**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended March 31, 2006**

 

**CommissionFile Number: 0-23642**

 

**NORTHWESTAIRLINES CORPORATION**

**(Debtor-In-Possession)**

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

 

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

 

**(612) 726-2111**

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

 

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

 

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

**Large accelerated filer**o                                             Accelerated filer ý                                           Non-accelerated filer o

 

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

 

**As of March 31, 2006, there were 87,272,973shares of the registrant’s Common Stock outstanding.**

 

 

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**NORTHWEST AIRLINESCORPORATION**

**(DEBTOR-IN-POSSESSION)**

 
| ** **                    | ** **                                                                                                                                                                                | ** **                                                                                  |
|-------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
| PART I. FINANCIAL INFORMATION |                                                                                                                                                                                      |
|                          |                                                                                                                                                                                      |                                                                                        |
|                          | Item 1.                                                                                                                                                                                   | Financial Statements                                                                        |   |
|                          |                                                                                                                                                                                      |                                                                                        |
|                          | Condensed Consolidated  Statements of Operations - Three months ended March 31, 2006 and 2005                                                                                             |                                                                                        |
|                          |                                                                                                                                                                                      |                                                                                        |
|                          | Condensed Consolidated  Balance Sheets - March 31, 2006 and December 31, 2005                                                                                                             |                                                                                        |
|                          |                                                                                                                                                                                      |                                                                                        |
|                          | Condensed Consolidated  Statements of Cash Flows - Three months ended March 31, 2006 and 2005                                                                                             |                                                                                        |
|                          |                                                                                                                                                                                      |                                                                                        |
|                          | Notes to Condensed  Consolidated Financial Statements                                                                                                                                     |                                                                                        |
|                          |                                                                                                                                                                                      |                                                                                        |
|                          | The  Computations of Ratio of Earnings to Fixed Charges and Ratio of Earnings to  Fixed Charges and Preferred Stock Requirements are attached hereto and filed  as Exhibits 12.1 and 12.2 |                                                                                        |
|                          |                                                                                                                                                                                      |                                                                                        |
|                          | Item 2.                                                                                                                                                                                   | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                          |                                                                                                                                                                                      |                                                                                        |   |
|                          | Item 3.                                                                                                                                                                                   | Quantitative and Qualitative  Disclosures About Market Risk                                 |   |
|                          |                                                                                                                                                                                      |                                                                                        |   |
|                          | Item 4.                                                                                                                                                                                   | Controls and Procedures                                                                     |   |
|                          |                                                                                                                                                                                      |                                                                                        |
| PART II. OTHER INFORMATION    |                                                                                                                                                                                      |
|                          |                                                                                                                                                                                      |                                                                                        |
|                          | Item 1.                                                                                                                                                                                   | Legal Proceedings                                                                           |   |
|                          |                                                                                                                                                                                      |                                                                                        |   |
|                          | Item 1A.                                                                                                                                                                                  | Risk Factors                                                                                |   |
|                          |                                                                                                                                                                                      |                                                                                        |   |
|                          | Item 6.                                                                                                                                                                                   | Exhibits                                                                                    |   |
|                          |                                                                                                                                                                                      |                                                                                        |
| SIGNATURE                     |                                                                                                                                                                                      |
|                          |                                                                                                                                                                                      |
| EXHIBIT INDEX                 |                                                                                                                                                                                      |
|                               |                                                                                                                                                                                           |                                                                                             |  |  |

 

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  March 31** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(Unaudited, in millions except per share amounts)**             | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Operating Revenues**                                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Passenger                                                                                       |       | $                                | 2,049      |   | $ | 2,035 |   |
| Regional carrier  revenues                                                                      |       | 339                              |       | 276 |   |
| Cargo                                                                                           |       | 214                              |       | 206 |   |
| Other                                                                                           |       | 288                              |       | 281 |   |
| Total operating  revenues                                                                       |       | 2,890                            |       | 2,798 |   |
|                                                                                            |       |                             |       |   |   |
| **Operating Expenses**                                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Salaries, wages  and benefits                                                                   |       | 676                              |       | 964 |   |
| Aircraft fuel  and taxes                                                                        |       | 744                              |       | 630 |   |
| Selling and  marketing                                                                          |       | 194                              |       | 205 |   |
| Aircraft  maintenance materials and repairs                                                     |       | 189                              |       | 144 |   |
| Other rentals and  landing fees                                                                 |       | 143                              |       | 156 |   |
| Depreciation and  amortization                                                                  |       | 134                              |       | 138 |   |
| Aircraft rentals                                                                                |       | 68                               |       | 104 |   |
| Regional carrier  expenses                                                                      |       | 366                              |       | 356 |   |
| Other                                                                                           |       | 391                              |       | 402 |   |
| Total operating  expenses                                                                       |       | 2,905                            |       | 3,099 |   |
| **Operating Income (Loss)**                                                                     |       | (15                              | )          | (301 | ) |
| ** **                                                                                      |       |                             |       |   |   |
| **Other Income (Expense)**                                                                      | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest  expense, net                                                                          |       | (138                             | )          | (151 | ) |
| Investment  income                                                                              |       | 18                               |       | 16 |   |
| Reorganization items,  net                                                                      |       | (975                             | )          | — |   |
| Other, net                                                                                      |       | 6                                |       | (19 | ) |
| Total other  income (expense)                                                                   |       | (1,089                           | )          | (154 | ) |
| **Income  (Loss) Before Income Taxes and Cumulative Effect of Accounting Change**               | ** ** | (1,104                           | )          | (455 | ) |
| Income tax  expense (benefit)                                                                   |       | —                           |       | 5 |   |
| **Income (Loss) Before Cumulative Effect of  Accounting Change**                                |       | (1,104                           | )          | (460 | ) |
| Cumulative  effect of accounting change                                                         |       | —                           |       | (69 | ) |
| **Net Income (Loss)**                                                                           |       | (1,104                           | )          | (529 | ) |
| Preferred stock  requirements                                                                   |       | —                           |       | (8 | ) |
| **Net Income (Loss) Applicable to Common  Stockholders**                                        |       | $                                | (1,104     | ) | $ | (537 | ) |
| Earnings (loss) per common share:                                                               |       |                             |       |   |   |
| *Basic  and Diluted*                                                                            | * *   | * *                         | * *   | * * | * * |
| Income (loss)  applicable to common stockholders before cumulative effect of accounting  change |       | $                                | (12.65     | ) | $ | (5.39 | ) |
| Cumulative  effect of accounting change                                                         |       | —                           |       | (.80 | ) |
| Net income (loss)  applicable to common stockholders                                            |       | $                                | (12.65     | ) | $ | (6.19 | ) |
| Average shares used in computation:                                                             |       |                             |       |   |   |
| *Basic  and Diluted*                                                                            | * *   | 87                               |       | 87 |   |

