** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

** **

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

**OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For the quarterly period ended**September30, 2007

** **

**Commission File Number:**0-23642

** **

**NORTHWESTAIRLINES CORPORATION**

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

** **

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

** **

**(612) 726-2111**

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

** **

**Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes **x     No o

** **

**Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):**

 

**Large accelerated filer**o                                             Acceleratedfiler x                                          Non-accelerated filer o

 

**Indicate by a check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).      Yes  **o     No x

** **

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequentto the distribution of securities under a plan confirmed by a court.  Yes  x     No o

 

**As of October 31, 2007, therewere 233,749,927 shares of the registrant’s Common Stock outstanding.**

 

 

----

** **

**NORTHWESTAIRLINES CORPORATION**

** **
| ** **                          | ** **                                                                                           | **Page No.** |
|-------------------------------------|------------------------------------------------------------------------------------------------------|-------------------|
| PART I.  FINANCIAL INFORMATION |                                                                                                 |
|                                |                                                                                                 |              |
| Item 1.                             | Financial Statements.                                                                                |              |
|                                |                                                                                                 |              |
|                                | Condensed  Consolidated Statements of Operations                                                     | 3                 |
|                                |                                                                                                 |              |
|                                | Condensed  Consolidated Balance Sheets                                                               | 5                 |
|                                |                                                                                                 |              |
|                                | Condensed  Consolidated Statements of Cash Flows                                                     | 6                 |
|                                |                                                                                                 |              |
|                                | Notes to  Condensed Consolidated Financial Statements                                                | 7                 |
|                                |                                                                                                 |              |
|                                | The  Computation of Ratio of Earnings to Fixed Charges is attached hereto and  filed as Exhibit 12.1 |              |
|                                |                                                                                                 |              |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations.         | 27                |
|                                |                                                                                                 |              |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk.                                         | 39                |
|                                |                                                                                                 |              |
| Item 4.                             | Controls and  Procedures.                                                                            | 39                |
|                                |                                                                                                 |              |
| PART II. OTHER  INFORMATION         |                                                                                                 |
|                                |                                                                                                 |              |
| Item 1.                             | Legal Proceedings.                                                                                   | 39                |
|                                |                                                                                                 |              |
| Item 1A.                            | Risk Factors.                                                                                        | 39                |
|                                |                                                                                                 |              |
| Item  6.                            | Exhibits.                                                                                            | 40                |
|                                |                                                                                                 |              |
| SIGNATURE                           | 41                                                                                                   |
|                                |                                                                                                 |              |
| EXHIBIT INDEX                       | 41                                                                                                   |
|                                     |                                                                                                      |                   |  |

 

2

----

 

PART I. FINANCIAL INFORMATION

 

**Item 1. Financial Statements.**

 

**NORTHWESTAIRLINES CORPORATION**

 
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
|-------------------------------------------------|

 
| ** **                                                                        | ** ** | **Successor**          | ** ** | **Predecessor**        | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** |
| ** **                                                                        | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                                        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| *(Unaudited, in millions except per share amounts)* | ** ** | **2007**               | ** ** | **2006**               | ** ** |
| **Operating  Revenues**                                                           |       |                   |       |                   |       |
| Passenger                                                                         | ** ** | **$**                  | **2,577**  | ** **             | $          | 2,554 |   |
| Regional carrier  revenues                                                        | ** ** | **379**                | ** ** | 358                    |       |
| Cargo                                                                             | ** ** | **212**                | ** ** | 254                    |       |
| Other                                                                             | ** ** | **210**                | ** ** | 241                    |       |
| Total operating  revenues                                                         | ** ** | **3,378**              | ** ** | 3,407                  |       |
|                                                                              | ** ** | ** **             | ** ** |                   |       |
| **Operating  Expenses**                                                           |       |                   | ** ** |                   |       |
| Aircraft fuel  and taxes                                                          | ** ** | **873**                | ** ** | 948                    |       |
| Salaries, wages  and benefits                                                     | ** ** | **660**                | ** ** | 678                    |       |
| Aircraft  maintenance materials and repairs                                       | ** ** | **210**                | ** ** | 170                    |       |
| Selling and  marketing                                                            | ** ** | **185**                | ** ** | 199                    |       |
| Other rentals  and landing fees                                                   | ** ** | **142**                | ** ** | 151                    |       |
| Depreciation and  amortization                                                    | ** ** | **122**                | ** ** | 122                    |       |
| Aircraft rentals                                                                  | ** ** | **93**                 | ** ** | 52                     |       |
| Regional carrier  expenses                                                        | ** ** | **192**                | ** ** | 356                    |       |
| Other                                                                             | ** ** | **442**                | ** ** | 365                    |       |
| Total operating  expenses                                                         | ** ** | **2,919**              | ** ** | 3,041                  |       |
| **Operating  Income (Loss)**                                                      | ** ** | **459**                | ** ** | 366                    |       |
| ** **                                                                        | ** ** | ** **             | ** ** |                   |       |
| **Other  Income (Expense)**                                                       |       |                   | ** ** |                   |       |
| Interest  expense, net                                                            | ** ** | **(107**               | **)**      | (137                   | )          |
| Investment  income                                                                | ** ** | **52**                 | ** ** | 30                     |       |
| Reorganization  items, net                                                        | ** ** | **—**             | ** ** | (1,431                 | )          |
| Other, net                                                                        | ** ** | **1**                  | ** ** | (1                     | )          |
| Total other  income (expense)                                                     | ** ** | **(54**                | **)**      | (1,539                 | )          |
| **Income  (Loss) Before Income Taxes**                                            | ** ** | **405**                | ** ** | (1,173                 | )          |
| ** **                                                                        | ** ** | ** **             | ** ** |                   |       |
| Income tax  expense (benefit)                                                     | ** ** | **161**                | ** ** | 6                      |       |
|                                                                              | ** ** | ** **             | ** ** |                   |       |
| **Net  Income (Loss) Applicable to Common Stockholders**                          |       | **$**                  | **244**    | ** **             | $          | (1,179 | ) |
| ** **                                                                        |       | ** **             |       | ** **             |       |   |   |
| Earnings (loss)  per common share:                                                |       |                   | ** ** |                   |       |
| *Basic*                                                                           | ** ** | **$**                  | **0.93**   | ** **             | $          | (13.50 | ) |
| *Diluted*                                                                         | ** ** | **$**                  | **0.93**   | ** **             | $          | (13.50 | ) |
| * *                                                                          | ** ** | ** **             | ** ** | ** **             |       |   |   |
| Average shares  used in computation:                                              |       |                   | ** ** |                   |       |
| *Basic*                                                                           | ** ** | **262**                | ** ** | 87                     |       |
| *Diluted*                                                                         | ** ** | **262**                | ** ** | 87                     |       |

 

*See accompanying notes.*

 

3

----

 

**NORTHWESTAIRLINES CORPORATION**

 
| CONDENSED CONSOLIDATED  STATEMENTS OF OPERATIONS |
|--------------------------------------------------|

 
| ** **                                                                        | ** ** | **Successor**           | ** ** | **Predecessor**            | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                        | ** ** | **Period From**    | ** ** | **Period From**       | ** ** | **Nine Months** | ** ** |
| ** **                                                                        | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** | **Ended** | ** ** |
| ** **                                                                        | ** ** | **September 30,**  | ** ** | **May 31,**           | ** ** | **September 30,** | ** ** |
| *(Unaudited, in millions except per share amounts)* | ** ** | **2007**                | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| **Operating  Revenues**                                                           |       |                    |       |                       | ** ** |   |   |
| Passenger                                                                         | ** ** | **$**                   | **3,438**  | ** **                 | **$**      | **3,768** | ** ** | $ | 7,028 |   |
| Regional carrier  revenues                                                        | ** ** | **514**                 | ** ** | **521**                    | ** ** | 1,093 |   |
| Cargo                                                                             | ** ** | **281**                 | ** ** | **318**                    | ** ** | 704 |   |
| Other                                                                             | ** ** | **275**                 | ** ** | **317**                    | ** ** | 763 |   |
| Total operating  revenues                                                         | ** ** | **4,508**               | ** ** | **4,924**                  | ** ** | 9,588 |   |
|                                                                              | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| **Operating  Expenses**                                                           |       |                    |       |                       | ** ** |   |   |
| Aircraft fuel  and taxes                                                          | ** ** | **1,140**               | ** ** | **1,286**                  | ** ** | 2,578 |   |
| Salaries, wages  and benefits                                                     | ** ** | **865**                 | ** ** | **1,027**                  | ** ** | 2,029 |   |
| Aircraft  maintenance materials and repairs                                       | ** ** | **274**                 | ** ** | **303**                    | ** ** | 542 |   |
| Selling and  marketing                                                            | ** ** | **250**                 | ** ** | **315**                    | ** ** | 583 |   |
| Other rentals  and landing fees                                                   | ** ** | **188**                 | ** ** | **235**                    | ** ** | 436 |   |
| Depreciation and  amortization                                                    | ** ** | **161**                 | ** ** | **206**                    | ** ** | 390 |   |
| Aircraft rentals                                                                  | ** ** | **124**                 | ** ** | **160**                    | ** ** | 174 |   |
| Regional carrier  expenses                                                        | ** ** | **255**                 | ** ** | **345**                    | ** ** | 1,088 |   |
| Other                                                                             | ** ** | **597**                 | ** ** | **684**                    | ** ** | 1,122 |   |
| Total operating  expenses                                                         | ** ** | **3,854**               | ** ** | **4,561**                  | ** ** | 8,942 |   |
| **Operating  Income (Loss)**                                                      | ** ** | **654**                 | ** ** | **363**                    | ** ** | 646 |   |
| ** **                                                                        | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| **Other  Income (Expense)**                                                       |       |                    |       |                       | ** ** |   |   |
| Interest  expense, net                                                            | ** ** | **(147**                | **)**      | **(219**                   | **)**      | (413 | ) |
| Investment  income                                                                | ** ** | **69**                  | ** ** | **56**                     | ** ** | 73 |   |
| Reorganization  items, net                                                        | ** ** | **—**              | ** ** | **1,551**                  | ** ** | (2,870 | ) |
| Other, net                                                                        | ** ** | **4**                   | ** ** | **(2**                     | **)**      | 2 |   |
| Total other  income (expense)                                                     | ** ** | **(74**                 | **)**      | **1,386**                  | ** ** | (3,208 | ) |
| **Income  (Loss) Before Income Taxes**                                            | ** ** | **580**                 | ** ** | **1,749**                  | ** ** | (2,562 | ) |
| ** **                                                                        | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| Income tax  expense (benefit)                                                     | ** ** | **230**                 | ** ** | **(2**                     | **)**      | 6 |   |
|                                                                              | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| **Net  Income (Loss) Applicable to Common Stockholders**                          |       | **$**                   | **350**    |                       | **$**      | **1,751** | ** ** | $ | (2,568 | ) |
| ** **                                                                        |       | ** **              |       | ** **                 | ** ** |   |   |
| Earnings (loss)  per common share:                                                |       |                    |       |                       | ** ** |   |   |
| *Basic*                                                                           | ** ** | **$**                   | **1.33**   | ** **                 | **$**      | **20.03** | ** ** | $ | (29.42 | ) |
| *Diluted*                                                                         | ** ** | **$**                   | **1.33**   | ** **                 | **$**      | **14.28** | ** ** | $ | (29.42 | ) |
| * *                                                                          | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| Average shares  used in computation:                                              |       |                    |       |                       | ** ** |   |   |
| *Basic*                                                                           | ** ** | **262**                 | ** ** | **87**                     | ** ** | 87 |   |
| *Diluted*                                                                         | ** ** | **262**                 | ** ** | **113**                    | ** ** | 87 |   |

 

*See accompanying notes.*

 

4

----

 

**NORTHWESTAIRLINES CORPORATION**

 
| CONDENSED CONSOLIDATED BALANCE SHEETS |
|---------------------------------------|

 
| ** **                                                                                                                                  | ** ** | **Successor**          | ** ** | **Predecessor**       | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| *(Unaudited, in millions)*                                                                                                        | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| **Assets**                                                                                                                                  |       |                   |       |                  |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Current  Assets**                                                                                                                         |       |                   | ** ** |                  |       |
| Cash and cash  equivalents                                                                                                                  | ** ** | **$**                  | **2,559**  | ** **            | $          | 1,461 |   |
| Unrestricted  short-term investments                                                                                                        | ** ** | **572**                | ** ** | 597                   |       |
| Restricted cash,  cash equivalents and short-term investments                                                                               | ** ** | **739**                | ** ** | 424                   |       |
| Accounts  receivable, less allowance (2007—$4, 2006—$14)                                                                          | ** ** | **726**                | ** ** | 638                   |       |
| Flight equipment  spare parts, less allowance (2007—$5, 2006—$255)                                                                | ** ** | **136**                | ** ** | 104                   |       |
| Prepaid expenses  and other                                                                                                                 | ** ** | **301**                | ** ** | 342                   |       |
| Total current  assets                                                                                                                       | ** ** | **5,033**              | ** ** | 3,566                 |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Property  and Equipment**                                                                                                                 |       |                   | ** ** |                  |       |
| Flight  equipment, net                                                                                                                      | ** ** | **7,249**              | ** ** | 7,609                 |       |
| Other property  and equipment, net                                                                                                          | ** ** | **553**                | ** ** | 571                   |       |
| Total property  and equipment, net                                                                                                          | ** ** | **7,802**              | ** ** | 8,180                 |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Flight  Equipment Under Capital Leases, net**                                                                                             | ** ** | **8**                  | ** ** | 12                    |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Other  Assets**                                                                                                                           |       |                   | ** ** |                  |       |
| Goodwill                                                                                                                                    | ** ** | **6,029**              | ** ** | 8                     |       |
| International  routes, less accumulated amortization (2007—$1; 2006—$334)                                                         | ** ** | **2,977**              | ** ** | 634                   |       |
| Other  intangibles, less accumulated amortization (2007—$31; 2006—$11)                                                            | ** ** | **2,159**              | ** ** | 21                    |       |
| Investments in  affiliated companies                                                                                                        | ** ** | **166**                | ** ** | 42                    |       |
| Other, less  accumulated depreciation and amortization (2007—$5; 2006—$914)                                                       | ** ** | **219**                | ** ** | 752                   |       |
| Total other  assets                                                                                                                         | ** ** | **11,550**             | ** ** | 1,457                 |       |
| **Total  Assets**                                                                                                                           | ** ** | **$**                  | **24,393** | ** **            | $          | 13,215 |   |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**                                                                                    |       |                   | ** ** |                  |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Current  Liabilities**                                                                                                                    |       |                   | ** ** |                  |       |
| Air traffic  liability/deferred frequent flyer liability                                                                                    | ** ** | **$**                  | **2,066**  | ** **            | $          | 1,557 |   |
| Accounts payable  and other liabilities                                                                                                     | ** ** | **1,596**              | ** ** | 1,441                 |       |
| Current  maturities of long-term debt                                                                                                       | ** ** | **474**                | ** ** | 213                   |       |
| Current  maturities of capital lease obligations                                                                                            | ** ** | **3**                  | ** ** | —                |       |
| Total current  liabilities                                                                                                                  | ** ** | **4,139**              | ** ** | 3,211                 |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Long-Term  Debt**                                                                                                                         | ** ** | **6,312**              | ** ** | 3,899                 |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Long-Term  Obligations Under Capital Leases**                                                                                             | ** ** | **125**                | ** ** | —                |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Deferred  Credits and Other Liabilities**                                                                                                 |       |                   | ** ** |                  |       |
| Long-term  pension and postretirement health care benefits                                                                                  | ** ** | **3,444**              | ** ** | 86                    |       |
| Deferred  frequent flyer liability                                                                                                          | ** ** | **1,548**              | ** ** | —                |       |
| Deferred income  taxes                                                                                                                      | ** ** | **1,131**              | ** ** | —                |       |
| Other                                                                                                                                       | ** ** | **140**                | ** ** | 161                   |       |
| Total deferred  credits and other liabilities                                                                                               | ** ** | **6,263**              | ** ** | 247                   |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Liabilities  Subject to Compromise**                                                                                                      | ** ** | **—**             | ** ** | 13,572                |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Preferred  Redeemable Stock Subject to Compromise**                                                                                       | ** ** | **—**             | ** ** | 277                   |       |
|                                                                                                                                        |       |                   | ** ** |                  |       |
| **Common  Stockholders’ Equity (Deficit)**                                                                                             |       |                   | ** ** |                  |       |
| Predecessor  Company common stock, $.01 par value; shares authorized—315,000,000; shares  issued—111,374,977 at December 31, 2006 |       | **—**             | ** ** | 1                     |       |
| Successor  Company common stock, $.01 par value; shares authorized—400,000,000; shares  issued—202,511,063 at September 30, 2007  |       | **2**                  | ** ** | —                |       |
| Additional  paid-in capital                                                                                                                 | ** ** | **7,208**              | ** ** | 1,505                 |       |
| Retained  earnings (accumulated deficit)                                                                                                    | ** ** | **350**                | ** ** | (7,384                | )          |
| Accumulated  other comprehensive income (loss)                                                                                              | ** ** | **(6**                 | **)**      | (1,100                | )          |
| Predecessor  Company treasury stock (2006—24,024,317 shares)                                                                           | ** ** | **—**             | ** ** | (1,013                | )          |
| Successor  Company treasury stock (2007—1,410) at September 30, 2007                                                                   | ** ** | **—**             | ** ** | —                |       |
| Total common  stockholders’ equity (deficit)                                                                                           | ** ** | **7,554**              | ** ** | (7,991                | )          |
| **Total  Liabilities and Stockholders’ Equity (Deficit)**                                                                              | ** ** | **$**                  | **24,393** | ** **            | ** ** | $ | 13,215 |   |
|                                                                                                                                             |            |                        |            |                       |            |  |  |  |

 

*See accompanying notes.*

 

5

----

 

