S. to be grounded, an order that remained in place for over 48 
hours. Northwest Airlines was only able to operate a limited portion 
of its scheduled flights for several days after the grounding order 
was lifted as it repositioned displaced aircraft and crews. 
Passenger traffic and yields on both domestic and international 
flights declined significantly when flights were permitted to 
resume, and the number of tickets refunded was substantially above 
normal. Northwest has continued to experience significantly lower 
revenue and has incurred additional costs (e.g., higher security 
costs and insurance premiums) as compared to periods prior to 
September 11, 2001. In addition to increased rates, aviation 
insurers have also 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.
    Under the Airline Stabilization Act, each air carrier is 
entitled to receive a maximum amount of compensation payments equal 
to the lesser of (i) its direct and incremental pretax losses 
attributed to the terrorist attacks for the period of September 11, 
2001, to December 31, 2001, or (ii) its available seat mile and/or 
revenue ton mile allocation of the $5 billion compensation available 
under the Airline Stabilization Act. Northwest Airlines received a 
total of $410 million as of December 31, 2001, and was expected to 
receive a final $51 million of additional funds under the Airline 
Stabilization Act in early 2002.
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    While the current environment creates significant challenges for 
Northwest and the other major airlines, the Applicant believes that 
these circumstances create opportunities for efficient regional 
carriers, including Pinnacle Airlines. Northwest represents that, 
although current market conditions are not favorable to an IPO of the 
Pinnacle Stock because valuations of commuter airlines have declined 
from their historical levels during the past six to eight months, 
Northwest anticipates that the Pinnacle Stock proposed to be 
contributed to the Plans will be sold through an IPO at a favorable 
price. The Applicant notes that market conditions are expected to 
improve within the next 30 months and that significant efforts have 
been undertaken by Northwest to prepare Pinnacle Airlines for public 
sale.
    9. Northwest asserts that the relief requested in this Application 
offers significant potential benefits both to the Plans and to 
Northwest. The Plans will benefit by receiving the full value of the 
minimum funding contribution of Northwest, through the opportunity to 
invest in a strong regional airline, and through sharing in the 
anticipated premium that would attach to such stock in the event of an 
IPO. Furthermore, the Plans' investment in Pinnacle Stock will be 
subject to the protections of an independent fiduciary. The Plans will 
also benefit from Northwest's preservation of liquidity, ensuring that 
it remains in a strong financial position and maximizing its ability to 
contribute to the Plans in the future. Northwest represents that its 
decision to seek an exemption to contribute Pinnacle Stock creates no 
more risk to the Plans, and perhaps even less risk, than investing in 
publicly-traded NWAC stock, which constitutes qualifying employer 
securities within the meaning of ERISA section 407(d)(5) and would be 
exempt from the prohibitions of ERISA sections 406 and 407 by reason of 
the statutory exemption set forth in ERISA section 408(e). The 
Applicant concludes by noting that the exemption sought by Northwest is 
one part of Northwest's overall strategy to manage its financial 
liquidity during a time of extraordinary financial challenges, while 
still meeting its long-term pension plan commitments. In this regard, 
Northwest notes that it is applying to the Internal Revenue Service for 
a waiver of its minimum funding contributions with respect to both the 
Contract Plan and the Salaried Plan for plan year 2003.
    10. Northwest requests exemptive relief from certain of the 
prohibited transaction restrictions of sections 406 and 407 of the Act 
and section 4975 of the Code for the periodic contributions of Pinnacle 
Stock to the Plans in order to satisfy all or any portion of 
Northwest's minimum funding requirements for plan years 2002, 2003, or 
2004 that are due in calendar years 2003 or 2004.
    Northwest requests exemptive relief because of its belief that the 
contributions of Pinnacle Stock would not meet the requirements for the 
acquisition of ``employer securities'' under section 408(e) of the Act. 
In this regard, section 408(e) provides, in part, that sections 406 and 
407 of the Act shall not apply to the acquisition or sale by a plan of 
``qualifying employer securities,'' as defined in section 407(d)(5) of 
the Act, if such acquisition or sale is for adequate consideration, no 
commission is charged, and, in the case of a plan other than an 
eligible individual account plan, such as a defined benefit plan, such 
acquisition does not exceed 10 percent (10%) of the fair market value 
of the assets of such plan. Under section 407(d)(5), stock is a 
``qualifying employer security,'' if such stock is issued by an 
employer of employees covered by the plan or by an affiliate of such 
employer. Section 407(d)(5) further provides that in the case of a plan 
other than an eligible individual account plan, such as a defined 
benefit plan, an employer security shall be considered a ``qualifying 
employer security,'' only if such employer security satisfies the 
requirements of section 407(f)(1). Section 407(f)(1) provides that 
stock satisfies the requirements of this paragraph if no more than 25 
percent (25%) of the aggregate issued and outstanding shares of stock 
of the same class is held by the plan and at least 50 percent (50%) of 
the aggregate amount of such shares is held by persons independent of 
the issuer.
    In this regard, Northwest anticipates that, after all of the 
proposed in-kind contributions of Pinnacle Stock to the Plans, 
substantially more than 25 percent (25%) of all issued and outstanding 
shares of Pinnacle Stock would be held by the Plans. The Applicant 
expects that nearly 100 percent (100%) of the Pinnacle Stock may 
ultimately be held by the Plans, with any remainder being held by 
Northwest. Thus, the requirement that 50 percent (50%) of the shares of 
Pinnacle Stock be held by persons independent of the issuer would not 
be met. Accordingly, the shares of Pinnacle Stock to be contributed to 
the Plans would not satisfy the requirements of sections 407(f)(1) of 
the Act and thus would not constitute ``qualifying employer 
securities'' within the meaning of section 407(d)(5) of the Act. If the 
shares of Pinnacle Stock do not constitute ``qualifying employer 
securities,'' the exemptive relief under section 408(e) of the Act 
would not be available. For the same reasons, it is anticipated that 
section 408(e) would not exempt the Plans' acquisition and holding of 
the Put Option.
    11. The Independent Fiduciary.\7\ Aon Fiduciary Counselors, Inc. 
(Fiduciary Counselors or Independent Fiduciary) has been retained as 
the Independent Fiduciary to represent the Plans' interests with 
respect to the proposed transactions. Fiduciary Counselors represents 
that it is qualified to serve as Independent Fiduciary on behalf of the 
Plans with respect to the proposed Exemption Transactions. Fiduciary 
Counselors acts primarily as an independent fiduciary for large pension 
plans. Prior to December 1999, Fiduciary Counselors operated as a 
business unit within Actuarial Sciences Associates, now Aon Consulting 
of New Jersey, Inc., a subsidiary of Aon Consulting, Inc. (Aon 
Consulting). In the past five years, Fiduciary Counselors has acted as 
independent fiduciary in transactions involving plan assets totaling 
more than $4 billion.
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    \7\ The Department notes that the Act's general standards of 
fiduciary conduct would apply to the transactions permitted by this 
proposed exemption, if granted. In this regard, section 404 of the 
Act requires, among other things, a fiduciary to discharge his 
duties respecting a plan solely in the interest of the plan's 
participants and beneficiaries and in a prudent manner. Accordingly, 
an independent plan fiduciary must act prudently with respect to: 
(1) The decision to enter into the transactions described herein; 
and (2) the negotiation of the terms of such a transaction, 
including, among other things, the specific terms by which the Plans 
will (A) acquire, hold, and sell the Pinnacle Stock and (B) acquire, 
hold and exercise the Put Option. The Department further emphasizes 
that it expects the independent plan fiduciary, prior to authorizing 
each acquisition of the Pinnacle Stock and any sale of such Stock, 
and prior to exercising the Put Option, to fully understand the 
benefits and risks associated with such transactions. In addition, 
the Department notes that such plan fiduciary must periodically 
monitor, and have the ability to so monitor, the Pinnacle Stock and 
the Put Option.
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    In evaluating the proposed Exemption Transactions, Fiduciary 
Counselors notes that it will use the services of investment 
professionals at Aon