 

*See accompanying notes.*

 

3

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**NORTHWEST AIRLINES CORPORATION**

**(DEBTOR-IN-POSSESSION)**

 

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                          | ** **   | **March 31** | ** **   | **December 31** | ** **   |
|---------------------------------------------------------------------|--------------|--------------|--------------|-----------------|--------------|
| **(Unaudited, in millions)**                              | ** **   | **2006**     | ** **   | **2005**        | ** **   |
| *** ***                                                        | *** *** | *** *** | *** *** | *** ***    | *** *** |
| **Assets**                                                          | ** **   | ** **   | ** **   | ** **      | ** **   |
|                                                                |         |         |         |            |         |
| **Current Assets**                                                  | ** **   | ** **   | ** **   | ** **      | ** **   |
| Cash and cash  equivalents                                          |         | $            | 677          |            | $            | 684 |   |
| Unrestricted  short-term investments                                |         | 602          |         | 578             |         |
| Restricted cash,  cash equivalents and short-term investments       |         | 652          |         | 600             |         |
| Accounts  receivable, net                                           |         | 673          |         | 592             |         |
| Flight equipment  spare parts, net                                  |         | 133          |         | 136             |         |
| Prepaid expenses  and other                                         |         | 429          |         | 403             |         |
| Total current  assets                                               |         | 3,166        |         | 2,993           |         |
|                                                                |         |         |         |            |         |
| **Property and Equipment**                                          | ** **   | ** **   | ** **   | ** **      | ** **   |
| Flight  equipment, net                                              |         | 7,459        |         | 7,394           |         |
| Other property  and equipment, net                                  |         | 746          |         | 753             |         |
| Total property  and equipment                                       |         | 8,205        |         | 8,147           |         |
|                                                                |         |         |         |            |         |
| **Flight Equipment Under Capital Leases, net**                      |         | 22           |         | 100             |         |
|                                                                |         |         |         |            |         |
| **Other Assets**                                                    | ** **   | ** **   | ** **   | ** **      | ** **   |
| Intangible  pension asset                                           |         | 363          |         | 363             |         |
| International  routes                                               |         | 634          |         | 634             |         |
| Investments in  affiliated companies                                |         | 42           |         | 41              |         |
| Other                                                               |         | 920          |         | 805             |         |
| Total other  assets                                                 |         | 1,959        |         | 1,843           |         |
| **Total  Assets**                                                   | ** **   | $            | 13,352       |            | $            | 13,083 |   |
|                                                                |         |         |         |            |         |
| **Liabilities and Stockholders’ Equity (Deficit)**             | ** **   | ** **   | ** **   | ** **      | ** **   |
|                                                                |         |         |         |            |         |
| **Current Liabilities**                                             | ** **   | ** **   | ** **   | ** **      | ** **   |
| Air traffic  liability                                              |         | $            | 1,859        |            | $            | 1,586 |   |
| Accounts payable  and other liabilities                             |         | 1,371        |         | 1,119           |         |
| Current  maturities of long-term debt and capital lease obligations |         | 103          |         | 85              |         |
| Total current  liabilities                                          |         | 3,333        |         | 2,790           |         |
|                                                                |         |         |         |            |         |
| **Long-Term Debt**                                                  |         | 1,437        |         | 1,085           |         |
| ** **                                                          | ** **   | ** **   | ** **   | ** **      | ** **   |
| **Deferred Credits and Other Liabilities**                          | ** **   | ** **   | ** **   | ** **      | ** **   |
| Long-term  pension and postretirement health care benefits          |         | 329          |         | 292             |         |
| Other                                                               |         | 103          |         | 102             |         |
| Total deferred  credits and other liabilities                       |         | 432          |         | 394             |         |
| ** **                                                          | ** **   | ** **   | ** **   | ** **      | ** **   |
| **Liabilities Subject to Compromise**                               |         | 14,599       |         | 14,162          |         |
| ** **                                                          | ** **   | ** **   | ** **   | ** **      | ** **   |
| **Preferred Redeemable Stock Subject to Compromise**                |         | 279          |         | 280             |         |
| ** **                                                          | ** **   | ** **   | ** **   | ** **      | ** **   |
| **Common Stockholders’ Equity (Deficit)**                      | ** **   | ** **   | ** **   | ** **      | ** **   |
| Common stock                                                        |         | 1            |         | 1               |         |
| Additional  paid-in capital                                         |         | 1,501        |         | 1,500           |         |
| Accumulated  deficit                                                |         | (5,652       | )            | (4,548          | )            |
| Accumulated  other comprehensive income (loss)                      |         | (1,565       | )            | (1,568          | )            |
| Treasury stock                                                      |         | (1,013       | )            | (1,013          | )            |
| Total common  stockholders’ equity (deficit)                   |         | (6,728       | )            | (5,628          | )            |
| **Total  Liabilities and Stockholders’ Equity (Deficit)**      | ** **   | $            | 13,352       |            | $            | 13,083 |   |

* *

*See accompanying notes.*

 

4

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**NORTHWEST AIRLINES CORPORATION**

**(DEBTOR-IN-POSSESSION)**

 