**NORTHWEST AIRLINES CORPORATION**

 
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
|-------------------------------------------------|

 
| ** **                                                                                                                                    | ** ** | **Successor**           | ** ** | **Predecessor**            | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                    | ** ** | **Period from**    | ** ** | **Period from**       | ** ** | **Nine Months** | ** ** |
| ** **                                                                                                                                    | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** | **Ended** | ** ** |
| ** **                                                                                                                                    | ** ** | **September 30,**  | ** ** | **May 31,**           | ** ** | **September 30,** | ** ** |
| *(Unaudited, in millions)*                                                                                                          | ** ** | **2007**                | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| **Cash  Flows from Operating Activities**                                                                                                     |       |                    |       |                       |       |   |   |
| Net income  (loss)                                                                                                                            | ** ** | **$**                   | **350**    | ** **                 | **$**      | **1,751** | ** ** | $ | (2,568 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities:                                          |       |                    |       |                       | ** ** |   |   |
| Depreciation and  amortization                                                                                                                | ** ** | **161**                 | ** ** | **206**                    | ** ** | 390 |   |
| Income tax  expense (benefit)                                                                                                                 | ** ** | **230**                 | ** ** | **(2**                     | **)**      | 6 |   |
| Pension and  other postretirement benefit contributions less than (greater than) expense                                                      |       | **(10**                 | **)**      | **3**                      | ** ** | 227 |   |
| Stock-based  compensation                                                                                                                     | ** ** | **41**                  | ** ** | **—**                 | ** ** | — |   |
| Reorganization  items, net                                                                                                                    | ** ** | **—**              | ** ** | **(1,551**                 | **)**      | 2,870 |   |
| Increase  (decrease) in cash flows from operating assets and liabilities, excluding the  effects of the acquisition of Mesaba Aviation, Inc.: |       |                    |       |                       | ** ** |   |   |
| Changes in  certain assets and liabilities                                                                                                    | ** ** | **(391**                | **)**      | **441**                    | ** ** | 270 |   |
| Long-term vendor  deposits/holdbacks                                                                                                          | ** ** | **162**                 | ** ** | **163**                    | ** ** | (23 | ) |
| Post-emergence  reorganization payments                                                                                                       | ** ** | **(151**                | **)**      | **—**                 | ** ** | — |   |
| Other, net                                                                                                                                    | ** ** | **(21**                 | **)**      | **13**                     | ** ** | (1 | ) |
| Net cash  provided by (used in) operating activities                                                                                          | ** ** | **371**                 | ** ** | **1,024**                  | ** ** | 1,171 |   |
|                                                                                                                                          | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| **Cash  Flows from Reorganization Activities**                                                                                                |       |                    |       |                       | ** ** |   |   |
| Net cash  provided by (used in) reorganization activities                                                                                     | ** ** | **—**              | ** ** | **5**                      | ** ** | 21 |   |
|                                                                                                                                          | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| **Cash  Flows from Investing Activities**                                                                                                     |       |                    |       |                       | ** ** |   |   |
| Capital  expenditures                                                                                                                         | ** ** | **(387**                | **)**      | **(312**                   | **)**      | (253 | ) |
| Purchase of  short-term investments                                                                                                           | ** ** | **—**              | ** ** | **(44**                    | **)**      | (18 | ) |
| Proceeds from  sales of short-term investments                                                                                                | ** ** | **72**                  | ** ** | **15**                     | ** ** | 32 |   |
| Decrease  (increase) in restricted cash, cash equivalents and short-term investments                                                          |       | **(205**                | **)**      | **(74**                    | **)**      | (102 | ) |
| Cash and cash  equivalents acquired in acquisition of Mesaba Aviation, Inc.                                                                   |       | **—**              |       | **16**                     | ** ** | — |   |
| Proceeds from  sale of property, equipment and other assets                                                                                   | ** ** | **258**                 | ** ** | **1**                      | ** ** | — |   |
| Other, net                                                                                                                                    | ** ** | **1**                   | ** ** | **—**                 | ** ** | 11 |   |
| Net cash  provided by (used in) investing activities                                                                                          | ** ** | **(261**                | **)**      | **(398**                   | **)**      | (330 | ) |
|                                                                                                                                          | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| **Cash  Flows from Financing Activities**                                                                                                     |       |                    |       |                       | ** ** |   |   |
| Proceeds from  long-term debt                                                                                                                 | ** ** | **409**                 | ** ** | **326**                    | ** ** | 1,302 |   |
| Payments of  long-term debt and capital lease obligations                                                                                     | ** ** | **(516**                | **)**      | **(610**                   | **)**      | (1,342 | ) |
| Proceeds from  equity rights offering                                                                                                         | ** ** | **750**                 | ** ** | **—**                 | ** ** | — |   |
| Other, net                                                                                                                                    | ** ** | **(1**                  | **)**      | **(1**                     | **)**      | (18 | ) |
| Net cash  provided by (used in) financing activities                                                                                          | ** ** | **642**                 | ** ** | **(285**                   | **)**      | (58 | ) |
|                                                                                                                                          | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| **Increase  (Decrease) in Cash and Cash Equivalents**                                                                                         | ** ** | **752**                 | ** ** | **346**                    | ** ** | 804 |   |
| ** **                                                                                                                                    | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| Cash and cash  equivalents at beginning of period                                                                                             | ** ** | **1,807**               | ** ** | **1,461**                  | ** ** | 684 |   |
| Cash and cash  equivalents at end of period                                                                                                   | ** ** | **$**                   | **2,559**  | ** **                 | **$**      | **1,807** | ** ** | $ | 1,488 |   |
|                                                                                                                                          | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| Available to be  borrowed under credit facilities                                                                                             | ** ** | **$**                   | **127**    | ** **                 | **$**      | **127** | ** ** | $ | — |   |
|                                                                                                                                          | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| **Cash  and cash equivalents and unrestricted short-term investments at end of period**                                                       | ** ** | **$**                   | **3,131**  | ** **                 | **$**      | **2,445** | ** ** | $ | 2,073 |   |
| ** **                                                                                                                                    | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| Supplemental  Cash Flow Information:                                                                                                          | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| Interest paid                                                                                                                                 | ** ** | **$**                   | **113**    | ** **                 | **$**      | **208** | ** ** | $ | 109 |   |
| Investing and  Financing Activities Not Affecting Cash:                                                                                       | ** ** | ** **              | ** ** | ** **                 | ** ** |   |   |
| Manufacturer  financing of aircraft and other non-cash transactions                                                                           | ** ** | **$**                   | **335**    | ** **                 | **$**      | **167** | ** ** | $ | 188 |   |

 

*Seeaccompanying notes.*

 

6

----

 

**NORTHWEST AIRLINES CORPORATION**

 
| NOTES  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
|-------------------------------------------------------|

 

**Note 1 –Basis of Presentation**

 

Thecondensed consolidated financial statements of Northwest Airlines Corporation (“NWACorp.”), a holding company whose operating subsidiary is Northwest Airlines, Inc.(“Northwest”), include the accounts of NWA Corp. and all consolidatedsubsidiaries (collectively, the “Company”). Unless otherwise indicated, theterms “we,” “us,” and “our” refer to NWA Corp. and all consolidated subsidiaries.The condensed consolidated financial statements included herein have beenprepared pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”). The information and footnote disclosures normallyincluded in annual financial statements prepared in accordance with U.S.Generally Accepted Accounting Principles (“GAAP”) have been condensed oromitted as permitted by such rules and regulations. These financialstatements and related notes should be read in conjunction with the financialstatements and notes included in the Company’s audited consolidated financialstatements, which are provided in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006, as amended by Form 10-K/Afilings dated April 6, 2007 and April 30, 2007 (collectively, the “2006Form 10-K”).

 

Northwest’soperations account for approximately 99% of the Company’s consolidatedoperating revenues and expenses. Northwest is a major air carrier engagedprincipally in the commercial transportation of passengers and cargo, directlyserving more than 240 cities in 25 countries in North America, Asia and Europe.Northwest’s global airline network includes domestic hubs at Detroit,Minneapolis/St. Paul and Memphis, an extensive Pacific route system with a hubin Tokyo, a transatlantic joint venture with KLM Royal Dutch Airlines (“KLM”),which operates through a hub in Amsterdam, a domestic and internationalalliance with Continental Airlines, Inc. (“Continental”) and Delta AirLines, Inc. (“Delta”), membership in SkyTeam, a global airlines alliancewith KLM, Continental, Delta, Air France, Alitalia, Aeroméxico, CSA CzechAirlines, Korean Air and Aeroflot, exclusive marketing agreements with threedomestic regional carriers, Pinnacle Airlines, Inc. (“Pinnacle”), MesabaAviation, Inc. (“Mesaba”) and Compass Airlines, Inc. (“Compass”),which currently operate as Northwest Airlink carriers and a cargo business thatincludes a dedicated fleet of freighter aircraft that operate through hubs inAnchorage and Tokyo.

 

Asa result of the application of fresh-start reporting in accordance withAmerican Institute of Certified Public Accountants’ Statement of Position 90-7,*Financial Reporting by Entities inReorganization under the Bankruptcy Code* (“SOP 90-7”) upon theCompany’s emergence from bankruptcy on May 31, 2007, the financialstatements prior to June 1, 2007 are not comparable with the financialstatements for periods on or after June 1, 2007. References to “SuccessorCompany” refer to the Company on or after June 1, 2007, after givingeffect to the application of fresh-start reporting. References to “PredecessorCompany” refer to the Company prior to June 1, 2007. See “Note 3 –Fresh-Start Reporting” for further details.

 

TheCompany maintains a Web site at *http://www.nwa.com*.Information contained on the Company’s Web site is not incorporated into thisquarterly report on Form 10-Q. Annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, all amendments tothose reports and other information about the Company are available free ofcharge through this Web site at *http://ir.nwa.com*as soon as reasonably practicable after those reports are electronically filedwith or furnished to the SEC.

 

Inthe opinion of management, the interim financial statements reflectadjustments, consisting of normal recurring accruals, unless otherwise noted,which are necessary to present fairly the Company’s financial position, resultsof operations and cash flows for the periods indicated.

 

TheCompany’s results of operations for interim periods are not necessarilyindicative of the results for an entire year due to seasonal factors as well ascompetitive and general economic conditions. The Company’s second and thirdquarter operating results have historically been more favorable due toincreased leisure travel on domestic and international routes during the springand summer months.

 

**Note 2 –Voluntary Reorganization Under Chapter 11**

 

*Background and General Bankruptcy Matters.*The following discussion provides generalbackground information regarding the Company’s Chapter 11 cases, and is notintended to be an exhaustive summary. Detailed information pertaining to thebankruptcy filings is set forth in the 2006 Form 10-K or may beobtained at *http://www.nwa-restructuring.com*.

 

7

----

 

OnSeptember 14, 2005 (the “Petition Date”), NWA Corp. and 12 of its directand indirect subsidiaries (collectively, the “Debtors”) filed voluntarypetitions for relief under Chapter 11 of the United States Bankruptcy Code withthe United States Bankruptcy Court for the Southern District of New York (the “BankruptcyCourt”). Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc.,an indirect subsidiary of NWA Corp., also filed a voluntary petition for reliefunder Chapter 11. On May 18, 2007, the Bankruptcy Court entered an orderapproving and confirming the Debtors’ First Amended Joint and Consolidated Planof Reorganization Under Chapter 11 of the Bankruptcy Code (as confirmed, the “Plan”or “Plan of Reorganization”). The Plan became effective and the Debtors emergedfrom bankruptcy protection on May 31, 2007 (the “Effective Date”). On theEffective Date, the Company implemented fresh-start reporting in accordancewith SOP 90-7.

 

*Claims Resolution Process*.   As permitted under thebankruptcy process, many of the Debtors’ creditors filed proofs of claim withthe Bankruptcy Court. Through the claims resolution process, many claims weredisallowed by the Bankruptcy Court because they were duplicative, amended orsuperseded by later filed claims, were without merit, or were otherwiseoverstated. Throughout the Chapter 11 proceedings, the Company also resolvedmany claims through settlements or by Bankruptcy Court orders following thefiling of an objection. The Company will continue to settle claims and fileadditional objections with the Bankruptcy Court.

 

Pursuantto terms of the Plan of Reorganization, approximately 225.8 million of theSuccessor Company’s common stock will be issued to holders of allowed generalunsecured claims and 8.6 million shares will be issued to holders who also helda guaranty claim from the Debtors. Once a claim is allowed consistent with theclaims resolution process, the claimant is entitled to a distribution of newcommon stock. Approximately 197.5 million shares of new common stock wereissued and distributed on or about May 31, 2007, July 16, 2007, and October 1,2007, as part of the initial distributions in respect of valid unsecuredclaims totaling $7.8 billion. Additionally, approximately 7.9 million shares ofnew common stock were distributed in respect of valid unsecured guaranty claims.In total, there are approximately 29.0 million remaining shares of new commonstock held in reserve under the terms of the Plan of Reorganization. Of theseshares, approximately 28.3 million are being held in reserve relating todisputed unsecured claims totaling $1.1 billion and 0.7 million are being heldin reserve relating to unsecured guaranty claims totaling $295 million.

 

TheCompany estimates that the probable range of unsecured claims to be allowedwill be between $8.0 and $8.4 billion. Differences between claim amounts filedand the Company’s estimates are being investigated and will be resolved in connectionwith the claims resolution process. However, there will be no further financialimpact to the Company associated with the settlement of such unsecured claims,as the holders of all allowed unsecured claims against the Predecessor Companywill receive under the Plan of Reorganization only their pro rata share of thedistribution of the newly issued Common Stock of the Successor Company.

 

Withrespect to administrative and priority claims, pursuant to the terms of thePlan of Reorganization these claims will be satisfied with cash. Manyadministrative and priority claims still remain unpaid, and the Company willcontinue to settle claims or file objections with the Bankruptcy Court toeliminate or reduce such claims. All of these claims have been accrued by theSuccessor Company based upon the best available estimates of amounts to bepaid. However, it should be noted that the claims resolution process isuncertain and could result in material adjustments to the Successor Company’sfinancial statements.

 

Additionally,secured claims were deemed unimpaired under the Plan of Reorganization. Pursuantto the Plan of Reorganization those claims were satisfied upon eitherreinstatement of the obligations in the Successor Company, surrendering thecollateral to the secured party, or by making full payment in cash. However,certain disputes still remain with respect to the valuation of some securityinterests that may result in material future adjustments to the Company’sfinancial results.

 

**Note 3 –Fresh-Start Reporting**

 

Uponemergence from its Chapter 11 proceedings on May 31, 2007, the Companyadopted fresh-start reporting in accordance with SOP 90-7. The Company’semergence from Chapter 11 resulted in a new reporting entity with no retainedearnings or accumulated deficit. Accordingly, the Company’s consolidatedfinancial statements for periods prior to June 1, 2007 are not comparableto consolidated financial statements presented on or after June 1, 2007.

 

Fresh-startreporting reflects the value of the Company as determined in the confirmed Planof Reorganization. Under fresh-start reporting, the Company’s asset values areremeasured and allocated in conformity with Statement of Financial AccountingStandards (“SFAS”) No. 141, *BusinessCombinations* (“SFAS No. 141”). The excess of reorganizationvalue over the fair value of tangible and identifiable intangible assets isrecorded as goodwill in the accompanying Condensed Consolidated Balance Sheets.In addition, fresh-start reporting also requires that all liabilities, otherthan deferred taxes and pension and other postretirement benefit obligations,should be stated at fair value or at the present values of the amounts to bepaid using appropriate market interest rates. Deferred taxes are determined inconformity with SFAS No. 109, *Accountingfor Income Taxes* (“SFAS No. 109”).

 

8

----

 

Preliminaryestimates of fair value included in the Successor Company financial statementsrepresent the Company’s best estimates based on independent appraisals andvaluations and, where the foregoing were not available, industry data andtrends and by reference to relevant market rates and transactions. Theforegoing estimates and assumptions are inherently subject to significantuncertainties and contingencies beyond the control of the Company. Accordingly,we cannot provide assurance that the estimates, assumptions, and valuesreflected in the valuations will be realized, and actual results could varymaterially. In accordance with SFAS No. 141, the preliminary allocation ofthe reorganization value is subject to additional adjustment within one yearafter emergence from bankruptcy when additional or improved information onasset and liability valuations becomes available. Future adjustments may resultfrom:

•                  Completion of valuation reports associatedwith long-lived tangible and intangible assets which may drive furtheradjustments or recording of additional assets or liabilities.

•                  Adjustments to deferred tax assets andliabilities, which may be based upon additional information, includingadjustments to fair value estimates of underlying assets or liabilities and thedetermination of cancellation of indebtedness income.

•                  Adjustments to recorded fair values whichcould change the amount of recorded goodwill.

 

Tofacilitate the calculation of the enterprise value of the Successor Company,Northwest’s financial advisors assisted management in the preparation of avaluation analysis for the Successor Company’s common stock to be distributedas of the Effective Date to the unsecured creditors. The enterprise valuationincluded (i) a 40% weighting towards a comparable company analysis basedon financial ratios and multiples of comparable companies, which were thenapplied to the financial projections developed by the Company to arrive at anenterprise value; and (ii) a 60% weighting towards a discounted cash flowanalysis which measures the projected multi-year, un-levered free cash flows ofthe Company to arrive at an enterprise value.

 

Theestimated enterprise value, and corresponding equity value, is highly dependentupon achieving the future financial results set forth in the five-yearfinancial projections included in the Company’s Plan of Reorganization, as wellas the realization of certain other assumptions. The equity value of theCompany was calculated to be a range of approximately $6.45 billion to $7.55billion. Based on claims trading prior to the Company’s Effective Date and thetrading value of the Company’s common stock post emergence, the equity value ofthe Company was estimated to be $6.45 billion for purposes of preparing theCompany’s financial statements. The estimates and assumptions made in thisvaluation are inherently subject to significant uncertainties and the resolutionof contingencies beyond the reasonable control of the Company. Accordingly,there can be no assurance that the estimates, assumptions, and amountsreflected in the valuations will be realized, and actual results could varymaterially. Moreover, the market value of the Company’s common stock may differmaterially from the equity valuation.

 

Aspart of the provisions of SOP 90-7, we were required to adopt on June 1,2007 all accounting guidance that was going to be effective within thesubsequent twelve-month period. See “Note 4 – Summary of Significant AccountingPolicies, New Accounting Standards” and “Note 5 – Fair Value Measurements” foradditional information.

 

Thefollowing Fresh-Start Condensed Consolidated Balance Sheet illustrates thefinancial effects on the Company of the implementation of the Plan ofReorganization and the adoption of fresh-start reporting. This Fresh-StartCondensed Consolidated Balance Sheet reflects the effect of the consummation ofthe transactions contemplated in the Plan of Reorganization, includingsettlement of various liabilities, issuance of certain securities, incurrenceof new indebtedness, repayment of old indebtedness, and other cash payments.

 

9

----

 

Theeffects of the Plan of Reorganization and fresh-start reporting on the Company’sCondensed Consolidated Balance Sheet are as follows: 

