**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIESEXCHANGE ACT OF 1934**

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**For the quarterly period ended**September 30, 2005

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**Commission File Number:**0-23642

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**NORTHWEST AIRLINESCORPORATION**

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

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| **Delaware**                                                        | ** ** | **41-1905580**                           |
|---------------------------------------------------------------------|------------|------------------------------------------|
| **(State or other jurisdiction of  incorporation or organization)** | ** ** | **(I.R.S. Employer Identification No.)** |

** **

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| **2700 Lone Oak Parkway, Eagan, Minnesota**  | ** ** | **55121**      |
|----------------------------------------------|------------|----------------|
| **(Address of principal executive offices)** | ** ** | **(Zip Code)** |

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**(612) 726-2111**

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

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

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**Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).      Yes **ý     No o

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

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**As of September 30, 2005, there were87,895,941 shares of the registrant’s Common Stock outstanding.**

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*NorthwestAirlines Corporation and Subsidiaries*

*(Debtors-in-Possession)*

 

 

 
| ** **     | ** **            | ** **                                                                                                                                                                               | ** ** |
|----------------|-----------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| PART I.        | FINANCIAL INFORMATION |                                                                                                                                                                                     |
|           |                  |                                                                                                                                                                                     |       |
|           | Item 1.               | Financial Statements.                                                                                                                                                                    |       |
|           |                  |                                                                                                                                                                                     |       |
|           |                  | Condensed  Consolidated Statements of Operations – Three months and nine months  ended September 30, 2005 and 2004                                                             |       |
|           |                  |                                                                                                                                                                                     |       |
|           |                  | Condensed  Consolidated Balance Sheets – September 30, 2005 and December 31, 2004                                                                                              |       |
|           |                  |                                                                                                                                                                                     |       |
|           |                  | Condensed  Consolidated Statements of Cash Flows – Nine months ended September 30,  2005 and 2004                                                                              |       |
|           |                  |                                                                                                                                                                                     |       |
|           |                  | Notes  to Condensed Consolidated Financial Statements                                                                                                                                    |       |
|           |                  |                                                                                                                                                                                     |       |
|           |                  | The Computations of Ratio of Earnings to Fixed  Charges and Ratio of Earnings to Fixed Charges and Preferred Stock  Requirements are attached hereto and filed as Exhibits 12.1 and 12.2 |       |
|           |                  |                                                                                                                                                                                     |       |
|           | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations.                                                                                             |       |
|           |                  |                                                                                                                                                                                     |       |
|           | Item 3.               | Quantitative  and Qualitative Disclosures About Market Risk.                                                                                                                             |       |
|           |                  |                                                                                                                                                                                     |       |
|           | Item 4.               | Controls and  Procedures.                                                                                                                                                                |       |
|           |                  |                                                                                                                                                                                     |       |
| PART  II.      | OTHER  INFORMATION    |                                                                                                                                                                                     |
|           |                  |                                                                                                                                                                                     |       |
|           | Item 1.               | Legal Proceedings.                                                                                                                                                                       |       |
|           |                  |                                                                                                                                                                                     |       |
|           | Item  6.              | Exhibits.                                                                                                                                                                                |       |
|           |                  |                                                                                                                                                                                     |       |
| SIGNATURE      |                  |
|           |                  |
| EXHIBIT  INDEX |                  |
|                |                       |                                                                                                                                                                                          |            |  |

 

2

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PART I.  FINANCIAL INFORMATION

 

**Item 1.  Financial Statements.**

* *

*NorthwestAirlines Corporation and Subsidiaries*

*(Debtors-in-Possession)*

 

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

 
| ** **                                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| ***(Unaudited, in millions except  per share amounts)***                                        | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating Revenues**                                                                          |       |                   |       |                  |       |   |   |   |   |
| Passenger                                                                                       |       | $                      | 2,482      |                  | $          | 2,297 |   | $ | 6,864 |   | $ | 6,440 |   |
| Regional  carrier revenues                                                                      |       | 360                    |       | 304                   |       | 980 |   | 795 |   |
| Cargo                                                                                           |       | 250                    |       | 211                   |       | 695 |   | 587 |   |
| Other                                                                                           |       | 286                    |       | 240                   |       | 832 |   | 704 |   |
| Total  operating revenues                                                                       |       | 3,378                  |       | 3,052                 |       | 9,371 |   | 8,526 |   |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| **Operating Expenses**                                                                          |       |                   |       |                  |       |   |   |   |   |
| Salaries,  wages and benefits                                                                   |       | 1,000                  |       | 952                   |       | 2,933 |   | 2,853 |   |
| Aircraft  fuel and taxes                                                                        |       | 893                    |       | 605                   |       | 2,313 |   | 1,554 |   |
| Selling  and marketing                                                                          |       | 206                    |       | 209                   |       | 634 |   | 588 |   |
| Aircraft  maintenance materials and repairs                                                     |       | 208                    |       | 121                   |       | 509 |   | 341 |   |
| Other  rentals and landing fees                                                                 |       | 158                    |       | 154                   |       | 482 |   | 449 |   |
| Depreciation  and amortization                                                                  |       | 133                    |       | 126                   |       | 413 |   | 504 |   |
| Aircraft  rentals                                                                               |       | 102                    |       | 109                   |       | 341 |   | 338 |   |
| Regional  carrier expenses                                                                      |       | 414                    |       | 322                   |       | 1,162 |   | 866 |   |
| Other                                                                                           |       | 431                    |       | 375                   |       | 1,242 |   | 1,114 |   |
| Total  operating expenses                                                                       |       | 3,545                  |       | 2,973                 |       | 10,029 |   | 8,607 |   |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| **Operating Income (Loss)**                                                                     |       | (167                   | )          | 79                    |       | (658 | ) | (81 | ) |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| **Other Income (Expense)**                                                                      |       |                   |       |                  |       |   |   |   |   |
| Interest  expense, net                                                                          |       | (159                   | )          | (133                  | )          | (469 | ) | (390 | ) |
| Investment  income                                                                              |       | 22                     |       | 14                    |       | 60 |   | 40 |   |
| Reorganization  items, net                                                                      |       | (159                   | )          | —                |       | (159 | ) | — |   |
| Other,  net                                                                                     |       | (5                     | )          | 2                     |       | 77 |   | (5 | ) |
| Total  other income (expense)                                                                   |       | (301                   | )          | (117                  | )          | (491 | ) | (355 | ) |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| **Income (Loss) Before Income Taxes and Cumulative Effect of Accounting  Change**               |       | (468                   | )          | (38                   | )          | (1,149 | ) | (436 | ) |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| Income  tax expense (benefit)                                                                   |       | 1                      |       | —                |       | 6 |   | — |   |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| **Income (Loss) Before Cumulative Effect of Accounting Change**                                 |       | (469                   | )          | (38                   | )          | (1,155 | ) | (436 | ) |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| Cumulative  effect of accounting change                                                         |       | —                 |       | —                |       | (69 | ) | — |   |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| **Net Income (Loss)**                                                                           |       | (469                   | )          | (38                   | )          | (1,224 | ) | (436 | ) |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| Preferred  stock requirements                                                                   |       | (6                     | )          | (8                    | )          | (22 | ) | (22 | ) |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| **Net Income (Loss) Applicable to Common Stockholders**                                         |       | $                      | (475       | )                     | $          | (46 | ) | $ | (1,246 | ) | $ | (458 | ) |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| Earnings (loss) per common share:                                                               |       |                   |       |                  |       |   |   |   |   |
| *Basic and Diluted*                                                                             |       |                   |       |                  |       |   |   |   |   |
| Income  (loss) applicable to common stockholders before cumulative effect of  accounting change |       | $                      | (5.45      | )                     | $          | (0.54 | ) | $ | (13.54 | ) | $ | (5.31 | ) |
| Cumulative  effect of accounting change                                                         |       | —                 |       | —                |       | (0.79 | ) | — |   |
| Net  income (loss) applicable to common stockholders                                            |       | $                      | (5.45      | )                     | $          | (0.54 | ) | $ | (14.33 | ) | $ | (5.31 | ) |
|                                                                                            |       |                   |       |                  |       |   |   |   |   |
| Average shares used in computation:                                                             |       |                   |       |                  |       |   |   |   |   |
| *Basic and Diluted*                                                                             |       | 87                     |       | 87                    |       | 87 |   | 86 |   |

* *

*Seeaccompanying notes.*

 

3

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*NorthwestAirlines Corporation and Subsidiaries*

*(Debtors-in-Possession)*

 

CONDENSEDCONSOLIDATED BALANCE SHEETS

 
| ** **                                                          | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|
| ***(Unaudited,  in millions)***                                     | ** ** | **2005**         | ** ** | **2004**        | ** ** |
| **Assets**                                                          |       |             |       |            |       |
|                                                                |       |             |       |            |       |
| **Current Assets**                                                  |       |             |       |            |       |
| Cash  and cash equivalents                                          |       | $                | 1,119      |            | $          | 707 |   |
| Unrestricted  short-term investments                                |       | 473              |       | 1,752           |       |
| Restricted  cash, cash equivalents and short-term investments       |       | 520              |       | 156             |       |
| Accounts  receivable, net                                           |       | 656              |       | 460             |       |
| Flight  equipment spare parts, net                                  |       | 127              |       | 125             |       |
| Prepaid  expenses and other                                         |       | 474              |       | 378             |       |
| Total  current assets                                               |       | 3,369            |       | 3,578           |       |
|                                                                |       |             |       |            |       |
| **Property and Equipment**                                          |       |             |       |            |       |
| Flight  equipment, net                                              |       | 7,465            |       | 7,355           |       |
| Other  property and equipment, net                                  |       | 763              |       | 769             |       |
| Total  property and equipment                                       |       | 8,228            |       | 8,124           |       |
|                                                                |       |             |       |            |       |
| **Flight Equipment Under Capital Leases, net**                      |       | 125              |       | 146             |       |
|                                                                |       |             |       |            |       |
| **Other Assets**                                                    |       |             |       |            |       |
| Intangible  pension asset                                           |       | 671              |       | 671             |       |
| International  routes                                               |       | 634              |       | 634             |       |
| Investments  in affiliated companies                                |       | 57               |       | 55              |       |
| Other                                                               |       | 877              |       | 834             |       |
| Total  other assets                                                 |       | 2,239            |       | 2,194           |       |
| **Total Assets**                                                    |       | $                | 13,961     |            | $          | 14,042 |   |
|                                                                |       |             |       |            |       |
| **Liabilities and Stockholders’ Equity  (Deficit)**            |       |             |       |            |       |
|                                                                |       |             |       |            |       |
| **Current Liabilities**                                             |       |             |       |            |       |
| Air  traffic liability                                              |       | $                | 1,762      |            | $          | 1,422 |   |
| Accounts  payable and other liabilities                             |       | 832              |       | 2,326           |       |
| Current  maturities of long-term debt and capital lease obligations |       | 15               |       | 749             |       |
| Total  current liabilities                                          |       | 2,609            |       | 4,497           |       |
|                                                                |       |             |       |            |       |
| **Long-Term Debt**                                                  |       | 304              |       | 7,715           |       |
|                                                                |       |             |       |            |       |
| **Long-Term Obligations Under Capital Leases**                      | ** ** | **—**       |       | 308             |       |
|                                                                |       |             |       |            |       |
| **Deferred Credits and Other Liabilities**                          |       |             |       |            |       |
| Long-term  pension and postretirement health care benefits          |       | 30               |       | 3,593           |       |
| Other                                                               |       | 14               |       | 753             |       |
| Total  deferred credits and other liabilities                       |       | 44               |       | 4,346           |       |
|                                                                |       |             |       |            |       |
| **Liabilities Subject to Compromise**                               |       | 15,036           | ** ** | **—**      | ** ** |
| ** **                                                          | ** ** | ** **       | ** ** | ** **      | ** ** |
| **Preferred Redeemable Stock**                                      |       | 281              |       | 263             |       |
|                                                                |       |             |       |            |       |
| **Common Stockholders’ Equity (Deficit)**                      |       |             |       |            |       |
| Common  stock                                                       |       | 1                |       | 1               |       |
| Additional  paid-in capital                                         |       | 1,484            |       | 1,471           |       |
| Accumulated  deficit                                                |       | (3,252           | )          | (1,999          | )          |
| Accumulated  other comprehensive income (loss)                      |       | (1,547           | )          | (1,547          | )          |
| Treasury  stock                                                     |       | (999             | )          | (1,013          | )          |
| Total  common stockholders’ equity (deficit)                   |       | (4,313           | )          | (3,087          | )          |
| **Total Liabilities and Stockholders’ Equity (Deficit)**       |       | $                | 13,961     |            | $          | 14,042 |   |

* *

*Seeaccompanying notes.*

* *

4

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*Northwest Airlines Corporation and Subsidiaries*

