**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

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

**OF THE SECURITIESEXCHANGE ACT OF 1934**

**For thequarterly period ended**September 30, 2006

**Commission File Number: 0-23642**

**NORTHWEST AIRLINES CORPORATION**

**(DEBTOR-IN-POSSESSION)**

**(Exactname of registrant as specified in its charter)**

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

 

**(612) 726-2111**

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

**Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes **x     No o

**Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):**
| Large accelerated filer o | Accelerated  filer x | Non-accelerated filer o |
|---------------------------|----------------------|-------------------------|

 

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

**As of September 30, 2006, there were 87,300,393shares of the registrant’s Common Stock outstanding.**

 

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**NORTHWEST AIRLINESCORPORATION**

**(DEBTOR-IN-POSSESSION)**
|                                | **Page No.**                                                                                                                                                                             |
|--------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                                                                                                     |
| PART I.  FINANCIAL INFORMATION |                                                                                                                                                                                     |
|                           |                                                                                                                                                                                     |
| Item 1.                        | Financial  Statements.                                                                                                                                                                   |   |
|                           |                                                                                                                                                                                     |   |
|                           | Condensed  Consolidated Statements of Operations – Three months and nine months ended  September 30, 2006 and 2005                                                                  | 3 |
|                           |                                                                                                                                                                                     |   |
|                           | Condensed  Consolidated Balance Sheets – September 30, 2006 and December 31, 2005                                                                                                   | 4 |
|                           |                                                                                                                                                                                     |   |
|                           | Condensed  Consolidated Statements of Cash Flows – Nine months ended September 30, 2006  and 2005                                                                                   | 5 |
|                           |                                                                                                                                                                                     |   |
|                           | Notes  to Condensed Consolidated Financial Statements                                                                                                                                    | 6 |
|                           |                                                                                                                                                                                     |   |
|                           | 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.                                                                                             | 22 |
|                           |                                                                                                                                                                                     |   |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk.                                                                                                                             | 34 |
|                           |                                                                                                                                                                                     |   |
| Item 4.                        | Controls  and Procedures.                                                                                                                                                                | 34 |
|                           |                                                                                                                                                                                     |   |
| PART II.  OTHER INFORMATION    |                                                                                                                                                                                     |
|                           |                                                                                                                                                                                     |
| Item 1.                        | Legal  Proceedings.                                                                                                                                                                      | 34 |
|                           |                                                                                                                                                                                     |   |
| Item 1A.                       | Risk Factors.                                                                                                                                                                            | 34 |
|                           |                                                                                                                                                                                     |   |
| Item 6.                        | Exhibits.                                                                                                                                                                                | 34 |
|                           |                                                                                                                                                                                     |   |
| SIGNATURE                      | 35                                                                                                                                                                                       |
|                           |                                                                                                                                                                                     |
| EXHIBIT INDEX                  | 35                                                                                                                                                                                       |

 

2

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PART I. FINANCIAL INFORMATION

**Item 1. Financial Statements.**

**NORTHWEST AIRLINES CORPORATION**

**(DEBTOR-IN-POSSESSION)**

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

 
| ** **                                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                      | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| **(Unaudited, in millions except per share amounts)**             | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating Revenues**                                                                          |       |                             |       |                            |       |   |   |   |   |
| Passenger                                                                                       |       | $                                | 2,554      |                            | $          | 2,482 |   | $ | 7,028 |   | $ | 6,864 |   |
| Regional carrier  revenues                                                                      |       | 358                              |       | 360                             |       | 1,093 |   | 980 |   |
| Cargo                                                                                           |       | 254                              |       | 250                             |       | 704 |   | 695 |   |
| Other                                                                                           |       | 241                              |       | 286                             |       | 763 |   | 832 |   |
| Total operating revenues                                                                        |       | 3,407                            |       | 3,378                           |       | 9,588 |   | 9,371 |   |
|                                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Operating Expenses**                                                                          |       |                             |       |                            |       |   |   |   |   |
| Aircraft fuel  and taxes                                                                        |       | 948                              |       | 893                             |       | 2,578 |   | 2,313 |   |
| Salaries, wages  and benefits                                                                   |       | 678                              |       | 1,000                           |       | 2,029 |   | 2,933 |   |
| Selling and  marketing                                                                          |       | 199                              |       | 206                             |       | 583 |   | 634 |   |
| Aircraft  maintenance materials and repairs                                                     |       | 170                              |       | 208                             |       | 542 |   | 509 |   |
| Other rentals  and landing fees                                                                 |       | 151                              |       | 158                             |       | 436 |   | 482 |   |
| Depreciation and  amortization                                                                  |       | 122                              |       | 133                             |       | 390 |   | 413 |   |
| Aircraft rentals                                                                                |       | 52                               |       | 102                             |       | 174 |   | 341 |   |
| Regional carrier  expenses                                                                      |       | 356                              |       | 414                             |       | 1,088 |   | 1,162 |   |
| Other                                                                                           |       | 365                              |       | 431                             |       | 1,122 |   | 1,242 |   |
| Total operating  expenses                                                                       |       | 3,041                            |       | 3,545                           |       | 8,942 |   | 10,029 |   |
|                                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Operating Income (Loss)**                                                                     |       | 366                              |       | (167                            | )          | 646 |   | (658 | ) |
|                                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Other Income (Expense)**                                                                      |       |                             |       |                            |       |   |   |   |   |
| Interest  expense, net                                                                          |       | (137                             | )          | (159                            | )          | (413 | ) | (469 | ) |
| Investment  income                                                                              |       | 30                               |       | 22                              |       | 73 |   | 60 |   |
| Reorganization  items, net                                                                      |       | (1,431                           | )          | (159                            | )          | (2,870 | ) | (159 | ) |
| Other, net                                                                                      |       | (1                               | )          | (5                              | )          | 2 |   | 77 |   |
| Total other  income (expense)                                                                   |       | (1,539                           | )          | (301                            | )          | (3,208 | ) | (491 | ) |
|                                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Income (Loss) Before Income  Taxes and Cumulative Effect of Accounting Change**               |       | (1,173                           | )          | (468                            | )          | (2,562 | ) | (1,149 | ) |
| Income tax  expense (benefit)                                                                   |       | 6                                |       | 1                               |       | 6 |   | 6 |   |
| **Income (Loss) Before Cumulative  Effect of Accounting Change**                                |       | (1,179                           | )          | (469                            | )          | (2,568 | ) | (1,155 | ) |
| Cumulative  effect of accounting change                                                         |       | —                           |       | —                          |       | — |   | (69 | ) |
| **Net Income (Loss)**                                                                           |       | (1,179                           | )          | (469                            | )          | (2,568 | ) | (1,224 | ) |
| Preferred stock  requirements                                                                   |       | —                           |       | (6                              | )          | — |   | (22 | ) |
| **Net Income (Loss) Applicable to  Common Stockholders**                                        |       | $                                | (1,179     | )                               | $          | (475 | ) | $ | (2,568 | ) | $ | (1,246 | ) |
| Earnings (loss) per  common share:                                                              |       |                             |       |                            |       |   |   |   |   |
| *Basic  and Diluted*                                                                            |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  applicable to common stockholders before cumulative effect of accounting  change |       | $                                | (13.50     | )                               | $          | (5.45 | ) | $ | (29.42 | ) | $ | (13.54 | ) |
| Cumulative  effect of accounting change                                                         |       | —                           |       | —                          |       | — |   | (.79 | ) |
| Net income  (loss) applicable to common stockholders                                            |       | $                                | (13.50     | )                               | $          | (5.45 | ) | $ | (29.42 | ) | $ | (14.33 | ) |
| Average shares used in  computation:                                                            |       |                             |       |                            |       |   |   |   |   |
| *Basic and Diluted*                                                                             |       | 87                               |       | 87                              |       | 87 |   | 87 |   |

 

*See accompanying notes.*

3

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**NORTHWEST AIRLINES CORPORATION**

**(DEBTOR-IN-POSSESSION)**

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                     | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| **(Unaudited, in millions)**                                         | ** ** | **2006**              | ** ** | **2005**             | ** ** |
|                                                                           |       |                  |       |                 |       |
| **Assets**                                                                     |       |                  |       |                 |       |
|                                                                           |       |                  |       |                 |       |
| **Current  Assets**                                                            |       |                  |       |                 |       |
| Cash and cash equivalents                                                      |       | $                     | 1,488      |                 | $          | 684 |   |
| Unrestricted short-term investments                                            |       | 585                   |       | 578                  |       |
| Restricted cash, cash equivalents and short-term  investments                  |       | 702                   |       | 600                  |       |
| Accounts receivable, less allowance (2006—$14, 2005–$12)             |       | 760                   |       | 592                  |       |
| Flight equipment spare parts, less allowance (2006—$252,  2005—$243) |       | 116                   |       | 136                  |       |
| Prepaid expenses and other                                                     |       | 374                   |       | 403                  |       |
| Total current assets                                                           |       | 4,025                 |       | 2,993                |       |
|                                                                           |       |                  |       |                 |       |
| **Property  and Equipment**                                                    |       |                  |       |                 |       |
| Flight equipment, net                                                          |       | 7,331                 |       | 7,394                |       |
| Other property and equipment, net                                              |       | 580                   |       | 753                  |       |
| Total property and equipment                                                   |       | 7,911                 |       | 8,147                |       |
|                                                                           |       |                  |       |                 |       |
| **Flight  Equipment Under Capital Leases, net**                                |       | 22                    |       | 100                  |       |
|                                                                           |       |                  |       |                 |       |
| **Other  Assets**                                                              |       |                  |       |                 |       |
| Intangible pension asset                                                       |       | —                |       | 363                  |       |
| International routes                                                           |       | 634                   |       | 634                  |       |
| Investments in affiliated companies                                            |       | 38                    |       | 41                   |       |
| Other                                                                          |       | 868                   |       | 805                  |       |
| Total other assets                                                             |       | 1,540                 |       | 1,843                |       |
| **Total Assets**                                                               |       | $                     | 13,498     |                 | $          | 13,083 |   |
|                                                                           |       |                  |       |                 |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**                       |       |                  |       |                 |       |
|                                                                           |       |                  |       |                 |       |
| **Current  Liabilities**                                                       |       |                  |       |                 |       |
| Air traffic liability                                                          |       | $                     | 1,782      |                 | $          | 1,586 |   |
| Accounts payable and other liabilities                                         |       | 1,441                 |       | 1,119                |       |
| Current maturities of long-term debt and capital  lease obligations            |       | 143                   |       | 85                   |       |
| Total current liabilities                                                      |       | 3,366                 |       | 2,790                |       |
|                                                                           |       |                  |       |                 |       |
| **Long-Term  Debt and Capital Leases**                                         |       | 2,952                 |       | 1,085                |       |
|                                                                           |       |                  |       |                 |       |
| **Deferred  Credits and Other Liabilities**                                    |       |                  |       |                 |       |
| Long-term pension and postretirement health care  benefits                     |       | 139                   |       | 292                  |       |
| Other                                                                          |       | 89                    |       | 102                  |       |
| Total deferred credits and other liabilities                                   |       | 228                   |       | 394                  |       |
|                                                                           |       |                  |       |                 |       |
| **Liabilities  Subject to Compromise**                                         |       | 14,670                |       | 14,162               |       |
|                                                                           |       |                  |       |                 |       |
| **Preferred  Redeemable Stock Subject to Compromise**                          |       | 278                   |       | 280                  |       |
|                                                                           |       |                  |       |                 |       |
| **Common  Stockholders’ Equity (Deficit)**                                |       |                  |       |                 |       |
| Common stock                                                                   |       | 1                     |       | 1                    |       |
| Additional paid-in capital                                                     |       | 1,503                 |       | 1,500                |       |
| Accumulated deficit                                                            |       | (7,116                | )          | (4,548               | )          |
| Accumulated other comprehensive income (loss)                                  |       | (1,371                | )          | (1,568               | )          |
| Treasury stock                                                                 |       | (1,013                | )          | (1,013               | )          |
| Total common stockholders’ equity (deficit)                               |       | (7,996                | )          | (5,628               | )          |
| **Total  Liabilities and Stockholders’ Equity (Deficit)**                 |       | $                     | 13,498     |                 | $          | 13,083 |   |

 

*See accompanying notes.*

4

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**NORTHWEST AIRLINES CORPORATION**

**(DEBTOR-IN-POSSESSION)**

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                                 | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **September 30**           | ** ** |
| **(Unaudited, in millions)**                                                     | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|                                                                                       |       |                            |       |   |   |
| **Cash  Flows from Operating Activities**                                                  |       |                            |       |   |   |
| Net income (loss)                                                                          |       | $                               | (2,568     | ) | $ | (1,224 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                            |       |   |   |
| Cumulative effect of accounting change                                                     |       | —                          |       | 69 |   |
| Depreciation and amortization                                                              |       | 390                             |       | 413 |   |
| Pension and other postretirement benefit  contributions less than expense                  |       | 227                             |       | 245 |   |
| Changes in certain assets and liabilities                                                  |       | 270                             |       | 256 |   |
| Long-term vendor deposits/holdbacks                                                        |       | (23                             | )          | (242 | ) |
| Reorganization items, net                                                                  |       | 2,870                           |       | 159 |   |
| Other, net                                                                                 |       | 5                               |       | (41 | ) |
| Net cash provided by (used in) operating activities                                        |       | 1,171                           |       | (365 | ) |
|                                                                                       |       |                            |       |   |   |
| **Cash  Flows from Reorganization Activities**                                             |       |                            |       |   |   |
| Net cash provided by (used in) reorganization  activities                                  |       | 21                              | ** ** | **—** | ** ** |
|                                                                                       |       |                            |       |   |   |
| **Cash  Flows from Investing Activities**                                                  |       |                            |       |   |   |
| Capital expenditures                                                                       |       | (253                            | )          | (318 | ) |
| Purchase of short-term investments                                                         |       | (18                             | )          | (192 | ) |
| Proceeds from sales of short-term investments                                              |       | 32                              |       | 1,495 |   |
| Decrease (increase) in restricted cash, cash  equivalents and short-term investments       |       | (102                            | )          | (364 | ) |
| Proceeds from sale of Pinnacle note receivable                                             | ** ** | **—**                      |       | 102 |   |
| Proceeds from sale of Prudential Financial Inc.  demutualization shares                    | ** ** | **—**                      |       | 102 |   |
| Other, net                                                                                 |       | 11                              |       | 7 |   |
| Net cash provided by (used in) investing activities                                        |       | (330                            | )          | 832 |   |
|                                                                                       |       |                            |       |   |   |
| **Cash  Flows from Financing Activities**                                                  |       |                            |       |   |   |
| Proceeds from long-term debt                                                               |       | 1,302                           |       | 448 |   |
| Payments of long-term debt and capital lease  obligations                                  |       | (1,342                          | )          | (481 | ) |
| Other, net                                                                                 |       | (18                             | )          | (22 | ) |
| Net cash provided by (used in) financing activities                                        |       | (58                             | )          | (55 | ) |
|                                                                                       |       |                            |       |   |   |
| **Increase  (Decrease) in Cash and Cash Equivalents**                                      |       | 804                             |       | 412 |   |
|                                                                                       |       |                            |       |   |   |
| Cash and cash  equivalents at beginning of period                                          |       | 684                             |       | 707 |   |
| Cash and cash  equivalents at end of period                                                |       | $                               | 1,488      |   | $ | 1,119 |   |
|                                                                                       |       |                            |       |   |   |
| Cash and cash  equivalents and unrestricted short-term investments at end of period        |       | $                               | 2,073      |   | $ | 1,592 |   |
|                                                                                       |       |                            |       |   |   |
| Supplemental  Cash Flow Information:                                                       |       |                            |       |   |   |
| Interest paid                                                                              |       | $                               | 109        |   | $ | 395 |   |
|                                                                                       |       |                            |       |   |   |
| Investing and  Financing Activities Not Affecting Cash:                                    |       |                            |       |   |   |
| Manufacturer  financing of aircraft and other non-cash transactions                        |       | $                               | 188        |   | $ | 295 |   |

 

*See accompanying notes.*

5

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**NORTHWEST AIRLINESCORPORATION**

**(DEBTOR-IN-POSSESSION)**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1 –Basis of Presentation**

The condensedconsolidated financial statements of Northwest Airlines Corporation (“NWA Corp.”),a holding company whose principal indirect operating subsidiary is NorthwestAirlines, Inc. (“Northwest”), include the accounts of NWA Corp. and allconsolidated subsidiaries (collectively, the “Company”).  Unless otherwise indicated, the terms “we,” “us,”and “our” refer to NWA Corp. and all consolidated subsidiaries.  The condensed consolidated financialstatements included herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  The information and footnote disclosuresnormally included in annual financial statements prepared in accordance withU.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed oromitted as permitted by such rules and regulations. These financial statementsand related notes should be read in conjunction with the financial statementsand notes included in the Company’s audited consolidated financial statements,which are provided in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005.  The Company’s accountingand reporting policies are summarized in “Note 2 – Summary of SignificantAccounting Policies” in the Annual Report on Form 10-K for 2005.