 
| ** **                                                                       | ** ** | ** **                 | ** ** | **(a)**                            | ** ** | **(b)**             | ** ** | **(c)**    | ** ** | **(d)**         | ** ** | ** **                 | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------|------------|---------------------|------------|------------|------------|-----------------|------------|----------------------------|------------|
| ** **                                                                       | ** ** | ** **                 | ** ** | ** **                         | ** ** | **New Credit** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** |
| ** **                                                                       | ** ** | ** **                 | ** ** | ** **                         | ** ** | **Facility**        | ** ** | **New**    | ** ** | ** **      | ** ** | **(Successor)**            | ** ** |
| ** **                                                                       | ** ** | **(Predecessor)**          | ** ** | **Debt Discharge &** | ** ** | **Financing**       | ** ** | **Equity** | ** ** | **Fresh-Start** | ** ** | **Reorganized**            | ** ** |
| *(in millions)*                                                             | ** ** | **May 31, 2007** | ** ** | **Reclassification**               | ** ** | **Transactions**    | ** ** | **Issued** | ** ** | **Adjustments** | ** ** | **June 1, 2007** | ** ** |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **ASSETS**                                                                       |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **CURRENT ASSETS**                                                               |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| Cash, cash equivalents and unrestricted short-term  investments                  |       | $                          | 2,465      |                               | $          | (20                 | )          | $          | —     |            | $          | 750                        |       | $ | — |   | $ | 3,195 |   |
| Restricted cash, cash equivalents and short-term  investments                    |       | 974                        |       | —                             |       | —              |       | —     |       | 170             |       | 1,144                      |       |
| Accounts receivable, less allowance                                              |       | 587                        |       | —                             |       | —              |       | —     |       | (9              | )          | 578                        |       |
| Flight equipment spare parts and maintenance and  operating supplies             |       | 217                        |       | —                             |       | —              |       | —     |       | 31              |       | 248                        |       |
| Prepaid expenses and other                                                       |       | 254                        |       | —                             |       | —              |       | (22        | )          | (51             | )          | 181                        |       |
| Total current assets                                                             |       | 4,497                      |       | (20                                | )          | —              |       | 728        |       | 141             |       | 5,346                      |       |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **PROPERTY AND EQUIPMENT**                                                       |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| Net flight equipment and net flight equipment under  capital lease               |       | 7,767                      |       | —                             |       | —              |       | —     |       | (1,068          | )          | 6,699                      |       |
| Other property and equipment, net                                                |       | 477                        |       | —                             |       | —              |       | —     |       | 69              |       | 546                        |       |
| Total property and equipment, net                                                |       | 8,244                      |       | —                             |       | —              |       | —     |       | (999            | )          | 7,245                      |       |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **OTHER ASSETS**                                                                 |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| Goodwill                                                                         |       | 18                         |       | —                             |       | —              |       | —     |       | 6,239           |       | 6,257                      |       |
| International routes and other intangible assets                                 |       | 653                        |       | —                             |       | —              |       | —     |       | 4,513           |       | 5,166                      |       |
| Investments in affiliated companies                                              |       | 22                         |       | —                             |       | —              |       | —     |       | 143             |       | 165                        |       |
| Other                                                                            |       | 739                        |       | —                             |       | —              |       | —     |       | (267            | )          | 472                        |       |
| Total other assets                                                               |       | 1,432                      |       | —                             |       | —              |       | —     |       | 10,628          |       | 12,060                     |       |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **Total Assets**                                                                 |       | $                          | 14,173     |                               | $          | (20                 | )          | $          | —     |            | $          | 728                        |       | $ | 9,770 |   | $ | 24,651 |   |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                    |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **CURRENT LIABILITIES**                                                          |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| Air traffic liability/deferred frequent flyer  liability                         |       | $                          | 2,006      |                               | $          | —              |       | $          | —     |            | $          | —                     |       | $ | 274 |   | $ | 2,280 |   |
| Accrued compensation and benefits                                                |       | 445                        |       | 4                                  |       | —              |       | —     |       | (20             | )          | 429                        |       |
| Accounts payable                                                                 |       | 1,538                      |       | 179                                |       | —              |       | —     |       | 5               |       | 1,722                      |       |
| Current maturities of long-term debt and capital  lease obligations              |       | 218                        |       | 305                                |       | (10                 | )          | —     |       | —          |       | 513                        |       |
| Current maturities of long-term debt - exit  financing                           |       | —                     |       | —                             |       | 10                  |       | —     |       | —          |       | 10                         |       |
| Other                                                                            |       | 87                         |       | —                             |       | —              |       | —     |       | (49             | )          | 38                         |       |
| Total current liabilities                                                        |       | 4,294                      |       | 488                                |       | —              |       | —     |       | 210             |       | 4,992                      |       |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **LONG-TERM OBLIGATIONS**                                                        |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| Long-term debt and obligations under capital leases                              |       | 4,149                      |       | 1,993                              |       | (1,215              | )          | —     |       | 22              |       | 4,949                      |       |
| Exit Financing                                                                   |       | —                     |       | —                             |       | 1,215               |       | —     |       | —          |       | 1,215                      |       |
| Total long-term obligations                                                      |       | 4,149                      |       | 1,993                              |       | —              |       | —     |       | 22              |       | 6,164                      |       |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **DEFERRED CREDITS AND OTHER LIABILITIES**                                       |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| Long-term pension and postretirement health care  benefits                       |       | 86                         |       | 3,786                              |       | —              |       | —     |       | (426            | )          | 3,446                      |       |
| Deferred frequent flyer liability                                                |       | —                     |       | —                             |       | —              |       | —     |       | 1,549           |       | 1,549                      |       |
| Deferred income taxes                                                            |       | 4                          |       | —                             |       | —              |       | —     |       | 1,127           |       | 1,131                      |       |
| Other                                                                            |       | 275                        |       | 125                                |       | —              |       | —     |       | (209            | )          | 191                        |       |
| Total deferred credits and other liabilities                                     |       | 365                        |       | 3,911                              |       | —              |       | —     |       | 2,041           |       | 6,317                      |       |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **LIABILITIES SUBJECT TO COMPROMISE**                                            |       | 14,350                     |       | (14,350                            | )          | —              |       | —     |       | —          |       | —                     |       |
| ** **                                                                       |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **PREFERRED REDEEMABLE STOCK SUBJECT TO COMPROMISE**                             |       | 275                        |       | (275                               | )          | —              |       | —     |       | —          |       | —                     |       |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **COMMON STOCKHOLDERS’ EQUITY (DEFICIT)**                                   |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| Predecessor Company common stock, additional paid-in  capital and treasury stock |       | 495                        |       | —                             |       | —              |       | —     |       | (495            | )          | —                     |       |
| Retained earnings (accumulated deficit)                                          |       | (8,655                     | )          | 1,763                              |       | —              |       | —     |       | 6,892           |       | —                     |       |
| Accumulated other comprehensive income (loss)                                    |       | (1,100                     | )          | —                             |       | —              |       | —     |       | 1,100           |       | —                     |       |
| Successor Company common stock and additional  paid-in capital                   |       | —                     |       | 6,450                              |       | —              |       | 728        |       | —          |       | 7,178                      |       |
| Total common stockholders’ equity (deficit)                                 |       | (9,260                     | )          | 8,213                              |       | —              |       | 728        |       | 7,497           |       | 7,178                      |       |
|                                                                             |       |                       |       |                               |       |                |       |       |       |            |       |                       |       |
| **Total Liabilities and Stockholders’ Equity  (Deficit)**                   |       | $                          | 14,173     |                               | $          | (20                 | )          | $          | —     |            | $          | 728                        |       | $ | 9,770 |   | $ | 24,651 |   |

 

10

----

 

*(a)**      **Debt Discharge andReclassification. *This column reflects the discharge of $8.2billion of liabilities subject to compromise pursuant to the terms of the Planof Reorganization. Pursuant to the Plan, the holders of general unsecuredclaims and guaranty claims together will receive approximately 234 millioncommon shares of the Successor Company in satisfaction of such claims.

 

Thiscolumn also reflects the Successor Company’s reinstatement of $6.4 billion ofsecured liabilities which had been classified as liabilities subject tocompromise on the Predecessor Company’s balance sheet, consisting of thefollowing:

•                  $3.8 billion represents the reinstatement ofpension and other post-retirement benefit plan liabilities;

•                  $2.3 billion reflects the reinstatement ofsecured debt, including accrued interest; and

•                  $0.3 billion is associated with accruals forpriority payments and other payments required under the Plan.

 

Additionally,this column reflects the payment of $20 million for cash cures and convenience class paymentsto certain unsecured creditors pursuant to the Plan, and the reclassificationof $125 million of pre-petition deferred liabilities and credits that werereclassified out of liabilities subject to compromise, and subsequently writtenoff as part of the fresh-start adjustments.

 

*(b)**      **New Credit FacilityFinancing Transactions*.  Inconnection with the Plan of Reorganization, on the Effective Date, the Company’sexisting $1.225 billion Senior Corporate Credit Facility was converted into theExit Facility in accordance with its terms. See “Note 10 - Long-Term Debt andShort-Term Borrowings” for further details.

 

*(c)**       **New Equity Issued*.  This column reflects $750 million ingross proceeds received on the Effective Date from the Company’s RightsOffering, offset by associated transaction costs of $22 million.

 

*(d)**      **Fresh-Start Adjustments*.  Fresh-start adjustments were recordedon the Effective Date to reflect asset values at their estimated fair valuesand liabilities at their estimated fair value or the present value of amountsto be paid, including the following:

•                  $4.5 billion of incremental intangible assetswere recorded in conjunction with the estimated fair value of  the Company’s international routeauthorities, slots and other intangible assets;

•                  $1.5 billion was recorded to recognize theadditional estimated fair value of the Company’s frequent flyer liability;

•                  The balance of the Company’s flight equipmentwas decreased by $1.1 billion to its estimated fair value;

•                  The Company’s deferred tax liability balancewas increased by $1.1 billion in conjunction with recording the estimated fairvalue of certain indefinite-lived intangible assets;

•                  The pension and OPEB liability balances werereduced by $0.4 billion due to the required remeasurement at emergence.  The weighted average discount rate used inour remeasurement was 6.17% at May 31, 2007, compared with a weighted averagediscount rate of 5.93% as of our last remeasurement date, December 31, 2006;

•                  The Company’s air traffic liability balancewas increased by $0.3 billion to its estimated fair value; and

•                  Entries were recorded to eliminate thePredecessor Company’s equity balances and establish the opening equity balancesof the Successor Company.

 

Additionally,goodwill of $6.2 billion was recorded to reflect the excess of the SuccessorCompany’s reorganization value over the value of tangible and identifiableintangible assets. Additional changes in the fair values of these assets andliabilities from the current estimated values, as well as changes in otherassumptions, could significantly impact the reported value of goodwill. Accordingly,there can be no assurance that the estimates, assumptions, and values reflectedin the valuations will be realized, and actual results could vary materially. Moreover,the market value of the Company’s common stock may differ materially fromthe equity valuation.

 

**Note 4 –Significant Accounting Policies**

 

*Basis of Consolidation.*  NWACorp. is a holding company whose operating subsidiary is Northwest. Theconsolidated financial statements include the accounts of NWA Corp. and allconsolidated subsidiaries. All significant intercompany transactions have beeneliminated. Investments in 20% to 50% owned companies, as well as Pinnacle, areaccounted for by the equity method. Other investments are accounted for by thecost method.

 

Certainprior year amounts have been reclassified to conform to the current yearfinancial statement presentation.

 

*Cash and Cash Equivalents.* Cashequivalents are carried at cost and consist primarily of cash and unrestrictedmoney market funds. These highly liquid instruments approximate fair value dueto their short maturities. The Company classifies investments with a maturityof more than three months as short-term investments.

 

11

----

 

*Restricted Cash.*  The Company in the ordinary course of business collects fundsfrom passengers and withholdings from employees that are required to be paid tovarious taxing authorities, in addition to certain taxes that are self assessed.These collections include U.S. transportation taxes, passenger facility chargesand fuel taxes, which are collected in the capacity of an agent and arepresented on a net basis. Withholdings include the employee portion of payrolltaxes, among others. The Company has also established an irrevocable tax trustand a VEBA trust; cash held in these trusts is included in restricted cash.

 

Varioustaxes and fees assessed on the sale of tickets to end customers are collectedby the Company as an agent and remitted to the respective taxing authority. Thesetaxes and fees have been presented on a net basis in the accompanyingconsolidated statements of operations, and recorded as a liability untilremitted to the respective taxing authority.

 

*Use of Estimates. *The preparation of consolidated financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the amounts reported in its consolidated financialstatements and accompanying notes. Actual results could differ from thoseestimates.

 

Underfresh-start reporting, the Company’s asset values were remeasured using fairvalue, which was allocated in conformity with SFAS No. 141. In addition,fresh-start reporting also requires that all liabilities, other than deferredtaxes and pension and other postretirement benefit obligations, be reported atfair value or the present values of the amounts to be paid using appropriatemarket interest rates. Deferred taxes are reported in conformity with SFAS No. 109.

 

Estimatesof fair value represent the Company’s best estimates based on appraisals andvaluations and, where the foregoing were not available, industry data andtrends and by reference to relevant market rates and transactions. Theestimates and assumptions are inherently subject to significant uncertaintiesand contingencies beyond the control of the Company. Accordingly, we cannotprovide assurance that the estimates, assumptions, and values reflected in thevaluations will be realized, and actual results could vary materially. Inaccordance with SFAS No. 141, the preliminary allocation of the fair valueof assets and liabilities is subject to additional adjustment within one yearafter emergence from bankruptcy, as final appraisals and valuations of certainassets and liabilities are completed. Any adjustments to the recorded fairvalues of these assets and liabilities may impact the amount of recordedgoodwill.

 

*Presentation of Regional Carrier Related Revenue and ExpenseItems. *Inconjunction with the effectiveness of the Amended Pinnacle ASA and the StockPurchase and Reorganization Agreement with Mesaba, the Company changed itspresentation of certain regional carrier related revenue and expense itemseffective January 1, 2007. This change in presentation had no impact onthe Company’s first, second, or third quarter 2007 operating income.

 

Ifthis change in presentation was retroactively applied to prior year financialstatements for the three months ended September 30, 2006, Other OperatingRevenues would have decreased $55 million, Depreciation and AmortizationExpense would have increased by $1 million, Aircraft Rentals Expense would haveincreased $43 million, Regional Carrier Expenses would have decreased $99million, and the Operating Income would have been unchanged.

 

Ifthis change in presentation was retroactively applied to prior year financialstatements for the nine months ended September 30, 2006, Other OperatingRevenues would have decreased $159 million, Depreciation and AmortizationExpense would have increased by $3 million, Aircraft Rentals Expense would haveincreased $142 million, Regional Carrier Expenses would have decreased $304million, and the Operating Income would have been unchanged.

 

*Operating Revenues.* Thevalue of unused passenger tickets, miscellaneous change orders (“MCO’s”) andtravel credit vouchers (“TCV’s”) are included in current liabilities as airtraffic liability. Passenger and cargo revenues are recognized when thetransportation is provided or when the ticket expires. Unused domesticpassenger tickets generally expire one year from scheduled travel. Unused internationalpassenger tickets generally expire one year from ticket issuance. On theEffective Date, the Company revised the accounting method used to recognizerevenue for unused tickets, adopting the delayed recognition approach. Underthe delayed recognition approach, no revenue is recognized on an unused ticketuntil the validity period has expired and the ticket can no longer be used. Priorto the Effective Date, the Company recognized breakage associated with unusedpassenger tickets based on estimates of future breakage based on historicalbreakage trends.

 

12

----

 

*Frequent Flyer Program*. Northwest operates a frequent flyer loyalty program known as “WorldPerks.”  WorldPerks is designed to retain and increasetraveler loyalty by offering incentives to travelers for their continuedpatronage. Under the WorldPerks program, miles are earned by flying onNorthwest or its alliance partners and by using the services of programpartners for such things as credit card use, hotel stays, car rentals and otheractivities. Northwest sells mileage credits to the program and alliancepartners. WorldPerks members accumulate mileage in their accounts and laterredeem mileage for free or upgraded travel on Northwest and alliance partners. WorldPerksmembers that achieve certain mileage thresholds also receive enhanced servicebenefits from Northwest such as special service lines, advance flightboarding and upgrades.

 

TheCompany adopted a deferred revenue method to recognize frequent flyer revenueson the Effective Date. Under this method, we account for miles earned and soldas separate deliverables in a multiple element arrangement as prescribed byEITF No. 00-21, *Revenue Arrangementswith Multiple Deliverables* (“EITF No. 00-21”). Therefore,mileage credits earned on or after June 1, 2007 are now deferred basedupon the price for which we sell mileage credits to other airlines (“deferredmileage credits”), which we believe represents the best evidence of their fairvalue in accordance with EITF No. 00-21. The revenue on deferred frequentflyer miles will be recognized when the miles are ultimately redeemed throughflight, upgrades or other means, or when it becomes remote that the miles willever be used. Estimating deferred mileage credits that will not be redeemedrequires significant management judgment. Based on current program rules andhistorical redemption trends, the Company records passenger revenue associatedwith deferred mileage credits if the mile is unredeemed seven years afterissuance.

 

Wepreviously accounted for frequent flyer miles earned on Northwest flights on anincremental cost basis as an accrued liability and as operating expense, whilemiles sold to airline and non-airline businesses were accounted for on adeferred revenue basis. Also in conjunction with the adoption of the newaccounting policy, Northwest began recording a component of the paymentsreceived from non-airline marketing partners in Other Revenue rather than inPassenger Revenue. The component recognized as Other Revenue is the portion ofthe payment received that represents the amount paid by the marketing partnerin excess of the value of the deferred mileage credits.

 

Asa result of the application of fresh-start reporting, the WorldPerks frequentflyer obligation was revalued at the Effective Date to reflect the estimatedfair value of miles to be redeemed in the future. Outstanding miles earned byflying Northwest or its partner carriers were revalued using a weighted-averageper-mile equivalent ticket value, taking into account such factors as class ofservice and domestic and international ticket itineraries, which can bereflected in awards flown by WorldPerks members. The Company recorded deferredrevenue for its frequent flyer program of $2.0 billion as of September 30,2007. At December 31, 2006, the Company had recorded an incremental costliability and deferred revenue for its frequent flyer program totaling $412million.

 

*Other Revenues*.  Other revenues include MLTrevenues, transportation related fees, charter revenues, and non-transportationrelated partner payments. These receipts are recognized as other revenue whenthe service is provided. Transportation related fees include the fees chargedin association with changes or extensions to passenger tickets and arerecognized in other revenue at the time the fee is incurred. Change fees arenon-refundable and are considered a separate transaction from the airtransportation; revenue for change fees is recognized at the time the fees areincurred as all services related to the ticket exchange were completed at thetime of the exchange.

 

*Property, Equipment and Depreciation.*  Ownedoperating property and equipment and equipment under capital leases used inoperations were remeasured at fair values in accordance with SFAS No. 141,as of the Effective Date. The Company records additions to property andequipment at cost when acquired. Property and equipment under capital lease,and related obligations for future lease payments, are recorded at amountsequal to the initial present value of those lease payments.

 

Depreciationis based on the straight-line method over assets’ estimated useful lives. Leaseholdimprovements are amortized over the remaining term of the lease, includingestimated renewal options when renewal is reasonably assured, or the estimateduseful life of the related asset, whichever is less. On the Effective Date, theSuccessor Company increased the depreciable lives of certain wide-body aircraftto better reflect the period over which those assets will be used. Futurepurchases of aircraft will be depreciated to estimated salvage values, overlives of 20 to 30 years; buildings and leasehold improvements will bedepreciated up to 31.5 years; and other property and equipment will bedepreciated over lives of three to 20 years.

 

13

----

 

TheCompany accounts for certain airport leases under EITF Issue No. 99-13, *Application of EITF Issue No. 97-10, The Effectof Lessee Involvement in Asset Construction, and FASB Interpretation No. 23,Leases of Certain Property Owned by a Government Unit or Authority to Entitiesthat Enter into Leases with Government Entities* (“EITF 97-10”),which require the financing related to certain guaranteed airport constructionprojects committed to after September 23, 1999, be recorded on the balancesheet. Capitalized expenditures of $89.4 million at September 30, 2007which relate to airport improvements at Memphis, Knoxville and Seattle wererecorded in other property and equipment, with the corresponding obligationsincluded in long-term obligations under capital leases. Also in accordance withEITF 97-10, capital expenditures associated with a construction project at theDetroit airport were reflected in other property and equipment with acorresponding liability on the balance sheet. This amount totaled $8.2 millionat September 30, 2007. Upon completion of the project, the correspondingasset and obligation will be removed from the balance sheet and will be accountedfor as an operating lease.

 

*Impairment of Long-Lived Assets.*  TheCompany evaluates long-lived tangible assets and definite-lived intangibleassets for potential impairments in compliance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, (“SFAS No. 144”). The Company recordsimpairment losses on long-lived assets when events and circumstances indicatethe assets might be impaired and the undiscounted cash flows estimated to begenerated by those assets are less than their carrying amounts. Impairmentlosses are measured by comparing the fair value of the assets to their carryingamounts. In determining the need to record impairment charges, the Company isrequired to make certain estimates regarding such things as the current fairmarket value of the assets and future net cash flows to be generated by theassets. The current fair market value is determined by independent appraisal orpublished sales values of similar assets and the future net cash flows arebased on assumptions such as asset utilization, expected remaining usefullives, future market trends and projected salvage values. Impairment chargesare recorded in depreciation and amortization expense on the Company’sCondensed Consolidated Statements of Operations. If there are subsequentchanges in these estimates, or if actual results differ from these estimates,additional impairment charges may be recognized.

 

*Flight Equipment Spare Parts.*  On the Effective Date, flight equipmentspare parts were remeasured at current replacement cost in accordance with SFASNo. 141. Inventories are expensed when consumed in operations or scrapped.An allowance for obsolescence is provided based on calculations defined by thetype of spare part. This obsolescence reserve is recorded over the useful lifeof the associated aircraft.

 

*Airframe and Engine Maintenance.* Routine maintenance, airframe and engine overhauls are charged toexpense as incurred or accrued when a contractual obligation exists, such asinduction of an asset at a vendor for service or on the basis of hours flownfor certain costs covered by power-by-the-hour type agreements. Modificationsthat enhance the operating performance or extend the useful lives of airframesor engines are capitalized and amortized over the remaining estimated usefullife of the asset.

 

*Goodwill and Intangibles.* Goodwill represents the excess of the reorganization value of theSuccessor Company over the fair value of tangible assets and identifiableintangible assets resulting from the application of SOP 90-7. Northwest’sgoodwill mainly consists of three components:

•                  A valuation allowance recorded against our netdeferred tax assets, as required by SFAS No. 109; this valuation allowance willbe reversed against goodwill when the Company reports income in future periods.

•                  Revenue-generating intangibles that do notmeet the contractual or separable criteria of SFAS No. 141, including ourflight network and international routes to open skies countries.

•                  The value inherent in future customerrelationships due to Northwest’s ability to attract new customers.

 

Identifiableintangible assets consist primarily of international route authorities, tradenames, the WorldPerks customer database, airport slots/airport operatingrights, certain partner contracts and other items. International routeauthorities, certain airport slots/airport operating rights and trade-names areindefinite-lived and, as such, are not amortized. The Company’s definite-livedintangible assets are amortized on a straight-line basis over the estimatedlives of the related assets, which span periods of four to 30 years.