[[Page 2583]]


Investment Consulting, Inc. (AIC), an affiliated registered investment 
adviser under the Investment Advisers Act of 1940, to provide certain 
investment and financial advice in support of Fiduciary Counselors' 
determinations. AIC is the full service investment-consulting 
subsidiary of Aon Consulting, providing investment management 
consulting services to institutional tax-exempt funds. Aon Consulting 
has investment consulting operations in the United States, United 
Kingdom, Canada, Continental Europe, Australia and New Zealand. 
Worldwide, Aon Consulting has about 125 people in its investment 
consulting practice. AIC has offices in seven U.S. cities and a U.S. 
staff of about forty.
    Neither Fiduciary Counselors nor AIC provides any other services to 
Northwest or its affiliates other than the independent fiduciary and 
related services they provide in connection with the proposed 
contribution of Pinnacle Stock to the Plans. An affiliate, Aon Risk 
Services of Minnesota, does provide insurance brokerage services to 
Northwest. However, the fees paid to Aon Risk Services of Minnesota and 
the fees paid to Fiduciary Counselors represent less than 1 percent 
(1%) of the revenue of Aon Corporation, one of the nation's largest 
risk management and benefits consulting companies, which is the 
ultimate parent company of Fiduciary Counselors, AIC, Aon Consulting 
and Aon Risk Services of Minnesota.
    In connection with the November 5, 2002 Independent Fiduciary 
Agreement between Fiduciary Counselors and Northwest (the Agreement), 
Northwest has agreed to pay Fiduciary Counselors an annual fee that 
would cover both the independent fiduciary and investment management 
services to be provided by Fiduciary Counselors and the investment 
advisory services to be provided by AIC. The initial fee was remitted 
directly to Aon Consulting, a parent company of both Fiduciary 
Counselors and AIC. Aon Consulting internally allocated 25 percent 
(25%) of the fee to Fiduciary Counselors, which comprised less than 5 
percent (5%) of Fiduciary Counselors' annual revenue, and 75 percent 
(75%) to AIC, which comprised less than 5 percent (5%) of AIC's 
revenue. So long as there is no change in control of Fiduciary 
Counselors or AIC, future payments will be allocated in a similar 
manner.
    12. At the request of Northwest's management, Morgan Stanley & Co. 
Incorporated (Morgan Stanley) prepared a preliminary valuation study of 
Pinnacle Airlines, dated September 24, 2002, which Fiduciary Counselors 
may take into account in determining the valuation of the Pinnacle 
Stock to be contributed to the Plans.\8\ Morgan Stanley, as part of its 
investment banking and advisory business, is continuously engaged in 
the valuation of businesses and securities in connection with mergers 
and acquisitions, negotiated underwritings, competitive biddings, 
secondary distributions of listed and unlisted securities, private 
placements and valuations for corporate, estate and other purposes. In 
connection with its investment banking and advisory business, Morgan 
Stanley has represented a number of companies in the airlines industry. 
The Applicant represents that the Independent Fiduciary has unfettered 
discretion to choose the methodologies and the ultimate values of the 
Pinnacle Stock contributed to the plans and the related Put Option. The 
Independent Fiduciary is not required to use only the Morgan Stanley 
valuation.
---------------------------------------------------------------------------


    \8\ Morgan Stanley is listed in the Securities and Exchange 
Commission Form S-1 registration statement for the Pinnacle Stock 
IPO as one of the underwriters for the IPO of the Pinnacle Stock.
---------------------------------------------------------------------------


    13. Under the terms of the Agreement, Fiduciary Counselors makes 
all the decisions on behalf of the Master Trust and the Plans regarding 
the acceptance of the proposed in-kind contribution of Pinnacle Stock, 
determines (with the assistance of the qualified independent appraiser 
engaged by the Independent Fiduciary) the value of the Pinnacle Stock 
held by the Master Trust from time to time, and make such other 
decisions with regard to the Pinnacle Stock as are contemplated by the 
Exemption Application as it may be ultimately approved. In this regard, 
Fiduciary Counselors has retained Eclat Consulting to prepare a 
valuation of the Pinnacle Stock that will serve as the basis for 
Fiduciary Counselors' determination.
    In making this determination to accept the securities, the 
Independent Fiduciary shall have discretion to negotiate the final 
terms and conditions of the contribution, including the registration, 
shareholder and put rights. The contributed Pinnacle Stock would be 
held as an ``Investment Fund'' within the Master Trust, under the 
management and control of the Independent Fiduciary as investment 
manager thereof, until such time as the Independent Fiduciary 
determines it is in the best interests of the Plans' participants and 
beneficiaries to dispose of such Pinnacle Stock.
    The Independent Fiduciary shall thereafter, until all transactions 
contemplated by the Exemption Application are concluded or it has been 
replaced by another independent fiduciary as hereinafter provided, 
continue to serve as Independent Fiduciary and continue to discharge 
the functions assigned to it as such in accordance with the provisions 
of the Exemption Application.
    The Independent Fiduciary confirms that it is (and shall continue 
to be during the term of its engagement hereunder) an ``investment 
adviser'' within the meaning of the Investment Advisers Act of 1940, 
and further acknowledges that, with respect to its duties pursuant to 
the Agreement, it is a fiduciary as defined in section 3(21) of ERISA. 
The Independent Fiduciary shall act for the exclusive benefit and in 
the sole interest of the Plans and their participants and beneficiaries 
and with the care, skill, prudence and diligence under the 
circumstances then prevailing that a prudent person acting in a like 
capacity and familiar with such matters would use in the conduct of an 
enterprise of a like character and with like aims.
    The Independent Fiduciary represents that, in evaluating the 
proposed Exemption Transactions, it has reviewed those documents that 
it deems relevant to the transactions including, but not limited to: 
(i) Copies of the current documents for the Plans and the Master Trust 
including all amendments thereto, as well as current summary plan 
descriptions and all other disclosures provided to participants and 
beneficiaries in the Plans regarding the Master Trust; (ii) copies of 
the Plans' most recent Form 5500 filings and all other financial and 
other information regarding the Plans reasonably requested by the 
Independent Fiduciary; (iii) copies of (or electronic access to) 
Northwest's most recent filings made with the Securities and Exchange 
Commission (SEC) as requested in order for the Independent Fiduciary to 
perform its obligations hereunder, including reasonable access to 
internal staff and outside professionals engaged by Northwest or the 
Plans regarding the Master Trust; and (iv) copies of (or electronic 
access to) Pinnacle Airlines' most recent filings made with the SEC as 
requested in order for the Independent Fiduciary to perform its 
obligations hereunder, including reasonable access to internal staff 
and outside professionals engaged by Pinnacle Airlines.
    The Agreement states that, as compensation for the services to be 
rendered by the Independent Fiduciary and its affiliates in connection 
with the Agreement, Northwest shall pay to the


