** **

**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C.20549**

** **

**FORM 10-Q**

** **

 

**QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

 

**For the quarterly period ended**September 30, 2008

** **

 

**Commission File Number:**1-15285

** **

**NORTHWEST AIRLINES CORPORATION**

**(Exact name of registrant as specified in its charter)**

** **

| **Delaware**                                                         | ** ** | **41-1905580**                            |
|----------------------------------------------------------------------|------------|-------------------------------------------|
| **(State or other  jurisdiction of incorporation or  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 whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes **x     Noo

** **

**Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-acceleratedfiler.  See definitions of “largeaccelerated filer,”  “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.**

** **

| **Large accelerated filer**x | ** ** | **Accelerated filer**o | ** ** | **Non-accelerated filer**o (Do | ** ** | **Smaller reporting company**o |
|------------------------------|------------|------------------------|------------|--------------------------------|------------|--------------------------------|
| ** **                   | ** ** | ** **             | ** ** | **not check if a smaller**     | ** ** | ** **                     |
| ** **                   | ** ** | ** **             | ** ** | **reporting company)**         | ** ** | ** **                     |

** **

**Indicate by a check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).**

**Yes **o     No x

** **

**Indicate by check mark whether theregistrant has filed all documents and reports required to be filed by Sections12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court.**

**Yes **x     No o

** **

**As of October 15, 2008, there were257,815,985 shares of the registrant’s Common Stock outstanding.**

 

 

 

 

**NORTHWEST AIRLINES CORPORATION**

 
| PART I. FINANCIAL INFORMATION | Page No.                                                                                              |
|----------------------------------------------|------------------------------------------------------------------------------------------------------------|
|                                         |                                                                                                       |   |
| 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 Computations of Ratio of  Earnings to Fixed Charges are attached hereto and filed as Exhibit 12.1 |   |
|                                         |                                                                                                       |   |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations.               | 23 |
|                                         |                                                                                                       |   |
| Item 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk.                                               | 37 |
|                                         |                                                                                                       |   |
| Item 4.                                      | Controls and  Procedures.                                                                                  | 37 |
|                                         |                                                                                                       |   |
| PART II. OTHER  INFORMATION             |                                                                                                       |
|                                         |                                                                                                       |   |
| Item 1.                                      | Legal Proceedings.                                                                                         | 37 |
|                                         |                                                                                                       |   |
| Item 1A.                                     | Risk Factors.                                                                                              | 37 |
|                                         |                                                                                                       |   |
| Item 4.                                      | Submission  of Matters to a Vote of Security Holders.                                                      | 39 |
|                                         |                                                                                                       |   |
| Item 6.                                      | Exhibits.                                                                                                  | 40 |
|                                         |                                                                                                       |   |
| SIGNATURE                                    | 41                                                                                                         |
|                                         |                                                                                                       |
| EXHIBIT INDEX                                | 41                                                                                                         |

 

2

 

PART I.  FINANCIALINFORMATION

 

**Item 1. Financial Statements.**

 

**NORTHWEST AIRLINES CORPORATION**

 

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

 
| * *                                                                          | ** ** | **Successor**                    | ** ** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|
| * *                                                                          | ** ** | **Three Months Ended** | ** ** | ** ** |
| * *                                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| * *                                                                          | ** ** | **September 30**            | ** ** | ** ** |
| *(Unaudited, in millions except per share amounts)* | ** ** | **2008**                         | ** ** | ** ** | **2007** | ** ** | ** ** |
| **Operating Revenues**                                                            |       |                             |       |       |   |   |   |
| Passenger                                                                         | ** ** | **$**                            | **2,732**  | ** ** | ** ** | $ | 2,577 |   |   |
| Regional  carrier revenues                                                        | ** ** | **557**                          | ** ** | ** ** | 379 |   |   |
| Cargo                                                                             | ** ** | **201**                          | ** ** | ** ** | 212 |   |   |
| Other                                                                             | ** ** | **308**                          | ** ** | ** ** | 210 |   |   |
| Total  operating revenues                                                         | ** ** | **3,798**                        | ** ** | ** ** | 3,378 |   |   |
|                                                                              |       |                             | ** ** | ** ** |   |   |   |
| **Operating Expenses**                                                            |       |                             | ** ** | ** ** |   |   |   |
| Aircraft  fuel and taxes                                                          | ** ** | **1,912**                        | ** ** | ** ** | 882 |   |   |
| Salaries,  wages and benefits                                                     | ** ** | **651**                          | ** ** | ** ** | 660 |   |   |
| Selling and  marketing                                                            | ** ** | **201**                          | ** ** | ** ** | 185 |   |   |
| Aircraft  maintenance materials and repairs                                       | ** ** | **181**                          | ** ** | ** ** | 210 |   |   |
| Other  rentals and landing fees                                                   | ** ** | **150**                          | ** ** | ** ** | 142 |   |   |
| Depreciation  and amortization                                                    | ** ** | **122**                          | ** ** | ** ** | 122 |   |   |
| Aircraft  rentals                                                                 | ** ** | **93**                           | ** ** | ** ** | 93 |   |   |
| Regional  carrier expenses                                                        | ** ** | **257**                          | ** ** | ** ** | 181 |   |   |
| Other                                                                             | ** ** | **447**                          | ** ** | ** ** | 444 |   |   |
| Total  operating expenses                                                         | ** ** | **4,014**                        | ** ** | ** ** | 2,919 |   |   |
|                                                                              |       |                             | ** ** | ** ** |   |   |   |
| **Operating Income (Loss)**                                                       | ** ** | **(216**                         | **)**      | ** ** | 459 |   |   |
|                                                                              |       |                             | ** ** | ** ** |   |   |   |
| **Other Income (Expense)**                                                        |       |                             | ** ** | ** ** |   |   |   |
| Interest  expense, net                                                            | ** ** | **(113**                         | **)**      | ** ** | (107 | ) |   |
| Investment  income                                                                | ** ** | **17**                           | ** ** | ** ** | 52 |   |   |
| Other, net                                                                        | ** ** | **(2**                           | **)**      | ** ** | 1 |   |   |
| Total other  income (expense)                                                     | ** ** | **(98**                          | **)**      | ** ** | (54 | ) |   |
|                                                                              |       |                             | ** ** | ** ** |   |   |   |
| **Income (Loss) Before Income Taxes**                                             | ** ** | **(314**                         | **)**      | ** ** | 405 |   |   |
|                                                                              |       |                             | ** ** | ** ** |   |   |   |
| Income tax  expense (benefit)                                                     | ** ** | **3**                            | ** ** | ** ** | 161 |   |   |
|                                                                              |       |                             | ** ** | ** ** |   |   |   |
| **Net Income (Loss)**                                                             | ** ** | **$**                            | **(317**   | **)**      | ** ** | $ | 244 |   |   |
|                                                                              |       |                             | ** ** | ** ** |   |   |   |
| Earnings  (loss) per common share:                                                |       |                             | ** ** | ** ** |   |   |   |
| *Basic*                                                                           | ** ** | **$**                            | **(1.20**  | **)**      | ** ** | $ | 0.93 |   |   |
| *Diluted*                                                                         | ** ** | **$**                            | **(1.20**  | **)**      | ** ** | $ | 0.93 |   |   |
|                                                                              |       |                             | ** ** | ** ** |   |   |   |
| Average  shares used in computation:                                              |       |                             | ** ** | ** ** |   |   |   |
| *Basic*                                                                           | ** ** | **265**                          | ** ** | ** ** | 262 |   |   |
| *Diluted*                                                                         | ** ** | **265**                          | ** ** | ** ** | 262 |   |   |

 

*Seeaccompanying notes.*

 

3

 

**NORTHWESTAIRLINES CORPORATION**

 

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

 
| ** **                                                                        | ** ** | **Successor**          | ** ** | **Predecessor** | ** **              |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|-----------------|-------------------------|
| ** **                                                                        | ** ** | **Nine Months**   | ** ** | ** **      | **Period from**    | ** ** | ** ** | **Period from** | ** ** | ** ** |
| ** **                                                                        | ** ** | ** **             | ** ** | ** **      | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                        | ** ** | **Ended**              | ** ** | ** **      | **June 1 to** | ** ** | ** ** | **January 1 to** | ** ** | ** ** |
| ** **                                                                        | ** ** | ** **             | ** ** | ** **      | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                        | ** ** | **September 30,** | ** ** | ** **      | **September 30,**  | ** ** | ** ** | **May 31,** | ** ** | ** ** |
| ** **                                                                        | ** ** | ** **             | ** ** | ** **      | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| *(Unaudited, in millions except per share amounts)* | ** ** | **2008**               | ** ** | ** **      | **2007**                | ** ** | ** ** | **2007** | ** ** | ** ** |
| **Operating Revenues**                                                            |       |                   |       |            |                    |   |   |   |   |   |
| Passenger                                                                         | ** ** | **$**                  | **7,529**  | ** **      | ** **              | $ | 3,438 |   |   | $ | 3,768 |   |   |
| Regional  carrier revenues                                                        | ** ** | **1,479**              | ** ** | ** **      | 514                     |   |   | 521 |   |   |
| Cargo                                                                             | ** ** | **611**                | ** ** | ** **      | 281                     |   |   | 318 |   |   |
| Other                                                                             | ** ** | **882**                | ** ** | ** **      | 275                     |   |   | 317 |   |   |
| Total  operating revenues                                                         | ** ** | **10,501**             | ** ** | ** **      | 4,508                   |   |   | 4,924 |   |   |
|                                                                              |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| **Operating Expenses**                                                            |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Aircraft  fuel and taxes                                                          | ** ** | **4,233**              | ** ** | ** **      | 1,152                   |   |   | 1,289 |   |   |
| Salaries,  wages and benefits                                                     | ** ** | **2,006**              | ** ** | ** **      | 865                     |   |   | 1,027 |   |   |
| Selling and  marketing                                                            | ** ** | **591**                | ** ** | ** **      | 250                     |   |   | 315 |   |   |
| Aircraft  maintenance materials and repairs                                       | ** ** | **599**                | ** ** | ** **      | 274                     |   |   | 303 |   |   |
| Other  rentals and landing fees                                                   | ** ** | **441**                | ** ** | ** **      | 188                     |   |   | 235 |   |   |
| Depreciation  and amortization                                                    | ** ** | **1,015**              | ** ** | ** **      | 161                     |   |   | 206 |   |   |
| Aircraft  rentals                                                                 | ** ** | **280**                | ** ** | ** **      | 124                     |   |   | 160 |   |   |
| Regional  carrier expenses                                                        | ** ** | **669**                | ** ** | ** **      | 241                     |   |   | 342 |   |   |
| Goodwill  and other indefinite-lived intangibles impairment                       |       | **3,841**              | ** ** | ** **      | -                       |   |   | - |   |   |
| Other                                                                             | ** ** | **1,395**              | ** ** | ** **      | 599                     |   |   | 684 |   |   |
| Total operating  expenses                                                         | ** ** | **15,070**             | ** ** | ** **      | 3,854                   |   |   | 4,561 |   |   |
|                                                                              |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| **Operating Income (Loss)**                                                       | ** ** | **(4,569**             | **)**      | ** **      | 654                     |   |   | 363 |   |   |
|                                                                              |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| **Other Income (Expense)**                                                        |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Interest  expense, net                                                            | ** ** | **(335**               | **)**      | ** **      | (147                    | ) |   | (219 | ) |   |
| Investment  income                                                                | ** ** | **78**                 | ** ** | ** **      | 69                      |   |   | 56 |   |   |
| Reorganization  items, net                                                        | ** ** | **-**                  | ** ** | ** **      | -                       |   |   | 1,551 |   |   |
| Other, net                                                                        | ** ** | **(218**               | **)**      | ** **      | 4                       |   |   | (2 | ) |   |
| Total other  income (expense)                                                     | ** ** | **(475**               | **)**      | ** **      | (74                     | ) |   | 1,386 |   |   |
|                                                                              |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| **Income (Loss) Before Income Taxes**                                             | ** ** | **(5,044**             | **)**      | ** **      | 580                     |   |   | 1,749 |   |   |
|                                                                              |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Income tax  expense (benefit)                                                     | ** ** | **(211**               | **)**      | ** **      | 230                     |   |   | (2 | ) |   |
|                                                                              |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| **Net Income (Loss)**                                                             | ** ** | **$**                  | **(4,833** | **)**           | ** **              | $ | 350 |   |   | $ | 1,751 |   |   |
|                                                                              |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Earnings  (loss) per common share:                                                |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| *Basic*                                                                           | ** ** | **$**                  | **(18.35** | **)**           | ** **              | $ | 1.33 |   |   | $ | 20.03 |   |   |
| *Diluted*                                                                         | ** ** | **$**                  | **(18.35** | **)**           | ** **              | $ | 1.33 |   |   | $ | 14.28 |   |   |
|                                                                              |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Average shares  used in computation:                                              |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| *Basic*                                                                           | ** ** | **263**                | ** ** | ** **      | 262                     |   |   | 87 |   |   |
| *Diluted*                                                                         | ** ** | **263**                | ** ** | ** **      | 262                     |   |   | 113 |   |   |

 

*Seeaccompanying notes.*

 

4

 

**NORTHWEST AIRLINES CORPORATION**

 
| CONDENSED CONSOLIDATED BALANCE  SHEETS                                                                                                                                          | ** ** | ** **             | ** ** | ** ** | ** **            |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------|-----------------------|
| ** **                                                                                                                                                                      | ** ** | **Successor**          | ** ** |
| ** **                                                                                                                                                                      | ** ** | **September 30,** | ** ** | ** ** | **December 31,** | ** ** | ** ** |
| *(Unaudited, in millions except share data)*                                                                                                           | ** ** | **2008**               | ** ** | ** ** | **2007**              | ** ** | ** ** |
| **Assets**                                                                                                                                                                      |       |                   | ** ** | ** ** |                  |   |   |
|                                                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| **Current Assets**                                                                                                                                                              |       |                   | ** ** | ** ** |                  |   |   |
| Cash and  cash equivalents                                                                                                                                                      | ** ** | **$**                  | **2,809**  | ** ** | ** **            | $ | 2,939 |   |   |
| Unrestricted  short-term investments                                                                                                                                            | ** ** | **286**                | ** ** | ** ** | 95                    |   |   |
| Restricted  cash, cash equivalents and short-term investments                                                                                                                   | ** ** | **446**                | ** ** | ** ** | 725                   |   |   |
| Accounts  receivable, less allowance (2008--$6, 2007--$4)                                                                                                                       | ** ** | **717**                | ** ** | ** ** | 776                   |   |   |
| Flight  equipment spare parts, less allowance (2008--$25, 2007--$10)                                                                                                            | ** ** | **132**                | ** ** | ** ** | 135                   |   |   |
| Maintenance  and operating supplies                                                                                                                                             | ** ** | **204**                | ** ** | ** ** | 180                   |   |   |
| Prepaid  expenses and other                                                                                                                                                     | ** ** | **260**                | ** ** | ** ** | 187                   |   |   |
| Total  current assets                                                                                                                                                           | ** ** | **4,854**              | ** ** | ** ** | 5,037                 |   |   |
|                                                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| **Property and Equipment**                                                                                                                                                      |       |                   | ** ** | ** ** |                  |   |   |
| Flight  equipment, net                                                                                                                                                          | ** ** | **8,053**              | ** ** | ** ** | 7,520                 |   |   |
| Other  property and equipment, net                                                                                                                                              | ** ** | **592**                | ** ** | ** ** | 558                   |   |   |
| Total property  and equipment                                                                                                                                                   | ** ** | **8,645**              | ** ** | ** ** | 8,078                 |   |   |
|                                                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| **Flight Equipment Under Capital Leases, Net**                                                                                                                                  | ** ** | **8**                  | ** ** | ** ** | 8                     |   |   |
|                                                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| **Other Assets**                                                                                                                                                                |       |                   | ** ** | ** ** |                  |   |   |
| Goodwill                                                                                                                                                                        | ** ** | **2,873**              | ** ** | ** ** | 6,035                 |   |   |
| International  routes, less accumulated amortization (2008--$4; 2007--$2)                                                                                                       | ** ** | **2,389**              | ** ** | ** ** | 2,976                 |   |   |
| Other  intangibles, less accumulated amortization (2008--$40; 2007--$54)                                                                                                        | ** ** | **1,497**              | ** ** | ** ** | 2,136                 |   |   |
| Investments  in affiliated companies                                                                                                                                            | ** ** | **3**                  | ** ** | ** ** | 24                    |   |   |
| Other, less  accumulated depreciation and amortization (2008--$29; 2007--$8)                                                                                                    | ** ** | **422**                | ** ** | ** ** | 223                   |   |   |
| Total other  assets                                                                                                                                                             | ** ** | **7,184**              | ** ** | ** ** | 11,394                |   |   |
| **Total Assets**                                                                                                                                                                | ** ** | **$**                  | **20,691** | ** ** | ** **            | $ | 24,517 |   |   |
|                                                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                   |       |                   | ** ** | ** ** |                  |   |   |
|                                                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| **Current Liabilities**                                                                                                                                                         |       |                   | ** ** | ** ** |                  |   |   |
| Air traffic  liability/deferred frequent flier liability                                                                                                                        | ** ** | **$**                  | **2,393**  | ** ** | ** **            | $ | 2,004 |   |   |
| Accounts  payable and other liabilities                                                                                                                                         | ** ** | **1,698**              | ** ** | ** ** | 1,651                 |   |   |
| Current  maturities of long-term debt                                                                                                                                           | ** ** | **593**                | ** ** | ** ** | 446                   |   |   |
| Current  obligations under capital leases                                                                                                                                       | ** ** | **8**                  | ** ** | ** ** | 3                     |   |   |
| Total  current liabilities                                                                                                                                                      | ** ** | **4,692**              | ** ** | ** ** | 4,104                 |   |   |
|                                                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| **Long-Term Debt**                                                                                                                                                              | ** ** | **7,001**              | ** ** | ** ** | 6,515                 |   |   |
|                                                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| **Long-Term Obligations Under Capital Leases**                                                                                                                                  | ** ** | **119**                | ** ** | ** ** | 124                   |   |   |
|                                                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| **Deferred Credits and Other Liabilities**                                                                                                                                      |       |                   | ** ** | ** ** |                  |   |   |
| Long-term  pension and postretirement health care benefits                                                                                                                      | ** ** | **3,639**              | ** ** | ** ** | 3,638                 |   |   |
| Deferred  frequent flier liability                                                                                                                                              | ** ** | **1,426**              | ** ** | ** ** | 1,490                 |   |   |
| Deferred  income taxes                                                                                                                                                          | ** ** | **913**                | ** ** | ** ** | 1,131                 |   |   |
| Other                                                                                                                                                                           | ** ** | **181**                | ** ** | ** ** | 138                   |   |   |
| Total  deferred credits and other liabilities                                                                                                                                   | ** ** | **6,159**              | ** ** | ** ** | 6,397                 |   |   |
|                                                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| **Common Stockholders’ Equity**                                                                                                                                            |       |                   | ** ** | ** ** |                  |   |   |
| Common  stock, $.01 par value; shares authorized--400,000,000; shares issued--253,698,246  and 233,187,998 at September 30, 2008 and December 31, 2007,  respectively |       | **3**                  | ** ** | ** ** | 2                     |   |   |
| Additional  paid-in capital                                                                                                                                                     | ** ** | **7,310**              | ** ** | ** ** | 7,235                 |   |   |
| Retained  earnings (accumulated deficit)                                                                                                                                        | ** ** | **(4,491**             | **)**      | ** ** | 342                   |   |   |
| Accumulated  other comprehensive income (loss)                                                                                                                                  | ** ** | **(102**               | **)**      | ** ** | (202                  | ) |   |
| Treasury  stock--2,931 and 1,684 at September 30, 2008 and December 31, 2007,  respectively                                                                           | ** ** | **-**                  | ** ** | ** ** | -                     |   |   |
| Total  common stockholders’ equity                                                                                                                                         | ** ** | **2,720**              | ** ** | ** ** | 7,377                 |   |   |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                             | ** ** | **$**                  | **20,691** | ** ** | ** **            | $ | 24,517 |   |   |
|                                                                                                                                                                                 |            |                        |            |            |                       |  |  |  |  |  |  |  |

 

*See accompanying notes.*

 

5

 