As discussed in Note 2,on September 14, 2005 (the “Petition Date”), NWA Corp. and certain of itsdirect and indirect subsidiaries (collectively, the “Debtors”) filed voluntarypetitions for relief under Chapter 11 of the United States Bankruptcy Code withthe United States Bankruptcy Court for the Southern District of New York (the “BankruptcyCourt”).  Subsequently, on September 30,2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWA Corp., 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)” (the “Chapter 11 case”).  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 concernbasis, which contemplates continuity of operations, realization of assets andliquidation of post-petition liabilities in the ordinary course ofbusiness.  In accordance with SOP 90-7,the financial statements for the periods presented distinguish transactions andevents that are directly associated with the reorganization from the ongoing operationsof the Company.

The Company maintains aWeb site at *http://www.nwa.com*.  Information contained on the Company’s Website is not incorporated into this quarterly report on Form 10-Q.  Annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, all amendments 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 interim financial statements reflectadjustments, consisting of normal recurring accruals, unless otherwise noted,which are necessary to present fairly the Company’s financial position, resultsof operations and cash flows for the periods indicated.

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

The Company believes that the material risks and uncertainties thatcould affect the outlook of an airline operating under Chapter 11 and in aglobal economy include, among others, the ability of the Company to continue asa going concern, the ability of the Company to obtain and maintain anynecessary financing for operations and other purposes, 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 aplan of reorganization with respect to its 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

6

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abilityof 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 war in Iraq, the possibility of additional terrorist attacks or the fear ofsuch attacks, concerns about SARS, Avian flu or other influenza or contagiousillnesses, labor strikes, work disruptions, labor negotiations both at othercarriers and the Company, low cost carrier expansion, capacity decisions ofother carriers, actions of the U.S. and foreign governments, foreign currencyexchange rate fluctuations, inflation and other factors discussed herein.  Additional information with respect to thesefactors and other events that could cause differences between forward-lookingstatements and future actual results is contained in “Item 1. Business – RiskFactors Related to Northwest and the Airline Industry” in the Company’s AnnualReport on Form 10-K for 2005.

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

*Backgroundand General Bankruptcy Matters.*  OnSeptember 14, 2005, NWA Corp. and 12 of its direct and indirect subsidiariesfiled voluntary petitions for relief under Chapter 11 of the United StatesBankruptcy Code with the United States Bankruptcy Court for the SouthernDistrict of New York.  Subsequently, onSeptember 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWACorp., also filed 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)”.  Accordingly,the accompanying consolidated financial statements have been prepared inaccordance with SOP 90-7, and on a going concern basis, which contemplatescontinuity of operations, realization of assets and liquidation ofpost-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 consolidated financialstatements shown herein include certain subsidiaries that did not file toreorganize under Chapter 11.  The assetsand liabilities of these subsidiaries are not considered material to theconsolidated financial statements.

Our condensedconsolidated financial statements have been prepared in accordance with GAAP ona going concern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business. Accordingly, ourcondensed consolidated financial statements do not include any adjustmentsrelating to the recoverability of assets and classification of liabilities thatmight be necessary should we be unable to continue as a going concern.  **However, asa result of the Company’s Chapter 11 proceedings and other matters discussed in“Item 1. Business – Risk Factors Related to Northwest and the Airline Industry”in the Company’s Annual Report on Form 10-K for 2005, realization of assets andsatisfaction of liabilities, without substantial adjustments and/or changes inownership, are subject to uncertainties. Given these uncertainties, there issubstantial doubt about the Company’s ability to continue as a going concern.**

The Company is usingthe provisions of Chapter 11 to reorganize its business, targeting $2.5 billionin annual business improvements, in order to return to profitability on asustained basis.  The Chapter 11 processwill allow the Company to realize three major elements essential to itstransformation, including:

·      Achieving $2.2 billion in annual reductions in both labor and non-laborcosts, $1.7 billion of which is incremental to year-end 2005 results;

·      Resizing and optimization of the Company’s fleet to better serveNorthwest’s markets;

·      Restructuring and recapitalization of the Company’s balance sheet,including a targeted reduction in debt and lease obligations of approximately$4.2 - $4.4 billion, providing debt and equity levels consistent with long-termprofitability.

 

To date, the Company has made substantial progress and is on target toachieve these objectives.  These actionsare outlined below and in “Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Restructuring Overview.”  In addition, any business plan that forms thebasis for a plan of reorganization will have to produce sufficient returns topermit the Company to have adequate access to the capital markets.  Any plan will likely require profitimprovements and/or cost reductions beyond those elements identifiedabove.  The Company will continue torefine its Chapter 11 related goals and objectives in response to marketconditions.

As required by theBankruptcy Code, the United States Trustee for the Southern District of NewYork appointed on September 30, 2005, an Official Committee of UnsecuredCreditors (the “Creditors’ Committee”). The Creditors’ Committee and its legal representatives have a right tobe heard on all matters that come before the Bankruptcy Court concerning thereorganization.  There can be noassurance that the Creditors’ Committee will support the Company’s positions orplan of reorganization.

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With the exceptionof the Company’s non-debtor subsidiaries, the Company continues to operate thebusiness as “debtor-in-possession” under the jurisdiction of the BankruptcyCourt and in accordance with the applicable provisions of the Bankruptcy Code,the Federal Rules of Bankruptcy Procedure, and applicable court orders.  In general, as debtor-in-possession, theCompany is authorized under Chapter 11 to continue to operate as an ongoingbusiness, but may not engage in transactions outside the ordinary course ofbusiness without the prior approval of the Bankruptcy Court.  In conjunction with the commencement of theChapter 11 case, the Debtors sought and obtained several orders from theBankruptcy Court that were intended to enable the Debtors to operate in thenormal course of business during the Chapter 11 case.  The most significant of these orders (i)authorize the Company to honor pre-petition obligations to customers, (ii)authorize the Company to honor obligations to employees for pre-petitionemployee salaries, wages, incentive compensation, and benefits, and (iii)permit the Debtors to operate their consolidated cash management system duringthe Chapter 11 case in substantially the same manner as it was operated priorto the commencement of the Chapter 11 case.

The bankruptcyfiling triggered defaults on substantially all the Company’s debt and leaseobligations.  Under Section 362 of theBankruptcy Code, the filing of a bankruptcy petition automatically stays mostactions against a debtor, including most actions to collect pre-petitionindebtedness or to exercise control over the property of a debtor’sestate.  Absent an order of theBankruptcy Court, substantially all pre-petition liabilities are subject tosettlement under the plan of reorganization.

The Debtors’rights to possess and operate certain qualifying aircraft, aircraft engines andother aircraft-related equipment that are leased or subject to a securityinterest or conditional sale contract are governed by Section 1110 of theBankruptcy Code.  Section 1110 providesthat unless the Debtors take certain action within 60 days after the PetitionDate or such later date as is agreed by the applicable lessor, secured party,or conditional vendor, the contractual rights of such financier to takepossession of such equipment and to enforce any of its other rights or remediesunder the applicable agreement are not limited or otherwise affected by theautomatic stay or any other provision of the Bankruptcy Code.

The Section 1110 deadline for the Debtors was November 14, 2005.  The Debtors sought to restructure or rejectobligations representing approximately 50% of its fleet count and havesubstantially completed over $400 million in annual aircraft ownership costreductions, including interest, rent and depreciation expense.

The Debtors’ balance sheet debt as of December 31, 2005 included $1.7billion in unsecured pre-petition debt obligations.  These obligations are reflected in theDebtors’ liabilities subject to compromise. See “Item 8. Consolidated Financial Statements and Supplementary Data,Note 6 – Liabilities Subject to Compromise” in the Company’s Annual Report onForm 10-K for 2005, for additional information.

Under Section 365of the Bankruptcy Code, debtors may assume, assume and assign, or reject certainexecutory contracts and unexpired leases, including leases of real property,aircraft, and aircraft engines, subject to the approval of the Bankruptcy Courtand other conditions.  In general,rejection of an unexpired lease or executory contract is treated as apre-petition breach of the lease or contract in question.  Subject to certain exceptions, this rejectionrelieves debtors of performing their future obligations under that lease orcontract but entitles the lessor or contract counterparty to a pre-petitiongeneral unsecured claim for damages caused by the deemed breach.  These pre-petition general unsecured claimsfor damages, where appropriate, are reflected in the Debtors’ liabilitiessubject to compromise.  See “Note 8 –Liabilities Subject to Compromise” for additional information.  The Company expects that additionalliabilities subject to compromise will arise in the future as a result ofdamage claims resulting from the rejection of certain executory contracts andunexpired leases by the Debtors. However, the Company expects that the assumption of certain executorycontracts and unexpired leases may convert liabilities subject to compromise toliabilities not subject to compromise. Due to the uncertain nature of many of the potential rejection andabandonment related claims, the Company is unable to project the magnitude ofthese overall claims with any degree of certainty at this time.

*LaborCost Restructuring.* The Company has implemented labor agreements with terms and conditionsworth approximately $1.4 billion in annual labor cost savings. The Company hasreached consensual agreement on collective bargaining agreements (“CBAs”) withthe Air Line Pilots Association (“ALPA”), the International Association ofMachinists and Aerospace Workers (“IAM”), the Aircraft Technical SupportAssociation (“ATSA”), the Transport Workers Union of America (“TWU”), and theNorthwest Airlines Meteorologists Association (“NAMA”).  All of the agreements with ALPA, the IAM,ATSA, TWU, and NAMA were implemented on or before August 1, 2006.  Two rounds of salaried and managementemployee pay and benefit cuts have also been achieved and implemented.   In addition, the Company imposed contractterms on its technicians represented by the Aircraft Mechanics FraternalAssociation (“AMFA”) in August 2005 and, under Section 1113(c) of theBankruptcy Code, imposed contract terms on its flight attendants represented bythe Association of Flight Attendants-Communication Workers of America (“AFA-CWA”)on July 31, 2006.  On November 6, 2006,the Company reached a ratified agreement with AMFA to end the labor disputewith the airline’s technicians.  Theagreement maintains the necessary annual labor cost savings from AMFA-representedemployees.

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Section 1113(c) ofthe Bankruptcy Code permits a debtor to move to reject its CBAs if the debtorfirst satisfies a number of statutorily prescribed substantive and proceduralprerequisites and obtains the Bankruptcy Court’s approval of the rejection orthe expiration of the statutorily prescribed time period.  After bargaining in good faith and sharingrelevant information with its unions, a debtor must make proposals to modifyits existing CBAs based on the most complete and reliable information availableat the time.  The proposed modificationsmust be necessary to permit the reorganization of a debtor and must providethat 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.   In October 2005, theCompany commenced Section 1113(c) proceedings with ALPA, the IAM, and theProfessional Flight Attendants Association (“PFAA”) and has subsequentlyreached consensual agreement with ALPA and the IAM.

With respect to theCompany’s flight attendants, the Company reached a tentative consensualagreement on a new contract with its flight attendants represented by the PFAAon March 1, 2006 (the “March TA”).  OnJune 6, 2006, the PFAA announced that its flight attendants failed to ratifythe tentative agreement.  As a result ofthe flight attendants’ failure to ratify this agreement, the Company requesteda ruling from the Bankruptcy Court on its Section 1113(c) motion to reject itsexisting flight attendant labor agreement and to permit the Company to imposenew contract terms.  On June 29, 2006,the Bankruptcy Court granted the Company’s Section 1113(c) motion to reject itscontract with the flight attendants and authorized the Company to implement theterms of the March TA; however, the Bankruptcy Court stayed implementation ofthe order until July 17, 2006.

Following theBankruptcy Court’s June 29, 2006 ruling, the Company and the PFAA commencednegotiations to reach a new agreement. On July 6, 2006, the Company’s flight attendants voted to change theirunion representation from the PFAA to the AFA-CWA.  Subsequently, the Company and the AFA-CWAcontinued negotiations to reach a new agreement, and on July 17, 2006, theparties announced that they reached a tentative consensual agreement (the “JulyTA”).  On July 31, 2006, the AFA-CWAannounced that its members failed to approve the July TA.  As a result of the flight attendants’ failureto ratify the July TA, and in accordance with the Bankruptcy Court’s previousauthorization, effective July 31, 2006 the Company implemented new contractterms and conditions for its flight attendants, consistent with the terms andconditions of the March TA.

On July 31, 2006,following the flight attendants’ failure to ratify a second proposed CBA andthe Company’s subsequent imposition of new contract terms for the flightattendants, the AFA-CWA provided the Company with a 15-day notice of its intentto strike or engage in other work actions, including CHAOS (Create Havoc AroundOur System).  In response, on August 1,2006, the Company filed a motion with the Bankruptcy Court seeking to obtain aninjunction against such activities.  TheAFA-CWA subsequently extended the strike deadline by 10 days to August 25,2006, in response to terrorist threats against air travel to and within theUnited States.  On August 17, 2006, theBankruptcy Court denied the Company’s request for an injunction.  On August 18, 2006, the Company filed anappeal of the Bankruptcy Court’s decision with the United States District Courtfor the Southern District of New York (“U.S. District Court”). On August 25,2006, the U.S. District Court issued an injunction pending appeal whichtemporarily prevented any work action by the AFA-CWA while the court consideredthe Company’s appeal.  The U.S. DistrictCourt reversed the Bankruptcy Court’s decision on September 15, 2006, andgranted the Company’s request for a preliminary injunction to prevent athreatened strike or work action by the AFA-CWA.  Subsequently, the AFA-CWA appealed the U.S.District Court’s ruling to the U.S. Second Circuit Court of Appeals.  Arguments related to this matter arescheduled to be heard on November 28, 2006. In addition, the Company is currently in mediated negotiations with theAFA-CWA and representatives of the National Mediation Board (“NMB”).  The AFA-CWA has requested that it be releasedfrom further negotiations by the NMB; to date the NMB has not granted thisrequest.   A strike or other form ofself-help could have a material adverse effect on the Company.

The Company hasalso commenced proceedings under Section 1114 of the Bankruptcy Code, pursuantto which the Company is seeking reductions in the costs it incurs to providemedical benefits to retirees. Negotiations with the committee formed to represent the Company’sretirees are ongoing.

*SecuritiesTrading Matters. *OnOctober 28, 2005, the Bankruptcy Court entered an order that restricts thetrading of the common stock and debt interests in the Company.  The purpose of the order is to ensure thatthe Company does not lose the benefit of its net operating loss carryforwards (“NOLs”)for tax purposes.  Under federal andstate income tax law, NOLs can be used to offset future taxable income, andthus 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’sability to use the NOLs.  Thus, theCompany obtained an order that enables it to closely monitor certain transfersof stock and claims and restrict those transfers that may compromise theCompany’s ability to use its NOLs.  See “Note6 – Income Taxes” for further information related to the Company’s NOLs.

The Company’s common stock ceased trading on the NASDAQ stock market onSeptember 26, 2005 and now trades in the “over-the-counter” market under thesymbol NWACQ.PK.  However, the Companycurrently believes that no value will be ascribed to the Company’s outstandingcommon stock, preferred redeemable stock, or other equity securities in theCompany’s plan of reorganization.  Uponthe effective date of the plan of reorganization, the Company

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expectsthat the outstanding common stock of the Company will be cancelled for noconsideration and therefore the Company’s stockholders will no longer have anyinterest as stockholders in the Company by virtue of their ownership of Companycommon stock prior to emergence from bankruptcy.

The New York StockExchange advised the Company on September 15, 2005, that trading in Northwest’s10.5% Class D Pass Through Certificates, Series 2003-1 due April 1, 2009,ticker symbol NWB RP09, as well as the 9.5% Senior Quarterly Interest Bonds dueAugust 15, 2039 (QUIBS), ticker symbol NWB, was suspended.  The QUIBS can still be traded on the “over-the-counter”market under the symbol NWBBQ.PK; however, the Company is no longer accruing orpaying interest.

*Planof Reorganization. *Inorder to exit Chapter 11 successfully, the Company must propose, and obtainconfirmation by the Bankruptcy Court of, a plan of reorganization thatsatisfies the requirements of the Bankruptcy Code.  A plan of reorganization would resolve, amongother things, the Debtors’ pre-petition obligations and set forth the revisedcapital 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.  The Bankruptcy Court has entered orders whichhave extended the deadline of the Debtors’ exclusive right to file a plan ofreorganization and the deadline to obtain necessary acceptance of the plan toJanuary 16, 2007 and March 16, 2007, respectively.

A plan ofreorganization must be voted on by holders of impaired claims and equityinterests, and must satisfy certain requirements of the Bankruptcy Code and, asnoted above, be confirmed by the Bankruptcy Court.  A plan has been accepted by holders of claimsagainst and equity interests in a debtor if (1) at least one-half in number andtwo-thirds in dollar amount of claims actually voting in each impaired class ofclaims have voted to accept the plan and (2) at least two-thirds in amount ofequity interests actually voting in each impaired class of equity interestshave voted to accept the plan.  Undercertain circumstances set forth in the provisions of Section 1129(b) of theBankruptcy Code, the Bankruptcy Court may confirm a plan even if such plan hasnot been accepted by all impaired classes of claims and equity interests.  A class of claims or an equity interest thatdoes not receive or retain any property under the plan on account of suchclaims or interests is deemed to have voted to reject the plan.  The precise requirements and evidentiaryshowing for confirming a plan, notwithstanding its rejection by one or moreimpaired classes of claims or equity interests, depends upon a number offactors, including the status and seniority of the claims or equity interestsin the rejecting class, i.e., secured claims or unsecured claims, subordinatedor senior claims, preferred or common stock.