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                                 | ** ** | **Three months ended  March 31** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(Unaudited, in millions)**                                                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                                       |       |                             |       |   |   |
| **Cash Flows from Operating Activities**                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                         |       | $                                | (1,104     | ) | $ | (529 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                             |       |   |   |
| Cumulative  effect of accounting change                                                    |       | —                           |       | 69 |   |
| Depreciation and  amortization                                                             |       | 134                              |       | 138 |   |
| Pension and  other postretirement benefit contributions less than expense                  |       | 73                               |       | 59 |   |
| Changes in  certain assets and liabilities                                                 |       | 300                              |       | 244 |   |
| Long-term vendor  deposits/holdbacks                                                       |       | (57                              | )          | — |   |
| Reorganization  items                                                                      |       | 975                              |       | — |   |
| Other, net                                                                                 |       | (1                               | )          | 26 |   |
| Net cash  provided by (used in) operating activities                                       |       | 320                              |       | 7 |   |
|                                                                                       |       |                             |       |   |   |
| **Cash Flows from Reorganization Activities**                                              | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net cash  provided by (used in) reorganization activities                                  |       | (9                               | )          | **—** | ** ** |
|                                                                                       |       |                             |       |   |   |
| **Cash Flows from Investing Activities**                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Capital  expenditures                                                                      |       | (137                             | )          | (50 | ) |
| Purchase of  short-term investments                                                        |       | (18                              | )          | (152 | ) |
| Proceeds from  sales of short-term investments                                             |       | —                           |       | 294 |   |
| Decrease  (increase) in restricted cash, cash equivalents and short-term investments       |       | (52                              | )          | (126 | ) |
| Proceeds from  sale of Pinnacle note receivable                                            | ** ** | **—**                       |       | 102 |   |
| Other, net                                                                                 |       | (1                               | )          | 4 |   |
| Net cash  provided by (used in) investing activities                                       |       | (208                             | )          | 72 |   |
|                                                                                       |       |                             |       |   |   |
| **Cash Flows from Financing Activities**                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from  long-term debt                                                              |       | 72                               |       | 16 |   |
| Payments of  long-term debt and capital lease obligations                                  |       | (182                             | )          | (273 | ) |
| Other, net                                                                                 |       | —                           |       | (11 | ) |
| Net cash  provided by (used in) financing activities                                       |       | (110                             | )          | (268 | ) |
|                                                                                       |       |                             |       |   |   |
| **Increase (Decrease) in Cash and Cash Equivalents**                                       |       | (7                               | )          | (189 | ) |
|                                                                                       |       |                             |       |   |   |
| Cash and cash equivalents at beginning of period                                           |       | 684                              |       | 707 |   |
| Cash and cash equivalents at end of period                                                 |       | $                                | 677        |   | $ | 518 |   |
|                                                                                       |       |                             |       |   |   |
| Cash and cash equivalents and unrestricted  short-term investments at end of period        |       | $                                | 1,279      |   | $ | 2,132 |   |
|                                                                                       |       |                             |       |   |   |
| Supplemental Cash Flow Information:                                                        |       |                             |       |   |   |
| Interest paid                                                                              |       | $                                | 120        |   | $ | 137 |   |
|                                                                                       |       |                             |       |   |   |
| Investing and Financing Activities Not Affecting  Cash:                                    |       |                             |       |   |   |
| Manufacturer  financing of aircraft and other non-cash transactions                        |       | $                                | 117        |   | $ | 56 |   |

* *

*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”). The condensedconsolidated financial statements included herein have been prepared pursuantto the rules and regulations of the Securities and Exchange Commission (“SEC”).The information and footnote disclosures normally included in annual financialstatements prepared in accordance with U.S. Generally Accepted AccountingPrinciples (“GAAP”) have been condensed or omitted as permitted by such rulesand regulations. These financial statements and related notes should be read inconjunction with the financial statements and notes included in the Company’saudited consolidated financial statements, which are provided in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2005. The Company’saccounting and reporting policies are summarized in “Note 2 – Summary ofSignificant Accounting 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., anindirect subsidiary of NWA Corp., also filed a voluntary petition for reliefunder Chapter 11. The Bankruptcy Court is jointly administering these casesunder the caption “In re Northwest Airlines Corporation, et al., Case No.05-17930 (ALG)” (the “Chapter 11 case”). Accordingly, the accompanyingcondensed consolidated financial statements have been prepared in accordancewith the American Institute of Certified Public Accountants Statement ofPosition 90-7, *Financial Reporting byEntities in Reorganization under the Bankruptcy Code* (“SOP 90-7”),and on a going concern basis, which contemplates continuity of operations,realization of assets and liquidation of post-petition liabilities in theordinary course of business. In accordance with SOP 90-7, the financialstatements for the periods presented distinguish transactions and events thatare directly associated with the reorganization from the ongoing operations ofthe Company.

 

The Company maintains aWeb site at *http://www.nwa.com*. Informationcontained on the Company’s Web site is not incorporated into this QuarterlyReport on Form 10-Q. Annual reports on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K, all amendments to those reports and otherinformation about the Company are available free of charge through this Website at *http://ir.nwa.com* as soonas reasonably practicable after those reports are electronically filed with orfurnished to the SEC. For information or questions concerning the Company’sChapter 11 restructuring see: *http://www.nwa-restructuring.com*.

 

Inthe opinion of management, the interim financial statements reflect adjustments,consisting of normal recurring accruals, unless otherwise noted, which arenecessary to present fairly the Company’s financial position, results ofoperations 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’s second and third quarter operating resultshave historically been more favorable due to increased leisure travel ondomestic and international routes during the spring and summer months.