[[Page 2584]]


Independent Fiduciary an annual fee of $250,000 for as long as Pinnacle 
Stock is owned by the Master Trust.
    The Independent Fiduciary has engaged the law firm of Jones, Day, 
Reavis & Pogue to advise it and to serve as legal counsel. As 
previously noted, the Independent Fiduciary has engaged the services of 
Eclat to assist it in determining the value of the Pinnacle Stock at 
the time of the initial acquisition by the Plans.
    The Agreement contemplates that either party may terminate such 
Agreement for any reason upon 60 days notice and that the Agreement may 
be terminated immediately for cause. In the event that a successor 
Independent Fiduciary is appointed, or there is a change in control of 
Fiduciary Counselors, the rights exercised by Fiduciary Counselors on 
behalf of the Plans in connection with the Term Sheet and the proposed 
Omnibus Agreement (see below) shall be exercised by the successor 
Independent Fiduciary (with the approval of the Department). The 
parties to the Agreement shall notify the Department within thirty (30) 
calendar days of any decision regarding the resignation, termination or 
change in control of the Independent Fiduciary.
    14. The Term Sheet and the Proposed Omnibus Agreement. The Term 
Sheet (as provided to the Department on January 10, 2003) provides that 
Northwest and Fiduciary Counselors will enter into an Omnibus Agreement 
that governs the terms upon which Northwest may make periodic 
contributions of Pinnacle Stock to the Plans in order to satisfy all or 
any portion of Northwest's minimum funding requirements that are due in 
calendar years 2003 or 2004. Contributions may also be made during 
calendar years 2003 or 2004 with respect to a plan year for which there 
is no required minimum funding contribution, thus creating a credit 
balance with respect to the relevant plan. No contribution of Pinnacle 
Stock shall be made that would cause the total combined value of all 
employer securities or employer real property held by any plan, 
immediately after the contribution, to exceed 10 percent (10%) of the 
total assets of such plan.
    The SEC Form S-1 registration statement for the IPO involving 
Pinnacle Airlines, Inc. describes a proposed share exchange. The 
Applicant represents that prior to the initial contribution, the 
following transactions will take place in the order indicated:
    (a) Pinnacle Airlines, Inc. will distribute, as a dividend, a $200 
million promissory note to NWA Inc., the sole shareholder of Pinnacle 
Airlines, Inc.
    (b) NWA Inc. will transfer to Pinnacle Airlines Corp. all of the 
outstanding shares of Pinnacle Airlines, Inc. and in consideration 
thereof, Pinnacle Airlines Corp. will issue to NWA Inc. 15 million 
shares of common stock of Pinnacle Airlines Corp. and one share of 
Series A Preferred Stock of Pinnacle Airlines Corp.
    (c) NWA Inc. will transfer the common stock of Pinnacle Airlines 
Corp. and the Series A Preferred Stock to Northwest as a contribution 
to the capital of Northwest.
    As a result of these transactions, Pinnacle Airlines, Inc. will 
become a wholly owned subsidiary of Pinnacle Airlines Corp. and 
Pinnacle Airlines Corp. will be a wholly owned subsidiary of Northwest. 
The terms of the Series A Preferred Stock and the terms of the $200 
million note are set forth in exhibits to the SEC Form S-1 registration 
statement.
    The Applicant represents that the holder of the Series A Preferred 
Stock has certain other voting rights in addition to the right to elect 
two members to the board of directors. An affirmative vote of NWA Inc. 
(the affiliate of Northwest which currently holds all of the shares of 
Pinnacle Airlines, Inc., including the Series A Preferred Stock) will 
be required in order for Pinnacle to:
    [sbull] Enter into business combinations and change of control 
transactions with a third party;
    [sbull] Sell or dispose of any capital stock of Pinnacle Airlines, 
Inc. or substantially all of the assets of Pinnacle Airlines Corp. or 
Pinnacle Airlines, Inc.;
    [sbull] Effect reorganizations and restructuring transactions;
    [sbull] Acquire airline assets that generate annual revenues of 
$500 million or more;
    [sbull] Increase the size of the board of directors;
    [sbull] Agree to allow a major airline other than Northwest to 
appoint more than one director to Pinnacle Airlines' board;
    [sbull] Amend Pinnacle Airlines' certificate of incorporation in a 
manner that would adversely affect the rights of the Series A preferred 
shareholder; or
    [sbull] Enter into any definitive agreements relating to the 
foregoing matters.
    The effect of this voting right will be to enable NWA Inc. to 
preclude Pinnacle Airlines from carrying out any of the foregoing 
proposals if NWA Inc. does not vote in favor of the proposal. Under the 
Term Sheet, Northwest has agreed not to exercise its rights under the 
Series A Preferred Stock to block an IPO or sale of Pinnacle Airlines 
if the Independent Fiduciary, on behalf of the Plans, initiates such an 
IPO or a sale after an ``Early Termination Event'' (defined below). The 
Term Sheet material terms that will be reflected in the Omnibus 
Agreement between the Independent Fiduciary and Northwest are set forth 
below.


Request To Contribute Pinnacle Shares


    Except with respect to the first such contribution, as to which 
Northwest and the Independent Fiduciary will agree on a shorter notice 
period, no later than 60 days before any date in calendar year 2003 or 
2004 on which Northwest proposes to make a contribution of Pinnacle 
Stock to the Plans, Northwest shall provide written notice to the 
Independent Fiduciary of its proposal to make such contribution and 
shall indicate the dollar value of the Pinnacle Stock that it intends 
to contribute.