 

14

----

 

Thefollowing table presents information about our intangible assets, includinggoodwill, at September 30, 2007 and December 31, 2006: 

 
| ** **                                                | ** ** | ** **          | ** ** | **Successor September 30, 2007** | ** ** | **Predecessor December 31, 2006** | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|
| *(in thousands)*                                     | ** ** | **Asset Life** | ** ** | **Gross Carrying  Amount**                 | ** ** | **Accumulated  Amortization**                    | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| SkyTeam alliance & other code share  partners    |       | 30                  |       | $                                               | 461,900    |                                             | $          | (5,132 | ) | $ | — |   | $ | — |   |
| England routes                                            |       | 5                   |       | 16,000                                          |       | (1,067                                           | )          | — |   | — |   |
| NWA customer relationships                                |       | 9                   |       | 530,000                                         |       | (19,629                                          | )          | — |   | — |   |
| WorldPerks affinity card contract                         |       | 15                  |       | 195,700                                         |       | (4,349                                           | )          | — |   | — |   |
| WorldPerks marketing partner relationships                |       | 22                  |       | 43,000                                          |       | (652                                             | )          | — |   | — |   |
| Visa contract                                             |       | 4                   |       | 11,900                                          |       | (992                                             | )          | — |   | — |   |
| Gates                                                     |       |                |       | —                                          |       | —                                           |       | 90,675 |   | (78,326 | ) |
|                                                      |       |                |       |                                            |       |                                             |       |   |   |   |   |
| Pacific routes and Narita slots/airport operating  rights |       | Indefinite          |       | 2,961,700                                       |       | —                                           |       | 967,639 |   | (333,679 | ) |
| NWA trade name and other                                  |       | Indefinite          |       | 663,700                                         |       | —                                           |       | 1,690 |   | (190 | ) |
| Slots/airport operating rights                            |       | Indefinite          |       | 283,300                                         |       | —                                           |       | 30,457 |   | (11,248 | ) |
| Goodwill                                                  |       | Indefinite          |       | 6,028,977                                       |       | —                                           |       | 7,740 |   | — |   |
|                                                      |       |                |       |                                            |       |                                             |       |   |   |   |   |
|                                                      |       |                |       | $                                               | 11,196,177 |                                             | $          | (31,821 | ) | $ | 1,098,201 |   | $ | (423,443 | ) |

 

Totalamortization expense recognized was approximately $23.9 million and $0.4million for the three month periods ended September 30, 2007 and September 30,2006, respectively. Amortization expense of $0.6 million was recognized for thefive month period ended May 31, 2007, $31.9 million for the four monthperiod ended September 30, 2007 and $1.1 million for the nine months endedSeptember 30, 2006. We expect to record amortization expense of $23.9million for the three months ended December 31, 2007, $95.5 million peryear from 2008 through 2010 and $93.7 million in 2011.

 

Inaccordance with SOP 90-7, a reduction in the valuation allowance associatedwith the realization of pre-emergence deferred tax assets will sequentiallyreduce the value of recorded goodwill followed by other indefinite-lived assetsuntil the net carrying cost of these assets is zero. During the third quarterof 2007, goodwill decreased $162 million due to the use of tax net operatinglosses and increased $3 million due to additional information to finalizecertain valuations performed at emergence. During the second quarter of 2007,goodwill decreased $68 million due to the use of tax net operating losses.

 

Inaccordance with SFAS No. 142, *Goodwilland Other Intangible Assets* (“SFAS No. 142”), we will apply afair value-based impairment test to the net book value of goodwill andindefinite-lived intangible assets on an annual basis or on an interim basiswhen a triggering event occurs. The Company intends to use October 1stas its annual impairment test date for our goodwill and indefinite-livedintangible assets, and we are presently updating estimates used in theapplication of fresh-start reporting to perform these tests.

 

SFASNo. 142 requires that a two-step impairment test be performed on goodwill.In the first step, the Company compares the fair value of each reporting unitto its carrying value. If the fair value of a reporting unit, as definedin SFAS No. 142, exceeds the carrying value of the net assets of the reportingunit, goodwill is not impaired and the Company is not required to perform furthertesting. If the carrying value of the net assets of a reporting unit exceedsthe fair value of the reporting unit, then the Company must perform thesecond step in order to determine the implied fair value of the goodwill andcompare it to the carrying value of the goodwill. If the carrying value ofgoodwill exceeds its implied fair value, the Company is required to record animpairment charge equal to such difference.

 

Weexpect to assess the fair value of the enterprise considering both the marketand income approaches. Under the market approach, the fair value of theenterprise is based on the aggregate fair market value of the Successor Company’scommon stock. Under the income approach, the fair value of the reportablesegment is based on the present value of estimated future cash flows. Theincome approach is dependent on a number of factors including estimates offuture capacity, passenger yield, passenger traffic, jet fuel and otheroperating costs, appropriate discount rates and other relevant factors.

 

*Advertising. *Advertising costs, included in selling andmarketing expenses, are expensed as incurred.

 

15

----

 

*Stock-Based Compensation. *Prior to theEffective Date, the Company maintained stock incentive plans for officers andkey employees of the Company (the “Prior Management Plans”) and a stock optionplan for pilot employees (the “Pilot Plan”). On the Effective Date, outstandingawards under the Prior Management Plans and Pilot Plan were cancelled inaccordance with the terms of the Plan of Reorganization. On the Effective Date,the Management Equity Plan of the Successor Company provided for in the Plan ofReorganization became effective. See “Note 14 – Stock-Based Compensation” foradditional information. The Company adopted SFAS No. 123 (Revised 2004), *Share-Based Payment* (“SFAS No. 123R”),using the modified-prospective transition method, effective January 1,2006. Under SFAS No. 123R, non-cash compensation expense for equity awardsis recognized over the vesting period, generally the required service period. TheCompany uses straight-line recognition for awards subject to graded vesting. SFASNo. 123R also requires the Company to estimate forfeitures of stockcompensation awards as of the grant date of the award.

 

*Foreign Currency.*  Assets and liabilitiesdenominated in foreign currency are remeasured at current exchange rates withresulting gains and losses included in net income.

 

*Deferred Tax Assets.*  The Company accounts for income taxesutilizing the liability method. Deferred income taxes are primarily recorded toreflect the tax consequences of differences between the tax and financialreporting bases of assets and liabilities. Under the provisions of SFAS No. 109,the realization of the future tax benefits of a deferred tax asset is dependenton future taxable income against which such tax benefits can be applied. Allavailable evidence must be considered in the determination of whethersufficient future taxable income will exist. Such evidence includes, but is notlimited to, the company’s financial performance, the market environment inwhich the company operates, the utilization of past tax credits, and the lengthof relevant carryback and carryforward periods. Sufficient negative evidence,such as cumulative net losses during a three-year period that includes thecurrent year and the prior two years, may require that a valuationallowance be established with respect to existing and future deferred taxassets. As a result, it is more likely than not that future deferred tax assetswill require a valuation allowance to be recorded to fully reserve against theuncertainty that those assets would be realized. On the Effective Date, theCompany restated deferred taxes based on the remeasured values of the SuccessorCompany and in accordance with SFAS No. 109. Use of net operating lossesfrom the Predecessor Company that require valuation allowances under SFAS No. 109are recognized as an adjustment to goodwill when used by the Successor Company.

 

*New Accounting Standards.*  In June 2006, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(“FIN48”), which clarifies SFAS No. 109. FIN 48 prescribes a consistentrecognition threshold and criteria for measurement of uncertain tax positionsfor financial statement purposes. FIN 48 requires the financial statementrecognition of an income tax benefit when the Company determines that it is “morelikely than not” the tax position will be ultimately sustained. FIN 48 alsorequires expanded disclosure with respect to the uncertainty in income taxes. TheCompany adopted FIN 48 as of January 1, 2007, and no change was requiredto its reserve for uncertain income tax positions under FIN 48.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS No. 159”). This statement permitsall entities to elect to measure eligible financial instruments at fair valueon a recurring basis. SFAS No. 159 is effective for fiscal years beginningafter November 15, 2007, and may not be applied retrospectively toprior fiscal years. The Successor Company did not elect to measure any eligiblefinancial instruments at fair value under this guidance.

 

**Note 5 –Fair Value Measurements**

 

SOP90-7 requires that the Company adopt new accounting standards that have beenissued and will become effective within the next year. In accordance with thisguidance, the Company adopted SFAS No. 157, *Fair Value Measurements*, on the Effective Date. SFAS No. 157defines fair value, establishes a consistent framework for measuring fair valueand expands disclosure requirements about fair value measurements. SFAS No. 157requires, among other things, the Company’s valuation techniques used tomeasure fair value to maximize the use of observable inputs and minimize theuse of unobservable inputs. This standard was applied prospectively to thevaluation of assets and liabilities on and after the Effective Date.

 

Thereare three general valuation techniques that may be used to measure fairvalue, as described below:

 

(A)      Market approach – Uses prices and otherrelevant information generated by market transactions involving identical orcomparable assets or liabilities;

(B)        Cost approach – Based on the amount thatcurrently would be required to replace the service capacity of an asset(replacement cost); and

(C)        Income approach – Uses valuation techniques toconvert future amounts to a single present amount based on current marketexpectations about the future amounts (includes present value techniques,option-pricing models, and excess earnings method). Net present value is anincome approach where a stream of expected cash flows is discounted at anappropriate market interest rate. Excess earnings method is a variation of theincome approach where the value of a specific asset is isolated from itscontributory assets.

 

16

----

 

Forassets and liabilities measured at fair value on a recurring basis during theperiod, SFAS No. 157 requires quantitative disclosures about the fair valuemeasurements separately for each major category of assets and liabilities. Therewere no changes in the valuation techniques used to measure the fair values ofassets measured on a recurring basis during the period. Assets measured at fairvalue on a recurring basis during the period included:

 
| ** **                                                     | ** ** | **Successor**          | ** ** | ** **                     | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                     | ** ** | ** **             | ** ** | **Quoted Prices in** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **As of**         | ** ** | **Active Markets**        | ** ** | **Significant Other** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **September 30,** | ** ** | **for Identical**         | ** ** | **Observable** | ** ** | **Unobservable** | ** ** | **Valuation** | ** ** |
| *(in millions)*                                           | ** ** | **2007**               | ** ** | **Assets (Level 1)** | ** ** | **Inputs (Level 2)** | ** ** | **Inputs (Level 3)** | ** ** | **Technique** | ** ** |
| **ASSETS**                                                     |       |                   |       |                           |       |   |   |   |   |   |   |
| Cash and cash  equivalents                                     | ** ** | **$**                  | **2,559**  |                           | $          | 2,559 |   | $ | — |   | $ | — |   | (A) |   |
| Unrestricted  short-term investments                           |       | **572**                |       | 572                            |       | — |   | — |   | (A) |   |
| Restricted cash,  cash equivalents, and short-term investments |       | **739**                |       | 739                            |       | — |   | — |   | (A) |   |
| Derivatives                                                    | ** ** | **48**                 |       | 48                             |       | — |   | — |   | (A) |   |
| Total                                                          | ** ** | **$**                  | **3,918**  |                           | $          | 3,918 |   | $ | — |   | $ | — |   |   |   |

 

**Note 6 – Geographic Regions**

 

TheCompany is managed as one cohesive business unit, of which revenues are derivedprimarily from the commercial transportation of passengers and cargo. Operatingrevenues from flight segments serving a foreign destination are classified intothe Pacific or Atlantic regions, as appropriate. The following table shows theoperating revenues for each region:

 
| ** **                  | ** ** | **Successor**          | ** ** | **Predecessor**        | ** ** |
|-----------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** |
| ** **                  | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| *(In millions)*        | ** ** | **2007**               | ** ** | **2006**               | ** ** |
| Domestic                    | ** ** | **$**                  | **2,156**  |                   | $          | 2,250 |   |
| Pacific,  principally Japan | ** ** | **766**                |       | 782                    |       |
| Atlantic                    | ** ** | **456**                |       | 375                    |       |
| Total operating  revenues   | ** ** | **$**                  | **3,378**  |                   | $          | 3,407 |   |

 
| ** **                  | ** ** | **Successor**           | ** ** | **Predecessor**            | ** ** |
|-----------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Period from**    | ** ** | **Period from**       | ** ** | **Nine Months** | ** ** |
| ** **                  | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** | **Ended** | ** ** |
| ** **                  | ** ** | **September 30,**  | ** ** | **May 31,**           | ** ** | **September 30,** | ** ** |
| *(In millions)*        | ** ** | **2007**                | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Domestic                    | ** ** | **$**                   | **2,906**  | ** **                 | **$**      | **3,346** |   | $ | 6,561 |   |
| Pacific,  principally Japan | ** ** | **998**                 | ** ** | **1,064**                  |       | 2,042 |   |
| Atlantic                    | ** ** | **604**                 | ** ** | **514**                    |       | 985 |   |
| Total operating  revenues   | ** ** | **$**                   | **4,508**  | ** **                 | **$**      | **4,924** |   | $ | 9,588 |   |

 

TheCompany’s tangible assets consist primarily of flight equipment, which areutilized across geographic markets and therefore have not been allocated.

 

17

----

 

**Note 7 – Reorganization Related Items**

 

Inaccordance with SOP 90-7, the financial statements for the Predecessor periodspresented distinguish transactions and events that are directly associated withthe reorganization from the ongoing operations of the Company. In connectionwith its bankruptcy proceedings, implementation of our Plan of Reorganizationand adoption of fresh-start accounting, the Company recorded the followinglargely non-cash reorganization income/(expense) items:

 
| ** **                                         | ** ** | **Predecessor**        | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **Three Months**  | ** ** | **Period from** | ** ** | **Nine Months** | ** ** |
| ** **                                         | ** ** | **Ended**              | ** ** | **January 1 to** | ** ** | **Ended** | ** ** |
| ** **                                         | ** ** | **September 30,** | ** ** | **May 31,** | ** ** | **September 30,** | ** ** |
| *(In millions)*                               | ** ** | **2006**               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Discharge of  unsecured claims and liabilities (a) |       | $                      | —     |   | **$** | **1,763** | ** ** | $ | — |   |
| Revaluation of  frequent flyer obligations (b)     |       | —                 |       | **(1,559** | **)** | — |   |
| Revaluation of  other assets and liabilities (c)   |       | —                 |       | **2,816** | ** ** | — |   |
| Employee-related  charges (d)                      |       | (1,405                 | )          | **(312** | **)** | (1,358 | ) |
| Abandonment of  aircraft and buildings (d)         |       | (29                    | )          | **(323** | **)** | (140 | ) |
| Restructured  aircraft lease/debt charges (d)      |       | (7                     | )          | **(74** | **)** | (1,330 | ) |
| Professional fees                                  |       | (15                    | )          | **(60** | **)** | (41 | ) |
| Other (d)                                          |       | 25                     |       | **(700** | **)** | (1 | ) |
| Reorganization  items, net                         |       | $                      | (1,431     | ) | **$** | **1,551** | ** ** | $ | (2,870 | ) |

 

(a)          The gain on discharge of unsecured claims andliabilities relates to the Company’s unsecured claims as of the Petition Dateand the discharge of unsecured claims established as part of the bankruptcyprocess. In accordance with the Plan of Reorganization, the Company dischargedits estimated $8.2 billion in unsecured creditor obligations in exchange forthe distribution of approximately 234 million common shares of the SuccessorCompany valued at emergence at $6.45 billion. Accordingly, the Companyrecognized a non-cash reorganization gain of approximately $1.8 billion.

 

(b)         The Company revalued its frequent flyer milesto estimated fair value as a result of fresh-start reporting, which resulted ina $1.6 billion non-cash reorganization charge.

 

(c)          In accordance with fresh-start reporting, theCompany revalued its assets at their estimated fair value and revalued itsliabilities at estimated fair value or the present value of amounts to be paid.This resulted in a non-cash reorganization gain of $2.8 billion, primarily as aresult of newly recognized intangible assets, offset partially by reductions inthe fair value of tangible property and equipment.

 

(d)         Prior to emergence, the Company recorded itsfinal provisions for allowed or projected unsecured claims includingemployee-related Association of Flight Attendants - Communication Workers ofAmerica (“AFA-CWA”) contract related claims, other employee-related claims,claims associated with restructured aircraft lease/debt, and municipal bondobligation related settlements.

 

For the three and nine months ended September 30, 2006, reorganizationitems largely consisted of negotiated employee claims associated with theCompany’s implementation of new contract terms with the Air Line PilotsAssociation (“ALPA”), the International Association of Machinists and AerospaceWorkers (“IAM”), the Aircraft Technical Support Association (“ATSA”), theTransport Workers Union of America (“TWU”) and the Northwest AirlinesMeteorologists Association (“NAMA”). In addition, the Company recorded pensionplan curtailment charges associated with the freezing of the contract pensionplan and other non-cash items.

 

**Note 8 – Income Taxes**

 

TheCompany accounts for income taxes in accordance with SFAS No. 109, whichrequires that deferred tax assets and liabilities be recognized, using enactedtax rates, for the tax effect of temporary differences between the financialreporting and tax bases of recorded assets and liabilities. SFAS No. 109 alsorequires that deferred tax assets be reduced by a valuation allowance if it ismore likely than not that some or all of the deferred tax assets will not berealized. Based on the consideration of all available evidence, the Company hasprovided a valuation allowance on deferred tax assets recorded beginning in thefirst quarter 2003. The Company continues to maintain a full valuationallowance against its deferred tax assets due to the uncertainty regarding theultimate realization of those assets.

 

18

----

 

Significantcomponents of the Company’s deferred tax assets and liabilities as of September30, 2007 and December 31, 2006 are as follows:

 
| ** **                                                    | ** ** | **Successor**          | ** ** | **Predecessor**       | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| *(In millions)*                                          | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| Deferred tax  liabilities:                                    |       |                   |       |                  |       |
| Accounting basis  of assets in excess of tax basis            |       | **$**                  | **1,702**  |                  | $          | 2,219 |   |
| Accounting basis  of intangible assets in excess of tax basis |       | **1,879**              |       | —                |       |
| Other                                                         |       | **103**                |       | 71                    |       |
| Total deferred  tax liabilities                               |       | **3,684**              |       | 2,290                 |       |
|                                                          |       | ** **             |       |                  |       |
| Deferred tax  assets:                                         |       | ** **             |       |                  |       |
| Expenses not yet  deducted for tax purposes                   |       | **210**                |       | 253                   |       |
| Reorganization  charges not yet deducted for tax purposes     |       | **1,062**              |       | 1,526                 |       |
| Pension and  postretirement benefits                          |       | **1,336**              |       | 1,476                 |       |
| Deferred revenue                                              |       | **784**                |       | —                |       |
| Travel award  programs                                        | ** ** | **—**             |       | 104                   |       |
| Net operating  loss carryforward                              |       | **1,114**              |       | 1,216                 |       |
| Alternative  minimum tax credit carryforward                  |       | **137**                |       | 134                   |       |
| Other                                                         |       | **58**                 |       | 17                    |       |
| Total deferred  tax assets                                    |       | **4,701**              |       | 4,726                 |       |
| Valuation  allowance for deferred tax assets                  |       | **(2,148**             | )          | (2,436                | )          |
| Net deferred tax  assets                                      |       | **2,553**              |       | 2,290                 |       |
| Net deferred tax  liability                                   |       | **$**                  | **1,131**  |                  | $          | — |   |

 

AtSeptember 30, 2007, the Company has certain federal deferred tax assets availablefor use in the regular tax system and the alternative minimum tax (“AMT”)system. The deferred tax assets available in the regular tax systeminclude:  NOLs of $3.1 billion, AMTcredits of $137 million, general business tax credits of $6 million and foreigntax credits of $17 million. The deferred tax assets available in the AMT systemare:  NOLs of $3.1 billion and foreigntax credits of $14 million. AMT credits available in the regular tax systemhave an unlimited carryforward period and all other deferred tax assets in bothsystems are available for years beyond 2007, expiring in 2008 through 2027.

 

TheCompany also has the following deferred tax assets available at September 30,2007, for use in certain states:  NOLswith a tax benefit value of approximately $77 million are available for yearsbeyond 2007, expiring in 2008 through 2027, and state job tax credits of $7million are available for years beyond 2007, expiring in 2008 through 2011.

 

Thevaluation allowance recorded against our net deferred tax assets in fresh-startreporting will be reversed against goodwill when the Company reports income infuture periods. As a result, the Company will generally report income taxexpense and reduce goodwill. However, our NOLs will generally offset mostincome taxes otherwise payable until the NOLs are fully consumed or expireunused.

 

TheCompany adopted FIN 48 on January 1, 2007. As of September 30, 2007, theCompany had unrecognized tax benefits of approximately $1 million, which, ifrecognized, would impact the effective tax rate in future periods. During thequarter ended September 30, 2007, the Company recognized $1 million ofpreviously unrecognized tax benefits as a result of a resolution of a state taxcontroversy.