 

TheCompany believes that the material risks and uncertainties that could affectthe outlook of an airline operating under Chapter 11 and in a global economyinclude, among others, the ability of the Company to continue as a goingconcern, the ability of the Company to obtain and maintain any necessaryfinancing for operations and other purposes, whether debtor-in-possessionfinancing or other financing, the ability of the Company to maintain adequateliquidity, the ability of the Company to absorb escalating fuel costs, theCompany’s ability to obtain court approval with respect to motions in theChapter 11 proceedings prosecuted by it from time to time, the ability ofthe Company to develop, confirm and consummate a plan of reorganization withrespect to its Chapter 11 proceedings, risks associated with third partiesseeking and obtaining court approval to terminate or shorten the exclusivityperiod for the Company to propose and confirm a plan of reorganization, toappoint a Chapter 11 trustee or to convert the cases to Chapter 7 cases,the ability of the Company to obtain and maintain normal terms with vendors andservice providers, the Company’s ability to maintain contracts that arecritical to its operations, the ability of the Company to realize assets andsatisfy liabilities without substantial adjustments and/or changes inownership, the potential adverse impact of the Chapter 11 proceedings onthe Company’s liquidity or results of operations, the ability of the Company tooperate pursuant to the terms of its financing facilities (particularly therelated financial covenants), the ability of the Company to attract, motivateand/or retain key

 

6

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executivesand associates, the future level of air travel demand, the Company’s futurepassenger traffic and yields, the airline industry pricing environment,increased costs for security, the cost and availability of aviation insurancecoverage and war risk coverage, the general economic condition of the UnitedStates and other regions of the world, the price and availability of jet fuel,the aftermath of the war in Iraq, the possibility of additional terrorist attacksor the fear of such attacks, concerns about SARS, Avian flu or other influenzaor contagious illnesses, 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. Additionalinformation with respect to these factors and other events that could causedifferences between forward-looking statements and future actual results iscontained in “Item 1. Business – Risk Factors Related to Northwest and theAirline Industry” in the Company’s Annual Report on Form 10-K for 2005.

 

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

 

*Backgroundand General Bankruptcy Matters.*On September 14, 2005, NWA Corp. and 12 of itsdirect and indirect subsidiaries filed voluntary petitions for relief underChapter 11 of the United States Bankruptcy Code with the United StatesBankruptcy Court for the Southern District of New York. Subsequently, onSeptember 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWACorp., also filed a voluntary petition for relief under Chapter 11. TheBankruptcy Court is jointly administering these cases under the caption “In reNorthwest 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 accordancewith SOP 90-7, the financial statements for the periods presented distinguishtransactions and events that are directly associated with the reorganizationfrom the ongoing operations of the Company. The consolidated financialstatements shown herein include certain subsidiaries that did not file toreorganize under Chapter 11. The assets and liabilities of these subsidiariesare not considered material to the consolidated 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, our condensedconsolidated financial statements do not include any adjustments relating tothe recoverability of assets and classification of liabilities that might benecessary should we be unable to continue as a going concern.

 

**However, as a result of the Company’s Chapter 11 proceedingsand other matters discussed in “Item 1. Business – Risk Factors Related toNorthwest and the Airline Industry” in the Company’s Annual Report on Form 10-Kfor 2005, realization of assets and satisfaction of liabilities, withoutsubstantial adjustments and/or changes in ownership, are subject touncertainties. Given these uncertainties, there is substantial doubt about theCompany’s ability to continue as a going concern.**

 

The Company intends touse the provisions of Chapter 11 to reorganize its business in order to returnto profitability on a sustained basis. The Chapter 11 process will allow theCompany to realize three major elements essential to its transformation including:

 

•  Achieving $2.5 billion in annual businessimprovements, including $2.2 billion in annual reductions in both labor andnon-labor costs, $1.7 billion of which is incremental to year-end 2005 results;

•  Resizing and optimization of the Company’s fleetto better serve Northwest’s markets;

•  Restructuring and recapitalization of theCompany’s balance sheet, including a targeted reduction in debt and leaseobligations of approximately $4.2 - $4.4 billion, providing debt and equitylevels consistent with long-term profitability.

 

TheCompany has taken a number of actions necessary to achieve these objectives. Theseactions are outlined below and in “Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations – 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 planwill likely require profit improvements and/or cost reductions beyond thoseelements identified above. The Company will continue to refine its Chapter 11related goals and objectives in response to market conditions.

 

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 legalrepresentatives have a right to be heard on all matters that come before theBankruptcy Court concerning the reorganization. There can be no assurance thatthe Creditors’ Committee will support the Company’s positions or plan ofreorganization.

 

7

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With the exception of theCompany’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. Ingeneral, as debtor-in-possession, the Company is authorized under Chapter 11 tocontinue to operate as an ongoing business, but may not engage in transactionsoutside the ordinary course of business without the prior approval of theBankruptcy Court. In conjunction with the commencement of the Chapter 11 case,the Debtors sought and obtained several orders from the Bankruptcy Court thatwere intended to enable the Debtors to operate in the normal course of businessduring the Chapter 11 case. The most significant of these orders (i) authorizethe Company to honor pre-petition obligations to customers, (ii) authorize theCompany to honor obligations to employees for pre-petition employee salaries,wages, incentive compensation, and benefits, and (iii) permit the Debtors tooperate their consolidated cash management system during the Chapter 11 case insubstantially the same manner as it was operated prior to the commencement ofthe Chapter 11 case.

 

The bankruptcy filingtriggered defaults on substantially all the Company’s debt and leaseobligations. Under Section 362 of the Bankruptcy Code, the filing of abankruptcy petition automatically stays most actions against a debtor,including most actions to collect pre-petition indebtedness or to exercisecontrol over the property of a debtor’s estate. Absent an order of theBankruptcy Court, substantially all pre-petition liabilities are subject tosettlement under the plan of reorganization.

 

The Debtors’ rights topossess and operate certain qualifying aircraft, aircraft engines and otheraircraft-related equipment that are leased or subject to a security interest orconditional sale contract are governed by Section 1110 of the Bankruptcy Code. Section1110 provides that unless the Debtors take certain action within 60 days afterthe Petition Date or such later date as is agreed by the applicable lessor,secured party, or conditional vendor, the contractual rights of such financierto take possession of such equipment and to enforce any of its other rights orremedies under the applicable agreement are not limited or otherwise affectedby the automatic stay or any other provision of the Bankruptcy Code.

