** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

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

**OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**Forthe quarterly period ended**June 30,2008

** **

**Commission File Number:**1-15285

** **

**NORTHWESTAIRLINES CORPORATION**

**(Exactname 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’stelephone number, including area code)**

** **

**Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes **x     No o

** **

**Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definitionsof “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.**

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

** **

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

** **

**Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.**

**Yes **x     No o

** **

**As of July 22, 2008,there were 253,207,930 shares of the registrant’s Common Stock outstanding.**

** **

 

 

----

 

**NORTHWESTAIRLINES 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  6.                            | Exhibits.                                                                                                   | 39                |
|                                |                                                                                                        |              |
| SIGNATURE                           | 40                                                                                                          |
|                                |                                                                                                        |              |
| EXHIBIT INDEX                       | 40                                                                                                          |
|                                     |                                                                                                             |                   |  |

 

2

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PART I.  FINANCIAL INFORMATION

 

**Item 1. Financial Statements.**

 

**NORTHWEST AIRLINES CORPORATION**

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
| ** **                                                  | ** ** | **Successor**                | ** ** | **Predecessor**         | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                                  | ** ** | ** **                   | ** ** | **Period from**    | ** ** | **Period from** | ** ** |
| ** **                                                  | ** ** | **Three Months**        | ** ** | **June 1 to** | ** ** | **April 1 to** | ** ** |
| ** **                                                  | ** ** | **Ended June 30,** | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** |
| *(Unaudited,  in millions except per share amounts)*        | ** ** | **2008**                     | ** ** | **2007**                | ** ** | **2007** | ** ** |
| **Operating  Revenues**                                     |       |                         |       |                    |       |   |   |
| Passenger                                                   | ** ** | **$**                        | **2,558**  | ** **              | $          | 861 |   | $ | 1,566 |   |
| Regional carrier  revenues                                  | ** ** | **512**                      | ** ** | 135                     |       | 229 |   |
| Cargo                                                       | ** ** | **212**                      | ** ** | 69                      |       | 129 |   |
| Other                                                       | ** ** | **294**                      | ** ** | 65                      |       | 127 |   |
| Total operating  revenues                                   | ** ** | **3,576**                    | ** ** | 1,130                   |       | 2,051 |   |
|                                                        |       |                         | ** ** |                    |       |   |   |
| **Operating  Expenses**                                     |       |                         | ** ** |                    |       |   |   |
| Aircraft fuel  and taxes                                    | ** ** | **1,207**                    | ** ** | 270                     |       | 585 |   |
| Salaries, wages  and benefits                               | ** ** | **685**                      | ** ** | 205                     |       | 412 |   |
| Selling and  marketing                                      | ** ** | **197**                      | ** ** | 65                      |       | 124 |   |
| Aircraft  maintenance materials and repairs                 | ** ** | **197**                      | ** ** | 64                      |       | 119 |   |
| Other rentals  and landing fees                             | ** ** | **153**                      | ** ** | 46                      |       | 94 |   |
| Depreciation and  amortization                              | ** ** | **745**                      | ** ** | 39                      |       | 85 |   |
| Aircraft rentals                                            | ** ** | **94**                       | ** ** | 31                      |       | 64 |   |
| Regional carrier  expenses                                  | ** ** | **207**                      | ** ** | 60                      |       | 131 |   |
| Goodwill and  other indefinite-lived intangibles impairment |       | **(76**                      | **)**      | —                  |       | — |   |
| Other                                                       | ** ** | **467**                      | ** ** | 155                     |       | 275 |   |
| Total operating  expenses                                   | ** ** | **3,876**                    | ** ** | 935                     |       | 1,889 |   |
|                                                        |       |                         | ** ** |                    |       |   |   |
| **Operating  Income (Loss)**                                | ** ** | **(300**                     | **)**      | 195                     |       | 162 |   |
|                                                        |       |                         | ** ** |                    |       |   |   |
| **Other  Income (Expense)**                                 |       |                         | ** ** |                    |       |   |   |
| Interest  expense, net                                      | ** ** | **(108**                     | **)**      | (40                     | )          | (87 | ) |
| Investment  income                                          | ** ** | **24**                       | ** ** | 17                      |       | 25 |   |
| Reorganization  items, net                                  | ** ** | **—**                   | ** ** | —                  |       | 1,944 |   |
| Other, net                                                  | ** ** | **(207**                     | **)**      | 3                       |       | (2 | ) |
| Total other  income (expense)                               | ** ** | **(291**                     | **)**      | (20                     | )          | 1,880 |   |
|                                                        | ** ** | ** **                   | ** ** |                    |       |   |   |
| **Income  (Loss) Before Income Taxes**                      | ** ** | **(591**                     | **)**      | 175                     |       | 2,042 |   |
|                                                        | ** ** | ** **                   | ** ** |                    |       |   |   |
| Income tax  expense (benefit)                               | ** ** | **(214**                     | **)**      | 69                      |       | (1 | ) |
|                                                        |       |                         | ** ** |                    |       |   |   |
| **Net  Income (Loss)**                                      | ** ** | **$**                        | **(377**   | **)**                   | $          | 106 |   | $ | 2,043 |   |
|                                                        |       |                         | ** ** |                    |       |   |   |
| Earnings (loss)  per common share:                          |       |                         | ** ** |                    |       |   |   |
| *Basic*                                                     | ** ** | **$**                        | **(1.43**  | **)**                   | $          | 0.41 |   | $ | 23.37 |   |
| *Diluted*                                                   | ** ** | **$**                        | **(1.43**  | **)**                   | $          | 0.41 |   | $ | 16.87 |   |
|                                                        |       |                         | ** ** |                    |       |   |   |
| Average shares  used in computation:                        |       |                         | ** ** |                    |       |   |   |
| *Basic*                                                     | ** ** | **263**                      | ** ** | 262                     |       | 87 |   |
| *Diluted*                                                   | ** ** | **263**                      | ** ** | 262                     |       | 113 |   |

 

*Seeaccompanying notes.*

 

3

----

** **

**NORTHWEST AIRLINES CORPORATION**

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
| ** **                                                                        | ** ** | **Successor**                | ** ** | **Predecessor**         | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                                                        | ** ** | ** **                   | ** ** | **Period from**    | ** ** | **Period from** | ** ** |
| ** **                                                                        | ** ** | **Six Months**          | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** |
| ** **                                                                        | ** ** | **Ended June 30,** | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** |
| *(Unaudited, in millions except per share amounts)* | ** ** | **2008**                     | ** ** | **2007**                | ** ** | **2007** | ** ** |
| **Operating  Revenues**                                                           |       |                         | ** ** |                    |       |   |   |
| Passenger                                                                         | ** ** | **$**                        | **4,797**  | ** **              | $          | 861 |   | $ | 3,768 |   |
| Regional carrier  revenues                                                        | ** ** | **922**                      | ** ** | 135                     |       | 521 |   |
| Cargo                                                                             | ** ** | **410**                      | ** ** | 69                      |       | 318 |   |
| Other                                                                             | ** ** | **574**                      | ** ** | 65                      |       | 317 |   |
| Total operating  revenues                                                         | ** ** | **6,703**                    | ** ** | 1,130                   |       | 4,924 |   |
|                                                                              |       |                         | ** ** |                    |       |   |   |
| **Operating  Expenses**                                                           |       |                         | ** ** |                    |       |   |   |
| Aircraft fuel  and taxes                                                          | ** ** | **2,321**                    | ** ** | 270                     |       | 1,289 |   |
| Salaries, wages  and benefits                                                     | ** ** | **1,355**                    | ** ** | 205                     |       | 1,027 |   |
| Selling and  marketing                                                            | ** ** | **390**                      | ** ** | 65                      |       | 315 |   |
| Aircraft maintenance  materials and repairs                                       | ** ** | **418**                      | ** ** | 64                      |       | 303 |   |
| Other rentals  and landing fees                                                   | ** ** | **291**                      | ** ** | 46                      |       | 235 |   |
| Depreciation and  amortization                                                    | ** ** | **893**                      | ** ** | 39                      |       | 206 |   |
| Aircraft rentals                                                                  | ** ** | **187**                      | ** ** | 31                      |       | 160 |   |
| Regional carrier  expenses                                                        | ** ** | **412**                      | ** ** | 60                      |       | 342 |   |
| Goodwill and  other indefinite-lived intangibles impairment                       |       | **3,841**                    | ** ** | —                  |       | — |   |
| Other                                                                             | ** ** | **948**                      | ** ** | 155                     |       | 684 |   |
| Total operating  expenses                                                         | ** ** | **11,056**                   | ** ** | 935                     |       | 4,561 |   |
|                                                                              |       |                         | ** ** |                    |       |   |   |
| **Operating  Income (Loss)**                                                      | ** ** | **(4,353**                   | **)**      | 195                     |       | 363 |   |
|                                                                              |       |                         | ** ** |                    |       |   |   |
| **Other  Income (Expense)**                                                       |       |                         | ** ** |                    |       |   |   |
| Interest  expense, net                                                            | ** ** | **(222**                     | **)**      | (40                     | )          | (219 | ) |
| Investment  income                                                                | ** ** | **61**                       | ** ** | 17                      |       | 56 |   |
| Reorganization  items, net                                                        | ** ** | **—**                   | ** ** | —                  |       | 1,551 |   |
| Other, net                                                                        | ** ** | **(216**                     | **)**      | 3                       |       | (2 | ) |
| Total other  income (expense)                                                     | ** ** | **(377**                     | **)**      | (20                     | )          | 1,386 |   |
|                                                                              |       |                         | ** ** |                    |       |   |   |
| **Income  (Loss) Before Income Taxes**                                            | ** ** | **(4,730**                   | **)**      | 175                     |       | 1,749 |   |
|                                                                              |       |                         | ** ** |                    |       |   |   |
| Income tax  expense (benefit)                                                     | ** ** | **(214**                     | **)**      | 69                      |       | (2 | ) |
|                                                                              |       |                         | ** ** |                    |       |   |   |
| **Net  Income (Loss)**                                                            | ** ** | **$**                        | **(4,516** | **)**                   | $          | 106 |   | $ | 1,751 |   |
|                                                                              |       |                         | ** ** |                    |       |   |   |
| Earnings (loss)  per common share:                                                |       |                         | ** ** |                    |       |   |   |
| *Basic*                                                                           | ** ** | **$**                        | **(17.19** | **)**                   | $          | 0.41 |   | $ | 20.03 |   |
| *Diluted*                                                                         | ** ** | **$**                        | **(17.19** | **)**                   | $          | 0.41 |   | $ | 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**     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| *(Unaudited, in millions except share data)*                                                                                                             | ** ** | **2008**          | ** ** | **2007** | ** ** |
| **Assets**                                                                                                                                                                        |       |              |       |   |   |
|                                                                                                                                                                              |       |              |       |   |   |
| **Current  Assets**                                                                                                                                                               |       |              |       |   |   |
| Cash and cash  equivalents                                                                                                                                                        | ** ** | **$**             | **3,216**  |   | $ | 2,939 |   |
| Unrestricted  short-term investments                                                                                                                                              | ** ** | **40**            |       | 95 |   |
| Restricted cash,  cash equivalents and short-term investments                                                                                                                     | ** ** | **424**           |       | 725 |   |
| Accounts  receivable, less allowance (2008—$4, 2007—$4)                                                                                                                 | ** ** | **773**           |       | 776 |   |
| Flight equipment  spare parts, less allowance (2008—$20, 2007—$10)                                                                                                      | ** ** | **132**           |       | 135 |   |
| Maintenance and  operating supplies                                                                                                                                               | ** ** | **197**           |       | 180 |   |
| Prepaid expenses  and other                                                                                                                                                       | ** ** | **462**           |       | 187 |   |
| Total current  assets                                                                                                                                                             | ** ** | **5,244**         |       | 5,037 |   |
|                                                                                                                                                                              |       |              |       |   |   |
| **Property  and Equipment**                                                                                                                                                       |       |              |       |   |   |
| Flight  equipment, net                                                                                                                                                            | ** ** | **7,913**         |       | 7,520 |   |
| Other property  and equipment, net                                                                                                                                                | ** ** | **594**           |       | 558 |   |
| Total property  and equipment                                                                                                                                                     | ** ** | **8,507**         |       | 8,078 |   |
|                                                                                                                                                                              |       |              |       |   |   |
| **Flight  Equipment Under Capital Leases, Net**                                                                                                                                   | ** ** | **8**             |       | 8 |   |
|                                                                                                                                                                              |       |              |       |   |   |
| **Other  Assets**                                                                                                                                                                 |       |              |       |   |   |
| Goodwill                                                                                                                                                                          | ** ** | **2,873**         |       | 6,035 |   |
| International  routes, less accumulated amortization (2008—$3; 2007—$2)                                                                                                 | ** ** | **2,390**         |       | 2,976 |   |
| Other  intangibles, less accumulated amortization (2008—$32; 2007—$54)                                                                                                  | ** ** | **1,504**         |       | 2,136 |   |
| Investments in  affiliated companies                                                                                                                                              | ** ** | **4**             |       | 24 |   |
| Other, less  accumulated depreciation and amortization (2008—$19; 2007—$8)                                                                                              | ** ** | **337**           |       | 223 |   |
| Total other  assets                                                                                                                                                               | ** ** | **7,108**         |       | 11,394 |   |
| **Total  Assets**                                                                                                                                                                 | ** ** | **$**             | **20,867** |   | $ | 24,517 |   |
|                                                                                                                                                                              |       |              |       |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                    |       |              |       |   |   |
|                                                                                                                                                                              |       |              |       |   |   |
| **Current  Liabilities**                                                                                                                                                          |       |              |       |   |   |
| Air traffic  liability/deferred frequent flier liability                                                                                                                          | ** ** | **$**             | **2,511**  |   | $ | 2,004 |   |
| Accounts payable  and other liabilities                                                                                                                                           | ** ** | **1,658**         |       | 1,651 |   |
| Current  maturities of long-term debt                                                                                                                                             | ** ** | **633**           |       | 446 |   |
| Current  obligations under capital leases                                                                                                                                         | ** ** | **8**             | ** ** | 3 |   |
| Total current  liabilities                                                                                                                                                        | ** ** | **4,810**         | ** ** | 4,104 |   |
|                                                                                                                                                                              |       |              | ** ** |   |   |
| **Long-Term  Debt**                                                                                                                                                               | ** ** | **6,730**         | ** ** | 6,515 |   |
|                                                                                                                                                                              |       |              | ** ** |   |   |
| **Long-Term  Obligations Under Capital Leases**                                                                                                                                   | ** ** | **119**           | ** ** | 124 |   |
|                                                                                                                                                                              |       |              | ** ** |   |   |
| **Deferred  Credits and Other Liabilities**                                                                                                                                       |       |              | ** ** |   |   |
| Long-term  pension and postretirement health care benefits                                                                                                                        | ** ** | **3,636**         | ** ** | 3,638 |   |
| Deferred  frequent flier liability                                                                                                                                                | ** ** | **1,465**         | ** ** | 1,490 |   |
| Deferred income  taxes                                                                                                                                                            | ** ** | **913**           | ** ** | 1,131 |   |
| Other                                                                                                                                                                             | ** ** | **170**           | ** ** | 138 |   |
| Total deferred  credits and other liabilities                                                                                                                                     | ** ** | **6,184**         | ** ** | 6,397 |   |
|                                                                                                                                                                              |       |              | ** ** |   |   |
| **Common  Stockholders’ Equity**                                                                                                                                             |       |              | ** ** |   |   |
| Common stock,  $.01 par value; shares authorized—400,000,000; shares issued—247,048,090 and  233,187,998 at June 30, 2008 and December 31, 2007, respectively |       | **2**             | ** ** | 2 |   |
| Additional  paid-in capital                                                                                                                                                       | ** ** | **7,298**         | ** ** | 7,235 |   |
| Retained  earnings (accumulated deficit)                                                                                                                                          | ** ** | **(4,174**        | **)**      | 342 |   |
| Accumulated  other comprehensive income (loss)                                                                                                                                    | ** ** | **(102**          | **)**      | (202 | ) |
| Treasury  stock—2,931 and 1,684 at June 30, 2008 and December 31, 2007,  respectively                                                                              | ** ** | **—**        | ** ** | — |   |
| Total common  stockholders’ equity                                                                                                                                           | ** ** | **3,024**         | ** ** | 7,377 |   |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                                              | ** ** | **$**             | **20,867** | ** ** | $ | 24,517 |   |

 

*Seeaccompanying notes.*

 

5

----

 