 

Subjectto the impact of the Company’s bankruptcy filing, open tax years for federalincome tax purposes are 1992 through 2006 and for state income tax purposesgenerally are 2005 and 2006.

 

TheCompany’s continuing practice is to recognize interest and penalties related toincome tax matters in income tax expense. The Company had $12 million accruedfor interest and nothing accrued for penalties at September 30, 2007.

 

19

----

 

**Note 9 – Earnings (Loss) Per Share Data**

 

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

 
| ** **                                                                                                   | ** ** | **Successor**          | ** ** | **Predecessor**        | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                   | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** |
| ** **                                                                                                   | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                                                                   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| *(In millions, except per share data)*                                              | ** ** | **2007**               | ** ** | **2006**               | ** ** |
| **Numerator:**                                                                                               |       |                   |       |                   |       |
| Net income  (loss) applicable to common stockholders                                                         | ** ** | **$**                  | **244**    |                   | $          | (1,179 | ) |
|                                                                                                         |       |                   |       |                   |       |
| Effect of  dilutive securities                                                                               | ** ** | **—**             |       | —                 |       |
| Adjusted net  income for diluted earnings (loss) per share                                                   | ** ** | **$**                  | **244**    |                   | $          | (1,179 | ) |
|                                                                                                         |       |                   |       |                   |       |
| **Denominator:**                                                                                             |       |                   |       |                   |       |
| Weighted-average  shares outstanding for basic and diluted earnings (loss) per share                         |       | **262.2**              |       | 87.3                   |       |
|                                                                                                         |       |                   |       |                   |       |
| Effect of  dilutive securities                                                                               | ** ** | **—**             |       | —                 |       |
| Adjusted  weighted-average shares outstanding and assumed conversions for diluted  earnings (loss) per share |       | **262.2**              |       | 87.3                   |       |
|                                                                                                         |       |                   |       |                   |       |
| **Basic  earnings (loss) per common share:**                                                                 |       |                   |       |                   |       |
|                                                                                                         |       |                   |       |                   |       |
| Net income  (loss) applicable to common stockholders                                                         | ** ** | **$**                  | **0.93**   |                   | $          | (13.50 | ) |
|                                                                                                         |       |                   |       |                   |       |
| **Diluted  earnings (loss) per common share:**                                                               |       |                   |       |                   |       |
| Net income  (loss) applicable to common stockholders                                                         | ** ** | **$**                  | **0.93**   |                   | $          | (13.50 | ) |

 

20

----

 
| ** **                                                                                                   | ** ** | **Successor**           | ** ** | **Predecessor**            | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                   | ** ** | **Period From**    | ** ** | **Period From**       | ** ** | **Nine Months** | ** ** |
| ** **                                                                                                   | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** | **Ended** | ** ** |
| ** **                                                                                                   | ** ** | **September 30,**  | ** ** | **May 31,**           | ** ** | **September 30,** | ** ** |
| *(In millions, except per share data)*                                              | ** ** | **2007**                | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| **Numerator:**                                                                                               |       |                    |       |                       |       |   |   |
| Net income  (loss) applicable to common stockholders                                                         | ** ** | **$**                   | **350**    | ** **                 | **$**      | **1,751** | ** ** | $ | (2,568 | ) |
|                                                                                                         |       |                    |       |                       | ** ** |   |   |
| Effect of  dilutive securities:                                                                              |       |                    |       |                       | ** ** |   |   |
| Gain on  discharge of convertible debt                                                                       | ** ** | **—**              | ** ** | **(82**                    | **)**      | — |   |
| Gain on  discharge of Series C Preferred Stock                                                               | ** ** | **—**              | ** ** | **(60**                    | **)**      | — |   |
| Adjusted net  income for diluted earnings (loss) per share                                                   | ** ** | **$**                   | **350**    | ** **                 | **$**      | **1,609** | ** ** | $ | (2,568 | ) |
|                                                                                                         |       |                    |       |                       | ** ** |   |   |
| **Denominator:**                                                                                             |       |                    |       |                       | ** ** |   |   |
| Weighted-average  shares outstanding for basic and diluted earnings (loss) per share                         |       | **262.2**               |       | **87.4**                   | ** ** | 87.3 |   |
|                                                                                                         |       |                    |       |                       | ** ** |   |   |
| Effect of  dilutive securities:                                                                              |       |                    |       |                       | ** ** |   |   |
| Contingently  convertible debt                                                                               | ** ** | **—**              | ** ** | **19.1**                   | ** ** | — |   |
| Series C  Preferred Stock                                                                                    | ** ** | **—**              | ** ** | **6.2**                    | ** ** | — |   |
| Adjusted  weighted-average shares outstanding and assumed conversions for diluted  earnings (loss) per share |       | **262.2**               |       | **112.7**                  | ** ** | 87.3 |   |
|                                                                                                         |       |                    |       |                       | ** ** |   |   |
| **Basic  earnings (loss) per common share:**                                                                 |       |                    |       |                       | ** ** |   |   |
| Net income  (loss) applicable to common stockholders                                                         | ** ** | **$**                   | **1.33**   | ** **                 | **$**      | **20.03** | ** ** | $ | (29.42 | ) |
|                                                                                                         |       |                    |       |                       | ** ** |   |   |
| **Diluted  earnings (loss) per common share:**                                                               |       |                    |       |                       | ** ** |   |   |
| Net income  (loss) applicable to common stockholders                                                         | ** ** | **$**                   | **1.33**   | ** **                 | **$**      | **14.28** | ** ** | $ | (29.42 | ) |

 

*Successor EPS*.  The Plan contemplated the issuance of approximately 277 millionshares of new common stock by the Successor Company (out of the 400 millionshares of new common stock authorized under its amended and restatedcertificate of incorporation). The new common stock was listed on the New YorkStock Exchange (“NYSE”) and began trading under the symbol “NWA” on May 31,2007. The distributions of the Successor Company’s common stock, subject to certainholdbacks as described in the Plan, were generally made as follows:

•      225.8 million shares of common stock wereissuable to holders of certain general unsecured claims;

•      8.6 million shares of common stock wereissuable to holders of guaranty claims;

•      27.8 million shares of common stock wereissued in the Rights Offering and Equity Commitment Agreement; and

•      15.2 million shares of common stock aresubject to awards under a management equity plan.

 

Inaccordance with SFAS No. 128, *Earnings per Share*(“SFAS No. 128”), basic and diluted earnings per share were computed bydividing net income by the weighted-average number of shares of common stockoutstanding for the three and four months ended September 30, 2007. SFAS No.128 requires that the entire 234.4 million shares to be issued to holders ofunsecured and guaranty claims be considered outstanding for purposes ofcalculating earnings per share as these shares will ultimately be issued tounsecured creditors once the allocation of disputed unsecured claims iscompleted.

 

AtSeptember 30, 2007, approximately 15 million in restricted stock units andstock options to purchase shares of the Successor Company’s common stock wereoutstanding but excluded from the computation of diluted earnings per share becausethe effect of including the shares would have been anti-dilutive.

 

AtMay 31, 2007, stock options to purchase approximately 7 million shares ofcommon stock were outstanding but excluded from the computation of dilutedearnings per share because the effect of including the shares would have beenanti-dilutive.

 

*Predecessor EPS. * Predecessor basic earnings per share wascomputed based on the Predecessor’s final weighted-average shares outstanding. Forthe three and nine months ended September 30, 2006, approximately 19 millionincremental shares related to dilutive securities were not included in thediluted earnings per share calculation because the Company reported a net lossfor this period.

 

21

----

 

Additionally,approximately 6 million shares of Series C Preferred Stock were excluded fromthe effect of dilutive securities for the three and nine months ended September30, 2006 because the Company reported a net loss for these periods.

 

Totalemployee stock options outstanding of approximately 8 million as of September30, 2006 were not included in diluted securities because the Company reported anet loss for the three months and nine months ended September 30, 2006.

 

**Note 10** -**Long-Term Debt and Short-TermBorrowings**

 

Asof September 30, 2007, maturities of long-term debt, excluding capital leaseobligations, through December 31, 2011 were as follows (in millions):

 
| remainder of  2007 |   | $   | 106    |   |
|-------------------------|--------|-----|--------|--------|
| 2008                    |   | 478 |   |
| 2009                    |   | 513 |   |
| 2010                    |   | 416 |   |
| 2011                    |   | 592 |   |

 

OnAugust 21, 2006, the Predecessor Company entered into a $1.225 billion SeniorCorporate Credit Facility (“Senior Facility”), formerly called the DIP/ExitFacility, consisting of a $1.05 billion term loan facility and a $175 millionrevolving credit facility which has been fully drawn. The final maturity dateof the Senior Facility is August 21, 2013. Principal on the term loan portionof the Senior Facility will be repaid at 1.0% per year with the balance (94%)due at maturity. The first such principal repayment was made on August 21,2007. Loans drawn under the $175 million revolving credit facility may beborrowed and repaid at the Company’s discretion. Up to $75 million of therevolving credit facility may be utilized by the Company as a letter of creditfacility. Both loan facilities under the Senior Facility bear interest at LIBORplus 2.00%. Letter of credit fees will be charged at the same credit spread ason the borrowings plus 12.5 basis points. To the extent that the revolvingcredit facility is not utilized, the Company is required to pay an undrawncommitment fee of 50 basis points per annum. The Senior Facility received acredit rating of BB from Standard & Poor’s Rating Services (“S&P”) anda Ba3 from Moody’s Investors Service, Inc. (“Moody’s”) and is secured by afirst lien on the Company’s Pacific route authorities. The interest rate as ofSeptember 30, 2007 was 7.15% on both the term loan facility and the revolvingcredit facility.

 

TheSenior Facility requires ongoing compliance with the following financialcovenants:

•      Unrestricted cash of at least $750 million;

•      Collateral coverage ratio of at least 1.50 to1.00; and

•      Fixed charge coverage ratio as set forthbelow:

 
| **Four Consecutive Fiscal Quarters Ending** | ** ** | **Minimum Ratio of  EBITDAR to  Consolidated  Fixed Charges (1)** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| September 30,  2007                                             |       | 1.40 to 1.00                                                                               |       |
| December 31,  2007 and each quarter ending thereafter           |       | 1.50 to 1.00                                                                               |       |

 

(1)         For purposes of calculating this ratio, EBITDAR is defined as operatingincome adjusted to exclude the effects of depreciation, amortization andaircraft rents and to include the effects of interest income and governmentalreimbursements for losses resulting from developments affecting the aviationindustry. Earnings also exclude non-recurring non-cash charges (subject to theinclusion of any cash payments then or thereafter made with respect thereto)and are determined without giving effect to any acceleration of rental expense.Fixed charges are defined as interest expense and aircraft rents (withoutgiving effect to any acceleration of rental expense).

 

Asof September 30, 2007, the Company was in compliance with all requiredfinancial covenants.

 

22

----

 

**Note 11 – Fleet Information and Commitments**

 

As shown in the following table, Northwest operated a mainline fleet of364 aircraft at September 30, 2007, consisting of 304 narrow-body and 60wide-body aircraft. Northwest’s purchase commitments for aircraft as ofSeptember 30, 2007 are also provided.

 
| ** **                            | ** ** | ** **   | ** ** | **In Service** | ** ** | **Aircraft** | ** ** |
|---------------------------------------|------------|--------------|------------|---------------------|------------|--------------|------------|
| ** **                            | ** ** | **Seating**  | ** ** | ** **          | ** ** | **Capital**  | ** ** | **Operating** | ** ** | ** ** | ** ** | **on Firm** | ** ** |
| **Aircraft Type**                | ** ** | **Capacity** | ** ** | **Owned**           | ** ** | **Lease**    | ** ** | **Lease** | ** ** | **Total** | ** ** | **Order** | ** ** |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Passenger  Aircraft**               |       |         |       |                |       |         |       |   |   |   |   |   |   |
| Airbus:                               |       |         |       |                |       |         |       |   |   |   |   |   |   |
| A319                                  |       | 124          |       | 55                  |       | —       |       | 2 |   | 57 |   | 5 |   |
| A320                                  |       | 148          |       | 45                  |       | —       |       | 28 |   | 73 |   | 2 |   |
| A330-200                              |       | 243          |       | 11                  |       | —       |       | — |   | 11 |   | — |   |
| A330-300                              |       | 298          |       | 20                  |       | —       |       | — |   | 20 |   | 1 |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| Boeing:                               |       |         |       |                |       |         |       |   |   |   |   |   |   |
| 787-8                                 |       | TBD          |       | —              |       | —       |       | — |   | — |   | 18 |   |
| 757-200                               |       | 160-184      |       | 38                  |       | 1            |       | 16 |   | 55 |   | — |   |
| 757-300                               |       | 224          |       | 16                  |       | —       |       | — |   | 16 |   | — |   |
| 747-400                               |       | 403          |       | 4                   |       | —       |       | 12 |   | 16 |   | — |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| McDonnell  Douglas:                   |       |         |       |                |       |         |       |   |   |   |   |   |   |
| DC9                                   |       | 100-125      |       | 103                 |       | —       |       | — |   | 103 |   | — |   |
|                                  |       |         |       | 292                 |       | 1            |       | 58 |   | 351 |   | 26 |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Freighter  Aircraft**               |       |         |       |                |       |         |       |   |   |   |   |   |   |
| Boeing 747F                           |       |         |       | 10                  |       | —       |       | 3 |   | 13 |   | — |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Total  Mainline Operated Aircraft** | ** ** | ** **   | ** ** | **302**             | ** ** | **1**        | ** ** | **61** | ** ** | **364** | ** ** | **26** | ** ** |
| ** **                            | ** ** | ** **   | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Regional  Aircraft**                |       |         |       |                |       |         |       |   |   |   |   |   |   |
| CRJ200                                |       | 50           |       | —              |       | —       |       | 141 |   | 141 |   | — |   |
| Saab 340                              |       | 30-34        |       | —              |       | —       |       | 49 |   | 49 |   | — |   |
| CRJ900                                |       | 76           |       | 7                   |       | —       |       | — |   | 7 |   | 29 |   |
| Embraer 175                           |       | 76           |       | 3                   |       | —       |       | — |   | 3 |   | 32 |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Total  Airlink Operated Aircraft**  | ** ** | ** **   | ** ** | **10**              | ** ** | **—**   | ** ** | **190** | ** ** | **200** | ** ** | **61** |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Total  Aircraft**                   | ** ** | ** **   | ** ** | **312**             | ** ** | **1**        | ** ** | **251** | ** ** | **564** | ** ** | **87** |   |

 

The Company took delivery of seven Airbus A330-300, seven CRJ900, andfour Embraer 175 aircraft during the nine months ended September 30, 2007. OneEmbraer 175 had not been placed in service before September 30, 2007, and istherefore not included in the table above. In connection with the acquisitionof these 18 aircraft, the Company entered into long-term debt arrangements. Undersuch arrangements, the aggregate amount of debt incurred totaled $785 million.

 

23

----

 

**Note 12 – Comprehensive Income (Loss)**

 

Comprehensiveincome (loss) consisted of the following:

 
| ** **                                                         | ** ** | **Successor**          | ** ** | **Predecessor**        | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** |
| ** **                                                         | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| *(In millions)*                                               | ** ** | **2007**               | ** ** | **2006**               | ** ** |
| Net income  (loss)                                                 | ** ** | **$**                  | **244**    | ** **             | $          | (1,179 | ) |
| Minimum pension  liability adjustments                             | ** ** | **—**             | ** ** | 201                    |       |
| Change in  unrealized gain (loss) on available-for-sale securities | ** ** | **(4**                 | **)**      | 4                      |       |
| Change in  deferred gain (loss) from hedging activities            | ** ** | **(2**                 | **)**      | (11                    | )          |
| Foreign currency  translation adjustments                          | ** ** | **—**             | ** ** | (2                     | )          |
| Comprehensive  income (loss)                                       | ** ** | **$**                  | **238**    | ** **             | $          | (987 | ) |

 
| ** **                                                         | ** ** | **Successor**           | ** ** | **Predecessor**            | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                         | ** ** | **Period From**    | ** ** | **Period From**       | ** ** | **Nine Months** | ** ** |
| ** **                                                         | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** | **Ended** | ** ** |
| ** **                                                         | ** ** | **September 30,**  | ** ** | **May 31,**           | ** ** | **September 30,** | ** ** |
| *(In millions)*                                               | ** ** | **2007**                | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Net income  (loss)                                                 | ** ** | **$**                   | **350**    | ** **                 | **$**      | **1,751** |   | $ | (2,568 | ) |
| Minimum pension  liability adjustments                             | ** ** | **—**              | ** ** | **—**                 |       | 201 |   |
| Change in  unrealized gain (loss) on available-for-sale securities | ** ** | **(5**                  | **)**      | **1**                      |       | 5 |   |
| Change in  deferred gain (loss) from hedging activities            | ** ** | **(1**                  | **)**      | **—**                 |       | (9 | ) |
| Foreign currency  translation adjustments                          | ** ** | **—**              | ** ** | **(1**                     | **)**      | — |   |
| Comprehensive  income (loss)                                       | ** ** | **$**                   | **344**    | ** **                 | **$**      | **1,751** |   | $ | (2,371 | ) |

 

# **Note 13 — Pension and Other PostretirementHealth Care Benefits**

 

TheCompany has several defined benefit pension plans and defined contribution401(k)-type plans covering substantially all of its employees. Northwest froze futurebenefit accruals for its defined benefit Pension Plans for Salaried Employees,Pilot Employees, and Contract Employees effective August 31, 2005, January 31,2006, and September 30, 2006, respectively. Replacement coverage was providedfor these employees through 401(k)-type defined contribution plans or in thecase of IAM represented employees, the IAM National Multi-Employer Plan.

 

Northwestalso sponsors various contributory and noncontributory medical, dental and lifeinsurance benefit plans covering certain eligible retirees and their dependents.The expected future cost of providing such postretirement benefits is accruedover the service lives of active employees. Retired employees are not offeredCompany-paid medical and dental benefits after age 64, with the exception ofcertain employees who retired prior to 1987 and receive lifetime Company-paidmedical and dental benefits. Prior to age 65, the retiree share of the cost ofmedical and dental coverage is based on a combination of years of service andage at retirement. Medical and dental benefit plans are unfunded and costs arepaid as incurred. The pilot group is provided Company-paid decreasing lifeinsurance coverage.

 

ThePension Protection Act of 2006 (“2006 Pension Act”) was signed into law onAugust 17, 2006. The 2006 Pension Act allows commercial airlines to electspecial funding rules for defined benefit plans that are frozen. The unfundedliability for a frozen defined benefit plan may be amortized over a fixed17-year period. The unfunded liability is defined as the actuarial liabilitycalculated using an 8.85% interest rate minus the fair market value of planassets. Northwest elected the special funding rules for frozen defined benefitplans under the 2006 Pension Act effective October 1, 2006. As a result of thiselection (1) the funding waivers that Northwest received for the 2003 plan yearcontributions were deemed satisfied under the 2006 Pension Act, and (2) thefunding standard account for each Plan has no deficiency as of September 30,2006. New contributions that came due under the 2006 Pension Act funding ruleswere paid while Northwest was in bankruptcy and must continue to be paid goingforward. If the new contributions are not paid, the future funding deficiencythat would develop will be based on the regular funding rules rather than thespecial funding rules.

 

Itis Northwest’s policy to fund annually at least the minimum contribution asrequired by the Employee Retirement Income Security Act of 1974, as amended(“ERISA”). Northwest’s 2007 calendar year contributions to its frozen definedbenefit plans under the provisions of the 2006 Pension Act and the replacementplans will approximate $124 million.