 

TheSection 1110 deadline for the Debtors was November 14, 2005. The Debtor hastargeted to restructure approximately 50% of its fleet count and is currentlyon track to realize a projected reduction of approximately $2.6 billion inbalance sheet debt and present value of operating lease payments related tothese assets. Agreements are in place or have been tentatively reached for themajority of the targeted savings; manufacturer agreements have also beenreached with certain aircraft, aircraft engine, and aircraft-related equipmentmanufacturers. The Company is currentlyin negotiations with the other parties.

 

TheDebtors’ balance sheet debt as of December 31, 2005 included $1.7 billion inunsecured pre-petition debt obligations. These obligations are reflected in theDebtors’ liabilities subject to compromise. See “Item 8. Consolidated FinancialStatements and Supplementary Data, Note 6 – Liabilities Subject to Compromise” inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2005, foradditional information.

 

Under Section 365 of theBankruptcy 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 executorycontract is treated as a pre-petition breach of the lease or contract inquestion. Subject to certain exceptions, this rejection relieves debtors ofperforming their future obligations under that lease or contract but entitlesthe lessor or contract counterparty to a pre-petition general unsecured claimfor damages caused by the deemed breach. These pre-petition general unsecuredclaims for damages, where appropriate, are reflected in the Debtors’liabilities subject to compromise. See “Note 9 – Liabilities Subject toCompromise” 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 theassumption of certain executory contracts and unexpired leases may convertliabilities subject to compromise to liabilities not subject to compromise. Dueto the uncertain nature of many of the potential rejection and abandonmentrelated claims, the Company is unable to project the magnitude of these overallclaims with any degree of certainty at this time.

 

8

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*Labor Cost Restructuring.*The Bankruptcy Code provides special treatmentfor collective bargaining agreements (“CBAs”). In particular, Section 1113(c)of the Bankruptcy Code permits the Company to move to reject its CBAs if theCompany first satisfies a number of statutorily prescribed substantive andprocedural prerequisites and obtains the Bankruptcy Court’s approval of therejection or the expiration of the statutorily prescribed time period. Afterbargaining in good faith and sharing relevant information with its unions, adebtor must make proposals to modify its existing CBAs based on the mostcomplete and reliable information available at the time. The proposedmodifications must be necessary to permit the reorganization of a debtor andmust provide that all the affected parties are treated fairly and equitably. Ultimately,rejection of the CBAs is appropriate if the unions refuse to agree to a debtor’snecessary proposal “without good cause” and the Bankruptcy Court determinesthat the balance of the equities favors rejection. In October 2005, the Companycommenced Section 1113(c) proceedings with the Professional Flight Attendants Association (“PFAA”), the Air Line Pilots Association (“ALPA”), andthe International Association of Machinists and Aerospace Workers("IAM"), and has subsequently completed the Section 1113(c) hearingwith the PFAA and ALPA

 

InNovember 2005, the Company obtained interim wage reductions either consensuallyor through Section 1113(e), which will remain in place until consensualagreements are reached or until the resolution of the Section 1113(c) process.

 

On January 13, 2006, the IAM, which represents theCompany’s ground employees, customer service agents and reservation agents, agreedto submit the Company’s contract settlement proposal to its members for ratification.As a result of the IAM’s agreement, the Company did not begin the Section1113(c) hearing related to the IAM collective bargaining agreements. On March7, 2006, the IAM announced that the contract proposal, covering the Company’scustomer service and reservations employees, was ratified by a majority of itsmembers. However, the Company’s contract proposal was not ratified by theIAM-represented equipment service employees (“ESEs”). As a result of the ESEratification vote, the Company will begin the Section 1113(c) hearing relatedto the collective bargaining agreement for the ESE members of the IAM on May15, 2006.

 

OnMarch 1, 2006, the Company reached a tentative consensual agreement on a newcontract with its flight attendants represented by the PFAA. The flight attendant agreement is subjectto ratification by the Company’s PFAA-represented employees. Voting is expectedto be completed by early June 2006 on the PFAA tentative agreement. On March 3,2006, the Company reached a tentative consensual agreement on a new contractwith its pilots, represented by ALPA. The pilot agreement was ratified by Northwest’s pilots on May 3, 2006. Currently,all of the tentative or ratified agreements with the PFAA, ALPA and the IAM,are conditioned on the other agreements becoming effective or on the Company’sobtaining the contemplated savings through implementation of new contractterms. As a result of the tentative agreements with the PFAA and ALPA, thejudge has not ruled on the Company's Section 1113(c) motions and is notexpected to rule with respect to an employee group that ratifies a newcollective bargaining agreement.

 

Ifa tentative agreement is not ratified, the Company would seek to impose newcontract terms pursuant to the Section 1113(c) process. Certain of the Company’sunions have threatened to strike were new contract terms to be imposed. TheCompany believes that the impacted employee groups are not permitted to strikeor engage in self-help remedies under the Railway Labor Act (“RLA”). In the eventthe Company were to impose new contract terms under Section 1113(c) and theimpacted union sought to strike or engage in self-help, the Company wouldattempt to obtain an injunction against such activities, although there is nocontrolling judicial authority that specifically addresses this issue. Failureto obtain such an injunction could lead to a strike or other form of self-helpwhich could have a material adverse effect on the Company.

 

TheCompany has also commenced proceedings under Section 1114 of the BankruptcyCode in conjunction with its Section 1113(c) hearings pursuant to which theCompany is seeking reductions in the costs it incurs to provide medicalbenefits to retirees.

 

*SecuritiesTrading Matters.*On October 28, 2005, the Bankruptcy Courtentered an order that restricts the trading of the common stock and debtinterests in the Company. The purpose of the order is to ensure that theCompany does not lose the benefit of its net operating loss carryforwards (“NOLs”)for tax purposes. Under federal and state income tax law, NOLs can be used tooffset future taxable income, and thus are a 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 that enables it to closely monitor certaintransfers of stock and claims and restrict those transfers that may compromisethe Company’s ability to use its NOLs. See “Note 7 – Income Taxes” for furtherinformation related to the Company’s NOLs.