**NORTHWEST AIRLINES CORPORATION**

 
| CONDENSED CONSOLIDATED STATEMENTS  OF CASH FLOWS                                                                                                   | ** ** | ** **             | ** ** | ** **      | ** **              |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------|-------------------------|
| ** **                                                                                                                                         | ** ** | **Successor**          | ** ** | **Predecessor** | ** **              |
| ** **                                                                                                                                         | ** ** | **Nine Months**   | ** ** | ** **      | **Period from**    | ** ** | ** ** | **Period from** | ** ** | ** ** |
| ** **                                                                                                                                         | ** ** | ** **             | ** ** | ** **      | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                         | ** ** | **Ended**              | ** ** | ** **      | **June 1 to** | ** ** | ** ** | **January 1 to** | ** ** | ** ** |
| ** **                                                                                                                                         | ** ** | ** **             | ** ** | ** **      | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                         | ** ** | **September 30,** | ** ** | ** **      | **September 30,**  | ** ** | ** ** | **May 31,** | ** ** | ** ** |
| ** **                                                                                                                                         | ** ** | ** **             | ** ** | ** **      | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| *(Unaudited, in millions)*                                                                                                               | ** ** | **2008**               | ** ** | ** **      | **2007**                | ** ** | ** ** | **2007** | ** ** | ** ** |
| **Cash Flows from Operating Activities**                                                                                                           |       |                   |       |            |                    |   |   |   |   |   |
| Net income  (loss)                                                                                                                                 | ** ** | **$**                  | **(4,833** | **)**           | ** **              | $ | 350 |   |   | $ | 1,751 |   |   |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities:                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Depreciation  and amortization                                                                                                                     | ** ** | **1,015**              | ** ** | ** **      | 161                     |   |   | 206 |   |   |
| Income tax  expense (benefit)                                                                                                                      | ** ** | **(211**               | **)**      | ** **      | 230                     |   |   | (2 | ) |   |
| Pension and  other postretirement benefit contributions less than (greater than) expense                                                           |       | **(9**                 | **)**      | ** **      | (10                     | ) |   | (2 | ) |   |
| Stock-based  compensation                                                                                                                          | ** ** | **84**                 | ** ** | ** **      | 41                      |   |   | - |   |   |
| Reorganization  items, net                                                                                                                         | ** ** | **-**                  | ** ** | ** **      | -                       |   |   | (1,551 | ) |   |
| Investment  impairment                                                                                                                             | ** ** | **213**                | ** ** | ** **      | -                       |   |   | - |   |   |
| Goodwill  and other indefinite-lived intangibles impairment                                                                                        | ** ** | **3,841**              | ** ** | ** **      | -                       |   |   | - |   |   |
| 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                                                                                                         | ** ** | **121**                | ** ** | ** **      | (192                    | ) |   | 15 |   |   |
| Air traffic  liability/deferred frequent flier liability                                                                                           | ** ** | **326**                | ** ** | ** **      | (199                    | ) |   | 448 |   |   |
| Long-term  vendor deposits/holdbacks                                                                                                               | ** ** | **-**                  | ** ** | ** **      | 162                     |   |   | 163 |   |   |
| Post-emergence  reorganization payments                                                                                                            | ** ** | **(7**                 | **)**      | ** **      | (151                    | ) |   | - |   |   |
| Other, net                                                                                                                                         | ** ** | **30**                 | ** ** | ** **      | (21                     | ) |   | 18 |   |   |
| Net cash  provided by (used in) operating activities                                                                                               | ** ** | **570**                | ** ** | ** **      | 371                     |   |   | 1,046 |   |   |
|                                                                                                                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| **Cash Flows from Reorganization Activities**                                                                                                      |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Net cash  provided by (used in) reorganization activities                                                                                          | ** ** | **-**                  | ** ** | ** **      | -                       |   |   | 5 |   |   |
|                                                                                                                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| **Cash Flows from Investing Activities**                                                                                                           |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Capital  expenditures                                                                                                                              | ** ** | **(1,014**             | **)**      | ** **      | (387                    | ) |   | (312 | ) |   |
| Purchase of  short-term investments                                                                                                                | ** ** | **-**                  | ** ** | ** **      | -                       |   |   | (44 | ) |   |
| Reclassification  of cash equivalents into short-term investments                                                                                  | ** ** | **(246**               | **)**      | ** **      | -                       |   |   | - |   |   |
| Proceeds  from sales of short-term investments                                                                                                     | ** ** | **55**                 | ** ** | ** **      | 72                      |   |   | 15 |   |   |
| Payments of  fuel hedge margin deposits                                                                                                            | ** ** | **(104**               | **)**      | ** **      | -                       |   |   | - |   |   |
| Investment  in affiliated companies                                                                                                                | ** ** | **(213**               | **)**      | ** **      | -                       |   |   | - |   |   |
| Decrease  (increase) in restricted cash, cash equivalents and short-term investments                                                               | ** ** | **277**                | ** ** | ** **      | (205                    | ) |   | (74 | ) |   |
| Cash and  cash equivalents acquired in acquisition of Mesaba Aviation, Inc.                                                                   | ** ** | **-**                  | ** ** | ** **      | -                       |   |   | 16 |   |   |
| Proceeds  from sale of property, equipment and other assets                                                                                        | ** ** | **16**                 | ** ** | ** **      | 258                     |   |   | 1 |   |   |
| Proceeds  from sale of investment in affiliate                                                                                                     | ** ** | **20**                 | ** ** | ** **      | -                       |   |   | - |   |   |
| Other, net                                                                                                                                         | ** ** | **-**                  | ** ** | ** **      | 1                       |   |   | - |   |   |
| Net cash  provided by (used in) investing activities                                                                                               | ** ** | **(1,209**             | **)**      | ** **      | (261                    | ) |   | (398 | ) |   |
|                                                                                                                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| **Cash Flows from Financing Activities**                                                                                                           |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Proceeds  from long-term debt                                                                                                                      | ** ** | **873**                | ** ** | ** **      | 409                     |   |   | 326 |   |   |
| Proceeds  from short-term borrowings                                                                                                               | ** ** | **133**                | ** ** | ** **      | -                       |   |   | - |   |   |
| Payments of  long-term debt and capital lease obligations                                                                                          | ** ** | **(365**               | **)**      | ** **      | (516                    | ) |   | (610 | ) |   |
| Payments of  deferred financing costs                                                                                                              | ** ** | **(114**               | **)**      | ** **      | (1                      | ) |   | (1 | ) |   |
| Proceeds  from equity rights offering                                                                                                              | ** ** | **-**                  | ** ** | ** **      | 750                     |   |   | - |   |   |
| Payments  related to equity rights offering                                                                                                        | ** ** | **-**                  | ** ** | ** **      | -                       |   |   | (22 | ) |   |
| Other, net                                                                                                                                         | ** ** | **(18**                | **)**      | ** **      | -                       |   |   | - |   |   |
| Net cash  provided by (used in) financing activities                                                                                               | ** ** | **509**                | ** ** | ** **      | 642                     |   |   | (307 | ) |   |
|                                                                                                                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| **Increase (Decrease) in Cash and Cash Equivalents**                                                                                               | ** ** | **(130**               | **)**      | ** **      | 752                     |   |   | 346 |   |   |
|                                                                                                                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Cash and  cash equivalents at beginning of period                                                                                                  | ** ** | **2,939**              | ** ** | ** **      | 1,807                   |   |   | 1,461 |   |   |
| Cash and  cash equivalents at end of period                                                                                                        | ** ** | **$**                  | **2,809**  | ** **      | ** **              | $ | 2,559 |   |   | $ | 1,807 |   |   |
|                                                                                                                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Available  to be borrowed under credit facilities                                                                                                  | ** ** | **$**                  | **7**      | ** **      | ** **              | $ | 127 |   |   | $ | 127 |   |   |
|                                                                                                                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Cash and  cash equivalents and unrestricted short-term investments at end of period                                                                | ** ** | **$**                  | **3,095**  | ** **      | ** **              | $ | 3,131 |   |   | $ | 2,445 |   |   |
|                                                                                                                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Supplemental  Cash Flow Information:                                                                                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Interest  paid                                                                                                                                     | ** ** | **$**                  | **319**    | ** **      | ** **              | $ | 113 |   |   | $ | 208 |   |   |
|                                                                                                                                               |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Investing  and Financing Activities Not Affecting Cash:                                                                                            |       |                   | ** ** | ** **      |                    |   |   |   |   |   |
| Manufacturer  financing of aircraft and other non-cash transactions                                                                                | ** ** | **$**                  | **-**      | ** **      | ** **              | $ | 335 |   |   | $ | 167 |   |   |

 

*See accompanying notes.*

 

6

 

**NORTHWESTAIRLINES CORPORATION**

 

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1 – Basis of Presentation**

 

The condensedconsolidated financial statements of Northwest Airlines Corporation (“NWA Corp.”),the direct parent corporation of Northwest Airlines, Inc. (“Northwest”),include the accounts of NWA Corp. and all consolidated subsidiaries(collectively, the “Company”).  Unlessotherwise indicated, the terms “we,” “us,” and “our” refer to NWA Corp. and allconsolidated subsidiaries.  The condensedconsolidated financial statements included herein have been prepared pursuantto the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information and footnote disclosuresnormally included in annual financial statements prepared in accordance withU.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, 2007, as amended (the “2007 Form 10-K”).

 

Northwest’s operations account for approximately 99% of theCompany’s consolidated operating revenues and expenses.  Northwest is a major air carrier engagedprincipally in the commercial transportation of passengers and cargo, directlyserving as many as 251 cities in 24 countries in North America, Asia andEurope.  Northwest’s global airlinenetwork includes domestic hubs at Detroit, Minneapolis/St. Paul and Memphis, anextensive Pacific route system with a hub in Tokyo, a transatlantic jointventure with KLM Royal Dutch Airlines (“KLM”), which operates through a hub inAmsterdam, a domestic and international alliance with Continental Airlines, Inc.(“Continental”) and Delta Air Lines, Inc. (“Delta”), membership inSkyTeam, a global airline alliance with KLM, Continental, Delta, Air France,Aeroflot, Alitalia, Aeromexico, China Southern, CSA Czech Airlines and KoreanAir, exclusive marketing agreements with three domestic regional carriers,Pinnacle Airlines, Inc. (“Pinnacle”), Mesaba Aviation, Inc. (“Mesaba”),a wholly-owned subsidiary, and Compass Airlines, Inc. (“Compass”), awholly-owned subsidiary, which currently operate as Northwest Airlink carriersand a cargo business that includes a dedicated fleet of freighter aircraft thatoperate through hubs in Anchorage and Tokyo. See “Note 15 – Subsequent Events”for additional information regarding Northwest’s alliances with Continental.

 

As a result of theapplication of fresh-start reporting in accordance with American Institute ofCertified Public Accountants’ Statement of Position 90-7, *Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code* (“SOP 90-7”) upon the Company’s emergencefrom bankruptcy on May 31, 2007, the financial statements prior to June 1,2007 are not comparable with the financial statements for periods on or after June 1,2007. References to “Successor Company” refer to the Company on or after June 1,2007, after giving effect to the application of fresh-start reporting.References to “Predecessor Company” refer to the Company prior to June 1,2007.  See “Note 3 – Fresh-StartReporting” for further details.

 

The Companymaintains a Web site at *http://www.nwa.com*.  Information contained on the Company’s Website is not incorporated into this quarterly report on Form 10-Q.  Annual reports on Form 10-K, 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.

 

In the opinion of management, the interim financialstatements reflect adjustments, consisting of normal recurring accruals, unlessotherwise noted, which are necessary to present fairly the Company’s financialposition, results of operations and cash flows for the periods indicated.

 

The Company’sresults of operations for interim periods are not necessarily indicative of theresults for an entire year due to seasonal factors as well as competitive andgeneral economic conditions.  The Company’ssecond and third quarter operating results have historically been morefavorable due to increased leisure travel on domestic and international routesduring the spring and summer months.

 

Certain prior yearamounts have been reclassified to conform to the current year financialstatement presentation.

 

*Merger Agreement with Delta.*  On April 14,2008, NWA Corp, and Delta entered into an Agreement and Plan of Merger (the “MergerAgreement”) that provides, among other things, for NWA Corp. to be merged witha wholly-owned subsidiary of Delta (the “Merger”).

 

7

 

Consummationof the Merger is subject to customary closing conditions, including theapproval of NWA Corp.’s and Delta’s stockholders and receiving certain domesticand foreign regulatory and antitrust approvals (including from the FederalAviation Administration and the United States Department of Transportation,under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, andpursuant to Council Regulation (EEC) 139/2004 of the European Commission).  The Merger Agreement contains certaintermination rights for both NWA Corp. and Delta.  The Merger Agreement further provides that,upon termination of the Merger Agreement under specified circumstances, theCompany may be required to pay to Delta, or Delta may be required to pay to theCompany, a termination fee of $165 million. NWA Corp.’s stockholders approved the proposed Merger at the annual stockholdersmeeting held on September 25, 2008. Delta’s stockholders approved share issuances in conjunction with theproposed Merger at a special stockholders meeting on the same date.

 

Underthe terms of the Merger Agreement, each outstanding share of NWA Corp. commonstock will be converted into the right to receive 1.25 shares of Delta commonstock.  Stock options and other equityawards granted under the Company’s 2007 Stock Incentive Plan will convert intostock options and equity awards with respect to Delta common stock, aftergiving effect to the exchange ratio.

 

Certaincontracts, employee benefit arrangements and debt instruments of the Companycontain change in control provisions that may be triggered by the Merger,resulting in changes to the terms or settlement amounts of the contracts,arrangements or instruments.

 

Wecurrently expect the Merger to close by the end of 2008.  However, factors outside of our control couldrequire us to complete the Merger at a later time or not to complete it at all.

 

*StockholderRights Plan.*  Pursuant to the Stockholder Rights Plan (the “RightsPlan”), each share of common stock has attached to it a right and, until therights expire or are redeemed, each new share of common stock issued by NWACorp., will include one right.  Onceexercisable, each right entitles the holder (other than the acquiring person orgroup) to purchase one one-hundredth of a share of Series A JuniorParticipating Preferred Stock at an exercise price of $120, subject toadjustment.  The rights becomeexercisable upon the occurrence of certain events, including the acquisition byany air carrier with passenger revenues in excess of approximately $1 billionper year (as such amount may be increased based on increases in the ConsumerPrice Index from 2000) (a “Major Carrier”), a holding company of a MajorCarrier or any of their respective affiliates acquires beneficial ownership of20% or more of NWA Corp.’s outstanding common stock or commences a tender orexchange offer that would result in such person or group acquiring beneficialownership of 20% or more of NWA Corp.’s outstanding common stock.  The rights expire on May 31, 2017, andmay be redeemed by NWA Corp. at a price of $.01 per right prior to the timethey become exercisable.

 

On April 14,2008, prior to the execution of the Merger Agreement, NWA Corp. amended theRights Plan to provide, among other things, that neither the approval,execution, delivery, announcement or performance of the Merger Agreement or theconsummation of the Merger or any other transactions contemplated thereby willcause a triggering event under which the rights would become exercisable.  The amendment also provides that the RightsPlan and the rights established thereby will terminate in all respects immediatelyprior to the Merger becoming effective.

 

*Restrictions on the Transfer of Common Stock.* To reduce the risk ofa limitation under Section 382 of the Internal Revenue Code on the Company’sability to use its net operating loss carryforwards (“NOLs”), the Amended andRestated Certificate of Incorporation of NWA Corp. restricts certain transfersof common stock for two years after the Company’s emergence frombankruptcy.  Such restrictions can beextended thereafter for three consecutive one year periods (to June 2012)upon, each time, the affirmative vote of the NWA Corp. stockholders.  During the two year period, theserestrictions generally provide that any attempted transfer of common stockprior to the expiration of the term of the transfer restrictions will beprohibited and void if such transfer would cause the transferee’s ownershipinterest in NWA Corp. to increase to 4.95% or above, including an increase in atransferee’s ownership interest from 4.95% or above to a greater ownershipinterest, unless approved by the Board of Directors on the basis that thetransfer does not increase the risk of an ownership change.  In the event that these restrictions areextended beyond the two year period, the Board of Directors will approveproposed transfers that, taking into account all prior transfers, do not resultin an aggregate owner shift under Section 382 of more than 30%.  If the aggregate owner shift as of any dateafter the two year period exceeds 30%, the Board of Directors has thediscretion to approve any subsequent transfers subject to the standardsapplicable during the two year period until the earlier of the date on whichthe aggregate owner shift no longer exceeds 30%, or the restriction is nolonger in effect.

 

**Note2 – Voluntary Reorganization Under Chapter 11**

 

*Background andGeneral Bankruptcy Matters.* The following discussion provides general background informationregarding the Company’s Chapter 11 cases, and is not intended to be anexhaustive summary.  Detailed informationpertaining to the bankruptcy filings may be obtained at *http://www.nwa-restructuring.com*.

 

8

 

On September 14, 2005 (the “PetitionDate”), NWA Corp. and 12 of its direct and indirect subsidiaries (collectively,the “Debtors”) filed voluntary petitions for relief under Chapter 11 of theUnited States Bankruptcy Code with the United States Bankruptcy Court for theSouthern District of New York (the “Bankruptcy Court”).  Subsequently, on September 30, 2005, NWAAircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed avoluntary petition for relief under Chapter 11. On May 18, 2007, the Bankruptcy Court entered an order approvingand confirming the Debtors’ First Amended Joint and Consolidated Plan ofReorganization Under Chapter 11 of the Bankruptcy Code (as confirmed, the “Plan”or “Plan of Reorganization”).  The Planbecame effective and the Debtors emerged from bankruptcy protection on May 31,2007 (the “Effective Date”).  On theEffective Date, the Company implemented fresh-start reporting in accordancewith SOP 90-7.

 

ThePlan generally provided for the full payment or reinstatement of allowedadministrative claims, priority claims, and secured claims, and thedistribution of new common stock of the Successor Company to the Debtors’creditors, employees and others in satisfaction of allowed unsecuredclaims.  The Plan contemplates theissuance of approximately 277 million shares of new common stock by theSuccessor Company out of the 400 million shares of new common stock authorizedunder its amended and restated certificate of incorporation.

 

The new common stockis listed on the New York Stock Exchange (the “NYSE”) and began trading underthe symbol “NWA” on May 31, 2007. Pursuant to the Plan of Reorganization, stockholders of NWA Corp. priorto the Effective Date received no distributions and their stock was cancelled.

 

In connection withthe consummation of the Plan of Reorganization, on the Effective Date, theCompany’s existing $1.225 billion Senior Corporate Credit Facility (“BankCredit Facility”) was converted into exit financing in accordance with itsterms.  See “Note 10 – Long-Term Debt”for additional information.

 

*Claims Resolution Process*.  Pursuant to termsof the Plan of Reorganization, approximately 234.4 million shares of theSuccessor Company’s common stock will be issued to holders of allowed generalunsecured and guaranty claims of the Debtors. Once a claim is allowed consistent with the claims resolution process,the claimant is entitled to a distribution of new common stock. Approximately 227.2 million shares of new common stock have been issued anddistributed through October 15, 2008, in respect of valid unsecured andguaranty claims.  In total, there areapproximately 7.2 million remaining shares of new common stock held in reserveunder the terms of the Plan of Reorganization. The Merger Agreement contemplates that following the Merger the right toreceive shares held in the reserves will become the right to receive shares ofDelta common stock adjusted for the exchange ratio.

 

The Company estimates that the probable range of unsecuredclaims to be allowed will be between $8.0 and $8.2 billion.  Differences between claim amounts filed andthe Company’s estimates are being investigated and will be resolved inconnection with the claims resolution process. However, there will be nofurther financial impact to the Company associated with the settlement of suchunsecured claims, as the holders of all allowed unsecured claims against thePredecessor Company will receive under the Plan of Reorganization only theirpro rata share of the distribution of the newly issued Common Stock of theSuccessor Company.  Secured claims weredeemed unimpaired under the Plan of Reorganization and were satisfied uponeither reinstatement of the obligations in the Successor Company, surrenderingthe collateral to the secured party, or by making full payment in cash.

 

**Note 3 – Fresh-Start Reporting**

 

Upon emergence from its Chapter 11 proceedings on May 31,2007, the Company adopted fresh-start reporting in accordance with SOP90-7.  The Company’s emergence fromChapter 11 resulted in a new reporting entity with no retained earnings oraccumulated deficit.  Accordingly, theCompany’s consolidated financial statements for periods prior to June 1,2007 are not comparable to consolidated financial statements presented on orafter June 1, 2007.

 

Fresh-start reporting reflects the value of the Company asdetermined in the confirmed Plan of Reorganization. Under fresh-startreporting, the Company’s asset values are remeasured and allocated inconformity with Statement of Financial Accounting Standards (“SFAS”) No. 141,*Business Combinations* (“SFAS No. 141”).The excess of reorganization value over the fair value of tangible andidentifiable intangible assets was recorded as goodwill in the accompanyingCondensed Consolidated Balance Sheets. In addition, fresh-start reporting alsorequired that all liabilities, other than deferred taxes and pension and otherpostretirement benefit obligations, be stated at fair value or at the presentvalues of the amounts to be paid using appropriate market interest rates.Deferred taxes were determined in conformity with SFAS No. 109, *Accounting for Income Taxes* (“SFAS No. 109”).  As part of the provisions of SOP 90-7, on June 1,2007 we were required to adopt all accounting guidance that was going to beeffective within the subsequent twelve-month period.  See “Note 5 – Fair Value Measurements” foradditional information.

 

Estimates of fair value represented the Company’s bestestimates based on its valuation models which incorporated industry data andtrends and relevant market rates and transactions.

 

9

 

To facilitate the calculation of the enterprise value of theSuccessor Company, Northwest’s financial advisors assisted management in thepreparation of a valuation analysis for the Successor Company’s common stock tobe distributed as of the Effective Date to the unsecured creditors.  The enterprise valuation included (i) a40% weighting towards a comparable company analysis based on financial ratiosand multiples of comparable companies, which were then applied to the financialprojections developed by the Company to arrive at an enterprise value; and (ii) a60% weighting towards a discounted cash flow analysis which measures theprojected multi-year, un-levered free cash flows of the Company to arrive at anenterprise value.

 

Theestimated enterprise value and corresponding equity value in fresh-startreporting were highly dependent upon achieving the future financial results setforth in the five-year financial projections included in the Company’s Plan ofReorganization, as well as the realization of certain other assumptions.  The equity value of the Company infresh-start reporting was calculated to be a range of approximately $6.45billion to $7.55 billion.  Based onclaims trading prior to the Company’s Effective Date and the trading value ofthe Company’s common stock post emergence, the equity value of the Company wasestimated to be $6.45 billion for purposes of preparing the Company’s financialstatements.  The estimates andassumptions made in this valuation were inherently subject to significantuncertainties and the resolution of contingencies beyond the reasonable controlof the Company.  See “Note 4 – Goodwilland Intangibles” for a description of the cumulative net goodwill impairmentcharges of $3.2 billion recorded in 2008.