Valuation of Pinnacle Shares


    The Term Sheet states that no later than 30 days prior to each date 
on which Northwest proposes to contribute Pinnacle Stock (or, with 
respect to the first such contribution, such earlier date as may be 
agreed), the Independent Fiduciary shall notify Northwest in writing 
(accompanied by a written valuation report) of the per share value that 
the Independent Fiduciary then preliminarily ascribes to the shares of 
Pinnacle Stock. In addition to determining the value of Pinnacle Stock 
at the time of a proposed contribution, the Independent Fiduciary shall 
provide to Northwest on an annual basis a written valuation of the per 
share value of all Pinnacle Stock held by the Plans as of each December 
31 and at any time the Independent Fiduciary exercises the Put Option.
    On the relevant contribution date, subject to the Independent 
Fiduciary's review and approval, Northwest may contribute to one or 
more Plans shares of Pinnacle Stock based on the per share value 
ascribed to such shares by the Independent Fiduciary. The Independent 
Fiduciary and the Plans will have the rights associated with such 
shares as described below. As a condition to any such contribution by 
Northwest, the Independent Fiduciary must determine on behalf of the 
Plans that the acceptance of the contributed shares is prudent and in 
the interests of the Plans' participants and beneficiaries and 
otherwise consistent with the fiduciary standards of ERISA. In 
addition, the Independent Fiduciary shall monitor on an ongoing basis 
the prudence of the Plans' continued holding of Pinnacle Stock 
consistent with the fiduciary standards of ERISA,


[[Page 2585]]


subject to the determination from time to time by the appropriate 
fiduciary of the Plans (other than the Independent Fiduciary) that such 
investment will not impair the liquidity of the Plans such that the 
Plans would not be able to pay benefits and expenses when due. If such 
appropriate Plan fiduciary determines the liquidity of the Plans is 
impaired, such fiduciary shall direct the Independent Fiduciary to 
dispose of all or a portion of the Pinnacle Stock consistent with the 
terms of this agreement to the extent commercially reasonable.
    All transactions involving the Plans in connection with the 
contribution of Pinnacle shares will be no less favorable to the Plans 
than arms' length transactions involving unrelated parties. No 
commissions, fees, costs, charges or other expenses will be borne by 
the Independent Fiduciary or the Plans in connection with any 
acquisition, holding or disposition of Pinnacle shares to or from the 
Plans, other than the underwriters' discount or other broker-dealer 
fees or commissions charged in any sale of such shares.
    The Applicant represents that the valuation approach that the 
Independent Fiduciary takes into account when determining the value of 
Pinnacle Stock with respect to any specific transaction will be the 
method that the Independent Fiduciary determines to be in the best 
interests of the Plans' participants and beneficiaries.
    The Independent Fiduciary's valuations will be used by the Master 
Trust Trustee for such Pinnacle Stock and by Northwest as plan 
administrator as the initial value of the Pinnacle Stock for Plan and 
Master Trust reporting purposes, and as the initial value to be used by 
each Plan's actuaries for valuation purposes. In addition to 
determining the fair market value of the Pinnacle Stock at the time it 
is contributed to the Plans, the Independent Fiduciary will thereafter 
determine the fair market value as of each March 31, June 30, September 
30, and December 31; at any time the Pinnacle Stock is sold or 
exchanged by the Plans (e.g., for purposes of exercising its Put 
Option, as described below); and at such other times as the Independent 
Fiduciary determines to be in the interests of participants and 
beneficiaries in any of the Plans.
    Northwest proposes that the contribution of Pinnacle Stock to the 
Master Trust be subject to a Put Option held by the Plans with respect 
to all of the Pinnacle Stock held by the Plans. The Put Option may be 
exercised on behalf of the Plans by the Independent Fiduciary, 
obligating Northwest (or an affiliate) to purchase the Pinnacle Stock 
from the Plans at a price not less than the greater of its fair market 
value as of the exercise date (as determined by the Independent 
Fiduciary) or the value placed on the stock at the time of its 
contribution.


Voting Provisions


    The Term Sheet provides that the shares of Pinnacle Stock 
contributed to the Plans will be identical to the shares retained by 
Northwest. With respect to the voting of such shares and related 
matters, the Omnibus Agreement will also provide as follows:
    [sbull] The initial board of directors of Pinnacle Airlines will be 
comprised of six individuals, four of whom will be individuals 
previously identified by Northwest in the S-1 registration statement, 
one of whom shall designated by Northwest and one of whom will be an 
individual designated by the Plans and reasonably acceptable to 
Northwest.
    [sbull] For so long as the Plans hold at least 5 percent (5%) of 
such shares, the Plans will have the right to designate one nominee to 
Pinnacle Airlines' board of directors, and Northwest will vote the 
shares of Pinnacle Stock held by it in favor of such designee.
    [sbull] The director designated by the Plans will have the right to 
serve on Pinnacle Airlines' audit committee to the extent permitted 
under applicable SEC and stock exchange requirements.
    [sbull] At such time as the Plans hold more than 50 percent (50%) 
of such shares, and until the earlier of either (i) the Plans hold less 
than 25 percent (25%) of such shares or (ii) the Put Option has 
terminated as to all shares held by the Plans, the affirmative vote of 
the director designated by the Plans shall be required to approve the 
appointment of any new Chief Executive Officer of Pinnacle and 
compensation of any Chief Executive Officer. In addition, the 
appointment and compensation of any Chief Executive Officer shall be 
approved by a majority of the directors, excluding the director 
designated by Northwest.
    [sbull] The Independent Fiduciary will direct the trustee of the 
Plans to vote shares of Pinnacle Stock held by the Plans in favor of 
the slate of director nominees proposed by Pinnacle's board of 
directors, except as the Plans and Northwest may otherwise agree.
    [sbull] The Independent Fiduciary will direct the trustee of the 
Plans to vote shares of Pinnacle Stock held by the Plans in favor of 
any merger or other matter requiring stockholder approval as 
recommended by Pinnacle Airlines' board of directors, provided such 
transaction or other action does not otherwise treat the shares held in 
the Plans differently than other shares of Pinnacle Stock.


Affiliate Transactions


    The Term Sheet provides that any change to the Airline Services 
Agreement (ASA) between Pinnacle and Northwest as in effect at the time 
of the initial contribution, including any early termination of the ASA 
by Pinnacle Airlines, must be approved by a majority of Pinnacle 
Airlines' independent directors, which majority must include the 
director designated by the Plans. Any other transaction between 
Pinnacle Airlines and Northwest or one of its affiliates (other than 
immaterial transactions in the ordinary course of business) that is not 
pursuant to and in accordance with the ASA is subject to the following 
requirements:
    [sbull] Each such transaction must be approved by a majority of the 
independent directors;
    [sbull] If the transaction is outside the ordinary course of 
business and involves more than $2 million, or if the transaction is in 
the ordinary course of business and involves more than $5 million, it 
must be approved by a majority of the independent directors and, at the 
request of the director designated by the Plans, a nationally 
recognized investment banking firm (which may include a ``boutique'' 
firm that specializes in airline related matters) must deliver a 
fairness opinion with respect to such transaction; and
    [sbull] If the transaction involves more than $10 million, it must 
be approved by a majority of the independent directors, which majority 
must include the director designated by the Plans.