The Debtors expectto develop their plan of reorganization for emergence from Chapter 11 in early2007.  Additional extensions to theDebtors’ exclusivity period will be sought as necessary.  There can be no assurance that areorganization plan will be proposed by the Debtors within the requiredtimeframe or that additional extensions, if required, will be approved.  Also, there is no assurance that the proposedplan will be approved by claim holders or confirmed by the Bankruptcy Court.

**Note 3 – Recent Accounting Pronouncements**

In September 2006, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 158, *Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans* (“SFASNo. 158”), which amends SFAS No. 87, *Employers’Accounting for Pensions* (“SFAS No. 87”) and SFAS No. 106,*Employers’ Accounting for Postretirement BenefitsOther Than Pensions*(“SFAS No. 106”) to require recognition of theoverfunded or underfunded status of pension and other postretirement benefitplans on the balance sheet. Under SFAS No. 158, gains and losses, prior servicecosts and credits, and any remaining transition amounts under SFAS No. 87 andSFAS No. 106 that have not yet been recognized through net periodic benefitcost will be recognized in accumulated other comprehensive income, net of taxeffects. The measurement date – the date at which the benefit obligation andplan assets are measured – is required to be the company’s fiscal year end. TheCompany currently utilizes a fiscal year-end measurement date.  SFAS No. 158 is effective for publicly-heldcompanies for fiscal years ending after December 15, 2006, except for themeasurement date provisions, which are effective for fiscal years ending afterDecember 15, 2008. The adoption of SFAS No. 158 is expected to increase theCompany’s equity deficit by approximately 2%-3%. SFAS No. 158 does not affectthe results of operations.

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFASNo. 157”). This statement provides a single definition of fair value, aframework for measuring fair value, and expanded disclosures concerning fairvalue. Previously, different definitions of fair value were contained invarious accounting pronouncements creating inconsistencies in measurement anddisclosures. SFAS No. 157 applies to those previously issuedpronouncements that prescribe fair value as the relevant measure of value,except SFAS No. 123 (Revised2004), *Share-Based Payment* (“SFASNo. 123R”) and related interpretations and pronouncements thatrequire or permit measurement similar to fair value but are not intended tomeasure fair value. This pronouncement is effective for fiscal years beginningafter November 15, 2007. The Company does not expect the adoption of SFASNo. 157 to have a material impact on its financial position, results ofoperations, or cash flows.

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In September 2006, the SEC Office of the Chief Accountant andDivisions of Corporation Finance and Investment Management released SABNo. 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*(“SAB No. 108”), which providesinterpretive guidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a current year misstatement.The SEC staff believes that registrants should quantify errors using both abalance sheet and an income statement approach and evaluate whether eitherapproach results in quantifying a misstatement that, when all relevantquantitative and qualitative factors are considered, is material. Thispronouncement is effective for fiscal years ending after November 15,2006. The Company will adopt SAB No. 108 effective the beginning of 2007.The adoption of SAB No. 108 is not expected to have a material impact onthe Company’s financial position, results of operations, or cash flows.

The FASB recently issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(“FIN48”), which clarifies FASB Statement No. 109, *Accountingfor Income Taxes*.  FIN 48defines the threshold for recognizing tax benefits in the Company’s financialstatements and promotes consistency in recognizing and measuring the taxbenefits.  FIN 48 provides that taxbenefits are to be recognized if the Company’s tax return positions will “morelikely than not” be sustained by a taxing authority.  In addition, FIN 48 requires an annualrollforward disclosure in the Company’s financial statements of the beginningand ending balances of unrecognized tax benefits.  The Company is currently evaluating theimpact of FIN 48 on its financial statements. FIN 48 is effective for the quarter beginning January 1, 2007.

The Company adopted SFAS No. 123R using the modified-prospectivetransition method, effective January 1, 2006.  In addition to requiring supplementaldisclosures, SFAS No. 123R eliminated the option to apply the intrinsicvalue measurement provisions of APB No. 25, *Accounting for Stock Issued to Employees* (“APB No. 25”), tostock compensation awards issued to employees. Furthermore, the Statement required the Company to recognizecompensation cost for the portion of outstanding awards previously accountedfor under the provisions of APB No. 25 for which the requisite service hadnot been rendered as of the adoption date for this Statement.  Because the Company voluntarily adopted thefair value method prescribed by SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFAS No. 123”)using the prospective method, effective January 1, 2003, the unvestedawards still accounted for under the provisions of APB No. 25, andtherefore subject to the provisions of SFAS No. 123R, were minimal.  The Statement also required the Company toestimate forfeitures of stock compensation awards as of the grant date of theaward.  The Company’s previous policy wasto recognize forfeitures as they occurred, and the required adjustment toestimate forfeitures as of the grant date of the award for outstanding awardsthat were not fully vested as of December 31, 2005 was immaterial.

**Note 4 – Geographic Regions**

The Company is managed as one cohesivebusiness unit, of which revenues are derived primarily from the commercialtransportation of passengers and cargo. Operating revenues from flight segments serving a foreign destinationare classified into the Pacific or Atlantic regions, as appropriate.  The following table shows the operatingrevenues for each region:
|                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| **(In millions)**      | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Domestic                    | ** ** | **$**                            | **2,250**  |                            | $          | 2,183 | ** ** | **$** | **6,561** |   | $ | 6,286 |   |
| Pacific,  principally Japan | ** ** | **782**                          |       | 747                             | ** ** | **2,042** |   | 2,006 |   |
| Atlantic                    | ** ** | **375**                          |       | 448                             | ** ** | **985** |   | 1,079 |   |
| Total operating  revenues   | ** ** | **$**                            | **3,407**  |                            | $          | 3,378 | ** ** | **$** | **9,588** |   | $ | 9,371 |   |

 

The Company’s tangible assets consistprimarily of flight equipment, which are utilized across geographic markets andtherefore have not been allocated.

**Note5 – Reorganization Related Items**

The condensed consolidated financialstatements have been prepared in accordance with SOP 90-7, and on a goingconcern basis, which contemplates continuity of operations, realization ofassets and liquidation of post-petition liabilities in the ordinary course ofbusiness.  In accordance with SOP 90-7,the financial statements for the periods presented distinguish transactions andevents that are directly associated with the reorganization from the ongoingoperations of the Company.

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Reorganization items recorded during the threemonths ended September 30, 2006 largely consisted of negotiated employee claimsassociated with the Company’s implementation of new contract terms with ALPA,the IAM, ATSA, TWU and NAMA.  The pensionplan curtailment charges are non-cash costs associated with the freezing of thecontract pension plan.  Aircraftrejection charges are non-cash costs that include the estimated allowable claims,net of gains on residual value guarantees, resulting from the Company’srejection of certain aircraft leases and return of aircraft as part of the bankruptcyprocess.  These claims remain subject tofuture adjustments arising from negotiated settlements, actions of theBankruptcy Court, the determination as to the value of any collateral securingclaims, proofs of claim or other events. The charges for professional fees include only those professional feesrelated to the bankruptcy process.

In addition to the charges disclosed above,reorganization items for the nine months ended September 30, 2006 includedrestructured aircraft lease/debt charges, which are primarily non-cash coststhat include the estimated claims resulting from the Company’s renegotiation ofcertain aircraft obligations.  TheCompany also recognized impairment charges on six owned aircraft, and relatedinventory and equipment, which were permanently removed from service; see “Note11 – Aircraft Impairments” for additional information.

Net reorganization items, as shown on theCondensed Consolidated Statements of Operations, consist of the following:
|                                           | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| **(In millions)**                    | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Restructured  aircraft lease/debt charges | ** ** | **$**                            | **6**      |                            | $          | 144 | ** ** | **$** | **1,329** |   | $ | 144 |   |
| Aircraft  rejection charges, net          | ** ** | **29**                           |       | 13                              | ** ** | **140** |   | 13 |   |
| Aircraft and  aircraft related impairment | ** ** | **—**                       |       | —                          | ** ** | **28** |   | — |   |
| Employee claims,  net                     | ** ** | **1,064**                        |       | —                          | ** ** | **1,064** |   | — |   |
| Pension plan  curtailment                 | ** ** | **332**                          |       | —                          | ** ** | **283** |   | — |   |
| Professional  fees                        | ** ** | **15**                           |       | 1                               | ** ** | **40** |   | 1 |   |
| Contract  rejection charges               | ** ** | **—**                       |       | 1                               | ** ** | **—** |   | 1 |   |
| Asset sale                                | ** ** | **(15**                          | **)**      | —                          | ** ** | **(15** | **)** | — |   |
| Other                                     | ** ** | **—**                       |       | —                          | ** ** | **1** |   | — |   |
| Reorganization  items, net                | ** ** | **$**                            | **1,431**  |                            | $          | 159 | ** ** | **$** | **2,870** |   | $ | 159 |   |

 

**Note 6 – Income Taxes**

The Company accounts for income taxes in accordance with SFAS No. 109, *Accounting for Income Taxes* (“SFAS No. 109”), which requiresthat deferred tax assets and liabilities be recognized, using enacted taxrates, for the tax effect of temporary differences between the financialreporting and tax bases of recorded assets and liabilities.  SFAS No. 109 also requires that deferred taxassets be reduced by a valuation allowance if it is more likely than not thatsome or all of the deferred tax assets will not be realized.

Based on the consideration of all available evidence, the Company hasprovided a valuation allowance on deferred tax assets recorded beginning in thefirst quarter 2003.  The Companycontinues to record a full valuation allowance against its deferred tax assetsdue to the uncertainty regarding the ultimate realization of those assets.  The Company’s third quarter 2006 net losstherefore was not reduced by any tax benefit.

In the event the Company were to experience a change in ownership, asdefined by Internal Revenue Code Section 382, upon emergence from Chapter 11the Company’s annual usage of its net operating loses (“NOLs”) that weregenerated prior to the change in ownership could be substantially limited.  The amount of limitation, if any, will bedetermined at the time of its emergence from Chapter 11.

On October 28, 2005, the Bankruptcy Courtentered an order that restricts the trading of the common stock and debtinterests in the Company.  The purpose ofthe order is to ensure the Company does not lose the benefit of its NOLs fortax purposes.  Under federal and stateincome tax law, NOLs can be used to offset future taxable income, and thus area valuable asset of the Debtors’ estate. Certain trading in the Company’s stock (or debt when the Company is inbankruptcy) could adversely affect the Company’s ability to use the NOLs.  Thus, the Company obtained an order thatenables it to closely monitor certain transfers of stock and claims andrestrict those transfers that may compromise the Company’s ability to use itsNOLs.

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**Note 7 – Earnings (Loss) Per Share Data**

The following table sets forth the computationof basic and diluted earnings (loss) per common share:
|                                                                                      | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                           | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| **(In millions, except per share data)**                    | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Numerator:**                                                                       |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) before cumulative effect of  accounting change                     |       | **$**                            | **(1,179** | **)**                           | $          | (469 | ) | **$** | **(2,568** | **)** | $ | (1,155 | ) |
| Cumulative effect of accounting change                                               | ** ** | **—**                       |       | —                          | ** ** | **—** |   | (69 | ) |
| Preferred stock requirements                                                         | ** ** | **—**                       |       | (6                              | )          | **—** |   | (22 | ) |
| Net income (loss) applicable to common stockholders                                  | ** ** | **$**                            | **(1,179** | **)**                           | $          | (475 | ) | **$** | **(2,568** | **)** | $ | (1,246 | ) |
|                                                                                 |       |                             |       |                            |       |   |   |   |   |
| **Denominator:**                                                                     |       |                             |       |                            |       |   |   |   |   |
| Weighted-average shares outstanding for basic and diluted  earnings (loss) per share |       | **87,294,251**                   |       | 87,153,391                      |       | **87,279,832** |   | 86,925,736 |   |
|                                                                                 |       |                             |       |                            |       |   |   |   |   |
| Earnings (loss) per common share:                                                    |       |                             |       |                            |       |   |   |   |   |
| Income (loss) before cumulative effect of accounting  change                         |       | **$**                            | **(13.50** | **)**                           | $          | (5.38 | ) | **$** | **(29.42** | **)** | $ | (13.29 | ) |
| Cumulative effect of accounting change                                               | ** ** | **—**                       |       | —                          | ** ** | **—** |   | (0.79 | ) |
| Preferred stock requirements                                                         | ** ** | **—**                       |       | (0.07                           | )          | **—** |   | (0.25 | ) |
| Net income  (loss) applicable to common stockholders                                 | ** ** | **$**                            | **(13.50** | **)**                           | $          | (5.45 | ) | **$** | **(29.42** | **)** | $ | (14.33 | ) |

 

Incremental shares related to dilutive securities were notincluded in the diluted earnings per share calculation because the Companyreported a net loss for these periods. These incremental shares included 19,096,666 and 19,096,688 shares forthe three and nine months ended September 30, 2006, respectively, and19,179,346 and 19,384,020 for the three and nine months ended September 30,2005, respectively.  Incremental sharesrelated to dilutive securities have an anti-dilutive impact on earnings pershare when a net loss is reported and therefore are not included in thecalculation.

Additionally, 6,270,631 and 6,348,426 shares of Series C Preferred Stockwere excluded from the effect of dilutive securities for the three and ninemonths ended September 30, 2006 and 2005, respectively, because the Companyreported a net loss for these periods.

Total employee stock options outstanding of7,477,782 and total employee stock options and restricted shares outstanding of9,474,862 as of September 30, 2006 and 2005, respectively, were not included indiluted securities because the Company reported a net loss for the three andnine months ended September 30, 2006 and 2005. There were no restricted shares outstanding as of September 30, 2006.

**Note 8 – Liabilities Subject to Compromise**

Liabilities subject to compromise refers toboth secured and unsecured obligations that will be accounted for under a planof reorganization, including claims incurred prior to the Petition Date.  They represent the estimated amount expectedto be allowed on known or potential claims to be resolved through the Chapter11 process, and remain subject to future adjustments arising from negotiatedsettlements, actions of the Bankruptcy Court, rejection of executory contractsand unexpired leases, the determination as to the value of any collateralsecuring claims, proofs of claim or other events.

The Debtors have endeavored to notify all oftheir known or potential creditors whose claims are subject to the Chapter 11cases.  Subject to certain exceptionsunder the Bankruptcy Code, the Chapter 11 filings automatically stayed thecontinuation of any judicial or administrative proceedings or other actionsagainst the Debtors or their property to recover on, collect or secure a claimarising prior to the time of filing on September 14, 2005.  The deadline for creditors to file proofs ofclaim with the Bankruptcy Court (the “Bar Date”) was August 16, 2006.** **A proof of claim arising from the rejection of an executory contract oran unexpired lease must be filed by the later of the Bar Date or 30 days fromthe effective date of the authorized rejection.

The aggregate amount of claims filed with the Bankruptcy Court farexceeds the Debtors’ estimate of ultimate liability. The Debtors believe thatmany of these claims are duplicative, based upon contingencies that have notoccurred, or otherwise are overstated, and are therefore invalid. Differencesbetween amounts recorded by the Debtors and claims filed by creditors are beinginvestigated and resolved in connection with the Debtors’ claims resolutionprocess.  Resolution of differencesbetween claim amounts the Company has estimated and claims filed by itscreditors will be subject to a final determination by the Bankruptcy Court.  The determination of how these liabilitieswill ultimately be

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treatedwill not be known until an approved plan of reorganization is confirmed by theBankruptcy Court and the claims resolution process is complete.  Completion of the claims resolution processmay occur well after confirmation of a plan of reorganization.  The Company will continue to evaluate theamounts of these liabilities through the remainder of the Chapter 11process.  To the extent that the Companyidentifies additional amounts subject to compromise, they will be recognizedaccordingly.  The ultimate number andallowed amounts of such claims are not presently determinable.

Subsequent to its Chapter 11 filing, theCompany recorded post-petition interest expense on pre-petition obligationsonly to the extent it believed the interest would be paid during the bankruptcyproceeding or that it was probable that the interest would be an allowedclaim.  Had the Company recorded interestexpense based on its pre-petition contractual obligations, interest expensewould have increased by $43.0 million and $139.8 million during the three andnine months ended September 30, 2006, respectively, and $9.5 million for thethree and nine months ended September 30, 2005.

At September 30, 2006 and December 31, 2005,the Company had liabilities subject to compromise of $14.7 billion and $14.2billion, respectively, consisting of the following:
|                                                              | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| **(In millions)**                                       | ** ** | **2006**              | ** ** | **2005**             | ** ** |
| Debt, including  accrued interest                            | ** ** | **$**                 | **5,618**  |                 | $          | 7,411 |   |
| Pension, postretirement  and other employee related expenses | ** ** | **4,058**             |       | 3,948                |       |
| Aircraft-related  accruals and deferrals                     | ** ** | **2,882**             |       | 1,455                |       |
| Capital lease  obligations, including accrued interest       | ** ** | **239**               |       | 350                  |       |
| Accounts payable  and other liabilities                      | ** ** | **1,873**             |       | 998                  |       |
| Total  liabilities subject to compromise                     | ** ** | **$**                 | **14,670** |                 | $          | 14,162 |   |

 

In addition to the $14.7 billion of liabilities subject to compromise asof September 30, 2006, itemized above, the Company’s $278 million of PreferredRedeemable Stock (“Series C Preferred Stock”) is also subject tocompromise.  This preferred security isnot presented as a liability on the Company’s Condensed Consolidated BalanceSheets due to its conversion features, as required by the provisions of SFAS150, *Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*.