 

TheCompany’s common stock ceased trading on the NASDAQ stock market on September26, 2005 and now trades in the “over-the-counter” market under the symbolNWACQ.PK. However, the Company currently believes that no value will beascribed to the Company’s outstanding common stock, preferred redeemable stock,or other equity securities in any plan of reorganization.

 

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

 

9

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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.*In order to exit Chapter 11 successfully,the Company must propose, and obtain confirmation by the Bankruptcy Court of, aplan of reorganization that satisfies the requirements of the Bankruptcy Code. Aplan of reorganization would resolve, among other things, the Debtors’pre-petition obligations and set forth the revised capital structure of thenewly reorganized entity. The Debtors have the exclusive right for 120 daysfrom the Petition Date to file a plan of reorganization and, if they do so, 60additional days to obtain necessary acceptance of the plan. On January 10,2006, pursuant to Section 1121(d) of the Bankruptcy Code, the Bankruptcy Courtapproved a motion filed by the Debtors to extend the deadline of the Debtors’exclusive right to file a plan of reorganization and the deadline to obtainnecessary acceptance of the plan to July 13, 2006 and September 12, 2006,respectively.

 

A plan of reorganizationmust be voted on by holders of impaired claims and equity interests, and mustsatisfy certain requirements of the Bankruptcy Code and, as noted above, beconfirmed by the Bankruptcy Court. A plan has been accepted by holders ofclaims against and equity interests in a Debtor if (1) at least one-half innumber and two-thirds in dollar amount of claims actually voting in eachimpaired class of claims have voted to accept the plan and (2) at leasttwo-thirds in amount of equity interests actually voting in each impaired classof equity interests have voted to accept the plan. Under certain circumstancesset forth in the provisions of Section 1129(b) of the Bankruptcy Code, theBankruptcy Court may confirm a plan even if such plan has not been accepted byall impaired classes of claims and equity interests. A class of claims or anequity interest that does not receive or retain any property under the plan onaccount of such claims or interests is deemed to have voted to reject the plan.The precise requirements and evidentiary showing for confirming a plan,notwithstanding its rejection by one or more impaired classes of claims orequity interests, depends upon a number of factors, including the status andseniority of the claims or equity interests in rejecting class, i.e., securedclaims or unsecured claims, subordinated or senior claims, preferred or commonstock.

 

Although the Debtorsexpect to develop a reorganization plan during 2006 for emergence from Chapter11, or obtain additional extensions to its exclusivity period, there can be noassurance that a reorganization plan will be proposed by the Debtors within therequired timeframe or that additional extensions, if required, will be approved.Also, there is no assurance that the proposed plan will be approved by claimholders or confirmed by the Bankruptcy Court.

 

**Note 3 –Change in Accounting for Certain Pension Plan Administrative Expenses**

 

During the second quarter of 2005, the Companychanged its method of recognizing certain pension plan administrative expensesassociated with the Company’s defined benefit pension plans and now includesthem as a service cost component of net periodic pension cost. These expensesinclude trustee fees, other administrative expenses and insurance premiums paidto the Pension Benefit Guaranty Corporation (“PBGC”), all of which previouslywere reflected as a reduction in the market value of plan assets and thereforeamortized with other asset gains and losses. The Company believes this changeis preferable because it more appropriately ascribes the expenses to the periodin which they are incurred. The cumulative effect of applying this change tonet periodic pension expense in prior years is $69.1 million, which wasretroactively recorded as of January 1, 2005, and is included in the Company’sCondensed Consolidated Statements of Operations for the three months endedMarch 31, 2005. The impact of this change on the three months ended March 31,2005 was an increase in net periodic benefit cost of $9.4 million.

 

The following tableillustrates pro forma amounts, assuming the new accounting method is appliedretroactively:

 

| **(In millions, except per share amounts)**         | ** ** | **Three months ended  March 31, 2005** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
|                                                | ** ** | ** **                             | ** ** | ** ** |
| Net income (loss) applicable to common stockholders | ** ** | **$**                                  | **(468**   | **)** |
|                                                |       |                                   |       |
| Earnings (loss) per common share:                   |       |                                   |       |
| *Basic  and Diluted*                                | ** ** | **$**                                  | **(5.39**  | **)** |

 

10

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**Note 4 – Recent Accounting Pronouncements**

 

The Company adopted SFAS No. 123 (Revised2004), *Share-Based Payment* (“SFASNo. 123R”), using the modified-prospective transition method, effectiveJanuary 1, 2006. In addition to requiring supplemental disclosures, SFASNo. 123R eliminated the option to apply the intrinsic value measurementprovisions of APB No. 25, *Accountingfor Stock Issued to Employees* (“APB No. 25”), to stock compensationawards issued to employees. Furthermore, the Statement required the Company torecognize compensation cost for the portion of outstanding awards previouslyaccounted for under the provisions of APB No. 25 for which the requisiteservice had not been rendered as of the adoption date for this Statement. Becausethe Company voluntarily adopted the fair value method prescribed by SFASNo. 123, *Accounting for Stock-BasedCompensation* (“SFAS No. 123”) using the prospective method,effective January 1, 2003, the unvested awards still accounted for underthe provisions of APB No. 25, and therefore subject to the provisions ofSFAS 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 was to recognize forfeitures as theyoccurred, and the required adjustment to estimate forfeitures as of the grantdate of the award for outstanding awards that were not fully vested as ofDecember 31, 2005 was immaterial.

 

**Note 5 – Geographic Regions**

 

The Company is managed as one cohesive businessunit, of which revenues are derived primarily from the commercialtransportation of passengers and cargo. Operating revenues from flight segmentsserving a foreign destination are classified into the Pacific or Atlanticregions, as appropriate. The following table shows the operating revenues foreach region for the three months ended March 31:

 

| **(In millions)**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Domestic                   | ** ** | **$**    | **2,018**  |     | $          | 1,931 |   |
| Pacific, principally Japan | ** ** | **610**  |       | 592      |       |
| Atlantic                   | ** ** | **262**  |       | 275      |       |
| Total operating  revenues  | ** ** | **$**    | **2,890**  |     | $          | 2,798 |   |

 

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

 

**Note6 – Reorganization Related Items**

 

The condensed consolidated financial statements havebeen prepared in accordance with SOP 90-7 and on a going concern basisthat contemplates continuity of operations, realization of assets andliquidation of post-petition liabilities in the ordinary course of business. Inaccordance with SOP 90-7, the financial statements for the periods presenteddistinguish transactions and events that are directly associated with thereorganization from the ongoing operations of the Company.