**NORTHWEST AIRLINES CORPORATION**

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
| ** **                                                                                                                                         | ** ** | **Successor**                | ** ** | **Predecessor**         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                         | ** ** | ** **                   | ** ** | **Period from**    | ** ** | **Period from** | ** ** |
| ** **                                                                                                                                         | ** ** | **Six Months**          | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** |
| ** **                                                                                                                                         | ** ** | **Ended June 30,** | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** |
| *(Unaudited, in millions)*                                                                                                               | ** ** | **2008**                     | ** ** | **2007**                | ** ** | **2007** | ** ** |
| **Cash  Flows from Operating Activities**                                                                                                          |       |                         | ** ** |                    |       |   |   |
| Net income  (loss)                                                                                                                                 | ** ** | **$**                        | **(4,516** | **)**                   | $          | 106 |   | $ | 1,751 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities:                                               |       |                         | ** ** |                    |       |   |   |
| Depreciation and  amortization                                                                                                                     | ** ** | **893**                      | ** ** | 39                      |       | 206 |   |
| Income tax  expense (benefit)                                                                                                                      | ** ** | **(214**                     | **)**      | 69                      |       | (2 | ) |
| Pension and  other postretirement benefit contributions less than (greater than) expense                                                           |       | **(8**                       | **)**      | —                  |       | (2 | ) |
| Stock-based  compensation                                                                                                                          | ** ** | **71**                       | ** ** | 10                      |       | — |   |
| 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                                                                                                         | ** ** | **(302**                     | **)**      | (77                     | )          | 15 |   |
| Air traffic  liability/deferred frequent flier liability                                                                                           | ** ** | **483**                      | ** ** | 16                      |       | 448 |   |
| Long-term vendor  deposits/holdbacks                                                                                                               | ** ** | **—**                   | ** ** | 147                     |       | 163 |   |
| Post-emergence  reorganization payments                                                                                                            | ** ** | **(5**                       | **)**      | (67                     | )          | — |   |
| Other, net                                                                                                                                         | ** ** | **21**                       | ** ** | (4                      | )          | 18 |   |
| Net cash  provided by (used in) operating activities                                                                                               | ** ** | **477**                      | ** ** | 239                     |       | 1,046 |   |
|                                                                                                                                               |       |                         | ** ** |                    |       |   |   |
| **Cash  Flows from Reorganization Activities**                                                                                                     |       |                         | ** ** |                    |       |   |   |
| Net cash  provided by (used in) reorganization activities                                                                                          | ** ** | **—**                   | ** ** | —                  |       | 5 |   |
|                                                                                                                                               |       |                         | ** ** |                    |       |   |   |
| **Cash  Flows from Investing Activities**                                                                                                          |       |                         | ** ** |                    |       |   |   |
| Capital  expenditures                                                                                                                              | ** ** | **(695**                     | **)**      | (128                    | )          | (312 | ) |
| Purchase of  short-term investments                                                                                                                | ** ** | **—**                   | ** ** | —                  |       | (44 | ) |
| Proceeds from  sales of short-term investments                                                                                                     | ** ** | **55**                       | ** ** | 9                       |       | 15 |   |
| Investment in  affiliated companies                                                                                                                | ** ** | **(213**                     | **)**      | —                  |       | — |   |
| Decrease  (increase) in restricted cash, cash equivalents and short-term investments                                                               | ** ** | **300**                      | ** ** | (7                      | )          | (74 | ) |
| Cash and cash  equivalents acquired in acquisition of Mesaba Aviation, Inc.                                                                   | ** ** | **—**                   | ** ** | —                  |       | 16 |   |
| Proceeds from  sale of investment in affiliate                                                                                                     | ** ** | **20**                       | ** ** | —                  |       | — |   |
| Other, net                                                                                                                                         | ** ** | **14**                       | ** ** | (1                      | )          | 1 |   |
| Net cash  provided by (used in) investing activities                                                                                               | ** ** | **(519**                     | **)**      | (127                    | )          | (398 | ) |
|                                                                                                                                               |       |                         | ** ** |                    |       |   |   |
| **Cash  Flows from Financing Activities**                                                                                                          |       |                         | ** ** |                    |       |   |   |
| Proceeds from  long-term debt                                                                                                                      | ** ** | **476**                      | ** ** | 67                      |       | 326 |   |
| Proceeds from  short-term borrowings                                                                                                               | ** ** | **133**                      | ** ** | —                  |       | — |   |
| Payments of  long-term debt and capital lease obligations                                                                                          | ** ** | **(216**                     | **)**      | (59                     | )          | (610 | ) |
| Proceeds from  equity rights offering                                                                                                              | ** ** | **—**                   | ** ** | 750                     |       | — |   |
| Payments related  to equity rights offering                                                                                                        | ** ** | **—**                   | ** ** | —                  |       | (22 | ) |
| Other, net                                                                                                                                         | ** ** | **(74**                      | **)**      | 1                       |       | (1 | ) |
| Net cash  provided by (used in) financing activities                                                                                               | ** ** | **319**                      | ** ** | 759                     |       | (307 | ) |
|                                                                                                                                               |       |                         | ** ** |                    |       |   |   |
| **Increase  (Decrease) in Cash and Cash Equivalents**                                                                                              | ** ** | **277**                      | ** ** | 871                     |       | 346 |   |
|                                                                                                                                               |       |                         | ** ** |                    |       |   |   |
| Cash and cash  equivalents at beginning of period                                                                                                  | ** ** | **2,939**                    | ** ** | 1,807                   |       | 1,461 |   |
| Cash and cash  equivalents at end of period                                                                                                        | ** ** | **$**                        | **3,216**  | ** **              | $          | 2,678 |   | $ | 1,807 |   |
|                                                                                                                                               |       |                         | ** ** |                    |       |   |   |
| Available to be  borrowed under credit facilities                                                                                                  | ** ** | **$**                        | **—** | ** **              | $          | 127 |   | $ | 127 |   |
|                                                                                                                                               |       |                         | ** ** |                    |       |   |   |
| Cash and cash  equivalents and unrestricted short-term investments at end of period                                                                | ** ** | **$**                        | **3,256**  | ** **              | $          | 3,310 |   | $ | 2,445 |   |
|                                                                                                                                               |       |                         | ** ** |                    |       |   |   |
| Supplemental  Cash Flow Information:                                                                                                               |       |                         | ** ** |                    |       |   |   |
| Interest paid                                                                                                                                      | ** ** | **$**                        | **221**    | ** **              | $          | 53 |   | $ | 208 |   |
|                                                                                                                                               |       |                         | ** ** |                    |       |   |   |
| Investing and  Financing Activities Not Affecting Cash:                                                                                            |       |                         | ** ** |                    |       |   |   |
| Manufacturer  financing of aircraft and other non-cash transactions                                                                                | ** ** | **$**                        | **—** | ** **              | $          | 84 |   | $ | 167 |   |

 

*Seeaccompanying notes.*

 

6

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**NORTHWESTAIRLINES CORPORATION**

 

NOTES TO 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’soperations account for approximately 99% of the Company’s consolidatedoperating revenues and expenses. Northwest is a major air carrier engaged principally in the commercialtransportation of passengers and cargo, directly serving as many as 251 citiesin 24 countries in North America, Asia and Europe.  Northwest’s global airline network includesdomestic hubs at Detroit, Minneapolis/St. Paul and Memphis, an extensivePacific route system with a hub in Tokyo, a transatlantic joint venture withKLM Royal Dutch Airlines (“KLM”), which operates through a hub in Amsterdam, adomestic and international alliance with Continental Airlines, Inc. (“Continental”)and Delta Air Lines, Inc. (“Delta”), membership in SkyTeam, a globalairline alliance with KLM, Continental, Delta, Air France, Aeroflot, Alitalia,Aeromexico, China Southern, CSA Czech Airlines and Korean Air, exclusivemarketing agreements with three domestic regional carriers, Pinnacle Airlines, Inc.(“Pinnacle”), Mesaba Aviation, Inc. (“Mesaba”), a wholly-owned subsidiary,and Compass Airlines, Inc. (“Compass”), a wholly-owned subsidiary, whichcurrently operate as Northwest Airlink carriers and a cargo business thatincludes a dedicated fleet of freighter aircraft that operate through hubs inAnchorage and Tokyo.

 

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 Company maintains aWeb 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.

 

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

 

The Company’s resultsof operations for interim periods are not necessarily indicative of the resultsfor an entire year due to seasonal factors as well as competitive and generaleconomic 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, the Company and Delta entered into an Agreement and Plan of Merger (the “MergerAgreement”) that provides, among other things, for the Company to be mergedwith a wholly-owned subsidiary of Delta (the “Merger”).

 

7

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Consummation of the Merger is subject tocustomary closing conditions, including obtaining the approval of NWA Corp.’sand Delta’s stockholders and receiving certain domestic and foreign regulatoryand antitrust approvals (including from the Federal Aviation Administration andthe United States Department of Transportation, under the Hart-Scott-RodinoAntitrust Improvements Act of 1976, as amended, and pursuant to CouncilRegulation (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 shareholders will vote on the proposed Merger at the annualshareholders meeting to be held on September 25, 2008.  Delta will also hold a special shareholdersmeeting on that same date to approve share issuances in conjunction with theproposed Merger.

 

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 Management Equity Plan will convertinto stock 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, priorto the execution of the Merger Agreement, NWA Corp. amended the Rights Plan toprovide, among other things, that neither the approval, execution, delivery,announcement or performance of the Merger Agreement or the consummation of theMerger or any other transactions contemplated thereby will cause a triggeringevent under which the rights would become exercisable.  The amendment also provides that the RightsPlan and the rights established thereby will terminate in all respectsimmediately prior to the Merger becoming effective.

 

*Restrictionson the Transfer of Common Stock.* To reduce the risk of alimitation 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 standards applicableduring the two year period until the earlier of the date on which the aggregateowner shift no longer exceeds 30%, or the restriction is no longer in effect.

 

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

 

*Background and General 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

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OnSeptember 14, 2005 (the “Petition Date”), NWA Corp. and 12 of its directand indirect subsidiaries (collectively, the “Debtors”) filed voluntarypetitions for relief under Chapter 11 of the United States Bankruptcy Code withthe United States Bankruptcy Court for the Southern District of New York (the “BankruptcyCourt”).  Subsequently, on September 30,2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWA Corp.,also filed a voluntary petition for 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 Companyimplemented fresh-start reporting in accordance with SOP 90-7.

 

The Plan generally provided for the fullpayment or reinstatement of allowed administrative claims, priority claims, andsecured claims, and the distribution of new common stock of the SuccessorCompany to the Debtors’ creditors, employees and others in satisfaction ofallowed unsecured claims.  The Plancontemplates the issuance of approximately 277 million shares of new commonstock by the Successor Company out of the 400 million shares of new commonstock authorized under its amended and restated certificate of incorporation.

 

The new common stock islisted on the New York Stock Exchange (the “NYSE”) and began trading under thesymbol “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 with theconsummation of the Plan of Reorganization, on the Effective Date, the Company’sexisting $1.225 billion Senior Corporate Credit Facility (“Bank Credit Facility”)was converted into exit financing in accordance with its terms.  See “Note 10 – Long-Term Debt” for additionalinformation.

 

*ClaimsResolution Process*.  Pursuant to terms of the Plan ofReorganization, approximately 234.4 million shares of the Successor Company’scommon stock will be issued to holders of allowed general unsecured andguaranty claims of the Debtors.  Once aclaim is allowed consistent with the claims resolution process, the claimant isentitled to a distribution of new common stock.  Approximately 222.6million shares of new common stock have been issued and distributed through July 2008,in respect of valid unsecured and guaranty claims.  In total, there are approximately 11.8million remaining shares of new common stock held in reserve under the terms ofthe Plan of Reorganization.  The MergerAgreement contemplates that following the Merger the right to receive sharesheld in the reserves will become the right to receive shares of Delta commonstock adjusted for the exchange ratio.

 

TheCompany estimates that the probable range of unsecured claims to be allowedwill be between $8.0 and $8.2 billion. Differences between claim amounts filed and the Company’s estimates arebeing investigated and will be resolved in connection with the claimsresolution process. However, there will be no further financial impact to theCompany associated with the settlement of such unsecured claims, as the holdersof all allowed unsecured claims against the Predecessor Company will receiveunder the Plan of Reorganization only their pro rata share of the distributionof the newly issued Common Stock of the Successor Company.  Secured claims were deemed unimpaired underthe Plan of Reorganization and were satisfied upon either reinstatement of theobligations in the Successor Company, surrendering the collateral to thesecured party, or by making full payment in cash.

 

**Note 3 – Fresh-Start Reporting**

 

Upon emergence from its Chapter 11 proceedings on May 31, 2007, theCompany adopted fresh-start reporting in accordance with SOP 90-7.  The Company’s emergence from Chapter 11resulted in a new reporting entity with no retained earnings or accumulateddeficit.  Accordingly, the Company’sconsolidated financial statements for periods prior to June 1, 2007 arenot comparable to consolidated financial statements presented on or after June 1,2007.

 

Fresh-start reporting reflects the value of the Company as determined inthe confirmed Plan of Reorganization. Under fresh-start reporting, the Company’sasset values are remeasured and allocated in conformity with Statement ofFinancial 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 best estimates basedon its valuation models which incorporated industry data and trends andrelevant market rates and transactions.

 

9

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Tofacilitate the calculation of the enterprise value of the Successor Company,Northwest’s financial advisors assisted management in the preparation of avaluation analysis for the Successor Company’s common stock to be distributedas of the Effective Date to the unsecured creditors.  The enterprise 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 the projectedmulti-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 the first and second quarters of 2008.

 

**Note 4 – Goodwill and Intangibles**

 

Goodwill represents the excess of the reorganizationvalue of the Successor Company over the fair value of tangible assets andidentifiable intangible assets resulting from the application of SOP 90-7.  Northwest’s goodwill mainly consists of twocomponents:

 

·                  A valuation allowance recorded against our netdeferred tax assets, as required by SFAS No. 109; this valuation allowancewill be reversed against goodwill when the Company reports income in futureperiods.

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

 

Identifiableintangible assets consist primarily of international route authorities, tradenames, airport slots/airport operating rights, certain partner contracts andother items. International route authorities, certain airport slots/airportoperating rights and trade names are indefinite-lived and, as such, are notamortized.  The Company’s definite-livedintangible assets are amortized on a straight-line basis over the remainingestimated lives of the related assets, which span periods of three to 29 years.

 

TheCompany tests the carrying amount of goodwill and other indefinite-livedintangible assets annually as of October 1 or whenever events orcircumstances 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.

 

TheCompany evaluates long-lived tangible assets and definite-lived intangibleassets for potential 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 announcedMerger with Delta was a triggering event under SFAS No. 142, requiring theCompany to further 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.

 

10

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Due to the limited time available between theMerger announcement date and the Company’s first quarter 2008 Form 10-Qfiling date, there was insufficient time to complete Step 2 of the goodwillimpairment test 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 believed 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, which includes an adjustment of estimatedgoodwill from $2.2 billion to the implied fair value of goodwill of $2.9billion.  The adjustment to goodwillresulted in the reversal of $674 million of impairment expense recorded in thefirst 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 toindefinite-lived intangibles, $213 million in other non-operating expenserelated to other than temporary impairment on investments in affiliatedcompanies and $214 million in income tax benefit related to the reversal ofdeferred tax liabilities related to certain of the indefinite-lived intangibleassets.

 

The indefinite-lived intangibles were impairedto fair value if the fair value was lower than the carrying amount, in accordancewith SFAS No. 142.  Thedefinite-lived intangibles and flight equipment were subject to recoverabilitytests to determine if a loss in fair value measured in Step 2 would result inan impairment 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 equityinvestment was subject to a recoverability test in accordance with AccountingPrinciples Board Opinion 18, *The EquityMethod of Accounting for 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.  Refer to “Note 5 – Fair Value Measurements”for details about the fair value measurements used in recognizing theseimpairments.

 

The following table presents a roll-forward ofthe intangible assets affected by impairment charges as the result of theimpairment analyses performed during the second quarter:

 
| ** **                                       | ** ** | **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                            |       | (6,784                              | )          | (14,722 | ) | — |   | — |   |
| SFAS  No. 142 Impairment                    |       | —                              |       | — |   | (584,700 | ) | (13,200 | ) |
| SFAS  No. 144 Impairment                    |       | (106,653                            | )          | (480,926 | ) | — |   | — |   |
| June 30,  2008 net carrying amount          |       | $                                   | 339,482    |   | $ | — |   | $ | 2,377,000 |   | $ | 650,425 |   |

 

In accordance with SOP 90-7,a reduction in the valuation allowance associated with the realization ofpre-emergence deferred tax assets in future periods will sequentially reducethe value of recorded goodwill followed by other indefinite-lived assets untilthe net carrying cost of these assets is zero. Adjustments to goodwill during the six months ended June 30, 2008are shown in the table below:

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

 

11

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The following table presents information about our intangible assets,including goodwill, at June 30, 2008 and December 31, 2007:

 
| ** **                                                | ** ** | ** **          | ** ** | **Successor**               | ** **    |
|-----------------------------------------------------------|------------|---------------------|------------|-----------------------------|---------------|
| ** **                                                | ** ** | ** **          | ** ** | **June 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                  |       | **$**                       | **352,200**   | ** ** | **$** | **(12,718** | **)** | $ | 461,900 |   | $ | (8,981 | ) |
| England airport  operating rights                         |       | 4                   | ** ** | **16,000**                  | ** **    | **(3,467** | **)** | 16,000 |   | (1,867 | ) |
| NWA customer  relationships                               |       | 8                   | ** ** | **—**                  | ** **    | **—** | ** ** | 530,000 |   | (34,352 | ) |
| WorldPerks  affinity card contract                        |       | 14                  | ** ** | **195,700**                 | ** **    | **(14,134** | **)** | 195,700 |   | (7,611 | ) |
| WorldPerks  marketing partner relationships               |       | 21                  |       | **43,000**                  |          | **(2,117** | **)** | 43,000 |   | (1,140 | ) |
| Visa contract                                             |       | 3                   | ** ** | **11,900**                  | ** **    | **(3,223** | **)** | 11,900 |   | (1,735 | ) |
|                                                      |       |                |       | ** **                  |          | ** ** |   |   |   |   |   |
| 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 |   | — |   |
|                                                      |       |                |       |                        |          |   |   |   |   |   |   |
| ** **                                                | ** ** | ** **          | ** ** | **$**                       | **6,802,790** | ** ** | **$** | **(35,659** | **)** | $ | 11,201,734 |   | $ | (55,686 | ) |

 

Total amortization expense recognized was approximately $595.8 million forthe three month period ended June 30, 2008, $7.9 million for the one monthperiod ended June 30, 2007 and $0.3 million for the two month period endedMay 31, 2007. Amortization expense of $619.7 million and $0.6 million wasrecognized for the six month period ended June 30, 2008 and the fivemonths ended May 31, 2007, respectively. Of the amortization expense recognized in the second quarter of 2008,$587.6 million was related to SFAS No. 144 impairment expense for theSkyTeam and other code share partners intangible and the customer relationshipintangible and reduced the carrying value, so the carrying amount andaccumulated amortization related to these assets has been deducted from thecurrent period in the table above.  Weexpect to record amortization expense of $16.5 million for the remainder of2008, $32.9 million per year from 2009 through 2010, $31.2 million in 2011 and $28.1 million in 2012.