**Note 9–Long-term Debt not Subject to Compromise**

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 “Note8 – Liabilities Subject to Compromise.” Maturities of long-term debt not subject to compromise, excludingcapital lease obligations, through December 31, 2010, are as follows (inmillions):

| remainder of |   | 2006 |   | $     | 39     |   |   |   |
|--------------|--------|------|--------|-------|--------|--------|--------|--------|
|         |   | 2007 |   | 147   |   |   |   |
|         |   | 2008 |   | 1,546 | *      |   |   |
|         |   | 2009 |   | 198   |   |   |   |
|         |   | 2010 |   | 145   |   |   |   |

 

----

*$1.215 billion represents the amount due under the Company’sDIP Facility (as defined below) in 2008; if the DIP Facility is converted toexit financing the maturity date will be extended five years with $1.162billion due in 2013.

On August 21, 2006, the Company entered into a $1.225 billion SuperPriority Debtor in Possession and Exit Credit and Guarantee Agreement (the “DIPFacility”) with a number of banks and institutions.  Under this agreement, Northwest is theborrower and NWA Corp., Northwest Airlines Holdings Corporation and NWA Inc.are the guarantors.  Proceeds from thefinancing were used to pay off the previously existing $975 million term loanwith accrued interest, to pay underwriting fees and expenses for the newfinancing, and to set aside $59.8 million in reserve to settle disputed claimsrelated to potential default interest and prepayment penalties asserted by theadministrative agent under the previous credit agreement.  In October 2006, the Company and theadministrative agent under the previous credit agreement reached an agreementas to the settlement amount to be paid by the Company, subject to BankruptcyCourt approval.  As of September 30,2006, the Company had adequately accrued for the entire settlement amount.

The DIP Facility consists of a $1.05 billion term loan facility and a$175 million revolving credit facility, both of which are required to be fullydrawn during the Company’s bankruptcy proceeding.  The term of the DIP Facility is the earlierof the Company’s exit from bankruptcy or two years and the DIP Facility bearsan interest rate of LIBOR plus 2.50%, which as of September 30, 2006 was7.90%.  The DIP Facility is secured by afirst lien on the Company’s Pacific route authorities which were last appraisedin January 2006 at $3.3 to $4.1 billion. Additionally, the Company’s obligations to

14

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thelenders have super-priority status while the Company is in bankruptcy.  The DIP Facility has a credit rating of BBB-from Standard & Poor’s Rating Services (“S&P”) and a Ba2 from Moody’sInvestors Service, Inc. (“Moody’s”).

Subject to the Company meeting certain conditions, including emergingfrom bankruptcy on or prior to August 21, 2008, the DIP Facility can beconverted to exit financing.  The finalmaturity, in such event, will be August 21, 2013.  The principal portion of the term loan willbe repaid at 1.0% per year (as is the case under the DIP Facility) with thebalance of 94% due at maturity.  Loansdrawn under the revolving credit facility may be borrowed and repaid at theCompany’s discretion.  Up to $75 millionof the revolving credit facility may be utilized by the Company as a letter ofcredit facility.  Both loan facilitiesunder the exit financing will continue to bear interest at LIBOR plus 2.50%,subject to certain potential adjustments described below.  Letter of credit fees will be charged at thesame credit spread as on the borrowings plus 12.5 basis points.  To the extent that the revolving creditfacility is not utilized, the Company is required to pay an undrawn commitmentfee of 50 basis points per annum.

The conditions to convert the DIP Facility to exit financing onemergence from bankruptcy include, among other items, a confirmed plan ofreorganization, labor savings and pension relief, a minimum of $2.0 billion inunrestricted cash and available committed credit facilities, a collateralcoverage ratio of at least 1.50 to 1.00, and continuation of ratings coverageof the exit financing by S&P and Moody’s. At conversion, the interest rateof LIBOR plus 2.50% remains in place for the exit financing, but is subject tothe following potential increases:

·      0.50% per annum for so long as either S&P’s rating or Moody’s ratingof the facility is less than BB- or Ba3, respectively

·      0.50% per annum for so long as the collateral coverage ratio is 1.75 to1.00 or less

Both the DIP Facility and, upon its conversion, the exit financingrequire ongoing compliance with the following financial covenants:

·      Unrestricted cash of at least $750 million

·      Collateral coverage ratio of at least 1.50 to 1.00

·      Fixed charge coverage ratio as set forth below:
| Four Consecutive Fiscal Quarters Ending | ** ** | **Minimum Ratio of  EBITDAR to**

**Consolidated  Fixed Charges** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| December 31,  2006                                          |       | 1.15  to 1.00                                                                         |       |
| March 31, 2007                                              |       | 1.20  to 1.00                                                                         |       |
| June 30, 2007                                               |       | 1.30  to 1.00                                                                         |       |
| September 30,  2007                                         |       | 1.40  to 1.00                                                                         |       |
| December 31, 2007 and  each quarter ending thereafter       |       | 1.50 to 1.00                                                                          |       |

 

15

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**Note 10 – Fleet Informationand Commitments**

As shown in the following table, Northwestoperated a fleet of 373 aircraft at September 30, 2006, consisting of 310narrow-body and 63 wide-body aircraft. Northwest’s purchase commitments for aircraft as of November 7, 2006 arealso provided.
| ** **                             | ** ** | ** **   | ** ** | ** **          | ** ** | ** **       | ** ** | ** **    | ** ** | ** ** | ** ** | **Aircraft**               | ** ** |
|----------------------------------------|------------|--------------|------------|---------------------|------------|------------------|------------|---------------|------------|------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **   | ** ** | **In Service** | ** ** | **on Firm** | ** ** |
| ** **                             | ** ** | **Seating**  | ** ** | ** **          | ** ** | **Capital**      | ** ** | **Operating** | ** ** | ** ** | ** ** | **Order as of**  | ** ** |
| **Aircraft Type**                 | ** ** | **Capacity** | ** ** | **Owned**           | ** ** | **Lease**        | ** ** | **Lease**     | ** ** | **Total**  | ** ** | **Nov. 7, 2006** | ** ** |
|                                   |       |         |       |                |       |             |       |          |       |       |       |                       |       |
| **Passenger  Aircraft**                | ** ** | ** **   | ** ** | ** **          | ** ** | ** **       | ** ** | ** **    | ** ** | ** ** | ** ** | ** **                 | ** ** |
| Airbus:                                |       |         |       |                |       |             |       |          |       |       |       |                       |       |
| A319                                   |       | 124          |       | 64                  |       | —           |       | 2             |       | 66         |       | 5                          |       |
| A320                                   |       | 148          |       | 45                  |       | —           |       | 28            |       | 73         |       | 2                          |       |
| A330-200                               |       | 243          |       | 10                  |       | —           |       | —        |       | 10         |       | 1                          |       |
| A330-300                               |       | 298          |       | 11                  |       | —           |       | —        |       | 11         |       | 10                         |       |
|                                   |       |         |       |                |       |             |       |          |       |       |       |                       |       |
| Boeing:                                |       |         |       |                |       |             |       |          |       |       |       |                       |       |
| 787-800                                |       | 221          |       | —              |       | —           |       | —        |       | —     |       | 18                         |  (1)  |
| 757-200                                |       | 180-184      |       | 33                  |       | 1                |       | 13            |       | 47         |       | —                     |       |
| 757-300                                |       | 224          |       | 16                  |       | —           |       | —        |       | 16         |       | —                     |       |
| 747-200                                |       | 353-430      |       | 2                   |       | —           |       | 1             |       | 3          |       | —                     |       |
| 747-400                                |       | 403          |       | 4                   |       | —           |       | 12            |       | 16         |       | —                     |       |
|                                   |       |         |       |                |       |             |       |          |       |       |       |                       |       |
| McDonnell  Douglas:                    |       |         |       |                |       |             |       |          |       |       |       |                       |       |
| DC9                                    |       | 100-125      |       | 108                 |       | —           |       | —        |       | 108        |       | —                     |       |
| DC10                                   |       | 273          |       | 9                   |       | —           |       | —        |       | 9          |       | —                     |       |
|                                   |       |         |       | 302                 |       | 1                |       | 56            |       | 359        |       | 36                         |       |
|                                   |       |         |       |                |       |             |       |          |       |       |       |                       |       |
| **Freighter  Aircraft**                | ** ** | ** **   | ** ** | ** **          | ** ** | ** **       | ** ** | ** **    | ** ** | ** ** | ** ** | ** **                 | ** ** |
| Boeing 747F                            |       |         |       | 11                  |       | —           |       | 3             |       | 14         |       | —                     |       |
|                                   |       |         |       |                |       |             |       |          |       |       |       |                       |       |
| **Total  Northwest Operated Aircraft** | ** ** | ** **   | ** ** | **313**             | ** ** | **1**            | ** ** | **59**        | ** ** | **373**    | ** ** | **36**                     | ** ** |
| ** **                             | ** ** | ** **   | ** ** | ** **          | ** ** | ** **       | ** ** | ** **    | ** ** | ** ** | ** ** | ** **                 | ** ** |
| **Regional  Aircraft**                 | ** ** | ** **   | ** ** | ** **          | ** ** | ** **       | ** ** | ** **    | ** ** | ** ** | ** ** | ** **                 | ** ** |
| Avro RJ85                              |       | 69           |       | 2                   |       | —           |       | 7             |       | 9          |       | —                     |       |
| CRJ200/440                             |       | 44-50        |       | —              |       | —           |       | 126           |       | 126        |       | —                     |  (1)  |
| Saab 340                               |       | 30-34        |       | —              |       | —           |       | 49            |       | 49         |       | —                     |       |
| CRJ900                                 |       | 76           |       | —              |       | —           |       | —        |       | —     |       | 36                         |  (2)  |
| Embraer 175                            |       | 76           |       | —              |       | —           |       | —        |       | —     |       | 36                         |  (2)  |
|                                   |       |         |       |                |       |             |       |          |       |       |       |                       |       |
| **Total  Airlink Operated Aircraft**   | ** ** | ** **   | ** ** | **2**               | ** ** | **—**       | ** ** | **182**       | ** ** | **184**    | ** ** | **72**                     | ** ** |
|                                   |       |         |       |                |       |             |       |          |       |       |       |                       |       |
| **Total Aircraft**                     | ** ** | ** **   | ** ** | **315**             | ** ** | **1**            | ** ** | **241**       | ** ** | **557**    | ** ** | **108**                    | ** ** |

 

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(1)          The Company entered into certain aircraft commitments prior to itsChapter 11 filing; see “Note 15 – Subsequent Events” for information related tothe restructuring of these agreements after September 30, 2006.

(2)          The Company entered into these aircraft commitments subsequent toSeptember 30, 2006; see “Note 15 – Subsequent Events” for additionalinformation.

The Company took delivery of three Airbus A330-200 aircraft during thenine months ended September 30, 2006.  Inconnection with the acquisition of these three aircraft, the Company enteredinto long-term debt arrangements.  Undersuch arrangements, the aggregate amount of debt incurred totaled $214 million.

16

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**Note 11 – Aircraft Impairments**

In the second quarter of 2006, the Companyrecorded $28 million related to the impairment of six owned aircraft, andrelated inventory and equipment, which were permanently removed fromservice.  These charges reflect theCompany’s decision to accelerate the retirement of its DC10 aircraft and topark three DC9 aircraft permanently, consistent with the Company’s ongoingreview of its aircraft fleet plan in conjunction with its overall routestructure and capacity requirements.  Thesecond quarter 2006 impairment charges were recorded as reorganization expensesand are discussed in “Note 5 – Reorganization Related Items.”  In the second quarter of 2005, the Companyrecorded, in operating expense, impairment charges totaling $48 millionassociated with aircraft and related equipment on nine owned and two leasedaircraft of various types.

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

Comprehensive income (loss) consisted of thefollowing:
| ** **                                                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| **(In millions)**                                             | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  (loss)                                                 | ** ** | **$**                            | **(1,179** | **)**                           | $          | (469 | ) | **$** | **(2,568** | **)** | $ | (1,224 | ) |
| Minimum pension  liability adjustments                             | ** ** | **201**                          |       | —                          | ** ** | **201** |   | — |   |
| Change in  unrealized gain/(loss) on available-for-sale securities | ** ** | **4**                            |       | (2                              | )          | **5** |   | (5 | ) |
| Change in  deferred gain/(loss) from hedging activities            | ** ** | **(11**                          | **)**      | (2                              | )          | **(9** | **)** | 11 |   |
| Foreign currency  translation adjustments                          | ** ** | **(2**                           | **)**      | (1                              | )          | **—** |   | (6 | ) |
| Comprehensive  income (loss)                                       | ** ** | **$**                            | **(987**   | **)**                           | $          | (474 | ) | **$** | **(2,371** | **)** | $ | (1,224 | ) |

 

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

The Company has several defined benefitpension plans and defined contribution 401(k)-typeplans covering substantially all of its employees.  Northwest froze future benefit accruals forits defined benefit Pension Plans for Salaried Employees, Pilot Employees, andContract Employees effective August 31, 2005, January 31, 2006, and September30, 2006, respectively.  Replacementcoverage will be provided for these employees through 401(k)-type definedcontribution plans or in the case of IAM represented employees, the IAMNational Multi-Employer Plan.

Northwest also sponsors various contributoryand noncontributory medical, dental and life insurance benefit plans coveringcertain eligible retirees and their dependents. The expected future cost of providing such postretirement benefits isaccrued over the service lives of active employees.  Retired employees are not offeredCompany-paid medical and dental benefits after age 64, with the exception ofcertain employees who retired prior to 1987 and receive lifetime Company-paidmedical and dental benefits.  Prior toage 65, the retiree share of the cost of medical and dental coverage is basedon a combination of years of service and age at retirement.  Medical and dental benefit plans are unfundedand costs are paid as incurred.  Thepilot group is provided Company-paid life insurance coverage in amounts thatdecrease based on age at retirement and age at time of death.

The Pension Protection Act of 2006 (“2006 Pension Act”) was signed intolaw on August 17, 2006. The 2006 Pension Act allows commercial airlines toelect special funding rules for defined benefit plans that are frozen.  The unfunded liability for a frozen definedbenefit plan may be amortized over a fixed 17-year period. The unfundedliability is defined as the actuarial liability calculated using an 8.85%interest rate minus the fair market value of plan assets.  Northwest elected the special funding rulesfor frozen defined benefit plans under the 2006 Pension Act effective October1, 2006.  As a result of this election (1)the funding waivers that Northwest received for the 2003 plan yearcontributions are deemed satisfied under the 2006 Pension Act, and (2) thefunding standard account for each Plan has no deficiency as of September 30,2006. However, new contributions that come due under the 2006 Pension Actfunding rules must be paid even while Northwest is in bankruptcy.  If the new contributions are not paid, thefuture funding deficiency that would develop will be based on the regularfunding rules rather than the special funding rules.

It is Northwest’s policy tofund annually at least the minimum contribution as required by the EmployeeRetirement Income Security Act of 1974, as amended (“ERISA”).  However, as a result of the commencement ofNorthwest’s Chapter 11 case, Northwest did not make minimum cash contributionsto its defined benefit pension plans that were due after September 14,2005.  Subsequent to Northwest’s bankruptcyfiling and prior to its election under the 2006 Pension Act, Northwest paid thenormal cost component of the plans’ minimum funding requirements relating toservice rendered post-petition and certain interest payments associated withits 2003 Contract Plan and Salaried Plan year waivers.  As noted above, effective October 1, 2006,Northwest elected the special funding rules available to commercial airlines.

17

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Asa result of Northwest’s Chapter 11 filing, we have appointed an independentfiduciary for all of our tax-qualified defined benefit pension plans.  The fiduciary is charged with pursuing, onbehalf of the plans, claims to recover minimum funding contributions due underfederal law, to the extent that Northwest is not continuing to fund the plansdue to bankruptcy prohibitions.

Northwest’s 2006 calendar year contributions toqualified defined benefit plans approximate $61 million, all of which has beenpaid as of September 30, 2006.  In 2007,Northwest’s calendar year contributions to its frozen defined benefit plans andthe replacement plans (taking into account the new funding provisions of the2006 Pension Act) are estimated to range between $120 million and $160 millionbased on current assumptions.  