 

Reorganization items recorded during the quarterended March 31, 2006 largely consisted of charges related to the restructuringof aircraft leases, debt restructuring, aircraft rejection charges, andprofessional fees, partially offset by a curtailment gain related to freezing anonqualified pilot pension plan. Restructured aircraft lease/debt charges areprimarily non-cash costs that include the estimated claims resulting from theCompany’s renegotiation of certain aircraft obligations. Aircraft rejectioncharges are non-cash costs that include the estimated allowable claimsresulting from the Company’s rejection of certain aircraft leases and return ofaircraft as part of the bankruptcy process. 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 feesinclude only those professional fees related to the bankruptcy process.

 

Net reorganization items, as shown on the CondensedConsolidated Statement of Operations, consist of the following:

 

| **(In millions)**                        | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|
| Restructured aircraft lease/debt charges |       | $        | 975        |   |
| Aircraft rejection charges               |       | 25       |       |
| Pension plan curtailment gain            |       | (49      | )          |
| Professional fees                        |       | 14       |       |
| Other                                    |       | 10       |       |
| Reorganization items,  net               |       | $        | 975        |   |

 

11

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**Note 7 – Income Taxes**

 

TheCompany 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 alsorequires that deferred tax assets be reduced by a valuation allowance if it ismore likely than not that some or all of the deferred tax assets will not berealized.

 

Basedon the consideration of all available evidence, the Company has provided avaluation allowance on deferred tax assets recorded beginning in the firstquarter 2003. The Company continues to record a full valuation allowanceagainst its deferred tax assets due to the uncertainty regarding the ultimaterealization of those assets. The Company’s first quarter 2006 net losstherefore was not reduced by any tax benefit.

 

Inthe event that the Company were to experience a change in ownership, as definedby Internal Revenue Code Section 382, upon emergence from Chapter 11 the annualusage of the remaining tax attributes, primarily NOLs, that were generatedprior to the change in ownership could be substantially limited. The amount oflimitation, if any, will be determined at the time of its emergence fromChapter 11.

 

On October 28, 2005, the Bankruptcy Court entered anorder that restricts the trading of the common stock and debt interests in theCompany. The purpose of the order is to ensure that the Company does not losethe benefit of its NOLs for tax purposes. Under federal and state income taxlaw, NOLs can be used to offset future taxable income, and thus are a valuableasset of the Debtors’ estate. Certain trading in the Company’s stock (or debtwhen the Company is in bankruptcy) could adversely affect the Company’s abilityto use the NOLs. Thus, the Company obtained an order that enables it to closelymonitor certain transfers of stock and claims and restrict those transfers thatmay compromise the Company’s ability to use its NOLs.

 

**Note 8 – Earnings (Loss) Per Share Data**

 

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

 

| ** **                                                                           | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                           | ** ** | **March 31**           | ** ** |
| **(In millions, except per share  data)**                                            | ** ** | **2006**               | ** ** | **2005** | ** ** |
| **Numerator:**                                                                       | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income (loss)  before cumulative effect of accounting change                     | ** ** | **$**                  | **(1,104** | **)** | $ | (460 | ) |
| Cumulative  effect of accounting change                                              | ** ** | **—**             |       | (69 | ) |
| Preferred stock  requirements                                                        | ** ** | **—**             |       | (8 | ) |
| Net income (loss)  applicable to common stockholders                                 | ** ** | **$**                  | **(1,104** | **)** | $ | (537 | ) |
|                                                                                 |       |                   |       |   |   |
| **Denominator:**                                                                     | ** ** | ** **             | ** ** | ** ** | ** ** |
| Weighted-average  shares outstanding for basic and diluted earnings (loss) per share | ** ** | **87,264,542**         |       | 86,729,563 |   |
|                                                                                 |       |                   |       |   |   |
| Earnings (loss) per common share:                                                    |       |                   |       |   |   |
| Income (loss)  before cumulative effect of accounting change                         | ** ** | **$**                  | **(12.65** | **)** | $ | (5.30 | ) |
| Cumulative  effect of accounting change                                              | ** ** | **—**             |       | (0.80 | ) |
| Preferred stock  requirements                                                        | ** ** | **—**             |       | (0.09 | ) |
| Net income (loss)  applicable to common stockholders                                 | ** ** | **$**                  | **(12.65** | **)** | $ | (6.19 | ) |

 

For the three months ended March 31, 2006 and 2005,19,096,699 and 19,418,282 incremental shares related to dilutive securities, respectively,were not included in the diluted earnings per share calculation because the Companyreported a net loss for these periods. Incremental shares related to dilutivesecurities have an anti-dilutive impact on earnings per share when a net lossis reported and therefore are not included in the calculation.

 

Additionally,6,293,501 and 6,435,509 shares of Series C Preferred Stock were excluded fromthe effect of dilutive securities for the three months ended March 31, 2006 and2005, respectively, because the Company reported a net loss for these periods.

 

Total employee stock options outstanding of7,821,406 and total employee stock options and restricted shares outstanding of9,413,809 as of March 31, 2006 and 2005, respectively, were not included indiluted securities because the Company reported a net loss for the three monthsended March 31, 2006 and 2005. There were no restricted shares outstanding asof March 31, 2006.