Transfer Restrictions and Early Termination Events


    The Term Sheet provides that until July 1, 2006, or such earlier 
date on which Northwest (1) does not, by the latest date to which 
Northwest may before the closing, purchase, sell to the public in a 
registered public offering or sell to a third party the Pinnacle Stock 
held by the Plans as to which the Independent Fiduciary has exercised 
the Put Option (as described below) or (2) breaches the Omnibus 
Agreement (and such breach is not cured within 30 days thereafter) 
(collectively, an ``Early Termination Event''), shares of Pinnacle 
Stock contributed to the Plans may not be transferred other than to 
Northwest or one of its designated affiliates in accordance with the 
Put Option described below. Such shares may, however, be transferred in 
the IPO, as


[[Page 2586]]


described below, or in a bona fide public offering in accordance with 
the registration rights described below. In no event may shares be 
transferred directly or indirectly in any manner that would result in 
Northwest being in violation of the ``scope clause'' under Northwest's 
collective bargaining agreement with its pilots.\9\
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    \9\ The Applicant notes that in general terms, as relevant to 
Pinnacle Airlines, the pilot scope clause requires that all 
``revenue flying'' performed by or for Northwest be performed by 
Northwest's pilots and generally prohibits Northwest from 
codesharing with another air carrier that operates aircraft with 60 
or more seats or with another air carrier whose parent or subsidiary 
operates aircraft with 60 or more seats. The scope clause also 
requires that any regional jets operated by Pinnacle Airlines be 
operated at all times with the Northwest designator code.
---------------------------------------------------------------------------


    The July 1, 2006 sunset date, together with the inclusion of an 
Early Termination Event, are the product of negotiation between 
Northwest and Fiduciary Counselors and balance Northwest's interest in 
having a reasonable period of time during which to determine the most 
advantageous timing of an IPO and the Plans' interest in enhancing the 
liquidity of Pinnacle Stock.
    In the event of a transfer of shares of Pinnacle Stock by the 
Plans, the Plans will exercise commercially reasonable efforts to 
maximize the amount realized for such shares, and to that end will 
follow customary procedures (including the retention, at Northwest's 
expense, of a nationally recognized investment banking firm) applicable 
to a transaction such as the sale of such shares.
    In the event of a proposed transfer of shares of Pinnacle Stock by 
the Plans after July 1, 2006, absent an Early Termination Event, 
Northwest will have a right of first refusal. This means that, if the 
Plans receive a bona fide offer from a third party to purchase such 
shares, the Plans must first offer such shares to Northwest at the 
offered price. If after 30 days from such offer Northwest declines to 
purchase such shares at the offered price, the Plans will be free for 
90 days to sell such shares to the third party who made the initial 
offer to purchase such shares at a price not less than the offered 
price. The Pinnacle Stock may not be sold at a price less than such 
offered price without re-offering such shares to Northwest and having 
these provisions apply again.


Initial Public Offering


    According to the Term Sheet, it is contemplated that Pinnacle 
Airlines will undertake an IPO. Until July 1, 2006, or the earlier 
occurrence of an Early Termination Event, the IPO will be undertaken at 
the sole discretion of Northwest. After such date or the earlier 
occurrence of an Early Termination Event, either the Plans or Northwest 
may trigger the IPO. In the event of an IPO, the Plans will be required 
to sell shares of Pinnacle Stock held by the Plans in accordance with 
the following requirements:
    [sbull] If at the time of the IPO the Plans own less than 50 
percent (50%) of the outstanding Pinnacle Stock, the Plans will sell 
shares ratably with Northwest's sale of shares in the IPO. If the 
aggregate number of shares sought to be sold by Northwest and the Plans 
collectively exceeds the number of shares that the managing underwriter 
advises can be sold without having an adverse effect on the IPO, 
Northwest and the Plans will be cutback pro rata.
    [sbull] If at the time of the IPO the Plans own 50 percent (50%) or 
more of the outstanding Pinnacle Stock, the Plans will sell, ratably 
with Northwest's sale of shares in the IPO, not less than such number 
of shares as is requested by the managing underwriter in the IPO in 
order to have an offering of optimal size (taking into account all the 
shares being sold). Beyond that, the Plans may sell additional shares 
at their discretion. However, if the aggregate number of shares sought 
to be sold by Northwest and the Plans collectively exceeds the number 
of shares that the managing underwriter advises can be sold without 
having an adverse effect on the IPO, Northwest and the Plans will be 
cutback pro rata.
    [sbull] Any shares as to which the Put Option shall have already 
been exercised (but shall not yet have been purchased) must be included 
in the IPO if requested by Northwest.
    The Independent Fiduciary may, on behalf of the Plans, engage an 
investment bank reasonably acceptable to Northwest to provide advice to 
the Plans in connection with any proposed IPO and subsequent 
disposition of Pinnacle Stock by the Plans, and Northwest will pay the 
reasonable fees and expenses in this regard. Northwest will consult 
with the Independent Fiduciary regarding any changes in the managing 
underwriter currently contemplated for the IPO.
    Any sale of shares in a registered public offering will be subject 
to the requirements described below:
    Northwest and the Plans will enter into a customary registration 
rights agreement covering the registration of all of the shares 
previously contributed to the Plans that are to be sold in the IPO or 
that are to be sold through a shelf registration or as otherwise 
contemplated by the Term Sheet. Such registration rights agreement will 
provide that, in the case of an underwritten offering, the Plans will 
enter into a customary underwriting agreement as may be negotiated by 
Northwest with the managing underwriter(s), and the Plans will sell in 
accordance with such underwriting agreement the shares of Pinnacle 
Stock that are to be sold by the Plans, on the same economic terms that 
shares of Pinnacle Stock held by Northwest are sold. The Plans will 
receive the net proceeds from the sale of their shares in the IPO. If 
Pinnacle Airlines has not consummated the IPO by the earlier of July 1, 
2006, or the date of the occurrence of an Early Termination Event, the 
Plans may exercise demand registration rights for an IPO.
    The Plans will be entitled to retain all of the net proceeds from 
the sale, even if such net proceeds are in excess of the initial 
contribution value ascribed to the Pinnacle Stock being sold in the 
IPO. If such net proceeds are less than such initial contribution 
value, however, Northwest will be obligated, no later than the closing 
date of the IPO, to remit to the Plans immediately available funds 
representing the amount by which, with respect to the shares actually 
sold, such net proceeds are less than the initial contribution value.
    If less than all of the shares of Pinnacle Stock held by the Plans 
are sold in the IPO, the Plans will have continuing registration rights 
to sell all or any portion of its remaining shares (subject to the same 
lock-up provisions that are imposed on Pinnacle Airlines). If there is 
an Early Termination Event or if at the time of the IPO such remaining 
shares are valued (based on the IPO price) at $50 million or more, the 
Plans will have one demand registration right.
    In the underwriting agreement, the indemnification obligation of 
the Plans will be limited to what a selling stockholder normally 
provides, namely, an obligation to indemnify in respect of information 
relating to itself and its holdings that is provided by the Plans to 
the underwriters expressly for inclusion in the registration statement. 
The Independent Fiduciary will cause the Plans to provide such 
information to the underwriters and otherwise to provide reasonable 
cooperation in order to facilitate the offering. Northwest will provide 
the Plans with the same indemnification and contribution it provides to 
the underwriters in the offering. In no event will the Plans be 
obligated to provide in such underwriting agreement representations and 
warranties beyond due authorization, good title, no conflicts and the 
like.