 

24

----

 

***Components of net periodic benefitcost of defined benefit plans and defined contribution plan costs:***

 
| ** **                                      | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **Successor**             | ** ** | **Predecessor**         | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                      | ** ** | **Three Months**     | ** ** | **Three Months**   | ** ** | **Three Months** | ** ** | **Three Months** | ** ** |
| ** **                                      | ** ** | **Ended**                 | ** ** | **Ended**               | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                      | ** ** | **September 30,**    | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| *(In millions)*                            | ** ** | **2007**                  | ** ** | **2006**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Defined benefit  plan costs                     |       |                      |       |                    |       |   |   |   |   |
| Service cost                                    | ** ** | **$**                     | **11**     |                    | $          | 35 | ** ** | **$** | **6** |   | $ | 7 |   |
| Interest cost                                   | ** ** | **139**                   |       | 132                     | ** ** | **11** |   | 14 |   |
| Expected return  on plan assets                 | ** ** | **(143**                  | **)**      | (120                    | )          | **—** |   | — |   |
| Amortization of  prior service cost             | ** ** | **—**                |       | 10                      | ** ** | **—** |   | (7 | ) |
| Recognized net  actuarial loss and other events |       | **—**                |       | 23                      |       | **—** |   | 9 |   |
| Net periodic  benefit cost                      | ** ** | **7**                     |       | 80                      | ** ** | **17** |   | 23 |   |
|                                            |       |                      |       |                    |       |   |   |   |   |
| Defined  contribution plan costs                | ** ** | **16**                    |       | 13                      | ** ** | **—** |   | — |   |
|                                            |       |                      |       |                    |       |   |   |   |   |
| Total benefit  cost                             | ** ** | **$**                     | **23**     |                    | $          | 93 | ** ** | **$** | **17** |   | $ | 23 |   |

 
| ** **                                      | ** ** | **Pension Benefits** | ** ** | **Other Benefits**    | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **Successor**             | ** ** | **Predecessor**            | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                      | ** ** | **Period From**      | ** ** | **Period From**       | ** ** | **Nine Months** | ** ** | **Period From** | ** ** | **Period From** | ** ** | **Nine Months** | ** ** |
| ** **                                      | ** ** | **June 1 to**   | ** ** | **January 1 to** | ** ** | **Ended** | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** | **Ended** | ** ** |
| ** **                                      | ** ** | **September 30,**    | ** ** | **May 31,**           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **May 31,** | ** ** | **September 30,** | ** ** |
| *(In millions)*                            | ** ** | **2007**                  | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Defined benefit  plan costs                     |       |                      |       |                       |       |   |   |   |   |   |   |   |   |
| Service cost                                    | ** ** | **$**                     | **15**     | ** **                 | **$**      | **19** |   | $ | 103 | ** ** | **$** | **8** | ** ** | **$** | **10** |   | $ | 25 |   |
| Interest cost                                   | ** ** | **185**                   | ** ** | **225**                    |       | 396 | ** ** | **15** | ** ** | **22** |   | 46 |   |
| Expected return  on plan assets                 | ** ** | **(191**                  | **)**      | **(207**                   | **)**      | (359 | ) | **—** | ** ** | **—** |   | — |   |
| Amortization of  prior service cost             | ** ** | **—**                | ** ** | **—**                 |       | 30 | ** ** | **—** | ** ** | **(15** | **)** | (12 | ) |
| Recognized net  actuarial loss and other events |       | **—**                |       | **18**                     |       | 80 |   | **—** |   | **16** |   | 29 |   |
| Net periodic  benefit cost                      | ** ** | **9**                     | ** ** | **55**                     |       | 250 | ** ** | **23** | ** ** | **33** |   | 88 |   |
|                                            |       |                      |       |                       |       |   |   |   |   |   |   |   |   |
| Defined  contribution plan costs                | ** ** | **20**                    | ** ** | **23**                     |       | 39 | ** ** | **—** | ** ** | **—** |   | — |   |
|                                            |       |                      |       |                       |       |   |   |   |   |   |   |   |   |
| Total benefit  cost                             | ** ** | **$**                     | **29**     | ** **                 | **$**      | **78** |   | $ | 289 | ** ** | **$** | **23** | ** ** | **$** | **33** |   | $ | 88 |   |

 

Related to the freezing of Northwest’s defined benefit plans coveringdomestic employees in 2006, Northwest recorded pension curtailment charges andgains. Curtailment charges and gains have been recorded as a component of netreorganization expense. Northwest has recorded the following pensioncurtailment amounts:

 
| ** **                 | ** ** | **Successor**          | ** ** | **Predecessor**        | ** ** | **Successor**           | ** ** | **Predecessor**            | ** ** |
|----------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** | **Period From**    | ** ** | **Period From**       | ** ** | **Nine Months** | ** ** |
| ** **                 | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** | **Ended** | ** ** |
| ** **                 | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,**  | ** ** | **May 31,**           | ** ** | **September 30,** | ** ** |
| *(In millions)*       | ** ** | **2007**               | ** ** | **2006**               | ** ** | **2007**                | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Curtailment  charge (gain) |       |                   |       |                   |       |                    |       |                       |       |   |   |
| Pilot Plan                 | ** ** | **$**                  | **—** |                   | $          | —                  | ** ** | **$**                      | **—** | ** ** | **$** | **—** |   | $ | (49 | ) |
| Contract Plan              | ** ** | **—**             |       | 332                    |       | —                  | ** ** | **—**                 |       | 332 |   |
| Total                      | ** ** | **$**                  | **—** |                   | $          | 332                     |       | $                          | —     | ** ** | **$** | **—** |   | $ | 283 |   |

 

Withthe Company’s adoption of fresh-start reporting, entries were made to eliminateall balances related to other comprehensive income therefore, there are noamounts to be amortized into net periodic benefit cost for the remainder of2007.

 

25

----

 

**Note 14 – Stock-Based Compensation**

 

Prior to the Effective Date, the Company maintained stock incentiveplans for officers and key employees of the Company (the “Prior ManagementPlans”) and a stock option plan for pilot employees (the “Pilot Plan”). On theEffective Date, outstanding awards under the Prior Management Plans and PilotPlan were cancelled in accordance with the terms of the Plan. On the EffectiveDate, the Management Equity Plan (“the 2007 Plan”) of the Successor Companyprovided for in the Plan of Reorganization became effective. The 2007 Plan is astock-based incentive compensation plan, under which the Compensation Committeeof the Board of Directors has the authority to grant cash awards and/or thefollowing type of equity-based awards: (1) stock options, (2) stockappreciation rights, (3) restricted stock, (4) restricted stock units, and/or(5) other stock-based awards, including performance-based awards. Each of theseawards may be granted alone, in conjunction with, or in tandem with otherawards under the 2007 Plan. Awards may be to any employee of the Company or itssubsidiaries. The number of participants participating in the 2007 Plan willvary from year to year. The aggregate number of shares of common stock of the SuccessorCompany available for issuance under the 2007 Plan is 21.3 million of which14.5 million have been granted and 6.8 million shares remained available forfuture awards under the 2007 Plan as of September 30, 2007. The Company adoptedSFAS No. 123R, using the modified-prospective transition method, effectiveJanuary 1, 2006.

 

Thetotal stock-based non-cash compensation expense related to stock-based plansand liability awards for the three months ended September 30, 2007 was $29.7million and $1.2 million, respectively. Year-to-date post emergence, the totalstock-based non-cash compensation expense related to stock-based plans andliability awards from June 1 through September 30, 2007 was $39.2 million and$1.5 million, respectively. There was no corresponding tax benefit in 2007 or2006 related to the stock-based compensation, as the Company records a fullvaluation allowance against its deferred tax assets due to the uncertaintyregarding the ultimate realization of those assets. See “Note 8 – Income Taxes”for additional information.

 

**Note 15 – Subsequent Events**

 

OnOctober 10, 2007, the Company closed on a $454 million secured public aircraftfinancing. The transaction was structured with Enhanced Equipment Trust Certificatesand will pre-fund the financing of 27 Embraer 175 aircraft.

 

26

----

 

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

 

**Overview**

 

On September 14, 2005 (the“Petition Date”), NWA Corp. and 12 of its direct and indirect subsidiaries(collectively, the “Debtors”) filed voluntary petitions for relief underChapter 11 of the United States Bankruptcy Code with the United StatesBankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiaryof NWA Corp., also filed a voluntary petition for relief under Chapter 11. OnMay 18, 2007, the Bankruptcy Court entered an order approving and confirmingthe Debtors’ First Amended Joint and Consolidated Plan of Reorganization UnderChapter 11 of the Bankruptcy Code (as confirmed, the “Plan” or “Plan ofReorganization”). The Plan became effective and the Debtors emerged frombankruptcy protection on May 31, 2007 (the “Effective Date”).

 

On the Effective Date, theCompany implemented fresh-start reporting in accordance with SOP 90-7. Thus theconsolidated financial statements prior to June 1, 2007 reflect results basedupon the historical cost basis of the Company while the post-emergenceconsolidated financial statements reflect the new basis of accountingincorporating the fair value adjustments made in recording the effects offresh-start reporting. Therefore, the post-emergence periods are not comparableto the pre-emergence periods. However, for discussions on the results ofoperations, the Company has combined the results for the five months ended May31, 2007 with the four months ended September 30, 2007. The combined period hasbeen compared to the nine months ended September 30, 2006. The Company believesthat the combined financial results provide management and investors a betterperspective of the Company’s core business and on-going operational financialperformance and trends for comparative purposes.

 

**ThirdQuarter 2007 Results**

 

For the quarter endedSeptember 30, 2007, the Company recorded net income applicable to commonstockholders of $244 million. This compares to a third quarter 2006 net lossapplicable to common stockholders of $1.2 billion. The Company recorded a thirdquarter 2007 pre-tax profit of $405 million, this compares to a $258 millionpre-tax profit in the third quarter of 2006, excluding reorganization items.

 

Operating revenues in thethird quarter decreased 0.9 percent versus the third quarter of 2006 to $3.4billion. System consolidated passenger revenue increased 1.5 percent, primarilydue to a 2.3 percent improvement on unit revenue. Excluding the impact offresh-start accounting, system passenger revenue increased 2.7 percent dueprimarily to a 3.5 percent improvement in unit revenue.

 

Operating expenses in thequarter decreased 4.0 percent year-over-year to $2.9 billion. During the thirdquarter, fuel averaged $2.11 per gallon, excluding taxes and mark-to-marketgains related to future period fuel derivative contracts, down 1.5 percentversus the third quarter of last year.

 

The Company recorded anon-cash income tax expense in the third quarter of 2007 of $161 million. Becauseof its net operating loss carryforwards, the Company expects to pay minimalcash taxes for the foreseeable future.

 

At September 30, 2007, theCompany had cash and cash equivalents of $2.6 billion, unrestricted short-terminvestments of $572 million, and borrowing capacity under an undrawn creditfacility of $127 million, providing total available liquidity of $3.3 billion. Thisamount excludes $739 million of restricted short-term investments (which mayinclude amounts held as cash).

 

27

----

 

**OperatingStatistics – Three and nine months ended September 30, 2007 and 2006**

 

Information with respect tothe Company’s operating statistics follows:

 
| **PASSENGER  AND REGIONAL CARRIER REVENUES AND STATISTICAL RESULTS** |
|----------------------------------------------------------------------|

 
| ** **                                | ** **   | **Three months ended** | ** **   | ** **  | ** ** | **Nine months ended** | ** ** | ** **  | ** ** |
|-------------------------------------------|--------------|----------------------------------|--------------|-------------|------------|---------------------------------|------------|-------------|------------|
| ** **                                | ** **   | **September 30,**           | ** **   | **Percent** | ** ** | **September 30,**          | ** ** | **Percent** | ** ** |
| ** **                                | ** **   | **2007**                         | ** **   | **2006**    | ** ** | **Change**                      | ** ** | **2007**    | ** ** | **2006** | ** ** | **Change** | ** ** |
| **Scheduled  service - Consolidated:**(1) |         |                             |         |        |       |                            |       |        |       |   |   |   |   |
| Available seat  miles (ASM) (millions)    | ** **   | **23,889**                       | ** **   | 24,073      |       | (0.8                            | )          | **70,438**  | ** ** | 69,713 |   | 1.0 |   |
| Revenue  passenger miles (RPM) (millions) | ** **   | **20,644**                       | ** **   | 20,521      |       | 0.6                             |       | **59,453**  | ** ** | 59,053 |   | 0.7 |   |
| Passenger load  factor                    | *** *** | **86.4**                         | %            | 85.2        | %          | 1.2                             |  pts. | **84.4**    | %          | 84.7 | % | (0.3 | ) pts. |
| Revenue  passengers (millions)            | ** **   | **17.3**                         |         | 17.6        |       | (1.7                            | )          | **50.3**    |       | 51.1 |   | (1.6 | ) |
| Passenger  revenue per RPM (yield)        | *** *** | **14.32**                        | ¢       | 14.19       | ¢     | 0.9                             |       | **13.86**   | ¢     | 13.75 | ¢ | 0.8 |   |
| Passenger  revenue per ASM (RASM)         | *** *** | **12.38**                        | ¢       | 12.10       | ¢     | 2.3                             |       | **11.70**   | ¢     | 11.65 | ¢ | 0.4 |   |
|                                      |         |                             |         |        |       |                            |       |        |       |   |   |   |   |
| **Scheduled  service - Mainline:**(2)     |         |                             |         |        |       |                            |       |        |       |   |   |   |   |
| Available seat  miles (ASM) (millions)    | ** **   | **22,030**                       |         | 22,237      |       | (0.9                            | )          | **65,178**  |       | 64,098 |   | 1.7 |   |
| Revenue  passenger miles (RPM) (millions) | ** **   | **19,215**                       |         | 19,160      |       | 0.3                             |       | **55,518**  |       | 54,871 |   | 1.2 |   |
| Passenger load  factor                    | ** **   | **87.2**                         | %            | 86.2        | %          | 1.0                             |  pts. | **85.2**    | %          | 85.6 | % | (0.4 | ) pts. |
| Revenue  passengers (millions)            | ** **   | **13.9**                         |         | 14.3        |       | (2.8                            | )          | **40.9**    |       | 41.2 |   | (0.7 | ) |
| Passenger  revenue per RPM (yield)        | *** *** | **13.41**                        | ¢  | 13.33       | ¢     | 0.6                             |       | **12.98**   | ¢     | 12.81 | ¢ | 1.3 |   |
| Passenger  revenue per ASM (RASM)         | *** *** | **11.70**                        | ¢       | 11.48       | ¢     | 1.9                             |       | **11.06**   | ¢     | 10.96 | ¢ | 0.9 |   |

 

(1)         Consolidated statisticsinclude Northwest Airlink regional carriers.

(2)         Mainline statisticsexclude Northwest Airlink regional carriers, which is consistent with how theCompany reports statistics to the Department of Transportation (“DOT”).

 

28

----

 
| **MAINLINE  OPERATING STATISTICAL RESULTS (1)** |
|-------------------------------------------------|

 
| ** **                                                                                                                                       | ** **   | **Three months ended** | ** ** | ** **  | ** ** | **Nine months ended** | ** ** | ** **  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------------|------------|-------------|------------|---------------------------------|------------|-------------|------------|
| ** **                                                                                                                                       | ** **   | **September 30,**           | ** ** | **Percent** | ** ** | **September 30,**          | ** ** | **Percent** | ** ** |
| ** **                                                                                                                                       | ** **   | **2007**                         | ** ** | **2006**    | ** ** | **Change**                      | ** ** | **2007**    | ** ** | **2006** | ** ** | **Change** | ** ** |
| Total operating  ASM (millions)                                                                                                                  | ** **   | **22,059**                       |       | 22,289      |       | (1.0                            | )          | **65,248**  |       | 64,187 |   | 1.7 |   |
|                                                                                                                                             |         |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Passenger  service operating expense per total ASM (2) (3)                                                                                       |         | **10.76**                        | ¢     | 10.98       | ¢     | (2.0                            | )          | **10.52**   | ¢     | 11.04 | ¢ | (4.7 | ) |
| Mainline fuel  expense per total ASM                                                                                                             | *** *** | **3.47**                         | ¢     | 3.71        | ¢     | (6.5                            | )          | **3.29**    | ¢     | 3.49 | ¢ | (5.7 | ) |
|                                                                                                                                             |         |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Mark-to-market  gains (losses) per total ASM related to fuel derivative contracts that settle  in future periods                                 |         | **0.05**                         | ¢     | (0.06       | )¢    | n/m                             |       | **0.05**    | ¢     | (0.02 | )¢ | n/m |   |
|                                                                                                                                             |         |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Mainline fuel  expense per total ASM, excluding mark-to-market gains related to fuel  derivative contracts that settle in future periods         |         | **3.52**                         | ¢     | 3.65        | ¢     | (3.6                            | )          | **3.34**    | ¢     | 3.47 | ¢ | (3.7 | ) |
|                                                                                                                                             |         |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Cargo ton miles  (millions)                                                                                                                      | ** **   | **529**                          |       | 590         |       | (10.3                           | )          | **1,491**   |       | 1,703 |   | (12.4 | ) |
| Cargo revenue  per ton mile                                                                                                                      | *** *** | **40.00**                        | ¢     | 43.17       | ¢     | (7.3                            | )          | **40.16**   | ¢     | 41.36 | ¢ | (2.9 | ) |
| Fuel gallons  consumed (millions)                                                                                                                | ** **   | **398**                          |       | 417         |       | (4.6                            | )          | **1,167**   |       | 1,196 |   | (2.4 | ) |
| Average fuel  cost per gallon, excluding taxes                                                                                                   | *** *** | **208.17**                       | ¢     | 217.78      | ¢     | (4.4                            | )          | **197.35**  | ¢     | 205.31 | ¢ | (3.9 | ) |
|                                                                                                                                             |         |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Mark-to-market  gains (losses) per fuel gallons consumed related to fuel derivative contracts  that settle in future periods                     |         | **2.72**                         | ¢     | (3.72       | )¢    | n/m                             |       | **2.71**    | ¢     | (1.26 | )¢ | n/m |   |
|                                                                                                                                             |         |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Average fuel  cost per gallon, excluding fuel taxes and mark-to-market gains related to  fuel derivative contracts that settle in future periods |         | **210.89**                       | ¢     | 214.06      | ¢     | (1.5                            | )          | **200.06**  | ¢     | 204.05 | ¢ | (2.0 | ) |
|                                                                                                                                             |         |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Number of  operating aircraft at end of period                                                                                                   | ** **   | ** **                       |       |        |       |                            |       | **364**     |       | 373 |   | (2.4 | ) |
| Full-time  equivalent employees at end of period                                                                                                 | ** **   | ** **                       |       |        |       |                            |       | **29,579**  |       | 31,084 |   | (4.8 | ) |

 

(1)         Mainline statistics exclude Northwest Airlinkregional carriers, which is consistent with how the Company reports statisticsto the DOT.

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

(3)   Passenger service operating expense excludesthe following items unrelated to passenger service operations:

 
| ** **                                   | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| *(In millions)*                         | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Regional carrier  expenses                   | ** ** | **$**                            | **320**    |                            | $          | 356 | ** ** | **$** | **899** |   | $ | 1,088 |   |
| Freighter  operations                        | ** ** | **173**                          |       | 194                             | ** ** | **460** |   | 582 |   |
| MLT Inc. - net  of intercompany eliminations | ** ** | **40**                           |       | 41                              | ** ** | **145** |   | 157 |   |
| Other                                        | ** ** | **14**                           |       | 2                               | ** ** | **48** |   | 29 |   |
|                                              |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

29

----

 

**Results ofOperations – Three months ended September 30, 2007 and 2006**

 

*OperatingRevenues*.  Operatingrevenues decreased 0.9 percent ($29 million), the result of reductions in cargorevenue and other revenue, partially offset by higher system passenger revenueand regional carrier revenues.