*(Debtors-in-Possession)*

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

** **
| ** **                                                                                          | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **September 30**      | ** ** |
| ***(Unaudited,  in millions)***                                                                     |       | **2005**              | ** ** | **2004** |   |
| **Cash Flows from Operating Activities**                                                            |       |                  |       |   |   |
| Net  income (loss)                                                                                  |       | $                     | (1,224     | ) | $ | (436 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in)                                |       |                  |       |   |   |
| operating  activities:                                                                              |       |                  |       |   |   |
| Cumulative  effect of accounting change                                                             |       | 69                    |       | — |   |
| Depreciation  and amortization                                                                      |       | 413                   |       | 504 |   |
| Pension  and other postretirement benefit contributions less than expense                           |       | 245                   |       | 164 |   |
| Changes  in certain assets and liabilities                                                          |       | 256                   |       | 160 |   |
| Reorganization  items                                                                               |       | 159                   |       | — |   |
| Other,  net                                                                                         |       | (283                  | )          | 21 |   |
| Net  cash provided by (used in) operating activities                                                |       | (365                  | )          | 413 |   |
|                                                                                                |       |                  |       |   |   |
| **Cash Flows from Reorganization Activities**                                                       |       |                  |       |   |   |
| Net  cash provided by (used in) reorganization activites                                            |       | —                |       | — |   |
|                                                                                                |       |                  |       |   |   |
| **Cash Flows from Investing Activities**                                                            |       |                  |       |   |   |
| Capital  expenditures                                                                               |       | (318                  | )          | (434 | ) |
| Purchase  of short-term investments                                                                 |       | (192                  | )          | (228 | ) |
| Proceeds  from sales of short-term investments                                                      |       | 1,495                 |       | 128 |   |
| Decrease  (increase) in restricted cash, cash equivalents and short-term investments                |       | (364                  | )          | (15 | ) |
| Proceeds  from sale of Pinnacle note receivable                                                     |       | 102                   |       | — |   |
| Demutualization  share proceeds                                                                     |       | 102                   |       | — |   |
| Other,  net                                                                                         |       | 7                     |       | 11 |   |
| Net  cash provided by (used in) investing activities                                                |       | 832                   |       | (538 | ) |
|                                                                                                |       |                  |       |   |   |
| **Cash Flows from Financing Activities**                                                            |       |                  |       |   |   |
| Proceeds  from long-term debt                                                                       |       | 448                   |       | 462 |   |
| Payments  of long-term debt and capital lease obligations                                           |       | (481                  | )          | (664 | ) |
| Other,  net                                                                                         |       | (22                   | )          | (4 | ) |
| Net  cash provided by (used in) financing activities                                                |       | (55                   | )          | (206 | ) |
|                                                                                                |       |                  |       |   |   |
| **Increase (Decrease) in Cash and Cash  Equivalents**                                               |       | 412                   |       | (331 | ) |
|                                                                                                |       |                  |       |   |   |
| Cash and cash equivalents at beginning of period                                                    |       | 707                   |       | 1,146 |   |
| Cash and cash equivalents at end of period                                                          |       | $                     | 1,119      |   | $ | 815 |   |
|                                                                                                |       |                  |       |   |   |
| Cash and  cash equivalents and unrestricted short-term investments at end of period                 |       | $                     | 1,592      |   | $ | 2,542 |   |
|                                                                                                |       |                  |       |   |   |
| Supplemental Cash Flow Information:                                                                 |       |                  |       |   |   |
| Interest paid                                                                                       |       | $                     | 395        |   | $ | 364 |   |
|                                                                                                |       |                  |       |   |   |
| Investing and Financing Activities Not Affecting  Cash:                                             |       |                  |       |   |   |
| Manufacturer  financing of aircraft, aircraft predelivery deposits and other non-cash  transactions |       | $                     | 295        |   | $ | 458 |   |

* *

*Seeaccompanying notes.*

* *

5

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* *

*NorthwestAirlines Corporation and Subsidiaries*

*(Debtors-in-Possession)*

 

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**Note1 – Basis of Presentation**

 

      The condensed consolidated financialstatements of Northwest Airlines Corporation (“NWA Corp.”), a holding companywhose principal indirect operating subsidiary is Northwest Airlines, Inc. (“Northwest”),include the accounts of NWA Corp. and all consolidated subsidiaries(collectively, the “Company”).  Thecondensed consolidated financial statements included herein have been preparedpursuant to the rules and regulations of the Securities and Exchange Commission(“SEC”).  The information and footnotedisclosures normally included in annual financial statements prepared inaccordance with U.S. Generally Accepted Accounting Principles (“GAAP”) havebeen condensed or omitted as permitted by such rules and regulations. Thesefinancial statements and related notes should be read in conjunction with thefinancial statements and notes included in the Company’s audited consolidatedfinancial statements, which are provided in the Company’s Annual Report on Form10-K for the year ended December 31, 2004. The Company’s accounting and reporting policies are summarized in “Note1 – Summary of Significant Accounting Policies” in the Annual Report onForm 10-K for 2004.

 

As discussedin Note 2, on September 14, 2005 (the “Petition Date”), Northwest AirlinesCorporation and certain of its direct and indirect subsidiaries (collectively,the “Debtors”) filed voluntary petitions for relief under Chapter 11 of theUnited States Bankruptcy Code with the United States Bankruptcy Court for theSouthern District of New York (the “Bankruptcy Court”).  Subsequently, on September 30, 2005, NWAAircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed avoluntary petition for relief under Chapter 11. The Bankruptcy Court is jointly administering these cases under thecaption “In re Northwest Airlines Corporation, et al., Case No. 05-17930 (ALG)”.  Accordingly, the accompanying condensedconsolidated financial statements have been prepared in accordance with theAmerican Institute of Certified Public Accountants Statement of Position 90-7, *Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code* (“SOP 90-7”), and on a going concern basis,which contemplates continuity of operations, realization of assets and liquidationof post-petition liabilities in the ordinary course of business.  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.

 

      The Company maintains a Web site at *http://www.nwa.com*.  Information contained on the Company’swebsite 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 to thosereports and other information about the Company are available free of chargethrough this Web site at *http://ir.nwa.com*as soon as reasonably practicable after those reports are electronically filedwith or furnished to the SEC.  Forinformation or questions concerning the Company’s Chapter 11 restructuring see:*http://www.nwa-restructuring.com*.

 

      In the opinion of management, the interimfinancial statements reflect adjustments, consisting of normal recurringaccruals, unless otherwise noted, which are necessary to present fairly theCompany’s financial position, results of operations and cash flows for theperiods indicated.

 

      The Company’s results of operations forinterim periods are not necessarily indicative of the results for an entireyear due to seasonal factors as well as competitive and general economicconditions.  The Company’s second andthird quarter operating results have historically been more favorable due toincreased leisure travel on domestic and international routes during the springand summer months.

 

The Companybelieves that the material risks and uncertainties that could affect theoutlook of an airline operating in the global economy include, among others,the ability of the Company to continue as a going concern, the ability of theCompany to obtain and maintain any necessary financing for operations and otherpurposes, whether debtor-in-possession financing or other financing, theability of the Company to maintain adequate liquidity, the ability of theCompany to absorb escalating fuel costs, the Company’s ability to obtain courtapproval with respect to motions in the Chapter 11 proceedings prosecutedby it from time to time, the ability of the Company to develop, confirm andconsummate a plan of reorganization with respect to the Chapter 11proceedings, risks associated with 

 

6

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third parties seeking and obtaining court approval toterminate or shorten the exclusivity period for the Company to propose andconfirm a plan of reorganization, to appoint a Chapter 11 trustee or toconvert the cases to Chapter 7 cases, the ability of the Company to obtain andmaintain normal terms with vendors and service providers, the Company’s abilityto maintain contracts that are critical to its operations, the ability of the Companyto realize assets and satisfy liabilities without substantial adjustmentsand/or changes in ownership, the potential adverse impact of theChapter 11 proceedings on the Company’s liquidity or results ofoperations, 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 UnitedStates and other regions of the world, the price and availability of jet fuel,the aftermath of the war in Iraq, the possibility of additional terroristattacks or the fear of such attacks, concerns about SARS, Avian flu or otherinfluenza or contagious illnesses, work disruptions, labor negotiations both atother carriers and the Company, low cost carrier expansion, capacity decisionsof other carriers, actions of the U.S. and foreign governments, foreigncurrency exchange rate fluctuation, inflation and other factors discussedherein.  Additional information withrespect to these factors and these and other events that could causedifferences between forward-looking statements and future actual results iscontained in “Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” below, and “Item 1. Business – RiskFactors Related to Northwest and the Airline Industry” and “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

*Increasein Restricted Cash.*  The Company, in the ordinary course ofbusiness, collects funds from passengers and withholdings from employees thatare required to be paid to various taxing authorities, in addition to certaintaxes that are self assessed.  These include U.S. transportation taxes,passenger facility charges, fuel taxes and the employee portion of payrolltaxes, among others.  The Company established an irrevocable trust in 2002and since then has made regular deposits to the trust from which payments areissued to the taxing authorities.  The increase in the irrevocable trustbalance from $5 million as of December 31, 2004, to $284 million as ofSeptember 30, 2005, represents the Company’s decision in the first quarter of2005 to increase its trust funding.  Additionally,as a result of the Company filing for bankruptcy, certain transactionprocessors required the establishment of short-term cash holdbacks.  The balance of these holdbacks was $89million as of September 30, 2005.  Thesebalances are included in restricted cash, cash equivalents and short-terminvestments on the Company’s Condensed Consolidated Balance Sheets.

 

**Note2 – Voluntary Reorganization Under Chapter 11**

 

On September 14, 2005, Northwest Airlines Corporation and 12 ofits direct and indirect subsidiaries filed voluntary petitions for relief underChapter 11 of the United States Bankruptcy Code with the United StatesBankruptcy Court for the Southern District of New York.  Subsequently, on September 30, 2005, NWAAircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed avoluntary petition for relief under Chapter 11. The Bankruptcy Court is jointly administering these cases under thecaption “In re Northwest Airlines Corporation, et al., Case No. 05-17930 (ALG)”.  The consolidated financial statements shownherein include certain subsidiaries that did not file to reorganize underChapter 11.  The assets and liabilitiesof these subsidiaries are not considered material to the consolidated financialstatements.

 

In order to exit Chapter 11 successfully, theCompany must propose, and obtain confirmation by the Bankruptcy Court of, aplan of reorganization that satisfies the requirements of the BankruptcyCode.  A plan of reorganization wouldresolve, among other things, the Debtors’ pre-petition obligations and setforth the revised capital structure of the newly reorganized entity.  The Debtors have the exclusive right for 120days from the Petition Date to file a plan of reorganization and, if they doso, 60 additional days to obtain necessary acceptance of the plan.  These deadlines may be extended by theBankruptcy Court.

 

The Companyintends to use the provisions of Chapter 11 to reorganize its business on asustainable basis.  The Chapter 11process will allow the Company to realize three major goals essential to itstransformation: first, a competitive cost structure, including both labor andnon-labor costs; second, a more efficient business model that will allow theCompany to continue to deliver superior choice and service to its customers;and third, a strengthened balance sheet with debt and equity levels consistentwith long-term profitability.

 

7

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As required by the Bankruptcy Code, the United StatesTrustee for the Southern District of New York appointed on September 30, 2005,an official committee of unsecured creditors (the “Creditors’ Committee”).  The Creditors’ Committee and its legalrepresentatives have a right to be heard on all matters that come before theBankruptcy Court concerning the reorganization. There can be no assurance that the Creditors’ Committee will support theCompany’s positions, or plan of reorganization.

 

With the exception of the Company’s non-debtorsubsidiaries, the Company continues to operate the business as “debtor-in-possession”under the jurisdiction of the Bankruptcy Court and in accordance with theapplicable provisions of the Bankruptcy Code, the Federal Rules of BankruptcyProcedure and applicable court orders. In general, as debtor-in-possession, the Company is authorized underChapter 11 to continue to operate as an ongoing business, but may not engage intransactions outside the ordinary course of business without the prior approvalof the Bankruptcy Court.  In conjunctionwith the commencement of the Chapter 11 case, the Debtors sought and obtainedseveral orders from the Bankruptcy Court that were intended to enable theDebtors to operate in the normal course of business during the Chapter 11case.  The most significant of theseorders (i) authorize the Company to honor pre-petition obligations tocustomers, (ii) authorize the Company to honor obligations to employees for pre-petitionemployee salaries, wages, and benefits and (iii) permit the Debtors to operatetheir consolidated cash management system during the Chapter 11 case insubstantially the same manner as it was operated prior to the commencement ofthe Chapter 11 case.

 

The bankruptcy filing triggered defaults onsubstantially all the Company’s debt and lease obligations.  Under Section 362 of the Bankruptcy Code, thefiling of a bankruptcy petition automatically stays most actions against adebtor, including most actions to collect pre-petition indebtedness or toexercise control over the property of a debtor’s estate.  Absent an order of the Bankruptcy Court,substantially all pre-petition liabilities are subject to settlement under theplan of reorganization.

 

The Debtors’ rights to possess and operate certainqualifying aircraft, aircraft engines and other aircraft-related equipment thatare leased or subject to a security interest or conditional sale contract aregoverned by a particular provision of the Bankruptcy Code that limits theeffect of the automatic stay.  Section1110 of the Bankruptcy Code (“Section 1110”) provides that unless the Debtorstake certain action within 60 days after the Petition Date or such later dateas is agreed by the applicable lessor, secured party, or conditional vendor,the contractual rights of such financier to take possession of such equipmentand to enforce any of its other rights or remedies under the applicableagreement are not limited or otherwise affected by the automatic stay or anyother provision of the Bankruptcy Code.

 

Under Section 365 of the Bankruptcy Code, debtors mayassume, assume and assign, or reject certain executory contracts and unexpiredleases, including leases of real property, aircraft and aircraft engines,subject to the approval of the Bankruptcy Court and other conditions.  In general, rejection of an unexpired leaseor executory contract is treated as a pre-petition breach of the lease orcontract in question.  Subject to certainexceptions, this rejection relieves debtors of performing their futureobligations under that lease or contract but entitles the lessor or contractcounterparty to a pre-petition general unsecured claim for damages caused bythe deemed breach.

 

Counterparties to these rejected contracts or leasesmay file proofs of claim against the Debtors’ estate for such damages.  Due to the uncertain nature of many of thepotential rejection and abandonment related claims, the Company is unable toproject the magnitude of these claims with any degree of certainty at thistime.

 

The Bankruptcy Code provides special treatment forcollective bargaining agreements (“CBAs”). In particular, Section 1113(c) of the Bankruptcy Code permits theCompany to move to reject its CBAs if the Company first satisfies a number ofstatutorily prescribed substantive and procedural prerequisites and obtains theBankruptcy Court’s approval of the rejection. After bargaining in good faith and sharing relevant information with itsunions, a debtor must make proposals to modify its existing CBAs based on themost complete and reliable information available at the time.  The proposed modifications must be necessaryto permit the reorganization of a debtor and must provide that all the affectedparties are treated fairly and equitably. Ultimately, rejection of the CBAs is appropriate if the unions refuse toagree to a debtor’s necessary proposal “without good cause” and the BankruptcyCourt determines that the balance of the equities favors rejection.  See “Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” for additionaldiscussion on the Company’s application under Section 1113(c) of the BankruptcyCode.