 

**Note 4 – Goodwill and Intangibles**

 

Goodwill represents the excess of thereorganization value of the Successor Company over the fair value of tangibleassets and identifiable intangible assets resulting from the application of SOP90-7.  Northwest’s goodwill mainlyconsists of two components:

 
| · | A valuation allowance recorded against our net deferred  tax assets, as required by SFAS No. 109; this valuation allowance will  be reversed against goodwill when the Company reports income in future  periods. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                   |
| · | Revenue-generating intangibles that do not meet the  contractual or separable criteria of SFAS No. 141, including our flight  network and international routes to open skies countries.                           |

 

Identifiable intangible assets consist primarily ofinternational route authorities, trade names, airport slots/airport operating rights,certain partner contracts and other items. International route authorities,certain airport slots/airport operating rights and trade names areindefinite-lived and, as such, are not amortized.  The Company’s definite-lived intangibleassets are amortized on a straight-line basis over the remaining estimatedlives of the related assets, which span periods of three to 29 years.

 

The Company tests the carrying amount of goodwill and otherindefinite-lived intangible assets annually as of October 1 or wheneverevents or circumstances indicate that impairment may have occurred.  Impairment testing is performed in accordancewith SFAS No. 142, *Goodwill and OtherIntangible Assets* (“SFAS No. 142”).  The Company is annually required to completeStep 1 (determining and comparing the fair value of the Company’s reportingunit to its carrying value) of the impairment test.  Step 2 is required to be completed if Step 1indicates that the carrying value of the reporting unit exceeds the fair valueand involves the calculation of the implied fair value of goodwill.  Step 2 of the goodwill impairment testinvolves measuring the Company’s other assets and liabilities at fair value tocalculate an implied fair value of goodwill and measure the amount ofimpairment, if any.

 

The Company evaluates long-lived tangible assets anddefinite-lived intangible assets for potential impairments in accordance withSFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*, (“SFAS No. 144”).   For definite-lived intangible assets,impairment evaluations are initiated based on quarterly reviews of keyindicators of impairment.  The Companyrecords impairment losses on long-lived assets when events and circumstancesindicate the assets might be impaired and the undiscounted cash flows estimatedto be generated by those assets are less than their carrying amounts.  Impairment losses are measured by comparingthe fair value of the assets to their carrying amounts.

 

TheCompany determined that the announced Merger with Delta on April 14, 2008,was a triggering event under SFAS No. 142, requiring the Company tofurther evaluate the carrying value of its goodwill.  As a result of this evaluation, the Companyrecorded a net goodwill impairment charge of $3.2 billion during the first andsecond quarters of 2008 to reduce the book value of Northwest’s equity to itsimplied fair value as of the Merger announcement date.  Based on the 5-day average closing price ofDelta’s common stock around the Merger announcement date, the right to receive1.25 shares of Delta stock for each share of NWA Corp. common stock, and theprojected number of NWA Corp.’s common shares to be converted into Delta commonstock on the transaction close date, the implied fair value of NWA Corp.’sequity on the announcement date was $3.3 billion.  Additionally, Northwest recorded a net $1.1billion of impairment charges in the second quarter related to certain flightequipment, definite-lived and indefinite-lived intangible assets, investmentsin affiliated companies, and the related deferred tax effects.

 

10

 

Dueto the limited time available between the Merger announcement date and theCompany’s first quarter 2008 Form 10-Q filing date, there was insufficienttime to complete Step 2 of the goodwill impairment test and calculate theimplied fair value of goodwill. Therefore, we recorded our best estimate of the impairment as of March 31,2008.  This implied fair valuecalculation resulted in the Company recording a goodwill impairment charge of$3.9 billion for the quarter ended March 31, 2008 because we believed theconditions that caused our implied fair value to decline existed as of thatdate.   Northwest finalized theimpairment test of long-lived assets and Step 2 of the goodwill impairment testduring the second quarter of 2008, resulting in an additional net charge of$547 million, which includes an adjustment of estimated goodwill from $2.2billion to the implied fair value of goodwill of $2.9 billion.  The adjustment to goodwill resulted in thereversal of $674 million of impairment expense recorded in the first quarter of2008 which is classified as goodwill and other indefinite-lived intangiblesimpairment expense.  Additionally,Northwest recorded $624 million of depreciation and amortization related toimpairment of certain flight equipment and definite-lived intangibles, $598million of impairment expense in goodwill and other indefinite-livedintangibles impairment expense related to indefinite-lived intangibles, $213million in other non-operating expense related to other than temporaryimpairment on investments in affiliated companies and $214 million in incometax benefit related to the reversal of deferred tax liabilities related tocertain of the indefinite-lived intangible assets.

 

Duringthe second quarter 2008, the indefinite-lived intangibles were impaired to fairvalue if the fair value was lower than the carrying amount, in accordance withSFAS No. 142.  The definite-livedintangibles and flight equipment were subject to recoverability tests todetermine if a loss in fair value measured in Step 2 would result in animpairment charge, in accordance with the guidance in SFAS No. 144.  The investment in affiliated companiesconsists of a minority ownership interest in Midwest Air Partners, LLC, whichin turn purchased Midwest Air Group, Inc. (the “Midwest” investment).  This equity investment was subject to arecoverability test in accordance with Accounting Principles Board Opinion 18, *The Equity Method of Accounting for Investments inCommon Stock* (“APB 18”). Under APB 18, a loss in value of an investment which is other than atemporary decline should be recognized.

 

Thefollowing table presents a roll-forward of the intangible assets affected by impairmentcharges as the result of the impairment analyses performed during the secondquarter:

 
| ** **                                      | ** ** | **Successor**                       | ** ** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|------------|
| ** **                                      | ** ** | **Definite-lived intangibles** | ** ** | ** ** | **Indefinite-lived intangibles** | ** ** | ** ** |
| ** **                                      | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Pacific Routes** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **SkyTeam**                         | ** ** | ** ** | ** ** | ** ** | ** ** | **and Narita** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Alliance and**               | ** ** | ** ** | ** ** | ** ** | ** ** | **Airport** | ** ** | ** ** | **NWA Trade** | ** ** | ** ** |
| ** **                                      | ** ** | **Other Code**                 | ** ** | ** ** | **NWA Customer** | ** ** | ** ** | **Operating** | ** ** | ** ** | **Name and** | ** ** | ** ** |
| *(In thousands)*                           | ** ** | **Share Partners**             | ** ** | ** ** | **Relationships** | ** ** | ** ** | **Rights** | ** ** | ** ** | **Other** | ** ** | ** ** |
| December 31, 2007 gross carrying amount    |       | $                                   | 461,900    |       |   | $ | 530,000 |   |   | $ | 2,961,700 |   |   | $ | 663,625 |   |   |
| December 31, 2007 accumulated amortization |       | (8,981                              | )          |       | (34,352 | ) |   | -     |   |   | -     |   |   |
| December 31, 2007 net carrying amount      |       | 452,919                             |       |       | 495,648 |   |   | 2,961,700 |   |   | 663,625 |   |   |
|                                            |       |                                |       |       |   |   |   |   |   |   |   |   |   |
| Amortization Expense                            |       | (9,719                              | )          |       | (14,722 | ) |   | -     |   |   | -     |   |   |
| SFAS No. 142 Impairment                    |       | -          |       |       | -      |   |   | (584,700 | ) |   | (13,200 | ) |   |
| SFAS No. 144 Impairment                    |       | (106,653                            | )          |       | (480,926 | ) |   | -     |   |   | -     |   |   |
| September 30, 2008 net carrying amount     |       | $                                   | 336,547    |       |   | $ | -      |   |   | $ | 2,377,000 |   |   | $ | 650,425 |   |   |

 

In accordance with SOP 90-7, a reduction in the valuationallowance associated with the realization of pre-emergence deferred tax assetsin future periods will sequentially reduce the value of recorded goodwillfollowed by other indefinite-lived assets until the net carrying cost of theseassets is zero.  Adjustments to goodwillduring the nine months ended September 30, 2008 are shown in the tablebelow:

 

| *(In thousands)*                      |   |           |          |       |
|--------------------------------------------|--------|----------------|---------------|------------|
| Balance as of December 31, 2007       |   | **$**          | **6,034,609** | ** ** | ** ** |
| Impairment charges, net                    |   | **(3,243,377** | **)**         | ** ** |
| Adjustments related to deferred tax assets |   | **74,013**     | ** **    | ** ** |
| Other                                      |   | **8,020**      | ** **    | ** ** |
| Balance as of September 30, 2008      |   | **$**          | **2,873,265** | ** ** | ** ** |

 

11

 

The following table presents information about ourintangible assets, including goodwill, at September 30, 2008 and December 31,2007:

 
| ** **                                               | ** ** | ** **          | ** ** | **Successor**                    | ** **    | ** ** |
|----------------------------------------------------------|------------|---------------------|------------|----------------------------------|---------------|------------|
| ** **                                               | ** ** | ** **          | ** ** | **September 30, 2008** | ** **    | ** ** | **December 31, 2007** | ** ** | ** ** |
| ** **                                               | ** ** | **Remaining**       | ** ** | **Gross Carrying**          | ** **    | ** ** | **Accumulated** | ** ** | ** ** | **Gross Carrying** | ** ** | ** ** | **Accumulated** | ** ** | ** ** |
| *(In thousands)*                                    | ** ** | **Asset Life** | ** ** | **Amount**                       | ** **    | ** ** | **Amortization** | ** ** | ** ** | **Amount** | ** ** | ** ** | **Amortization** | ** ** | ** ** |
| SkyTeam alliance & other code share partners    | ** ** | 29                  |       | **$**                            | **352,200**   | ** ** | ** ** | **$** | **(15,653** | **)** | ** ** | $ | 461,900 | ** ** | ** ** | $ | (8,981 | ) | ** ** |
| England airport operating rights                         |       | 4                   |       | **16,000**                       | ** **    | ** ** | **(4,267** | **)** | ** ** | 16,000 |   |   | (1,867 | ) |   |
| NWA customer relationships                               |       | 8                   |       | **-    **    | ** **    | ** ** | **-** | ** ** | ** ** | 530,000 |   |   | (34,352 | ) |   |
| WorldPerks affinity card contract                        |       | 14                  |       | **195,700**                      | ** **    | ** ** | **(17,396** | **)** | ** ** | 195,700 |   |   | (7,611 | ) |   |
| WorldPerks marketing partner relationships               |       | 21                  |       | **43,000**                       |          |       | **(2,606** | **)** | ** ** | 43,000 |   |   | (1,140 | ) |   |
| Visa contract                                            |       | 3                   |       | **11,900**                       | ** **    | ** ** | **(3,967** | **)** | ** ** | 11,900 |   |   | (1,736 | ) |   |
|                                                     |       |                |       |                             |          |       |   | ** ** | ** ** |   |   |   |   |   |   |
| Pacific routes and Narita slots/airport operating rights |       | Indefinite          |       | **2,377,000**                    |          |       | **-** | ** ** | ** ** | 2,961,700 |   |   | -     |   |   |
| NWA trade name and other                                 |       | Indefinite          |       | **650,425**                      | ** **    | ** ** | **-** | ** ** | ** ** | 663,625 |   |   | -     |   |   |
| Slots/airport operating rights                           |       | Indefinite          |       | **283,300**                      | ** **    | ** ** | **-** | ** ** | ** ** | 283,300 |   |   | -     |   |   |
| Goodwill                                                 |       | Indefinite          |       | **2,873,265**                    | ** **    | ** ** | **-** | ** ** | ** ** | 6,034,609 |   |   | -     |   |   |
|                                                     |       |                |       | ** **                       | ** **    | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
|                                                     |       |                |       | **$**                            | **6,802,790** | ** ** | ** ** | **$** | **(43,889** | **)** | ** ** | $ | 11,201,734 |   |   | $ | (55,687 | ) |   |

 

Total amortization expense recognized was approximately$8.2 million and $23.9 million for the three month periods ended September 30,2008 and September 30, 2007, respectively. Amortization expense of $627.9million, $31.9 million and $0.6 million was recognized for the nine monthperiod ended September 30, 2008, four month period ended September 30,2007 and five month period ended May 31, 2007, respectively.  Of the amortization expense recognized duringthe nine months ended September 30, 2008, $587.6 million was related tothe second quarter 2008 SFAS No. 144 impairment expense of intangibles forthe SkyTeam alliance & other code share partners and the NWA customerrelationships.  Accordingly, the carryingamount and accumulated depreciation related to these assets have been reducedby corresponding amounts.  We expect torecord amortization expense of $8.2 million for the remainder of 2008, $32.9million per year from 2009through 2010, $31.2 million in 2011, $28.1 million in 2012 and $26.7 million in2013.

 

**Note 5 – Fair Value Measurements**

 

The Company adopted SFAS No. 157, *Fair Value Measurements*(“SFAS No. 157”),on the Effective Date in accordance with SOP 90-7. 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 tothe valuation of assets and liabilities on and after the Effective Date.

 

There are three general valuation techniques that may beused to measure fair value, as described below:

 

(A)        Market approach – Uses prices and other relevant informationgenerated by market transactions involving identical or comparable assets orliabilities.  Prices may be indicated bypricing guides, sale transactions, market trades, or other sources;

(B)       Cost approach – Based on the amount that currently would berequired to replace the service capacity of an asset (replacement cost); and

(C)      Income approach – Uses valuation techniques to convertfuture amounts to a single present amount based on current market expectationsabout the future amounts (includes present value techniques, option-pricingmodels, and excess earnings method).  Netpresent value is an income approach where a stream of expected cash flows isdiscounted at an appropriate market interest rate.  Excess earnings method is a variation of theincome approach where the value of a specific asset is isolated from itscontributory assets.

 

12

 

*Measured on a Recurring Basis.*   For assets andliabilities measured at fair value on a recurring basis during the period, SFASNo. 157 requires quantitative disclosures about the fair valuemeasurements separately for each major category.

 

Additionally, based on market conditions during the period,we changed the valuation technique for our $250 million investment in the TheReserve Primary Fund (the “Primary Fund”) from a market approach to an incomeapproach using a discounted cash flow model.  The Primary Fund was aAAA-rated money market fund which has suspended redemptions and is in theprocess of liquidating the portfolio of investments because it held somesecurities in Lehman Brothers which was downgraded.  As a result, in mid-September, the net assetvalue of the Primary Fund decreased below $1 per share as a result of thetrustees of the Primary Fund valuing at zero debt securities issued by LehmanBrothers Holdings, Inc. (“Lehman Brothers”) held by the Primary Fund.  Accordingly, Northwest reclassified thissecurity on its balance sheet from cash equivalents to unrestricted short-terminvestments and recognized an other than temporary impairment of $3.75 million,which was Northwest’s pro rata share of the Primary Fund’s overall investmentattributable to the Lehman Brothers’ securities.  As each security in the portfolio matures oradditional liquidity becomes available within the fund, the money market fundmanager will repay those amounts to each investor on a pro rata basis.  As a result of these events, Northwestadjusted its fair value measurement of the Primary Fund from Level 1 to Level 3within the SFAS No. 157 three-tier fair value hierarchy.  Changes inmarket conditions could result in further adjustments to the fair value ofthese investments.

 

Assets and liabilities itemized below were measured at fairvalue during the period using the market and income approaches:

 
| ** **                                                     | ** ** | **Successor Assets**      | ** ** | ** ** | ** **           | ** ** |
|----------------------------------------------------------------|------------|--------------------------------|------------|------------|----------------------|------------|
| ** **                                                     | ** ** | ** **                     | ** ** | ** ** | **Quoted**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Quoted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                     | ** ** | ** ** | **Prices**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Prices** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                     | ** ** | ** ** | **in Active**   | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **in Active** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                     | ** ** | ** ** | **Markets for** | ** ** | ** ** | **Other** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Markets for** | ** ** | ** ** | **Other** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **As of**                 | ** ** | ** ** | **Identical**        | ** ** | ** ** | **Observable** | ** ** | ** ** | **Unobservable** | ** ** | ** ** | **As of** | ** ** | ** ** | **Identical** | ** ** | ** ** | **Observable** | ** ** | ** ** | **Unobservable** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **September 30,**         | ** ** | ** ** | **Assets**           | ** ** | ** ** | **Inputs** | ** ** | ** ** | **Inputs** | ** ** | ** ** | **December 31,** | ** ** | ** ** | **Assets** | ** ** | ** ** | **Inputs** | ** ** | ** ** | **Inputs** | ** ** | ** ** | **Valuation** | ** ** |
| *(In millions)*                                           | ** ** | **2008**                       | ** ** | ** ** | **(Level 1)**   | ** ** | ** ** | **(Level 2)** | ** ** | ** ** | **(Level 3)** | ** ** | ** ** | **2007** | ** ** | ** ** | **(Level 1)** | ** ** | ** ** | **(Level 2)** | ** ** | ** ** | **(Level 3)** | ** ** | ** ** | **Technique** | ** ** |
| Cash and cash equivalents                                      |       | **$**                          | **2,809**  |       |                 | **$**      | **2,809** |   |   | **$** | **-** |   |   | **$** | **-** |   |   | $ | 2,939 |   |   | $ | 2,939 |   |   | $ | - |   |   | $ | - |   |   | (A) |   |
| Unrestricted short-term investments                            |       | **286**                        |       |       | **-**                |       |   | **40** |   |   | **246** |   |   | 95 |   |   | 95 |   |   | - |   |   | - |   |   | (C) |   |
| Restricted cash, cash equivalents, and short-term  investments |       | **446**                        |       |       | **441**              |       |   | **5** |   |   | **-** |   |   | 725 |   |   | 725 |   |   | - |   |   | - |   |   | (A),(C) |   |
| Derivatives                                                    |       | **40**                         |       |       | **-**                |       |   | **40** |   |   | **-** |   |   | 26 |   |   | - |   |   | 26 |   |   | - |   |   | (A),(C) |   |
| Total                                                          |       | **$**                          | **3,581**  |       |                 | **$**      | **3,250** |   |   | **$** | **85** |   |   | **$** | **246** |   |   | $ | 3,785 |   |   | $ | 3,759 |   |   | $ | 26 |   |   | $ | - |   |   |   |   |
|                                                           |       | ** **                     |       |       | ** **           |       |   | ** ** |   |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                     | ** ** | **Successor Liabilities** | ** ** | ** ** | ** **           | ** ** |
| ** **                                                     | ** ** | ** **                     | ** ** | ** ** | **Quoted**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Quoted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                     | ** ** | ** ** | **Prices**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Prices** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                     | ** ** | ** ** | **in Active**   | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **in Active** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                     | ** ** | ** ** | **Markets for** | ** ** | ** ** | **Other** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Markets for** | ** ** | ** ** | **Other** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **As of**                 | ** ** | ** ** | **Identical**        | ** ** | ** ** | **Observable** | ** ** | ** ** | **Unobservable** | ** ** | ** ** | **As of** | ** ** | ** ** | **Identical** | ** ** | ** ** | **Observable** | ** ** | ** ** | **Unobservable** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **September 30,**         | ** ** | ** ** | **Assets**           | ** ** | ** ** | **Inputs** | ** ** | ** ** | **Inputs** | ** ** | ** ** | **December 31,** | ** ** | ** ** | **Assets** | ** ** | ** ** | **Inputs** | ** ** | ** ** | **Inputs** | ** ** | ** ** | **Valuation** | ** ** |
| *(In millions)*                                           | ** ** | **2008**                       | ** ** | ** ** | **(Level 1)**   | ** ** | ** ** | **(Level 2)** | ** ** | ** ** | **(Level 3)** | ** ** | ** ** | **2007** | ** ** | ** ** | **(Level 1)** | ** ** | ** ** | **(Level 2)** | ** ** | ** ** | **(Level 3)** | ** ** | ** ** | **Technique** | ** ** |
| Derivatives                                                    |       | **$**                          | **169**    |       |                 | **$**      | **-** |   |   | **$** | **169** |   |   | **$** | **-** |   |   | $ | 3 |   |   | $ | - |   |   | $ | 3 |   |   | $ | - |   |   | (A),(C) |   |
| Total                                                          |       | **$**                          | **169**    |       |                 | **$**      | **-** |   |   | **$** | **169** |   |   | **$** | **-** |   |   | $ | 3 |   |   | $ | - |   |   | $ | 3 |   |   | $ | - |   |   |   |   |

 

13

 

For the Primary Fund assets reclassified into unrestrictedshort-term investments during the third quarter, and measured at fair value ona recurring basis using Level 3 inputs, the reconciliation of the beginning andending balances is reflected in the table below:

 

| ** **                                          | ** ** | **Successor Assets** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|------------|
| ** **                                          | ** ** | **Level 3**          | ** ** | ** ** |
| ** **                                          | ** ** | **Unrestricted**          | ** ** | ** ** |
| ** **                                          | ** ** | **Short-term**            | ** ** | ** ** |
| *(In millions)*                                | ** ** | **Investments**           | ** ** | ** ** |
| Balance as of December 31, 2007                | ** ** | **$**                     | **-**      | ** ** | ** ** |
| Gains (losses) during the period:   Investment loss | ** ** | **(4**                    | **)**      | ** ** |
| Purchases, sales, and settlements (net)             | ** ** | **-**                     | ** ** | ** ** |
| Transfers in or (out) of Level 3                    | ** ** | **250**                   | ** ** | ** ** |
| Balance as of September 30, 2008               | ** ** | **$**                     | **246**    | ** ** | ** ** |

 

*Measuredon a Non-Recurring Basis. *For assets and liabilities measured on a non-recurring basisduring the period, SFAS No. 157 requires quantitative disclosures aboutthe fair value measurements separately for each major category.   During the third quarter of 2008, Northwestdid not remeasure assets or liabilities at fair value on a non-recurring basis.  For further information about Northwest’sgoodwill and other asset impairment charges recorded in the first and secondquarters, refer to “Note 4 – Goodwill and Intangibles.”