 

*SystemPassenger Revenues. * In the following analysis by region, mainline statistics excludeNorthwest Airlink regional carriers, which is consistent with how the Companyreports statistics to the DOT. On the Effective Date, in conjunction withimplementing fresh-start reporting, the Company changed its policies pertainingto the accounting of frequent flyer obligations and breakage of passengertickets. Frequent flyer obligations are now recognized on a deferred revenuemethod versus an incremental cost method. Adjustments to air traffic liabilityare now recognized as revenue based on the delayed recognition approach, whenthe validity period of the ticket has expired, versus the use of historicaltrends and estimates. The following analysis by region outlines the Company’syear-over-year performance as reported and excluding fresh-start relatedchanges.

 
| ** **                                  | ** ** | **Mainline** | ** ** | **Total**   | ** ** | ** **   | ** **  |
|---------------------------------------------|------------|--------------|------------|-------------|------------|--------------|-------------|
| ** **                                  | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** **  | **Mainline** | ** ** | **Consolidated** | ** ** |
| **As  reported:**                           |       |         |       |        |       |         |        |   |   |   |   |
| **2007**                                    |       |         |       |        |       |         |        |   |   |   |   |
| Passenger  revenues (in millions)           |       | $            | 1,531      |        | $          | 626          |        | $ | 420 |   | $ | 2,577 |   | $ | 2,956 |   |
|                                        |       |         |       |        |       |         |        |   |   |   |   |
| **Increase  (Decrease) from 2006:**         |       |         |       |        |       |         |        |   |   |   |   |
| Passenger  revenues (in millions)           |       | $            | (67        | )           | $          | 19           |        | $ | 71 |   | $ | 23 |   | $ | 44 |   |
| Percent                                     |       | (4.2         | )%         | 3.1         | %          | 20.3         | %           | 0.9 | % | 1.5 | % |
|                                        |       |         |       |        |       |         |        |   |   |   |   |
| Scheduled  service ASMs (capacity)          |       | (5.5         | )%         | 0.3         | %          | 15.5         | %           | (0.9 | )% | (0.8 | )% |
| Scheduled  service RPMs (traffic)           |       | (3.3         | )%         | 0.9         | %          | 12.9         | %           | 0.3 | % | 0.6 | % |
| Passenger load  factor                      |       | 1.9          |  pts. | 0.5         |  pts. | (2.0         | ) pts. | 1.0 |  pts. | 1.2 |  pts. |
| Yield                                       |       | (0.9         | )%         | 2.3         | %          | 6.7          | %           | 0.6 | % | 0.9 | % |
| Passenger RASM                              |       | 1.3          | %          | 2.9         | %          | 4.3          | %           | 1.9 | % | 2.3 | % |
|                                        |       |         |       |        |       |         |        |   |   |   |   |
| **Excluding  fresh-start related changes:** |       |         |       |        |       |         |        |   |   |   |   |
| **2007**                                    |       |         |       |        |       |         |        |   |   |   |   |
| Passenger  revenues (in millions)           |       | $            | 1,566      |        | $          | 636          |        | $ | 414 |   | $ | 2,616 |   | $ | 2,990 |   |
|                                        |       |         |       |        |       |         |        |   |   |   |   |
| **Increase  (Decrease) from 2006:**         |       |         |       |        |       |         |        |   |   |   |   |
| Passenger  revenues (in millions)           |       | $            | (32        | )           | $          | 29           |        | $ | 65 |   | $ | 62 |   | $ | 78 |   |
| Percent                                     |       | (2.0         | )%         | 4.8         | %          | 18.6         | %           | 2.4 | % | 2.7 | % |
|                                        |       |         |       |        |       |         |        |   |   |   |   |
| Yield                                       |       | 1.3          | %          | 3.9         | %          | 5.0          | %           | 2.1 | % | 2.1 | % |
| Passenger RASM                              |       | 3.7          | %          | 4.6         | %          | 2.7          | %           | 3.4 | % | 3.5 | % |

 

*CargoRevenues*.  Cargorevenues decreased 16.5 percent ($42 million) to $212 million due primarily toa 10.3 percent reduction in capacity and a 7.3 percent reduction in yield.

 

*OtherRevenue. *Otherrevenue decreased 12.9 percent ($31 million) due to the change in presentationof regional carrier related revenue and expense items, as described in “Item 1.Financial Statements, Note 4 – Significant Accounting Policies,” partiallyoffset by the portion of payments received for frequent flyer miles that is nowrecorded in Other Revenue.

 

30

----

 

*OperatingExpenses*.  Operatingexpenses decreased 4.0 percent ($122 million) for the three months endedSeptember 30, 2007. As a result of the adoption of fresh-start reporting, theCompany’s financial statements on or after June 1, 2007 are not comparable withits pre-emergence financial statements because they are, in effect, those of anew entity. In addition to the fair value adjustments required for fresh-startreporting, the Company changed its policies pertaining to the accounting forfrequent flyer obligations and breakage of passenger tickets. The effects offresh-start reporting, the policy changes and the impact of exit-related stockcompensation expense on the Company’s Condensed Consolidated Statements ofOperations are itemized in column (1). On April 24, 2007, Mesaba Aviation, Inc.was acquired by the Company and became a wholly-owned consolidated subsidiary,the impact of which is itemized in column (2). In conjunction with the AmendedAirline Services Agreement with Pinnacle Airlines, Inc. and the Stock Purchaseand Reorganization Agreement with Mesaba Aviation, Inc., the Company changedits presentation of certain regional carrier related revenue and expense itemseffective January 1, 2007. This change in presentation had no impact on theCompany’s operating income for the three months ended September 30, 2007 and isitemized in column (3). Excluding the items described above, the comparable year-over-yearoperating performance variances are itemized in column (4). The following tableand notes present operating expenses for the three months ended September 30,2007 and 2006 and describe significant year-over-year variances:

 
| ** **                                  | ** ** | ** **                       | ** ** | ** **             | ** ** | **Increase (Decrease) Due To:** | ** ** | ** **      | ** ** | ** **  | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **(1)**                | ** ** | **(2)**                                        | ** ** | **(3)**         | ** ** | **(4)**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                       | ** ** | **Fresh-Start/**       | ** ** | **Mesaba**                                     | ** ** | **Regional**    | ** ** | ** **  | ** ** | **Total** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **September 30,**           | ** ** | **September 30,** | ** ** | **Exit-Related**                               | ** ** | **Net of** | ** ** | **Carrier** | ** ** | ** ** | ** ** | **Incr (Decr)** | ** ** | **Percent** | ** ** |
| *(In millions)*                        | ** ** | **2007**                         | ** ** | **2006**               | ** ** | **Stk Comp Exp**                     | ** ** | **Elim**        | ** ** | **Reclass** | ** ** | **Operations** | ** ** | **from 2006** | ** ** | **Change** | ** ** |
| **OPERATING  EXPENSES**                     |       |                             |       |                   |       |                                           |       |            |       |        |       |   |   |   |   |   |   |
| Aircraft fuel and  taxes                    |       | $                                | 873        |                   | $          | 948                                            |       | $               | —     |        | $          | 4 |   | $ | — |   | $ | (79 | ) A | $ | (75 | ) | (7.9 | )% |
| Salaries, wages  and benefits               |       | 660                              |       | 678                    |       | 7                                              |       | 27              |       | —      |       | (52 | ) B | (18 | ) | (2.7 | ) |
| Aircraft maintenance  materials and repairs |       | 210                              |       | 170                    |       | —                                         |       | 7               |       | —      |       | 33 |  C | 40 |   | 23.5 |   |
| Selling and  marketing                      |       | 185                              |       | 199                    |       | (7                                             | )          | —          |       | —      |       | (7 | ) D | (14 | ) | (7.0 | ) |
| Other rentals and  landing fees             |       | 142                              |       | 151                    |       | —                                         |       | 3               |       | —      |       | (12 | ) E | (9 | ) | (6.0 | ) |
| Depreciation and  amortization              |       | 122                              |       | 122                    |       | (2                                             | )          | 2               |       | 1           |       | (1 | ) F | — |   | — |   |
| Aircraft rentals                            |       | 93                               |       | 52                     |       | —                                         |       | —          |       | 43          |       | (2 | ) F | 41 |   | 78.8 |   |
| Regional carrier  expenses                  |       | 192                              |       | 356                    |       | —                                         |       | (53             | )          | (99         | )          | (12 | ) G | (164 | ) | (46.1 | ) |
| Other                                       |       | 442                              |       | 365                    |       | —                                         |       | 12              |       | —      |       | 65 |  H | 77 |   | 21.1 |   |
| Total operating  expenses                   |       | $                                | 2,919      |                   | $          | 3,041                                          |       | $               | (2         | )           | $          | 2 |   | $ | (55 | ) | $ | (67 | ) | $ | (122 | ) | (4.0 | )% |

 

A.                        Aircraft fuel and taxes decreased due to a 4.4percent decrease in the average fuel cost per gallon to $2.08 and a 4.6 percentdecrease in gallons consumed. Fuel expense for the quarter ended September 30,2007 includes $31.5 million in net fuel derivative contract gains, consistingof $10.8 million in mark-to-market gains related to fuel derivative contractsthat will settle during the remainder of 2007, in addition to gains of $20.7million for contracts that were settled in the current period.

B.                          Salaries, wages and benefits were loweryear-over-year primarily due to reductions in employee benefit costs andoutsourcing of certain station operations, partially offset by increasesrelated to employee profit sharing and performance incentive plans.

C.                          Aircraft maintenance materials and repairsincreased primarily due to volume.

D.                         Selling and marketing expense decreasedprimarily due to a reduction in commission expense.

E.                           Other rentals and landing fees decreased dueto reduced facility rents and fewer overall landings.

F.                           Depreciation and amortization and aircraftrentals were relatively flat year-over-year.

G.                          Regional carrier expense decreasedyear-over-year primarily due to the restructured agreements with our regionalairline affiliates and lower fuel costs.

H.                         Other expenses (which include MLT operatingexpenses, outside services, insurance, passenger food, personnel expenses,communication expenses and supplies) were higher versus prior year due largelyto an increase in outside services with the shift to third party vendors versusinternally staffed station operations which is offset in salaries, wages andbenefits. Increased passenger claims and professional fees also contributed tothe variance.

 

*OtherIncome and Expense. *Non-operating expense decreased $1.5 billion year-over-year, primarilydue to the Company’s emergence from bankruptcy thus eliminating reorganizationexpenses. See “Item 1. Financial Statements, Note 7 – Reorganization Items” foradditional information related to reorganization items.

 

31

----

 

**Results of Operations – Nine months ended September 30, 2007and 2006**

 

*OperatingRevenues*.  Operatingrevenues decreased 1.6% ($156 million), the result of reductions in regionalcarrier revenues, cargo revenue, and other revenue, partially offset by highersystem passenger revenue.

 

*SystemPassenger Revenues. *In the following analysis by region, mainline statistics excludeNorthwest Airlink regional carriers, which is consistent with how the Companyreports statistics to the DOT.

 

The following analysis byregion outlines the Company’s year-over-year performance as reported and excludingfresh-start related changes.

 
| ** **                                  | ** ** | **Mainline** | ** ** | **Total**   | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|--------------|------------|-------------|------------|--------------|------------|
| ** **                                  | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** | **Mainline** | ** ** | **Consolidated** | ** ** |
| **As  reported:**                           | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2007**                                    |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)           |       | $            | 4,494      |        | $          | 1,665        |       | $ | 1,047 |   | $ | 7,206 |   | $ | 8,241 |   |
|                                        |       |         |       |        |       |         |       |   |   |   |   |
| **Increase  (Decrease) from 2006:**         |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)           |       | $            | (86        | )           | $          | 104          |       | $ | 160 |   | $ | 178 |   | $ | 120 |   |
| Percent                                     |       | (1.9         | )%         | 6.7         | %          | 18.0         | %          | 2.5 | % | 1.5 | % |
|                                        |       |         |       |        |       |         |       |   |   |   |   |
| Scheduled  service ASMs (capacity)          |       | (0.9         | )%         | 3.6         | %          | 9.1          | %          | 1.7 | % | 1.0 | % |
| Scheduled  service RPMs (traffic)           |       | (0.2         | )%         | 1.5         | %          | 6.0          | %          | 1.2 | % | 0.7 | % |
| Passenger load  factor                      |       | 0.6          |  pts. | (1.8        | ) pts.     | (2.6         | ) pts.     | (0.4 | ) pts. | (0.3 | ) pts. |
| Yield                                       |       | (1.7         | )%         | 5.2         | %          | 11.3         | %          | 1.3 | % | 0.8 | % |
| Passenger RASM                              |       | (1.0         | )%         | 3.0         | %          | 8.1          | %          | 0.9 | % | 0.4 | % |
|                                        |       |         |       |        |       |         |       |   |   |   |   |
| **Excluding  fresh-start related changes:** |       |         |       |        |       |         |       |   |   |   |   |
| **2007**                                    |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)           |       | $            | 4,560      |        | $          | 1,680        |       | $ | 1,039 |   | $ | 7,279 |   | $ | 8,308 |   |
|                                        |       |         |       |        |       |         |       |   |   |   |   |
| **Increase  (Decrease) from 2006:**         |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)           |       | $            | (20        | )           | $          | 119          |       | $ | 152 |   | $ | 251 |   | $ | 187 |   |
| Percent                                     |       | (0.4         | )%         | 7.6         | %          | 17.1         | %          | 3.6 | % | 2.3 | % |
|                                        |       |         |       |        |       |         |       |   |   |   |   |
| Yield                                       |       | (0.2         | )%         | 6.1         | %          | 10.4         | %          | 2.3 | % | 1.6 | % |
| Passenger RASM                              |       | 0.5          | %          | 3.9         | %          | 7.3          | %          | 1.9 | % | 1.3 | % |

 

*CargoRevenues. *Cargorevenues decreased 14.9 percent ($105 million) to $599 million due primarily toa 12.4 percent reduction in capacity and a 2.9 percent reduction in yield.

 

*OtherRevenue. *Otherrevenue decreased 22.4 percent ($171 million) due to reduced partner revenue,the change in presentation of regional carrier related revenue and expenseitems, as described in “Item 1. Financial Statements, Note 4 – SignificantAccounting Policies,” partially offset by the portion of payments received forfrequent flyer miles that is now recorded in Other Revenue.

 

32

----

 

*OperatingExpenses*.  Operatingexpenses decreased 5.9 percent ($527 million) for the nine months endedSeptember 30, 2007. As a result of the adoption of fresh-start reporting, theCompany’s financial statements on or after June 1, 2007 are not comparable withits pre-emergence financial statements because they are, in effect, those of anew entity. In addition to the fair value adjustments required for fresh-startreporting, the Company changed its policies pertaining to the accounting forfrequent flyer obligations and breakage of passenger tickets. The effects offresh-start reporting, the policy changes and the impact of exit-related stockcompensation expense on the Company’s Condensed Consolidated Statements ofOperations are itemized in column (1). On April 24, 2007, Mesaba Aviation, Inc.was acquired by the Company and became a wholly-owned consolidated subsidiary,the impact of which is itemized in column (2). In conjunction with the AmendedAirline Services Agreement with Pinnacle Airlines, Inc. and the Stock Purchaseand Reorganization Agreement with Mesaba Aviation, Inc., the Company changedits presentation of certain regional carrier related revenue and expense itemseffective January 1, 2007. This change in presentation had no impact on the Company’scombined operating income for the nine months ended September 30, 2007 and isitemized in column (3). Excluding the items described above the comparableyear-over-year operating performance variances are itemized in column (4). Thefollowing table and notes present operating expenses for the nine months endedSeptember 30, 2007 and 2006 and describe significant year-over-year variances:

 
| ** **                                  | ** ** | ** **                      | ** ** | **Increase (Decrease) Due To:** | ** ** | ** **        | ** ** | ** **      | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|------------------------------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **Nine Months Ended** | ** ** | **(1)**                                        | ** ** | **(2)**           | ** ** | **(3)**         | ** ** | **(4)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Combined**                    | ** ** | ** **                                     | ** ** | **Fresh-Start/**  | ** ** | **Mesaba**      | ** ** | **Regional** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **September 30,**          | ** ** | **September 30,**                         | ** ** | **Exit-Related**  | ** ** | **Net of** | ** ** | **Carrier** | ** ** | ** ** | ** ** | **Incr (Decr)** | ** ** | **Percent** | ** ** |
| *(In  millions)*                            | ** ** | **2007**                        | ** ** | **2006**                                       | ** ** | **Stk Comp  Exp** | ** ** | **Elim**        | ** ** | **Reclass** | ** ** | **Operations** | ** ** | **from  2006** | ** ** | **Change** | ** ** |
| **OPERATING  EXPENSES**                     |       |                            |       |                                           |       |              |       |            |       |   |   |   |   |   |   |   |   |
| Aircraft fuel and  taxes                    |       | $                               | 2,426      |                                           | $          | 2,578             |       | $               | —     |   | $ | 7 |   | $ | — |   | $ | (159 | ) A | $ | (152 | ) | (5.9 | )% |
| Salaries, wages  and benefits               |       | 1,892                           |       | 2,029                                          |       | 9                 |       | 47              |       | — |   | (193 | ) B | (137 | ) | (6.8 | ) |
| Aircraft  maintenance materials and repairs |       | 577                             |       | 542                                            |       | —            |       | 12              |       | — |   | 23 |  C | 35 |   | 6.5 |   |
| Selling and  marketing                      |       | 565                             |       | 583                                            |       | (7                | )          | —          |       | — |   | (11 | ) C | (18 | ) | (3.1 | ) |
| Other rentals and  landing fees             |       | 423                             |       | 436                                            |       | —            |       | 6               |       | — |   | (19 | ) C | (13 | ) | (3.0 | ) |
| Depreciation and  amortization              |       | 367                             |       | 390                                            |       | (3                | )          | 4               |       | 3 |   | (27 | ) D | (23 | ) | (5.9 | ) |
| Aircraft rentals                            |       | 284                             |       | 174                                            |       | —            |       | —          |       | 142 |   | (32 | ) E | 110 |   | 63.2 |   |
| Regional carrier  expenses                  |       | 600                             |       | 1,088                                          |       | —            |       | (85             | )          | (304 | ) | (99 | ) F | (488 | ) | (44.9 | ) |
| Other                                       |       | 1,281                           |       | 1,122                                          |       | —            |       | 19              |       | — |   | 140 |  G | 159 |   | 14.2 |   |
| Total operating  expenses                   |       | $                               | 8,415      |                                           | $          | 8,942             |       | $               | (1)        |   | $ | 10 |   | $ | (159 | ) | $ | (377 | ) | $ | (527 | ) | (5.9 | )% |
|                                        |       |                            |       |                                           |       |              |       |            |       |   |   |   |   |   |   |   |   |
|                                             |            |                                 |            |                                                |            |                   |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

A.                        Aircraft fuel and taxes decreased due to a 3.9percent decrease in the average fuel cost per gallon to $1.97 and a 2.4 percentdecrease in gallons consumed. Fuel expense for the nine months ended September30, 2007 includes $47.7 million in net fuel derivative contract gains,consisting of $31.5 million in mark-to-market gains related to fuel derivativecontracts that will settle during the remainder of 2007, in addition to gainsof $16.2 million for contracts that were settled in the current period.

B.                          Salaries, wages and benefits were loweryear-over-year primarily due to reductions in employee benefit costs andoutsourcing of certain station operations, partially offset by increasesrelated to employee profit sharing and performance incentive plans.

C.                          Aircraft maintenance, selling and marketing,and other rentals and landing fees were relatively flat year-over-year.

D.                         Depreciation and amortization reductions werelargely due to the retirement of the DC10 fleet, partially offset byincremental deliveries of A330 aircraft.

E.                           Aircraft rentals expense decreased due torestructured and rejected aircraft leases.

F.                           Regional carrier expense decreasedyear-over-year primarily due to the reduction in regional carrier capacity andrestructured agreements with our regional airline affiliates.

G.                          Other expenses (which include MLT operatingexpenses, outside services, insurance, passenger food, personnel expenses,communication expenses and supplies) were higher versus prior year due largelyto an increase in outside services with the shift to third party vendors versusinternally staffed station operations which is offset in salaries, wages andbenefits. Increased passenger claims and professional fees also contributed tothe variance.

* *

*OtherIncome and Expense.*Non-operatingexpense decreased $4.5 billion year-over-year, primarily due to a $1.8 billiongain on debt discharge, $1.3 billion in net gains associated with revaluing ourassets and liabilities at fresh-start, and a $1.4 billion year-over-yearreduction in other reorganization-related expenses. See “Item 1. FinancialStatements, Note 7 – Reorganization Related Items” for additional informationrelated to reorganization items.

 

33

----

 

**Liquidityand Capital Resources**

 

At September 30, 2007, theCompany had cash and cash equivalents of $2.6 billion, unrestricted short-terminvestments of $572 million, and borrowing capacity under an undrawn creditfacility of $127 million, providing total available liquidity of $3.3 billion. Thisamount excludes $739 million of restricted short-term investments (which mayinclude amounts held as cash).

 

*Cash Flows. * Liquidity increased by $1.2 billion duringthe nine months ended September 30, 2007, primarily due to net cash provided byoperating activities, the return of credit card holdbacks, and proceeds fromthe Rights Offering, partially offset by net cash used in investing activitiesand payments of long-term debt and capital lease obligations.