 

8

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On October 28, 2005, the Bankruptcy Court entered anorder that restricts the trading of the common stock and debt interests in theCompany.  The purpose of the order is toensure that the Company does not lose the benefit of its net operating losscarryforwards (“NOLs”) for tax purposes. Under federal and state income tax law, NOLs can be used to offsetfuture taxable income, and thus are a valuable asset of the Debtors’ estate.  Certain trading in the Company’s stock (ordebt when the Company is in bankruptcy) could adversely affect the Company’s abilityto use the NOLs.  Thus, the Companyobtained an order that enables it to closely monitor certain transfers of stockand claims and restrict those transfers that may compromise the Company’sability to use its NOLs.

 

The Companyreceived written notification on September 15, 2005, from NASDAQ that itscommon stock would be delisted in accordance with Marketplace Rules 4300,4450(f) and IM-4300.  Effective with theopening of business on September 26, 2005, the Company’s common stock ceasedtrading on the NASDAQ stock market.  Oncedelisted, shares can still be traded in the “over-the-counter” market under thesymbol NWACQ.PK.  However, the Companyurges that appropriate caution be exercised with respect to existing and futureinvestments in its common stock.  TheCompany currently believes that no value will be ascribed to the Company’s outstandingcommon stock and other equity securities in any plan of reorganization.

 

The New YorkStock Exchange advised the Company on September 15, 2005 that trading inNorthwest’s 10.5% Class D Pass Through Certificates, Series 2003-1 due April,1, 2009, ticker symbol NWB RP09, as well as the 9 1⁄2% Senior Quarterly InterestBonds due August 15, 2039 (QUIBS), ticker symbol NWB, was suspended.

 

**Note3 – Change in Accounting for Certain Pension Plan Administrative Expenses**

 

During the second quarter of 2005, theCompany changed its method of recognizing certain pension plan administrativeexpenses associated with the Company’s defined benefit pension plans and nowincludes them as a service cost component of net periodic pension cost.  These expenses include trustee fees, otheradministrative expenses and insurance premiums paid to the Pension BenefitGuaranty Corporation (“PBGC”), all of which previously were reflected as areduction in the market value of plan assets and therefore amortized with otherasset gains and losses.  The Companybelieves this change is preferable because it more appropriately ascribes theexpenses to the period in which they are incurred.  The cumulative effect of applying this changeto net periodic pension expense in prior years is $69.1 million, which has beenretroactively recorded as of January 1, 2005, and is included in the Company’sCondensed Consolidated Statements of Operations for the nine months endedSeptember 30, 2005.  The impact of thischange on the three and nine months ended September 30, 2005 was anincrease in net periodic benefit cost of $9.4 million and $28.2 million,respectively.

 

The following table illustrates pro formaamounts, assuming the new accounting method is applied retroactively (inmillions, except per share amounts):
| ** **                                           | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| ** **                                           |       | **2005**               | ** ** | 2004                  |       | **2005** | ** ** | 2004 |   |
|                                                 |       | ** **             | ** ** |                  |       | ** ** | ** ** |   |   |
| Net income  (loss) applicable to common stockholders | ** ** | **$**                  | **(475**   | **)**                 | $          | (56 | ) | **$** | **(1,177** | **)** | $ | (486 | ) |
|                                                 |       | ** **             | ** ** |                  |       | ** ** | ** ** |   |   |
| Earnings (loss) per common share:                    |       | ** **             | ** ** |                  |       | ** ** | ** ** |   |   |
| *Basic and Diluted*                                  | ** ** | **$**                  | **(5.45**  | **)**                 | $          | (0.64 | ) | **$** | **(13.54** | **)** | $ | (5.63 | ) |
|                                                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

**Note 4 – Recent AccountingPronouncements**

 

      In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 123 (Revised 2004), *Share-Based Payment*(“SFAS No. 123R”).  In addition torequiring supplemental disclosures, SFAS No. 123R eliminates the option toapply the intrinsic value measurement provisions of Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issuedto Employees* (“APB No. 25”) to stock compensation awards issued toemployees.  Furthermore, the Company isrequired to recognize compensation cost for the portion of outstanding awardspreviously accounted for under the provisions of APB No. 25 for which therequisite service had not been rendered as of the adoption date for thisStatement.  The Statement also requirescompanies to estimate forfeitures of stock compensation awards as of the grantdate of the award.  Because the Companyvoluntarily 

 

 

9

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adopted thefair value method prescribed by SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS No. 123”), effective January 1,2003, the unvested awards still accounted for under the provisions of APB No.25, and therefore subject to the provisions of SFAS No. 123R, are minimal.  Additionally, the overall impact ofestimating the remaining forfeitures for awards outstanding as of the adoptiondate is insignificant.  Therefore, theimpact of adopting SFAS No. 123R will be immaterial.  SFAS No. 123R is effective for the fiscalquarter beginning January 1, 2006, though early adoption is permitted.

 

**Note 5 – GeographicRegions**

 

      The Company is managed as one cohesivebusiness unit, the revenues of which 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 (in millions):

 
| ** **                 | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| ** **                 |       | **2005**               |       | 2004                  | ** ** | **2005** |   | 2004 |   |
| Domestic                   | ** ** | **$**                  | **2,183**  |                  | $          | 2,037 | ** ** | **$** | **6,286** |   | $ | 5,826 |   |
| Pacific, principally Japan | ** ** | **747**                |       | 676                   | ** ** | **2,006** |   | 1,803 |   |
| Atlantic                   | ** ** | **448**                |       | 339                   | ** ** | **1,079** |   | 897 |   |
| Total  operating revenues  | ** ** | **$**                  | **3,378**  |                  | $          | 3,052 | ** ** | **$** | **9,371** |   | $ | 8,526 |   |

 

**Note 6 – Aircraft Impairments and Other Related Charges**

 

    In June 2005, the Company recorded $48million for the impairment and other charges related to nine owned and twoleased aircraft of various types that it does not intend to return toservice.  Of the $48 million recorded,approximately $40 million related to aircraft rent expense and other charges onthe two leased aircraft and $8 million was attributable to aircraft impairmentson the nine owned aircraft.  In June 2004,the Company recorded impairment charges totaling $104 million associated withaircraft and related inventory.  As theCompany continues to review its aircraft fleet plan in conjunction with itsoverall route structure and capacity needs, including changes associated withthe Company’s eventual plan of reorganization, there will likely be the needfor additional charges associated with both owned and leased aircraft.  The impact of these aircraft impairments andother related charges may be significant.

## ** **

## **Note 7 – Reorganization Related Items**

 

The condensedconsolidated financial statements have been prepared in accordance with SOP90-7 and on a going concern basis that contemplates continuity of operations,realization of assets and liquidation of post-petition liabilities in theordinary course of business.  Inaccordance with SOP 90-7, the financial statements for the periods presenteddistinguish transactions and events that are directly associated with thereorganization from the ongoing operations of the Company.

 

Reorganizationitems recorded during the quarter ended September 30, 2005, largely consist ofthe write-off of debt and lease valuation adjustments and aircraft rejectioncharges.  Debt and lease valuationadjustments represent one time non-cash charges related to the write-off ofissuance costs, discounts and premiums related to the Company’s debt and leasesclassified as subject to compromise.  Aircraftrejection charges are non-cash costs that include the estimated claimsresulting from the Company’s rejection of certain aircraft leases and return ofaircraft as part of the bankruptcy process. Contract rejection charges are non-cash costs of the estimated claimsresulting from the Company’s rejection of certain contract obligations, such asexecutory contracts and unexpired facility leases.  These claims remain subject to futureadjustments arising from negotiated settlements, actions of the BankruptcyCourt, the determination as to the value of any collateral securing claims,proofs of claim or other events.

 

10

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For thethree-month period ending September 30, 2005, the Company recognized thefollowing reorganization related items (in millions):

 

| Debt and lease valuation  adjustments | ** ** | $  | 144    | ** ** |
|---------------------------------------|------------|----|--------|------------|
| Aircraft  rejection charges           |       | 13 |   |
| Professional  fees                    |       | 1  |   |
| Contract  rejection charges           |       | 1  |   |
| Total reorganization  expenses        |       | $  | 159    |       |

** **

**Note 8 – Income Taxes**

 

The Companyaccounts for income taxes in accordance with SFAS No. 109, *Accountingfor Income Taxes* (“SFAS No. 109”), which requires that deferred taxassets and liabilities be recognized, using enacted tax rates, for the taxeffect of temporary differences between the financial reporting and tax basesof recorded assets and liabilities.  SFASNo. 109 also requires that deferred tax assets be reduced by a valuationallowance if it is more likely than not that some or all of the deferred taxassets will not be realized.

 

Based on theconsideration of all available evidence, the Company was required to provide avaluation allowance on deferred tax assets recorded beginning in the firstquarter 2003.  The Company continues torecord a full valuation allowance against its deferred tax assets due to theuncertainty regarding the ultimate realization of those assets.  The Company’s third quarter 2005 net losstherefore was not reduced by any tax benefit.

 

In the eventthat the Company were to experience a change in ownership, as defined byInternal Revenue Code Section 382, upon emergence from the current Chapter 11 filingthe annual usage of the remaining tax attributes that were generated prior tothe change in ownership could be substantially limited.  The amount of limitation, if any, will bedetermined at the time of the emergence from the current Chapter 11 reorganization.

 

On October 28, 2005, the Bankruptcy Court entered anorder that restricts the trading of the common stock and debt interests in theCompany.  The purpose of the order is toensure that the Company does not lose the benefit of its NOLs for tax purposes.  Under federal and state income tax law, NOLscan be used to offset future taxable income, and thus are a valuable asset ofthe Debtors’ estate.  Certain trading inthe Company’s stock (or debt when the Company is in bankruptcy) could adverselyaffect the Company’s ability to use the NOLs. Thus, the Company obtained an order that enables it to closely monitorcertain transfers of stock and claims and restrict those transfers that maycompromise the Company’s ability to use its NOLs.

 

11

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## **Note 9 – Earnings (Loss) Per ShareData**

 

The followingtable sets forth the computation of basic and diluted earnings (loss) percommon share (in millions, except per share data):

 
| ** **                                                                           | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| ** **                                                                           |       | **2005**               | ** ** | 2004                  |       | **2005** | ** ** | 2004 |   |
| **Numerator:**                                                                       |       | ** **             | ** ** |                  |       | ** ** | ** ** |   |   |
| Income  (loss) before cumulative effect of accounting change                         | ** ** | **$**                  | **(469**   | **)**                 | $          | (38 | ) | **$** | **(1,155** | **)** | $ | (436 | ) |
| Cumulative  effect of accounting change                                              | ** ** | **—**             | ** ** | —                |       | **(69** | **)** | — |   |
| Preferred  stock requirements                                                        | ** ** | **(6**                 | **)**      | (8                    | )          | **(22** | **)** | (22 | ) |
| Net income  (loss) applicable to common stockholders                                 | ** ** | **$**                  | **(475**   | **)**                 | $          | (46 | ) | **$** | **(1,246** | **)** | $ | (458 | ) |
|                                                                                 |       | ** **             | ** ** |                  |       | ** ** | ** ** |   |   |
| **Denominator:**                                                                     |       | ** **             | ** ** |                  |       | ** ** | ** ** |   |   |
| Weighted-average  shares outstanding for basic and diluted earnings (loss) per share | ** ** | **87,153,391**         | ** ** | 86,523,146            |       | **86,925,736** | ** ** | 86,327,275 |   |
|                                                                                 |       | ** **             | ** ** |                  |       | ** ** | ** ** |   |   |
| Earnings  (loss) per common share:                                                   |       | ** **             | ** ** |                  |       | ** ** | ** ** |   |   |
| Income  (loss) before cumulative effect of accounting change                         | ** ** | **$**                  | **(5.38**  | **)**                 | $          | (0.45 | ) | **$** | **(13.29** | **)** | $ | (5.06 | ) |
| Cumulative  effect of accounting change                                              | ** ** | **—**             | ** ** | —                |       | **(0.79** | **)** | — |   |
| Preferred  stock requirements                                                        | ** ** | **(0.07**              | **)**      | (0.09                 | )          | **(0.25** | **)** | (0.25 | ) |
| Net income  (loss) applicable to common stockholders                                 | ** ** | **$**                  | **(5.45**  | **)**                 | $          | (0.54 | ) | **$** | **(14.33** | **)** | $ | (5.31 | ) |
|                                                                                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

      Incrementalshares related to contingently convertible debt and the dilutive portion ofemployee stock options and unvested restricted shares under the treasury methodwere not included in the diluted earnings per share calculation because theCompany reported a net loss for these periods. These incremental shares included approximately 19.2 million and 19.4million shares for the three and nine months ended September 30, 2005,respectively, and 19.5 million and 19.7 million shares for the three and ninemonths ended September 30, 2004, respectively. Incremental shares related to dilutive securities have an anti-dilutiveimpact on earnings per share when a net loss is reported and therefore are notincluded in the calculation.

 

      Because of the previously stated intent ofthe Company to settle the Series C Preferred Stock with cash rather than by theCompany issuing additional common stock, approximately 6.4 million shares ofSeries C Preferred Stock equivalents were excluded from the effect of the abovedilutive securities computations.

 

      The Company had total employee stockoptions and restricted shares outstanding of 9.5 million and 6.5 million as ofSeptember 30, 2005 and 2004, respectively.

 

**Note10 – Liabilities Subject to Compromise**

 

Liabilitiessubject to compromise refers to both secured and unsecured obligations that willbe accounted for under a plan of reorganization, including claims incurredprior to the Petition Date.  Theyrepresent the estimated amount expected to be allowed on known or potentialclaims to be resolved through the Chapter 11 process, and remain subject tofuture adjustments arising from negotiated settlements, actions of theBankruptcy Court, rejection of executory contracts and unexpired leases, thedetermination as to the value of any collateral securing claims, proofs ofclaim or other events.