***Components of net periodic benefit cost of definedbenefit plans and defined contribution plan costs:***
|                                                | ** ** | **Three months ended September 30** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                     | ** ** | **Pension Benefits**                               | ** ** | **Other Benefits** | ** ** |
| **(In millions)**                         | ** ** | **2006**                                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Defined benefit  plan costs                    |       |                                                    |       |   |   |   |   |   |   |
| Service cost                                   | ** ** | **$**                                                   | **35**     |   | $ | 72 | ** ** | **$** | **7** |   | $ | 8 |   |
| Interest cost                                  | ** ** | **132**                                                 |       | 137 | ** ** | **14** |   | 14 |   |
| Expected return on plan assets                 | ** ** | **(120**                                                | **)**      | (128 | ) | **—** |   | — |   |
| Amortization of prior service cost             | ** ** | **10**                                                  |       | 19 | ** ** | **(7** | **)** | (2 | ) |
| Recognized net actuarial loss and other events |       | **23**                                                  |       | 120 |   | **9** |   | 8 |   |
| Net periodic benefit cost                      | ** ** | **80**                                                  |       | 220 | ** ** | **23** |   | 28 |   |
|                                           |       |                                                    |       |   |   |   |   |   |   |
| Defined  contribution plan costs               | ** ** | **13**                                                  |       | — | ** ** | **—** |   | — |   |
|                                           |       |                                                    |       |   |   |   |   |   |   |
| Total benefit cost                             | ** ** | **$**                                                   | **93**     |   | $ | 220 | ** ** | **$** | **23** |   | $ | 28 |   |

 
|                                                | ** ** | **Nine months ended September 30** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                     | ** ** | **Pension Benefits**                              | ** ** | **Other Benefits** | ** ** |
| **(In millions)**                         | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Defined benefit  plan costs                    |       |                                                   |       |   |   |   |   |   |   |
| Service cost                                   | ** ** | **$**                                                  | **103**    |   | $ | 218 | ** ** | **$** | **25** |   | $ | 25 |   |
| Interest cost                                  | ** ** | **396**                                                |       | 412 | ** ** | **46** |   | 42 |   |
| Expected return on plan assets                 | ** ** | **(359**                                               | **)**      | (383 | ) | **—** |   | — |   |
| Amortization of prior service cost             | ** ** | **30**                                                 |       | 56 | ** ** | **(12** | **)** | (7 | ) |
| Recognized net actuarial loss and other events |       | **80**                                                 |       | 196 |   | **29** |   | 23 |   |
| Net periodic benefit cost                      | ** ** | **250**                                                |       | 499 | ** ** | **88** |   | 83 |   |
|                                           |       |                                                   |       |   |   |   |   |   |   |
| Defined  contribution plan costs               | ** ** | **39**                                                 |       | — | ** ** | **—** |   | — |   |
|                                           |       |                                                   |       |   |   |   |   |   |   |
| Total benefit cost                             | ** ** | **$**                                                  | **289**    |   | $ | 499 | ** ** | **$** | **88** |   | $ | 83 |   |

 

18

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Related to the freezing of Northwest’s defined benefit plans coveringdomestic employees in 2005 and 2006, Northwest recorded pension curtailmentcharges and gains.  Curtailment chargesrecorded prior to Northwest’s bankruptcy filing were recorded in pensionexpense; curtailment charges and gains recorded after Northwest’s Chapter 11filing have been recorded as a component of net reorganization expense.  Northwest has recorded the following pensioncurtailment amounts:
|                            | ** ** | **Three months** | ** ** | **Nine months**  | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **September 30** | ** ** | **September 30** | ** ** |
| **(In millions)**     | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Curtailment  Charge/(Gain) |       |                  |       |                  |       |   |   |   |   |
| Salaried Plan              | ** ** | **$**                 | **—** |                  | $          | 28 | ** ** | **$** | **—** |   | $ | 28 |   |
| Pilot Plan                 | ** ** | **—**            |       | —                | ** ** | **(49** | **)** | — |   |
| Contract Plan              | ** ** | **332**               |       | 54                    | ** ** | **332** |   | 54 |   |
|                       |       |                  |       |                  |       |   |   |   |   |
| Total                      | ** ** | **$**                 | **332**    |                  | $          | 82 | ** ** | **$** | **283** |   | $ | 82 |   |

 

**Note 14 – Stock-Based Compensation**

As of September 30, 2006, theCompany maintains stock incentive plans for officers and key employees of theCompany (the “Management Plans”) and a stock option plan for pilot employees(the “Pilot Plan”).  The Company adopted SFAS No. 123 (Revised2004), *Share-Based Payment* (“SFASNo. 123R”), using the modified-prospective transition method, effectiveJanuary 1, 2006.  In addition torequiring supplemental disclosures, SFAS No. 123R eliminated the option toapply the intrinsic value measurement provisions of APB No. 25, *Accounting for Stock Issued to Employees* (“APBNo. 25”), to stock compensation awards issued to employees.  Furthermore, the Statement required theCompany 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.  Because the Company voluntarilyadopted the fair value method prescribed by SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFASNo. 123”) using the prospective method, effective January 1, 2003,the unvested awards still accounted for under the provisions of APBNo. 25, and therefore subject to the provisions of SFAS No. 123R,were minimal.  The Statement alsorequired the Company to estimate forfeitures of stock compensation awards as ofthe grant date of the award.  The Company’sprevious policy was to recognize forfeitures as they occurred, and the requiredadjustment to estimate forfeitures as of the grant date of the award foroutstanding awards that were not fully vested as of December 31, 2005 wasimmaterial.

The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option pricing model with the followingassumptions:  risk-free interest rate,stock price volatility, and expected life. The Company establishes the risk-free interest rate using the U.S.Treasury yield curve as of the grant date. The expected volatility assumption is set based primarily on historicalvolatility.  The expected life assumptionis set based on past exercise behavior of option holders.

The fair value of options granted under theManagement Plan was estimated on the date of grant using the Black-Scholesoption pricing model with the following assumptions.  There were no options granted under the PilotPlan for the periods presented.
|                                           | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                      |       |                                                |       |                                               |       |   |   |   |   |
| Weighted average  risk-free interest rate |       | N/A                                                 |       | 4.1                                                | %          | N/A |   | 4.0 | % |
|                                      |       |                                                |       |                                               |       |   |   |   |   |
| Stock price  volatility                   |       | N/A                                                 |       | 50.0                                               | %          | N/A |   | 50.0 | % |
|                                      |       |                                                |       |                                               |       |   |   |   |   |
| Expected lives in years                   |       | N/A                                                 |       | 6.0                                                |       | N/A |   | 6.0 |   |

 

19

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A reconciliation of the number of options outstandingand exercisable under the Management Plan as of September 30, 2006, and changesduring the nine months then ended, are as follows:
|                                     | ** ** | ** ** | ** ** | **Weighted-Average**    | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------|------------|
| **(Shares in thousands)** | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding at  12/31/05            |       | 2,815      |       | $                       | 12.59      |   |
| Granted                             |       | —     |       | —                  |       |
| Forfeited                           |       | (401       | )          | $                       | 16.45      |   |
| Exercised                           |       | —     |       | —                  |       |
| Outstanding at  9/30/06             |       | 2,414      |       | $                       | 11.95      |   |
|                                |       |       |       |                    |       |
| Exercisable at 9/30/06              |       | 1,799      |       | $                       | 13.44      |   |

 

A summary of the number of options outstanding and exercisable under theManagement Plan categorized by range of exercise prices as of September 30,2006, are as follows:

|                                     | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                           | ** ** |
|-------------------------------------|------------|------------------------------|------------|--------------------------------------------------------|------------|
| **(Shares in thousands)** | ** ** | **Shares**                   | ** ** | **Weighted-Average  Remaining  Contractual Life** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| Range of  Exercise Prices           |       |                         |       |                                                   |       |   |   |   |   |   |   |
| $4.61 to $24.59(1)                  |       | 2,159                        |       | 6.1  years                                             |       | $ | 9.09 |   | 1,544 |   | $ | 9.69 |   |
| $26.16 to $39.31                    |       | 229                          |       | 1.4  years                                             |       | $ | 34.57 |   | 229 |   | $ | 34.57 |   |
| $43.56 to $51.97                    |       | 26                           |       | 2.3 years                                              |       | $ | 50.49 |   | 26 |   | $ | 50.49 |   |

 

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(1)          1.7million of the 2.2 million shares outstanding had an exercise price of $8.31,and approximately 1.3 million of these shares were exercisable.

A reconciliation of the number of options outstanding and exercisableunder the Pilot Plan as of September 30, 2006, and changes during the ninemonths then ended, are as follows:
|                                     | ** ** | ** ** | ** ** | **Weighted-Average**    | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------|------------|
| **(Shares in thousands)** | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding at  12/31/05            |       | 5,064      |       | $                       | 9.96       |   |
| Granted                             |       | —     |       | —                  |       |
| Forfeited                           |       | —     |       | —                  |       |
| Exercised                           |       | —     |       | —                  |       |
| Outstanding at  9/30/06             |       | 5,064      |       | $                       | 9.96       |   |
|                                |       |       |       |                    |       |
| Exercisable at 9/30/06              |       | 4,833      |       | $                       | 9.99       |   |

 

A summary of the number of options outstanding and exercisable under thePilot Plan categorized by exercise price as of September 30, 2006, are asfollows:
|                                     | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | ** **                   | ** ** | **Weighted-Average**         | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | ** ** | ** ** |
| **(Shares in thousands)** | ** ** | **Shares**                   | ** ** | **Contractual Life**    | ** ** | **Shares** | ** ** |
| Exercise Prices                     |       |                         |       |                         |       |   |   |
| $                                   | 7.33       |                         | 3,500      |                         | 8.0  years |   | 3,499 |   |
| $                                   | 9.19       |                         | 926        |                         | 6.8  years |   | 696 |   |
| $                                   | 19.62      |                         | 134        |                         | 5.0  years |   | 134 |   |
| $                                   | 24.69      |                         | 123        |                         | 3.0  years |   | 123 |   |
| $                                   | 27.88      |                         | 381        |                         | 3.0 years  |   | 381 |   |

 

20

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During the three and nine months ended September 30, 2006, the totalstock-based compensation expense for all compensation related to stock-basedplans was $0.6 million and $2.0 million, respectively, which includes $0.5million and $1.5 million of stock option expense.  In the three and ninemonths ended September 30, 2005, the Company recognized stock-basedcompensation expense of $3.9 million and $12.6 million respectively, whichincludes $2.2 million and $7.7 million of stock option expense.  There was no corresponding tax benefit in2006 or 2005 related to this stock-based compensation, as the Company records afull valuation allowance against its deferred tax assets due to the uncertaintyregarding the ultimate realization of those assets.  As of September 30, 2006, the Company hadapproximately $0.8 million of total unrecognized compensation expense relatedto nonvested awards.  The Company expectsto recognize this expense over a weighted average period of approximately 0.5years.

**Note 15 – Subsequent Events**

On October 5, 2006, the Company announced thatit placed firm orders for 36 Bombardier Canadair Regional Jet (“CRJ”) 900aircraft and 36 Embraer 175 aircraft with deliveries scheduled to commence inMay 2007.  If operated by an ownedaffiliate, the Company intends to finance these aircraft through manufacturerprovided or arranged debt financing.  Therespective agreements with Bombardier and Embraer also grant the Companyoptions and purchase rights for an additional 96 CRJ900 aircraft and 136Embraer 175 aircraft.  Compass Airlines, an indirect subsidiary ofNWA Corp., will operate the 36 Embraer 175 aircraft as Northwest Airlink.  The operator of the 36 Bombardier aircraftwill be designated at a later date.

As part of the agreement to order new CRJ900aircraft, the Company reached agreements with the applicable lenders torestructure the existing 126 CRJ200/440 aircraft fleet.  This agreement includes the return of 15previously rejected CRJ200/440 aircraft into the Northwest Airlink fleet.  This marks the completion of Northwest’s CRJfleet restructuring.  As a result, theAirlink CRJ200/440 fleet will total 141 aircraft.  In the fourth quarter, the Company willrecord a non-cash reorganization expense of approximately $285 million for therestructuring of these aircraft agreements.

The terms of the agreement with Bombardierprovide for the termination of the existing purchase agreement for CRJ200/440aircraft as it relates to the remaining 13 aircraft to be delivered.  Northwest will assume the CRJ200/440 purchaseagreement as it relates to aircraft that have been delivered, and reject thepurchase agreement as it relates to aircraft that have not been delivered.  Bombardier will be entitled to an allowedgeneral unsecured claim, without setoff or recoupment, in an amount to besubsequently determined in accordance with the claims process in the Debtors’cases, pursuant to the terms of the Restructuring Agreements for damagesresulting from such rejection. The agreements with Bombardier and Embraer wereapproved by the Bankruptcy Court on October 26, 2006.

On October 19, 2006 the Company announced agreements with The BoeingCompany and Rolls-Royce plc which will allow Northwest to take delivery of itsfirst Boeing 787 aircraft in August 2008. Northwest expects to introduce the new 787 Dreamliner into commercialservice in October 2008.  Theseagreements provide for the assumption of the Company’s purchase agreement for18 Boeing 787s, equipped with Rolls-Royce Trent 1000 engines, which was enteredinto in May 2005.  Introduction of theBoeing 787 aircraft to the Company’s fleet is a key element to the Company’soverall restructuring plan.  The Boeing andRolls-Royce agreements were approved by the Bankruptcy Court on November 7,2006.  These agreements restructuredpre-petition aircraft purchase commitments the Company has related to its May2005 order.  In connection with theseagreements the Company also restructured certain secured loan arrangements withBoeing, including loans secured by aircraft and accounts receivable, and willrepay a loan secured by Northwest’s equity investment in its regional carriers.

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

**ThirdQuarter 2006 Results**

For the quarter ended September 30, 2006, theCompany recorded a net loss applicable to common stockholders of $1.2billion.  This compares to a thirdquarter 2005 net loss applicable to common stockholders of $475 million.  Excluding reorganization items, the Companyreported a 2006 third quarter net profit of $252 million.  This compares to a prior year third quarternet loss of $234 million, excluding reorganization and unusual items.

Operating revenues in the third quarterincreased 0.9 percent versus the third quarter of 2005 to $3.4 billion.  System passenger revenue increased 2.9percent to more than $2.5 billion on 8.0 percent fewer mainline available seatmiles (“ASMs”), resulting in an 11.8 percent improvement in unit revenue.  Regional carrier revenues decreased slightlydue to a 20.7 percent capacity reduction.

Operating expenses in the quarter decreased14.2 percent year-over-year to $3.0 billion, while mainline unit costs,excluding fuel and unusual items, decreased by 11.8 percent.  Salaries, wages and benefits decreased 32.2percent, primarily due to the implementation of consensually agreed uponcollective bargaining agreements (“CBAs”), wage reductions imposed underSection 1113, mechanic pay and headcount reductions, and the reduced level offlying.  Aircraft maintenance materialsand repairs expense decreased 18.3 percent, attributable to lower maintenancevolume partially offset by the increased shift to third party maintenancevendors.  Aircraft rental expensedecreased 49.0 percent, primarily due to restructured and rejected aircraftleases.  

**SignificantCompany Announcements**

*Fleet Optimization.*  OnOctober 19, 2006 the Company announced agreements with The Boeing Company andRolls-Royce plc which will allow Northwest to take delivery of its first Boeing787 aircraft in August 2008.  Northwestexpects to introduce the new 787 Dreamliner into commercial service in October2008.  These agreements provide for theassumption of the Company’s purchase agreement for 18 Boeing 787s, equippedwith Rolls-Royce Trent 1000 engines, which was entered into in May 2005 and isa key element to the overall restructuring plan.  The Boeing and Rolls-Royce agreements wereapproved by the Bankruptcy Court on November 7, 2006.  These agreements restructured certain otherpre-petition obligations of the Company owing to Boeing.

On October 5, 2006, the Company announced thatit placed firm orders for 36 Bombardier Canadair Regional Jet (“CRJ”) 900aircraft and 36 Embraer 175 aircraft with deliveries scheduled to commence inMay 2007.  If operated by an ownedaffiliate, the Company intends to finance these aircraft through manufacturerprovided or arranged debt financing.  Therespective agreements with Bombardier and Embraer also grant the Companyoptions and purchase rights for an additional 96 CRJ900 aircraft and 136Embraer 175 aircraft.  Compass Airlines, an indirect subsidiary ofNWA Corp., will operate the 36 Embraer 175 aircraft as Northwest Airlink.  The operator of the 36 Bombardier aircraftwill be designated at a later date.

*Pension Protection Act*.  ThePension Protection Act of 2006 (“2006 Pension Act”) was signed into law onAugust 17, 2006.  The 2006 Pension Actreceived broad bipartisan support in the U.S. Congress.  The comprehensive legislation protectsemployees’ pension benefits and strengthens the Pension Benefit GuarantyCorporation (“PBGC”), which guarantees pension benefits.  The 2006 Pension Act allows commercialairlines to elect special funding rules for defined benefit plans that arefrozen.  The unfunded liability for afrozen defined benefit plan may be amortized over a fixed 17-year period. Theunfunded liability is defined as the actuarial liability calculated using an8.85% interest rate minus the fair market value of plan assets.  Northwest elected the special funding rulesfor frozen defined benefit plans under the 2006 Pension Act on October 1, 2006.

*European Expansion.*  TheCompany announced an expansion of its European flight network with new serviceto Brussels, Belgium and Düsseldorf, Germany, as well as the first and onlynonstop service between Hartford, Connecticut and Amsterdam, theNetherlands.  Northwest, in cooperationwith its joint venture partner, KLM Royal Dutch Airlines, also announced thatit will add more flights in the Detroit – Amsterdam and Boston – Amsterdammarkets.  In total, the Company will addsix trans-Atlantic flights and two new European destinations to its globalnetwork.

*New Route Authority to China. *The Company has filed a request with the U.S. Department ofTransportation (“DOT”) for new authority to expand its service to China.  Northwest is asking government approval toprovide daily, nonstop service between Detroit and Shanghai.