 

**Note 5 – Fair Value Measurements**

 

The Company adopted SFAS No. 157, *FairValue Measurements*(“SFAS No. 157”), on the Effective Date inaccordance with SOP 90-7. SFAS No. 157 defines fair value,establishes a consistent framework for measuring fair value and expandsdisclosure 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.

 

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

 

(A)      Market approach – Uses prices and other relevant information generatedby 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 be required toreplace the service capacity of an asset (replacement cost); and

(C)        Income approach – Uses valuation techniques toconvert future amounts to a single present amount based on current marketexpectations about the future amounts (includes present value techniques,option-pricing models, and excess earnings method).  Net present value is an income approach wherea stream of expected cash flows is discounted at an appropriate market interestrate.  Excess earnings method is avariation of the income approach where the value of a specific asset isisolated from its contributory assets.

 

*Measured on a Recurring Basis.*   Forassets and liabilities measured at fair value on a recurring basis during theperiod, SFAS No. 157 requires quantitative disclosures about the fairvalue measurements separately for each major category.  There were no changes in the valuationtechniques used to measure the fair values of assets measured on a recurringbasis during the period.  Assets andliabilities itemized below were measured at fair value on a recurring basisduring the period using the market and income approaches:

 

12

----

 
| ** **                                                     | ** ** | **Successor Assets** | ** ** |
|----------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                     | ** ** | ** **                | ** ** | **Quoted Prices** | ** ** | ** ** | ** ** | ** ** | ** ** | **Quoted Prices** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                | ** ** | **in Active** | ** ** | **Significant** | ** ** | ** ** | ** ** | **in Active** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                | ** ** | **Markets for** | ** ** | **Other** | ** ** | ** ** | ** ** | **Markets for** | ** ** | **Other** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **As of**            | ** ** | **Identical** | ** ** | **Observable** | ** ** | **As of** | ** ** | **Identical** | ** ** | **Observable** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **June 30,**         | ** ** | **Assets** | ** ** | **Inputs** | ** ** | **December 31,** | ** ** | **Assets** | ** ** | **Inputs** | ** ** | **Valuation** | ** ** |
| *(In millions)*                                           | ** ** | **2008**                  | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **2007** | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **Technique** | ** ** |
| Cash and cash  equivalents                                     | ** ** | **$**                     | **3,216**  | ** ** | **$** | **3,216** | ** ** | **$** | **—** |   | $ | 2,939 |   | $ | 2,939 |   | $ | — |   | (A) |   |
| Unrestricted  short-term investments                           | ** ** | **40**                    | ** ** | **—** | ** ** | **40** |   | 95 |   | 95 |   | — |   | (A),(C) |   |
| Restricted cash,  cash equivalents, and short-term investments | ** ** | **424**                   | ** ** | **419** | ** ** | **5** |   | 725 |   | 725 |   | — |   | (A),(C) |   |
| Derivatives                                                    | ** ** | **330**                   | ** ** | **—** | ** ** | **330** |   | 60 |   | — |   | 60 |   | (A),(C) |   |
| Total                                                          | ** ** | **$**                     | **4,010**  | ** ** | **$** | **3,635** | ** ** | **$** | **375** |   | $ | 3,819 |   | $ | 3,759 |   | $ | 60 |   |   |   |

 
| ** **           | ** ** | **Successor ****Liabilities** | ** ** |
|----------------------|------------|------------------------------------|------------|
| ** **           | ** ** | ** **                         | ** ** | **Quoted Prices** | ** ** | ** ** | ** ** | ** ** | ** ** | **Quoted Prices** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** **                         | ** ** | **in Active** | ** ** | **Significant** | ** ** | ** ** | ** ** | **in Active** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** **                         | ** ** | **Markets for** | ** ** | **Other** | ** ** | ** ** | ** ** | **Markets for** | ** ** | **Other** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **As of**                     | ** ** | **Identical** | ** ** | **Observable** | ** ** | **As of** | ** ** | **Identical** | ** ** | **Observable** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **June 30,**                  | ** ** | **Liabilities** | ** ** | **Inputs** | ** ** | **December 31,** | ** ** | **Liabilities** | ** ** | **Inputs** | ** ** | **Valuation** | ** ** |
| *(In millions)* | ** ** | **2008**                           | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **2007** | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **Technique** | ** ** |
| Derivatives          | ** ** | **$**                              | **14**     | ** ** | **$** | **—** | ** ** | **$** | **14** |   | $ | 3 |   | $ | — |   | $ | 3 |   | (A),(C) |   |
| Total                | ** ** | **$**                              | **14**     | ** ** | **$** | **—** | ** ** | **$** | **14** |   | $ | 3 |   | $ | — |   | $ | 3 |   |   |   |

 

*Measured ona Non-Recurring Basis. *For assets and liabilities measured on anon-recurring basis during the period, SFAS No. 157 requires quantitativedisclosures about the fair value measurements separately for each majorcategory. Northwest completed Step 2 of the goodwill impairment test during thesecond quarter of 2008.  During thisprocess, the Company was required to measure the fair value of its assets andliabilities.  Assets and liabilitiesmeasured during this process resulted in fair values either at, above or belowbook value.  Where fair values of assetswere below book value, Northwest recorded impairments under the criteria ofSFAS No. 142 for indefinite-lived intangibles or performed recoverabilitytests as described in SFAS No. 144 or APB 18, as appropriate.  Based on the results of the recoverabilitytests, Northwest recorded impairments on certain definite-lived intangibles andon investments in affiliates.  The lossesrelated to impairments of indefinite-lived intangibles were recorded in otheroperating expense, impairments of definite-lived intangibles were recorded indepreciation and amortization, and impairments of investments in affiliateswere recorded in other non-operating income (expense) on the CondensedConsolidated Statement of Operations based on the fair values of the impairedassets.

 

The Company also recorded areversal of $674 million of goodwill impairment in goodwill and otherindefinite-lived intangibles impairment expense during the second quarter of2008 to reflect an adjustment to the $3.9 billion goodwill impairment chargerecorded in the first quarter of 2008. The goodwill measurement recorded in the first quarter of 2008 was anestimate and was adjusted based on the completion of Step 2 of the goodwillimpairment test during the second quarter of 2008.  The goodwill impairment amount was affectedboth by the impairments described above and by changes in fair values that arenot recorded on the balance sheet in accordance with generally accepted accountingprinciples.  The assets itemized belowwere measured at fair value on a non-recurring basis using information as of March 31,2008, in conjunction with Step 2 of Northwest’s goodwill impairment test.  See “Note 4 – Goodwill and Intangibles” forfurther information about the impairment testing process.  These values were recorded as of April 1,2008:

 
| ** **                                            | ** ** | **Successor Assets** | ** ** |
|-------------------------------------------------------|------------|---------------------------|------------|
| ** **                                            | ** ** | ** **                | ** ** | ** ** | ** ** | **Quoted Prices** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **                | ** ** | ** ** | ** ** | **in Active** | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **                | ** ** | ** ** | ** ** | **Markets for** | ** ** | **Other** | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **                | ** ** | ** ** | ** ** | **Identical** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** | **Total** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Month of**         | ** ** | **Fair Value** | ** ** | **Assets** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** | **Gains** | ** ** | **Valuation** | ** ** |
| *(In millions)*                                  | ** ** | **Measurement**           | ** ** | **Measurement** | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **(Losses)** | ** ** | **Technique** | ** ** |
| Flight  equipment, net                                |       | Apr 2008                  | ** ** | **$** | **74** | ** ** | **$** | **—** | ** ** | **$** | **74** | ** ** | **$** | **—** | ** ** | **$** | **(36** | **)** | **(A)** | ** ** |
| Goodwill (1)                                          |       | Apr 2008                  | ** ** | **2,873** | ** ** | **—** | ** ** | **—** | ** ** | **2,873** | ** ** | **674** | ** ** | **(C)** | ** ** |
| International  routes and other intangible assets (1) |       | Apr 2008                  | ** ** | **3,026** | ** ** | **—** | ** ** | **—** | ** ** | **3,026** | ** ** | **(1,185** | **)** | **(A),(C)** | ** ** |
| Investment in  affiliate (2)                          |       | Apr 2008                  | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **(213** | **)** | **(C)** | ** ** |
| ** **                                            | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **(760** | **) ** | ** ** | ** ** |
|                                                       |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

13

----

 

(1)   Goodwill represents the excess of the fairvalue of the Company’s assets over the allocated values of the identifiableassets as determined under the guidance of SFAS No. 142 and SFAS No. 141.  International routes and other intangibleassets are identified by type in “Note 4 – Goodwill and Intangibles.”  Northwest’s fair value measurements forgoodwill, international routes and other intangible assets included significantunobservable inputs (Level 3), which generally include the Company’s five-yearbusiness plan, 12-months of historical revenues and expenses by city pair,Company projections of available seat miles, revenue passenger miles, loadfactors, and operating costs per available seat mile, and a discount rate.

 

One of the significant unobservable inputs underlying the goodwill andintangible 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 a bid-to-yield analysis of majorairline corporate bonds and the expected market rate of return for equity wasmeasured based on the risk free rate, the airline industry beta, and riskpremiums based on the Federal Reserve Statistical Release H.15 or Ibbotson®Stocks, Bonds, Bills, and Inflation® Valuation Yearbook, Edition 2008.  These factors resulted in an 11% discountrate on March 31, 2008.  Thiscompares to an 11% discount rate at emergence and a 10.5% discount rate on ourlast impairment testing date of October 31, 2007.

 

(2)          The valuation of investments in affiliatesconsists of Northwest’s investment in Midwest.  This investment was measured at fair valuebased on an income approach, which included significant unobservable inputs(Level 3).  The unobservable inputsgenerally include cash flow projections and a discount rate developed using aCAPM, which utilized a similar approach to the discussion of the CAPMabove.  However, the industry peer setfor Midwest considered other mid-sized airlines similar to Midwest and resultedin a 17.5% discount rate.  Due toNorthwest’s position as a minority investor, current cash flow projectionswould result in the majority investor receiving all of the expected excess cashflows of the entity.

 

**Note 6 – Geographic Regions**

 

The Company is managed as one cohesive businessunit, of which revenues are derived primarily from the commercialtransportation of passengers and cargo. Operating revenues from flight segments serving a foreign destinationare classified into the Pacific or Atlantic regions, as appropriate.  The following table shows the operatingrevenues for each region:

 
| ** **                  | ** ** | **Successor**                | ** ** | **Predecessor**         | ** ** |
|-----------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | ** **                   | ** ** | **Period from**    | ** ** | **Period from** | ** ** |
| ** **                  | ** ** | **Three Months**        | ** ** | **June 1 to** | ** ** | **April 1 to** | ** ** |
| ** **                  | ** ** | **Ended June 30,** | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** |
| *(In millions)*        | ** ** | **2008**                     | ** ** | **2007**                | ** ** | **2007** | ** ** |
| Domestic                    | ** ** | **$**                        | **2,330**  |                    | $          | 751 |   | $ | 1,404 |   |
| Pacific,  principally Japan | ** ** | **718**                      |       | 231                     |       | 425 |   |
| Atlantic                    | ** ** | **528**                      |       | 148                     |       | 222 |   |
| Total operating  revenues   | ** ** | **$**                        | **3,576**  |                    | $          | 1,130 |   | $ | 2,051 |   |

 
| ** **                  | ** ** | **Successor**                | ** ** | **Predecessor**         | ** ** |
|-----------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | ** **                   | ** ** | **Period from**    | ** ** | **Period from** | ** ** |
| ** **                  | ** ** | **Six Months**          | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** |
| ** **                  | ** ** | **Ended June 30,** | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** |
| *(In millions)*        | ** ** | **2008**                     | ** ** | **2007**                | ** ** | **2007** | ** ** |
| Domestic                    | ** ** | **$**                        | **4,419**  |                    | $          | 751 |   | $ | 3,346 |   |
| Pacific,  principally Japan | ** ** | **1,386**                    |       | 231                     |       | 1,064 |   |
| Atlantic                    | ** ** | **898**                      |       | 148                     |       | 514 |   |
| Total operating  revenues   | ** ** | **$**                        | **6,703**  |                    | $          | 1,130 |   | $ | 4,924 |   |

 

The Company’s tangible assets consist primarily offlight equipment, which are utilized across geographic markets and thereforehave not been allocated.

 

14

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**Note7 – Reorganization Related Items**

 

In accordance with SOP 90-7, the financialstatements for the periods presented distinguish transactions and events thatare directly associated with the reorganization from the ongoing operations ofthe Company.  In connection with itsbankruptcy proceedings, implementation of our Plan of Reorganization andadoption of fresh-start accounting, the Company recorded the following largelynon-cash reorganization income/(expense) items:

 
| ** **                                         | ** ** | **Predecessor**          | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|
| ** **                                         | ** ** | **Period from**     | ** ** | **Period from** | ** ** |
| ** **                                         | ** ** | **April 1 to** | ** ** | **January 1 to** | ** ** |
| ** **                                         | ** ** | **May 31,**         | ** ** | **May 31,** | ** ** |
| *(In millions)*                               | ** ** | **2007**                 | ** ** | **2007** | ** ** |
| Discharge of  unsecured claims and liabilities (a) |       | $                        | 1,763      |   | $ | 1,763 |   |
| Revaluation of  frequent flyer obligations (b)     |       | (1,559                   | )          | (1,559 | ) |
| Revaluation of  other assets and liabilities (c)   |       | 2,816                    |       | 2,816 |   |
| Employee-related  charges (d)                      |       | (308                     | )          | (312 | ) |
| Abandonment of  aircraft and buildings (d)         |       | (275                     | )          | (323 | ) |
| Restructured  aircraft lease/debt charges (d)      |       | (72                      | )          | (74 | ) |
| Professional  Fees                                 |       | (43                      | )          | (60 | ) |
| Other (d)                                          |       | (378                     | )          | (700 | ) |
| Reorganization  items, net                         |       | $                        | 1,944      |   | $ | 1,551 |   |

 

(a)   The gain on discharge of unsecured claims andliabilities relates to the Company’s unsecured claims as of the Petition Dateand the discharge of unsecured claims established as part of the bankruptcyprocess.  In accordance with the Plan ofReorganization, the Company discharged its estimated $8.2 billion in unsecuredcreditor obligations in exchange for the distribution of approximately 234million common shares of the Successor Company valued at emergence at $6.45 billion.  Accordingly, the Company recognized anon-cash reorganization gain of approximately $1.8 billion.

 

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

 

(c)   In accordance with fresh-start reporting, theCompany revalued its assets at their estimated fair value and revalued itsliabilities at estimated fair value or the present value of amounts to bepaid.  This resulted in a non-cashreorganization gain of $2.8 billion, primarily as a result of newly recognizedintangible assets, offset partially by reductions in the fair value of tangibleproperty and equipment.

 

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

 

**Note 8 – Income Taxes**

 

TheCompany accounts for income taxes in accordance with SFAS No. 109, which requires that deferred tax assets and liabilities are recognizedusing enacted tax rates, for the tax effect of temporary differences betweenthe financial 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 notthat some 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 of 2003.  The Company continues to maintain a fullvaluation allowance against its deferred tax assets due to the uncertaintyregarding the ultimate realization of those assets.

 

Anownership change under Section 382 of the Internal Revenue Code occurredin connection with the Company’s Plan of Reorganization.  However, the Company does not believe thatsuch change has any material impact on the Company’s ability to use its NOLcarryforwards and other tax attributes.

 

Generally,the Company would not record a tax benefit related to a quarterly net lossunless it had a high degree of confidence that it would record a full-yearprofit.  A tax benefit of $214 millionwas recorded during the second quarter of 2008 to decrease the deferred taxliability associated with the impairment of an indefinite-lived intangibleasset.

 

15

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

 

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

 
| ** **                                                                                                   | ** ** | **Successor**         | ** ** | **Predecessor**         | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                                                   | ** ** | **Three Months** | ** ** | **Period from**    | ** ** | **Period from** | ** ** |
| ** **                                                                                                   | ** ** | **Ended**             | ** ** | **June 1 to** | ** ** | **April 1 to** | ** ** |
| ** **                                                                                                   | ** ** | **June 30,**     | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** |
| *(In millions)*                                                                                         | ** ** | **2008**              | ** ** | **2007**                | ** ** | **2007** | ** ** |
| **Numerator:**                                                                                               |       |                  |       |                    |       |   |   |
| Net income  (loss) applicable to common stockholders                                                         | ** ** | **$**                 | **(377**   | )                       | $          | 106 |   | $ | 2,043 |   |
|                                                                                                         |       |                  |       |                    |       |   |   |
| Effect of dilutive  securities:                                                                              |       |                  |       |                    |       |   |   |
| Gain on  discharge of convertible debt                                                                       | ** ** | **—**            |       | —                  |       | (82 | ) |
| Gain on  discharge of Series C Preferred Stock                                                          | ** ** | **—**            |       | —                  |       | (60 | ) |
| Adjusted net  income for diluted earnings (loss) per share                                                   | ** ** | **$**                 | **(377**   | )                       | $          | 106 |   | $ | 1,901 |   |
|                                                                                                         |       |                  |       |                    |       |   |   |
| **Denominator:**                                                                                             |       |                  |       |                    |       |   |   |
| Weighted-average  shares outstanding for basic and diluted earnings (loss) per share                         |       | **263.1**             |       | 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 |       | **263.1**             |       | 262.2                   |       | 112.7 |   |
|                                                                                                         |       |                  |       |                    |       |   |   |
|                                                                                                         |       |                  |       |                    |       |   |   |
| **Basic  earnings (loss) per common share**                                                                  | ** ** | **$**                 | **(1.43**  | )                       | $          | 0.41 |   | $ | 23.37 |   |
|                                                                                                         |       |                  |       |                    |       |   |   |
|                                                                                                         |       |                  |       |                    |       |   |   |
| **Diluted  earnings (loss) per common share**                                                                | ** ** | **$**                 | **(1.43**  | )                       | $          | 0.41 |   | $ | 16.87 |   |

 

16

----

 
| ** **                                                                                                   | ** ** | **Successor**       | ** ** | **Predecessor**         | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                                                                                                   | ** ** | **Six Months** | ** ** | **Period from**    | ** ** | **Period from** | ** ** |
| ** **                                                                                                   | ** ** | **Ended**           | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** |
| ** **                                                                                                   | ** ** | **June 30,**   | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** |
| *(In millions)*                                                                                         | ** ** | **2008**            | ** ** | **2007**                | ** ** | **2007** | ** ** |
| **Numerator:**                                                                                               |       |                |       |                    |       |   |   |
| Net income  (loss) applicable to common stockholders                                                         | ** ** | **$**               | **(4,516** | **)**                   | $          | 106 |   | $ | 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 for diluted earnings (loss) per share                                                   | ** ** | **$**               | **(4,516** | **)**                   | $          | 106 |   | $ | 1,609 |   |
|                                                                                                         |       |                |       |                    |       |   |   |
| **Denominator:**                                                                                             |       |                |       |                    |       |   |   |
| Weighted-average  shares outstanding for basic and diluted earnings (loss) per share                         |       | **262.7**           |       | 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 |       | **262.7**           |       | 262.2                   |       | 112.7 |   |
|                                                                                                         |       |                |       |                    |       |   |   |
|                                                                                                         |       |                |       |                    |       |   |   |
| **Basic  earnings (loss) per common share**                                                                  | ** ** | **$**               | **(17.19** | **)**                   | $          | 0.41 |   | $ | 20.03 |   |
|                                                                                                         |       |                | ** ** |                    |       |   |   |
|                                                                                                         |       |                | ** ** |                    |       |   |   |
| **Diluted  earnings (loss) per common share**                                                                | ** ** | **$**               | **(17.19** | **)**                   | $          | 0.41 |   | $ | 14.28 |   |

 

*Successor EPS*.   For the three and six months ended June 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.