 

The Debtorshave endeavored to notify all of their known or potential creditors whoseclaims are subject to the Chapter 11 cases. Subject to certain exceptions under the Bankruptcy Code, the Chapter 11filings automatically stayed the continuation of any judicial or administrativeproceedings or other actions against the Debtors or their property to recoveron, collect or secure a claim arising prior to the time of filing on September14, 2005.  The deadline for creditors tofile proofs of claim with the Bankruptcy Court (the “Bar Date”) has not yetbeen determined.  A proof of claimarising from the rejection of an executory contract or an expired lease must befiled the later of the Bar Date or thirty days from the effective date of theauthorized rejection.

 

12

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Differencesbetween liability amounts the Company has estimated and future claims to be filedby its creditors will be examined by the Bankruptcy Court, which will make afinal determination of the allowable claims. The determination of how these liabilities will ultimately be treatedwill not be known until the Bankruptcy Court approves a plan of reorganizationand the claims resolution process is complete, which may occur well afterconfirmation of a plan of reorganization. The Company will continue to evaluate the amounts of these liabilitiesthrough the remainder of the Chapter 11 process.  To the extent that the Company identifies additionalamounts subject to compromise, they will be recognized accordingly.  As a result, the amounts of liabilitiessubject to compromise are subject to change.

 

Subsequent toits Chapter 11 filing, the Company recorded post-petition interest expense onpre-petition obligations only to the extent it believes the interest will bepaid during the bankruptcy proceeding or that it is probable that the interestwill be an allowed claim.  Had theCompany recorded interest expense based on its pre-petition contractualobligations, interest expense would have increased by $9.5 million during thethird quarter of 2005.

 

 AtSeptember 30, 2005, the Company had liabilities subject to compromise of $15.0billion consisting of the following (in millions):

 
| Debt, including accrued  interest                            | ** ** | $     | 8,403  | ** ** |
|--------------------------------------------------------------|------------|-------|--------|------------|
| Pension,  postretirement and other employee related expenses |       | 4,369 |   |
| Aircraft-related  accruals and deferrals                     |       | 825   |   |
| Capital  lease obligations, including accrued interest       |       | 369   |   |
| Accounts  payable and other liabilities                      |       | 1,070 |   |
| Total Liabilities Subject to  Compromise                     |       | $     | 15,036 |       |

 

In addition to the $15 billion ofliabilities subject to compromise itemized above, the Company’s $281 million ofPreferred Redeemable Stock is also subject to compromise.  This preferred security is not presented as aliability on the Company’s Condensed Consolidated Balance Sheets due to itsconversion features, as required by the provisions of SFAS 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.

 

**Note 11 – Long-term Debt not Subject to Compromise**

 

      The bankruptcy filing triggered defaultson substantially all the Company’s debt and lease obligations.  Long-term pre-petition debt obligations,which are classified as liabilities subject to compromise, are included in “Note10 – Liabilities Subject to Compromise”. Maturities of long-term debt not subject to compromise, excludingcapital lease obligations, through December 31, 2009, are as follows (inmillions):

 

| 2005 |   | $  | 7      |   |
|------|--------|----|--------|--------|
| 2006 |   | 14 |   |
| 2007 |   | 25 |   |
| 2008 |   | 25 |   |
| 2009 |   | 25 |   |

 

13

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**Note 12 – Fleet Information andCommitments**

 

As shown in the following table, Northwestoperated a fleet of 409 aircraft at September 30, 2005, consisting of 342narrow-body and 67 wide-body aircraft. Northwest’s purchase commitments for aircraft as of September 30, 2005are also provided.  The Company isevaluating its overall fleet requirements and purchase commitments in light ofits financial condition and operational requirements.

 
| ** **                            | ** ** | ** **   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **    | ** ** | ** **  | ** ** | **Total**       | ** ** | **Aircraft**   | ** ** |
|---------------------------------------|------------|--------------|------------|------------|------------|-------------|------------|---------------|------------|-------------|------------|-----------------|------------|----------------|------------|
| ** **                            | ** ** | **Seating**  | ** ** | ** ** | ** ** | **Capital** | ** ** | **Operating** | ** ** | **Not  in** | ** ** | **Aircraft**    | ** ** | **on  Firm**   | ** ** |
| **Aircraft Type**                     | ** ** | **Capacity** | ** ** | **Owned**  | ** ** | **Lease**   | ** ** | **Lease**     | ** ** | **Service** | ** ** | **in  Service** | ** ** | **Order  (1)** | ** ** |
|                                  |       |         |       |       |       |        |       |          |       |        |       |            |       |           |       |
| **Passenger Aircraft**                |       |         |       |       |       |        |       |          |       |        |       |            |       |           |       |
| Airbus:                               |       |         |       |       |       |        |       |          |       |        |       |            |       |           |       |
| A319                                  |       | 124          |       | 62         |       | —      |       | 12            |       | —      |       | 74              |       | 7              |       |
| A320                                  |       | 148          |       | 43         |       | 4           |       | 31            |       | (1          | )          | 77              |       | 2              |       |
| A330-200                              |       | 243          |       | 7          |       | —      |       | —        |       | —      |       | 7               |       | 5              |       |
| A330-300                              |       | 298          |       | 11         |       | —      |       | —        |       | —      |       | 11              |       | 9              |       |
|                                  |       |         |       |       |       |        |       |          |       |        |       |            |       |           |       |
| Boeing:                               |       |         |       |       |       |        |       |          |       |        |       |            |       |           |       |
| 787-800                               |       | 221          |       | —     |       | —      |       | —        |       | —      |       | —          |       | 18             |       |
| 757-200                               |       | 180-184      |       | 32         |       | 5           |       | 18            |       | (7          | )          | 48              |       | —         |       |
| 757-300                               |       | 224          |       | 16         |       | —      |       | —        |       | —      |       | 16              |       | —         |       |
| 747-200                               |       | 353-430      |       | 3          |       | —      |       | 2             |       | (1          | )          | 4               |       | —         |       |
| 747-400                               |       | 403          |       | 4          |       | —      |       | 12            |       | —      |       | 16              |       | —         |       |
|                                  |       |         |       |       |       |        |       |          |       |        |       |            |       |           |       |
| DC9                                   |       | 78-125       |       | 141        |       | —      |       | —        |       | (14         | )          | 127             |       | —         |       |
| DC10                                  |       | 273          |       | 13         |       | —      |       | 7             |       | (4          | )          | 16              |       | —         |       |
|                                  |       |         |       | 332        |       | 9           |       | 82            |       | (27         | )          | 396             |       | 41             |       |
|                                  |       |         |       |       |       |        |       |          |       |        |       |            |       |           |       |
| **Freighter Aircraft**                | ** ** |         |       |       |       |        |       |          |       |        |       |            |       |           |       |   |
| Boeing  747-200F                      |       |         |       | 9          |       | —      |       | 5             |       | (1          | )          | 13              |       | —         |       |
|                                  |       |         |       |       |       |        |       |          |       |        |       |            |       |           |       |
| **Total Northwest Operated Aircraft** | ** ** | **341**      | ** ** | **9**      | ** ** | **87**      | ** ** | **(28**       | **)**      | **409**     | ** ** | **41**          | ** ** |
| ** **                            | ** ** | ** **   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **    | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** |
| **Regional Aircraft**                 | ** ** |         |       |       |       |        |       |          |       |        |       |            |       |           |       |   |
| BAE  AVRO RJ85                        |       | 69           |       | 10         |       | —      |       | 25            |       | —      |       | 35              |       | —         |       |
| Bombardier  CRJ-200/440               |       | 44-50        |       | —     |       | —      |       | 141           |       | (2          | )          | 139             |       | 13             |       |
| SAAB  340                             |       | 30-34        |       | —     |       | —      |       | 49            |       | —      |       | 49              |       | —         |       |
|                                  |       |         |       |       |       |        |       |          |       |        |       |            |       |           |       |
| **Total Airlink Operated Aircraft**   | ** ** | **10**       | ** ** | **—** | ** ** | **215**     | ** ** | **(2**        | **)**      | **223**     | ** ** | **13**          | ** ** |
|                                  |       |         |       |       |       |        |       |          |       |        |       |            |       |           |       |
| **Total Aircraft**                    | ** ** | ** **   | ** ** | **351**    | ** ** | **9**       | ** ** | **302**       | ** ** | **(30**     | **)**      | **632**         | ** ** | **54**         | ** ** |

 
| (1) |   | Aircraft  on firm order represent aircraft commitments the Company entered into prior  to its Chapter 11 filing date. The Company is evaluating these purchase  commitments as part of its overall plan of reorganization. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

14

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**Note 13 – ComprehensiveIncome (Loss)**

 

      Comprehensive income (loss) consisted ofthe following (in millions):

 
| ** **                                                       | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| ** **                                                       |       | **2005**               |       | 2004                  | ** ** | **2005** |   | 2004 |   |
| Net income  (loss)                                               | ** ** | **$**                  | **(469**   | **)**                 | $          | (38 | ) | **$** | **(1,224** | **)** | $ | (436 | ) |
| Change in  unrealized gain/loss on available-for-sale securities | ** ** | **(2**                 | **)**      | 2                     |       | **(5** | **)** | (5 | ) |
| Change in  deferred gain/loss from hedging activities            | ** ** | **(2**                 | **)**      | 41                    |       | **11** | ** ** | 38 |   |
| Foreign  currency translation adjustments                        | ** ** | **(1**                 | **)**      | —                |       | **(6** | **)** | (1 | ) |
| Comprehensive  income (loss)                                     | ** ** | **$**                  | **(474**   | **)**                 | $          | 5 |   | **$** | **(1,224** | **)** | $ | (404 | ) |

 

**Note 14 – Pension and Other Postretirement Benefits**

 

The Company has several noncontributorypension plans covering substantially all of its employees.  The benefits for these plans are basedprimarily on years of service and, in some cases, employee compensation.   The amounts disclosed below do not reflectthe impact of any changes to the benefit plans that might be contemplated as aresult of the bankruptcy filing or negotiations with the Company’s unions underthe CBAs.

 

The componentsof net periodic cost of defined benefit plans included the following (inmillions):

 
| ** **                                      |       | **Three months ended September 30** |       |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      |       | **Pension Benefits**                |       | **Other Benefits** |   |
| ** **                                      |       | **2005**                            | ** ** | 2004 |   | **2005** | ** ** | 2004 |   |
| Service cost                                    | ** ** | **$**                               | **72**     | ** ** | $ | 60 |   | **$** | **8** | ** ** | $ | 7 |   |
| Interest  cost                                  | ** ** | **137**                             | ** ** | 132 |   | **14** | ** ** | 13 |   |
| Expected  return on plan assets                 | ** ** | **(128**                            | **)**      | (125 | ) | **—** | ** ** | — |   |
| Amortization  of prior service cost             | ** ** | **19**                              | ** ** | 19 |   | **(2** | **)** | (2 | ) |
| Recognized  net actuarial loss and other events | ** ** | **120**                             | ** ** | 22 |   | **8** | ** ** | 6 |   |
| Net periodic  benefit cost                      | ** ** | **$**                               | **220**    | ** ** | $ | 108 |   | **$** | **28** | ** ** | $ | 24 |   |

 
| ** **                                      |       | **Nine  months ended September 30** |       |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      |       | **Pension  Benefits**               |       | **Other  Benefits** |   |
| ** **                                      |       | **2005**                            | ** ** | 2004 |   | **2005** | ** ** | 2004 |   |
| Service cost                                    | ** ** | **$**                               | **218**    | ** ** | $ | 181 |   | **$** | **25** | ** ** | $ | 22 |   |
| Interest  cost                                  | ** ** | **412**                             | ** ** | 396 |   | **42** | ** ** | 39 |   |
| Expected  return on plan assets                 | ** ** | **(383**                            | **)**      | (375 | ) | **—** | ** ** | — |   |
| Amortization  of prior service cost             | ** ** | **56**                              | ** ** | 57 |   | **(7** | **)** | (6 | ) |
| Recognized  net actuarial loss and other events | ** ** | **196**                             | ** ** | 67 |   | **23** | ** ** | 18 |   |
| Net periodic  benefit cost                      | ** ** | **$**                               | **499**    | ** ** | $ | 326 |   | **$** | **83** | ** ** | $ | 73 |   |

 

 

EffectiveAugust 31, 2005, the Company froze future benefit accruals under the NorthwestAirlines Pension Plan for Salaried Employees, a defined benefit plan thatcovers approximately 3,600 active management and salaried personnel.  Under a plan freeze, no additional service iscredited but defined benefits previously earned are unaffected.  For periods after August 31, 2005,replacement pension coverage will be provided for management and salariedpersonnel through a 401(k)-type defined contribution plan.  In connection with the plan freeze, theCompany recorded a one time non-cash curtailment charge of $28 million.

 

In addition,the Company recorded a $54 million non-cash pension curtailment charge duringthe third quarter 2005 for the Northwest Airlines Pension Plan for Contractemployees as the result of contract employee headcount reductions that occurredin conjunction with the Aircraft Mechanics Fraternal Association (“AMFA”)strike.  Should the Company 

 

15

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successfully negotiate to freeze its other definedbenefit plans with its unionized workforce, additional non-cash curtailmentcharges of approximately $400 million would be recorded.

 

As a result ofthe Company’s voluntarily filing for Chapter 11 on September 14, 2005, theCompany did not make scheduled minimum cash contributions to its qualifieddefined benefit pension plans for September and October in the amounts of $59million and $83 million, respectively.