[[Page 2587]]


    The Plans will also have unlimited ``piggyback'' registration 
rights in the event Pinnacle Airlines files a registration statement 
(other than on Form S-4 or S-8) covering shares of its common stock. 
Upon the request of Northwest or the Plans, Pinnacle Airlines will file 
a shelf registration statement (subject to customary lock-up 
provisions) covering all of the Pinnacle shares owned by the Plans, 
provided that Pinnacle Airlines is eligible to use Form S-3 at the time 
of such request.


Liquidity and Financial Information


    The Term Sheet provides that beginning March 31, 2003, Northwest 
will provide as promptly as practicable after the end of each calendar 
quarter a notice to the Independent Fiduciary of its cash liquidity as 
of the end of such quarter. However, if the aggregate initial 
contribution value of Pinnacle Stock held by the Plans is equal to or 
less than $225 million and if Northwest's liquidity at the end of any 
month is less than $1.75 billion, it will provide such notice monthly 
until such time as its liquidity exceeds $1.75 billion. If liquidity at 
any week end is less than $1.5 billion, Northwest will provide the 
Independent Fiduciary with such reports on a weekly basis until 
liquidity increases to $1.5 billion or more. If the aggregate initial 
contribution value of Pinnacle Stock held by the Plans is greater than 
$225 million and if Northwest's liquidity at the end of any month is 
less than $1.75 billion, it will provide such notice monthly until such 
time as its liquidity exceeds $1.75 billion. If liquidity at any week 
end is less than $1.6 billion, Northwest will provide the Independent 
Fiduciary with such reports on a weekly basis until liquidity increases 
to $1.6 billion or more. Notwithstanding the above, the weekly 
reporting requirement described above shall not apply until the 
aggregate initial contribution value of Pinnacle Stock is greater than 
or equal to $50 million.
    Northwest shall provide to the Independent Fiduciary the 
information referred to in sections 6.1, 6.2, 6.7 and 6.11 of the 
$1.125 billion Credit and Guarantee Agreement dated as of October 24, 
2000, under which Northwest is the borrower (the Credit Agreement), and 
any other information required to be provided to the lenders, at the 
same time the information is provided to the lenders under the Credit 
Agreement, as the same may be amended from time to time (or similar 
information required to be provided to the lenders under any successor 
credit agreement). In addition, Northwest shall provide to the 
Independent Fiduciary copies of any amendments to the Credit Agreement.


Put Option


    According to the Term Sheet, the Plans will be granted a ``Put 
Option'' with respect to each share of Pinnacle Stock, which may be 
exercised by the Independent Fiduciary at any time and from time to 
time. To exercise the Put Option, the Independent Fiduciary must 
provide written notice to Northwest of its election to put to Northwest 
any or all of the shares of Pinnacle Stock then held by the Plans. The 
date of the notice of the election shall be the ``exercise date.'' The 
closing date of the purchase and sale of shares with respect to which 
the Put Option has been exercised will be the 30th calendar day after 
such notice is given. However, if Pinnacle has not yet consummated the 
IPO by the date that would otherwise be the closing date, Northwest 
will have the right to defer such closing date as follows:
    In the event the aggregate initial contribution value of Pinnacle 
Stock held by the Plans is equal to or less than $225 million:
    [sbull] If Northwest's liquidity is equal to or greater than $1.75 
billion, Northwest may defer the closing date for up to an additional 
150 days;
    [sbull] If Northwest's liquidity is equal to or greater than $1.5 
billion and less than $1.75 billion, Northwest may defer the closing 
date for up to an additional 90 days;
    [sbull] If Northwest's liquidity is equal to or greater than $1.25 
billion and less than $1.5 billion, Northwest may defer the closing 
date for up to an additional 60 days.
    In the event the aggregate initial contribution value of Pinnacle 
Stock held by the Plans is greater than $225 million and equal to or 
less than $325 million:
    [sbull] If Northwest's liquidity is equal to or greater than $1.75 
billion, Northwest may defer the closing date for up to an additional 
150 days;
    [sbull] If Northwest's liquidity is equal to or greater than $1.6 
billion and less than $1.75 billion, Northwest may defer the closing 
date for up to an additional 90 days;
    [sbull] If Northwest's liquidity is equal to or greater than $1.5 
billion and less than $1.6 billion, Northwest may defer the closing 
date for up to an additional 60 days.
    In the event the aggregate initial contribution value of Pinnacle 
Stock held by the Plans is greater than $325 million:
    [sbull] If Northwest's liquidity is equal to or greater than $1.75 
billion, Northwest may defer the closing date for up to an additional 
120 days;
    [sbull] If Northwest's liquidity is equal to or greater than $1.6 
billion and less than $1.75 billion, Northwest may defer the closing 
date for up to an additional 60 days;
    [sbull] If Northwest's liquidity is equal to or greater than $1.5 
billion and less than $1.6 billion, Northwest may defer the closing 
date for up to an additional 30 days.
    If during the period of any such deferral, Northwest's liquidity 
falls below the threshold for the applicable deferral period, such 
period shall be shortened to the lesser of (i) the remaining time in 
the original deferral period, or (ii) the applicable deferral period 
based on such lower level of liquidity. However, if before the end of 
such period Northwest's liquidity increases to a higher level, the 
longer deferral period will apply (subject to reduction if liquidity 
falls below the relevant threshold).
    If at the time of such exercise shares of Pinnacle Stock are 
publicly traded and remain so traded, Northwest may defer the closing 
date, but the deferral periods based on the liquidity levels described 
above will be 120 days, 60 days and 30 days, respectively.
    The closing date may be further deferred and deferred payments may 
be made by Northwest as agreed to by the Independent Fiduciary beyond 
these prescribed periods, through the posting (within 30 days following 
the exercise date) of collateral by Northwest in an amount and on terms 
satisfactory to the Independent Fiduciary.
    Notwithstanding the foregoing, the closing date shall accelerate to 
the date on which Northwest's obligations under its revolving credit 
facility shall have accelerated.
    Prior to the applicable closing date (which shall not be subject to 
further extension without the Independent Fiduciary's consent), 
Northwest may in its discretion arrange for the Pinnacle Stock as to 
which the Put Option has been exercised, instead of being sold to 
Northwest, to be sold to the public in an underwritten offering or to a 
third party selected by Northwest. The Plans will be entitled to retain 
all of the net proceeds from such underwritten offering or sale of the 
Pinnacle Stock belonging to the Plans to a third party, even if such 
net proceeds are in excess of the applicable ``Put Price'' (as defined 
below). If the net proceeds received by the Plans in such underwritten 
offering or sale to a third party are less than such Put Price, 
Northwest will be obligated, no later than the closing date of such 
offering or sale, to remit to the Plans