 

Forthe period June 1 to June 30, 2007, approximately 13 millionrestricted stock units and stock options to purchase shares of the SuccessorCompany’s common stock were outstanding but excluded from the computation ofdiluted earnings per share because the effect of including the shares wouldhave been anti-dilutive.

 

*Predecessor EPS.*  Predecessor basic earnings per share wascomputed based on the Predecessor’s weighted average shares outstanding.  Dilutive earnings per share includedsecurities related to the Company’s Series C Preferred Stock andconvertible debt.

 

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

 

17

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

 

As of June 30, 2008, maturities of long-term debt (inclusive ofshort-term maturities), excluding capital lease obligations, through December 31,2012 were as follows (in millions):

 
| remainder of | 2008   |   | $      | 372 |  (a) |
|--------------|--------|--------|--------|-----|-----------|
| 2009         |   | 568    |   |
| 2010         |   | 500    |   |
| 2011         |   | 632    |   |
| 2012         |   | 464    |   |

 

(a)        In November 2007, theCompany entered into an accounts receivable financing facility.  The facility size is up to $150 million andas of June 30, 2008, the available amount of $133 million 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 entered into a $1.225billion Senior Corporate Credit Facility (“Bank Credit Facility”), formerlyreferred to by us as the DIP/Exit Facility, consisting of a $1.05 billion termloan facility and a $175 million revolving credit facility which has been fullydrawn since its inception.  The finalmaturity date of the Bank Credit Facility is August 21, 2013.  Principal on the term loan portion of theBank Credit Facility will be repaid at 1.0% per year with the balance (94%) dueat maturity.  The first such principalrepayment was made on August 21, 2007. Loans drawn under the $175 million revolving credit facility may beborrowed and repaid at the Company’s discretion.  Up to $75 million of the revolving creditfacility may be utilized by the Company as a letter of credit facility.  As amended in March 2007, both loan facilitiesunder the Bank Credit Facility bear interest at LIBOR plus 2.00%.  Letter of credit fees are 2.125% perannum.  To the extent that the revolvingcredit facility is not utilized, the Company is required to pay an undrawncommitment fee of 50 basis points per annum. As of June 30, 2008 the Bank Credit Facility was rated BB by Standard &Poor’s Rating Services (“S&P”) and B1 by Moody’s Investor Services, Inc.(“Moody’s”). Subsequently, on July 25, 2008, S&P downgraded the Bank CreditFacility to BB-. The Bank Credit Facility 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 arising fromhedging trades entered into with Bank Credit Facility lenders.  The interest rate as of June 30, 2008was 4.48% on both the term loan facility and the revolving credit facility.

 

The Bank Credit Facilityrequires ongoing compliance with various financial covenants including arequirement for the Company to maintain a minimum ratio of consolidated EBITDARto consolidated fixed charges (“Fixed Charge Coverage Ratio”).  Under a recent amendment to the Bank CreditFacility completed in April 2008, compliance by the Company with the FixedCharge Coverage Ratio has been waived from April 1, 2008 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 calculatingthis ratio, EBITDAR is defined as operating income, adjusted to exclude theeffects of depreciation, amortization, aircraft rents and costs (but only up to$150 million of cash costs) payable in connection with a merger or acquisitionand to include the effects of interest income and governmental reimbursementsfor losses resulting from 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 of obtainingthe April 2008 amendment) and aircraft rent expense (without giving effectto any acceleration of rental expense). Additionally, certain aircraft sublease rental income is excluded fromEBITDAR and reduces aircraft rental expense in fixed charges.

 

Although the Company was incompliance with all required financial covenants as of June 30, 2008,continued compliance depends on many factors, some of which are beyond theCompany’s control, including the overall industry revenue environment and thelevel of fuel costs.

 

18

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**Note 11 –Fleet Information and Commitments**

 

As shown in the following table, Northwest operateda mainline fleet of 339 aircraft at June 30, 2008, consisting of 280narrow-body and 59 wide-body aircraft. Northwest’s purchase commitments for aircraft as of June 30, 2008are also provided.

 
| ** **                            | ** ** | ** **   | ** ** | **In Service** | ** ** | ** **  | ** ** |
|---------------------------------------|------------|--------------|------------|---------------------|------------|-------------|------------|
| ** **                            | ** ** | ** **   | ** ** | ** **          | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | **Aircraft** | ** ** |
| ** **                            | ** ** | **Seating**  | ** ** | ** **          | ** ** | **Capital** | ** ** | **Operating** | ** ** | ** ** | ** ** | **on Firm** | ** ** |
| **Aircraft Type**                | ** ** | **Capacity** | ** ** | **Owned**           | ** ** | **Lease**   | ** ** | **Lease** | ** ** | **Total** | ** ** | **Order** | ** ** |
|                                  |       |         |       |                |       |        |       |   |   |   |   |   |   |
| **Passenger  Aircraft**               |       |         |       |                |       |        |       |   |   |   |   |   |   |
| Airbus:                               |       |         |       |                |       |        |       |   |   |   |   |   |   |
| A319                                  |       | 124          |       | 55                  |       | —      |       | 2 |   | 57 |   | 5 |   |
| A320                                  |       | 148          |       | 45                  |       | —      |       | 28 |   | 73 |   | 2 |   |
| A330-200                              |       | 243          |       | 11                  |       | —      |       | — |   | 11 |   | — |   |
| A330-300                              |       | 298          |       | 21                  |       | —      |       | — |   | 21 |   | — |   |
|                                  |       |         |       |                |       |        |       |   |   |   |   |   |   |
| Boeing:                               |       |         |       |                |       |        |       |   |   |   |   |   |   |
| 787-8                                 |       | TBD          |       | —              |       | —      |       | — |   | — |   | 18 |   |
| 757-200                               |       | 160-184      |       | 38                  |       | 1           |       | 16 |   | 55 |   | — |   |
| 757-300                               |       | 224          |       | 16                  |       | —      |       | — |   | 16 |   | — |   |
| 747-400                               |       | 403          |       | 4                   |       | —      |       | 12 |   | 16 |   | — |   |
|                                  |       |         |       |                |       |        |       |   |   |   |   |   |   |
| McDonnell  Douglas:                   |       |         |       |                |       |        |       |   |   |   |   |   |   |
| DC9                                   |       | 100-125      |       | 79                  |       | —      |       | — |   | 79 |   | — |   |
|                                  |       |         |       | 269                 |       | 1           |       | 58 |   | 328 |   | 25 |   |
|                                  |       |         |       |                |       |        |       |   |   |   |   |   |   |
| **Freighter  Aircraft**               |       |         |       |                |       |        |       |   |   |   |   |   |   |
| Boeing 747F                           |       |         |       | 8                   |       | —      |       | 3 |   | 11 |   | — |   |
|                                  |       |         |       |                |       |        |       |   |   |   |   |   |   |
| **Total  Mainline Operated Aircraft** | ** ** | ** **   | ** ** | **277**             | ** ** | **1**       | ** ** | **61** | ** ** | **339** | ** ** | **25** | ** ** |
| ** **                            | ** ** | ** **   | ** ** | ** **          | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Regional  Aircraft**                |       |         |       |                |       |        |       |   |   |   |   |   |   |
| CRJ200                                |       | 50           |       | —              |       | —      |       | 141 |   | 141 |   | — |   |
| Saab 340                              |       | 33           |       | —              |       | —      |       | 49 |   | 49 |   | — |   |
| CRJ900                                |       | 76           |       | 25                  |       | —      |       | — |   | 25 |   | 11 |   |
| Embraer 175                           |       | 76           |       | 24                  |       | —      |       | — |   | 24 |   | 12 |   |
|                                  |       |         |       |                |       |        |       |   |   |   |   |   |   |
| **Total  Airlink Operated Aircraft**  | ** ** | ** **   | ** ** | **49**              | ** ** | **—**  | ** ** | **190** | ** ** | **239** |   | **23** |   |
|                                  |       |         |       |                |       |        |       |   |   |   |   |   |   |
| **Total  Aircraft**                   | ** ** | ** **   | ** ** | **326**             | ** ** | **1**       | ** ** | **251** | ** ** | **578** |   | **48** |   |

 

The Company took delivery of 12 CRJ900 and 15 Embraer 175 aircraft during the six months ended June 30,2008.    In connection with theacquisition of these 27 aircraft,the Company entered into long-term debt arrangements.  Under such arrangements, the aggregate amountof debt incurred totaled $476million.

 

19

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

 

Comprehensive income (loss) consisted of thefollowing:

 
| ** **                                                          | ** ** | **Successor**         | ** ** | **Predecessor**         | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **Three Months** | ** ** | **Period from**    | ** ** | **Period from** | ** ** |
| ** **                                                          | ** ** | **Ended**             | ** ** | **June 1 to** | ** ** | **April 1 to** | ** ** |
| ** **                                                          | ** ** | **June 30,**     | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** |
| *(In millions)*                                                | ** ** | **2008**              | ** ** | **2007**                | ** ** | **2007** | ** ** |
| Net income  (loss)                                                  | ** ** | **$**                 | **(377**   | **)**                   | $          | 106 |   | $ | 2,043 |   |
| Pension, other  postretirement, and long-term disabilities benefits | ** ** | **1**                 | ** ** | —                  |       | — |   |
| Change in  unrealized gain (loss) on available-for-sale securities  | ** ** | **—**            | ** ** | (1                      | )          | — |   |
| Change in  deferred gain (loss) from hedging activities             | ** ** | **83**                | ** ** | 1                       |       | — |   |
| Foreign currency  translation adjustments                           | ** ** | **—**            | ** ** | —                  |       | (1 | ) |
| Comprehensive  income (loss)                                        | ** ** | **$**                 | **(293**   | **)**                   | $          | 106 |   | $ | 2,042 |   |

 
| ** **                                                          | ** ** | **Successor**       | ** ** | **Predecessor**         | ** ** |
|---------------------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **Six Months** | ** ** | **Period from**    | ** ** | **Period from** | ** ** |
| ** **                                                          | ** ** | **Ended**           | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** |
| ** **                                                          | ** ** | **June 30,**   | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** |
| *(In millions)*                                                | ** ** | **2008**            | ** ** | **2007**                | ** ** | **2007** | ** ** |
| Net income  (loss)                                                  | ** ** | **$**               | **(4,516** | **)**                   | $          | 106 |   | $ | 1,751 |   |
| Pension, other  postretirement, and long-term disabilities benefits | ** ** | **72**              | ** ** | —                  |       | — |   |
| Change in  unrealized gain (loss) on available-for-sale securities  | ** ** | **—**          | ** ** | (1                      | )          | 1 |   |
| Change in  deferred gain (loss) from hedging activities             | ** ** | **28**              | ** ** | 1                       |       | — |   |
| Foreign currency  translation adjustments                           | ** ** | **—**          | ** ** | —                  |       | (1 | ) |
| Comprehensive  income (loss)                                        | ** ** | **$**               | **(4,416** | **)**                   | $          | 106 |   | $ | 1,751 |   |

 

**Note 13 – Pension and Other Postretirement Health CareBenefits**

 

TheCompany has 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 Pension Protection Act of 2006 (“2006 Pension Act”) allowscommercial airlines to elect special funding rules for defined benefitplans that are frozen.  The unfundedliability for a frozen defined benefit plan may be amortized over a fixed17-year period. The unfunded liability is defined as the actuarial liabilitycalculated using an 8.85% interest rate minus the fair market value of planassets.  Northwest elected the specialfunding rules for frozen defined benefit plans under the 2006 Pension Acteffective October 1, 2006.  As aresult of this election (1) the funding waivers that Northwest receivedfor the 2003 plan year contributions were deemed satisfied under the 2006Pension Act, and (2) the funding standard account for each Plan wasreduced to zero as of September 30, 2006. New contributions that came due under the 2006 Pension Act funding rules werepaid while Northwest was in bankruptcy and must continue to be paid goingforward.  If the new contributions arenot paid, the future funding deficiency that would develop will be based on theregular funding rules rather than the special funding rules.

 

20

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Federal legislation enacted in December 2007 effected a change inthe retirement age for pilots from age 60 to 65.  Due to this legislative change, the Companyhas updated its retirement assumptions for pilots and assumes that certainpilots will continue to work past age 60. This change had an immaterial impacton Northwest’s overall pension benefit and other postretirement obligations.

 

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

*** ***
| ** **                                       | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **Successor**             | ** ** | **Predecessor**         | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                       | ** ** | **Three Months**     | ** ** | **Period from**    | ** ** | **Period from** | ** ** | **Three Months** | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **                                       | ** ** | **Ended**                 | ** ** | **June 1 to** | ** ** | **April 1 to** | ** ** | **Ended** | ** ** | **June 1 to** | ** ** | **April 1 to** | ** ** |
| ** **                                       | ** ** | **June 30,**         | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **May 31,** | ** ** |
| *(In millions)*                             | ** ** | **2008**                  | ** ** | **2007**                | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2007** | ** ** |
| Defined benefit  plan costs                      | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                     | ** ** | **$**                     | **6**      |                    | $          | 4 |   | $ | 8 | ** ** | **$** | **6** |   | $ | 2 |   | $ | 4 |   |
| Interest cost                                    | ** ** | **141**                   |       | 46                      |       | 90 | ** ** | **12** |   | 4 |   | 9 |   |
| Expected return  on plan assets                  | ** ** | **(140**                  | **)**      | (48                     | )          | (83 | ) | **—** |   | — |   | — |   |
| Amortization of  prior service cost              | ** ** | **—**                |       | —                  |       | — | ** ** | **—** |   | — |   | (6 | ) |
| Recognized net  actuarial loss and other  events | ** ** | **—**                | ** ** | —                  | ** ** | 7 | ** ** | **—** | ** ** | — | ** ** | 6 | ** ** |
| Net periodic  benefit cost                       | ** ** | **7**                     |       | 2                       |       | 22 | ** ** | **18** |   | 6 |   | 13 |   |
| ** **                                       | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Defined  contribution plan costs                 | ** ** | **27**                    |       | 4                       |       | 7 | ** ** | **—** |   | — |   | — |   |
| ** **                                       | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total benefit  cost                              | ** ** | **$**                     | **34**     |                    | $          | 6 |   | $ | 29 | ** ** | **$** | **18** |   | $ | 6 |   | $ | 13 |   |

 
| ** **                                       | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **Successor**             | ** ** | **Predecessor**         | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                       | ** ** | **Six Months**       | ** ** | **Period from**    | ** ** | **Period from** | ** ** | **Six Months** | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **                                       | ** ** | **Ended**                 | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** | **Ended** | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** |
| ** **                                       | ** ** | **June 30,**         | ** ** | **June 30,**       | ** ** | **May 31,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **May 31,** | ** ** |
| *(In millions)*                             | ** ** | **2008**                  | ** ** | **2007**                | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2007** | ** ** |
| Defined benefit  plan costs                      | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                     | ** ** | **$**                     | **11**     |                    | $          | 4 |   | $ | 19 | ** ** | **$** | **12** |   | $ | 2 |   | $ | 10 |   |
| Interest cost                                    | ** ** | **282**                   |       | 46                      |       | 225 | ** ** | **24** |   | 4 |   | 22 |   |
| Expected return  on plan assets                  | ** ** | **(280**                  | **)**      | (48                     | )          | (207 | ) | **—** |   | — |   | — |   |
| Amortization of  prior service cost              | ** ** | **—**                |       | —                  |       | — | ** ** | **—** |   | — |   | (15 | ) |
| Recognized net  actuarial loss and other  events | ** ** | **—**                | ** ** | —                  | ** ** | 18 | ** ** | **—** | ** ** | — | ** ** | 16 | ** ** |
| Net periodic  benefit cost                       | ** ** | **13**                    |       | 2                       |       | 55 | ** ** | **36** |   | 6 |   | 33 |   |
| ** **                                       | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Defined  contribution plan costs                 | ** ** | **55**                    |       | 4                       |       | 23 | ** ** | **—** |   | — |   | — |   |
| ** **                                       | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total benefit  cost                              | ** ** | **$**                     | **68**     |                    | $          | 6 |   | $ | 78 | ** ** | **$** | **36** |   | $ | 6 |   | $ | 33 |   |

 

21

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**Note 14 – Stock-Based Compensation**

 

Priorto the Effective Date, the Company maintained stock incentive plans forofficers and key employees of the Company (the “Prior Management Plans”) and astock option plan for pilot employees (the “Pilot Plan”).  On the Effective Date, outstanding awardsunder the Prior Management Plans and Pilot Plan were cancelled in accordancewith the terms of the Plan.  On theEffective Date, the Management Equity Plan (“the 2007 Plan”) of the SuccessorCompany provided for in the Plan of Reorganization became effective.  The 2007 Plan is a stock-based incentivecompensation plan, under which the Compensation Committee of the Board ofDirectors has the authority to grant to Company employees equity-based awardsincluding stock options, stock appreciation rights, restricted stock,restricted stock units, and/or other stock-based awards, includingperformance-based awards.  Each of theseawards may be granted alone, in conjunction with, or in tandem with otherawards under the 2007 Plan.  Awards maybe to any employee of the Company or its subsidiaries.  The number of participants participating inthe 2007 Plan will vary from year to year. At its inception, the 2007 Plan provided that 21.3 million shares ofcommon stock of the Successor Company were available for issuance under theplan.  As of June 30, 2008,approximately 6.9 million shares remained available for new awards to begranted under the 2007 Plan.