 

During thesecond quarter of 2005, the Company changed its method of recognizing certainpension plan administrative expenses associated with the Company’s definedbenefit pension plans and now includes them as a service cost component of netperiodic pension cost.  These expensesinclude trustee fees, other administrative expenses and insurance premiums paidto the PBGC, all of which were previously reflected as a reduction in themarket value of plan assets and therefore amortized with other asset gains andlosses.  The Company believes this changeis preferable because it more appropriately ascribes the expenses to the periodin which they are incurred.  Thecumulative effect of applying this change to net periodic pension expense inprior years is $69.1 million, which has been retroactively recorded as ofJanuary 1, 2005, and is included in the Company’s Condensed ConsolidatedStatements of Operations for the nine months ended September 30, 2005.  The impact of this change on the three andnine months ended September 30, 2005 was an increase in net periodic benefitcost of $9.4 million and $28.2 million, respectively.

 

On April 10,2004, the President signed into law the Pension Funding Equity Act (the “PensionAct”), which reduced current contributions for certain companies, including theDebtors.  Including the effect of thePension Act, the Company’s 2005 calendar year cash contributions to qualified definedbenefit pension plans were expected to approximate $411 million.  Through September 14, 2005, the Company had contributed$268 million to these plans and, as a result of its bankruptcy filing on thatdate, does not plan to make additional contributions during the currentcalendar year.  Absent furtherlegislative relief, authorization by the IRS to reschedule futurecontributions, contractual relief under the Company’s collective bargainingagreements, substantial changes in interest rates, or asset returnssignificantly above the 9.5% annual rate currently assumed, the Company will notbe able to meet its contribution requirements for 2006 and beyond based oncurrent funding projections.  As a resultof the Chapter 11 filings, the Company has suspended making the full amount ofrequired minimum funding contributions to its defined benefit pensionplans.  The Company currently intends,however, to continue timely to pay the normal cost component of the plans’minimum funding requirements relating to service rendered post-petition.  The Company has appointed an independentfiduciary for all of its tax-qualified defined benefit pension plans, who ischarged with pursuing, on behalf of the plans, claims to recover minimumfunding contributions due under federal law, to the extent that the Debtors arenot continuing to fund the plans due to bankruptcy prohibitions.  The plans’ level of underfunding is expectedto increase during the Chapter 11 cases.

 

On July 26,2005, the U.S. Senate Finance Committee reported out of committee acomprehensive pension reform bill that included a provision that would affordairlines a 14-year period to amortize unfunded amounts in frozen definedbenefit pension plans.  Based on theCompany’s preliminary understanding of the bill’s contents, we believe itprovides a potential solution that would significantly reduce the definedbenefit plans’ estimated 2006 and 2007 pension funding requirements, ifenacted.   If the Company obtainssufficient pension relief, on an expedited basis, and can avoid additionalmaterially adverse business developments, it will attempt to preserve itspension plans.  Otherwise, termination ofthe defined benefit pension plans would become inevitable.

 

**Note 15 – Subsequent Events**

 

On October 13,2005 Mesaba Aviation, Inc. (“Mesaba”), a wholly owned subsidiary of MAIRHolding, Inc. (“MAIR”), filed a voluntary petition for relief under Chapter 11of the United States Bankruptcy Code in the District of Minnesota (Case No.05-39258 (GFK)).  In accordance with theprovisions of the Bankruptcy Code, Mesaba will continue to operate its businessas a debtor-in-possession.  The Companyis currently unable to determine the impact of Mesaba’s bankruptcy on itsoperations or financial condition with any certainty.

 

The Company owns 27.5%of MAIR’s common stock and accounts for this investment under the equity methodof accounting.  The book value of thisinvestment as of September 30, 2005, was $44.3 million.  Any losses incurred by Mesaba during its bankruptcywould negatively impact the Company’s net earnings, as well as the book valueof the Company’s investment in MAIR, as Mesaba’s financial resultsare fully consolidated into MAIR’s net income (loss) applicable tocommon stockholders.

 

16

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

 

**Overview**

 

OnSeptember 14, 2005, NorthwestAirlines Corporation and 12 of its direct and indirect subsidiaries filedvoluntary petitions for relief under Chapter 11 of the United States BankruptcyCode with the United States Bankruptcy Court for the Southern District of NewYork.  Subsequently, on September 30,2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWA Corp., alsofiled a voluntary petition for relief under Chapter 11.  The Bankruptcy Court is jointly administeringthese cases under the caption “In re Northwest Airlines Corporation, et al.,Case No. 05-17930 (ALG)”.  Theconsolidated financial statements shown herein include certain subsidiariesthat did not file to reorganize under Chapter 11.  The assets and liabilities of thesesubsidiaries are not considered material to the consolidated financialstatements.  See “Note 2 – VoluntaryReorganization Under Chapter 11” for additional information related to theCompany’s rights, risks and obligations under the Chapter 11 filing.

 

The competitivepressures on pre-deregulation carriers that are operating today (“LegacyCarriers”) have dramatically intensified in recent years due to the increasinglyrapid growth of low cost carriers (“LCCs”), which have much lower labor andoperating costs and can profitably charge much lower fares.  Legacy Carriers have been forced to matchthese fares in order to stay competitive, even though such fares are below theirfully allocated costs.  Largely as aresult, Legacy Carriers as a group have lost almost $35 billion since January1, 2001, and their long-term debt has increased from $26 billion to almost $56billion as of June 30, 2005.  Since 2001,the Company has lost nearly $4.0 billion and its long-term debt has increasedfrom approximately $4.0 billion to $9.0 billion; its unfunded pensionliabilities have gone from a deficit of $486 million to a deficit of $3.8billion; and its shareholders’ equity has gone from positive $231 million to adeficit of $4.3 billion.

 

The effect of thesecompetitive changes has been amplified by a corresponding change in the airlinedistribution system.  Increasingly,tickets are being purchased over the Internet rather than through traditionaltravel agencies.  These Internet travelsites use sophisticated search engines, which can scan multiple airline faresand then display those fares based on various criteria, including price.  The result is a significant increase in thetransparency of airline pricing with a corresponding emphasis on each airlinematching the lowest available fare in the market.

 

The efforts of theCompany – and of all the Legacy Carriers – to restructure theiroperations to cope with the radical changes in the airline industry broughtabout by the growth of the LCCs have been significantly complicated by theenormous increase in the price of jet fuel. The Company currently expects that its fuel bill for 2005 will beapproximately $3.2 billion.  Thiscompares to $2.2 billion for 2004 and $1.6 billion for 2003.  There have been numerous attempts by variousLegacy Carriers to raise fares to recoup these fuel expenses but, because ofthe competitive pressure asserted by the LCCs, most of these attempts have beeneither unsuccessful or only partially successful.  In fact, the industry’s yields have declined2.7% since 2003.

 

The Company attempted torestructure its business to respond to this competitive market environmentvoluntarily, rather than resorting to a bankruptcy filing, but was unable to doso.  The Company intends to use theprovisions of Chapter 11 to reorganize its business on a sustainable basis.  The Chapter 11 process will allow the Companyto realize three major goals essential to its transformation: first, acompetitive cost structure, including both labor and non-labor costs; second, amore efficient business model that will allow the Company to continue todeliver superior choice and service to its customers; and third, a strengthenedbalance sheet with debt and equity levels consistent with long-termprofitability.

 

*Labor Cost Restructuring.*The vast majority of the Company’s employees workunder the terms of CBAs.  The Company iscurrently in discussions with its labor groups, striving to reach consensualagreements to obtain competitive wage scales, work rules and benefit plans inefforts to attain an overall $1.4 billion in annual labor cost savings.  As of September 30, 2005, the Company hadachieved approximately $490 million of its targeted savings through a bridgeagreement with its Air Line Pilots Association (“ALPA”) represented employees,savings generated by the imposed AMFA contract, and pay and benefit reductionsfrom its management employees.

 

On August 19, 2005,the AMFA, which represents mechanics, cleaners and custodians at Northwest,declined to send the terms of the Company’s final contract offer to itsmembership for ratification and called a strike against the 

 

17

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Company.  As aresult, the Company implemented its previously developed contingency plans.  Since August 19, the Company has heldmultiple negotiations with AMFA, but no resolution has been reached.  The Company has subsequently replaced theaircraft mechanics and cleaners who went on strike with a combination of newlyhired personnel, AMFA members who crossed the picket lines to reclaim theirjobs, and third party contractors.  Ofthe total replacement workers, approximately 880 will be permanent Northwestemployees.

 

TheBankruptcy Code provides special treatment for CBAs.  In particular, Section 1113(c) of theBankruptcy Code permits the Company to move to reject its CBAs if the Companyfirst satisfies a number of statutorily prescribed substantive and proceduralprerequisites and obtains the Bankruptcy Court’s approval of therejection.  After bargaining in goodfaith and sharing relevant information with its unions, a debtor must makeproposals to modify its existing CBAs based on the most complete and reliableinformation available at the time.  Theproposed modifications must be necessary to permit the reorganization of a debtorand must provide that all the affected parties are treated fairly and equitably. Ultimately, rejection of the CBAs isappropriate if the unions refuse to agree to a debtor’s necessary proposal “withoutgood cause” and the Bankruptcy Court determines that the balance of the equitiesfavors rejection.

 

Afterfiling its Bankruptcy Petitions, but before filing a motion under Section 1113with the Bankruptcy Court, the Company submitted its proposals under Section1113 to its Unions (“Unions”).   Havingthus satisfied the requirements outlined above, the Company filed anapplication on October 12, 2005, to reject, under section 1113(c) of the BankruptcyCode, nine CBAs between the Company and the six Unions that represent the vastmajority of the Company’s employees.  Informulating its Section 1113 proposal, the Company set out goals for the netamount of savings needed from each labor group in order to achieve overallcompetitive labor costs.  The Company istargeting approximately $1.4 billion in annual labor cost savings, based on a “steadystate” level of operations.  Such savingsdo not include pension restructuring, which the Company also anticipates.  As described in “Note 14 – Pension andOther Postretirement Benefits”, new pension legislation is currently underconsideration.  If a legislative solutionarrives expeditiously and provides sufficient relief, and the Company is able toavoid other adverse economic events in its business environment, the Companyproposes to “freeze” its underfunded defined benefit plans, thereby preservingall vested benefits for current and future retirees.  The Company proposes, in place of definedbenefit plans, to offer a defined contribution plan for all employees at 5% ofwages, or plans that are of equivalent cost to the Company.  Relief under Section 1113(c) or new consensualCBAs is essential to the Company’s ability to achieve competitive labor costs.  Even if the Company is successful inachieving competitive labor costs (whether through rejecting the CBAs underSection 1113(c) or through consensual agreements), there can be no assurancethat this will not result in labor disruptions.

 

OnNovember 7, 2005, the Company reached interim labor cost savings agreementswith ALPA and the Professional Flight Attendants Association (“PFAA”).  The ALPA Master Executive Council agreed totemporary pay and other reductions of $215 million on an annualized basis and PFAAleaders agreed to cuts of $117 million, both on an annual “steady state” levelof operations.  In connection with theseagreements, the Company agreed to extend the first hearing date under Section1113(c) to no earlier than January 16, 2006. The ALPA agreement is subject tomembership ratification, and both agreements are contingent upon the imposition(either voluntarily or through Section 1113(e)) of comparable reductions onwork groups represented by the International Association of Machinists and AerospaceWorkers (“IAM”).

 

TheCompany was unable to reach an interim agreement with the IAM leadership andconsequently has filed a Section 1113(e) motion with the Bankruptcy Court thatseeks temporary wage and benefit reductions of $114 million from thatunion.  Northwest has asked for amid-November hearing date.  The Companyand the IAM continue to negotiate, in hopes of reaching a permanent costreduction agreement.

 

TheCompany reached tentative agreements on permanent wage and benefit reductionswith employees represented by the Aircraft Technical Support Association andThe Northwest Airlines Meteorology Association. The airline hopes to reach an agreement with the Transport Workers Unionof America in the near future.

 

*Non-laborCost Restructuring*.  Since 2001, the Company has achievedapproximately $1.7 billion of annual operating improvements through costreductions and revenue enhancement initiatives. The Company intends to obtain additional savings of $150 millionannually through further reductions in non-labor costs.  Areas targeted for reduction includetechnology related costs, distribution expenses, procurement costs and otheritems.  Additionally, cost reductionsthrough restructuring of the Company’s agreements with its regional carrierswill be pursued.

 

*Balance Sheet Restructuring*. In the face of mounting losses and prior to its bankruptcy filing, theCompany managed to remain in business through a strategy that includedborrowing cash and selling assets.  Thishad the unfortunate consequence of leaving the Company today with a very highdebt burden of $14 billion, which includes $5 billion of aircraft-related operatinglease commitments.  To successfullyrestructure and exit bankruptcy, the Company must eliminate excess debt andrecapitalize its balance sheet.  Withrespect to its aircraft-related debt, the Company intends to use the authority providedby its Chapter 11 proceedings to negotiate reductions in above-market 

 

18

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aircraft leases or, in cases where this is not possible, to return theaffected aircraft.   The Company willreduce unprofitable flying and re-optimize its network as part of this capacityreduction.

 

The bankruptcy filing triggered defaults on substantially all the Company’sdebt and lease obligations.  UnderSection 362 of the Bankruptcy Code, the filing of a bankruptcy petitionautomatically stays most actions against a debtor, including most actions tocollect pre-petition indebtedness or to exercise control over the property of adebtor’s estate.  Absent an order of theBankruptcy Court, substantially all pre-petition liabilities are subject tosettlement under the plan of reorganization.

 

Notwithstandingthe preceding general discussion of the automatic stay, the Debtors’ rights topossess and operate certain qualifying aircraft, aircraft engines and otheraircraft-related equipment that are leased or subject to a security interest orconditional sale contract are governed by a particular provision of theBankruptcy Code that specifies different treatment.  Section 1110 provides that unless the Debtorstake certain action within 60 days after the Petition Date or such later dateas is agreed by the applicable lessor, secured party, or conditional lender,the contractual rights of such financier to take possession of such equipmentand to enforce any of its other rights or remedies under the applicableagreement are not limited or otherwise affected by the automatic stay or anyother provision of the Bankruptcy Code.  This applies to substantially all of theCompany’s aircraft.  The Company iscurrently in negotiations with the affected parties.