[[Page 2588]]


immediately available funds representing the amount by which such net 
proceeds are less than the Put Price. The Plans will at the request of 
Northwest enter into a customary agreement with respect to such sale. 
In no event will the Plans be obligated to provide representations and 
warranties beyond due authorization, good title, no conflicts and the 
like.
    In an IPO that is not triggered by the exercise of the Put Option, 
if the Plans voluntarily choose to sell less than all of the shares of 
Pinnacle Stock held by the Plans, and if the net proceeds per share in 
such offering are equal to or greater than the ``Floor Price'' (as 
defined below), the Put Option will expire with respect to the shares 
retained in the Plans. In addition, if in such offering the net 
proceeds per share are less than the Floor Price, and the Plans 
voluntarily choose to sell less than all of the shares of Pinnacle 
Stock held by the Plans, Northwest's maximum put obligation with 
respect to the retained shares will be equal to the excess of the Floor 
Price over the net proceeds per share in such offering.
    The Put Option will be suspended if all of the remaining shares of 
Pinnacle Stock held by the Plans have a ``Market Value'' (as defined 
below) not less than 110 percent (110%) of the Floor Price and such 
shares are ``Freely Tradeable.'' Shares are Freely Tradeable while they 
are (i) eligible to be sold under Rule 144(k) or (ii) covered during 
such period by an effective shelf registration statement on Form S-3.
    The Put Option will terminate when (i) the Pinnacle Stock held by 
the Plans is Freely Tradeable, (ii) more than 50 percent (50%) of the 
outstanding Pinnacle Stock is held by the public and (iii) one of the 
following applies: (A) If the Plans own less than 10 percent (10%) of 
the outstanding shares of Pinnacle Stock, the weighted average daily 
trading price of Pinnacle Stock is 110 percent (110%) of the Floor 
Price for any 30 trading days within a 60 consecutive trading day 
period; (B) if the Plans own equal to or greater than 10 percent (10%) 
and less than 25 percent (25%) of the outstanding shares of Pinnacle 
Stock, the weighted average daily trading price of Pinnacle Stock is 
110 percent (110%) of the Floor Price for any 60 trading days within a 
90 consecutive trading day period or (C) if the Plans own equal to or 
greater than 25 percent (25%) and less than 50 percent (50%) of the 
outstanding shares of Pinnacle Stock, the weighted average daily 
trading price of Pinnacle Stock is 110 percent (110%) of the Floor 
Price for any 90 trading days within a 120 consecutive trading day 
period. The time periods are tolled for any black-out or lock-up 
period.
    The ``Put Price'' as of a particular date will be the greater of 
(i) the ``Floor Price,'' which is the initial contribution value 
ascribed to the Pinnacle Stock with respect to which the determination 
is being made or (ii) the ``Market Value'' (as described below) of such 
Pinnacle Stock as of the applicable exercise, closing or other relevant 
date, unless Northwest has arranged for a sale to the public in an 
underwritten offering in which case the Put Price will be the initial 
contribution value ascribed to the Pinnacle Stock as to which the Put 
Option has been exercised.
    In any event, at a time prior to Pinnacle Stock being publicly 
traded, in connection with a sale to a third party by Northwest in 
response to the Independent Fiduciary's exercise of the Put Option, the 
Plans will receive the greater of (i) the initial contribution value, 
(ii) the fair market value as determined by the Independent Fiduciary 
at the time of the exercise of the Put Option, or (iii) the proceeds 
from the sale of Pinnacle Stock held by the Plans sold by Northwest to 
a third party.
    The ``Market Value'' of the Pinnacle Stock will be (i) if the 
Pinnacle shares are not then traded on the NYSE or NASDAQ, the greater 
of the fair market value determined by the Independent Fiduciary on (I) 
the exercise date or (II) the closing date, (ii) if the Pinnacle shares 
are then traded on the NYSE or NASDAQ, the greater of (I) the average 
of the closing price for the Pinnacle shares over the ten trading days 
prior to the exercise date or (II) the closing price for the Pinnacle 
shares on the closing date.


Amount Credited to Funding Standard Account


    Northwest will cause to be credited to the funding standard account 
of each Plan an amount equal to the value of the shares of Pinnacle 
Stock contributed to each Plan as determined by the Independent 
Fiduciary on the date of the contribution, regardless of the amount of 
Northwest's deduction for such contribution for federal income tax or 
any other purpose.


Modification of Draft of ASA


    The draft of the ASA should be revised to provide that the 
acquisition or disposition of shares of Pinnacle Stock pursuant to the 
terms of the Omnibus Agreement does not constitute a Change of Control 
(as defined in the ASA).
    The draft should also be revised to eliminate the unilateral right 
of Northwest to terminate the ASA in the event of the bankruptcy of 
Northwest. The Applicant also notes that in a Chapter 11 proceeding, a 
debtor in possession can reject an executory contract (like the ASA). 
In such an event, the other party to the rejected contract (Pinnacle) 
would have an unsecured claim for contract damages arising from the 
rejection of the contract. The Applicant represents that the more 
likely result in the case of the ASA would be a renegotiation of the 
contract.
    15. In summary, the Applicant represents that the proposed 
transactions meet the requirements set forth in section 408(a) of the 
Act since, among other things:
    (a) An Independent Fiduciary will represent the Plans' interests 
for all purposes with respect to the Pinnacle Stock, and will 
determine, prior to entering into any of the transactions described 
herein, that each such transaction, including the contribution of the 
Pinnacle Stock, is in the interests of the Plans;
    (c) The Independent Fiduciary will negotiate and approve the terms 
of any of the transactions between the Plans and Northwest that relate 
to the Pinnacle Stock;
    (d) The Independent Fiduciary will manage the holding and 
disposition of the Pinnacle Stock and take whatever actions it deems 
necessary to protect the rights of the Plans with respect to the 
Pinnacle Stock;
    (e) The terms of any transactions between the Plans and Northwest 
will be no less favorable to the Plans than terms negotiated at arm's-
length under similar circumstances between unrelated third parties;
    (f) An independent qualified appraiser selected by the Independent 
Fiduciary will determine the fair market value of the Pinnacle Stock 
contributed to each Plan as of the date of each such contribution;
    (g) The terms of (1) the Put Option granted by Northwest; (2) any 
exercise of the Put Option by the Plans; and (3) any sale of the 
Pinnacle Stock by the Plans to Northwest other than through the 
exercise of the Put Option will be in accordance with the terms set 
forth in the Term Sheet and the proposed Omnibus Agreement;
    (h) Immediately after each contribution, employer securities and 
employer real property, including the Pinnacle Stock, will represent no 
more than 10 percent (10%) of the value of each Plan's assets; and
    (i) The Plans will not incur any fees, costs or other charges as a 
result of their


[[Page 2589]]


participation in any of the transactions described herein.