 

Thetotal stock-based non-cash compensation expense related to stock-based plansand liability awards for the three months ended June 30, 2008 was $38.1million and $0.7 million, respectively. The total stock-based non-cash compensationexpense related to stock-based plans and liability awards for the month andquarter of June 2007 was $9.5 million and $0.3 million, respectively. Thetotal stock-based non-cash compensation expense related to stock-based plansand liability awards for the six months ended June 30, 2008 was $70.0million and $1.2 million, respectively. There was no corresponding tax benefit in 2008 or 2007 related to thestock-based compensation, as the Company records a full valuation allowanceagainst its deferred tax assets due to the uncertainty regarding the ultimaterealization of those assets.   See “Note8 – Income Taxes” for additional information.

 

**Note 15 – Subsequent Events**

 

*Aircraft Financing. *On July 15, 2008, the Company entered into a $183 million privatedebt financing secured by ten 757-200 aircraft and 17 spare engines, which hadpreviously been unencumbered.  Theobligation is to be repaid over seven years.

 

22

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

 

**Overview**

 

On September 14, 2005 (the “Petition Date”),NWA Corp. and 12 of its direct and indirect subsidiaries (collectively, the “Debtors”)filed voluntary petitions for relief under Chapter 11 of the United StatesBankruptcy Code with the United States Bankruptcy Court for the SouthernDistrict of New York (the “Bankruptcy Court”). Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc.,an indirect subsidiary of NWA Corp., also filed a voluntary petition for reliefunder Chapter 11.  On May 18, 2007,the Bankruptcy Court entered an order approving and confirming the Debtors’First Amended Joint and Consolidated Plan of Reorganization Under Chapter 11 ofthe Bankruptcy Code (as confirmed, 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 implementedfresh-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”).  Thus the consolidated financialstatements prior to June 1, 2007 reflect results based upon the historicalcost basis of the Company while the post-emergence consolidated financialstatements reflect the new basis of accounting incorporating the fair valueadjustments made in recording the effects of fresh-start reporting.  Therefore, the post-emergence periods are notcomparable to the pre-emergence periods. However, for discussions on the results of operations, the Companybelieves that comparisons of financial results between the post-emergence andpre-emergence periods provide management and investors with a betterperspective of the Company’s core business and on-going operational financialperformance and trends.

 

*Merger Agreement with Delta.*  On April 14, 2008, the Company and DeltaAir Lines, Inc. (“Delta”) entered into an Agreement and Plan of Merger(the “Merger Agreement”) that provides, among other things, for the Company tobe merged with a wholly-owned subsidiary of Delta (the “Merger”).

 

Consummation of the Merger is subject tocustomary closing conditions, including obtaining the approval of NWA Corp.’sand Delta’s stockholders and receiving certain domestic and foreign regulatoryand antitrust approvals (including from the Federal Aviation Administration andthe United States Department of Transportation, under the Hart-Scott-RodinoAntitrust Improvements Act of 1976, as amended, and pursuant to CouncilRegulation (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 shareholders will vote on the proposed Merger at the annualshareholders meeting to be held on September 25, 2008.  Delta will also hold a special shareholdersmeeting on that same date to approve share issuances in conjunction with theproposed Merger.

 

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 Management Equity Plan will convertinto stock 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.

 

*Personnel Reductions.* As a result of previouslydisclosed capacity reductions, the Company recently announced its intention toreduce frontline and management personnel by 2,500. The Company intends toachieve the reductions first through a variety of voluntary programs includingearly-out programs, voluntary leaves, work rule modifications andattrition, and if voluntary means fail to achieve the targeted reductions,furloughs.

 

**SecondQuarter 2008 Results**

 

For the quarter ended June 30, 2008, theCompany recorded a net loss of $377 million, which includes net impairmentcharges of $547 million and a $250 million gain associated withmarking-to-market out-of-period fuel hedges. This compares to the combinedsecond quarter 2007 net income of $2.1 billion, which included $1.9 billionrelated to reorganization items.

 

23

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Operating revenues in the second quarter increased12.4 percent versus the second quarter of 2007 to $3.6 billion.  System consolidated passenger revenueincreased 10.0 percent to more than $3.1 billion on 3.6 percent additionalavailable seat miles (“ASMs”), resulting in a 6.1 percent increase in unitrevenue, excluding fresh-start adjustments.

 

Operating expenses in the quarter increased 37.3percent year-over-year to $3.9 billion. Aircraft fuel and taxes increased 41.2 percent compared with the secondquarter of 2008, primarily due to an increase in price.  During the second quarter, fuel averaged$3.45 per gallon, excluding taxes and mark-to-market expense related to futureperiod fuel derivative contracts, up 69.3 percent versus the second quarter oflast year.  Additionally, the Companyrecorded, as additional depreciation and amortization expense, impairmentcharges of $624 million associated with Step 2 of the goodwill impairmentrelated to aircraft and other long-lived intangible assets. The Company alsorecorded non-cash impairment charges of $598 million related to the Company’sPacific routes and reversed $674 million of the non-cash goodwill impairmentadjustment recorded in the first quarter in conjunction with Step 2 of thegoodwill impairment test.

 

The Company recorded a non-cash income tax benefitof $214 million in the second quarter of 2008, primarily related to theimpairment charges recorded in conjunction with Step 2 of the goodwillimpairment test for certain indefinite-lived intangible assets.  The Company recorded a non-cash income taxexpense in the combined second quarter of 2007 of $68 million

 

At June 30, 2008, the Company had cash and cashequivalents of $3.2 billion and unrestricted short-term investments of $40million, providing total available liquidity of $3.3 billion.  This amount excludes $424 million of restrictedshort-term investments (which may include amounts held as cash).

 

**OperatingStatistics – Three and six months ended June 30, 2008 and 2007**

 

Information with respect to the Company’s operatingstatistics follows:

 

**PASSENGERAND REGIONAL CARRIER REVENUES AND STATISTICAL RESULTS**

 
| ** **                                              | ** ** | **Three Months Ended** | ** **     | ** **  | **Six Months Ended** | ** **       | ** ** | ** **  |
|---------------------------------------------------------|------------|----------------------------------|----------------|-------------|--------------------------------|------------------|------------|-------------|
| ** **                                              | ** ** | **June 30**                 | ** **     | **Percent** | ** **                     | **June 30** | ** ** | **Percent** | ** ** |
| ** **                                              | ** ** | **2008**                         | ** **     | **2007**    | ** **                     | **Change**       | ** ** | **2008**    | ** ** | **2007** | ** ** | **Change** | ** ** |
| **Scheduled  service - Consolidated:**(1)               |       |                             |           |        |                           |             |       |        |   |   |   |   |   |
| Available seat  miles (ASM) (millions)                  | ** ** | **24,519**                       |           | 23,656      |                           | 3.6              | ** ** | **47,878**  |   | 46,549 |   | 2.9 |   |
| Revenue  passenger miles (RPM) (millions)               | ** ** | **20,852**                       |           | 20,192      |                           | 3.3              | ** ** | **40,067**  |   | 38,810 |   | 3.2 |   |
| Passenger load  factor                                  | ** ** | **85.0**                         | %              | 85.4        | %                              | (0.4             | )pts.      | **83.7**    | %** ** | 83.4 | % | 0.3 | pts.  |
| Revenue  passengers (millions)                          | ** ** | **17.5**                         |           | 17.4        |                           | 0.6              | ** ** | **33.3**    |   | 33.0 |   | 0.9 |   |
| Passenger  revenue per RPM (yield)                      | ** ** | **14.73**                        | *¢ * | 13.82       | *¢*                       | 6.6              | ** ** | **14.27**   | *¢* | 13.62 | *¢ * | 4.8 | * * |
| Passenger  revenue per ASM (RASM)                       | ** ** | **12.52**                        | *¢*       | 11.80       | *¢*                       | 6.1              | ** ** | **11.95**   | *¢* | 11.35 | *¢* | 5.3 | * * |
|                                                    |       |                             |           |        |                           |             |       |        |   |   |   |   |   |
| **Fuel  gallons consumed - Consolidated**(millions) (1) | ** ** | **436**                          |           | 433         |                           | 0.7              | ** ** | **856**     |   | 851 |   | 0.6 |   |
|                                                    |       |                             |           |        |                           |             |       |        |   |   |   |   |   |
| **Scheduled  service - Mainline:**(2)                   |       |                             |           |        |                           |             |       |        |   |   |   |   |   |
| Available seat  miles (ASM) (millions)                  | ** ** | **21,913**                       |           | 21,897      |                           | 0.1              | ** ** | **43,058**  |   | 43,148 |   | (0.2 | ) |
| Revenue  passenger miles (RPM) (millions)               | ** ** | **18,839**                       |           | 18,811      |                           | 0.1              | ** ** | **36,459**  |   | 36,303 |   | 0.4 |   |
| Passenger load  factor                                  | ** ** | **86.0**                         | %              | 85.9        | %                              | 0.1              | pts   | **84.7**    | % | 84.1 | % | 0.6 | pts. |
| Revenue  passengers (millions)                          | ** ** | **13.3**                         |           | 14.1        |                           | (5.7             | )          | **25.6**    |   | 27.0 |   | (5.2 | ) |
| Passenger  revenue per RPM (yield)                      | ** ** | **13.58**                        | *¢ * | 12.90       | *¢*                       | 5.3              |       | **13.16**   | *¢*  | 12.75 | *¢ * | 3.2 |   |
| Passenger  revenue per ASM (RASM)                       | ** ** | **11.67**                        | *¢*       | 11.08       | *¢*                       | 5.3              |       | **11.14**   | *¢*  | 10.73 | *¢* | 3.8 | * * |
|                                                    |       |                             |           |        |                           |             |       |        |   |   |   |   |   |
| **Fuel  gallons consumed - Mainline**(millions) (2)     | ** ** | **376**                          |           | 390         |                           | (3.6             | )          | **743**     |   | 769 |   | (3.4 | ) |

 

(1)   Consolidatedstatistics include Northwest Airlink regional carriers.

 

(2)          Mainlinestatistics exclude Northwest Airlink regional carriers, which is consistentwith how the Company reports statistics to the Department of Transportation (“DOT”).

 

24

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**MAINLINEOPERATING STATISTICAL RESULTS (1)**

 
| ** **                                                                                                                                       | ** **   | **Three Months Ended** | ** **       | ** **  | ** **     | **Six Months Ended** | ** **   | ** **  | ** **       |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------------|------------------|-------------|----------------|--------------------------------|--------------|-------------|------------------|
| ** **                                                                                                                                       | ** **   | **June 30**                 | ** **       | **Percent** | ** **     | **June 30**               | ** **   | **Percent** | ** **       |
| ** **                                                                                                                                       | ** **   | **2008**                         | ** **       | **2007**    | ** **     | **Change**                     | ** **   | **2008**    | ** **       | **2007** | ** ** | **Change** | ** ** |
| Total operating  ASM (millions)                                                                                                                  | ** **   | **22,058**                       |             | 21,921      |           | 0.6                            | ** **   | **43,327**  |             | 43,188 |   | 0.3 |   |
|                                                                                                                                             |         |                             |             |        |           |                           |         |        |             |   |   |   |   |
| Passenger service  operating expense                                                                                                             |         |                             |             |        |           |                           |         |        |             |   |   |   |   |
| per total ASM  (2) (3)                                                                                                                      | *** *** | **12.04**                        | *¢** * | 10.47       | *¢*  | 15.0                           | *** *** | **12.14**   | *¢** * | 10.39 | *¢*  | 16.8 |   |
| Mainline fuel  expense per total ASM                                                                                                             | *** *** | **4.66**                         | *¢** * | 3.42        | *¢*  | 36.3                           | *** *** | **4.60**    | *¢** * | 3.19 | *¢*  | 44.2 |   |
|                                                                                                                                             |         |                             |             |        |           |                           |         |        |             |   |   |   |   |
| Mark-to-market  gains (losses) per total ASM related to fuel derivative contracts that settle  in future periods                                 |         | **0.90**                         | *¢*         | (0.03       | )*¢*      | n/m                            |         | **0.44**    | *¢** * | 0.04 | *¢*  | n/m |   |
|                                                                                                                                             |         |                             |             |        |           |                           |         |        |             |   |   |   |   |
| Mainline fuel  expense per total ASM, excluding mark-to-market gains related to fuel  derivative contracts that settle in future periods         |         | **5.56**                         | *¢** * | 3.39        | *¢*  | 64.0                           |         | **5.04**    | *¢** * | 3.23 | *¢*  | 56.0 |   |
|                                                                                                                                             |         |                             |             |        |           |                           |         |        |             |   |   |   |   |
| Cargo ton miles  (millions)                                                                                                                      | ** **   | **459**                          |             | 505         |           | (9.1                           | )            | **917**     |             | 962 |   | (4.7 | ) |
| Cargo revenue  per ton mile                                                                                                                      | *** *** | **46.27**                        | *¢*         | 39.19       | *¢*  | 18.1                           | *** *** | **44.69**   | *¢** * | 40.24 | *¢*  | 11.1 |   |
| Fuel gallons consumed  (millions)                                                                                                                | ** **   | **376**                          |             | 390         |           | (3.6                           | )            | **743**     |             | 769 |   | (3.4 | ) |
| Average fuel  cost per gallon, excluding taxes                                                                                                   | *** *** | **287.80**                       | *¢** * | 205.89      | *¢*  | 39.8                           | *** *** | **283.82**  | *¢** * | 191.74 | *¢*  | 48.0 |   |
|                                                                                                                                             |         |                             |             |        |           |                           |         |        |             |   |   |   |   |
| Mark-to-market  gains (losses) per fuel gallons consumed related to fuel derivative contracts  that settle in future periods                     |         | **57.30**                        | *¢*         | (2.01       | )*¢*      | n/m                            |         | **27.42**   | *¢** * | 2.70 | *¢*  | n/m |   |
|                                                                                                                                             |         |                             |             |        |           |                           |         |        |             |   |   |   |   |
| Average fuel  cost per gallon, excluding fuel taxes and mark-to-market gains related to  fuel derivative contracts that settle in future periods |         | **345.10**                       | *¢*         | 203.88      | *¢*       | 69.3                           |         | **311.24**  | *¢*         | 194.44 | *¢*  | 60.1 |   |
|                                                                                                                                             |         |                             |             |        |           |                           |         |        |             |   |   |   |   |
| Number of  operating aircraft at end of period                                                                                                   | ** **   | ** **                       |             |        |           |                           |         | **339**     |             | 372 |   | (8.9 | ) |
| Full-time  equivalent employees at end of period                                                                                                 | ** **   | ** **                       |             |        |           |                           |         | **29,674**  |             | 29,589 |   | 0.3 |   |

 
| (1)    | Mainline statistics exclude Northwest  Airlink regional carriers, which is consistent with how the Company reports  statistics to the DOT.                                                                                                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                    |
| (2)    | This financial measure excludes non-passenger  service expenses. The Company believes that providing financial measures  directly related to passenger service operations allows investors to evaluate  and compare the Company’s core operating results to those of the industry. |
|   |                                                                                                                                                                                                                                                                                    |
| (3)    | Passenger service operating expense excludes the  following items unrelated to passenger service operations, net of  eliminations where applicable:                                                                                                                                     |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| *(In millions)*                         | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Goodwill  impairment                         | ** ** | **$**                            | **(674**   | **)**                          | $          | — | ** ** | **$** | **3,243** |   | $ | — |   |
| Other impairment  charges                    | ** ** | **1,222**                        | ** ** | **—**                     |       | **1,240** |   | — |   |
| Regional carrier  expenses                   | ** ** | **446**                          |       | 305                            | ** ** | **859** |   | 579 |   |
| Freighter  operations                        | ** ** | **157**                          |       | 154                            | ** ** | **323** |   | 288 |   |
| MLT Inc. - net  of intercompany eliminations | ** ** | **39**                           |       | 50                             | ** ** | **84** |   | 105 |   |
| Other                                        | ** ** | **29**                           |       | 19                             | ** ** | **48** |   | 35 |   |
|                                              |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

25

----

 

**Results of Operations – Three months ended June 30, 2008and 2007**

 

*Operating Revenues*.  Operating revenues increased12.4 percent ($395 million), the result of increased regional carrier revenues,system passenger revenue, charter revenue, and other revenue.