 

**Operating Statistics – Three and nine monthsended September 30, 2005 and 2004**

 

Comparative operatingstatistics and results for the three and nine months ended September 30, 2005and 2004, are provided below.  Asdescribed in “Note 1 – Basis of Presentation”, results for the most recentperiod are presented in accordance with SOP 90-7 and on a going concern basis.

 

Information with respect to the Company’s operatingstatistics follows (1):

 
| ** **                                                 |       | **Three  months ended** | ** ** | ** **  | ** ** | **Nine  months ended** | ** ** | ** **  |     |
|------------------------------------------------------------|------------|-------------------------|------------|-------------|------------|------------------------|------------|-------------|----------|
| ** **                                                 |       | **September  30**       | ** ** | **Percent** | ** ** | **September  30**      | ** ** | **Percent** |     |
| ** **                                                 |       | **2005**                |       | 2004        | ** ** | **Change**             | ** ** | **2005**    |     | 2004 | ** ** | **Change** |   |
| Scheduled service:                                         |       |                    |       |        |       |                   |       |        |     |   |   |   |   |
| Available seat  miles (ASM) (millions)                     | ** ** | **24,160**              |       | 23,814      |       | 1.5                    | ** ** | **70,697**  |     | 68,409 |   | 3.3 |   |
| Revenue  passenger miles (RPM) (millions)                  | ** ** | **20,437**              |       | 19,744      |       | 3.5                    | ** ** | **58,625**  |     | 55,225 |   | 6.2 |   |
| Passenger load  factor                                     | ** ** | **84.6**                | %          | 82.9        | %          | 1.7                    | pts.       | **82.9**    | %        | 80.7 | % | 2.2 | pts.  |
| Revenue  passengers (millions)                             | ** ** | **15.0**                |       | 14.8        |       | 1.4                    | ** ** | **43.6**    |     | 41.6 |   | 4.8 |   |
| Passenger  revenue per RPM (yield)                         | ** ** | **12.14**               | *¢*   | 11.63       | *¢*   | 4.4                    | ** ** | **11.71**   | *¢* | 11.66 | *¢* | 0.4 | * * |
| Passenger  revenue per ASM (RASM)                          | ** ** | **10.27**               | *¢*   | 9.64        | *¢*   | 6.5                    | ** ** | **9.71**    | *¢* | 9.41 | *¢* | 3.2 | * * |
| Total operating ASM  (millions)                            | ** ** | **24,186**              |       | 23,839      |       | 1.5                    | ** ** | **70,816**  |     | 68,524 |   | 3.3 |   |
| Passenger service  operating expense per total ASM (2) (3) | ** ** | **11.82**               | *¢*   | 10.24       | *¢*   | 15.4                   | ** ** | **11.43**   | *¢* | 10.36 | *¢* | 10.3 |   |
| Pension curtailment  charges per total ASM                 | ** ** | **0.34**                | *¢*   | 0.00        | *¢*   | n/m                    | ** ** | **0.11**    | *¢* | 0.00 | *¢* | n/m |   |
| Aircraft and aircraft  related write-downs per total ASM   | ** ** | **0.00**                | *¢*   | 0.00        | *¢*   | n/m                    | ** ** | **0.07**    | *¢* | 0.15 | *¢* | (53.3 | ) |
| Mainline fuel expense  per total ASM                       | ** ** | **3.24**                | *¢*   | 2.26        | *¢*   | 43.4                   | ** ** | **2.88**    | *¢* | 2.02 | *¢* | 42.6 |   |
| Cargo ton miles  (millions)                                | ** ** | **633**                 |       | 579         |       | 9.3                    | ** ** | **1,791**   |     | 1,697 |   | 5.5 |   |
| Cargo revenue per ton  mile                                | ** ** | **39.55**               | *¢*   | 36.45       | *¢*   | 8.5                    | ** ** | **38.80**   | *¢* | 34.59 | *¢* | 12.2 | * * |
| Fuel gallons consumed  (millions)                          | ** ** | **462**                 |       | 459         |       | 0.7                    | ** ** | **1,348**   |     | 1,322 |   | 2.0 |   |
| Average fuel cost per  gallon, excluding taxes             | ** ** | **184.52**              | *¢*   | 124.45      | *¢*   | 48.3                   | ** ** | **162.75**  | *¢* | 111.19 | *¢* | 46.4 | * * |
| Number of operating  aircraft at end of period             | ** ** | ** **              |       |        |       |                   |       | **409**     |     | 436 |   | (6.2 | ) |

 
| (1) |   | All statistics exclude Northwest Airlink regional  carriers, which is consistent with how the Company reports statistics to the  Department of Transportation (“DOT”) and is comparable to statistics reported  by other major network airlines.                              |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (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. |

 

 

19

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| (3) |   | Passenger service operating expense excludes the  following items unrelated to passenger service operations (in millions): |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------|

 
| ** **                                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| ** **                                             |       | **2005**               |       | 2004                  | ** ** | **2005** |   | 2004 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Freighter operations                                   | ** ** | **$**                  | **223**    |                  | $          | 150 | ** ** | **$** | **578** |   | $ | 442 |   |
| MLT Inc. – net of  intercompany eliminations | ** ** | **42**                 |       | 44                    | ** ** | **158** |   | 153 |   |
| Regional carriers                                      | ** ** | **414**                |       | 322                   | ** ** | **1,162** |   | 866 |   |
| Other                                                  | ** ** | **10**                 |       | 15                    | ** ** | **34** |   | 43 |   |
|                                                        |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

**Resultsof Operations – Three months ended September 30, 2005 and 2004**

 

*OperatingRevenues*.  Operating revenues increased 10.7% ($326million), the result of higher system passenger, regional carrier, cargo andother revenues.

 

System passenger revenuesincreased 8.1% ($185 million).  Thefollowing analysis by region is based on information reported to the DOT andexcludes regional carriers:

 
| ** **                         | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2005**                           |       |       |       |         |       |        |       |         |       |
| Passenger  revenues (in millions)  |       | $          | 2,482      |         | $          | 1,536       |       | $            | 576        |   | $ | 370 |   |
|                               |       |       |       |         |       |        |       |         |       |
| **Increase (Decrease) from 2004:** |       |       |       |         |       |        |       |         |       |
| Passenger  revenues (in millions)  |       | $          | 185        |         | $          | 68          |       | $            | 45         |   | $ | 72 |   |
| Percent                            |       | 8.1        | %          | 4.6          | %          | 8.5         | %          | 24.2         | %          |
|                               |       |       |       |         |       |        |       |         |       |
| Scheduled  service ASMs (capacity) |       | 1.5        | %          | (0.4         | )%         | (0.1        | )%         | 12.8         | %          |
| Scheduled  service RPMs (traffic)  |       | 3.5        | %          | 2.7          | %          | 1.0         | %          | 11.4         | %          |
| Passenger load  factor             |       | 1.7        | pts.       | 2.5          | pts.       | 0.9         | pts.       | (1.2         | ) pts.     |
| Yield                              |       | 4.4        | %          | 1.9          | %          | 7.4         | %          | 11.3         | %          |
| Passenger RASM                     |       | 6.5        | %          | 5.1          | %          | 8.6         | %          | 9.8          | %          |
|                                    |            |            |            |              |            |             |            |              |            |  |  |  |  |  |

 

 

As indicated in the above table:

•                  Domestic passenger revenues increased 4.6%, primarily due to highertraffic and a slight rise in yields.

•                  Pacific passenger revenues rose 8.5% due principally to substantiallyimproved yields.

•                  Atlantic passenger revenues advanced over 24% due to a sharp rise in bothtraffic and yields on significantly more capacity.

 

Regional carrier revenuesincreased 18.4% ($56 million) to $360 million, due primarily to the increasedcapacity from 32 additional Bombardier CRJ aircraft that have entered servicesince September 30, 2004.

 

Cargo revenues increased18.5% ($39 million) to $250 million due to a 9.3% rise in ton miles flown and 8.5%higher yields.  Other revenue increased19.2% ($46 million) as a result of increased partner revenue, higher ticketchange fees and other non-transportation service fees.

 

*Operating Expenses*. Operating expenses increased 19.2% ($572 million).  The following table and notes presentoperating expenses for the three months ended September 30, 2005 and 2004 anddescribe significant year-over-year variances:

 

20

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| ** **                                 | ** ** | **Three  months ended** | ** ** | **Increase**   | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                                 | ** ** | **September  30**       | ** ** | **(Decrease)** | ** ** | **Percent**    | ** ** | ** ** | ** ** |
| ***(in millions)***                        | ** ** | **2005**                |       | 2004           |       | **from  2004** |       | **Change** |       | **Note** |   |
| **Operating Expenses**                     |       |                    |       |           |       |           |       |       |       |   |   |
| Salaries, wages and benefits               | ** ** | **$**                   | **1,000**  | ** **     | $          | 952            |       | $          | 48         |   | 5.0 | % | A |   |
| Aircraft fuel and taxes                    | ** ** | **893**                 |       | 605            |       | 288            |       | 47.6       |       | B |   |
| Selling and marketing                      | ** ** | **206**                 |       | 209            |       | (3             | )          | (1.4       | )          | C |   |
| Aircraft maintenance materials and repairs | ** ** | **208**                 |       | 121            |       | 87             |       | 71.9       |       | D |   |
| Other rentals and landing fees             | ** ** | **158**                 |       | 154            |       | 4              |       | 2.6        |       | E |   |
| Depreciation and amortization              | ** ** | **133**                 |       | 126            |       | 7              |       | 5.6        |       | F |   |
| Aircraft rentals                           | ** ** | **102**                 |       | 109            |       | (7             | )          | (6.4       | )          | G |   |
| Regional carrier expenses                  | ** ** | **414**                 |       | 322            |       | 92             |       | 28.6       |       | H |   |
| Other                                      | ** ** | **431**                 |       | 375            |       | 56             |       | 14.9       |       | I |   |
| **Total  operating expenses**              | ** ** | **$**                   | **3,545**  | ** **     | $          | 2,973          |       | $          | 572        |   | 19.2 | % |   |   |
|                                            |            |                         |            |                |            |                |            |            |            |  |  |  |  |  |  |

 
| A. |   | Salaries, wages and benefits increased primarily due  to pension curtailment charges, partially offset by the wages foregone during  the AMFA strike and pilot and management reductions that became effective as  of December 1, 2004. |
|----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| B. |   | Aircraft fuel and taxes were higher due to a 48.3%  increase in the average fuel cost per gallon to $1.85 (net of hedging  transactions) and 0.7% more gallons consumed.                                                                |
| C. |   | Selling and marketing were essentially flat versus  the previous year.                                                                                                                                                                  |
| D. |   | Aircraft maintenance materials and repairs increased  by $87 million, due primarily to outsourcing required by the AMFA strike and  a higher volume of engine maintenance work.                                                         |
| E. |   | Other rentals and landing fees increased due to  higher rates across the system.                                                                                                                                                        |
| F. |   | Depreciation expense increased primarily due to  additional aircraft and lower salvage values, partially offset by impairment  charges booked in prior periods and certain aircraft becoming fully  depreciated.                        |
| G. |   | Aircraft rental expense decreased primarily due to  aircraft purchased off lease and charges taken on leased aircraft recorded in  June 2005.                                                                                           |
| H. |   | The $92 million increase was primarily driven by  increased regional carrier capacity and higher regional carrier fuel costs.                                                                                                           |
| I. |   | Other expenses (which include MLT operating  expenses, outside services, insurance, passenger food, personnel expenses,  communication expenses and supplies) increased $56 million due to outsourcing  and contingency planning.       |

 

*OtherIncome and Expense.*  Non-operating expense increased 157%($184 million) primarily due to reorganization expenses that totaled $159million.  See “Note 7 – ReorganizationRelated Items” for additional information related to reorganization expenses.

 

**Resultsof Operations – Nine months ended September 30, 2005 and 2004**

 

      *Operating Revenues*.  Operating revenues increased 9.9% ($845million), the result of higher system passenger, regional carrier, cargo andother revenues.

 

System passenger revenuesincreased 6.6% ($424 million).  The followinganalysis by region is based on information reported to the DOT and excludesregional carriers:

 

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** **
| ** **                         | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2005**                           |       |       |       |         |       |        |       |         |       |
| Passenger  revenues (in millions)  |       | $          | 6,864      |         | $          | 4,433       |       | $            | 1,526      |   | $ | 905 |   |
|                               |       |       |       |         |       |        |       |         |       |
| **Increase (Decrease) from 2004:** |       |       |       |         |       |        |       |         |       |
| Passenger  revenues (in millions)  |       | $          | 424        |         | $          | 103         |       | $            | 174        |   | $ | 147 |   |
| Percent                            |       | 6.6        | %          | 2.4          | %          | 12.9        | %          | 19.4         | %          |
|                               |       |       |       |         |       |        |       |         |       |
| Scheduled  service ASMs (capacity) |       | 3.3        | %          | 0.8          | %          | 5.0         | %          | 12.0         | %          |
| Scheduled  service RPMs (traffic)  |       | 6.2        | %          | 5.0          | %          | 4.8         | %          | 13.5         | %          |
| Passenger load  factor             |       | 2.2        | pts.       | 3.2          | pts.       | (0.2        | ) pts.     | 1.2          | pts.       |
| Yield                              |       | 0.4        | %          | (2.5         | )%         | 7.8         | %          | 5.1          | %          |
| Passenger RASM                     |       | 3.2        | %          | 1.5          | %          | 7.4         | %          | 6.5          | %          |

 

As indicated in the above table:

•                  Domestic passenger revenues increased 2.4% due to higher traffic, partiallyoffset by lower yields.

•                  Pacific passenger revenues showed an increase of almost 13% due tosignificantly improved yields and higher traffic on additional capacity.