 

**Note 6 – Geographic Regions**

 

The Company is managed as onecohesive business unit, of which revenues are derived primarily from thecommercial transportation of passengers and cargo.  Operating revenues from flight segmentsserving a foreign destination are classified into the Pacific or Atlanticregions, as appropriate.  The followingtable shows the operating revenues for each region:

 

| * *                   | ** ** | **Successor**                    | ** ** | ** ** |
|----------------------------|------------|----------------------------------|------------|------------|
| * *                   | ** ** | **Three Months Ended** | ** ** | ** ** |
| * *                   | ** ** | **September 30**            | ** ** | ** ** |
| *(In millions)*       | ** ** | **2008**                         | ** ** | ** ** | **2007** | ** ** | ** ** |
| Domestic                   | ** ** | **$**                            | **2,359**  |       |   | $ | 2,156 |   |   |
| Pacific, principally Japan | ** ** | **822**                          |       |       | 766 |   |   |
| Atlantic                   | ** ** | **617**                          |       |       | 456 |   |   |
| Total operating revenues   | ** ** | **$**                            | **3,798**  |       |   | $ | 3,378 |   |   |

 

|                       | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**         | ** ** | ** ** |
|----------------------------|------------|------------------------|------------|------------|-------------------------|------------|------------|
|                       | ** ** | **Nine Months**   | ** ** | ** ** | **Period from**    | ** ** | ** ** | **Period from** | ** ** | ** ** |
|                       | ** ** | **Ended**              | ** ** | ** ** | **June 1 to** | ** ** | ** ** | **January 1 to** | ** ** | ** ** |
|                       | ** ** | **September 30,** | ** ** | ** ** | **September 30,**  | ** ** | ** ** | **May 31,** | ** ** | ** ** |
| *(In millions)*       | ** ** | **2008**               | ** ** | ** ** | **2007**                | ** ** | ** ** | **2007** | ** ** | ** ** |
| Domestic                   | ** ** | **$**                  | **6,777**  |       |                    | $          | 2,906      |   |   | $ | 3,346 |   |   |
| Pacific, principally Japan | ** ** | **2,208**              |       |       | 998                     |       |       | 1,064 |   |   |
| Atlantic                   | ** ** | **1,516**              |       |       | 604                     |       |       | 514 |   |   |
| Total operating revenues   | ** ** | **$**                  | **10,501** |       |                    | $          | 4,508      |   |   | $ | 4,924 |   |   |

 

The Company’s tangible assetsconsist primarily of flight equipment, which are utilized across geographicmarkets and therefore have not been allocated.

 

14

** **

**Note 7 – Reorganization Related Items**

 

In accordance with SOP 90-7, thefinancial statements for the periods presented distinguish transactions andevents that are directly associated with the reorganization from the ongoingoperations 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**            | ** ** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|------------|
| ** **                                        | ** ** | **Period from**       | ** ** | ** ** |
| ** **                                        | ** ** | **January 1 to** | ** ** | ** ** |
| ** **                                        | ** ** | **May 31,**           | ** ** | ** ** |
| *(In millions)*                              | ** ** | **2007**                   | ** ** | ** ** |
| 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)                      |       | (312                       | )          |       |
| Abandonment of aircraft and buildings (d)         |       | (323                       | )          |       |
| Restructured aircraft lease/debt charges (d)      |       | (74                        | )          |       |
| Professional fees                                 |       | (60                        | )          |       |
| Other (d)                                         |       | (700                       | )          |       |
| Reorganization items, net                         |       | $                          | 1,551      |       |   |

 
| (a)    |   | The  gain on discharge of unsecured claims and liabilities relates to the  Company’s unsecured claims as of the Petition Date and the discharge of  unsecured claims established as part of the bankruptcy process. In accordance  with the Plan of Reorganization, the Company discharged its estimated $8.2  billion in unsecured creditor obligations in exchange for the distribution of  approximately 234 million common shares of the Successor Company valued at  emergence at $6.45 billion. Accordingly, the Company recognized a non-cash  reorganization gain of approximately $1.8 billion. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (b)    |   | The  Company revalued its frequent flyer miles to estimated fair value as a result  of fresh-start reporting, which resulted in a $1.6 billion non-cash  reorganization charge.                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (c)    |   | In  accordance with fresh-start reporting, the Company revalued its assets at  their estimated fair value and revalued its liabilities 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 a result of newly  recognized intangible assets, offset partially by reductions in the fair  value of tangible property and equipment.                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (d)    |   | Prior  to emergence the Company recorded its final provisions for allowed or  projected unsecured claims including employee-related Association of Flight  Attendants – Communication Workers of America (“AFA-CWA”) contract related  claims, other employee related claims, claims associated with restructured  aircraft lease/debt, and municipal bond obligation related settlements.                                                                                                                                                                                                     |

 

**Note 8 – Income Taxes**

 

The Company accounts for income taxes in accordance with SFAS No. 109,which requires that deferred tax assets and liabilities are recognized usingenacted tax rates, for the tax effect of temporary differences between thefinancial reporting and tax bases of recorded assets and liabilities.  SFAS No. 109 also requires that deferredtax assets be reduced by a valuation allowance if it is more likely than not thatsome or all of the deferred tax assets will not be realized.  Based on the consideration of all availableevidence, the Company has provided a valuation allowance on deferred tax assetsrecorded beginning in the first quarter 2003. The Company continues to maintain a full valuation allowance against itsdeferred tax assets due to the uncertainty regarding the ultimate realizationof those assets.

 

An ownership change under Internal Revenue Code Section 382occurred in connection with the Company’s bankruptcy Plan ofReorganization.  However, the Companydoes not believe that such change has any material impact on the Company’sability to use its NOL carryforwards and other tax attributes.

 

Generally, the Company would not record a tax benefitrelated to a quarterly net loss unless it had a high degree of confidence thatit would record a full-year profit.  Atax benefit of $214 million was recorded during the 2008 second quarter todecrease the deferred tax liability associated with the impairment of an indefinite-livedintangible asset.

 

15

 

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

 

The following tables set forth thecomputation of basic and diluted earnings (loss) per common share:

 
| ** **                                                                                                   | ** ** | **Successor**                    | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|
| ** **                                                                                                   | ** ** | **Three Months Ended** | ** ** | ** ** |
| ** **                                                                                                   | ** ** | **September 30**            | ** ** | ** ** |
| *(In millions)*                                                                                         | ** ** | **2008**                         | ** ** | ** ** | **2007** | ** ** | ** ** |
| **Numerator:**                                                                                               |       |                             |       |       |   |   |   |
| Net  income (loss) applicable to common stockholders                                                         | ** ** | **$**                            | **(317**   | **)**      | ** ** | $ | 244 |   |   |
|                                                                                                         |       |                             | ** ** | ** ** |   |   |   |
| Effect  of dilutive securities                                                                               | ** ** | **-**                            | ** ** | ** ** | - |   |   |
| Adjusted  net income (loss) for diluted earnings (loss) per share                                            |       | **$**                            | **(317**   | **)**      | ** ** | $ | 244 |   |   |
|                                                                                                         |       |                             | ** ** | ** ** |   |   |   |
| **Denominator:**                                                                                             |       |                             | ** ** | ** ** |   |   |   |
| Weighted-average  shares outstanding for basic and diluted earnings (loss) per share                         |       | **265.0**                        | ** ** | ** ** | 262.2 |   |   |
|                                                                                                         |       |                             | ** ** | ** ** |   |   |   |
| Effect  of dilutive securities                                                                               | ** ** | **-**                            | ** ** | ** ** | - |   |   |
| Adjusted  weighted-average shares outstanding and assumed conversions for diluted  earnings (loss) per share |       | **265.0**                        | ** ** | ** ** | 262.2 |   |   |
|                                                                                                         |       |                             | ** ** | ** ** |   |   |   |
|                                                                                                         |       |                             | ** ** | ** ** |   |   |   |
| **Basic earnings (loss) per common share**                                                                   | ** ** | **$**                            | **(1.20**  | **)**      | ** ** | $ | 0.93 |   |   |
|                                                                                                         |       |                             | ** ** | ** ** |   |   |   |
|                                                                                                         |       |                             | ** ** | ** ** |   |   |   |
| **Diluted earnings (loss) per common share**                                                                 | ** ** | **$**                            | **(1.20**  | **)**      | ** ** | $ | 0.93 |   |   |

 

16

 
| ** **                                                                                                   | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**         | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------|-------------------------|------------|
| ** **                                                                                                   | ** ** | **Nine Months**   | ** ** | ** ** | **Period from**    | ** ** | ** ** | **Period from** | ** ** | ** ** |
| ** **                                                                                                   | ** ** | **Ended**              | ** ** | ** ** | **June 1 to** | ** ** | ** ** | **January 1 to** | ** ** | ** ** |
| ** **                                                                                                   | ** ** | **September 30,** | ** ** | ** ** | **September 30,**  | ** ** | ** ** | **May 31,** | ** ** | ** ** |
| *(In millions)*                                                                                         | ** ** | **2008**               | ** ** | ** ** | **2007**                | ** ** | ** ** | **2007** | ** ** | ** ** |
| **Numerator:**                                                                                               |       |                   | ** ** | ** ** |                    |       |   |   |   |   |
| Net  income (loss) applicable to common stockholders                                                         | ** ** | **$**                  | **(4,833** | **)**      | ** **              | $          | 350 |   |   | $ | 1,751 |   |   |
|                                                                                                         |       |                   | ** ** | ** ** |                    |       |   |   |   |   |
| Effect  of dilutive securities:                                                                              |       |                   | ** ** | ** ** |                    |       |   |   |   |   |
| Gain  on discharge of convertible debt                                                                       | ** ** | **-**                  | ** ** | ** ** | -                       |       |   | (82 | ) |   |
| Gain  on discharge of Series C Preferred Stock                                                          | ** ** | **-**                  | ** ** | ** ** | -                       |       |   | (60 | ) |   |
| Adjusted  net income (loss) for diluted earnings (loss) per share                                            |       | **$**                  | **(4,833** | **)**      | ** **              | $          | 350 |   |   | $ | 1,609 |   |   |
|                                                                                                         |       |                   | ** ** | ** ** |                    |       |   |   |   |   |
| **Denominator:**                                                                                             |       |                   | ** ** | ** ** |                    |       |   |   |   |   |
| Weighted-average  shares outstanding for basic and diluted earnings (loss) per share                         |       | **263.4**              | ** ** | ** ** | 262.2                   |       |   | 87.4 |   |   |
|                                                                                                         |       |                   | ** ** | ** ** |                    |       |   |   |   |   |
| 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 |       | **263.4**              | ** ** | ** ** | 262.2                   |       |   | 112.7 |   |   |
|                                                                                                         |       |                   | ** ** | ** ** |                    |       |   |   |   |   |
|                                                                                                         |       |                   | ** ** | ** ** |                    |       |   |   |   |   |
| **Basic earnings (loss) per common share**                                                                   | ** ** | **$**                  | **(18.35** | **)**      | ** **              | $          | 1.33 |   |   | $ | 20.03 |   |   |

 

*Successor EPS*.  For the three and nine months ended September 30,2008, approximately 12 million restricted stock units and stock options topurchase shares of the Successor Company’s common stock were outstanding butexcluded from the computation of diluted earnings per share because the Companyreported a net loss for these periods.

 

For the three monthsended September 30, 2007 and the period from June 1 to September 30,2007, approximately 15 million restricted stock units and stock options topurchase shares of the Successor Company’s common stock were outstanding butexcluded from the computation of diluted earnings per share because the effectof including the shares would have been anti-dilutive.

 

*Predecessor EPS.*  Predecessor basic earnings pershare was computed based on the Predecessor’s weighted average sharesoutstanding.  Dilutive earnings per shareincluded securities related to the Predecessor’s Series C Preferred Stockand convertible debt.

 

For the period from January 1to May 31, 2007, stock options to purchase approximately 7 million sharesof common stock were outstanding but excluded from the computation of dilutedearnings per share because the effect of including the shares would have beenanti-dilutive.

 

17

 

**Note 10** -**Long-Term Debt**

 

As of September 30,2008, contractual maturities of long-term debt (inclusive of short-termmaturities), excluding capital lease obligations and any potential accelerationof the Bank Credit Facility as described below, through December 31, 2012were as follows (in millions):

 
| remainder of |   | 2008 |   | $   | 218    |  (a) |
|--------------|--------|------|--------|-----|--------|-----------|
|         |   | 2009 |   | 599 |   |
|         |   | 2010 |   | 538 |   |
|         |   | 2011 |   | 670 |   |
|         |   | 2012 |   | 504 |   |

 

(a)   In November 2007, the Company enteredinto an accounts receivable financing facility. The facility size is up to $150 million and as of September 30,2008, $115 million of the $122 million available was drawn.  The financing is a 364-day facility thatmatures in November 2008 with annual renewal provisions that could resultin a final maturity date of November 29, 2012.

 

On August 21, 2006, the Predecessor Company enteredinto a $1.225 billion Senior Corporate Credit Facility (“Bank Credit Facility”),formerly referred to by us as the DIP/Exit Facility, consisting of a $1.05billion term loan facility and a $175 million revolving credit facility whichhas been fully drawn since its inception. Loans drawn under the $175 million revolving credit facility may beborrowed and repaid at the Company’s discretion.  Up to $75 million of the revolving creditfacility may be utilized by the Company as a letter of credit facility.  As amended in March 2007, both loanfacilities under the Bank Credit Facility bear interest at LIBOR plus2.00%.  Letter of credit fees are 2.125%per annum.  To the extent that therevolving credit facility is not utilized, the Company is required to pay anundrawn commitment fee of 50 basis points per annum.  The Bank Credit Facility is rated BB- byStandard & Poor’s Rating Services (“S&P”) and B1 by Moody’sInvestors Service, Inc. (“Moody’s”) and is secured by a first lien on theCompany’s Pacific Route authorities.  TheMarch 2007 amendment also allowed the Company to grant pari-passu liens inthe Pacific Route authorities to secure up to $150 million of exposure arisingfrom hedging trades entered into with Bank Credit Facility lenders.  The interest rate as of September 30,2008 was 4.75% on both the term loan facility and the revolving creditfacility.

 

The final maturity date of theBank Credit Facility is August 21, 2013. Principal on the term loan portion of the Bank Credit Facility will berepaid at 1.0% per year with the balance (94.0%) due at maturity.  The first two such principal repayments weremade on August 21, 2007 and August 21, 2008.  On September 15, 2008, the Companyentered into an amendment to the Bank Credit Facility which provides that, (i) subjectto the consummation of the Merger, the Company will be permitted to guaranteeapproximately $2.5 billion of Delta obligations, (ii) the Company will berequired to repay $300 million of the approximately $1.2 billion outstandingunder the Bank Credit Facility and (iii) the final maturity date will bethe earlier of the date on which Northwest is merged with and into Delta or December 31,2010.  The merger of Northwest with Delta(as opposed to the Merger of NWA Corp. with a subsidiary of Delta) is notexpected to occur before late 2009.

 

The Bank Credit Facility requires ongoing compliance withvarious financial covenants including a requirement for the Company to maintaina minimum ratio of consolidated EBITDAR to consolidated fixed charges (“FixedCharge Coverage Ratio”).  Under anamendment to the Bank Credit Facility completed in April 2008, complianceby the Company with the Fixed Charge Coverage Ratio has been waived through March 31,2009 followed by a phase-in period as set forth below:

 
| **Number of**      | ** ** | ** **                                                  | ** ** | **Required**            | ** ** |
|-------------------------|------------|-------------------------------------------------------------|------------|-------------------------|------------|
| **Months Covered** | ** ** | **Period Ending**                                      | ** ** | **Coverage Ratio** | ** ** |
| Three                   |       | June 30, 2009                                          |       | 1.00 to 1.0             |       |
| Six                     |       | September 30, 2009                                     |       | 1.10 to 1.0             |       |
| Nine                    |       | December 31, 2009                                      |       | 1.20 to 1.0             |       |
| Twelve                  |       | March 31, 2010                                         |       | 1.30 to 1.0             |       |
| Twelve                  |       | June 30, 2010                                          |       | 1.40 to 1.0             |       |
| Twelve                  |       | September 30, 2010 and each  quarter ending thereafter |       | 1.50 to 1.0             |       |

 

For purposes of calculating this ratio, EBITDAR is definedas operating income, adjusted to exclude the effects of depreciation,amortization, aircraft rents and costs (but only up to $150 million of cashcosts) payable in connection with a merger or acquisition and to include theeffects of interest income and governmental reimbursements for losses resultingfrom developments affecting the aviation industry.  Earnings also exclude non-recurring non-cashcharges (subject to the inclusion of any cash payments then or thereafter madewith respect thereto) and are determined without giving effect to anyacceleration of rental expense.  Fixedcharges are defined as interest expense (excluding the fees and expenses ofobtaining the April 2008 and September 2008 amendments and non-cashmerger-related adjustments incurred in connection with the Merger) and aircraftrent expense (without giving effect to any acceleration of rentalexpense).  Additionally, certain aircraftsublease rental income is excluded from EBITDAR and reduces aircraft rentalexpense in fixed charges.

 

18

 

Although the Company was in compliance with all requiredfinancial covenants as of September 30, 2008, continued compliance dependson many factors, some of which are beyond the Company’s control, including theoverall industry revenue environment and the level of fuel costs.

 

**Note 11 – FleetInformation and Commitments**

 

As shown in the following table,Northwest operated a mainline fleet of 319 aircraft at September 30, 2008,consisting of 260 narrow-body and 59 wide-body aircraft.  Northwest’s purchase commitments for aircraftas of September 30, 2008 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          |       | 42                  |       |        | -          |          |   | 28 |   |   | 70 |   |   | 2 |   |   |
| A330-200                             |       | 243          |       | 11                  |       |        | -          |          |   | - |   |   | 11 |   |   | - |   |   |
| A330-300                             |       | 298          |       | 21                  |       |        | -          |          |   | - |   |   | 21 |   |   | - |   |   |
|                                 |       |         |       |                |       |        |       |          |   |   |   |   |   |   |   |   |   |   |
| Boeing:                              |       |         |       |                |       |        |       |          |   |   |   |   |   |   |   |   |   |   |
| 787-8                                |       | TBD          |       | -                   |       |        | -          |          |   | - |   |   | - |   |   | 18 |   |   |
| 757-200                              |       | 160-184      |       | 34                  |       |        | 1          |          |   | 15 |   |   | 50 |   |   | - |   |   |
| 757-300                              |       | 224          |       | 16                  |       |        | -          |          |   | - |   |   | 16 |   |   | - |   |   |
| 747-400                              |       | 403          |       | 4                   |       |        | -          |          |   | 12 |   |   | 16 |   |   | - |   |   |
|                                 |       |         |       |                |       |        |       |          |   |   |   |   |   |   |   |   |   |   |
| McDonnell  Douglas:                  |       |         |       |                |       |        |       |          |   |   |   |   |   |   |   |   |   |   |
| DC9                                  |       | 100-125      |       | 67                  |       |        | -          |          |   | - |   |   | 67 |   |   | - |   |   |
|                                 |       |         |       | 250                 |       |        | 1          |          |   | 57 |   |   | 308 |   |   | 25 |   |   |
|                                 |       |         |       |                |       |        |       |          |   |   |   |   |   |   |   |   |   |   |
| **Freighter Aircraft**               |       |         |       |                |       |        |       |          |   |   |   |   |   |   |   |   |   |   |
| Boeing 747F                          |       |         |       | 8                   |       |        | -          |          |   | 3 |   |   | 11 |   |   | - |   |   |
|                                 |       |         |       |                |       |        |       |          |   |   |   |   |   |   |   |   |   |   |
| **Total Mainline Operated Aircraft** | ** ** | **258**      | ** ** | ** **          | **1**      | ** **  | ** ** | **60**        | ** ** | ** ** | **319** | ** ** | ** ** | **25** | ** ** | ** ** |
| ** **                           | ** ** | ** **   | ** ** | ** **          | ** ** | ** **  | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Regional Aircraft**                |       |         |       |                |       |        |       |          |   |   |   |   |   |   |   |   |   |   |
| CRJ200                               |       | 50           |       | -                   |       |        | -          |          |   | 141 |   |   | 141 |   |   | - |   |   |
| Saab 340                             |       | 33           |       | -                   |       |        | -          |          |   | 49 |   |   | 49 |   |   | - |   |   |
| CRJ900                               |       | 76           |       | 31                  |       |        | -          |          |   | - |   |   | 31 |   |   | 5 |   |   |
| Embraer 175                          |       | 76           |       | 28                  |       |        | -          |          |   | - |   |   | 28 |   |   | 6 |   |   |
|                                 |       |         |       |                |       |        |       |          |   |   |   |   |   |   |   |   |   |   |
| **Total Airlink Operated Aircraft**  | ** ** | **59**       | ** ** | ** **          | **-**      | ** **  | ** ** | **190**       | ** ** | ** ** | **249** |   |   | **11** |   |   |
|                                 |       |         |       |                |       |        |       |          |   |   |   |   |   |   |   |   |   |   |
| **Total Aircraft**                   | ** ** | ** **   | ** ** | **317**             | ** ** | ** **  | **1**      | ** **    | ** ** | **250** | ** ** | ** ** | **568** |   |   | **36** |   |   |

 

The Company took deliveryof 18 CRJ900 and 21 Embraer 175 aircraft during thenine months ended September 30, 2008. Two Embraer 175 aircraft had not been placed into service before September 30,2008 and therefore are not included in the table above.  In connection with the acquisition of these 39 aircraft, the Company entered intolong-term debt arrangements.  Under sucharrangements, the aggregate amount of debt incurred totaled $690 million.