 

*System Passenger Revenues.* In the following analysis by region, mainline statistics excludeNorthwest Airlink regional carriers, which is consistent with how the Companyreports statistics to the DOT.  On the EffectiveDate, in conjunction with implementing fresh-start reporting, the Companychanged its policies pertaining to the accounting of frequent flyer obligationsand breakage of passenger tickets. Frequent flyer obligations are now recognized on a deferred revenuemethod versus an incremental cost method. The impact of the changes to accounting for frequent flyer obligationson the Successor Company was an increase of $1 million in mainline passengerrevenue and an increase of $4 million in regional carrier revenue for the threemonths ended June 30, 2008 and a reduction of $7 million in mainlinepassenger revenue and an increase of $1 million in regional carrier revenue in June 2007.  The following analysis by region outlines theCompany’s performance as reported and excluding the fresh-start relatedchanges.

 
| ** **                                 | ** ** | **Mainline** | ** ** | **Total**   | ** ** | ** **   | ** ** |
|--------------------------------------------|------------|--------------|------------|-------------|------------|--------------|------------|
| ** **                                 | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** | **Mainline** | ** ** | **Consolidated** | ** ** |
| **As reported:**                           |       |         |       |        |       |         |       |   |   |   |   |
| **2008**                                   |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)          |       | $            | 1,529      |        | $          | 576          |       | $ | 453 |   | $ | 2,558 |   | $ | 3,070 |   |
|                                       |       |         |       |        |       |         |       |   |   |   |   |
| **Increase (Decrease) from 2007:**         |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)          |       | $            | (19        | )           | $          | 51           |       | $ | 99 |   | $ | 131 |   | $ | 279 |   |
| Percent                                    |       | (1.2         | )%         | 9.7         | %          | 28.0         | %          | 5.4 | % | 10.0 | % |
|                                       |       |         |       |        |       |         |       |   |   |   |   |
| Scheduled  service ASMs (capacity)         |       | (6.7         | )%         | (0.9        | )%         | 28.1         | %          | 0.1 | % | 3.6 | % |
| Scheduled  service RPMs (traffic)          |       | (5.9         | )%         | 0.6         | %          | 22.0         | %          | 0.1 | % | 3.3 | % |
| Passenger  load factor                     |       | 0.7          | pts.       | 1.4         | pts.       | (4.2         | )pts.      | 0.1 | pts. | (0.4 | )pts. |
| Yield                                      |       | 5.0          | %          | 9.1         | %          | 4.8          | %          | 5.3 | % | 6.6 | % |
| Passenger  RASM                            |       | 5.9          | %          | 10.8        | %          | (0.2         | )%         | 5.3 | % | 6.1 | % |
|                                       |       |         |       |        |       |         |       |   |   |   |   |
| **Excluding fresh-start related changes:** |       |         |       |        |       |         |       |   |   |   |   |
| **2008**                                   |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)          |       | $            | 1,524      |        | $          | 582          |       | $ | 451 |   | $ | 2,557 |   | $ | 3,065 |   |
|                                       |       |         |       |        |       |         |       |   |   |   |   |
| **Increase (Decrease) from 2007:**         |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)          |       | $            | (55        | )           | $          | 53           |       | $ | 98 |   | $ | 96 |   | $ | 241 |   |
| Percent                                    |       | (3.5         | )%         | 10.0        | %          | 27.8         | %          | 3.9 | % | 8.5 | % |
|                                       |       |         |       |        |       |         |       |   |   |   |   |
| Yield                                      |       | 2.6          | %          | 9.2         | %          | 4.8          | %          | 3.8 | % | 5.2 | % |
| Passenger  RASM                            |       | 3.5          | %          | 10.9        | %          | (0.2         | )%         | 3.8 | % | 4.7 | % |

 

*Regional Carrier Revenues*.  Regional carrier revenuesincreased 40.7 percent ($148 million) to $512 million primarily due to a 48.0percent increase in available seat miles, resulting in a 4.8 percent decreasein unit revenue.

 

*Cargo Revenues*.  Cargo revenues increased 7.1percent ($14 million) to $212 million due primarily to an 18.1 percentimprovement in yield offset by a 9.1 percent decrease in volume.

 

*Other Revenue. *Otherrevenue increased 53.1 percent ($102 million) to $294 million due primarily toincreased charter and partner revenues, and the portion of payments receivedfrom non-airline marketing partners for frequent flyer miles that is nowrecorded in Other Revenues.

 

26

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*Operating Expenses*.  Operating expenses increased37.3 percent ($1.1 billion) for the three months ended June 30, 2008.  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 the second quarter of 2008, the Company recorded impairmentcharges associated with international routes, other intangibles and aircraftand reversed a portion of an impairment charge to goodwill recorded in firstquarter, the impacts are itemized in column (2).  On April 24, 2007, Mesaba Aviation, Inc.was acquired by the Company and became a wholly-owned consolidated subsidiary,the impact for the portion of the second quarter of 2008 when Mesaba was not awholly owned subsidiary in the second quarter of 2007 is itemized in column(3).  Excluding the items describedabove, the comparable year-over-year operating performance variances areitemized in column (4).  The followingtable and notes present operating expenses for the three months ended June 30,2008 and 2007 and describe significant year-over-year variances:

 
| ** **                                       | ** ** | ** **              | ** ** | ** **        | ** ** | **Increase (Decrease) Due To:** | ** ** | ** **     | ** ** | ** **      | ** ** | ** **     | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-------------------|------------|------------------------------------------------|------------|----------------|------------|-----------------|------------|----------------|------------|
| ** **                                       | ** ** | **Three  Months Ended** | ** ** | **(1)**           | ** ** | **(2)**                                        | ** ** | **(3)**        | ** ** | **(4)**         | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **              | ** ** | **Fresh-Start/**  | ** ** | ** **                                     | ** ** | ** **     | ** ** | ** **      | ** ** | ** **     | ** ** | **Total** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **              | ** ** | **Combined**      | ** ** | **Exit-Related**                               | ** ** | ** **     | ** ** | **Mesaba**      | ** ** | ** **     | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **June 30,**       | ** ** | **June 30,** | ** ** | **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                         | ** ** | **$**                   | **1,207**  |              | $          | 855                                            |       | $              | —     |            | $          | —         |       | $ | — |   | $ | 352 |   | A |   | $ | 352 |   | 41.2 | % |
| Salaries,  wages and benefits                    | ** ** | **685**                 |       | 617               |       | 13                                             |       | —         |       | 12              |       | 43             |       | B |   | 68 |   | 11.0 |   |
| Selling  and marketing                           | ** ** | **197**                 |       | 189               |       | —                                         |       | —         |       | —          |       | 8              |       | C |   | 8 |   | 4.2 |   |
| Aircraft  maintenance materials and repairs      |       | **197**                 |       | 183               |       | —                                         |       | —         |       | 4               |       | 10             |       | C |   | 14 |   | 7.7 |   |
| Other  rentals and landing fees                  | ** ** | **153**                 |       | 140               |       | —                                         |       | —         |       | 2               |       | 11             |       | C |   | 13 |   | 9.3 |   |
| Depreciation  and amortization                   | ** ** | **745**                 |       | 124               |       | (1                                             | )          | 624            |       | 1               |       | (3             | )          | C |   | 621 |   | 500.8 |   |
| Aircraft  rentals                                | ** ** | **94**                  |       | 95                |       | —                                         |       | —         |       | —          |       | (1             | )          | C |   | (1 | ) | (1.1 | ) |
| Regional  carrier expenses                       | ** ** | **207**                 |       | 191               |       | —                                         |       | —         |       | (20             | )          | 36             |       | D |   | 16 |   | 8.4 |   |
| Goodwill  and other indefinite-lived intangibles | ** ** | **(76**                 | **)**      | —            |       | —                                         |       | (76            | )          | —          |       | —         |       | E |   | (76 | ) | n/m |   |
| Other                                            | ** ** | **467**                 |       | 430               |       | —                                         |       | —         |       | —          |       | 37             |       | F |   | 37 |   | 8.6 |   |
| Total  operating expenses                        | ** ** | **$**                   | **3,876**  |              | $          | 2,824                                          |       | $              | 12         |            | $          | 548            |       | $ | (1 | ) | $ | 493 |   |   |   | $ | 1,052 |   | 37.3 | % |

 

A.           Aircraft fuel and taxes increased due to a 39.8 percent increase in theaverage fuel cost per gallon to $2.88 offset by a 3.6 percent decrease ingallons consumed. During the second quarter of 2008 we recognized $269.3million in net fuel derivative contract gains, consisting of $229.5 million inmark-to-market gains related to fuel derivative contracts that will settle infuture periods and gains of $39.8 million for contracts settled in the currentperiod. During the second quarter of 2007 we recognized $6.4 million in netfuel derivative contract losses, consisting of $7.8 million in mark-to-marketlosses related to fuel derivative contracts that settled after June 30,2007, partially offset by gains of $1.4 million for contracts settled in theperiod.

B.             Salaries and wages increased $24 million due to increased volume,employee retention program expense and summer reliability program expense,partially offset by decreased employee profit sharing program related expense.Benefits increased $18 million due to higher group insurance costs and higherpension costs.

C.             Selling and marketing expense, aircraft maintenance materials and repairsexpense, other rentals and landing fees, depreciation and amortization, andaircraft rentals were relatively flat year-over-year.

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

E.              During the second quarter of 2008, as part of Step 2 of the goodwillimpairment test, the Company recorded non-cash impairment charges to certainindefinite-lived intangibles and reversed a portion of the goodwill impairmentcharge recorded in the first quarter to reduce the book value of Northwest’sequity to its implied fair value as of the Merger announcement date. See “Item 1.Financial Statements, Note 4 – Goodwill and Intangibles” and “Item 1. FinancialStatements, Note 5 – Fair Value Measurements” for additional information.

F.              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. Increases in personnel expenses and communication expensesalso contributed to the increase.

 

27

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*Other Income and Expense.* The Company recordednon-operating expense of $291 million in the second quarter of 2008 as comparedto non-operating income of $1.9 billion in the second quarter of 2007,primarily due to a $1.8 billion gain on debt discharge and $1.3 billion in netgains associated with the revaluation of our assets and liabilities as part ofour adoption of fresh-start accounting in the second quarter of 2007 and theimpairment of its $213 million minorityownership interest in Midwest Air Partners, LLC in conjunction with Step 2 of the goodwill impairment test in the secondquarter of 2008. See “Item 1. Financial Statements, Note 4 – Goodwilland Intangibles” and “Item 1. Financial Statements, Note 5 – Fair ValueMeasurements” for additional information related to Step 2 of the goodwillimpairment test and “Item 1. Financial Statements, Note 7 – ReorganizationRelated Items” for additional information related to reorganization items.

 

*Tax Expense (Benefit).* The Company recorded a non-cash income tax benefit of $214 million in thesecond quarter of 2008, primarily related to the impairment charges recorded inconjunction with Step 2 of the goodwill impairment test for certainindefinite-lived intangible assets. The Company recorded a non-cash income taxexpense in the combined second quarter of 2007 of $68 million. See “Item1. Financial Statements, Note 8 – Income Taxes” for additional discussion ofthe Company’s tax accounts.

 

**Results of Operations – Six months ended June 30, 2008and 2007**

 

*Operating Revenues*. Operating revenues increased 10.7 percent ($649 million), the result ofincreased regional carrier revenues, system passenger revenue, charter revenue,and other revenue.

 

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

 

Thefollowing analysis 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)          |       | $            | 2,920      |        | $          | 1,116        |       | $ | 761 |   | $ | 4,797 |   | $ | 5,719 |   |
|                                       |       |         |       |        |       |         |       |   |   |   |   |
| **Increase (Decrease) from 2007:**         |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)          |       | $            | (43        | )           | $          | 77           |       | $ | 134 |   | $ | 168 |   | $ | 435 |   |
| Percent                                    |       | (1.5         | )%         | 7.4         | %          | 21.4         | %          | 3.6 | % | 8.2 | % |
|                                       |       |         |       |        |       |         |       |   |   |   |   |
| Scheduled  service ASMs (capacity)         |       | (5.2         | )%         | (1.7        | )%         | 22.6         | %          | (0.2 | )% | 2.9 | % |
| Scheduled  service RPMs (traffic)          |       | (3.4         | )%         | (0.5        | )%         | 17.2         | %          | 0.4 | % | 3.2 | % |
| Passenger  load factor                     |       | 1.5          | pts.       | 1.0         | pts.       | (3.8         | )pts.      | 0.6 | pts. | 0.3 | pts. |
| Yield                                      |       | 2.0          | %          | 7.9         | %          | 3.7          | %          | 3.2 | % | 4.8 | % |
| Passenger  RASM                            |       | 3.9          | %          | 9.2         | %          | (0.9         | )%         | 3.8 | % | 5.3 | % |
|                                       |       |         |       |        |       |         |       |   |   |   |   |
| **Excluding fresh-start related changes:** |       |         |       |        |       |         |       |   |   |   |   |
| **2008**                                   |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)          |       | $            | 2,920      |        | $          | 1,139        |       | $ | 763 |   | $ | 4,822 |   | $ | 5,736 |   |
|                                       |       |         |       |        |       |         |       |   |   |   |   |
| **Increase (Decrease) from 2007:**         |       |         |       |        |       |         |       |   |   |   |   |
| Passenger  revenues (in millions)          |       | $            | (74        | )           | $          | 96           |       | $ | 137 |   | $ | 159 |   | $ | 418 |   |
| Percent                                    |       | (2.5         | )%         | 9.2         | %          | 21.9         | %          | 3.4 | % | 7.9 | % |
|                                       |       |         |       |        |       |         |       |   |   |   |   |
| Yield                                      |       | 0.9          | %          | 9.7         | %          | 4.2          | %          | 3.0 | % | 4.5 | % |
| Passenger  RASM                            |       | 2.8          | %          | 11.0        | %          | (0.4         | )%         | 3.6 | % | 4.9 | % |

 

*Regional Carrier Revenues*. Regional carrier revenues increased 40.5 percent ($266 million) to $922million primarily due to a 41.7 percent increase in available seat miles,resulting in a 0.7 percent decrease in unit revenue.

 

*Cargo Revenues.* Cargo revenues increased 5.9 percent ($23 million) to $410 million dueprimarily to an 11.1 percent increase in yield offset by a 4.7 percent decreasein volume.

 

*Other Revenue.* Other revenue increased 50.3 percent ($192 million) to $574 million dueto increased charter and partner revenues, and the portion of payments receivedfrom non-airline marketing partners for frequent flyer miles that is nowrecorded in Other Revenues.

 

28

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*Operating Expenses*. Operating expenses increased $5.6 billion for the six months ended June 30,2008 as compared to the combined six months ended June 30, 2007. As aresult of the adoption of fresh-start reporting, the Company’s financialstatements on or after June 1, 2007 are not comparable with itspre-emergence financial statements because they are, in effect, those of a newentity. The effects of fresh-start reporting and the impact of exit-relatedstock compensation expense on the Company’s Condensed Consolidated Statementsof Operations are itemized in column (1). During 2008, the Company recordedimpairment charges associated with goodwill, international routes, otherintangibles and aircraft; the impacts are itemized in column (2). On April 24,2007, Mesaba Aviation, Inc. was acquired by the Company and became awholly-owned consolidated subsidiary; the impact for the portion of 2008 whenMesaba was not a wholly owned subsidiary in 2007 is itemized in column (3). Excludingthe items described above, the comparable year-over-year operating performancevariances are itemized in column (4). The following table and notes presentoperating expenses for the six months ended June 30, 2008 and 2007 anddescribe significant year-over-year variances:

 
| ** **                                       | ** ** | ** **                     | ** ** | ** **        | ** ** | **Increase (Decrease) Due To:** | ** ** | ** **     | ** ** | ** **      | ** ** | ** **     | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|-------------------|------------|------------------------------------------------|------------|----------------|------------|-----------------|------------|----------------|------------|
| ** **                                       | ** ** | **Six Months Ended** | ** ** | **(1)**           | ** ** | **(2)**                                        | ** ** | **(3)**        | ** ** | **(4)**         | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **                     | ** ** | **Fresh-Start/**  | ** ** | ** **                                     | ** ** | ** **     | ** ** | ** **      | ** ** | ** **     | ** ** | **Total** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **                     | ** ** | **Combined**      | ** ** | **Exit-Related**                               | ** ** | ** **     | ** ** | **Mesaba**      | ** ** | ** **     | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **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                         | ** ** | **$**                          | **2,321**  |              | $          | 1,559                                          |       | $              | —     |            | $          | —         |       | $ | 1 |   | $ | 761 |   | A |   | $ | 762 |   | 48.9 | % |
| Salaries,  wages and benefits                    | ** ** | **1,355**                      |       | 1,232             |       | 21                                             |       | —         |       | 47              |       | 55             |       | B |   | 123 |   | 10.0 |   |
| Selling  and marketing                           | ** ** | **390**                        |       | 380               |       | —                                         |       | —         |       | —          |       | 10             |       | C |   | 10 |   | 2.6 |   |
| Aircraft  maintenance materials and repairs      | ** ** | **418**                        |       | 367               |       | —                                         |       | —         |       | 13              |       | 38             |       | C |   | 51 |   | 13.9 |   |
| Other  rentals and landing fees                  | ** ** | **291**                        |       | 281               |       | —                                         |       | —         |       | 6               |       | 4              |       | C |   | 10 |   | 3.6 |   |
| Depreciation  and amortization                   | ** ** | **893**                        |       | 245               |       | (3                                             | )          | 642            |       | 3               |       | 6              |       | C |   | 648 |   | 264.5 |   |
| Aircraft  rentals                                | ** ** | **187**                        |       | 191               |       | —                                         |       | —         |       | —          |       | (4             | )          | C |   | (4 | ) | (2.1 | ) |
| Regional  carrier expenses                       | ** ** | **412**                        |       | 402               |       | —                                         |       | —         |       | (75             | )          | 85             |       | D |   | 10 |   | 2.5 |   |
| Goodwill  and other indefinite-lived intangibles | ** ** | **3,841**                      |       | —            |       | —                                         |       | 3,841          |       | —          |       | —         |       | E |   | 3,841 |   | n/m |   |
| Other                                            | ** ** | **948**                        |       | 839               |       | —                                         |       | —         |       | 13              |       | 96             |       | F |   | 109 |   | 13.0 |   |
| Total  operating expenses                        | ** ** | **$**                          | **11,056** |              | $          | 5,496                                          |       | $              | 18         |            | $          | 4,483          |       | $ | 8 |   | $ | 1,051 |   |   |   | $ | 5,560 |   | 101.2 | % |

 
| A. |   | Aircraft fuel and taxes increased due to a 48.0  percent increase in the average fuel cost per gallon to $2.84 offset by a 3.4  percent decrease in gallons consumed. Fuel expense for the 2008 period  includes $274.6 million in net fuel derivative contract gains, consisting of  $217.2 million in mark-to-market gains related to fuel derivative contracts  that will settle in future periods and gains of $57.4 million for contracts  settled during the period. Fuel expense for the 2007 period includes $16.2  million in net fuel derivative contract gains, consisting of $20.7 million in  mark-to-market gains related to fuel derivative contracts that settled after  June 30, 2007, partially offset by losses of $4.5 million for contracts  settled during the period. |
|----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| B. |   | Salaries, wages and benefits were higher  year-over-year primarily due to increased volume, employee retention program  expense, summer reliability program expense, and higher group insurance and  pension costs, partially offset by decreased employee profit sharing program  related expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| C. |   | Selling and marketing expense, aircraft  maintenance materials and repairs expense, other rentals and landing fees,  depreciation and amortization, and aircraft rentals were relatively flat  year-over-year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| D. |   | Regional carrier expenses increased primarily due  to higher fuel costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| E. |   | During 2008, as part of the goodwill impairment  test, the Company recorded non-cash impairment charges to goodwill and other  indefinite-lived intangibles to reduce the book value of Northwest’s equity  to its implied fair value as of the Merger announcement date. See “Item 1.  Financial Statements, Note 4 – Goodwill and Intangibles” and “Note 5 – Fair  Value Measurements” for additional information.                                                                                                                                                                                                                                                                                                                                           |
| F. |   | Other expenses (which include MLT operating  expenses, outside services, insurance, passenger food, personnel expenses,  communication expenses and supplies) were higher versus prior year due  largely to increases in outside services with the shift to third party  vendors versus internally staffed station operations. Increases in personnel  expenses, communication expenses and supplies also contributed to the  increase.                                                                                                                                                                                                                                                                                                                                                           |