•                  Atlantic passenger revenues increased 19.4% due to a strong rise intraffic and improved yields on significantly more capacity.

 

Regional carrier revenuesincreased 23.3% ($185 million) to $980 million, due primarily to the increasedcapacity from 32 additional Bombardier CRJ aircraft that have entered servicesince September 30, 2004.

 

Cargo revenues increased18.4% ($108 million) to $695 million due to 12.2% higher yields and 5.5% moreton miles flown.  Other revenue increased18.2% ($128 million) as a result of increased partner revenue, rental revenue,higher ticket change fees and other non-transportation service fees.

 

*Operating Expenses*. Operating expenses increased 16.5% ($1.4 billion).  The following table and notes presentoperating expenses for the nine months ended September 30, 2005 and 2004 anddescribe significant year-over-year variances:

 
| ** **                                 | ** ** | **Nine  months ended** | ** ** | **Increase**   | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                                 | ** ** | **September  30**      | ** ** | **(Decrease)** | ** ** | **Percent**    | ** ** | ** ** | ** ** |
| ***(in millions)***                        | ** ** | **2005**               |       | 2004           |       | **from  2004** | ** ** | **Change** | ** ** | **Note** |   |
| **Operating Expenses**                     |       |                   |       |           |       |           |       |       |       |   |   |
| Salaries, wages and benefits               | ** ** | **$**                  | **2,933**  | ** **     | $          | 2,853          |       | $          | 80         |   | 2.8 | % | A |   |
| Aircraft fuel and taxes                    | ** ** | **2,313**              |       | 1,554          |       | 759            |       | 48.8       |       | B |   |
| Selling and marketing                      | ** ** | **634**                |       | 588            |       | 46             |       | 7.8        |       | C |   |
| Aircraft maintenance materials and repairs | ** ** | **509**                |       | 341            |       | 168            |       | 49.3       |       | D |   |
| Other rentals and landing fees             | ** ** | **482**                |       | 449            |       | 33             |       | 7.3        |       | E |   |
| Depreciation and amortization              | ** ** | **413**                |       | 504            |       | (91            | )          | (18.1      | )          | F |   |
| Aircraft rentals                           | ** ** | **341**                |       | 338            |       | 3              |       | 0.9        |       | G |   |
| Regional carrier expenses                  | ** ** | **1,162**              |       | 866            |       | 296            |       | 34.2       |       | H |   |
| Other                                      | ** ** | **1,242**              |       | 1,114          |       | 128            |       | 11.5       |       | I |   |
| **Total  operating expenses**              | ** ** | **$**                  | **10,029** | ** **     | $          | 8,607          |       | $          | 1,422      |   | 16.5 | % |   |   |
|                                            |            |                        |            |                |            |                |            |            |            |  |  |  |  |  |  |

 
| A. |   | Salaries, wages and  benefits increased slightly due to pension curtailment charges, annual wage  rate increases and increased capacity, partially offset by the wages foregone  during the AMFA strike and pilot and management reductions that became  effective as of December 1, 2004.                                                                            |
|----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| B. |   | Aircraft fuel and taxes  were higher due to a 46.4% increase in the average fuel cost per gallon to  $1.63 (net of hedging transactions) and 2% more gallons consumed. Fuel hedge  transactions reduced fuel costs by $20.8 million for the nine months ended  September 30, 2005 compared with a $2 million reduction for the nine months  ended September 30, 2004. |
| C. |   | Selling and marketing  increases were largely volume related, due to a 6.6% increase in passenger  revenue and a 23.3% increase in regional carrier revenues.                                                                                                                                                                                                         |

 

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| D. |   | Aircraft maintenance materials and repairs increased  by $168 million, due to increased outsourcing and a higher volume of engine  maintenance work.                                                                               |
|----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| E. |   | Other rentals and landing fees increased due to  higher rates across the system.                                                                                                                                                   |
| F. |   | Depreciation expense decreased primarily due to $104  million of aircraft and aircraft related impairments recorded in the second  quarter of 2004.                                                                                |
| G. |   | Aircraft rental expense was essentially unchanged  versus the previous year.                                                                                                                                                       |
| H. |   | The $296 million increase was primarily driven by  increased regional carrier capacity and higher regional carrier fuel costs.                                                                                                     |
| I. |   | Other expenses (which include MLT operating  expenses, outside services, insurance, passenger food, personnel expenses,  communication expenses and supplies) increased $128 million due to  outsourcing and contingency planning. |

 

*OtherIncome and Expense.*  Non-operating expense increased 38.3%($136 million) primarily due to higher interest expense related to increaseddebt levels, rising interest rates on variable rate debt, an $18 million lossrecognized on the sale of the Pinnacle Airlines note to Pinnacle Airlines Corp,and expenses in the amount of $159 million incurred during reorganization,partially offset by a $102 million gain from the sale of Prudential shares.  See “Note 7 – Reorganization RelatedItems” for additional information related to reorganization expenses.

 

**Liquidityand Capital Resources**

 

The matters described in “Liquidityand Capital Resources”, to the extent that they relate to future events orexpectations, may be significantly affected by the Company’s Chapter 11filing.  The Chapter 11 proceedings willinvolve, or may result in, various restrictions on the Company’s activities,limitations on financing, the need to obtain Bankruptcy Court and Creditors’Committee approval for various matters and uncertainty as to relationships withvendors, suppliers, customers and others with whom the Company may conduct orseek to conduct business.

 

Generally, under theBankruptcy Code, most of a debtor’s liabilities must be satisfied in fullbefore a debtor’s stockholders can receive any distribution on account of suchshares.   The Company currently believes that no valuewill be ascribed to the Company’s outstanding common stock and other equitysecurities in any plan of reorganization.

 

As of September 30, 2005,the Company had cash, cash equivalents and short-term investments of $2.11billion.  This amount includes $520million of restricted cash, cash equivalents and short-term investments,resulting in available liquidity of $1.59 billion.

 

*Cash Flows.*  Liquiditydecreased by $867 million during the nine months ended September 30, 2005,largely due to net losses, capital expenditures, debt payments, funding of theCompany’s irrevocable tax trust and certain cash holdbacks and deposits requiredby various transaction processors as a result of the Company’s bankruptcyfiling.

 

*OperatingActivities.*  Operating activities for the nine monthsended September 30, 2005, consumed $365 million, a difference of $778 millionfrom the $413 million of cash provided by operating activities for the ninemonths ended September 30, 2004.  Thisdecrease was largely driven by a higher net loss in 2005.

 

*CreditCard Processing Agreements.*  In September2005, Northwest executed an agreement that amended and restated its Credit CardProcessing Agreement with U.S. Bank.  Thenew agreement extends the term until December 31, 2008, includes a provisionthat will allow a certain level of funds to be withheld by U.S. Bank from creditcard sales, and secures all obligations under the agreement as well as those underthe Co-Branded Credit Card Agreement and the letter of credit facility withU.S. Bank referred to below.  Suchamounts withheld by U.S. Bank would be released in part or in whole upon Northwestmeeting certain requirements.  As part ofthis agreement, U.S. Bank is currently holding certain amounts, which are reflectedas components of Other assets on the Company’s Condensed Consolidated BalanceSheets.

 

The agreement alsoprovides for certain amendments to the Co-Branded Credit Card Agreement, whichwould similarly be extended until December 31, 2008.  New terms include an option for prepayment ofmiles and fees to Northwest from U.S. Bank under the WorldPerks program,subject to Northwest meeting certain requirements.  In addition, the agreement includes anextension of Northwest’s $98 million standby letter of credit facility throughApril 30, 2006, which allows for letters of credit to be outstanding throughApril 30, 2007.

 

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The Bankruptcy Courtentered a final order in October 2005 that authorized Northwest to assume theCredit Card Processing Agreement, to continue to perform under the Co-BrandedCredit Card Agreement, and to continue the $98 million standby letter of creditfacility.

 

In October 2005, Northwestexecuted an addendum to its airline card services agreement with AmericanExpress Travel Related Services Company, Inc., (“American Express”), that providesfor the retention of certain funds by American Express from credit card sales.  The initial reserve will increase or decreasebased on Northwest achieving certain requirements.  As part of this agreement, American Expressis currently holding certain amounts, which are reflected as components ofOther assets on the Company’s Condensed Consolidated Balance Sheets.  This agreement is subject to Bankruptcy Courtapproval.

 

*InvestingActivities.*  Investing activities for the nine monthsended September 30, 2005, consisted primarily of the sale of short-terminvestments, aircraft capital expenditures and other related costs.  Other related costs include engine purchases,costs to commission aircraft before entering revenue service, deposits onordered aircraft, facility improvements and ground equipment purchases.  Investing activities for the nine monthsended September 30, 2005 also included $279 million of additional funding tothe Company’s irrevocable tax trust, which increased the Company’s restrictedcash, cash equivalents and short-term investment balance.  See “Note 1 – Basis of Presentation” foradditional information regarding the Company’s irrevocable tax trust.  Additionally, investing activities during forthe nine months ended September 30, 2005, included proceeds of $102 millionfrom the sale of the Company’s note receivable from Pinnacle Airlines and $102million in proceeds from the sale of the Prudential Financial Inc. common stockreceived in conjunction with Prudential’s demutualization.  Investing activities for the nine monthsended September 30, 2004, other than aircraft and related purchases and short-terminvestments, included facility and aircraft modification programs.

 

*Financing Activities. *Financing activities in the nine months endedSeptember 30, 2005, included financing one Airbus A330 aircraft with long-termdebt, debt proceeds of $227 million from three secured financing agreements,debt proceeds of $101 million from the financing of certain of the Company’sproperties in Tokyo, repayment of $188 million unsecured notes due in March2005, plus payment of other debt and capital lease obligations.  Financing activities in the nine months endedSeptember 30, 2004, included financing one Airbus A330-200 and one AirbusA330-300 aircraft with long-term debt, the issuance of $300 million unsecurednotes due 2009, repayment of $138 million of 8.375% unsecured notes in March2004, repayment of $195 million 8.52% unsecured notes in April 2004, pluspayment of other debt and capital lease obligations.

 

In addition to the one Airbus A330 aircraft financedwith debt proceeds discussed above, the Company also took delivery of four AirbusA319, two Airbus A330 and 24 Bombardier CRJ aircraft during the nine monthsended September 30, 2005.  The four AirbusA319 and two Airbus A330 aircraft were acquired largely through non-cashtransactions with the manufacturer, which are reflected as debt on the Company’sConsolidated Balance Sheets but are not classified as cash flowactivities.  The Company entered intooperating leases with respect to the 24 Bombardier CRJ aircraft and thensubleased 22 of the aircraft to Pinnacle Airlines pursuant to the Company’sairline services agreement with Pinnacle Airlines.  The remaining two Bombardier CRJ aircraftwere subleased to Mesaba pursuant to the Company’s airline services agreementwith Mesaba.  In connection with the acquisitionof all 31 aircraft, the Company entered into long-term debt arrangements andoperating leases under which the aggregate amount of debt incurred totaled $213million and the minimum lease payments at inception equaled $561 million.

 

24

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Investing activities affecting cash flows and non-cashtransactions and leasing activities related to the initial acquisition ofaircraft consisted of the following for the nine months ended September 30:

 

| ** **                     | ** ** | **Investing Activities   Affecting Cash   Flows** | ** ** | **Non-cash   Transactions and   Leasing Activities** | ** ** |
|--------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                          | ** ** | **2004**                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                           |       |                                              |       |                                                 |       |   |   |   |   |
| Airbus A319                    | ** ** | **—**                                        |       | —                                               | ** ** | **4** |   | — |   |
| Airbus A330-300                | ** ** | **1**                                             |       | 1                                                    | ** ** | **2** |   | 2 |   |
| Airbus A330-200                | ** ** | **—**                                        |       | 1                                                    | ** ** | **—** |   | 3 |   |
| Bombardier CRJ – 440 | ** ** | **—**                                        |       | —                                               | ** ** | **12** |   | 24 |   |
| Bombardier CRJ – 200 | ** ** | **—**                                        |       | —                                               | ** ** | **12** |   | 9 |   |
| ** **                     |       | **1**                                             |       | 2                                                    | ** ** | **30** |   | 38 |   |

 

 

      *Debt.*  The bankruptcy filing triggered defaults onsubstantially all the Company’s debt and lease obligations.  Long-term pre-petition debt obligations,which are classified as liabilities subject to compromise, are included in “Note10 – Liabilities Subject to Compromise”. Maturities of long-term debt not subject to compromise, excludingcapital lease obligations, through December 31, 2009, are as follows (inmillions):

 

| 2005 | ** ** | $  | 7      | ** ** |
|------|------------|----|--------|------------|
| 2006 |       | 14 |   |
| 2007 |       | 25 |   |
| 2008 |       | 25 |   |
| 2009 |       | 25 |   |

 

*      Aircraft Commitments.* The Company is evaluating its overallfleet requirements and purchase commitments in light of its financial conditionand operational requirements.  Currently,committed expenditures for the 54 aircraft and related equipment on firm order,including estimated amounts for contractual price escalations and predeliverydeposits, will be approximately $224 million for the remainder of 2005, $708million in 2006, $857 million in 2007, $1.2 billion in 2008 and $486 million in2009.

 

*Pension Funding Obligations.*  The Company has several noncontributory pension planscovering substantially all of its employees. As of December 31, 2004, the Company’s plans were significantlyunderfunded as measured under the provisions of SFAS No. 87, *Employers’ Accounting for Pensions*(“SFASNo. 87”).  Projected benefit obligationsunder the plans totaled $9.25 billion, approximately $3.82 billion in excess ofthe fair value of plan assets. Unless future asset returns exceed planassumptions, and so long as the Company maintains the plans, the Company willhave to satisfy the underfunded amounts of the plans through cash contributionsover time.  The timing and amount offunding requirements also depend upon a number of other factors, includinginterest rates, potential changes in pension legislation, the Company’sdecision to make voluntary prepayments, applications for and receipt of waiversto reschedule contributions, and changes to pension plan benefits.  The Company’s recent bankruptcy filing mayalso impact the timing and amounts of future contributions.