 

19

 

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

 

Comprehensive income (loss) consisted of the following:

 
| ** **                                                          | ** ** | **Successor**                    | ** ** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|------------|
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | ** ** |
| ** **                                                          | ** ** | **September 30**            | ** ** | ** ** |
| *(In millions)*                                                | ** ** | **2008**                         | ** ** | ** ** | **2007** | ** ** | ** ** |
| Net income  (loss)                                                  | ** ** | **$**                            | **(317**   | **)**      | ** ** | $ | 244 |   |   |
| Pension,  other postretirement, and long-term disabilities benefits | ** ** | **1**                            | ** ** | ** ** | - |   |   |
| Change in  unrealized gain (loss) on available-for-sale securities  | ** ** | **-**                            | ** ** | ** ** | (4 | ) |   |
| Change in  deferred gain (loss) from hedging activities             | ** ** | **(1**                           | **)**      | ** ** | (2 | ) |   |
| Foreign  currency translation adjustments                           | ** ** | **-**                            | ** ** | ** ** | - |   |   |
| Comprehensive  income (loss)                                        | ** ** | **$**                            | **(317**   | **)**      | ** ** | $ | 238 |   |   |

 
| ** **                                                          | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**         | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|------------|-------------------------|------------|------------|
| ** **                                                          | ** ** | **Nine Months**   | ** ** | ** ** | **Period from**    | ** ** | ** ** | **Period from** | ** ** | ** ** |
| ** **                                                          | ** ** | **Ended**              | ** ** | ** ** | **June 1 to** | ** ** | ** ** | **January 1 to** | ** ** | ** ** |
| ** **                                                          | ** ** | **September 30,** | ** ** | ** ** | **September 30,**  | ** ** | ** ** | **May 31,** | ** ** | ** ** |
| *(In millions)*                                                | ** ** | **2008**               | ** ** | ** ** | **2007**                | ** ** | ** ** | **2007** | ** ** | ** ** |
| Net income  (loss)                                                  | ** ** | **$**                  | **(4,833** | **)**      | ** **              | $          | 350        |   |   | $ | 1,751 |   |   |
| Pension,  other postretirement, and long-term disabilities benefits | ** ** | **72**                 | ** ** | ** ** | -                       |       |       | - |   |   |
| Change in  unrealized gain (loss) on available-for-sale securities  | ** ** | **-**                  | ** ** | ** ** | (5                      | )          |       | 1 |   |   |
| Change in  deferred gain (loss) from hedging activities             | ** ** | **28**                 | ** ** | ** ** | (1                      | )          |       | - |   |   |
| Foreign  currency translation adjustments                           | ** ** | **-**                  | ** ** | ** ** | -                       |       |       | (1 | ) |   |
| Comprehensive  income (loss)                                        | ** ** | **$**                  | **(4,733** | **)**      | ** **              | $          | 344        |   |   | $ | 1,751 |   |   |

 

**Note 13 – Pensionand Other Postretirement Health Care Benefits**

 

The Companyhas several defined benefit pension plans and defined contribution 401(k)-type plans covering substantially allof 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 provided for theseemployees through 401(k)-type defined contribution plans including the PilotMoney Purchase Plan or, in the case of International Association of Machinists &Aerospace Workers (“IAM”) represented employees, the IAM NationalMulti-Employer Plan.

 

Northwestalso sponsors various contributory and noncontributory medical, dental and lifeinsurance benefit plans covering certain eligible retirees and theirdependents.  The expected future cost ofproviding such postretirement benefits is accrued over the service lives ofactive employees.  Retired employees arenot offered Company-paid medical and dental benefits after age 64, with theexception of certain employees who retired prior to 1987 and receive lifetimeCompany-paid medical and dental benefits. Prior to age 65, the retiree share of the cost of medical and dentalcoverage is based on a combination of years of service and age at retirement.  Medical and dental benefit plans are unfundedand costs are paid as incurred.  Thepilot group is provided Company-paid decreasing life insurance coverage.

 

The PensionProtection Act of 2006 (“2006 Pension Act”) allows commercial airlines to electspecial funding rules for defined benefit plans that are frozen.  The unfunded liability for a frozen definedbenefit 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 the special funding rules forfrozen defined benefit plans under the 2006 Pension Act effective October 1,2006.  As a result of this election (1) thefunding waivers that Northwest received for the 2003 plan year contributionswere deemed satisfied under the 2006 Pension Act, and (2) the fundingstandard account for each Plan was reduced to zero as of September 30,2006.  New contributions that came dueunder the 2006 Pension Act funding rules were paid while Northwest was inbankruptcy and must continue to be paid going forward.  If the new contributions are not paid, thefuture funding deficiency that would develop will be based on the regularfunding rules rather than the special funding rules.

 

20

----

 

Federallegislation enacted in December 2007 effected a change in the retirementage for pilots from age 60 to 65.  Due tothis legislative change, the Company has updated its retirement assumptions forpilots and assumes that certain pilots will continue to work past age 60. Thischange had an immaterial impact on Northwest’s overall pension benefit andother postretirement obligations.

 

***Components of net periodic benefit cost of defined benefitplans and defined contribution plan costs:***

 
| ** **                                      | ** ** | **Successor**                    | ** ** | ** **                       | ** ** | ** **                 | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **Pension Benefits**        | ** ** | **Other Benefits**          | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **September 30,**           | ** ** | **September 30,**           | ** ** | ** **                 | ** ** | ** ** | ** ** |
| *(In millions)*                            | ** ** | **2008**                         | ** ** | **2007**                         | ** ** | **2008**                   | ** ** | **2007** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Defined  benefit plan costs                     | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                                   | ** ** | ** $**                      | **6**      | ** **                       | ** ** |  $                    | 11         |   |   | ** $** | **6** |   | ** ** |  $ | 6 | ** ** |   |   |   |   |   |   |   |   |   |
| Interest  cost                                  | ** ** | **141**                          | ** ** | ** **                       | 139        |                       |       | **12** |   | ** ** | 11 | ** ** |   |   |   |   |   |   |   |
| Expected  return on plan assets                 | ** ** | **(140**                         | **)**      | ** **                       | (143       | )                          |       | **-** |   | ** ** | - | ** ** |   |   |   |   |   |   |   |
| Amortization  of prior service cost             | ** ** | **-**                            | ** ** | ** **                       | -          |                       |       | **-** |   | ** ** | - | ** ** |   |   |   |   |   |   |   |
| Recognized  net actuarial loss and other events | ** ** | **-**                            | ** ** | ** **                       | **-**      | ** **                 | ** ** | **-** | ** ** | ** ** | **-** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic  benefit cost                      | ** ** | **7**                            | ** ** | ** **                       | 7          |                       |       | **18** |   | ** ** | 17 | ** ** |   |   |   |   |   |   |   |
| ** **                                      | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Defined  contribution plan costs                | ** ** | **27**                           | ** ** | ** **                       | 16         |                       |       | **-** |   | ** ** | - | ** ** |   |   |   |   |   |   |   |
| Total  benefit cost                             | ** ** | ** $**                      | **34**     | ** **                       | ** ** |  $                    | 23         |   |   | ** $** | **18** |   | ** ** |  $ | 17 | ** ** |   |   |   |   |   |   |   |   |   |
| ** **                                      | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Pension Benefits**        | ** ** | **Other Benefits**          | ** ** |
| ** **                                      | ** ** | **Successor**                    | ** ** | **Predecessor**                  | ** ** | **Successor**              | ** ** | **Predecessor** | ** ** |
| ** **                                      | ** ** | **Nine Months**             | ** ** | **Period from**             | ** ** | **Period from**       | ** ** | **Nine Months** | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **                                      | ** ** | **Ended**                        | ** ** | **June 1 to**          | ** ** | **January 1 to** | ** ** | **Ended** | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** |
| ** **                                      | ** ** | **September 30,**           | ** ** | **September 30,**           | ** ** | **May 31,**           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **May 31,** | ** ** |
| *(In millions)*                            | ** ** | **2008**                         | ** ** | **2007**                         | ** ** | **2007**                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2007** | ** ** |
| Defined  benefit plan costs                     | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                                   | ** ** | ** $**                      | **17**     | ** **                       | ** ** |  $                    | 15         |   |   |  $ | 19 |   | ** ** | ** $** | **19** | ** ** |   |  $ | 8 |   |   |  $ | 10 |   |   |
| Interest  cost                                  | ** ** | **423**                          | ** ** | ** **                       | 185        |                       |       | 225 |   | ** ** | **36** | ** ** |   | 15 |   |   | 22 |   |   |
| Expected  return on plan assets                 | ** ** | **(420**                         | **)**      | ** **                       | (191       | )                          |       | (207 | ) | ** ** | **-** | ** ** |   | - |   |   | - |   |   |
| Amortization  of prior service cost             | ** ** | **-**                            | ** ** | ** **                       | -          |                       |       | - |   | ** ** | **-** | ** ** |   | - |   |   | (15 | ) |   |
| Recognized  net actuarial loss and other events | ** ** | **1**                            | ** ** | ** **                       | **-**      | ** **                 | ** ** | 18 | ** ** | ** ** | **-** | ** ** | ** ** | **-** | ** ** | ** ** | 16 | ** ** | ** ** |
| Net  periodic benefit cost                      | ** ** | **21**                           | ** ** | ** **                       | 9          |                       |       | 55 |   | ** ** | **55** | ** ** |   | 23 |   |   | 33 |   |   |
| ** **                                      | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Defined  contribution plan costs                | ** ** | **82**                           | ** ** | ** **                       | 20         |                       |       | 23 |   | ** ** | **-** | ** ** |   | - |   |   | - |   |   |
| Total  benefit cost                             | ** ** | ** $**                      | **103**    | ** **                       | ** ** |  $                    | 29         |   |   |  $ | 78 |   | ** ** | ** $** | **55** | ** ** |   |  $ | 23 |   |   | $ | 33 |   |   |

 

21

 

**Note 14 – Stock-BasedCompensation**

 

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, outstanding awards under the Prior ManagementPlans and Pilot Plan were cancelled in accordance with the terms of thePlan.  On the Effective Date, the 2007Stock Incentive Plan (the “2007 Plan”) of the Successor Company provided for inthe Plan of Reorganization became effective. In September 2008, the stockholders of the Company approved anamendment to the 2007 Plan, which expanded the definition of participants toinclude members of the Company’s Board of Directors.  The 2007 Plan is a stock-based incentivecompensation plan, under which the Compensation Committee of the Board ofDirectors has the authority to grant to employees equity-based awards includingstock options, stock appreciation rights, restricted stock, restricted stockunits, and/or other stock-based awards, including performance-basedawards.  Each of these awards may begranted alone, in conjunction with, or in tandem with other awards under the2007 Plan.  Awards may be made to anyemployee of the Company or a subsidiary of the Company who is selected toparticipate in the plan and to members of the Company’s Board ofDirectors.  The number of participantsparticipating in the 2007 Plan, as amended, will vary from year to year.  At its inception, the 2007 Plan provided that21.3 million shares of common stock of the Successor Company were available forissuance under the plan.  As of September 30,2008, approximately 6.8 million shares remained available for new awards to begranted under the 2007 Plan.

 

The totalstock-based non-cash compensation expense recognized related to stock-basedplans and liability awards is summarized as follows:

 
| ** **                                       | ** ** | **Successor**                    | ** ** | **Predecessor**        | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | ** **                       | ** ** | ** **             | ** ** | **Nine Months** | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Ended**              | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** |
| ** **                                       | ** ** | **September 30,**           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **May 31,** | ** ** |
| *(In millions)*                             | ** ** | **2008**                         | ** ** | **2007**               | ** ** | **2008** | ** ** | **2007** | ** ** | **2007** | ** ** |
| Stock-based  plans                               | ** ** | **$**                            | **12.4**   |                   | $          | 29.7 | ** ** | **$** | **82.4** |   | $ | 39.2 |   | $ | 0.2  |   |
| Liability  awards                                | ** ** | **0.5**                          |       | 1.2                    | ** ** | **1.8** |   | 1.5 |   | (1.3) |   |
| Total stock-based non-cash  compensation expense |       | **$**                            | **12.9**   |                   | $          | 30.9 |   | **$** | **84.2** |   | $ | 40.7 |   | $ | (1.1) |   |

 

There was nocorresponding tax benefit in 2008 or 2007 related to the stock-basedcompensation, as the Company records a full valuation allowance against itsdeferred tax assets due to the uncertainty regarding the ultimate realizationof those assets.  See “Note 8 – IncomeTaxes” for additional information.

 

**Note 15 – SubsequentEvents**

 

*Alliances with Continental.* Since 1998, Northwest and Continental have been in a domestic andinternational commercial alliance (“CO/NW Alliance Agreement”) that includescodesharing, frequent flyer program reciprocity and other cooperative marketingprograms.  The CO/NW Alliance Agreement allowed either party to provide asix-month notice of termination of the agreement in the event of a change ofcontrol involving the Company, which under the CO/NW Alliance Agreementoccurred on the execution of the Merger Agreement with Delta.  On October 9,2008, Continental Airlines provided NWA Corp. with such a six-month notice andas a result the CO/NW Alliance Agreement will terminate in April 2009.

 

Northwest,Continental, and Delta are also party to a separate three-way commercialalliance agreement (the “DL/CO/NW Alliance Agreement”).  The DL/CO/NWAlliance Agreement was designed to connect the three carriers’ domestic andinternational networks and provides for codesharing, reciprocity of frequentflyer programs, airport club use and other cooperative marketing programs. The DL/CO/NW Alliance Agreement allows each party to provide a nine-monthnotice of termination of the agreement following the consummation of a changeof control involving two of the three parties to the agreement.  Based onContinental’s decision to terminate the CO/NW Alliance Agreement withNorthwest, and Continental’s announced intention to join the Star Alliance, theCompany anticipates that Continental will also terminate the DL/CO/NW AllianceAgreement and its participation in SkyTeam following the closing of the Merger. The financial impact of Continental’stermination of its alliance relationships with Northwest and Delta was fullyconsidered and netted against the projected network synergies generated by theMerger.

 

22

 

**Item 2.       Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

**Overview**

 

On September 14, 2005 (the “Petition Date”), NWA Corp. and 12 of itsdirect and 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 relief under Chapter 11.  On May 18, 2007, the Bankruptcy Courtentered an order approving and confirming the Debtors’ First Amended Joint andConsolidated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (asconfirmed, the “Plan” or “Plan of Reorganization”).  The Plan became effective and the Debtorsemerged from bankruptcy protection on May 31, 2007 (the “Effective Date”).

 

On the Effective Date, the Company implemented fresh-start reporting inaccordance with American Institute of Certified Public Accountants’Statement of Position 90-7, *FinancialReporting by Entities in Reorganization under the Bankruptcy Code* (“SOP90-7”). Thus the consolidated financial statements prior to June 1, 2007reflect results based upon the historical cost basis of the Company while thepost-emergence consolidated financial statements reflect the new basis ofaccounting incorporating the fair value adjustments made in recording theeffects of fresh-start reporting.  Therefore,the post-emergence periods are not comparable to the pre-emergenceperiods.  However, for discussions on theresults of operations, the Company believes that comparisons of financialresults between the post-emergence and pre-emergence periods provide managementand investors with a better perspective of the Company’s core business andon-going operational financial performance and trends.

 

*Merger Agreement with Delta.* On April 14, 2008, NWA Corp. and Delta Air Lines, Inc. (“Delta”)entered into an Agreement and Plan of Merger (the “Merger Agreement”) thatprovides, among other things, for NWA Corp. to be merged with a wholly-ownedsubsidiary of Delta (the “Merger”).

 

Consummation of theMerger is subject to customary closing conditions, including obtaining theapproval of NWA Corp.’s and Delta’s stockholders and receiving certain domesticand foreign regulatory and antitrust approvals (including from the FederalAviation Administration and the United States Department of Transportation,under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, andpursuant to Council Regulation (EEC) 139/2004 of the European Commission).  The Merger Agreement contains certaintermination rights for both NWA Corp. and Delta.  The Merger Agreement further provides that,upon termination of the Merger Agreement under specified circumstances, theCompany may be required to pay to Delta, or Delta may be required to pay to theCompany, a termination fee of $165 million. NWA Corp.’s stockholders approved the proposed Merger at the annualstockholders meeting held on September 25, 2008.  Delta’s stockholders approved share issuancesin conjunction with the proposed Merger at a special stockholders meeting onthe same date.

 

Under the terms ofthe Merger Agreement, each outstanding share of NWA Corp. common stock will beconverted into the right to receive 1.25 shares of Delta common stock.  Stock options and other equity awards grantedunder the Company’s 2007 Management Equity Plan will convert into stock optionsand equity awards with respect to Delta common stock, after giving effect tothe exchange ratio.

 

Certain contracts,employee benefit arrangements and debt instruments of the Company containchange in control provisions that may be triggered by the Merger, resulting inchanges to the terms or settlement amounts of the contracts, arrangements orinstruments.

 

We currently expectthe Merger to close by the end of 2008. However, factors outside of our control could require us to complete theMerger at a later time or not to complete it at all.

 

**Third Quarter 2008 Results**

 

For the quarter ended September 30,2008, the Company recorded a net loss of $317 million, which includes a $409.6million loss associated with marking-to-market out-of-period fuel hedges. Thiscompares to third quarter 2007 net income of $244 million, which included a$12.1 million gain associated with marking-to-market out-of-period fuel hedges.

 

Operating revenues in the thirdquarter increased 12.4 percent versus the third quarter of 2007 to $3.8billion.  System consolidated passengerrevenue increased 11.3 percent to $3.3 billion on 2.9 percent additionalavailable seat miles (“ASMs”), resulting in an 8.1 percent increase in unitrevenue.

 

23

 

Operating expenses in the quarter increased 37.5 percent year-over-yearto $4 billion.  Aircraft fuel and taxesincreased 116.8 percent compared with the third quarter of 2007, primarily dueto increased fuel prices and marking-to-market out-of-period fuel hedges.  During the third quarter, fuel averaged $3.79per gallon, excluding taxes and mark-to-market expense related to future periodfuel derivative contracts, up 79.8 percent versus the third quarter of lastyear.

 

At September 30, 2008, theCompany had cash and cash equivalents of $2.8 billion and unrestrictedshort-term investments of $286 million, providing total available liquidity of$3.1 billion.  This amount excludes $446million of restricted short-term investments (which may include amounts held ascash).

 

**Operating Statistics– Three and nine months ended September 30, 2008 and 2007**

 

Information with respect to theCompany’s operating statistics follows:

 

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

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | ** **  | **Nine Months Ended** | ** **            | ** ** | ** **  |
|--------------------------------------------------------|------------|----------------------------------|------------|-------------|---------------------------------|-----------------------|------------|-------------|
| ** **                                             | ** ** | **September 30**            | ** ** | **Percent** | ** **                      | **September 30** | ** ** | **Percent** | ** ** |
| ** **                                             | ** ** | **2008**                         | ** ** | **2007**    | ** **                      | **Change**            | ** ** | **2008**    | ** ** | **2007** | ** ** | **Change** | ** ** |
| **Scheduled service - Consolidated:**(1)               |       |                             |       |        |                            |                  |       |        |   |   |   |   |   |
| Available  seat miles (ASM) (millions)                 | ** ** | **24,587**                       | ** ** |        | 23,889                          |                  |       | 2.9         |   | ** ** | **72,464** | ** ** |   | 70,438 |   |   | 2.9 |   |   |
| Revenue  passenger miles (RPM) (millions)              | ** ** | **21,037**                       | ** ** |        | 20,644                          |                  |       | 1.9         |   | ** ** | **61,104** | ** ** |   | 59,453 |   |   | 2.8 |   |   |
| Passenger  load factor                                 | ** ** | **85.6**                         | %          |        | 86.4                            | %                     |       | (0.8        | )pts. |   | **84.3** | % | ** ** | 84.4 | % |   | (0.1 | )pts. |   |
| Revenue  passengers (millions)                         | ** ** | **17.1**                         | ** ** |        | 17.3                            |                  |       | (1.2        | ) |   | **50.5** |   |   | 50.3 |   |   | 0.4 |   |   |
| Passenger  revenue per RPM (yield)                     | ** ** | **15.63**                        | *¢*   | * *    | 14.32                           | *¢*              |       | 9.1         | ** ** | ** ** | **14.74** | *¢* | * * | 13.86 | *¢* | * * | 6.3 |   | * * |
| Passenger  revenue per ASM (RASM)                      | ** ** | **13.38**                        | *¢*   | * *    | 12.38                           | *¢*              | * *   | 8.1         | ** ** | ** ** | **12.43** | *¢* | * * | 11.70 | *¢* | * * | 6.2 |   | * * |
|                                                   |       |                             |       |        |                            |                  |       |        |   |   |   | * * |   |   |   |   |   |   |   |
| **Fuel gallons consumed - Consolidated**(millions) (1) | ** ** | **430**                          | ** ** |        | 443                             |                  |       | (2.9        | ) |   | **1,286** | * * |   | 1,295 |   |   | (0.7 | ) |   |
|                                                   |       |                             |       |        |                            |                  |       |        |   |   |   | * * |   |   |   |   |   |   |   |
| **Scheduled service - Mainline:**(2)                   |       |                             |       |        |                            |                  |       |        |   |   |   | * * |   |   |   |   |   |   |   |
| Available  seat miles (ASM) (millions)                 | ** ** | **21,745**                       | ** ** |        | 22,030                          |                  |       | (1.3        | ) |   | **64,803** | * * |   | 65,178 |   |   | (0.6 | ) |   |
| Revenue  passenger miles (RPM) (millions)              | ** ** | **18,879**                       | ** ** |        | 19,215                          |                  |       | (1.7        | ) |   | **55,338** | * * |   | 55,518 |   |   | (0.3 | ) |   |
| Passenger  load factor                                 | ** ** | **86.8**                         | **%**      |        | 87.2                            | %                     |       | (0.4        | )pts. |   | **85.4** | *%* |   | 85.2 | % |   | 0.2 | pts. |   |
| Revenue  passengers (millions)                         | ** ** | **12.7**                         | ** ** |        | 13.9                            |                  |       | (8.6        | ) |   | **38.2** | * * |   | 40.9 |   |   | (6.6 | ) |   |
| Passenger  revenue per RPM (yield)                     | ** ** | **14.47**                        | *¢*   | * *    | 13.41                           | *¢*              | * *   | 7.9         |   |   | **13.61** | *¢* | ** ** | 12.98 | *¢* | * * | 4.9 |   |   |
| Passenger  revenue per ASM (RASM)                      | ** ** | **12.56**                        | *¢*   | * *    | 11.70                           | *¢*              | * *   | 7.4         |   |   | **11.62** | *¢* | ** ** | 11.06 | *¢* | ** ** | 5.1 | * * | * * |
|                                                   |       |                             |       |        |                            |                  |       |        |   |   |   | * * |   |   |   |   |   |   |   |
| **Fuel gallons consumed - Mainline**(millions) (2)     | ** ** | **367**                          | ** ** |        | 398                             |                  |       | (7.8        | ) |   | **1,110** | * * |   | 1,167 |   |   | (4.9 | ) |   |

 

(1)   Consolidatedstatistics include Northwest Airlink regional carriers.