*Air France Codeshare Agreement.* TheCompany announced it will begin codeshare implementation with Air France thatwill benefit customers traveling through Northwest’s WorldGateway at ourDetroit hub and Air France’s Paris hub at Charles de Gaulle Airport.  Effective September 2, 2006, Northwest andAir France began codesharing on each other’s nonstop flights between Detroitand Paris, offering customers more convenient flight options.

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*Additional Cargo Frequencies to China.*  NWACargo, the cargo division of Northwest Airlines will expand its all-cargofreighter service between the United States and China after being awarded fouradditional frequencies per week by the DOT. NWA Cargo currently serves Shanghai and Guangzhou with dedicatedall-cargo freighters.  In 2007, NWA Cargowill expand its Guangzhou freighter service to daily operations with theadditional frequencies, providing same day service to the United States with astop in Japan.

**RestructuringOverview**

On September 14, 2005, NWA Corp. and 12 of its direct and indirectsubsidiaries 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. Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., anindirect subsidiary of NWA Corp., also filed a voluntary petition for reliefunder Chapter 11.  The Bankruptcy Courtis jointly administering these cases under the caption “In re NorthwestAirlines 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.  See “Note 2 – VoluntaryReorganization Under Chapter 11” for additional information related to theCompany’s rights, risks and obligations under the Chapter 11 filing.

The Company isusing the provisions of Chapter 11 to reorganize its business, targeting $2.5billion in annual business improvements, in order to return to profitability ona sustained basis.  The Chapter 11process will allow the Company to realize three major elements essential to itstransformation, as described below.  Todate, the Company has made substantial progress and is on target to achievethese objectives:

·      Achieving $2.2 billion in annual reductions in both labor and non-laborcosts, $1.7 billion of which is incremental to year-end 2005 results;

·      Resizing and optimization of the Company’s fleet to better serveNorthwest’s markets;

·      Restructuring and recapitalization of the Company’s balance sheet,including a targeted reduction in debt and lease obligations of approximately$4.2 - $4.4 billion, providing debt and equity levels consistent with long-termprofitability.

*LaborCost Restructuring* The Company has implemented laboragreements with terms and conditions worth approximately $1.4 billion in annuallabor cost savings. The Company has reached consensual agreement on CBAs withthe Air Line Pilots Association (“ALPA”), the International Association ofMachinists and Aerospace Workers (“IAM”), the Aircraft Technical SupportAssociation (“ATSA”), the Transport Workers Union of America (“TWU”), and theNorthwest Airlines Meteorologists Association (“NAMA”).  All of the agreements with ALPA, the IAM,ATSA, TWU, and NAMA were implemented on or before August 1, 2006.  Two rounds of salaried and managementemployee pay and benefit cuts have also been achieved and implemented.   In addition, the Company imposed contractterms on its technicians represented by the Aircraft Mechanics FraternalAssociation (“AMFA”) in August 2005 and, under Section 1113(c) of theBankruptcy Code, imposed contract terms on its flight attendants represented bythe Association of Flight Attendants-Communication Workers of America (“AFA-CWA”)on July 31, 2006.  On November 6, 2006,the Company reached a ratified agreement with AMFA to end the labor disputewith the airline’s technicians.  Theagreement maintains the necessary annual labor cost savings fromAMFA-represented employees.

Section 1113(c) ofthe Bankruptcy Code permits a debtor to move to reject its CBAs if the debtorfirst satisfies a number of statutorily prescribed substantive and proceduralprerequisites and obtains the Bankruptcy Court’s approval of the rejection orthe expiration of the statutorily prescribed time period.  After bargaining in good faith and sharingrelevant information with its unions, a debtor must make proposals to modifyits existing CBAs based on the most complete and reliable information availableat the time.  The proposed modificationsmust be necessary to permit the reorganization of a debtor and must providethat 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 theequities favors rejection.   In October2005, the Company commenced Section 1113(c) proceedings with ALPA, the IAM, andthe Professional Flight Attendants Association (“PFAA”) and has subsequentlyreached consensual agreement with ALPA and the IAM.

With respect to theCompany’s flight attendants, the Company reached a tentative consensualagreement on a new contract with its flight attendants represented by the PFAAon March 1, 2006 (the “March TA”).  OnJune 6, 2006, the PFAA announced that its flight attendants failed to ratifythe tentative agreement.  As a result ofthe flight attendants’ failure to ratify this agreement, the Company requesteda ruling from the Bankruptcy Court on its Section 1113(c) motion to reject itsexisting flight attendant labor agreement and to permit the Company to imposenew contract terms.  On June 29, 2006,the Bankruptcy Court granted the Company’s Section 1113(c) motion to reject itscontract with the flight attendants and authorized the Company to implement theterms of the March TA; however, the Bankruptcy Court stayed implementation ofthe order until July 17, 2006.

23

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Following theBankruptcy Court’s June 29, 2006 ruling, the Company and the PFAA commencednegotiations to reach a new agreement. On July 6, 2006, the Company’s flight attendants voted to change theirunion representation from the PFAA to the AFA-CWA.  Subsequently, the Company and the AFA-CWAcontinued negotiations to reach a new agreement, and on July 17, 2006, theparties announced that they reached a tentative consensual agreement (the “JulyTA”).  On July 31, 2006, the AFA-CWAannounced that its members failed to approve the July TA.  As a result of the flight attendants’ failureto ratify the July TA, and in accordance with the Bankruptcy Court’s previousauthorization, effective July 31, 2006 the Company implemented new contractterms and conditions for its flight attendants, consistent with the terms andconditions of the March TA.

On July 31, 2006,following the flight attendants’ failure to ratify a second proposed CBA andthe Company’s subsequent imposition of new contract terms for the flightattendants, the AFA-CWA provided the Company with a 15-day notice of its intentto strike or engage in other work actions, including CHAOS (Create Havoc AroundOur System).  In response, on August 1,2006, the Company filed a motion with the Bankruptcy Court seeking to obtain aninjunction against such activities.  TheAFA-CWA subsequently extended the strike deadline by 10 days to August 25,2006, in response to terrorist threats against air travel to and within theUnited States.  On August 17, 2006, theBankruptcy Court denied the Company’s request for an injunction.  On August 18, 2006, the Company filed anappeal of the Bankruptcy Court’s decision with the United States District Courtfor the Southern District of New York (“U.S. District Court”). On August 25,2006, the U.S. District Court issued an injunction pending appeal whichtemporarily prevented any work action by the AFA-CWA while the court consideredthe Company’s appeal.  The U.S. DistrictCourt reversed the Bankruptcy Court’s decision on September 15, 2006, andgranted the Company’s request for a preliminary injunction to prevent athreatened strike or work action by the AFA-CWA.  Subsequently, the AFA-CWA appealed the U.S.District Court’s ruling to the U.S. Second Circuit Court of Appeals.  Arguments related to this matter arescheduled to be heard on November 28, 2006. In addition, the Company is currently in mediated negotiations with theAFA-CWA and representatives of the National Mediation Board (“NMB”).  The AFA-CWA has requested that it be releasedfrom further negotiations by the NMB; to date the NMB has not granted thisrequest.   A strike or other form ofself-help could have a material adverse effect on the Company.

The Company hasalso commenced proceedings under Section 1114 of the Bankruptcy Code, pursuantto which the Company is seeking reductions in the costs it incurs to providemedical benefits to retirees. Negotiations with the committee formed to represent the Company’sretirees are ongoing.

*Non-labor Cost Restructuring*.  TheCompany continues to pursue reductions in non-labor costs consistent with itsinitial $150 million target. Savings are expected to be realized through therestructuring of our agreements with our regional airline affiliates, reductionin properties and facilities costs, reduced fuel burn, and lower distribution,insurance and interest costs. Additional savings are expected through therenegotiation of other executory contracts.

*Balance Sheet Restructuring*.  In the face of mounting lossesand prior to its bankruptcy filing, the Company sustained its operationslargely through a strategy that included borrowing cash and sellingassets.  This strategy had theconsequence of leaving the Company with a debt burden of $14 billion, whichincluded $5 billion of aircraft-related operating lease present valuecommitments.  To successfully restructureand exit bankruptcy, the Company must eliminate excess debt and recapitalizeits balance sheet.

The Section 1110 deadline for the Debtors was November 14, 2005.  The Debtors sought to restructure or rejectobligations representing approximately 50% of its fleet count and havesubstantially completed over $400 million in annual aircraft ownership costreductions, including interest, rent and depreciation expense.

The Debtors’ balance sheet debt as ofDecember 31, 2005 included $1.7 billion in unsecured pre-petition debtobligations.  These obligations arereflected in the Debtors’ liabilities subject to compromise.  See “Note 6 – Liabilities Subject to Compromise” in the Company’s AnnualReport on Form 10-K for 2005, for additional information.  As outlined in SOP 90-7, the Company nolonger records post-petition interest expense on these pre-petition unsecureddebt obligations.  The interest expensereduction associated with this unsecured debt is projected to drive $150million of annual savings.

24

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**OperatingStatistics – Three and nine months ended September 30, 2006 and 2005**

Information with respect to the Company’soperating statistics follows:
| ** **                                                      | ** ** | **Three months ended** | ** **   | ** **  | ** ** | **Nine months ended** | ** ** | ** **  | ** **   |
|-----------------------------------------------------------------|------------|----------------------------------|--------------|-------------|------------|---------------------------------|------------|-------------|--------------|
| ** **                                                      | ** ** | **September 30**            | ** **   | **Percent** | ** ** | **September 30**           | ** ** | **Percent** | ** **   |
| ** **                                                      | ** ** | **2006**                         | ** **   | **2005**    | ** ** | **Change**                      | ** ** | **2006**    | ** **   | **2005** | ** ** | **Change** | ** ** |
| **Scheduled  service - Consolidated: (1)**                      |       |                             |         |        |       |                            |       |        |         |   |   |   |   |
| Available seat miles (ASM) (millions)                           | ** ** | **24,073**                       |         | 26,476      |       | (9.1                            | )          | **69,713**  |         | 77,307 |   | (9.8 | ) |
| Revenue passenger miles (RPM) (millions)                        | ** ** | **20,521**                       |         | 22,113      |       | (7.2                            | )          | **59,053**  |         | 63,195 |   | (6.6 | ) |
| Passenger load factor                                           | ** ** | **85.2**                         | **%**        | 83.5        | %          | 1.7                             | pts.       | **84.7**    | **%**        | 81.7 | % | 3.0 | pts. |
| Revenue passengers (millions)                                   | ** ** | **17.6**                         |         | 18.7        |       | (5.9                            | )          | **51.1**    |         | 53.9 |   | (5.2 | ) |
| Passenger revenue per RPM (yield)                               | ** ** | **14.19**                        | ***¢*** | 12.85       | *¢*   | 10.4                            | ** ** | **13.75**   | ***¢*** | 12.41 | *¢* | 10.8 |   |
| Passenger revenue per ASM (RASM)                                | ** ** | **12.10**                        | ***¢*** | 10.73       | *¢*   | 12.8                            | ** ** | **11.65**   | ***¢*** | 10.15 | *¢* | 14.8 |   |
|                                                            |       |                             |         |        |       |                            |       |        |         |   |   |   |   |
| **Scheduled  service - Mainline: (2)**                          |       |                             |         |        |       |                            |       |        |         |   |   |   |   |
| Available seat miles (ASM) (millions)                           | ** ** | **22,237**                       |         | 24,160      |       | (8.0                            | )          | **64,098**  |         | 70,697 |   | (9.3 | ) |
| Revenue passenger miles (RPM) (millions)                        | ** ** | **19,160**                       |         | 20,437      |       | (6.2                            | )          | **54,871**  |         | 58,625 |   | (6.4 | ) |
| Passenger load factor                                           | ** ** | **86.2**                         | **%**        | 84.6        | %          | 1.6                             | pts.       | **85.6**    | **%**        | 82.9 | % | 2.7 | pts. |
| Revenue passengers (millions)                                   | ** ** | **14.3**                         |         | 15.0        |       | (4.7                            | )          | **41.2**    |         | 43.6 |   | (5.5 | ) |
| Passenger revenue per RPM (yield)                               | ** ** | **13.33**                        | ***¢*** | 12.14       | *¢*   | 9.8                             | ** ** | **12.81**   | ***¢*** | 11.71 | *¢* | 9.4 | * * |
| Passenger revenue per ASM (RASM)                                | ** ** | **11.48**                        | ***¢*** | 10.27       | *¢*   | 11.8                            | ** ** | **10.96**   | ***¢*** | 9.71 | *¢* | 12.9 |   |
|                                                            |       |                             |         |        |       |                            |       |        |         |   |   |   |   |
| Total operating ASM (millions)                                  | ** ** | **22,289**                       |         | 24,186      |       | (7.8                            | )          | **64,187**  |         | 70,816 |   | (9.4 | ) |
|                                                            |       |                             |         |        |       |                            |       |        |         |   |   |   |   |
| Passenger service operating expense per total  ASM (3) (4) |       | **10.98**                        | ***¢*** | 11.82       | *¢*   | (7.1                            | )          | **11.04**   | ***¢*** | 11.43 | *¢* | (3.4 | ) |
| Pension curtailment charges per total ASM (5)                   | ** ** | **—**                       |         | 0.34        | *¢*   | (100.0                          | )          | **—**  |         | 0.11 | *¢* | (100.0 | ) |
| Aircraft and aircraft related write-downs per total  ASM (5)    |       | **—**                       |         | —      |       | —                          |       | **—**  |         | 0.07 | *¢* | (100.0 | ) |
| Mainline fuel expense per total ASM                             | ** ** | **3.71**                         | ***¢*** | 3.24        | *¢*   | 14.5                            | ** ** | **3.49**    | ***¢*** | 2.88 | *¢* | 21.2 |   |
|                                                            |       |                             |         |        |       |                            |       |        |         |   |   |   |   |
| Cargo ton miles (millions)                                      | ** ** | **590**                          |         | 633         |       | (6.8                            | )          | **1,703**   |         | 1,791 |   | (4.9 | ) |
| Cargo revenue per ton mile                                      | ** ** | **43.17**                        | ***¢*** | 39.55       | *¢*   | 9.2                             | ** ** | **41.36**   | ***¢*** | 38.80 | *¢* | 6.6 |   |
| Fuel gallons consumed (millions)                                | ** ** | **417**                          |         | 462         |       | (9.7                            | )          | **1,196**   |         | 1,348 |   | (11.3 | ) |
| Average fuel cost per gallon, excluding taxes                   | ** ** | **217.78**                       | ***¢*** | 184.52      | *¢*   | 18.0                            | ** ** | **205.31**  | ***¢*** | 162.75 | *¢* | 26.2 |   |
| Number of operating aircraft at end of period                   | ** ** | ** **                       |         |        |       |                            |       | **373**     |         | 409 |   | (8.8 | ) |
| Full-time  equivalent employees at end of period                | ** ** | ** **                       |         |        |       |                            |       | **32,760**  |         | 33,755 |   | (2.9 | ) |

 

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(1)                      Consolidatedstatistics include Northwest Airlink regional carriers.

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

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

(4)                      Passenger serviceoperating expense excludes the following items unrelated to passenger serviceoperations:
|                                              | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| **(In millions)**                       | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Freighter  operations                        | ** ** | **$**                            | **194**    |                            | $          | 223 | ** ** | **$** | **582** |   | $ | 578 |   |
| MLT Inc. - net  of intercompany eliminations | ** ** | **41**                           |       | 42                              | ** ** | **157** |   | 158 |   |
| Regional  carriers                           | ** ** | **356**                          |       | 414                             | ** ** | **1,088** |   | 1,162 |   |
| Other                                        | ** ** | **2**                            |       | 10                              | ** ** | **29** |   | 34 |   |
|                                              |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

(5)                      During the quartersended September 30, 2006, and June 30, 2006 the Company recorded $332 millionin pension curtailment and $28 million related to aircraft impairments,respectively, in reorganization expense;

25

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during the sameperiods in 2005 the Company recorded $82 million in pension curtailment and $48million in aircraft impairments in operating expense.

**Results ofOperations – Three months ended September 30, 2006 and 2005**

*Operating Revenues*.  Operating revenues increased 0.9% ($29million), the result of higher system passenger and cargo revenue offset byreductions in regional carrier revenues and other revenue.

System passenger revenues increased 2.9% ($72million).  The following analysis byregion is based on information reported to the DOT and excludes regionalcarriers:
|                                     | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|-------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2006**                            | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** |
| Passenger revenues (in millions)    |       | $          | 2,554      |         | $          | 1,598       |       | $            | 607        |   | $ | 349 |   |
|                                |       |       |       |         |       |        |       |         |       |
| **Increase  (Decrease) from 2005:** | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** |
| Passenger revenues (in millions)    |       | $          | 72         |         | $          | 62          |       | $            | 31         |   | $ | (21 | ) |
| Percent                             |       | 2.9        | %          | 4.0          | %          | 5.4         | %          | (5.7         | )%         |
|                                |       |       |       |         |       |        |       |         |       |
| Scheduled service ASMs (capacity)   |       | (8.0       | )%         | (8.1         | )%         | (5.1        | )%         | (12.0        | )%         |
| Scheduled service RPMs (traffic)    |       | (6.2       | )%         | (5.8         | )%         | (4.4        | )%         | (10.8        | )%         |
| Passenger load factor               |       | 1.6        | pts.       | 2.0          | pts.       | 0.7         | pts.       | 1.3          | pts.       |
| Yield                               |       | 9.8        | %          | 10.5         | %          | 10.4        | %          | 5.7          | %          |
| Passenger RASM                      |       | 11.8       | %          | 13.2         | %          | 11.1        | %          | 7.3          | %          |

 

Asindicated in the above table:

·                  Domestic passenger revenues increased due toimproved yield on reduced capacity.