 

On April 10, 2004, thePresident signed into law the Pension Act, which reduced current contributionsfor certain companies, including the Debtors. Including the effect of the Pension Act, the Company’s 2005 calendaryear cash contributions to qualified defined benefit pension plans wereexpected to approximate $411 million. Through September 14, 2005, the Company had contributed $268 million tothese plans and, as a result of its bankruptcy filing on that date, does notplan to make additional contributions during the current calendar year.  Absent further legislative relief,authorization by the IRS to reschedule future contributions, contractual reliefunder the Company’s collective bargaining agreements, substantial changes ininterest rates, or asset returns significantly above the 9.5% annual ratecurrently assumed,  the Company will notbe able to meet its contribution 

 

25

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requirements for 2006 and beyond based on current fundingprojections.  As a result of the Chapter11 filings, the Company has suspended making the full amount of requiredminimum funding contributions to its defined benefit pension plans.  The Company currently intends, however, tocontinue timely to pay the normal cost component of the plans’ minimum fundingrequirements relating to service rendered post-petition.  The Company has appointed an independentfiduciary for all of its tax-qualified defined benefit pension plans, who ischarged with pursuing, on behalf of the plans, claims to recover minimumfunding contributions due under federal law, to the extent that the Debtors arenot continuing to fund the plans due to bankruptcy prohibitions.  The plans’ level of underfunding is expectedto increase during the Chapter 11 cases.

 

On July 26, 2005, theU.S. Senate Finance Committee reported out of committee a comprehensive pensionreform bill that included a provision that would afford airlines a 14-yearperiod to amortize unfunded amounts in frozen defined benefit pension plans.  Based on the Company’s preliminaryunderstanding of the bill’s contents, we believe it provides a potentialsolution that would significantly reduce the defined benefit plans’ estimated2006 and 2007 pension funding requirements, if enacted.  If the Company obtains sufficient pensionrelief, on an expedited basis, and can avoid additional materially adversebusiness developments, it will attempt to preserve its pension plans.  Otherwise, termination of the defined benefitpension plans would become inevitable.

 

**Other Information**

 

*ExpandedServices Between the U.S. and China.*  On June 18, 2004, the United States and thePeople’s Republic of China agreed to a series of amendments to the 1980 U.S. –China Air Transport Agreement.  Theamendments provide for a significant expansion of air services between the twocountries.  On September 3, 2004, the DOTawarded Northwest six additional U.S. – China all-cargo frequencies, threeof which became available to Northwest on November 1, 2004, and three thatbecame available on March 25, 2005.  TheCompany is using these frequencies to expand its cargo service to Shanghai, viaits cargo hubs in Anchorage and Tokyo. Additionally, on February 22, 2005, the DOT awarded Northwest threeadditional U.S. – China all-cargo frequencies that will become availableon March 25, 2006.

 

*Foreign Currency.* The Company is exposed to the effect of foreign currency exchange ratefluctuations on the U.S. dollar value of foreign currency-denominated operatingrevenues and expenses.  The Company’slargest exposure comes from the Japanese yen. From time to time, the Company uses financial instruments to hedge itsexposure to the Japanese yen.  Hedginggains or losses are recorded in accumulated other comprehensive income (loss)until the associated transportation is provided, at which time they arerecognized as an increase or decrease in revenue.  The Company hedged $73.3 million of itsyen-denominated sales in the three months ended September 30, 2005, resultingin an effective rate of 105 yen per U.S. dollar, the prevailing averagecontract rate for the period.  TheCompany hedged $130 million of its yen-denominated sales in the three months endedSeptember 30, 2004, resulting in an effective rate of 114 yen per U.S. dollar,the prevailing average contract rate for the period. The average market yenrate for the quarters ended September 30, 2005 and 2004 was 109.5 and 112.3,respectively.  At September 30, 2005, theCompany has hedged approximately 26% and 5% of its remaining 2005 and 2006anticipated yen-denominated sales at an average rate of 105 and 101 yen perU.S. dollar, respectively, and has recorded $10.4 million of unrealized gain inaccumulated other comprehensive income associated with those hedges.

 

      *Aircraft Fuel.*  The Company’s earnings are affected bychanges in the price and availability of aircraft fuel.  On an annual basis, the Company’s mainlineand regional carrier fuel consumption approximates 2.1 billion gallons,producing a $21 million variance for each one-cent change in the cost pergallon of fuel.  From time to time, theCompany manages the price risk of fuel costs by utilizing futures contractstraded on regulated futures exchanges, swap agreements and options.  As of September 30, 2005, there were nooutstanding fuel hedges or associated unrealized gains (losses) in accumulatedother comprehensive income (loss).  As ofJuly 2004, the Company had hedged the price of approximately 25% of itsprojected fuel requirements for the second half of 2004 through collarsestablished at a crude oil price of $34 to $41 per barrel.  Comparatively, the average crude oil pricefor the three months ended September 30, 2005 was $65 per barrel.

 

      *War Risk Insurance*.  As a result of the Air Transportation Safetyand System Stabilization Act (“Airline Stabilization Act”), the U.S. HomelandSecurity Act and the U.S. Emergency Wartime Supplemental Appropriations Act,the U.S. federal government assumes most war risk coverage.  Following multiple extensions, this coverageis scheduled to expire on December 31, 2005.  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 or at what cost the 

 

26

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coverage will be provided.  Refer to “Item 1. Business – RiskFactors Related to Northwest and the Airline Industry” in the Company’s AnnualReport on Form 10-K for 2004 for additional discussion regarding war riskcoverage and insurance costs.

 

*      Employee Stock Plan.*  Duringthe third quarter of 2005, State Street Bank and Trust Company, which is thetrustee for the Company common stock that was given to salaried employees inthe Employee Stock Plan during the wage savings period from 1993 – 1996, soldall remaining shares of the Company’s common stock for which it is trusteeunder that plan.

 

*Forward-LookingStatements.*  Certain of the statements made throughoutManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and elsewhere in this quarterly report are forward-looking and arebased upon information available to the Company on the date hereof.  The Company, through its management, may alsofrom time to time make oral forward-looking statements.  In connection with the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995, the Companyis hereby identifying important factors that could cause actual results todiffer materially from those contained in any forward-looking statement made byor on behalf of the Company.  Any suchstatement is qualified by reference to the following cautionary statements.

 

The Company believes thatthe material risks and uncertainties that could affect the outlook of anairline operating in the global economy include, among others, the ability ofthe Company to continue as a going concern, the ability of the Company toobtain and maintain any necessary financing for operations and other purposes,whether debtor-in-possession financing or other financing, the ability of theCompany to maintain adequate liquidity, the ability of the Company to absorbescalating fuel costs, the Company’s ability to obtain court approval withrespect to motions in the Chapter 11 proceedings prosecuted by it fromtime to time, the ability of the Company to develop, confirm and consummate a planof reorganization with respect to the Chapter 11 proceedings, risksassociated with third parties seeking and obtaining court approval to terminateor shorten the exclusivity period for the Company to propose and confirm a planof reorganization, to appoint a Chapter 11 trustee or to convert the casesto Chapter 7 cases, the ability of the Company to obtain and maintain normalterms with vendors and service providers, the Company’s ability to maintaincontracts that are critical to its operations, the ability of the Company torealize assets and satisfy liabilities without substantial adjustments and/orchanges in ownership, the potential adverse impact of the Chapter 11proceedings on the Company’s liquidity or results of operations, the ability ofthe Company to operate pursuant to the terms of its financing facilities(particularly the related financial covenants), the ability of the Company toattract, motivate and/or retain key executives and associates, the future levelof air travel demand, the Company’s future passenger traffic and yields, theairline industry pricing environment, increased costs for security, the costand availability of aviation insurance coverage and war risk coverage, thegeneral economic condition of the United States and other regions of the world,the price and availability of jet fuel, the aftermath of the war in Iraq, thepossibility of additional terrorist attacks or the fear of such attacks,concerns about SARS, Avian flu or other influenza or contagious illnesses, workdisruptions, labor negotiations both at other carriers and the Company, lowcost carrier expansion, capacity decisions of other carriers, actions of theU.S. and foreign governments, foreign currency exchange rate fluctuation,inflation and other factors discussed herein. Additional information with respect to these factors and these and otherevents that could cause differences between forward-looking statements andfuture actual results is contained in “Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” above, and “Item 1.Business – Risk Factors Related to Northwest and the Airline Industry” and“Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations” in the Company’s Annual Report on Form 10-K for the yearended December 31, 2004.

 

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

 

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**Item 3.      Quantitative and Qualitative Disclosures About Market Risk.**

 

Information required bythis item is provided under the captions “Foreign Currency” and “Aircraft Fuel”within “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” in this Quarterly Report on Form 10-Q.  Also see “Item 7a. Quantitative andQualitative Disclosures About Market Risk” in the Company’s Annual Report onForm 10-K for 2004.

 

**Item 4.      Controls and Procedures.**

 

**      Evaluation of Disclosure Controls andProcedures –**Asof September 30, 2005, management performed an evaluation under the supervisionand with the participation of the Company’s President and Chief ExecutiveOfficer and Executive Vice President and Chief Financial Officer of theeffectiveness of the design and operation of the Company’s disclosure controlsand 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 material informationrequired to be disclosed in the Company’s periodic reports filed with the SECas of the end of such period.

 

**      Changes in Internal Control –**There was no change in the Company’sinternal control over financial reporting that occurred during the Company’sfiscal third quarter ended September 30, 2005 that has materially affected, oris reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

PART II.  OTHER INFORMATION

 

**Item 1.       LegalProceedings.**

 

      Reference is made to “Item 3. LegalProceedings” in the Company’s Annual Report on Form 10-K for 2004.

 

          *Series C PreferredStock Litigation.*  In June 2003, the IBT and certain relatedparties commenced litigation against Northwest Airlines Corporation in New Yorkstate court, *International Brotherhood ofTeamsters, Local 2000 et al. v. Northwest Airlines Corporation* (NewYork Sup. Ct., Case No. 601742/03).  InAugust 2003, the IAM and a related party also commenced litigation againstNorthwest Airlines Corporation in New York state court, *International Association of Machinists and AerospaceWorkers et al. v. Northwest Airlines Corporation* (New York Sup. Ct.,Case No. 602476/03).  Both lawsuitschallenge the Company’s decision not to purchase its Series C Preferred Stockand seek to compel the Company to repurchase the Series C Preferred Stock thathad been put to the Company.  The Companyannounced on August 1, 2003, that the Board of Directors had determined thatthe Company could not legally repurchase the outstanding Series C PreferredStock at that time because the Board was unable to determine that the Companyhad adequate surplus to repurchase the outstanding Series C PreferredStock.  Before discovery was complete,plaintiffs filed motions for summary judgment. On March 24, 2005, the judge ruled that the Company had breached thearrangements related to the Series C Preferred Stock, and indicated that atrial on damages would be necessary. On August 24, 2005, Northwest and theplaintiffs reached an agreement, among other things, to cancel the trial and toestablish the amount of damages owed to employees represented by the plaintiffsshould the trial court’s liability determination be upheld (nearly $277million).  The agreement also established the procedural process forNorthwest to appeal the trial court’s liability judgment and to seek a stay ofenforcement of the judgment.  The plaintiffs also agreed not to take anyaction to enforce the judgment unless and until the New York State AppellateDivision denies Northwest’s motion to stay enforcement of the judgment.

 

      Further proceedings in this litigation, and substantially allof the Company’s other litigation, including the litigation disclosed in theCompany’s annual report on Form 10-K for 2004, have been stayed following theCompany’s Chapter 11 filing.

 

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**Item 6.       Exhibits**

 

          (a)     Exhibits:

 

| *10.1 |   | Management Compensation Agreement dated as of  September 14, 2005 between Northwest Airlines, Inc. and Douglas M. Steenland                                                                                                 |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.2 |   | Letter Agreement dated as of July 1, 2005 between  Northwest Airlines Corporation and J. Timothy Griffin amending an outstanding  Award under the Northwest Airlines Corporation E-Commerce Incentive  Compensation Program |
| *10.3 |   | First Amendment of Northwest Airlines Excess Pension  Plan for Salaried Employees (2001 Restatement)                                                                                                                        |
| 12.1  |   | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                           |
| 12.2  |   | Computation of Ratio of Earnings to Fixed Charges  and Preferred Stock Requirements                                                                                                                                         |
| 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                                                                                                                                                                      |

 

*  Compensatory plans in which the directors andexecutive officers of Northwest participate.

#### SIGNATURE

 

      Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized this 9th day of November 2005.

 
|     |     | NORTHWEST AIRLINES CORPORATION

  |
|----------|----------|----------------------------------------|
|     |     | By                                     | /s/ James G.  Mathews |
|     |     |                                   | James G. Mathews |
| * * | * * | * *                               | *Vice  President – Finance and Chief Accounting Officer (principal accounting  officer)* |

 

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#### EXHIBIT INDEX

 
| Exhibit No. |   | Description                                                                                                                                                                                                                 |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.1       |   | Management Compensation Agreement dated as of  September 14, 2005 between Northwest Airlines, Inc. and Douglas M. Steenland                                                                                                 |
| *10.2       |   | Letter Agreement dated as of July 1, 2005 between  Northwest Airlines Corporation and J. Timothy Griffin amending an outstanding  Award under the Northwest Airlines Corporation E-Commerce Incentive  Compensation Program |
| *10.3       |   | First Amendment of Northwest Airlines Excess Pension  Plan for Salaried Employees (2001 Restatement)                                                                                                                        |
| 12.1        |   | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                           |
| 12.2        |   | Computation of Ratio of Earnings to Fixed Charges  and Preferred Stock Requirements                                                                                                                                         |
| 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                                                                                                                                                                      |

 

*  Compensatory plans in which the directors andexecutive officers of Northwest participate.

 

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