 

(2)   Mainline statistics exclude Northwest Airlinkregional carriers, which is consistent with how the Company reports statisticsto the Department of Transportation (“DOT”).

 

24

 

**MAINLINE OPERATINGSTATISTICAL RESULTS (1)**

 
| ** **                                                                                                                                | ** **   | **Three Months Ended** | ** **        | ** **  | ** ** | **Nine Months Ended** | ** ** | ** **  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------|-------------------|-------------|------------|-----------------------|------------|-------------|------------|
| ** **                                                                                                                                | ** **   | **September 30**       | ** **        | **Percent** | ** ** | **September 30**      | ** ** | **Percent** | ** ** |
| ** **                                                                                                                                | ** **   | **2008**               | ** **        | **2007**    | ** ** | **Change**            | ** ** | **2008**    | ** ** | **2007** | ** ** | **Change** | ** ** |
| Total  operating ASM (millions)                                                                                                           | ** **   | **21,880**             |              |        | 22,059     |                  |       | (0.8        | )          | ** ** | **65,207** |   |   | 65,248 |   |   | (0.1 | ) |   |
|                                                                                                                                      | ** **   | ** **             |              |        |       |                  |       |        | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Passenger  service operating expense per total ASM (2) (3)                                                                                |         | **14.76**              | **¢**        |        | 10.76      | ¢                |       | 37.2        |       |   | **13.02** | **¢** |   | 10.52 | ¢ |   | 23.8 |   |   |
| Mainline  fuel expense per total ASM                                                                                                      | *** *** | **7.55**               | **¢**        |        | 3.47       | ¢                |       | 117.6       | ** ** | ** ** | **5.59** | **¢** |   | 3.29 | ¢ |   | 69.9 |   |   |
|                                                                                                                                      | ** **   | ** **             |              |        |       |                  |       |        | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Out-of-period  mark-to-market gains (losses) per total ASM related to fuel derivative  contracts                                          |         | **(1.50**              | **)¢**       |        | 0.05       | ¢                |       | n/m         |       |   | **(0.21** | **)¢** |   | 0.05 | ¢ |   | n/m |   |   |
|                                                                                                                                      | ** **   | ** **             |              |        |       |                  |       |        | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Mainline  fuel expense per total ASM, excluding out-of-period mark-to-market  adjustments related to fuel derivative contracts            | ** **   | **6.05**               | **¢**        |        | 3.52       | ¢                |       | 71.9        | ** ** | ** ** | **5.38** | **¢** |   | 3.34 | ¢ |   | 61.1 |   |   |
|                                                                                                                                      | ** **   | ** **             |              |        |       |                  |       |        | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Cargo ton  miles (millions)                                                                                                               | ** **   | **402**                |              |        | 529        |                  |       | (24.0       | )          | ** ** | **1,320** |   |   | 1,491 |   |   | (11.5 | ) |   |
| Cargo  revenue per ton mile                                                                                                               | ** **   | **50.06**              | **¢**        |        | 40.00      | ¢                |       | 25.2        | ** ** | ** ** | **46.33** | **¢** |   | 40.16 | ¢ |   | 15.4 |   |   |
| Fuel  gallons consumed (millions)                                                                                                         | ** **   | **367**                |              |        | 398        |                  |       | (7.8        | )          | ** ** | **1,110** |   |   | 1,167 |   |   | (4.9 | ) |   |
| Average  fuel cost per gallon, excluding taxes                                                                                            | ** **   | **474.80**             | **¢**        |        | 208.17     | ¢                |       | 128.1       | ** ** | ** ** | **346.92** | **¢** |   | 197.35 | ¢ |   | 75.8 |   |   |
|                                                                                                                                      | ** **   | ** **             |              |        |       |                  |       |        | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Out-of-period  mark-to-market gains (losses) per fuel gallons consumed related to fuel  derivative contracts                         |         | **(95.65**             | **)¢ ** |        | 2.72       | ¢                |       | n/m         |       |   | **(13.24** | **)¢** |   | 2.71 | ¢ |   | n/m |   |   |
|                                                                                                                                      | ** **   | ** **             |              |        |       |                  |       |        | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Average  fuel cost per gallon, excluding fuel taxes and out-of-period mark-to-market  gains (losses) related to fuel derivative contracts |         | **379.15**             | **¢**        |        | 210.89     | ¢                |       | 79.8        |       |   | **333.68** | **¢** |   | 200.06 | ¢ |   | 66.8 |   |   |
|                                                                                                                                      | ** **   | ** **             |              |        |       |                  |       |        | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Number of  operating aircraft at end of period                                                                                            | ** **   | ** **             |              |        |       |                  |       |        | ** ** | ** ** | **319** |   |   | 364 |   |   | (12.4 | ) |   |
| Full-time  equivalent employees at end of period                                                                                          | ** **   | ** **             |              |        |       |                  |       |        | ** ** | ** ** | **28,135** |   |   | 29,579 |   |   | (4.9 | ) |   |

 

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

 

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

 

(3)   Passengerservice operating expense excludes the following items unrelated to passengerservice operations, net of eliminations where applicable:

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **September 30**  | ** ** | **September 30**           | ** ** |
| *(In millions)*                              | ** ** | **2008**               |       | **2007**                        | ** ** | **2008** |   | **2007** |   |
| Goodwill  impairment                         | ** ** | **$**                  | **-**      |                            | $          | - | ** ** | **$** | **3,243** |   | $ | - |   |
| Other  impairment charges                    | ** ** | **-**                  |       | -                               | ** ** | **1,240** |   | - |   |
| Regional  carrier expenses                   | ** ** | **578**                |       | 320                             | ** ** | **1,437** |   | 899 |   |
| Freighter  operations                        | ** ** | **175**                |       | 173                             | ** ** | **498** |   | 460 |   |
| MLT Inc. -  net of intercompany eliminations | ** ** | **29**                 |       | 40                              | ** ** | **113** |   | 145 |   |
| Other                                        | ** ** | **3**                  |       | 14                              | ** ** | **51** |   | 48 |   |
|                                              |            |                        |            |                                 |            |  |  |  |  |  |  |  |  |

 

25

 

**Results of Operations – Threemonths ended September 30, 2008 and 2007**

 

*Operating Revenues*.  Operating revenues increased12.4 percent ($420 million).

 

*System Passenger Revenues.* Mainline passenger revenues increased by 6.0 percent.  In the following analysis by region, mainlinestatistics exclude Northwest Airlink regional carriers, which is consistentwith how the Company reports statistics to the DOT.

 
| ** **                         |   | **Mainline** |   | **Total**   |   |         |
|------------------------------------|--------|--------------|--------|-------------|--------|--------------|
| ** **                         |   | **Domestic** |   | **Pacific** |   | **Atlantic** |   | **Mainline** |   | **Consolidated** |
| **2008**                           |   |         |   |        |   |         |   |   |   |   |   |   |   |   |   |
| Passenger  revenues (in millions)  |   | $            | 1,526  |        |   | $            | 683 |   |   | $ | 523 |   |   | $ | 2,732 |   |   | $ | 3,289 |   |
|                               |   |         |   |        |   |         |   |   |   |   |   |   |   |   |   |
| **Increase (Decrease) from 2007:** |   |         |   |        |   |         |   |   |   |   |   |   |   |   |   |
| Passenger  revenues (in millions)  |   | $            | (5     | )           |   | $            | 57 |   |   | $ | 103 |   |   | $ | 155 |   |   | $ | 333 |   |
| Percent                            |   | (0.3         | )%     |        | 9.1    | %            |   | 24.5 | % |   | 6.0 | % |   | 11.3 | % |
|                               |   |         |   |        |   |         |   |   |   |   |   |   |    |   |   |
| Scheduled  service ASMs (capacity) |   | (9.9         | )%     |        | 1.9    | %            |   | 22.4 | % |   | (1.3 | )% |   | 2.9 | % |
| Scheduled  service RPMs (traffic)  |   | (8.6         | )%     |        | (1.7   | )%           |   | 20.5 | % |   | (1.7 | )% |   | 1.9 | % |
| Passenger  load factor             |   | 1.2          | pts.   |        | (3.1   | )pts.        |   | (1.3 | )pts. |   | (0.4 | )pts. |   | (0.8 | )pts. |
| Yield                              |   | 9.1          | %      |        | 11.0   | %            |   | 3.2 | % |   | 7.9 | % |   | 9.1 | % |
| Passenger  RASM                    |   | 10.7         | %      |        | 7.1    | %            |   | 1.6 | % |   | 7.4 | % |   | 8.1 | % |

 

*Regional Carrier Revenues*.  Regional carrier revenuesincreased 47.0 percent ($178 million) to $557 million primarily due to a 52.9percent increase in available seat miles associated with the delivery of new 76seat regional aircraft, partially offset by a decrease in yield.

 

*Cargo Revenues*.  Cargo revenues decreased 5.2percent ($11 million) to $201 million due primarily to a 24.0 percent decreasein volume offset by a 25.2 percent improvement in yield.

 

*Other Revenue. *Other revenue increased 46.7 percent ($98 million) to $308 million dueprimarily to increased charter and partner revenues.

 

26

 

*Operating Expenses*.  Operating expenses increased37.5 percent ($1.1 billion) for the three months ended September 30, 2008.  The following table and notes presentoperating expenses for the three months ended September 30, 2008 and 2007and describe significant year-over-year variances:

** **
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Increase**   | ** ** | ** **         | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|----------------|------------|--------------------|------------|------------|------------|
| ** **                                  | ** ** | **September 30**            | ** ** | **(Decrease)** | ** ** | **Percent**        | ** ** | ** ** | ** ** |
| *(In millions)*                        | ** ** | **2008**                         | ** ** | **2007**       | ** ** | **from 2007** | ** ** | **Change** | ** ** | **Note** | ** ** |
| **Operating Expenses**                      |       |                             |       |           |       |               |       |       |       |   |   |   |   |   |   |
| Aircraft  fuel and taxes                    | ** ** | **$**                            | **1,912**  | ** **     |       | $                  | 882        |       |       | $ | 1,030 |   |   | 116.8 | % |   | A |   |
| Salaries,  wages and benefits               | ** ** | **651**                          | ** ** |           | 660        |               |       | (9         | )          |   | (1.4 | ) |   | B |   |
| Selling and  marketing                      | ** ** | **201**                          | ** ** |           | 185        |               |       | 16         |       |   | 8.6 |   |   | C |   |
| Aircraft  maintenance materials and repairs | ** ** | **181**                          | ** ** |           | 210        |               |       | (29        | )          |   | (13.8 | ) |   | D |   |
| Other  rentals and landing fees             | ** ** | **150**                          | ** ** |           | 142        |               |       | 8          |       |   | 5.6 |   |   | E |   |
| Depreciation  and amortization              | ** ** | **122**                          | ** ** |           | 122        |               |       | -          |       |   | - |   |   | B |   |
| Aircraft  rentals                           | ** ** | **93**                           | ** ** |           | 93         |               |       | -          |       |   | - |   |   | B |   |
| Regional  carrier expenses                  | ** ** | **257**                          | ** ** |           | 181        |               |       | 76         |       |   | 42.0 |   |   | F |   |
| Other                                       | ** ** | **447**                          | ** ** |           | 444        |               |       | 3          |       |   | 0.7 |   |   | B |   |
| Total  operating expenses                   | ** ** | **$**                            | **4,014**  | ** **     |       | $                  | 2,919      |       |       | $ | 1,095 |   |   | 37.5 | % |   |   |   |

 

A.     Aircraft fuel and taxes increased due to a 128.1 percent increase in theaverage fuel cost per gallon to $4.75 offset by a 7.8 percent decrease ingallons consumed.  During the thirdquarter of 2008 we recognized $436.2 million in net fuel derivative contractlosses, consisting of $378.1 million in out-of-period mark-to-market losses and$58.1 million of losses for contracts settled in the current period.  During the third quarter of 2007 werecognized $31.5 million in net fuel derivative contract gains, consisting of$10.8 million in out-of-period mark-to-market losses and $20.7 million of gainsfor contracts settled in the period.

B.    Salaries, wages and benefits, depreciation and amortization, aircraftrentals, and other expenses were relatively flat year-over-year.

C.    Selling and marketing increased year-over-year primarily due to highercredit card fees and commissions.

D.    Aircraft maintenance and repairs decreased year-over-year primarily dueto lower engine repair expense.

E.    Other rentals and landing fees increased year-over-year primarily due tohigher facilities rents and landing fees.

F.     Regional carrier expense increased year-over-year primarily due to higherfuel costs.

 

*Other Income and Expense.* The Company recorded non-operating expense of $98 million in the thirdquarter of 2008 as compared to non-operating expense of $54 million in thethird quarter of 2007.  The increase innon-operating expense is primarily due to increased interest expense and lowerinvestment income compared to the third quarter 2007.

 

*Tax Expense (Benefit).* Given its recent loss experience, the Company provides a valuationallowance against tax benefits, principally for net operating losses in excessof its deferred tax liability.  It ismore likely than not that future deferred tax assets will require a valuationallowance to be recorded to fully reserve against the uncertainty that thoseassets would be realized.  See “Item 1.Financial Statements, Note 8 – Income Taxes” for additional discussion of theCompany’s tax accounts.

 

27

 

**Results ofOperations – Nine months ended September 30, 2008 and 2007**

 

*Operating Revenues*.  Operating revenues increased11.3 percent ($1.1 billion).

 

*System Passenger Revenues. *In thefollowing analysis by region, mainline statistics exclude Northwest Airlinkregional carriers, which is consistent with how the Company reports statisticsto the DOT.

 

The followinganalysis by region outlines the Company’s year-over-year performance asreported and excluding fresh-start related changes.

 
| ** **                         |   | **Mainline** |   | **Total**   |   |         |
|------------------------------------|--------|--------------|--------|-------------|--------|--------------|
| ** **                         |   | **Domestic** |   | **Pacific** |   | **Atlantic** |   | **Mainline** |   | **Consolidated** |
| **As reported:**                   |   |         |   |        |   |         |   |   |   |   |   |   |   |   |   |
| **2008**                           |   |         |   |        |   |         |   |   |   |   |   |   |   |   |   |
| Passenger  revenues (in millions)  |   | $            | 4,446  |        |   | $            | 1,799 |   |   | $ | 1,284 |   |   | $ | 7,529 |   |   | $ | 9,008 |   |
|                               |   |         |   |        |   |         |   |   |   |   |   |   |   |   |   |
| **Increase (Decrease) from 2007:** |   |         |   |        |   |         |   |   |   |   |   |   |   |   |   |
| Passenger  revenues (in millions)  |   | $            | (48    | )           |   | $            | 134 |   |   | $ | 237 |   |   | $ | 323 |   |   | $ | 767 |   |
| Percent                            |   | (1.1         | )%     |        | 8.0    | %            |   | 22.6 | % |   | 4.5 | % |   | 9.3 | % |
|                               |   |         |   |        |   |         |   |   |   |   |   |   |   |   |   |
| Scheduled  service ASMs (capacity) |   | (6.7         | )%     |        | (0.5   | )%           |   | 22.6 | % |   | (0.6 | )% |   | 2.9 | % |
| Scheduled  service RPMs (traffic)  |   | (5.1         | )%     |        | (0.9   | )%           |   | 18.5 | % |   | (0.3 | )% |   | 2.8 | % |
| Passenger  load factor             |   | 1.4          | pts.   |        | (0.4   | )pts.        |   | (2.9 | )pts. |   | 0.2 | pts. |   | (0.1 | )pts. |
| Yield                              |   | 4.3          | %      |        | 9.1    | %            |   | 3.5 | % |   | 4.9 | % |   | 6.3 | % |
| Passenger  RASM                    |   | 6.1          | %      |        | 8.6    | %            |   | 0.1 | % |   | 5.1 | % |   | 6.2 | % |

 

*Regional Carrier Revenues*.  Regional carrier revenuesincreased 42.9 percent ($444 million) to $1.5 billion primarily due to a 45.7percent increase in available seat miles associated with the delivery of new 76seat regional aircraft, partially offset by a decrease in yield.

 

*Cargo Revenues.*  Cargo revenues increased 2.0percent ($12 million) to $611 million due primarily to a 15.4 percent increasein yield offset by an 11.5 percent decrease in volume.

 

*Other Revenue.*  Other revenue increased 49percent ($290 million) to $882 million due to increased charter and partnerrevenues, and the portion of payments received from non-airline marketingpartners for frequent flyer miles that is now recorded in Other Revenues.

 

28

 

*Operating Expenses*.  Operating expenses increased$6.7 billion for the nine months ended September 30, 2008 as compared tothe combined nine months ended September 30, 2007.  As a result of the adoption of fresh-startreporting, the Company’s financial statements on or after June 1, 2007 arenot comparable with its pre-emergence financial statements because they are, ineffect, those of a new entity.  Theeffects of fresh-start reporting and the impact of exit-related stockcompensation expense on the Company’s Condensed Consolidated Statements ofOperations are itemized in column (1). During 2008, the Company recorded impairment charges associated withgoodwill, international routes, other intangibles and aircraft; the impacts areitemized in column (2). On April 24, 2007, Mesaba Aviation, Inc. wasacquired by the Company and became a wholly-owned consolidated subsidiary; theimpact for the portion of 2008 when Mesaba was not a wholly owned subsidiary in2007 is itemized 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 nine months ended September 30,2008 and 2007 and describe significant year-over-year variances:

 
| ** **                                        | ** ** | ** **                               | ** ** | **Increase (Decrease) Due To:** | ** **                                 | ** **          | ** ** | ** **                                                                       | ** ** | ** **      |
|---------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------|--------------------------------------------|---------------------|------------|----------------------------------------------------------------------------------|------------|-----------------|
| ** **                                        | ** ** | ** **                               | ** ** | **(1)**                                        | ** **                                 | **(2)**             | ** ** | **(3)**                                                                          | ** ** | **(4)**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Nine Months Ended**          | ** ** | **Fresh-Start/**                               | ** **                                 | ** **          | ** ** | ** **                                                                       | ** ** | ** **      | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** |
| ** **                                        | ** ** | **September 30,**                   | ** ** | **Exit-Related**                               | ** **                                 | ** **          | ** ** | **Mesaba**                                                                       | ** ** | ** **      | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** |
| ** **                                        | ** ** | ** **                               | ** ** | **Combined**                                   | ** **                                 | **Stock Comp** | ** ** | **Impairment**                                                                   | ** ** | **Net of** | ** ** | ** ** | ** ** | ** ** | ** ** | **(Decrease)** | ** ** | **Percent** |
| *(In millions)*                              | ** ** | **2008**                                 | ** ** | **2007**                                       | ** **                                 | **Expense**         | ** ** | **Charges**                                                                      | ** ** | **Elimination** | ** ** | **Operations** | ** ** | **Note** | ** ** | **from 2007** | ** ** | **Change** |
| **Operating Expenses**                            |       |                                     |       |                                           |                                       |                |       |                                                                             |       |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Aircraft  fuel and taxes                          | ** ** | **$     4,233** | ** ** |                                           | $      2,441 |                |       | $             - |       |            | $           - |   |   | $          1 |   |   | $      1,791 |   |   | A |   | $   1,792 |   |   | 73.4 | % |
| Salaries,  wages and benefits                     | ** ** | **2,006**                                | ** ** |                                           | 1,892                                      |                |       | 21                                                                               |       |            | - |   |   | 47 |   |   | 46 |   |   | B |   | 114 |   |   | 6.0 |   |
| Selling and  marketing                            | ** ** | **591**                                  | ** ** |                                           | 565                                        |                |       | -                                                                                |       |            | - |   |   | - |   |   | 26 |   |   | C |   | 26 |   |   | 4.6 |   |
| Aircraft  maintenance materials and repairs       |       | **599**                                  | ** ** |                                           | 577                                        |                |       | -                                                                                |       |            | - |   |   | 13 |   |   | 9 |   |   | D |   | 22 |   |   | 3.8 |   |
| Other  rentals and landing fees                   | ** ** | **441**                                  | ** ** |                                           | 423                                        |                |       | -                                                                                |       |            | - |   |   | 6 |   |   | 12 |   |   | D |   | 18 |   |   | 4.3 |   |
| Depreciation  and amortization                    | ** ** | **1,015**                                | ** ** |                                           | 367                                        |                |       | (3                                                                               | )          |            | 642 |   |   | 3 |   |   | 6 |   |   | D |   | 648 |   |   | 176.6 |   |
| Aircraft  rentals                                 | ** ** | **280**                                  | ** ** |                                           | 284                                        |                |       | -                                                                                |       |            | - |   |   | - |   |   | (4 | ) |   | D |   | (4 | ) |   | (1.4 | ) |
| Regional  carrier expenses                        | ** ** | **669**                                  | ** ** |                                           | 583                                        |                |       | -                                                                                |       |            | - |   |   | (75 | ) |   | 161 |   |   | E |   | 86 |   |   | 14.8 |   |
| Goodwill  and other indefinite- lived intangibles |       | **3,841**                                |       |                                           | -                                          |                |       | -                                                                                |       |            | 3,841 |   |   | - |   |   | - |   |   | F |   | 3,841 |   |   | n/m |   |
| Other                                             | ** ** | **1,395**                                | ** ** |                                           | 1,283                                      |                |       | -                                                                                |       |            | - |   |   | 13 |   |   | 99 |   |   | G |   | 112 |   |   | 8.7 |   |
| Total  operating expenses                         | ** ** | **$   15,070**            | ** ** |                                           | $      8,415 |                |       | $          18                  |       |            | $    4,483 |   |   | $          8 |   |   | $      2,146 |   |   |   |   | $   6,655 |   |   | 79.1 | % |

 

A.     Aircraft fuel and taxes increased due to a 75.8 percent increase in theaverage fuel cost per gallon to $3.47 offset by a 4.9 percent decrease ingallons consumed.  Fuel expense for the2008 period includes $161.6 million in net fuel derivative contract losses,consisting of $161.0 million in out-of-period mark-to-market losses and $0.6million of losses for contracts settled in the current period.  Fuel expense for the 2007 period includes$47.7 million in net fuel derivative contract gains, consisting of $31.5million in out-of-period mark-to-market gains and $16.2 million of gains forcontracts settled during the period.