 

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*Other Income and Expense.* The Company recordednon-operating expense of $377 million in the six months ended June 30,2008 as compared to non-operating income of $1.4 billion in the six monthsended June 30, 2007, a difference of $1.7 billion year-over-year,primarily due to a $1.8 billion gain on debt discharge and $1.3 billion in netgains associated with the revaluation of our assets and liabilities as part ofour adoption of fresh-start accounting in the six months ended June 30,2007 and the impairment of its $213million minority ownership interest in Midwest Air Partners, LLC in conjunction with Step 2 of the goodwillimpairment test in the six months ended June 30, 2008. Refer to “Item1. Financial Statements, Note 4 – Goodwill and Intangibles” and “Note 5 – FairValue Measurements” for additional information. See “Item 1. FinancialStatements, Note 7 – Reorganization Related Items” for additional informationrelated to reorganization items.

 

*Tax Expense (Benefit).* The Company recorded a non-cash income tax benefit of $214 million in thesix months ended June 30, 2008, primarily related to the impairmentcharges recorded in conjunction with Step 2 of the goodwill impairment test forcertain indefinite-lived intangible assets. The Company recorded a non-cashincome tax expense in the six months ended June 30, 2007 of $67 million. See“Item 1. Financial Statements, Note 8 – Income Taxes” for additional discussionof the Company’s tax accounts.

 

**Liquidity and Capital Resources**

 

AtJune 30, 2008, the Company had cash and cash equivalents of $3.2 billionand unrestricted short-term investments of $40 million, providing totalavailable liquidity of $3.3 billion. Thisamount excludes $424 million of restricted short-term investments (which mayinclude amounts held as cash).

 

*Significant Liquidity Events*

 

InNovember 2007, the Company entered into an accounts receivable financingfacility. The facility size is up to $150 million and as of June 30, 2008,the available amount of $133 million was drawn. 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.

 

*Cash Flows.* Liquidity increased by $121 million during the six months ended June 30,2008, primarily due to net cash provided by operating activities.

 

*Operating Activities.* Net cash provided by operating activities for the six months ended June 30,2008 was $477 million, which compares with $1.3 billion of net cash provided byoperating activities for the six months ended June 30, 2007. The decreasein year-over-year net cash provided by operations was primarily due to reducednet income in 2008 and the 2007 increase in operating cash flows due to therelease of bankruptcy-related vendor holdbacks.

 

*Investing Activities.* Investing activities during the six months ended June 30, 2008included the purchase of 12 CRJ900 and 15 Embraer 175 aircraft and otherrelated costs. Other related costs included costs to commission aircraft beforeentering revenue service, deposits on ordered aircraft, facility improvementsand ground equipment purchases. On January 31, 2008, theCompany also contributed $213 million for a minority ownership interest inMidwest Air Partners, LLC, which in turn purchased Midwest Air Group, Inc.(the “Midwest” investment). Subsequently, as part of Step 2 of the goodwillimpairment test completed during the second quarter of 2008, the Company wasrequired to re-measure the fair value of its investment in Midwest. Based onMidwest’s financial deterioration subsequent to January 31, 2008, the fairvalue re-measurement of the Company’s investment in Midwest resulted in theCompany writing off the carrying value of its investment in Midwest during thesecond quarter of 2008. For additional information regarding the completion ofStep 2 of the goodwill impairment test and the related fair valuere-measurement of the Company’s investment in Midwest, see “Item 1. FinancialStatements, Note 4 – Goodwill and Intangibles and Note 5 – Fair ValueMeasurements.” Additionally, during thesix months ended June 30, 2008, the Company had decreases in restrictedcash, cash equivalents and short-term investments, proceeds from the sales ofshort-term investments and sold its Class A Preferred share to Pinnaclefor a purchase price of $20 million. Investing activities during the six monthsended June 30, 2007 included the purchase of four A330-300, two CRJ900,and one Embraer 175 aircraft and other related costs.

 

*Financing Activities.*Financing activities during the six months ended June 30, 2008consisted primarily of the financing of 12 CRJ900 and 15 Embraer 175 aircraftwith long-term debt, a draw of $133 million on the accounts receivable financingfacility and scheduled debt payments. Financingactivities during the six months ended June 30, 2007 consisted primarilyof $750 million in proceeds from the equity offering consummated as part of theCompany’s emergence from bankruptcy, the financing of one A330-300, two CRJ900,and one Embraer 175 with long-term debt, and the financing of Boeing 787pre-delivery deposits, partially offset by debt payments and debt prepayments.

 

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The Company also financed the delivery of threeAirbus A330-300 aircraft during the six months ended June 30, 2007 throughnon-cash transactions with the manufacturer, which are reflected as long-termdebt on the Company’s Condensed Consolidated Balance Sheets, but are notclassified as a cash flow activity. In connection with the acquisition of theseaircraft, the Company entered into long-term debt arrangements. Under thesearrangements, the aggregate amount of debt incurred totaled approximately $251million.

 

Investing activities affecting cash flows andnon-cash transactions and leasing activities related to the initial acquisitionof aircraft consisted of the following for the six months ended June 30:

 
| ** **      | ** ** | **Investing Activities  Affecting Cash Flows** | ** ** | **Non-cash  Transactions and  Leasing Activities** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **      | ** ** | **2008**                                                      | ** ** | **2007**                                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|            |       |                                                          |       |                                                         |       |   |   |   |   |
| Airbus A330-300 | ** ** | **—**                                                    |       | 1                                                            | ** ** | **—** |   | 3 |   |
| CRJ900          | ** ** | **12**                                                        |       | 2                                                            | ** ** | **—** |   | — |   |
| Embraer 175     | ** ** | **15**                                                        |       | 1                                                            | ** ** | **—** |   | — |   |
| ** **      |       | **27**                                                        |       | 4                                                            | ** ** | **—** |   | 3 |   |

 

*Debt*. Maturities of long-termdebt (inclusive of short-term maturities), excluding capital lease obligations,through December 31, 2012, are as follows (in millions):

 
| remainder of |   | 2008 |   | $   | 372    |  (a) |
|--------------|--------|------|--------|-----|--------|-----------|
|         |   | 2009 |   | 568 |   |
|         |   | 2010 |   | 500 |   |
|         |   | 2011 |   | 632 |   |
|         |   | 2012 |   | 464 |   |

 

(a)          In November 2007, theCompany entered into an accounts receivable financing facility. The facilitysize is up to $150 million and as of June 30, 2008, the available amountof $133 million was drawn. The financing is a 364-day facility that matures in November 2008with annual renewal provisions that could result in a final maturity date of November 29,2012.

 

On August 21, 2006, thePredecessor Company entered into a $1.225 billion Senior Corporate CreditFacility (“Bank Credit Facility”), formerly referred to by us as the DIP/ExitFacility, consisting of a $1.05 billion term loan facility and a $175 millionrevolving credit facility which has been fully drawn since its inception. Thefinal maturity date of the Bank Credit Facility is August 21, 2013. Principalon the term loan portion of the Bank Credit Facility will be repaid at 1.0% peryear with the balance (94%) due at maturity. The first such principal repaymentwas made on August 21, 2007. Loans drawn under the $175 million revolvingcredit facility may be borrowed and repaid at the Company’s discretion. Up to$75 million of the revolving credit facility may be utilized by the Company asa letter of credit facility. As amended in March 2007, both loanfacilities under the Bank Credit Facility bear interest at LIBOR plus 2.00%. Letterof credit fees are 2.125% per annum. To the extent that the revolving creditfacility is not utilized, the Company is required to pay an undrawn commitmentfee of 50 basis points per annum. As of June 30, 2008 the Bank Credit Facilitywas rated BB by Standard & Poor’s Rating Services (“S&P”) and B1 byMoody’s Investor Services, Inc. (“Moody’s”). Subsequently, on July 25, 2008,S&P downgraded the Bank Credit Facility to BB-. The Bank Credit Facility issecured by a first lien on the Company’s Pacific Route authorities. The March 2007amendment also allowed the Company to grant pari-passu liens in the PacificRoute authorities to secure up to $150 million of exposure arising from hedgingtrades entered into with Bank Credit Facility lenders. The interest rate as of June 30,2008 was 4.48% on both the term loan facility and the revolving creditfacility.

 

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The Bank Credit Facilityrequires ongoing compliance with various financial covenants including arequirement for the Company to maintain a minimum ratio of EBITDAR toconsolidated fixed charges (“Fixed Charge Coverage Ratio”). Under a recentamendment to the Bank Credit Facility completed in April 2008, complianceby the Company with the Fixed Charge Coverage Ratio has been waived from April 1,2008 through March 31, 2009 followed by a phase-in period as set forthbelow:

 
| **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 calculatingthis ratio, EBITDAR is defined as operating income, adjusted to exclude theeffects of depreciation, amortization, aircraft rents and costs (but only up to$150 million of cash costs) payable in connection with a merger or acquisitionand to include the effects of interest income and governmental reimbursementsfor losses resulting from developments affecting the aviation industry. Earningsalso exclude non-recurring non-cash charges (subject to the inclusion of anycash payments then or thereafter made with respect thereto) and are determinedwithout giving effect to any acceleration of rental expense. Fixed charges aredefined as interest expense (excluding fees and expenses of obtaining the April 2008amendment) and aircraft rent expense (without giving effect to any accelerationof rental expense). Additionally, certain aircraft sublease rental income isexcluded from EBITDAR and reduces aircraft rental expense in fixed charges.

 

Althoughthe Company was in compliance with all required financial covenants as of June 30,2008, continued compliance depends on many factors, some of which are beyondthe Company’s control, including the overall industry revenue environment andthe level of fuel costs.

 

*Aircraft Commitments.* Committed expenditures foraircraft and related equipment, including estimated amounts for contractualprice escalations and predelivery deposits, will be approximately (inmillions):

 
| remainder of |   | 2008 |   | $   | 557    |   |
|--------------|--------|------|--------|-----|--------|--------|
|         |   | 2009 |   | 327 |   |
|         |   | 2010 |   | 743 |   |
|         |   | 2011 |   | 225 |   |
|         |   | 2012 |   | 649 |   |

 

*Pension Funding Obligations.*****TheCompany has several defined benefit pension plans and defined contribution 401(k)-type plans covering substantially allof its employees. Northwest froze future benefit accruals for its definedbenefit Pension Plans for Salaried Employees, Pilot Employees, and ContractEmployees effective August 31, 2005, January 31, 2006, and September 30,2006, respectively. Replacement pension coverage is provided for theseemployees through 401(k)-type defined contribution plans including the PilotMoney Purchase Plan or, in the case of IAM represented employees, the IAMNational Multi-Employer Plan.

 

ThePension Protection Act of 2006 (“2006 Pension Act”) allows commercial airlinesto elect special funding rules for defined benefit plans that are frozen. Theunfunded liability for a frozen defined benefit plan may be amortized over afixed 17-year period. The unfunded liability is defined as the actuarialliability calculated using an 8.85% interest rate minus the fair market valueof plan assets. Northwest elected the special funding rules for frozendefined benefit plans under the 2006 Pension Act effective October 1,2006. As a result of this election (1) the funding waivers that Northwestreceived for the 2003 plan year contributions were deemed satisfied under the2006 Pension Act, and (2) the funding standard account for each Plan wasreduced 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 contributionsare not paid, the future funding deficiency that would develop will be based onthe regular funding 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”).

 

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**CriticalAccounting Estimates**

 

*Goodwill and Other Impairments.* The Companytests the carrying amount of goodwill and other indefinite-lived intangibleassets annually as of October 1 or whenever events or circumstancesindicate that impairment may have occurred. Impairment testing is performed inaccordance with SFAS No. 142, *Goodwilland Other Intangible Assets* (“SFAS No. 142”). The Company isannually required to complete Step 1 (determining and comparing the fair valueof the Company’s reporting unit to its carrying value) of the impairment test. Step2 is required to be completed if Step 1 indicates that the carrying value of thereporting unit exceeds the fair value and involves the calculation of theimplied fair value of goodwill. Step 2 of the goodwill impairment test involvesmeasuring the Company’s other assets and liabilities at fair value to calculatean implied fair value of goodwill and measure the amount of impairment, if any.

 

TheCompany evaluates long-lived tangible assets and definite-lived intangibleassets for potential impairments in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-LivedAssets*, (“SFAS No. 144”). For definite-lived intangible assets,impairment evaluations are initiated based on quarterly reviews of keyindicators of impairment. The Company records impairment losses on long-livedassets when events and circumstances indicate the assets might be impaired andthe undiscounted cash flows estimated to be generated by those assets are lessthan their carrying amounts. Impairment losses are measured by comparing thefair value of the assets to their carrying amounts.

 

TheCompany determined that the announced Merger with Delta was a triggering eventunder SFAS No. 142, requiring the Company to further evaluate the carryingvalue of its goodwill. As a result of this evaluation, the Company recorded animpairment charge to reduce the book value of Northwest’s equity to its impliedfair value as of the Merger announcement date. Based on the 5-day averageclosing price of Delta’s common stock around the Merger announcement date, theright to receive 1.25 shares of Delta stock for each share of NWA Corp. commonstock, and the projected number of NWA Corp.’s common shares to be convertedinto Delta common stock on the transaction close date, the implied fair valueof NWA Corp.’s equity on the announcement date was $3.3 billion.

 

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 theimpairment as of March 31, 2008. This implied fair value calculationresulted in the Company recording a goodwill impairment charge of $3.9 billionfor the quarter ended March 31, 2008 because we believe the conditionsthat caused our implied fair value to decline existed as of that date. Northwestfinalized the impairment test of long-lived assets and Step 2 of the goodwillimpairment test during the second quarter of 2008, resulting in an additionalnet charge of $547 million ($2.08 per share), which includes an adjustment ofestimated goodwill from $2.2 billion to the implied fair value of goodwill of$2.9 billion. The adjustment to goodwill resulted in the reversal of $674million of impairment expense recorded in the first quarter of 2008 which isclassified as goodwill and other indefinite-lived intangibles impairmentexpense. Additionally, Northwest recorded $624 million of depreciation andamortization related to impairment of certain flight equipment anddefinite-lived intangibles, $598 million of impairment expense in goodwill andother indefinite-lived intangibles impairment expense related toindefinite-lived intangibles, $213 million in other non-operating expenserelated to other than temporary impairment on investments in affiliatedcompanies and $214 million in income tax benefit related to the reversal ofdeferred tax liabilities related to certain of the indefinite-lived intangibleassets.

 

Theindefinite-lived intangibles were impaired to fair value if the fair value waslower than the carrying amount, in accordance with SFAS No. 142. Thedefinite-lived intangibles and flight equipment were subject to recoverabilitytests to determine if a loss in fair value measured in Step 2 would result inan impairment charge, in accordance with the guidance in SFAS No. 144. Theinvestment in affiliated companies consists of a minority ownership interest inMidwest Air Partners, LLC, which in 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 aninvestment which is other than a temporary decline should be recognized. See “Item1. Financial Statements, Note 5 – Fair Value Measurements” for details aboutthe fair value measurements used in recognizing these impairments. See “Item 1.Financial Statements, Note 4 – Goodwill and Intangibles” and “Item 1. FinancialStatements, Note 5 – Fair Value Measurements” for additional informationregarding the impairments and fair value measurements related to theimpairments.