·                  Pacific passenger revenues increased versusprior year due to higher yield on reduced capacity.

·                  Atlantic passenger revenues decreased versusprior year due to reduced capacity and traffic partially offset by higheryield.

Regional carrier revenues decreased 0.6% ($2million) to $358 million primarily due to a 20.7% capacity reduction offset bya 22.7% increase in yield.

Cargo revenues increased 1.6% ($4 million) to$254 million due primarily to a 9.2% higher yield partially offset by a 6.8%reduction in cargo traffic.  Otherrevenue decreased 15.7% ($45 million) primarily due to reduced partner revenue.

*Operating Expenses*.  Operating expenses decreased 14.2% ($504million) for the three months ended September 30, 2006.  The following table and notes presentoperating expenses for the three months ended September 30, 2006 and 2005 anddescribe significant year-over-year variances:
|                                             | ** ** | **Three months ended** | ** ** | **Increase**   | ** ** | ** **         | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|----------------|------------|--------------------|------------|------------|------------|
| ** **                                  | ** ** | **September 30**            | ** ** | **(Decrease)** | ** ** | **Percent**        | ** ** | ** ** | ** ** |
| **(In millions)**                      | ** ** | **2006**                         | ** ** | **2005**       | ** ** | **from 2005** | ** ** | **Change** | ** ** | **Note** | ** ** |
| **Operating  Expenses**                     | ** ** | ** **                       | ** ** | ** **     | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Aircraft fuel  and taxes                    | ** ** | **$**                            | **948**    |           | $          | 893                |       | $          | 55         |   | 6.2 | % | A |   |
| Salaries, wages  and benefits               | ** ** | **678**                          |       | 1,000          |       | (322               | )          | (32.2      | )          | B |   |
| Selling and  marketing                      | ** ** | **199**                          |       | 206            |       | (7                 | )          | (3.4       | )          | C |   |
| Aircraft  maintenance materials and repairs | ** ** | **170**                          |       | 208            |       | (38                | )          | (18.3      | )          | D |   |
| Other rentals  and landing fees             | ** ** | **151**                          |       | 158            |       | (7                 | )          | (4.4       | )          | E |   |
| Depreciation and  amortization              | ** ** | **122**                          |       | 133            |       | (11                | )          | (8.3       | )          | F |   |
| Aircraft rentals                            | ** ** | **52**                           |       | 102            |       | (50                | )          | (49.0      | )          | G |   |
| Regional carrier  expenses                  | ** ** | **356**                          |       | 414            |       | (58                | )          | (14.0      | )          | H |   |
| Other                                       | ** ** | **365**                          |       | 431            |       | (66                | )          | (15.3      | )          | I |   |
| **Total  operating expenses**               | ** ** | **$**                            | **3,041**  |           | $          | 3,545              |       | $          | (504       | ) | (14.2 | )% |   |   |

 

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A.           Aircraft fuel andtaxes were higher due to an 18.0% increase in the average fuel cost per gallonto $2.18 partially offset by 9.7% fewer gallons consumed.   Fuel expense for the quarter ended September30, 2006 includes $17.6 million in hedge transaction losses.

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B.             Salaries, wages andbenefits were lower year-over-year primarily due to consensually agreed uponCBAs, wage reductions imposed under Section 1113, the reduced level of flying,and curtailment charges recorded as pension expense in 2005.

C.             Selling andmarketing expense decreases were primarily due to a decline in enplanements, ashift in the volume of bookings made by travel agents via ComputerizedReservations Systems (“CRS”) to nwa.com, and lower booking fee rates.

D.            Aircraft maintenancematerials and repairs expense decreased largely due to lower maintenance volumecompared to 2005, partially offset by the shift to third party maintenancevendors.

E.              Other rentals andlanding fees decreased primarily due to fewer overall landings.

F.              Depreciation expensereductions were largely due to owned aircraft, and related inventory andequipment, permanently removed from service.

G.             Aircraft rentalexpense decreased primarily due to restructured and rejected aircraft leases.

H.            Regional carrierexpense dropped year-over-year due to reduced capacity, partially offset by higherfuel costs.

I.                 Other expenses(which include MLT operating expenses, outside services, insurance, passengerfood, personnel expenses, communication expenses and supplies) decreasedprincipally due to volume reductions.

*Other Income and Expense.*  Non-operating expenseincreased $1.2 billion year-over-year primarily due to reorganization expenses. See “Note 5 – Reorganization Related Items” for additional informationrelated to reorganization expense.

**Results of Operations – Nine months ended September 30, 2006and 2005**

*Operating Revenues*.  Operating revenues increased 2.3% ($217million), the result of higher regional carrier, system passenger, and cargorevenue offset by reductions in other revenues.

System passenger revenues increased 2.4% ($164million).  The following analysis byregion is based on information reported to the DOT and excludes regionalcarriers:
|                                     | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|-------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2006**                            | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** |
| Passenger revenues (in millions)    |       | $          | 7,028      |         | $          | 4,580       |       | $            | 1,561      |   | $ | 887 |   |
|                                |       |       |       |         |       |        |       |         |       |
| **Increase  (Decrease) from 2005:** | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** |
| Passenger revenues (in millions)    |       | $          | 164        |         | $          | 147         |       | $            | 35         |   | $ | (18 | ) |
| Percent                             |       | 2.4        | %          | 3.3          | %          | 2.3         | %          | (2.0         | )%         |
|                                |       |       |       |         |       |        |       |         |       |
| Scheduled service ASMs (capacity)   |       | (9.3       | )%         | (10.5        | )%         | (6.3        | )%         | (9.6         | )%         |
| Scheduled service RPMs (traffic)    |       | (6.4       | )%         | (6.5         | )%         | (5.3        | )%         | (8.0         | )%         |
| Passenger load factor               |       | 2.7        | pts.       | 3.6          | pts.       | 0.9         | pts.       | 1.5          | pts.       |
| Yield                               |       | 9.4        | %          | 10.5         | %          | 7.9         | %          | 6.6          | %          |
| Passenger RASM                      |       | 12.9       | %          | 15.6         | %          | 9.2         | %          | 8.4          | %          |

 

As indicated in the above table:

·                  Domestic passenger revenues increased due toimproved yield on reduced capacity.

·                  Pacific passenger revenues increased withhigher yield on reduced capacity.

·                  Atlantic passenger revenues decreased due toreduced capacity and traffic partially offset by improved yield.

Regional carrier revenues increased 11.5%($113 million) to $1.1 billion due to improved yield on a 15.1% capacityreduction.

Cargo revenues increased 1.3% ($9 million) to$704 million due to 6.6% higher yield, partially offset by a 4.9% reduction incargo traffic.  Other revenue decreased8.3% ($69 million) as a result of reduced partner revenue.

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*Operating Expenses*.  Operating expenses decreased 10.8% ($1.1billion) for the nine months ended September 30, 2006.  The following table and notes presentoperating expenses for the nine months ended September 30, 2006 and 2005 anddescribe significant year-over-year variances:
| ** **                                  | ** ** | **Nine months ended** | ** ** | **Increase**   | ** ** | ** **         | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|----------------|------------|--------------------|------------|------------|------------|
| ** **                                  | ** ** | **September 30**           | ** ** | **(Decrease)** | ** ** | **Percent**        | ** ** | ** ** | ** ** |
| **(In millions)**                      | ** ** | **2006**                        | ** ** | **2005**       | ** ** | **from 2005** | ** ** | **Change** | ** ** | **Note** | ** ** |
| **Operating  Expenses**                     | ** ** | ** **                      | ** ** | ** **     | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Aircraft fuel  and taxes                    | ** ** | **$**                           | **2,578**  |           | $          | 2,313              |       | $          | 265        |   | 11.5 | % | A |   |
| Salaries, wages  and benefits               | ** ** | **2,029**                       |       | 2,933          |       | (904               | )          | (30.8      | )          | B |   |
| Selling and  marketing                      | ** ** | **583**                         |       | 634            |       | (51                | )          | (8.0       | )          | C |   |
| Aircraft  maintenance materials and repairs | ** ** | **542**                         |       | 509            |       | 33                 |       | 6.5        |       | D |   |
| Other rentals  and landing fees             | ** ** | **436**                         |       | 482            |       | (46                | )          | (9.5       | )          | E |   |
| Depreciation and  amortization              | ** ** | **390**                         |       | 413            |       | (23                | )          | (5.6       | )          | F |   |
| Aircraft rentals                            | ** ** | **174**                         |       | 341            |       | (167               | )          | (49.0      | )          | G |   |
| Regional carrier  expenses                  | ** ** | **1,088**                       |       | 1,162          |       | (74                | )          | (6.4       | )          | H |   |
| Other                                       | ** ** | **1,122**                       |       | 1,242          |       | (120               | )          | (9.7       | )          | I |   |
| **Total operating  expenses**               | ** ** | **$**                           | **8,942**  |           | $          | 10,029             |       | $          | (1,087     | ) | (10.8 | )% |   |   |

 

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A.           Aircraft fuel and taxes were higher due to a26.2% increase in the average fuel cost per gallon to $2.05, partially offsetby 11.3% fewer****gallonsconsumed.  Fuel expense for the ninemonths ended September 30, 2006 includes $17.4 million in hedge transactionlosses.

B.             Salaries, wages andbenefits decreased primarily due to consensually agreed upon CBAs, wagereductions imposed under Section 1113, mechanic pay and headcount reductions,the reduced level of flying, and curtailment charges recorded as pensionexpense in 2005.

C.             Selling andmarketing expense decreases were primarily due to a decline in enplanements, ashift in the volume of bookings made by travel agents via CRS to nwa.com, andlower booking fee rates.

D.            Aircraft maintenancematerials and repairs expense increased largely due to higher maintenancevolume in the first half of the year compared to 2005 and the shift to thirdparty maintenance vendors versus internally completed maintenance work.

E.              Other rentals andlanding fees decreased due to reduced facility rents and fewer overalllandings.

F.              Depreciation expenseis lower as a result of owned aircraft, and related inventory and equipment,permanently removed from service.

G.             Aircraft rentalexpense decreased primarily due to restructured and rejected aircraft leases.

H.            Regional carrierexpense dropped year-over-year due to reduced capacity, partially offset byhigher fuel costs.

I.                 Other expenses(which include MLT operating expenses, outside services, insurance, passengerfood, personnel expenses, communication expenses and supplies) decreasedprimarily due to volume reductions.

*Other Income and Expense.*  Non-operating expenseincreased $2.7 billion year-over-year primarily due to reorganizationexpenses.  See “Note 5 – ReorganizationRelated Items” for additional information related to reorganization expense.

**Liquidity and Capital Resources**

As of September 30, 2006, the Company’s totalliquidity, consisting of unrestricted cash, cash equivalents and short-terminvestments, was $2.07 billion.  Thisamount excludes $702 million of restricted short-term investments (which mayinclude amounts held as cash).

*Cash Flows.* Liquidity increasedby $811 million during the nine months ended September 30, 2006, primarily dueto net cash provided by operating activities, partially offset by net cash usedin financing and investing activities as discussed below.

*Operating Activities.*  Net cash provided by operating activities forthe nine months ended September 30, 2006, was $1.2 billion, which compares with$365 million of cash used in operating activities for the nine months endedSeptember 30, 2005.  The increase in netcash provided by operations was due to a net profit, excluding reorganizationitems, in 2006.  Reorganization expensesare comprised of mainly non-cash items.

*Investing Activities.*  Investing activities during the nine monthsended September 30, 2006, consisted primarily of the purchase of three A330-200aircraft and other related costs.  Otherrelated costs include engine purchases, costs to commission aircraft beforeentering revenue service, deposits on ordered aircraft, facility improvementsand ground equipment purchases. Investing activities for the nine months ended September 30, 2006 alsoincluded additional funding to the Company’s irrevocable tax trust andincreased vendor holdback amounts, which increased the Company’s

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restricted cash, cash equivalents and short-terminvestments balance.  Investingactivities for the nine months ended September 30, 2005, other than aircraftand related purchases and short-term investments, included $279 million offunding to the Company’s irrevocable tax trust, proceeds of $102 million fromthe sale of the Company’s note receivable from Pinnacle Airlines, and $102million in proceeds from the sale of Prudential Financial Inc. common stock.

*Financing Activities. *Financing activities during the nine monthsended September 30, 2006, consisted primarily of financing one Airbus A330-200aircraft with long-term debt and the $100 million repurchase of EETC notes(related to the purchase of six of the Company’s 757-200 aircraft),representing a 42% discount off the outstanding balance of the notes.  As a result of the notes repurchased, theCompany now owns the six 757-200 aircraft free of any liens.  Financing activities in the nine months ended September 30, 2005, includedfinancing one Airbus A330 aircraft with long-term debt, debt proceeds of $227million from three secured financing agreements, debt proceeds of $101 millionfrom the financing of certain of the Company’s properties in Tokyo, repaymentof $188 million unsecured notes due in March 2005, plus payment of other debtand capital lease obligations.

Inaddition to the one A330-200 aircraft financed with debt proceeds describedabove, the Company also took delivery of two other Airbus A330-200 aircraftduring the nine months ended September 30, 2006.  The Airbus A330-200 aircraft were acquiredlargely through non-cash transactions with the manufacturer, which arereflected as long-term debt on the Company’s consolidated balance sheets, butare not classified as a cash flow activity. In connection with the acquisition of these aircraft, the Companyentered into long-term debt arrangements. Under these arrangements, the aggregate amount of debt incurred totaledapproximately $214 million.

Investing activities affecting cash flows andnon-cash transactions and leasing activities related to the initial acquisitionof aircraft consisted of the following for the nine months ended September 30:
|                       | ** ** | **Investing Activities  Affecting Cash Flows** | ** ** | **Non-cash  Transactions and  Leasing Activities** | ** ** |
|-----------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                                      | ** ** | **2005**                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|                  |       |                                                          |       |                                                         |       |   |   |   |   |
| Airbus A319           | ** ** | **—**                                                    |       | —                                                       | ** ** | **—** |   | 4 |   |
| Airbus A330-200       | ** ** | **1**                                                         |       | —                                                       | ** ** | **2** |   | — |   |
| Airbus A330-300       | ** ** | **—**                                                    |       | 1                                                            | ** ** | **—** |   | 2 |   |
| Bombardier CRJ -  440 | ** ** | **—**                                                    |       | —                                                       | ** ** | **—** |   | 12 |   |
| Bombardier CRJ -  200 | ** ** | **—**                                                    |       | —                                                       | ** ** | **—** |   | 12 |   |
|                  | ** ** | **1**                                                         |       | 1                                                            | ** ** | **2** |   | 30 |   |

 

*Debt*.  The bankruptcy filing triggereddefaults on 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 “Note8 – Liabilities Subject to Compromise.” Maturities of long-term debt not subject to compromise, excludingcapital lease obligations, through December 31, 2010, are as follows (inmillions):

| remainder of | 2006 |   | $     | 39     |   |
|--------------|------|--------|-------|--------|--------|
|         | 2007 |   | 147   |   |
|         | 2008 |   | 1,546 | *      |
|         | 2009 |   | 198   |   |
|         | 2010 |   | 145   |   |

 

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*$1.215 billion represents the amount due under the Company’sDIP Facility (as defined below) in 2008; if the DIP Facility is converted toexit financing the maturity date will be extended five years with $1.162billion due in 2013.

On August 21, 2006, the Company entered into a $1.225 billion SuperPriority Debtor in Possession and Exit Credit and Guarantee Agreement (the “DIPFacility”) with a number of banks and institutions.  Under this agreement, Northwest is theborrower and NWA Corp., Northwest Airlines Holdings Corporation and NWA Inc.are the guarantors.  Proceeds from thefinancing were used to pay off the previously existing $975 million term loanwith accrued interest, to pay underwriting fees and expenses for the newfinancing, and to set aside $59.8 million in reserve to settle disputed claimsrelated to potential default interest and prepayment penalties asserted by theadministrative agent under the previous credit agreement.  In October 2006, the Company and theadministrative agent under the previous credit agreement reached an agreementas to the settlement amount to be paid by the Company, subject to BankruptcyCourt approval.  As of September 30,2006, the Company had adequately accrued for the entire settlement amount.

29

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The DIP Facility consists of a $1.05 billion term loan facility and a$175 million revolving credit facility, both of which are required to be fullydrawn during the Company’s bankruptcy proceeding.  The term of the DIP Facility is the earlierof the Company’s exit from bankruptcy or two years and the DIP Facility bearsan interest rate of LIBOR plus 2.50%, which as of September 30, 2006 was7.90%.  The DIP Facility is secured by afirst lien on the Company’s Pacific route authorities which were last appraisedin January 2006 at $3.3 to $4.1 billion. Additionally, the Company’s obligations to the lenders havesuper-priority status while the Company is in bankruptcy.  The DIP Facility has a credit rating of BBB-from Standard & Poor’s Ratings Services (“S&P”) and a Ba2 from Moody’sInvestors Service, Inc. (“Moody’s”).