B.    Salaries, wages and benefits were higher year-over-year primarily due toincreased volume, employee retention program expense, summer reliabilityprogram expense, and higher group insurance and pension costs, partially offsetby decreased employee profit sharing program related expense.

C.    Selling and marketing expense, increased primarily due to increasedselling and marketing fees and credit cards fees.

D.    Aircraft maintenance materials and repairs expense, other rentals andlanding fees, depreciation and amortization, and aircraft rentals wererelatively flat year-over-year.

E.    Regional carrier expenses increased primarily due to higher fuel costs.

F.     During 2008, as part of the goodwill impairment test, the Companyrecorded non-cash impairment charges to goodwill and other indefinite-livedintangibles to reduce the book value of Northwest’s equity to its implied fairvalue as of the Merger announcement date. See “Item 1. Financial Statements, Note 4 – Goodwill andIntangibles” for additional information.

G.    Other expenses (which include MLT operating expenses, outside services,insurance, passenger food, personnel expenses, communication expenses andsupplies) were higher versus prior year due largely to increases in outsideservices with the shift to third party vendors versus internally staffedstation operations, personnel expenses, communication expenses and passengerfood.

 

29

 

*Other Income and Expense.* The Company recorded non-operating expense of $475 million in the ninemonths ended September 30, 2008 as compared to non-operating income of$1.3 billion in the nine months ended September 30, 2007.  The difference of $1.8 billion year-over-yearwas primarily due to a $1.8 billion gain on debt discharge and $1.3 billion innet gains associated with the revaluation of our assets and liabilities as partof our adoption of fresh-start accounting. These gains were offset by $1.6 billion in reorganization-relatedexpenses in the nine months ended September 30, 2007 and the impairment ofthe Company’s $213 million minorityownership interest in Midwest Air Partners, LLC in conjunction with Step 2 of the goodwill impairment test recordedduring the second quarter of 2008. See “Critical Accounting Estimates, *Goodwilland Other Impairments*” for additional information and “Item 1.Financial Statements, Note 7 – Reorganization Related Items” for additionalinformation related to reorganization items.

 

*Tax Expense (Benefit).* The Company recorded a non-cashincome tax benefit of $211 million in the nine months ended September 30,2008, primarily related to the impairment charges recorded in conjunction withStep 2 of the goodwill impairment test for certain indefinite-lived intangibleassets.  The Company recorded a non-cashincome tax expense in the nine months ended September 30, 2007 of $228million.  See “Item 1. FinancialStatements, Note 8 – Income Taxes” for additional discussion of the Company’stax accounts.

 

**Liquidity andCapital Resources**

 

At September 30,2008, the Company had cash and cash equivalents of $2.8 billion andunrestricted short-term investments of $286 million, providing total availableliquidity of $3.1 billion.  This amount excludes $446 million ofrestricted short-term investments (which may include amounts held as cash).

 

*Significant Liquidity Events*

 

In November 2007,the Company entered into an accounts receivable financing facility.  The facility size is up to $150 million andas of September 30, 2008, $115 million of the $122 million available wasdrawn.  The financing is a 364-dayfacility that matures in November 2008 with annual renewal provisions thatcould result in a final maturity date of November 29, 2012.

 

On July 15,2008, the Company entered into a $183 million private debt financing secured byten 757-200 aircraft and 17 spare engines, which had previously beenunencumbered.  The obligation is to berepaid over seven years.

 

*Cash Flows.* Liquidity decreased by $33 million during the nine months ended September 30,2008, primarily due to net cash used in investing activities, offset by netcash provided by operating activities and net cash provided by financing activities.

 

*Operating Activities.*  Net cash provided by operatingactivities for the nine months ended September 30, 2008 was $570 million,which compares with $1.4 billion of net cash provided by operating activitiesfor the nine months ended September 30, 2007.  The decrease in year-over-year net cashprovided by operations was primarily due to reduced net income in 2008.

 

*Investing Activities.*  Investing activities during thenine months ended September 30, 2008 included the purchase of 18 CRJ900and 21 Embraer 175 aircraft and other related costs. Other related costsincluded costs to commission aircraft before entering revenue service, depositson ordered aircraft, facility improvements and ground equipment purchases.  On January 31, 2008, the Company alsocontributed $213 million for a minority ownership interest in Midwest AirPartners, LLC, which in turn purchased Midwest Air Group, Inc. (the “Midwest”investment).  Subsequently, as part of Step 2 of the goodwill impairmenttest completed during the second quarter of 2008, the Company was required tore-measure the fair value of its investment in Midwest.  Based on Midwest’sfinancial deterioration subsequent to January 31, 2008, the fair valuere-measurement of the Company’s investment in Midwest resulted in the Companywriting off the carrying value of its investment in Midwest during the secondquarter of 2008.  Additionally, during the nine months ended September 30,2008, the Company had decreases in restricted cash, cash equivalents andshort-term investments, an increase in unrestricted short-term investments andsold its Class A Preferred share to Pinnacle for a purchase price of $20million.  During the third quarter of2008, the Company also made margin call payments of $118 million related to itsoutstanding fuel hedge contracts.  Thisamount includes $104 million of margin call deposits classified as prepaidexpenses and $14 million that was classified as restricted cash.  Investing activities during the nine monthsended September 30, 2007 included the purchase of seven A330-300, sevenCRJ900, and four Embraer 175 aircraft and other related costs.

 

30

 

*Financing Activities. *Financing activities during thenine months ended September 30, 2008 consisted primarily of the financingof 18 CRJ900 and 21 Embraer 175 aircraft with long-term debt, the financing often 757-200 aircraft and 17 spare engines for proceeds of $183 million, and anet draw of $115 million on an accounts receivable financingfacility, offset by scheduled debtpayments.  Financing activities duringthe nine months ended September 30, 2007 consisted primarily of receiving$750 million in proceeds from the equity offering consummated as part of theCompany’s emergence from bankruptcy, the financing of one A330-300, sevenCRJ900, and four Embraer 175 with long-term debt, and the financing of Boeing787 pre-delivery deposits, partially offset by debt payments and debtprepayments.

 

The Company also financed thedelivery of six Airbus A330-300 aircraft during the nine months ended September 30,2007 through non-cash transactions with the manufacturer, which are reflectedas long-term debt on the Company’s Condensed Consolidated Balance Sheets, butare not classified as a cash flow activity. In connection with the acquisition of these aircraft, the Companyentered into long-term debt arrangements. Under these arrangements, the aggregate amount of debt incurred totaledapproximately $502 million.

 

Investing activities affectingcash flows and non-cash transactions and leasing activities related to theinitial acquisition of aircraft consisted of the following for the nine monthsended September 30:

 

| ** **       | ** ** | **Investing Activities  Affecting Cash Flows** | ** ** | ** ** | **Non-cash  Transactions and  Leasing Activities** | ** ** | ** ** |
|------------------|------------|---------------------------------------------------------------|------------|------------|--------------------------------------------------------------|------------|------------|
| ** **       | ** ** | **2008**                                                      | ** ** | ** ** | **2007**                                                     | ** ** | ** ** | **2008** | ** ** | ** ** | **2007** | ** ** | ** ** |
|             |       |                                                          |       |       |                                                         |       |       |   |   |   |   |   |   |
| Airbus  A330-300 | ** ** | **-**                                                         |       |       | 1                                                            | ** ** | ** ** | **-** |   |   | 6 |   |   |
| CRJ900           | ** ** | **18**                                                        |       |       | 7                                                            | ** ** | ** ** | **-** |   |   | - |   |   |
| Embraer 175      | ** ** | **21**                                                        |       |       | 4                                                            | ** ** | ** ** | **-** |   |   | - |   |   |
| ** **       |       | **39**                                                        |       |       | 12                                                           | ** ** | ** ** | **-** |   |   | 6 |   |   |

 

*Debt*.  Contractualmaturities of long-term debt (inclusive of short-term maturities), excludingcapital lease obligations and any potential acceleration of the Bank CreditFacility as described below, through December 31, 2012, are as follows (inmillions):

 
| remainder  of | 2008   |   | $      | 218 |    (a) |
|---------------|--------|--------|--------|-----|-----------------------|
| 2009          |   | 599    |   |
| 2010          |   | 538    |   |
| 2011          |   | 670    |   |
| 2012          |   | 504    |   |

 

(a)   In November 2007,the Company entered into an accounts receivable financing facility.  The facility size is up to $150 million andas of September 30, 2008, $115 million of the $122 million available wasdrawn.  The financing is a 364-dayfacility that matures in November 2008 with annual renewal provisions thatcould result in a final maturity date of November 29, 2012.

 

On August 21,2006, the Predecessor Company entered into a $1.225 billion Senior CorporateCredit Facility (“Bank Credit Facility”), formerly referred to by us as theDIP/Exit Facility, consisting of a $1.05 billion term loan facility and a $175million revolving credit facility which has been fully drawn since itsinception.  Loans drawn under the $175million revolving credit facility may be borrowed and repaid at the Company’sdiscretion.  Up to $75 million of therevolving credit facility may be utilized by the Company as a letter of creditfacility.  As amended in March 2007,both loan facilities under the Bank Credit Facility bear interest at LIBOR plus2.00%.  Letter of credit fees are 2.125%per annum.  To the extent that therevolving credit facility is not utilized, the Company is required to pay anundrawn commitment fee of 50 basis points per annum.  The Bank Credit Facility is rated BB- byStandard & Poor’s Rating Services (“S&P”) and B1 by Moody’sInvestors Service, Inc. (“Moody’s”) and is secured by a first lien on theCompany’s Pacific Route authorities.  TheMarch 2007 amendment also allowed the Company to grant pari-passu liens inthe Pacific Route authorities to secure up to $150 million of exposure arisingfrom hedging trades entered into with Bank Credit Facility lenders.  The interest rate as of September 30,2008 was 4.75% on both the term loan facility and the revolving creditfacility.

 

The final maturity date of theBank Credit Facility is August 21, 2013. Principal on the term loan portion of the Bank Credit Facility will berepaid at 1.0% per year with the balance (94.0%) due at maturity.  The first two such principal repayments weremade on August 21, 2007 and August 21, 2008.  On September 15, 2008, the Companyentered into an amendment to the Bank Credit Facility which provides that, (i) subjectto the consummation of the Merger, the Company will be permitted to guaranteeapproximately $2.5 billion of Delta obligations, (ii) the Company will berequired to repay $300 million of the approximately $1.2 billion outstandingunder the Bank Credit Facility and (iii) the final maturity date will bethe earlier of the date on which Northwest is merged with and into Delta orDecember 31, 2010.  The merger ofNorthwest with Delta (as opposed to the Merger of NWA Corp. with a subsidiaryof Delta) is not expected to occur before late 2009.

 

31

 

The Bank Credit Facility requires ongoing compliance withvarious financial covenants including a requirement for the Company to maintaina minimum ratio of consolidated EBITDAR to consolidated fixed charges (“FixedCharge Coverage Ratio”).  Under anamendment to the Bank Credit Facility completed in April 2008, complianceby the Company with the Fixed Charge Coverage Ratio has been waived through March 31,2009 followed by a phase-in period as set forth below:

 
| **Number of**      | ** ** | ** **                                                  | ** ** | **Required**       | ** ** |
|--------------------|------------|-------------------------------------------------------------|------------|--------------------|------------|
| **Months Covered** | ** ** | **Period Ending**                                           | ** ** | **Coverage Ratio** | ** ** |
| Three              |       | June 30, 2009                                          |       | 1.00 to 1.0        |       |
| Six                |       | September 30, 2009                                     |       | 1.10 to 1.0        |       |
| Nine               |       | December 31, 2009                                      |       | 1.20 to 1.0        |       |
| Twelve             |       | March 31, 2010                                         |       | 1.30 to 1.0        |       |
| Twelve             |       | June 30, 2010                                          |       | 1.40 to 1.0        |       |
| Twelve             |       | September 30, 2010 and each  quarter ending thereafter |       | 1.50 to 1.0        |       |

 

For purposes of calculating this ratio, EBITDAR is definedas operating income, adjusted to exclude the effects of depreciation,amortization, aircraft rents and costs (but only up to $150 million of cashcosts) payable in connection with a merger or acquisition and to include theeffects of interest income and governmental reimbursements for losses resultingfrom developments affecting the aviation industry.  Earnings also exclude non-recurring non-cashcharges (subject to the inclusion of any cash payments then or thereafter madewith respect thereto) and are determined without giving effect to anyacceleration of rental expense.  Fixedcharges are defined as interest expense (excluding the fees and expenses ofobtaining the April 2008 and September 2008 amendments and non-cashmerger-related adjustments incurred in connection with the Merger) and aircraftrent expense (without giving effect to any acceleration of rentalexpense).  Additionally, certain aircraftsublease rental income is excluded from EBITDAR and reduces aircraft rentalexpense in fixed charges.

 

Although the Company was in compliance with all requiredfinancial covenants as of September 30, 2008, continued compliance dependson many factors, some of which are beyond the Company’s control, including theoverall industry revenue environment and the level of fuel costs.

 

*Aircraft Commitments.* Committed expenditures for aircraftand related equipment, including estimated amounts for contractual priceescalations and predelivery deposits, will be approximately (in millions):

 
| remainder  of | 2008   |   | $      | 269 |   |
|---------------|--------|--------|--------|-----|--------|
| 2009          |   | 314    |   |
| 2010          |   | 749    |   |
| 2011          |   | 232    |   |
| 2012          |   | 670    |   |

 

*Pension Funding Obligations.*****The Companyhas several defined benefit pension plans and defined contribution 401(k)-type plans covering substantially allof 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 pension coverage is provided forthese employees through 401(k)-type defined contribution plans including thePilot Money Purchase Plan or, in the case of IAM represented employees, the IAMNational Multi-Employer Plan.

 

The PensionProtection Act of 2006 (“2006 Pension Act”) allows commercial airlines to electspecial funding rules for defined benefit plans that are frozen.  The unfunded liability for a frozen definedbenefit 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 the special funding rules forfrozen defined benefit plans under the 2006 Pension Act effective October 1,2006.  As a result of this election (1) thefunding waivers that Northwest received for the 2003 plan year contributionswere deemed satisfied under the 2006 Pension Act, and (2) the fundingstandard account for each Plan was reduced to zero as of September 30,2006.  New contributions that came dueunder the 2006 Pension Act funding rules were paid while Northwest was inbankruptcy and must continue to be paid going forward.  If the new contributions are not paid, thefuture funding deficiency that would develop will be based on the regularfunding rules rather than the special 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”).

 

32

 

**Critical Accounting Estimates**

 

*Goodwill and Other Impairments.*  The Company tests the carrying amount ofgoodwill and other indefinite-lived intangible assets annually as of October 1or whenever events or circumstances indicate that impairment may haveoccurred.  Impairment testing is performedin accordance with SFAS No. 142, *Goodwilland Other Intangible Assets* (“SFAS No. 142”).  The Company is annually required to completeStep 1 (determining and comparing the fair value of the Company’s reportingunit to its carrying value) of the impairment test.  Step 2 is required to be completed if Step 1indicates that the carrying value of the reporting unit exceeds the fair valueand involves the calculation of the implied fair value of goodwill.  Step 2 of the goodwill impairment testinvolves measuring the Company’s other assets and liabilities at fair value tocalculate an implied fair value of goodwill and measure the amount ofimpairment, if any.

 

The Companyevaluates long-lived tangible assets and definite-lived intangible assets forpotential impairments in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, (“SFAS No. 144”).  For definite-lived intangible assets,impairment evaluations are initiated based on quarterly reviews of keyindicators of impairment.  The Companyrecords impairment losses on long-lived assets when events and circumstancesindicate the assets might be impaired and the undiscounted cash flows estimatedto be generated by those assets are less than their carrying amounts.  Impairment losses are measured by comparingthe fair value of the assets to their carrying amounts.

 

The Company determined that the announced Merger with Deltawas a triggering event under SFAS No. 142, requiring the Company tofurther evaluate the carrying value of its goodwill.  As a result of this evaluation, the Companyrecorded an impairment charge to reduce the book value of Northwest’s equity toits implied fair value as of the Merger announcement date.  Based on the 5-day average closing price ofDelta’s common stock around the Merger announcement date, the right to receive1.25 shares of Delta stock for each share of NWA Corp. common stock, and theprojected number of NWA Corp.’s common shares to be converted into Delta commonstock on the transaction close date, the implied fair value of NWA Corp.’sequity on the announcement date was $3.3 billion.

 

Due to the limited time available between the Mergerannouncement date and the Company’s first quarter 2008 Form 10-Q filingdate, there was insufficient time to complete Step 2 of the goodwill impairmenttest and calculate the implied fair value of goodwill.  Therefore, we recorded our best estimate ofthe impairment as of March 31, 2008. This implied fair value calculation resulted in the Company recording agoodwill impairment charge of $3.9 billion for the quarter ended March 31,2008 because we believe the conditions that caused our implied fair value todecline existed as of that date.  Northwest finalized the impairment test of long-lived assets and Step 2of the goodwill impairment test during the second quarter of 2008, resulting inan additional net charge of $547 million ($2.08 per share), which includes anadjustment of estimated goodwill from $2.2 billion to the implied fair value ofgoodwill of $2.9 billion.  The adjustmentto goodwill resulted in the reversal of $674 million of impairment expenserecorded in the first quarter of 2008 which is classified as goodwill and otherindefinite-lived intangibles impairment expense.  Additionally, Northwest recorded $624 millionof depreciation and amortization related to impairment of certain flightequipment and definite-lived intangibles, $598 million of impairment expense ingoodwill and other indefinite-lived intangibles impairment expense related to indefinite-livedintangibles, $213 million in other non-operating expense related to other thantemporary impairment on investments in affiliated companies and $214 million inincome tax benefit related to the reversal of deferred tax liabilities related tocertain of the indefinite-lived intangible assets.

 

The indefinite-lived intangibles were impaired to fair valueif the fair value was lower than the carrying amount, in accordance with SFAS No. 142.  The definite-lived intangibles and flightequipment were subject to recoverability tests to determine if a loss in fairvalue measured in Step 2 would result in an impairment charge, in accordancewith the guidance in SFAS No. 144. The investment in affiliated companies consists of a minority ownershipinterest in Midwest Air Partners, LLC, which in turn purchased Midwest AirGroup, Inc. (the “Midwest” investment).  This equity investment wassubject to a recoverability test in accordance with Accounting Principles BoardOpinion 18, *The Equity Method of Accountingfor Investments in Common Stock* (“APB 18”).  Under APB 18, a loss in value of aninvestment which is other than a temporary decline should be recognized.  See “Item 1. Financial Statements, Note 4 –Goodwill and Intangibles” for additional information regarding the impairmentsand fair value measurements related to the impairments.

 

One of the significant unobservable inputs underlying thegoodwill and intangible fair value measurements is the discount rate.  In our Step 2 analysis performed as of March 31,2008, Northwest determined the discount rate using the Weighted Average Cost ofCapital (“WACC”) of the airline industry, which we measured using a CapitalAsset Pricing Model (“CAPM”).  The CAPMin our valuation of goodwill and indefinite-lived intangibles utilized a 50%debt and 50% equity structure.  Thehistorical average debt-to-equity structure of the major airlines since 1990 isalso approximately 50% debt and 50% equity, which was similar to Northwest’sdebt-to-equity structure at emergence.  The return on debt was measured using abid-to-yield analysis of major airline corporate bonds and the expected marketrate of return for equity was measured based on the risk free rate, the airlineindustry beta, and risk premiums based on the Federal Reserve StatisticalRelease H.15 or Ibbotson® Stocks, Bonds, Bills, and Inflation® ValuationYearbook, Edition 2008.  These factorsresulted in an 11% discount rate on March 31, 2008.  This compares to an 11% discount rate atemergence and a 10.5% discount rate on our last impairment testing date of October 31,2007.

 

33

 

The estimates andassumptions made in this valuation are inherently subject to significantjudgments and are influenced by market forces beyond the reasonable control ofthe Company.  Accordingly, there can beno assurance that the estimates, assumptions, and amounts reflected in thevaluations will be realized, and actual results could vary materially.  Moreover, the market value of the Company’scommon stock may differ materially from the equity valuation.