 

One of the significant unobservable inputs underlying the goodwill andintangible fair value measurements is the discount rate. In our Step 2 analysisperformed as of March 31, 2008, Northwest determined the discount rateusing the Weighted Average Cost of Capital (“WACC”) of the airline industry,which we measured using a Capital Asset Pricing Model (“CAPM”). The CAPM in ourvaluation of goodwill and indefinite-lived intangibles utilized a 50% debt and50% equity structure. The historical average debt-to-equity structure of themajor airlines since 1990 is also approximately 50% debt and 50% equity, whichwas similar to Northwest’s debt-to-equity structure at emergence. The return ondebt was measured using a bid-to-yield analysis of major airline corporatebonds and the expected market rate of return for equity was measured based onthe risk free rate, the airline industry beta, and risk premiums based on theFederal Reserve Statistical Release H.15 or Ibbotson® Stocks, Bonds, Bills, andInflation® Valuation Yearbook, Edition 2008. These factors resulted 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.

 

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Theestimates and assumptions made in this valuation are inherently subject tosignificant judgments and are influenced by market forces beyond the reasonablecontrol of the Company. Accordingly, there can be no assurance that theestimates, assumptions, and amounts reflected in the valuations will berealized, and actual results could vary materially. Moreover, the market valueof the Company’s common stock may differ materially from the equity valuation.

 

**Other Information**

 

*Foreign Currency. *The Company isexposed to the effect of foreign currency exchange rate fluctuations on theU.S. dollar value of foreign currency-denominated operating revenues andexpenses.  The Company’s largest exposurecomes from the Japanese yen.  From timeto time, the Company uses financial instruments to hedge its exposure to theJapanese yen.  Hedging gains or lossesare recorded in accumulated other comprehensive income (loss) until theassociated transportation is provided, at which time they are recognized as anincrease or decrease in revenue.  TheCompany hedged 12.1 billion yen of its yen-denominated sales during the threemonths ended June 30, 2008, resulting in an effective rate of 109.0 yenper U.S. dollar on forward contracts, the prevailing average contract rate forthe period.  The Company did not hedgeany of its yen-denominated sales during the three months ended June 30,2007.  The average market yen rate forthe quarters ended June 30, 2008 and 2007 was 106.7 and 120.3,respectively.

 

Onoccasion, the Company uses forward contracts, collars or put options to hedge aportion 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 June 30, 2008, the Company had hedged approximately 51.8% ofits anticipated yen-denominated sales for the remainder of 2008 and 31.5% ofits anticipated 2009 yen-denominated sales. The 2008 Japanese yen hedges consist of forward contracts which hedgeapproximately 42.7% of remaining yen-denominated sales at an average rate of109.4 yen per U.S. dollar and collar options which hedge approximately 9.1% ofremaining yen-denominated sales with a rate range between 102.4 and 116.4 yenper U.S. dollar. The 2009 Japanese yen hedges consist of forward contractswhich hedge approximately 25.2% of its 2009 anticipated yen-denominated salesat an average rate of 100.1 yen per U.S. dollar and collar options which hedgeapproximately 6.3% of remaining yen-denominated sales with a rate range between99.5 and 103.5 yen per U.S. dollar.  Asof June 30, 2008, a $1.6 million unrealized pre-tax gain was outstandingin accumulated other comprehensive income associated with the Japanese yenhedge contracts.  As of June 30,2007, the Company had no hedges in place for its anticipated 2007yen-denominated sales.

 

Asof June 30, 2008, the Company had also hedged approximately 66.0% of itsremaining 2008 anticipated Canadian dollar denominated sales with forwardcontracts at an average rate of 1.001 Canadian dollars per U.S. dollar.  A $3.5 million unrealized pre-tax gain wasoutstanding in accumulated other comprehensive income associated with theCanadian dollar hedge contracts, as of June 30, 2008.  The Company did not hedge any of its Canadiandollar denominated sales during the three months ended June 30, 2007 andas of June 30, 2007 had no hedges in place for its remaining 2007 Canadiandollar denominated sales.  The averageCanadian dollar to U.S. dollar exchange rate for the quarters ended June 30,2008 and 2007 was 1.003 and 1.100, respectively.

 

Counterparties to these financial instruments expose the Company tocredit loss in the event of nonperformance, but the Company does not expect anyof the counterparties to fail to meet their obligations.  The amount of such credit exposure isgenerally the unrealized gains, if any, in such contracts.  To manage credit risks, the Company selects counterpartiesbased on credit ratings, limits exposure to any single counterparty andmonitors the market position with each counterparty.  It is the Company’s practice to participatein foreign currency hedging transactions with a maximum span 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 June 30, 2008, the Company had economically hedged theprice of approximately 57% of its projected fuel requirements for theremainder of 2008 and 3% of its projected fuel requirements for 2009,through a combination of collars, three-way collars and swapagreements.  Including additionalthree-way collar options entered into in July 2008, the Company has hedgedapproximately 60% of its projected fuel requirements for the remainder of 2008and 10% of its projected fuel requirements for 2009.

 

The 2008 collars, which hedge the price of approximately 32% of the Company’sprojected fuel requirements for the remainder of 2008, provide upsideprotection beginning, on average, with a crude oil equivalent price of $103.55per barrel, and payment obligations beginning, on average, with a crude oilequivalent price of $88.02 per barrel.  The three-way crude oil collars,which hedge the price of approximately 14% of the Company’s projected fuelrequirements for the remainder of 2008, provide upside protection beginning, onaverage, with a crude oil equivalent price of $124.69 per barrel and capped, onaverage, at $142.71 per barrel, and payment obligations beginning, on average,with a crude oil equivalent price of $108.00 per barrel.   The 2008 swap contracts consist ofextendable jet fuel swap agreements which hedge approximately 6% 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, and non-extendable crude oil swap contracts which hedgeapproximately 5% of the Company’s projected remaining 2008 fuel requirementsand provide upside protection at, on average, a crude oil equivalent price of$135.20 per barrel.   The three-way heating oil collars, which hedge theprice of approximately 3% of the Company’s projected fuel requirements for theremainder of 

 

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2008, provide upside protection beginning, on average, with a heating oilequivalent price of $170.10 per barrel and capped, on average, at $185.13 perbarrel, and payment obligations beginning, on average, with a heating oilequivalent price of $155.07 per barrel.

 

The 2009 fuel hedges, including those purchased in July 2008, consistof three-way crude oil and heating oil collar options, which hedgeapproximately 10% of the Company’s projected fuel requirements for 2009.  The three-way crude oil collars, which hedgethe price of approximately 9% of the Company’s projected fuel requirements for2009, provide upside protection beginning, on average, with a crude oilequivalent price of $132.83 per barrel and capped, on average, at $162.91 perbarrel, and payment obligations beginning, on average, with a crude oilequivalent price of $112.23 per barrel. The three-way heating oil collars, which hedge the price ofapproximately 1% of the Company’s projected fuel requirements for 2009, provideupside protection beginning, on average, with a heating oil equivalent price of$174.30 per barrel and capped, on average, at $205.13 per barrel, and paymentobligations beginning, on average, with a heating oil equivalent price of$143.47 per barrel.

 

The Company currently has no fuel derivative contracts outstanding that aredesignated for special hedge accounting treatment, and therefore had no relatedunrealized gains (losses) in accumulated other comprehensive income (loss) asof June 30, 2008.  The Companyrecords any changes in the contracts’ values as mark-to-market adjustmentsthrough the Consolidated Statement of Operations on a quarterly basis.  During the three months ended June 30,2008, the Company recognized $269.3 million of net fuel derivative gains asreductions in fuel expense, including $229.5 million of unrealized gainsrelated to fuel derivative contracts that will settle in future periods.  Effective June 2007, the Company beganallocating mark-to-market adjustments to regional carrier expense for fuelconsumed by our non-consolidated Airlink partners.  For the three months ended June 30,2008, the Company recognized $24.0 million of fuel derivative net gains asreductions in regional carrier expense, including $20.4 million of unrealizedgains related to fuel derivative contracts that will settle in future periods.

 

As of June 30, 2007, the Company had hedged the price ofapproximately 35% of its projected fuel requirements for the remainder of 2007through a combination of collar options and fixed price swap agreements.  The collar options, which hedged the price ofapproximately 25% of the Company’s projected fuel requirements for theremainder of 2007, consisted of crude oil put options with a price range of $53to $55.95 per barrel, and related call options at a price of $72 perbarrel.  The fixed price crude oil swapagreements, which hedged the price of approximately 10% of the Company’sprojected fuel requirements for the remainder of 2007, included agreements witha price range of $62 to $64.98 per barrel. Net losses of $6.4 million were recorded as increases in fuel expenseduring the three months ended June 30, 2007, including $7.8 million inmark-to-market losses related to fuel derivative contracts that settled after June 30,2007, offset by gains of $1.4 million for contracts that settled in the threemonths ended June 30, 2008. Additionally, for the month ended June 30, 2007, gains of $1.8million 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 June 30, 2008 of $392 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 June 30,2008 of $916 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 June 30, 2008, the Companyhas recorded $19.1 million of pre-tax unrealized gains in accumulated othercomprehensive income (loss) associated with these hedges.

 

*War Risk Insurance.*  Following the events of September 11,2001, commercial aviation insurers materially curtailed war risk coverage andincreased insurance premiums. Subsequently, the FAA was mandated to offer U.S. airlines war riskinsurance.  The Secretary ofTransportation recently stated that the coverage would be extended to December 31,2008, from its current expiration of August 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 that 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 premiums couldnegatively 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.

 

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Ifwe were to be involved in an accident, we could be exposed to significant tortliability.  Although we carry insuranceto cover damages arising from such accidents, resulting tort liability could behigher than our policy limits which could negatively impact our financialcondition.

 

*Open Skies Air Services Agreement. *In April 2007, the U.S.and the European Union (“E.U.”) approved an “open skies” air services agreementthat provides airlines from the U.S. and E.U. Member States open access to eachothers’ markets, with freedom of pricing and unlimited rights to fly beyond theU.S. and beyond each E.U. Member State.  Under the open skies agreement,which went into effect on March 30, 2008, every U.S. and E.U.airline is authorized to operate between airports in the U.S. and London’sHeathrow, Gatwick and other airports.  As a result of the open skiesagreement, the Company announced an expansion of its transatlantic routenetwork with three new daily nonstop flights to London Heathrow from Detroit,Minneapolis/St. Paul and Seattle. Service from Minneapolis/St. Paul began on March 29,2008 with an arrival at London Heathrow on March 30, 2008.  Nonstop service from Detroit and Seattlebegan on May 1, 2008 and June 1, 2008, respectively.

 

*Final Approval of Six-Way Antitrust Immunity. *On May 22, 2008, the DOTapproved the joint application for antitrust immunity filed by Northwest andKLM, together with Air France, Delta, Alitalia, and CSA Czech Airlines.

 

*Forward-Looking Statements.*  Certain of the statements made throughoutManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and elsewhere in this quarterly report are not purely historicalfacts, including statements regarding our beliefs, expectations, intentions orstrategies for the future, may be “forward-looking statements” under thePrivate 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 or suggestedby the forward-looking statements. Such risks and uncertainties include, amongothers, the ability of the company to operate pursuant to the terms of itsfinancing facilities (particularly the related financial covenants), theability of the Company to attract, motivate and/or retain key executives andassociates, the future level of air travel demand, the Company’s futurepassenger 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 stockholder or regulatoryapprovals, or the failure of other closing conditions.  Northwest cautions that the foregoing list offactors is not exclusive.  Additionalinformation with respect to the factors and events that could cause differencesbetween forward-looking statements and future actual results is contained inthe company’s Securities and Exchange Commission filings, including the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007, asamended (the “2007 Form 10-K”) and subsequent quarterly reports on Form 10-Qand current reports on Form 8-K. We undertake no obligation to update anyforward-looking statements to reflect events or circumstances that may ariseafter the date of this release.

 

Developmentsin any of these areas, as well as other risks and uncertainties detailed fromtime to time in the Company’s Securities and Exchange Commission filings, couldcause the Company’s results to differ from results that have been or may beprojected by or on behalf of the Company. The Company 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.

 

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**Item 3.****          ****Quantitativeand Qualitative Disclosures About Market Risk.**

 

Information required by this item is provided underthe captions “Foreign Currency” and “Aircraft Fuel” within “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis Quarterly Report on Form 10-Q. Also see “Item 7a. Quantitative and Qualitative Disclosures About MarketRisk” in the Company’s 2007 Form 10-K.

 

**Item 4.****          ****Controlsand Procedures.**

 

**Evaluation of Disclosure Controls and Procedures –** As of June 30, 2008, management performed an evaluation under thesupervision and with the participation of the Company’s President and ChiefExecutive Officer and Executive Vice President and Chief Financial Officer ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures covered 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 materialinformation required to be disclosed in the Company’s periodic reports filedwith the SEC as of the end of such period.

 

**Changes in Internal Control –** There was no change in the Company’s internal control over financialreporting that occurred during the Company’s fiscal second quarter ended June 30,2008 that has materially affected, or is reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

**Item 1.****          ****LegalProceedings.**

 

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

 

On June 18, 2008 a private lawsuit was filed onbehalf of 28 individuals seeking an injunction to prohibit the proposedMerger.  *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.  RiskFactors.**

 

SeePart I, Item 1A., “Risk Factors,” of the Company’s 2007 Form 10-K fora detailed discussion of the risk factors affecting the Company. Theinformation below provides updates to the previously disclosed risk factors andshould be read in conjunction with the risk factors and information disclosedin the 2007 Form 10-K.

 

**Risks Relating to the Pending Merger with Delta Air Lines**

 

***Uncertainty aboutthe Merger and diversion of management could harm us or the combined company,whether or not the Merger is completed.***

 

In response to the announcement of the Merger,current and prospective employees could experience uncertainty about theirfuture with us or the combined company. These uncertainties may impair ourability to retain, recruit or motivate key personnel. Completion of the Mergerwill also require a significant amount of time and attention from ourmanagement. The diversion of management attention away from ongoing operationscould adversely affect our business relationships. If the Merger is notcompleted by the end of 2008 as currently anticipated, the adverse effectsof these uncertainties and the diversion of management could be exacerbated bythe delay.

 

***Failure tocomplete the Merger for regulatory or other reasons could adversely affect ourstock price and our future business and financial results.***

 

Completionof the Merger 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, and approval of our and DeltaAir Lines’ stockholders. There is no assurance that we will receive thenecessary approvals or satisfy the other conditions necessary for completion ofthe Merger. Failure to complete the pending Merger would prevent us fromrealizing the anticipated benefits of the Merger.  We will also incur transaction costs, whetheror not the Merger is completed. In addition, the current market price of ourcommon stock may reflect a market assumption that the Merger will occur, and afailure to complete the Merger could result in a negative perception by themarket of us generally and a resulting decline in the market price of ourcommon stock.

 

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***The anticipatedbenefits of the Merger may not be realized fully or at all or may take longerto realize than expected.***

 

The Merger involves the integration of two companiesthat have previously operated independently. Prior to announcement, we did notconduct any integration planning for the two companies. The two companies willdevote significant management attention and resources to integrating the twocompanies. Delays in this process could adversely affect the combined company’sbusiness, financial results, financial condition and stock price. Even if weare able to integrate our business operations successfully, there can be noassurance that this integration will result in the realization of the fullbenefits of synergies, cost savings, innovation and operational efficienciesthat we currently expect from this integration or that these benefits will beachieved within the anticipated time frame.

 

Additionally, as a condition to their approval of theMerger, regulatory agencies may impose requirements, limitations or costs orrequire divestitures or place restrictions on the conduct of the combinedcompany’s business. If we agree to these requirements, limitations, costs, divestituresor restrictions, our ability to realize the anticipated benefits of the Mergermay be impaired.

 

# ***Any “ownership change” could limit our ability toutilize our net operating loss carryforwards.***

# ** **

Underthe Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), acorporation is generally allowed a deduction in any taxable year for netoperating losses carried over from prior years. As of December 31, 2007, the Company had approximately $3.6 billionof federal and state net operating loss (“NOL”) carryforwards.  A corporation’s use of its NOL carryforwardsis generally limited under Section 382 of the Internal Revenue Code if acorporation undergoes an “ownership change.” However, when an “ownership change” occurs pursuant to theimplementation of a plan of reorganization under the Bankruptcy Code (as wasthe 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.

 

Itis currently anticipated that the completion of the Merger will result in asecond ownership change under Section 382. Pursuant to the Merger Agreement, the Company will elect out of Section 382(l)(5).  In that case, Section 382(l)(6) willbe applicable to the ownership change that occurred pursuant to the Plan ofReorganization.  Nonetheless, a secondownership change could further limit the Company’s ability to utilize its NOLcarryforwards for taxable years including or following the subsequent “ownershipchange.”

 

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**Item 6.****          ****Exhibits.**

 

(a)          Exhibits:

 

10.1         Second Amendment dated as of April 30,2008 to the Super Priority Debtor in Possession and Exit Credit and GuaranteeAgreement dated as of August 21, 2006 among Northwest Airlines Corporation,Northwest Airlines, Inc. and various lenders and agents.

 

10.2         Letter Agreement dated May 13, 2008 and GeneralRelease between Northwest Airlines, Inc. and Neal S. Cohen.

 

10.3         Consent Letter dated June 16, 2008 issued to Neal S.Cohen by Northwest Airlines, Inc.

 

12.1         Computation of Ratio ofEarnings 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.

 

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SIGNATURE

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized this 30th day of July 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**                                                                                                                                                                                                                                               |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                          |
| 10.1                 |       | Second Amendment dated  as of April 30, 2008 to the Super Priority Debtor in Possession and Exit  Credit and Guarantee Agreement dated as of August 21, 2006 among Northwest  Airlines Corporation, Northwest Airlines, Inc. and various lenders and  agents. |
|                 |       |                                                                                                                                                                                                                                                          |
| 10.2                 |       | Letter Agreement dated  May 13, 2008 and General Release between Northwest Airlines, Inc. and Neal S.  Cohen.                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                          |
| 10.3                 |       | Consent Letter dated  June 16, 2008 issued to Neal S. Cohen by Northwest Airlines, Inc.                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                          |
| 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                                                                                                                                                                                                   |

 

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