 

*OperatingActivities. *Netcash provided by operating activities for the nine months ended September 30,2007 was $1.4 billion, which compares with $1.2 billion of cash provided byoperating activities for the nine months ended September 30, 2006. The $1.4billion in net cash provided by operations was due to net income excludingreorganization items, changes in certain assets and liabilities and a decreasein vendor deposits and holdbacks, partially offset by post-emergencereorganization related payments. Reorganization items consist primarily ofnon-cash items.

 

*InvestingActivities. *Investingactivities during the nine months ended September 30, 2007 included thepurchase of seven A330-300, seven CRJ900, and four Embraer 175 aircraft andother related costs. Other related costs included engine purchases, costs tocommission aircraft before entering revenue service, deposits on orderedaircraft, facility improvements and ground equipment purchases. Investingactivities for the nine months ended September 30, 2006 consisted primarily ofthe purchase of three A330-200 aircraft and other related costs.  Investing activities for the nine months endedSeptember 30, 2006 also included additional funding to the Company’sirrevocable tax trust and increased vendor holdback amounts, which increasedthe Company’s restricted cash, cash equivalents and short-term investmentsbalance.

 

*FinancingActivities.  *Financingactivities during the nine months ended September 30, 2007 consisted primarilyof $750 million in proceeds from the Rights Offering, the financing of oneA330-300, seven CRJ900, and four Embraer 175 aircraft with long-term debt, andthe financing of Boeing 787 pre-delivery deposits, partially offset by debtpayments and debt prepayments. Financing activities in the nine months endedSeptember 30, 2006 consisted primarily of financing one Airbus A330-200aircraft with long-term debt and the $100 million repurchase of EETC notes(related to the purchase of six of the Company’s 757-200 aircraft).

 

The Company also financed thedelivery of six Airbus A330-300 aircraft during the nine months ended September30, 2007 through non-cash transactions with the manufacturer, which arereflected as long-term debt on the Company’s Condensed Consolidated BalanceSheets, but are not classified as a cash flow activity. In connection with theacquisition of these aircraft, the Company entered into long-term debtarrangements. Under these arrangements, the aggregate amount of debt incurredtotaled approximately $502 million.

 

Investing activitiesaffecting cash flows and non-cash transactions and leasing activities relatedto the initial acquisition of aircraft consisted of the following for the ninemonths ended September 30:

 
| ** **      | ** ** | **Investing Activities  Affecting Cash  Flows** | ** ** | **Non-cash  Transactions and  Leasing Activities** | ** ** |
|-----------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **      | ** ** | **2007**                                                  | ** ** | **2006**                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|            |       |                                                      |       |                                                         |       |   |   |   |   |
| Airbus A330-200 | ** ** | **—**                                                |       | 1                                                            | ** ** | **—** |   | 2 |   |
| Airbus A330-300 | ** ** | **1**                                                     |       | —                                                       | ** ** | **6** |   | — |   |
| CRJ900          | ** ** | **7**                                                     |       | —                                                       | ** ** | **—** |   | — |   |
| Embraer 175     | ** ** | **4**                                                     |       | —                                                       | ** ** | **—** |   | — |   |
| ** **      |       | **12**                                                    |       | 1                                                            | ** ** | **6** |   | 2 |   |

 

34

----

 

*Debt*.  Maturities of long-term debt,excluding capital lease obligations, through December 31, 2011, are as follows(in millions):

 
| remainder of   2007 |   | $   | 106    |   |
|--------------------------|--------|-----|--------|--------|
| 2008                     |   | 478 |   |
| 2009                     |   | 513 |   |
| 2010                     |   | 416 |   |
| 2011                     |   | 592 |   |

 

As of September 30, 2007, theCompany was in compliance with all required financial covenants.

 

*Credit Rating Agency Actions. *Effective May 31, 2007, S&P issued a ‘B+’corporate credit rating for the Company, and Moody’s issued a ‘B1’ corporatefamily rating.  Both credit ratingagencies issued a stable ratings outlook for the Company.

 

*AircraftCommitments. *Committed expenditures for aircraft and related equipment, including estimatedamounts for contractual price escalations and predelivery deposits, will beapproximately (in millions):

 
| remainder  of  2007 |   | $     | 357    |   |
|--------------------------|--------|-------|--------|--------|
| 2008                     |   | 1,235 |   |
| 2009                     |   | 1,152 |   |
| 2010                     |   | 768   |   |
| 2011                     |   | 79    |   |

 

*PensionFunding Obligations.** ***The Company has several defined benefitpension plans and defined contribution 401(k)-type plans covering substantiallyall of its employees. Northwest froze future benefit accruals for its definedbenefit Pension Plans for Salaried Employees, Pilot Employees, and ContractEmployees effective August 31, 2005, January 31, 2006, and September 30, 2006,respectively. Replacement pension coverage is provided for these employeesthrough 401(k)-type defined contribution plans or in the case of IAMrepresented employees, the IAM National Multi-Employer Plan.

 

The Pension Protection Act of2006 (“2006 Pension Act”) was signed into law on August 17, 2006. The 2006Pension Act allows commercial airlines to elect special funding rules fordefined benefit plans that are frozen. The unfunded liability for a frozendefined benefit plan may be amortized over a fixed 17-year period. The unfundedliability is defined as the actuarial liability calculated using an 8.85%interest rate minus the fair market value of plan assets. Northwest elected thespecial funding rules for frozen defined benefit plans under the 2006 PensionAct effective October 1, 2006. As a result of this election (1) the fundingwaivers that Northwest received for the 2003 plan year contributions weredeemed satisfied under the 2006 Pension Act, and (2) the funding****standard account for each Plan has nodeficiency as of September 30, 2006. New contributions that came due under the2006 Pension Act funding rules were paid while Northwest was in bankruptcy andmust continue to be paid going forward. If the new contributions are not paid,the future funding deficiency that would develop will be based on the regularfunding rules rather than the special funding rules.

 

It is Northwest’s policy tofund annually at least the minimum contribution as required by the EmployeeRetirement Income Security Act of 1974, as amended (“ERISA”). Northwest’s 2007calendar year contributions to its frozen defined benefit plans under theprovisions of the 2006 Pension Act and the replacement plans will approximate$124 million.

 

**SignificantCompany Announcements**

 

* Service Expansion. *On September 25, 2007 the Company was notifiedby the DOT that its bid to provide nonstop service between Detroit and Shanghaihas been tentatively approved effective March 25, 2009. The Company plans touse the Boeing 787 for the new service. Additionally, the Company announcedthat it will inaugurate two new routes to Europe in 2008, Minneapolis/St. Paulto Paris and Portland, Oregon to Amsterdam.

 

35

----

 

*AntitrustImmunity*.  SkyTeamcarriers Air France, Alitalia, CSA Czech Airlines (“CSA”), Delta Air Lines,Inc. (“Delta”), KLM Royal Dutch Airlines (“KLM”) and Northwest, applied withthe DOT for antitrust immunity for transatlantic routings. Delta currently hasantitrust immunity with Air France, Alitalia and CSA, while Northwest hasantitrust immunity with KLM. Included in the application is a joint ventureagreement between Air France, Delta, KLM and Northwest that would create acomprehensive and integrated partnership among the four SkyTeam members acrossthe Atlantic. This application is the first under the landmark European Union –U.S. open skies treaty. On October 18, 2007, the DOT entered a scheduling orderwhich establishes a timeline for consideration of Northwest’s application forexpanded antitrust immunity with its SkyTeam alliance partners Air France,Alitalia, CSA, Delta, and KLM.

 

*AirlinkOperations. *OnAugust 21, 2007, Compass Airlines, Inc. completed its first revenue flight withthe new 76-seat Embraer 175 aircraft. The Embraer 175 offers dual-class servicewith 12 seats in first class, arranged in a one seat-aisle-two seatconfiguration, and 64 seats in coach class, arranged in a two seat-aisle-twoseat configuration.

 

*Opening ofa Reservations Call Center. *On October 16, 2007, the Company officially opened its new RegionalSioux City Reservations Call Center in downtown Sioux City, Iowa. The 32,000square foot center will employ more than 300 reservations sales agents andmanagement employees.

 

**OtherInformation**

 

*ForeignCurrency. *TheCompany is exposed to the effect of foreign currency exchange rate fluctuationson the U.S. dollar value of foreign currency-denominated operating revenues andexpenses. The Company’s largest exposure comes from the Japanese yen. From timeto time, the Company uses financial instruments to hedge its exposure to theJapanese yen. Hedging gains or losses are recorded in accumulated othercomprehensive income (loss) until the associated transportation is provided, atwhich time they are recognized as an increase or decrease in revenue. TheCompany did not hedge any of its yen-denominated sales during the three monthsended September 30, 2007. The Company hedged $50 million of its yen-denominatedsales in the three months ended September 30, 2006, resulting in an effectiverate of 101.6 yen per U.S. dollar, the prevailing average contract rate for theperiod. The average market yen rate for the quarters ended September 30, 2007and 2006 was 118.4 and 113.5, respectively.

 

As of September 30, 2007, theCompany had hedged approximately 20.1% of its 2008 anticipated yen-denominatedsales.  Including additional Japanese yenhedges entered into on November 7, 2007, the Company has hedged approximately29.7% of its 2008 anticipated yen-denominated sales.  The 2008 Japanese yen hedges consist offorward contracts which hedge approximately 19.7% of yen-denominated sales atan average rate of 109.6 yen per U.S. dollar and collar options which hedgeapproximately 10.0% of yen-denominated sales with a rate range between 102.4and 116.4 yen per U.S. dollar.  Thiscompares to 4.1% of remaining anticipated 2006 yen-denominated sales hedged asof September 30, 2006.  As of September30, 2007, Company had also hedged approximately 41.6% of its 2008 anticipatedCanadian dollar denominated sales. Including additional Canadian dollar hedges entered into on October 2,2007, the Company has hedged approximately 68.6% of its 2008 anticipatedCanadian dollar denominated sales with forward contracts at an average rate of1.0008 Canadian dollars per U.S. dollar.  As of September 30, 2007, a $1.1 millionunrealized gain and a $2.6 million unrealized loss were outstanding inaccumulated other comprehensive income (loss) associated with the Japanese yenand Canadian dollar hedge contracts, respectively.

 

*AircraftFuel.  *TheCompany’s earnings are affected by changes in the price and availability ofaircraft fuel. On an annual basis, the Company’s mainline and regional carrierfuel consumption approximates 1.8 billion gallons, producing a $18 millionvariance for each one-cent change in the cost per gallon of fuel. From time totime, the Company manages the price risk of fuel costs by utilizing futurescontracts traded on regulated futures exchanges, swap agreements and options. Asof September 30, 2007, the Company had hedged the price of approximately 50% ofits projected fuel requirements for the remainder of 2007, through acombination of collar options and fixed price swap agreements.

 

The collar options in placeat September 30, 2007, which hedge the price of approximately 40% of theCompany’s projected fuel requirements for the remainder of 2007, consisted ofcrude oil put options with an average price of $56 per barrel, and related calloptions with an average price of $75 per barrel. The fixed price crude oil swapagreements, which hedge the price of approximately 10% of the Company’sprojected fuel requirements for the remainder of 2007, included agreements withan average price of $63 per barrel.

 

In October 2007, the Companyentered into fuel derivative collar options which hedge approximately 10% ofthe Company’s first quarter of 2008 fuel requirements. The collar optionsconsist of crude oil put options with a price of $63.50 per barrel, and relatedcall options at a price of $84 per barrel.

 

36

----

 

The Company currently has nofuel derivative contracts outstanding that are designated for hedge accountingtreatment, and therefore had no related unrealized gains (losses) inaccumulated other comprehensive income (loss) as of September 30, 2007. TheCompany records any changes in the contracts’ values as mark-to-marketadjustments through the statement of operations on a monthly basis. Net gainsof $31.5 million were recorded as decreases in fuel expense during the threemonths ended September 30, 2007, including $10.8 million in mark-to-marketgains related to fuel derivative contracts that will settle in the remainder of2007, and gains of $20.7 million for contracts that settled in the currentperiod. Effective June 2007, the Company began allocating mark-to-marketadjustments to regional carrier expense for fuel consumed by our Airlinkpartners. For the quarter ended September 30, 2007, gains of $3.6 million wererecorded as a reduction to regional carrier expense. As of September 30, 2006,the Company had hedged the price of approximately 50% of its projected fuelrequirements for the last quarter of 2006 through two collar optionsestablished at a crude oil price of $65 to $79.40 per barrel and $65 to $74.99per barrel, respectively. Losses of $17.3 million were recorded as additionalfuel expense during the three months ended September 30, 2006.

 

*InterestRates.  *TheCompany’s earnings are also affected by changes in interest rates due to theimpact those changes have on its interest income from cash equivalents andshort-term investments and its interest expense from floating rate debtinstruments. During June 2006, the Company entered into individual interestrate cap hedges related to three floating rate debt instruments, with a totalcumulative notional amount of $504 million. As of September 30, 2007, the totalcumulative notional amount was $437 million. The objective of the interest ratecap hedges is to protect the anticipated payments of interest (cash flows) onthe designated debt instruments from adverse market interest rate changes. Asof September 30, 2007, the Company had recorded $0.4 million of unrealizedgains in accumulated other comprehensive income (loss) associated with thosehedges.

 

*War RiskInsurance*.  FollowingSeptember 11, 2001, aviation insurers significantly increased airline insurancepremiums and reduced the maximum amount of coverage available to airlines forcertain types of claims. Our total aviation and other insurance expenses were$48 million higher in 2006 than in 2000. The FAA is currently providingaviation war risk insurance as required by the Homeland Security Act of 2002 asamended by the Consolidated Appropriations Act of 2005 and subsequently by theContinuing Appropriations Resolution 2007. However, following multipleextensions, this coverage is scheduled to expire on December 31, 2007. Whilethe government may again extend the period that it provides excess war riskcoverage, there is no assurance that this will occur, or if it does, how longthe extension will last, what will be included in the coverage, or at what costthe coverage will be provided. Should the U.S. government stop providing warrisk insurance in its current form to the U.S. airline industry, it is expectedthat the premiums charged by commercial aviation insurers for this coverage, ifavailable at all, would be substantially higher than the premiums currentlycharged by the government, the maximum amount of coverage available would bereduced, and the type of coverage could be more restrictive. Commercialaviation insurers could further increase insurance premiums and reduce orcancel coverage, in the event of a new terrorist attack or other eventsadversely affecting the airline industry. Significant increases in insurancepremiums could negatively impact our financial condition and results ofoperations. If we are unable to obtain adequate war risk insurance, ourbusiness could be materially and adversely affected.

 

If we were to be involved inan accident, we could be exposed to significant tort liability. Although wecarry insurance to cover damages arising from such accidents, resulting tortliability could be higher than our policy limits which could negatively impactour financial condition.

 

*Open SkiesAir Services Agreement. *In April 2007, the United States and the European Union approved an“open skies” air services agreement that provides airlines from the UnitedStates and E.U. member states open access to each other’s markets, with freedomof pricing and unlimited rights to fly beyond the United States and beyond eachE.U. member state.  Under the open skies agreement, which goes intoeffect on March 30, 2008, every U.S. and E.U. airline is authorized tooperate between airports in the United States and London’s Heathrow, Gatwickand other airports.  Given the significant uncertainty regarding howopen skies will ultimately affect its London operations, the Company is stillin the process of evaluating its course of action.

 

37

----

 

*Forward-LookingStatements. *Certainof the statements made throughout Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and elsewhere in this quarterlyreport are not purely historical facts, including statements regarding ourbeliefs, expectations, intentions or strategies for the future, may be“forward-looking statements” under the Private Securities Litigation Reform Actof 1995. All forward-looking statements involve a number of risks and uncertaintiesthat could cause actual results to differ materially from the plans, intentionsand expectations reflected in or suggested by the forward-looking statements. Suchrisks and uncertainties include, among others, the ability of the company tooperate pursuant to the terms of its financing facilities (particularly therelated financial covenants), the ability of the company to attract, motivateand/or retain key executives and associates, the future level of air traveldemand, the company’s future passenger traffic and yields, the airline industrypricing environment, increased costs for security, the cost and availability ofaviation insurance coverage and war risk coverage, the general economiccondition of the U.S. and other regions of the world, the price andavailability of jet fuel, the war in Iraq, the possibility of additionalterrorist attacks or the fear of such attacks, concerns about Severe AcuteRespiratory Syndrome (SARS) and other influenza or contagious illnesses, laborstrikes, work disruptions, labor negotiations both at other carriers and thecompany, low cost carrier expansion, capacity decisions of other carriers,actions of the U.S. and foreign governments, foreign currency exchange ratefluctuations and inflation. Additional information with respect to the factorsand events that could cause differences between forward-looking statements andfuture actual results is contained in the company’s Securities and ExchangeCommission filings, including the company’s Annual Report on Form 10-K for theyear ended December 31, 2006 and subsequent quarterly reports on Form 10-Q andcurrent reports on Form 8-K. We undertake no obligation to update anyforward-looking statements to reflect events or circumstances that may ariseafter the date of this release.

 

Developments in any of theseareas, as well as other risks and uncertainties detailed from time to time inthe Company’s Securities and Exchange Commission filings, could cause theCompany’s results to differ from results that have been or may be projected byor on behalf of the Company. The Company undertakes no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise. These statements deal with theCompany’s expectations about the future and are subject to a number of factorsthat could cause actual results to differ materially from the Company’sexpectations. All subsequent written or oral forward-looking statementsattributable to the Company, or persons acting on behalf of the Company, areexpressly qualified in their entirety by the factors described above.

 

38

----

 

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

** **

Information required by this item is provided underthe captions “Foreign Currency” and “Aircraft Fuel” within “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis Quarterly Report on Form 10-Q.  Alsosee “Item 7a. Quantitative and Qualitative Disclosures About Market Risk” inthe Company’s Annual Report on Form 10-K for 2006.

 

**Item 4.    Controls andProcedures.**

** **

**Evaluation of Disclosure Controls and Procedures –** As of September 30,2007, management performed an evaluation under the supervision and with theparticipation of the Company’s President and Chief Executive Officer andExecutive Vice President and Chief Financial Officer of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedurescovered in this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief ExecutiveOfficer and Executive Vice President and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures are effective in alerting themin a timely manner to material information required to be disclosed in theCompany’s periodic reports filed with the SEC as of the end of such period.

 

**Changes in Internal Control –** There was no changein the Company’s internal control over financial reporting that occurred duringthe Company’s fiscal third quarter ended September 30, 2007 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

PART II. OTHER INFORMATION

 

**Item 1.    Legal Proceedings.**

** **

None.

 

**Item 1A.  RiskFactors.**

** **

Weare affected by risks specific to us as well as factors that affect allbusinesses operating in a global market. The significant factors known to us that could materially adverselyaffect our business, financial condition, or operating results are described in“Item 1A. Risk Factors” in our most recently filed Annual Report on Form 10-Kfor 2006.  There have been no materialchanges in those risk factors.

 

39

----

 
| **Item 6.** |   | **Exhibits.** |
|-------------|--------|---------------|

 
| (a)  |   | Exhibits: |
|-----------|--------|-----------|
|      |   | 12.1      | Computation  of Ratio of Earnings to Fixed Charges |
|      |   | 31.1      | Rule  13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|      |   | 31.2      | Rule  13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|      |   | 32.1      | Section  1350 Certification of Chief Executive Officer |
|      |   | 32.2      | Section  1350 Certification of Chief Financial Officer |

 

40

----

 

SIGNATURE

 

Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorizedthis 9th day of November 2007.

 
|   | NORTHWEST  AIRLINES CORPORATION |
|--------|---------------------------------|
|   |                            |
|   | By                         | /s/  Anna M. Schaefer |   |
|   |                            | Anna  M. Schaefer |   |
|   |                            | *Vice  President – Finance and Chief Accounting Officer  (principal accounting officer)* |

* *

* *
| EXHIBIT INDEX |
|---------------|

 
| ** ** | **Exhibit No.** | ** ** | **Description**                                                    |
|------------|-----------------|------------|--------------------------------------------------------------------|
|       | 12.1            |       | Computation  of Ratio of Earnings to Fixed Charges                 |
|       | 31.1            |       | Rule  13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|       | 31.2            |       | Rule  13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|       | 32.1            |       | Section  1350 Certification of Chief Executive Officer             |
|       | 32.2            |       | Section  1350 Certification of Chief Financial Officer             |

 

41

----