 

**Other Information**

 

*Foreign Currency. *The Company is exposed to the effect of foreign currencyexchange rate fluctuations on the U.S. dollar value of foreigncurrency-denominated operating revenues and expenses.  The Company’s largest exposure comes from theJapanese yen.  From time to time, theCompany uses financial instruments to hedge its exposure to the Japaneseyen.  Hedging gains or losses arerecorded in accumulated other comprehensive income (loss) until the associatedtransportation is provided, at which time they are recognized as an increase ordecrease in revenue.  The Company hedged27.4 billion yen of its yen-denominated sales during the three months ended September 30,2008, resulting in an effective rate of 109.44 yen per U.S. dollar on forwardcontracts, the prevailing average contract rate for the period.  The Company did not hedge any of itsyen-denominated sales during the three months ended September 30,2007.  The average market yen rate forthe quarters ended September 30, 2008 and 2007 was 108.62 and 118.40,respectively.

 

On occasion, the Company uses forward contracts, collars orput options to hedge a portion of its anticipated yen-denominated sales.  The changes in market value of suchinstruments have historically been highly effective at offsetting exchange ratefluctuations in yen-denominated sales. As of September 30, 2008, the Company had hedged approximately40.1% of its anticipated yen-denominated sales for the remainder of 2008 and31.6% of its anticipated 2009 yen-denominated sales.  The 2008 Japanese yen hedges consist offorward contracts which hedge approximately 29.5% of remaining yen-denominatedsales at an average rate of 109.19 yen per U.S. dollar and collar options whichhedge approximately 10.6% of remaining yen-denominated sales with a rate rangebetween 102.40 and 116.40 yen per U.S. dollar. The 2009 Japanese yen hedgesconsist of forward contracts which hedge approximately 25.3% of its 2009 anticipatedyen-denominated sales at an average rate of 100.06 yen per U.S. dollar andcollar options which hedge approximately 6.3% of yen-denominated sales with arate range between 99.52 and 103.50 yen per U.S. dollar.  This compares to 20.1% of its anticipated2008 sales hedged as of September 30, 2007.  As of September 30, 2008 and 2007,unrealized pre-tax gains of $8.3 million and $1.1 million, respectively, wereoutstanding in accumulated other comprehensive income associated with theJapanese yen hedge contracts.

 

As of September 30,2008, the Company had also hedged approximately 64.6% of its remaining 2008anticipated Canadian dollar denominated sales with forward contracts at anaverage rate of 1.0012 Canadian dollars per U.S. dollar.  This compares to 41.6% of its anticipated2008 sales hedged as of September 30, 2007.  As of September 30, 2008 and 2007, anunrealized pre-tax gain of $5.3 million and an unrealized pre-tax loss of $2.6million, respectively, were outstanding in accumulated other comprehensiveincome associated with the Canadian dollar hedge contracts.  The average Canadian dollar to U.S. dollarexchange rate for the quarters ended September 30, 2008 and 2007 was 1.008and 1.04, respectively.

 

Counterpartiesto these financial instruments expose the Company to credit loss in the eventof nonperformance, but the Company does not expect any of the counterparties tofail to meet their obligations.  Theamount of such credit exposure is generally the unrealized gains, if any, insuch contracts.  To manage credit risks,the Company selects counterparties based on credit ratings, limits exposure toany single counterparty and monitors the market position with eachcounterparty.  It is the Company’spractice to participate in foreign currency hedging transactions with a maximumspan of 24 months.

 

*Aircraft Fuel.*  The Company is exposed to the effect ofchanges in the price and availability of aircraft fuel.  In order to provide a measure of control overprice and supply, the Company trades and ships fuel and maintains fuel storagefacilities to support its flight operations. To further manage the price risk of fuel costs, the Company primarilyutilizes futures contracts traded on regulated futures exchanges, swapagreements and options.

 

As of September 30,2008, the Company had economically hedged the price of approximately 79%of its projected fuel requirements for the remainder of 2008 and 24% ofits projected fuel requirements for 2009, through a combination ofcollars, three-way collars and swap agreements.

 

The 2008 crude oilcollars, which hedge the price of approximately 55% of the Company’s projectedfuel requirements for the remainder of 2008, provide upside protectionbeginning, on average, with a crude oil equivalent price of $105.62 per barrel,and payment obligations beginning, on average, with a crude oil equivalentprice of $89.05 per barrel.  The 2008heating oil collars, which hedge the price of approximately 12% of the Company’sprojected fuel requirements for the remainder of 2008, provide upsideprotection beginning, on average, with a heating oil equivalent price of$138.92 per barrel, and payment obligations beginning, on average, with aheating oil equivalent price of $121.34 per barrel.  The 2008 swap contracts consist of extendablejet fuel swap agreements which hedge approximately 12% of the Company’sprojected remaining 2008 fuel requirements and provide upside protection at ajet fuel equivalent price of $160.94 per barrel and capped, on average, at$199.50 per barrel.

 

34

 

The 2009 crude oilcollars, which hedge the price of approximately 9% of the Company’s projectedfuel requirements for 2009, provide upside protection beginning, on average,with a crude oil equivalent price of $110.25 per barrel, and paymentobligations beginning, on average, with a crude oil equivalent price of $88.28per barrel.  The 2009 three-way crude oilcollars, which hedge the price of approximately 10% of the Company’s projectedfuel requirements for 2009, provide upside protection beginning, on average,with a crude oil equivalent price of $134.33 per barrel and capped, on average,at $166.56 per barrel, and payment obligations beginning, on average, with acrude oil equivalent price of $114.30 per barrel.  The three-way heating oil collars, whichhedge the price of approximately 1% of the Company’s projected fuelrequirements for 2009, provide upside protection beginning, on average, with aheating oil equivalent price of $174.30 per barrel and capped, on average, at$205.13 per barrel, and payment obligations beginning, on average, with aheating oil equivalent price of $143.47 per barrel.  The 2009 crude oil swaps, which hedgeapproximately 1% of the Company’s projected 2009 fuel requirements and provideupside protection at a crude oil equivalent price of $100.09 per barrel.  The 2009 jet fuel swap agreements, whichhedge approximately 3% of the Company’s projected 2009 fuel requirements andprovide upside protection at a jet fuel equivalent price of $160.94 per barreland capped, on average, at $199.50 per barrel.

 

The Company currently has nofuel derivative contracts outstanding that are designated for special hedgeaccounting treatment, and therefore had no related unrealized gains (losses) inaccumulated other comprehensive income (loss) as of September 30,2008.  The Company records any changes inthe contracts’ values as mark-to-market adjustments through the ConsolidatedStatement of Operations on a quarterly basis. During the three months ended September 30, 2008, the Companyrecognized $436.2 million of net fuel derivative losses as increases in fuelexpense, including $378.1 million of out-of-period losses.  The Company allocates mark-to-marketadjustments to regional carrier expense for fuel consumed by ournon-consolidated Airlink partners.  Forthe three months ended September 30, 2008, the Company recognized $36.5million of fuel derivative net losses as increases in regional carrier expense,including $31.5 million of out-of-period losses.

 

As of September 30, 2007, theCompany had hedged the price of approximately 50% of its projected fuelrequirements for the remainder of 2007 through a combination of collar optionsand fixed price swap agreements.  Thecollar options, which hedged the price of approximately 40% of the Company’sprojected fuel requirements for the remainder of 2007, consisted of crude oilput options with an average price of $56 per barrel, and related call optionsat an average price of $75 per barrel. The fixed price crude oil swap agreements, which hedged the price ofapproximately 10% of the Company’s projected fuel requirements for theremainder of 2007, included agreements with an average price of $63 perbarrel.  Net gains of $31.5 million wererecorded as decreases in fuel expense during the three months ended September 30,2007, including $10.8 million in out-of-period mark-to-marketgains and $20.7 million of gains for contracts that settled in the three monthsended September 30, 2007. Additionally, for the three months ended September 30, 2007, netgains of $3.6 million were recorded as a reduction to regional carrier expense.

 

*Interest********Rates.*  The Company’s earnings are also affected bychanges in interest rates due to the impact those changes have on its interestexpense from floating rate debt instruments. During June 2006, the Company entered into individual interest ratecap hedges related to three floating rate debt instruments, with a totalcumulative notional amount as of September 30, 2008 of $381 million.  Additionally, during February 2008, theCompany entered into individual interest rate swap hedges related to twofloating rate debt instruments, with a total cumulative notional amount as of September 30,2008 of $901 million.  The objective ofthe interest rate cap and swap hedges is to protect the anticipated payments ofinterest (cash flows) on the designated debt instruments from adverse marketinterest rate changes.  The maturity dateof each of the interest rate cap and swap hedges corresponds exactly with thematurity dates of the designated debt instruments.  As of September 30, 2008, theCompany has recorded $10.3 million of pre-tax unrealized gains in accumulatedother comprehensive income (loss) associated with these hedges.  On October 7, 2008, the company enteredinto ten additional interest rate swap hedges related to ten floating debtinstruments with a total cumulative notional amount of $492.6 million at aweighted average interest rate of 4.25%.

 

35

* *

*War Risk Insurance.* Following the events of September 11, 2001, commercial aviationinsurers materially curtailed war risk coverage and increased insurancepremiums.  Subsequently, the FAA wasmandated to offer U.S. airlines war risk insurance.  The coverage was recently extended to March 31,2009, from its previous expiration of December 31, 2008.  While the government may again extend theperiod that it provides war risk coverage, there is no assurance that this willoccur, or if it does, how long the extension will last, what will be includedin the coverage, or at what cost the coverage will be provided.  Commercial war risk insurance in amounts andscope adequate for our operations is not currently available at reasonableprices.  Should the U.S. government stopproviding war risk insurance in its current form to the U.S. airline industry,it is expected that the premiums charged by commercial aviation insurers forthis coverage, if available at all, would be higher than the premium currentlycharged by the government and the coverage materially more restrictive.  Commercial aviation insurers could furtherincrease insurance premiums and reduce or cancel coverage in the event of a newterrorist attack or other events adversely affecting the airline industry.  Significant increases in insurance premiumscould negatively impact our financial condition and results of operations.  If we are unable to obtain adequate war riskinsurance, our business could be materially and adversely affected.

 

If we were to be involved in anaccident, we could be exposed to significant tort liability.  Although we carry insurance to cover damagesarising from such accidents, resulting tort liability could be higher than ourpolicy limits which could negatively impact our financial condition.

 

*Forward-LookingStatements.*  Certain of thestatements made throughout Management’s Discussion and Analysis of FinancialCondition and Results of Operations and elsewhere in this quarterly report arenot purely historical facts, including statements regarding our beliefs,expectations, intentions or strategies for the future, may be “forward-lookingstatements” under the Private Securities Litigation Reform Act of 1995.  All forward-looking statements involve anumber of risks and uncertainties that could cause actual results to differmaterially from the plans, intentions and expectations reflected in orsuggested by the forward-looking statements. Such risks and uncertaintiesinclude, among others, the ability of the Company to operate pursuant to theterms of its financing facilities (particularly the related financialcovenants), the ability of the Company to attract, motivate and/or retain keyexecutives and associates, the future level of air travel demand, the Company’sfuture passenger traffic and yields, the airline industry pricing environment,increased costs for security, the cost and availability of aviation insurancecoverage and war risk coverage, the general economic condition of the U.S. andother regions of the world, the price and availability of jet fuel, the war inIraq, the possibility of additional terrorist attacks or the fear of suchattacks, concerns about Severe Acute Respiratory Syndrome (SARS) and otherinfluenza or contagious illnesses, labor strikes, work disruptions, labornegotiations both at other carriers and the Company, difficulties inintegrating the operations of the Company and Delta following the Merger, lowcost carrier expansion, capacity decisions of other carriers, actions of theU.S. and foreign governments (including conditions imposed by U.S. or foreigngovernments to obtain regulatory approval for the Merger), foreign currencyexchange rate fluctuations and inflation. Other factors include the possibility that the Merger may not close,including due to the failure to receive required regulatory approvals, or thefailure of other closing conditions.  TheCompany cautions that the foregoing list of factors is not exclusive.  Additional information with respect to thefactors and events that could cause differences between forward-lookingstatements and future actual results is contained in the Company’s Securitiesand Exchange Commission filings, including the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007, as amended (the “2007 Form 10-K”)and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.We undertake no obligation to update any forward-looking statements to reflectevents or circumstances that may arise after the date of this release.

 

Developments in anyof these areas, as well as other risks and uncertainties detailed from time totime in the Company’s Securities and Exchange Commission filings, could causethe Company’s results to differ from results that have been or may be projectedby or on behalf of the Company.  TheCompany undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.  These statementsdeal with the Company’s expectations about the future and are subject to anumber of factors that could cause actual results to differ materially from theCompany’s expectations.  All subsequentwritten or oral forward-looking statements attributable to the Company, orpersons acting on behalf of the Company, are expressly qualified in theirentirety by the factors described above.

 

36

 

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

 

Information required by this item is provided under the captions “ForeignCurrency” and “Aircraft Fuel” within “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.  Also see “Item 7a. Quantitative andQualitative Disclosures About Market Risk” in the Company’s 2007 Form 10-K.

 

**Item 4.   Controls and Procedures.**

 

**Evaluation of Disclosure Controls andProcedures –** As of September 30,2008, 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’sPresident and Chief Executive Officer and Executive Vice President and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective in alerting them in a timely manner to material informationrequired to be disclosed in the Company’s periodic reports filed with the SECas of the end of such period.

 

**Changes in Internal Control –** There wasno change in the Company’s internal control over financial reporting thatoccurred during the Company’s fiscal third quarter ended September 30,2008 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

**Item 1.   Legal Proceedings.**

 

Reference is made to “Item 3. Legal Proceedings” in the Company’s 2007 Form 10-K.

 

On June 18, 2008 a private lawsuit was filed on behalf of 28 individualsseeking an injunction to prohibit the proposed Merger.  *D’Augusta, et al. v. Northwest Airlines Corporation and Delta Air Lines, Inc.*,(Civ. 08-3007 N.D. Calif.).  Thecomplaint alleges that the proposed Merger would violate Section 7 of theClayton Act, 15 U.S.C. Sec. 18.  TheCompany intends to vigorously defend the lawsuit.

 

**Item 1A.  Risk Factors.**

 

See Part I, Item1A., “Risk Factors,” of the Company’s 2007 Form 10-K for a detaileddiscussion of the risk factors affecting the Company. The information belowprovides updates to the previously disclosed risk factors and should be read inconjunction with the risk factors and information disclosed in the 2007 Form 10-K.

 

**RisksRelating to the Pending Merger with Delta Air Lines**

 

***Uncertainty about the Merger anddiversion of management could harm us or the combined company, whether or notthe Merger is completed.***

 

Inresponse to the announcement of the Merger, current and prospective employeescould experience uncertainty about their future with us or the combinedcompany.  These uncertainties may impairour ability to retain, recruit or motivate key personnel.  Completion of the Merger will also require asignificant amount of time and attention from our management.  The diversion of management attention awayfrom ongoing operations could adversely affect our business relationships.  If the Merger is not completed by the end of2008 as currently anticipated, the adverse effects of these uncertaintiesand the diversion of management could be exacerbated by the delay.

 

***Failure to complete the Merger forregulatory or other reasons could adversely affect our stock price and ourfuture business and financial results.***

 

Completion of theMerger is conditioned upon, among other things, the receipt of certainregulatory and antitrust approvals, including under the Hart-Scott-RodinoAntitrust Improvements Act of 1976, as amended. There is no assurance that we will receive the necessary approvals orsatisfy the other conditions necessary for completion of the Merger.  Failure to complete the pending Merger wouldprevent us from realizing the anticipated benefits of the Merger.   We will also incur transaction costs,whether or not the Merger is completed. In addition, the current market priceof our common stock may reflect a market assumption that the Merger will occur,and a failure to complete the Merger could result in a negative perception bythe market of us generally and a resulting decline in the market price of ourcommon stock.

 

37

 

***The anticipated benefits of theMerger may not be realized fully or at all or may take longer to realize thanexpected.***

 

TheMerger involves the integration of two companies that have previously operatedindependently.  Prior to announcement, wedid not conduct any integration planning for the two companies.  The two companies will devote significant managementattention and resources to integrating the two companies.  Delays in this process could adversely affectthe combined company’s business, financial results, financial condition andstock price.  Even if we are able tointegrate our business operations successfully, there can be no assurance thatthis integration will result in the realization of the full benefits ofsynergies, cost savings, innovation and operational efficiencies that wecurrently expect from this integration or that these benefits will be achievedwithin the anticipated time frame.

 

Additionally,as a condition to their approval of the Merger, regulatory agencies may imposerequirements, limitations or costs or require divestitures or placerestrictions on the conduct of the combined company’s business.  If we agree to these requirements,limitations, costs, divestitures or restrictions, our ability to realize theanticipated benefits of the Merger may be impaired.

 

# ***Any “ownershipchange” could limit our ability to utilize our net operating losscarryforwards.***

# ** **

Under the Internal Revenue Code of 1986, as amended (the “InternalRevenue Code”), a corporation is generally allowed a deduction in any taxableyear for net operating losses carried over from prior years.  As of December 31, 2007, the Company hadapproximately $3.6 billion of federal and state net operating loss (“NOL”)carryforwards.  A corporation’s use ofits NOL carryforwards is generally limited under Section 382 of theInternal Revenue Code if a corporation undergoes an “ownership change.”  However, when an “ownership change” occurspursuant to the implementation of a plan of reorganization under the BankruptcyCode (as was the case on the Effective Date of the Company’s Plan), special rules ineither Section 382(l)(5) or Section 382(l)(6) of theInternal Revenue Code apply instead of the general Section 382 limitationrules.  In general terms, Sections 382(l)(5) or(l)(6) allow for a more favorable utilization of a company’s NOLcarryforwards than would otherwise have been available following an “ownershipchange” not in connection with a plan of reorganization.

 

It is currentlyanticipated that the completion of the Merger will result in a second ownershipchange under Section 382.  Pursuantto the Merger Agreement, the Company has elected out of Section 382(l)(5).  As such, Section 382(l)(6) will beapplicable to the ownership change that occurred pursuant to the Plan ofReorganization.  Nonetheless, anysubsequent (including the one in connection with the Merger) ownership changecould further limit the Company’s ability to utilize its NOL carryforwards fortaxable years including or following the subsequent “ownership change.”

 

38

 

**Item 4.  Submission of Matters to aVote of Security Holders.**

 

The Company’s AnnualMeeting of Stockholders was held on September 25, 2008 in New York City,New York. At the Annual Meeting, the stockholders of the Company voted on fouritems.  215,321,944 shares of the Company’scommon stock, 85% of the outstanding shares, were represented in person or byproxy.

 

1. The nominees for director wereelected based upon the following votes:

 
| **Nominees**          | ** ** | ** **  | **In Favor** | ** ** | **Withheld** | ** ** |
|-----------------------|------------|-------------|-------------------|------------|--------------|------------|
| Roy J.  Bostock       |       | 177,023,495 |              | 38,298,449 |         |
|                  |       |        |              |       |         |
| David A.  Brandon     |       | 153,272,119 |              | 62,049,825 |         |
|                  |       |        |              |       |         |
| Michael J.  Durham    |       | 205,204,698 |              | 10,117,246 |         |
|                  |       |        |              |       |         |
| John M.  Engler       |       | 190,884,167 |              | 24,437,777 |         |
|                  |       |        |              |       |         |
| Mickey P.  Foret      |       | 204,641,917 |              | 10,680,027 |         |
|                  |       |        |              |       |         |
| Robert L.  Friedman   |       | 191,221,635 |              | 24,100,309 |         |
|                  |       |        |              |       |         |
| Doris Kearns  Goodwin |       | 191,545,886 |              | 23,776,058 |         |
|                  |       |        |              |       |         |
| Jeffrey G.  Katz      |       | 191,861,891 |              | 23,460,053 |         |
|                  |       |        |              |       |         |
| James J.  Postl       |       | 197,782,530 |              | 17,539,414 |         |
|                  |       |        |              |       |         |
| Rodney E.  Slater     |       | 212,604,362 |              | 2,717,582  |         |
|                  |       |        |              |       |         |
| Douglas M.  Steenland |       | 190,279,239 |              | 25,042,705 |         |
|                  |       |        |              |       |         |
| William S.  Zoller    |       | 203,691,997 |              | 11,629,947 |         |

 

2.The proposal to adopt the Agreement and Plan of Merger dated as of April 14,2008, by and among Delta Air Lines, Inc., Nautilus Merger Corporation, adirect, wholly-owned subsidiary of Delta, and the Company received thefollowing votes:

 
| **For**     | ** ** | **Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|-------------|------------|-------------|------------|-----------------|------------|---------------------------|------------|
| 191,140,765 |       | 3,254,803   |       | 252,087         |       | 20,674,289                |       |

 

3.The proposal to ratify the appointment of Ernst & Young as independentauditors for the year ending December 31, 2008 received the followingvotes:

 
| **For**     | ** ** | **Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|-------------|------------|-------------|------------|-----------------|------------|---------------------------|------------|
| 212,498,495 |       | 1,637,793   |       | 1,185,656       |       | –                    |       |

 

4.The proposal to approve the amendment to the Northwest Airlines Corporation2007 Stock Incentive Plan received the following votes:

 
| **For**     | ** ** | **Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|-------------|------------|-------------|------------|-----------------|------------|---------------------------|------------|
| 176,739,204 |       | 16,561,103  |       | 1,347,348       |       | 20,674,289                |       |

 

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) Certificationof Chief Executive Officer.

 

31.2      Rule 13a-14(a)/15d-14(a) Certificationof Chief Financial Officer.

 

32.1      Section 1350Certification of Chief Executive Officer.

 

32.2      Section 1350Certification of Chief Financial Officer.

 

40

 

 

SIGNATURE

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized this 22nd day of October 2008.

 
|     | 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