General Information


    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which require, among other things, that a fiduciary 
discharge his or her duties respecting the plan solely in the interest 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the requirements of section 401(a) of the Code that the plan 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) The proposed exemption, if granted, will not extend to 
transactions prohibited under section 406(b)(3) of the Act and section 
4975(c)(1)(F) of the Code;
    (3) Before an exemption may be granted under section 408(a) of the 
Act and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interest of the plan 
and of its participants and beneficiaries and protective of the rights 
of participants and beneficiaries of the plan;
    (4) This proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and the Code, 
including statutory or administrative exemptions. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction; and
    (5) This proposed exemption, if granted, is subject to the express 
condition that the facts and representations set forth in this notice 
accurately describe, where relevant, the material terms of the 
transactions to be consummated pursuant to such exemption.


Written Comments and Hearing Requests


    All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemption to the address above, 
within the time frame set forth above, after the publication of this 
proposed exemption in the Federal Register. All comments will be made a 
part of the record. Comments received will be available for public 
inspection with the referenced applications at the address set forth 
above.


Notice to Interested Persons


    Within fifteen (15) calendar days of publication of the Notice of 
Proposed Exemption (the Notice) in the Federal Register, Northwest 
shall provide notice to all participants of the Plans (including active 
employees, separated vested participants and retirees) by mailing first 
class a photocopy of the Notice, plus a copy of the supplemental 
statement (Supplemental Statement), as required, pursuant to 29 CFR 
2570.43(b)(2). Northwest shall also provide the same notice by first 
class mailing to the representatives of the unions that represent 
employees of Northwest who currently participate in the Plans.


Proposed Exemption


    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and section 4975(c)(2) of 
the Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).


Section I. Covered Transactions


    The restrictions of sections 406(a), 406(b)(1) and (b)(2), and 
407(a) of the Act and the sanctions resulting from the application of 
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) 
through (E) of the Code, shall not apply to:
    (1) The transfer of the common shares of either Pinnacle Airlines, 
Inc. or Pinnacle Airlines Corp. (Pinnacle Stock) to the Northwest 
Airlines Pension Plan for Salaried Employees, the Northwest Airlines 
Pension Plan for Pilot Employees, and the Northwest Airlines Pension 
Plan for Contract Employees (the Plans) through the in-kind 
contribution(s) of such shares by Northwest Airlines, Inc. (Northwest), 
a party in interest with respect to such Plans;
    (2) The holding of the Pinnacle Stock by the Plans;
    (3) The sale of the Pinnacle Stock by the Plans to Northwest; and
    (4) The acquisition, holding, and exercise by the Plans of a put 
option (the Put Option) granted by Northwest which permits the Plans to 
sell the Pinnacle Stock to Northwest.


Section II. Conditions


    This exemption is conditioned upon adherence to the material facts 
and representations described herein and upon satisfaction of the 
following requirements:
    (a) The Plans acquire the Pinnacle Stock through one or more 
contributions by Northwest during the calendar years 2003 and 2004;
    (b) An independent qualified fiduciary (the Independent Fiduciary), 
acting on behalf of the Plans, represents the Plans' interests for all 
purposes with respect to the Pinnacle Stock, and determines, prior to 
entering into any of the transactions described herein, that each such 
transaction, including the contribution of the Pinnacle Stock, is in 
the interests of the Plans;
    (c) The Independent Fiduciary negotiates and approves the terms of 
any of the transactions between the Plans and Northwest that relate to 
the Pinnacle Stock;
    (d) The Independent Fiduciary manages the holding and disposition 
of the Pinnacle Stock and takes whatever actions it deems necessary to 
protect the rights of the Plans with respect to the Pinnacle Stock;
    (e) The terms of any transactions between the Plans and Northwest 
are no less favorable to the Plans than terms negotiated at arm's-
length under similar circumstances between unrelated third parties;
    (f) An independent qualified appraiser selected by the Independent 
Fiduciary determines the fair market value of the Pinnacle Stock 
contributed to each Plan as of the date of each such contribution;
    (g) The terms of (1) the Put Option granted by Northwest; (2) any 
exercise of the Put Option by the Plans; and (3) any sale of the 
Pinnacle Stock by the Plans to Northwest other than through the 
exercise of the Put Option will be in accordance with the terms set 
forth in the Term Sheet and the proposed Omnibus Agreement;
    (h) Immediately after each contribution, employer securities and 
employer real property, including the Pinnacle Stock, will represent no 
more than 10 percent (10%) of the value of each Plan's assets. For 
purposes of this requirement, the term ``employer real property'' means 
real property leased to, and the term ``employer securities'' means 
securities issued by, an employer any of whose employees are covered by 
the Plans or by an affiliate of such employer; and
    (i) The Plans incur no fees, costs or other charges as a result of 
their participation in any of the transactions described herein.


[[Page 2590]]


Section IV. Definitions


    (a) The term ``independent fiduciary'' means a fiduciary who is: 
(1) Independent of and unrelated to Northwest and its affiliates, and 
(2) appointed to act on behalf of the Plans for all purposes related 
to, but not limited to, (A) the in-kind contribution of the Pinnacle 
Stock by Northwest to the Plans, (B) the holding of the Pinnacle Stock 
by the Plans; (C) the acquisition, holding, and exercise by the Plans 
of the Put Option, and (D) any sale of the Pinnacle Stock by the Plans. 
For purposes of this exemption, a fiduciary will not be deemed to be 
independent of and unrelated to Northwest if: (1) Such fiduciary 
directly or indirectly controls, is controlled by or is under common 
control with Northwest, (2) such fiduciary directly or indirectly 
receives any compensation or other consideration in connection with any 
transaction described in this exemption; except that an independent 
fiduciary may receive compensation for acting as an independent 
fiduciary from Northwest in connection with the transactions 
contemplated herein if the amount or payment of such compensation is 
not contingent upon or in any way affected by the independent 
fiduciary's ultimate decision, and (3) more than 5 percent (5%) of such 
fiduciary's gross income, for federal income tax purposes, in its prior 
tax year, will be paid by Northwest and its affiliates in the 
fiduciary's current tax year.
    (b) The term ``affiliate'' means:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) any officer, director, employee, relative, or partner in any 
such person; and
    (3) any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.


    Signed at Washington, DC, this 14th day of January 2003.
Ivan L. Strasfeld,
Director, Office of Exemption, Determinations, Pension and Welfare 
Benefits Administration, Department of Labor.
[FR Doc. 03-1187 Filed 1-16-03; 8:45 am]

BILLING CODE 4510-29-P