Subject to the Company meeting certain conditions, including emergingfrom bankruptcy on or prior to August 21, 2008, the DIP Facility can beconverted to exit financing.  The finalmaturity, in such an event, will be August 21, 2013.  The principal portion of the term loan willbe repaid at 1.0% per year (as is the case under the DIP Facility) with thebalance of 94% due at maturity.  Loansdrawn under the revolving credit facility may be borrowed and repaid at theCompany’s discretion.  Up to $75 millionof the revolving credit facility may be utilized by the Company as a letter ofcredit facility.  Both loan facilitiesunder the exit financing will continue to bear interest at LIBOR plus 2.50%,subject to certain potential adjustments described below.  Letter of credit fees will be charged at thesame credit spread as on the borrowings plus 12.5 basis points.  To the extent that the revolving creditfacility is not utilized, the Company is required to pay an undrawn commitmentfee of 50 basis points per annum.

The conditions to convert the DIP Facility to exit financing onemergence from bankruptcy include, among other items, a confirmed plan ofreorganization, labor savings and pension relief, a minimum of $2.0 billion inunrestricted cash and available committed credit facilities, a collateralcoverage ratio of at least 1.50 to 1.00, and continuation of ratings coverageof the exit financing by S&P and Moody’s. At conversion, the interest rateof LIBOR plus 2.50% remains in place for the exit financing, but is subject tothe following potential increases:

·      0.50% per annum for so long as either S&P’s rating or Moody’s ratingof the facility is less than BB- or Ba3, respectively

·      0.50% per annum for so long as the collateral coverage ratio is 1.75 to1.00 or less

Both the DIP Facility and, upon its conversion, the exit financingrequire ongoing compliance with the following financial covenants:

·      Unrestricted cash of at least $750 million

·      Collateral coverage ratio of at least 1.50 to 1.00

·      Fixed charge coverage ratio as set forth below:
| Four Consecutive Fiscal Quarters Ending | ** ** | **Minimum Ratio of  EBITDAR to  Consolidated  Fixed Charges** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| December 31,  2006                                          |       | 1.15  to 1.00                                                                     |       |
| March 31, 2007                                              |       | 1.20  to 1.00                                                                     |       |
| June 30, 2007                                               |       | 1.30  to 1.00                                                                     |       |
| September 30,  2007                                         |       | 1.40  to 1.00                                                                     |       |
| December 31, 2007 and  each quarter ending thereafter       |       | 1.50 to 1.00                                                                      |       |

 

*Aircraft Commitments.* Committed expenditures for aircraft andrelated equipment, including estimated amounts for contractual priceescalations and predelivery deposits, which have been assumed by the Companypost Chapter 11 filing, will be approximately (in millions):

| remainder of | 2006 |   | $     | 303    |   |
|--------------|------|--------|-------|--------|--------|
|         | 2007 |   | 1,453 |   |
|         | 2008 |   | 2,019 |   |
|         | 2009 |   | 537   |   |
|         | 2010 |   | 768   |   |

 

During the first quarter of 2006, the Company finalized agreements withAirbus and Pratt & Whitney that permit continued delivery and financing ofthe remaining 12 A330-300 and A330-200 wide-body aircraft that Northwest had onorder.  Airbus agreed to providefinancing for ­9 of the 12 A330s, and Pratt & Whitney will providefinancing for the remainder.

On October 5, 2006, the Company announced thatit placed firm orders for 36 Bombardier CRJ900 aircraft and 36 Embraer 175aircraft with deliveries scheduled to commence in May 2007.  If operated by an owned affiliate, the Companyintends to finance these aircraft through manufacturer provided or arrangeddebt financing.  The respectiveagreements with Bombardier and Embraer also grant the Company options andpurchase rights for an additional 96 CRJ900 aircraft and 136 Embraer 175

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aircraft.  Compass Airlines, an indirect subsidiary ofNWA Corp., will operate the 36 Embraer 175 aircraft as Northwest Airlink.  The operator of the 36 Bombardier aircraftwill be designated at a later date.

On October 19, 2006 the Company announced agreements with The BoeingCompany and Rolls-Royce plc which will allow Northwest to take delivery of itsfirst Boeing 787 aircraft in August 2008. Northwest expects to introduce the new 787 Dreamliner into commercialservice in October 2008.  Theseagreements provide for the assumption of the Company’s purchase agreement for18 Boeing 787s, equipped with Rolls-Royce Trent 1000 engines, which was enteredinto in May 2005.  Introduction of theBoeing 787 aircraft to the Company’s fleet is a key element to the Company’soverall restructuring plan.  The Boeingand Rolls-Royce agreements were approved by the Bankruptcy Court on November 7,2006.  These agreements restructuredpre-petition aircraft purchase commitments the Company has related to its May2005 order.  In connection with theseagreements the Company also restructured certain secured loan arrangements withBoeing, including loans secured by aircraft and accounts receivable, and willrepay a loan secured by Northwest’s equity investment in its regional carriers

Fleet commitments associated with the Company’s agreements withBombardier, Embraer, Boeing and Rolls-Royce plc, approved by the BankruptcyCourt after September 30, 2006, are included in the table of aircraft commitmentsabove.

*Pension Funding Obligations.*****TheCompany has several defined benefit pension plans and defined contribution 401(k)-type plans covering substantially allof its employees.  Northwest froze futurebenefit accruals for its defined benefit Pension Plans for Salaried Employees,Pilot Employees, and Contract Employees effective August 31, 2005, January 31,2006, and September 30, 2006, respectively. Replacement pension coverage will be provided for these employeesthrough 401(k)-type defined contribution plans or in the case of IAMrepresented employees, the IAM National Multi-Employer Plan.

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

The 2006 Pension Act was signed into law on August 17, 2006. The 2006Pension Act allows commercial airlines to elect special funding rules fordefined benefit plans that are frozen. The unfunded liability for a frozen defined benefit plan may beamortized over a fixed 17-year period. The unfunded liability is defined as theactuarial liability calculated using an 8.85% interest rate minus the fairmarket value of plan assets.  Northwestelected the special funding rules for frozen defined benefit plans under the2006 Pension Act effective October 1, 2006. As a result of this election  (1)the funding waivers that Northwest received for the 2003 plan yearcontributions are deemed satisfied under the 2006 Pension Act, and (2) thefunding standard account for each Plan has no deficiency as of September 30,2006.  However, new contributions thatcome due under the 2006 Pension Act funding rules must be paid even whileNorthwest is in bankruptcy.  If the newcontributions are not paid, the future funding deficiency that would developwill be based on the regular funding rules rather than the special funding rules.

It is Northwest’s policy to fund annually at least the minimumcontribution as required by ERISA. However, as a result of the commencement of Northwest’s Chapter 11 case,Northwest did not make minimum cash contributions to its defined benefitpension plans that were due after September 14, 2005.  Subsequent to Northwest’s bankruptcy filingand prior to its election under the 2006 Pension Act, Northwest paid the normalcost component of the plans’ minimum funding requirements relating to servicerendered post-petition and certain interest payments associated with its 2003Contract Plan and Salaried Plan year waivers. As noted above, effective October 1, 2006, Northwest elected the specialfunding rules available to commercial airlines.

Asa result of Northwest’s Chapter 11 filing it has appointed an independentfiduciary for all of its tax-qualified defined benefit pension plans.  The fiduciary is charged with pursuing, onbehalf of the plans, claims to recover minimum funding contributions due underfederal law, to the extent that Northwest is not continuing to fund the plansdue to bankruptcy prohibitions.

Northwest’s 2006 calendar year contributions toqualified defined benefit plans approximate $61 million, all of which has beenpaid as of September 30, 2006.  In 2007,Northwest’s calendar year contributions to its frozen defined benefit plans andthe replacement plans (taking into account the new funding provisions of the2006 Pension Act) are estimated to range between $120 million and $160 millionbased on current assumptions.

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**Other Information**

*Foreign Currency.*  The Company is exposed to theeffect of foreign currency exchange rate fluctuations on the U.S. dollar valueof foreign currency-denominated operating revenues and expenses.  The Company’s largest exposure comes from theJapanese yen.  From time to time, theCompany uses financial instruments to hedge its exposure to the Japaneseyen.  Hedging gains or losses arerecorded in accumulated other comprehensive income (loss) until the associatedtransportation is provided, at which time they are recognized as an increase ordecrease in revenue.  The Company hedged$50 million of its yen-denominated sales in the three months ended September30, 2006, resulting in an effective rate of 101.6 yen per U.S. dollar, theprevailing average contract rate for the period.  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.  Theaverage market yen rate for the quarters ended September 30, 2006 and 2005 was113.5 and 109.5, respectively.  AtSeptember 30, 2006, the Company had hedged approximately 4.1% of its remaining2006 anticipated yen-denominated sales at an average rate of 100.9 yen per U.S.dollar, and has recorded $0.8 million of unrealized gains in accumulated othercomprehensive income (loss) associated with those hedges.

*Aircraft Fuel.*  TheCompany’s earnings are affected by changes in the price and availability ofaircraft fuel.  On an annual basis, theCompany’s mainline and regional carrier fuel consumption approximates 1.8 billion gallons, producing an $18 million variance for each one-centchange in the cost per gallon of fuel. From time to time, the Company manages the price risk of fuel costs byutilizing futures contracts traded on regulated futures exchanges, swapagreements and options.  As of September30, 2006, the Company had hedged the price of approximately 50% of itsprojected fuel requirements for the last quarter of 2006.  The hedged fuel requirements are materiallysplit between two collar options established at a crude oil price of $65 to$79.40 per barrel and $65 to $74.99 per barrel, respectively.  Effective August 31, 2006, the Company’soutstanding fuel hedge contracts failed to qualify for hedge accountingtreatment.  The Company is currentlyrecording any adjustment in the contracts’ values as mark-to-market adjustmentsthrough the statement of operations on a monthly basis.  Losses of $17.6 million were recorded asadditional fuel expense during the three months ended September 30, 2006.  As of September 30, 2005, there were nooutstanding fuel hedges or unrealized gains (losses) on outstanding fuel hedgesin accumulated other comprehensive income (loss).

In October 2006, the Company entered into two collar options associatedwith its projected 2007 fuel requirements. The first collar option, established at a crude oil price of $56.70 to$72 per barrel, hedges approximately 10% of the Company’s projected fuelrequirements for the first half of 2007; and the second collar option,established at a crude oil price of $53.90 to $72 per barrel, hedgesapproximately 10% of the Company’s projected fuel requirements for full year2007.  Therefore, in total, the Companyhas effectively hedged approximately 20% of its projected fuel requirements forthe first half of 2007, and approximately 10% of its projected fuel requirementsfor the second half of 2007.

*Interest Rates.*  TheCompany’s earnings are also affected by changes in interest rates due to theimpact those changes have on its interest income from cash equivalents andshort-term investments and its interest expense from floating rate debtinstruments.  During June 2006, theCompany entered into individual interest rate cap hedges related to threefloating rate debt instruments, with a total cumulative notional amount of $504million.  The objective of the interest ratecap hedges is to protect the anticipated payments of interest (cash flows) onthe designated debt instruments from adverse market interest rate changes.   As of September 30, 2006, the Company hasrecorded $2.8 million of unrealized losses in accumulated other comprehensiveincome (loss) associated with those hedges.

*War Risk Insurance*.  As aresult of the Air Transportation Safety and System Stabilization Act (“AirlineStabilization Act”), the U.S. Homeland Security Act and the U.S. EmergencyWartime Supplemental Appropriations Act, the U.S. federal government assumesmost war risk coverage.  Followingmultiple extensions, this coverage is scheduled to expire on December 31,2006.  While the government may againextend the period that it provides war risk coverage, there is no assurancethat this will occur, or if it does, how long the extension will last or atwhat cost the coverage will be provided. Refer to “Item 1. Business - Risk Factors Related to Northwest and theAirline Industry” in the Company’s Annual Report on Form 10-K for 2005 foradditional discussion regarding war risk coverage and insurance costs.

*Forward-Looking Statements.*  Certain of the statements made throughoutManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and elsewhere in this quarterly report are forward-looking and are based upon informationavailable to the Company on the date hereof. The Company, through its management, may also from time to time makeoral forward-looking statements.  Inconnection with the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, the Company is hereby identifying importantfactors that could cause actual results to differ materially from thosecontained in any forward-looking statement made by or on behalf of the Company.  Any such statement is qualified by referenceto the following cautionary statements.

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The Company believes that the material risks and uncertainties thatcould affect the outlook of an airline operating under Chapter 11 and in aglobal economy include, among others, the ability of the Company to continue asa going concern, the ability of the Company to obtain and maintain anynecessary financing for operations and other purposes, 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 aplan of reorganization with respect to its 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 war in Iraq, the possibility ofadditional terrorist attacks or the fear of such attacks, concerns about SARS,Avian flu or other influenza or contagious illnesses, labor strikes, 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 fluctuations,inflation and other factors discussed herein. Additional information with respect to these factors and other eventsthat could cause differences between forward-looking statements and futureactual results is contained in “Item 1. Business - Risk Factors Related toNorthwest and the Airline Industry” in the Company’s Annual Report on Form 10-Kfor 2005.

Developments in any of these areas, as well as other risks anduncertainties detailed from time to time in the Company’s Securities andExchange Commission filings, could cause the Company’s results to differ fromresults that have been or may be projected by or on behalf of the Company.  The Company undertakes no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise. These statements deal with the Company’s expectations about the futureand are subject to a number of factors that could cause actual results todiffer materially from the Company’s expectations.  All subsequent written or oralforward-looking statements attributable to the Company, or persons acting onbehalf of the Company, are expressly qualified in their entirety by the factorsdescribed above.

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

Information required by this item is providedunder the captions “Foreign Currency” and “Aircraft Fuel” within “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis Quarterly Report on Form 10-Q.  Alsosee “Item 7a. Quantitative and Qualitative Disclosures About Market Risk” inthe Company’s Annual Report on Form 10-K for 2005.

**Item 4.    Controls andProcedures.**

**Evaluationof Disclosure Controls and Procedures –** As of September 30,2006, management performed an evaluation under the supervision and with theparticipation of the Company’s President and Chief Executive Officer andExecutive Vice President and Chief Financial Officer of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedurescovered in this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief ExecutiveOfficer and Executive Vice President and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures are effective in alerting themin a timely manner to material information required to be disclosed in theCompany’s periodic reports filed with the SEC as of the end of such period.

**Changes inInternal Control –** There was no change in the Company’s internalcontrol over financial reporting that occurred during the Company’s fiscalthird quarter ended September 30, 2006 that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

PART II. OTHER INFORMATION

**Item 1.    LegalProceedings.**

Referenceis made to “Item 3. Legal Proceedings” in the Company’s Annual Report on Form10-K for 2005.

In addition, see “Labor Cost Restructuring” in“Note 2 – Voluntary Reorganization Under Chapter 11”, and in “Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations – Restructuring Overview”,relating to the strike injunction litigation with the AFA-CWA.

Substantially all of theCompany’s litigation has been stayed following the Company’s Chapter 11 filing.

**Item 1A.  RiskFactors.**

We are affected by risksspecific to us as well as factors that affect all businesses operating in aglobal market.  The significant factorsknown to us that could materially adversely affect our business, financial condition,or operating results are described in “Item 1. Business – Risk Factors Relatedto Northwest and the Airline Industry” in our most recently filed Annual Reporton Form 10-K for 2005.  There have beenno material changes in those risk factors.

**Item 6.    Exhibits.**

(a)   Exhibits:
| 10.1 | Super Priority Debtor in Possession and Exit Credit  and Guarantee Agreement dated as of August 21, 2006 among Northwest Airlines  Corporation, Northwest Airlines Holdings Corporation, NWA Inc., Northwest  Airlines, Inc. and various lenders and agents |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 | Route Security Agreement dated as of August 21, 2006  between Northwest Airlines, Inc. and Citicorp USA, Inc., as Collateral Agent                                                                                                                          |
| 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                                                                                                                                                                                                      |

 

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SIGNATURE

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized this 9th day ofNovember 2006.
|     | NORTHWEST AIRLINES CORPORATION |
|----------|--------------------------------|
|     |                           |
|     | By                             | /s/ Anna M.  Schaefer |   |
|     |                           | Anna M. Schaefer |
| * * | * *                       | *Vice  President – Finance and Chief Accounting Officer  (principal accounting officer)* |

 

EXHIBIT INDEX
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                             |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                        |
| 10.1        |       | Super Priority Debtor in Possession and Exit Credit  and Guarantee Agreement dated as of August 21, 2006 among Northwest Airlines  Corporation, Northwest Airlines Holdings Corporation, NWA Inc., Northwest  Airlines, Inc. and various lenders and agents |
| 10.2        |       | Route Security Agreement dated as of August 21, 2006  between Northwest Airlines, Inc. and Citicorp USA, Inc., as Collateral Agent                                                                                                                          |
| 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                                                                                                                                                                                                      |

 

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