 

12

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**Note 9 – Liabilities Subject to Compromise**

 

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

 

The Debtors have endeavored to notify all of theirknown or potential creditors whose claims are subject to the Chapter 11 cases. Subjectto certain exceptions under the Bankruptcy Code, the Chapter 11 filingsautomatically stayed the continuation of any judicial or administrativeproceedings or other actions against the Debtors or their property to recoveron, collect or secure a claim arising prior to the time of filing on September14, 2005. The deadline for creditors to file proofs of claim with theBankruptcy Court (the “Bar Date”) has not yet been determined. A proof of claimarising from the rejection of an executory contract or an unexpired lease mustbe filed the later of the Bar Date or 30 days from the effective date of theauthorized rejection.

 

Differencesbetween liability amounts the Company has estimated and future claims to befiled by its creditors will be examined by the Debtors and, if necessary, willbe subject to a final determination of the allowable claims by the BankruptcyCourt. The determination of how these liabilities will ultimately be treatedwill not be known until an approved plan of reorganization is confirmed by theBankruptcy Court and the claims resolution process is complete. Completion ofthe claims resolution process may occur well after confirmation of a plan ofreorganization. The Company will continue to evaluate the amounts of theseliabilities through the remainder of the Chapter 11 process. To the extent thatthe Company identifies additional amounts subject to compromise, they will berecognized accordingly. As a result, the amounts of liabilities subject tocompromise are subject to change.

 

Subsequent to its Chapter 11 filing, the Companyrecorded post-petition interest expense on pre-petition obligations only to theextent it believes the interest will be paid during the bankruptcy proceedingor that it is probable that the interest will be an allowed claim. Had theCompany recorded interest expense based on its pre-petition contractualobligations, interest expense would have increased by $48.2 million during thefirst quarter of 2006.

 

At March 31, 2006 and December 31, 2005, the Companyhad liabilities subject to compromise of $14.6 billion and $14.2 billion,respectively, consisting of the following:

 

| ** **                                                   | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------|------------|--------------|------------|-----------------|------------|
| **(In millions)**                                            | ** ** | **2006**     | ** ** | **2005**        | ** ** |
| Debt, including accrued interest                             | ** ** | **$**        | **7,071**  |            | $          | 7,411 |   |
| Pension, postretirement and other employee related  expenses | ** ** | **3,913**    |       | 3,948           |       |
| Aircraft-related accruals and deferrals                      | ** ** | **2,445**    |       | 1,455           |       |
| Capital lease obligations, including accrued  interest       | ** ** | **250**      |       | 350             |       |
| Accounts payable and other liabilities                       | ** ** | **920**      |       | 998             |       |
| Total  liabilities subject to compromise                     | ** ** | **$**        | **14,599** |            | $          | 14,162 |   |

 

Inaddition to the $14.6 billion of liabilities subject to compromise as of March31, 2006, itemized above, the Company’s $279 million of Preferred RedeemableStock is also subject to compromise. This preferred security is not presentedas a liability on the Company’s Condensed Consolidated Balance Sheets due toits conversion features, as required by the provisions of SFAS 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.

 

**Note 10— Long-term Debt not Subject to Compromise**

 

The bankruptcy filing triggered defaults onsubstantially all the Company’s debt and lease obligations. Long-termpre-petition debt obligations, which are classified as liabilities subject tocompromise, are included in “Note 9 – Liabilities Subject to Compromise.”  Maturities of long-term debt not subject tocompromise, excluding capital lease obligations, through December 31, 2010, areas follows (in millions):

 

| 2006 |   | $   | 77     |   |
|------|--------|-----|--------|--------|
| 2007 |   | 112 |   |
| 2008 |   | 307 |   |
| 2009 |   | 172 |   |
| 2010 |   | 119 |   |

 

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**Note 11 – Fleet Information and Commitments**

 

As shown in the following table, Northwest operateda fleet of 367 aircraft at March 31, 2006, consisting of 302 narrow-body and 65wide-body aircraft. Northwest’s purchase commitments for aircraft as of March31, 2006 are also provided.

 

| ** **                             | ** ** | ** **   | ** ** | **In Service** | ** ** | ** **  | ** ** |
|----------------------------------------|------------|--------------|------------|----------------|------------|-------------|------------|
| ** **                             | ** ** | ** **   | ** ** | ** **     | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | **Aircraft** | ** ** |
| ** **                             | ** ** | **Seating**  | ** ** | ** **     | ** ** | **Capital** | ** ** | **Operating** | ** ** | ** ** | ** ** | **on Firm** | ** ** |
| **Aircraft Type**                      | ** ** | **Capacity** | ** ** | **Owned**      | ** ** | **Lease**   | ** ** | **Lease** | ** ** | **Total** | ** ** | **Order** | ** ** |
|                                   |       |         |       |           |       |        |       |   |   |   |   |   |   |
| **Passenger Aircraft**                 | ** ** | ** **   | ** ** | ** **     | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Airbus:                                |       |         |       |           |       |        |       |   |   |   |   |   |   |
| A319                                   |       | 124          |       | 64             |       | —      |       | 2 |   | 66 |   | 5 |   |
| A320                                   |       | 148          |       | 45             |       | —      |       | 28 |   | 73 |   | 2 |   |
| A330-200                               |       | 243          |       | 9              |       | —      |       | — |   | 9 |   | 2 |   |
| A330-300                               |       | 298          |       | 11             |       | —      |       | — |   | 11 |   | 10 |   |
|                                   |       |         |       |           |       |        |       |   |   |   |   |   |   |
| Boeing:                                |       |         |       |           |       |        |       |   |   |   |   |   |   |
| 787-800                                |       | 221          |       | —         |       | —      |       | — |   | — |   | 18 |  (1) |
| 757-200                                |       | 180-184      |       | 32             |       | 1           |       | 11 |   | 44 |   | — |   |
| 757-300                                |       | 224          |       | 16             |       | —      |       | — |   | 16 |   | — |   |
| 747-200                                |       | 353-430      |       | 2              |       | —      |       | 2 |   | 4 |   | — |   |
| 747-400                                |       | 403          |       | 4              |       | —      |       | 9 |   | 13 |   | — |   |
|                                   |       |         |       |           |       |        |       |   |   |   |   |   |   |
| McDonnell Douglas:                     |       |         |       |           |       |        |       |   |   |   |   |   |   |
| DC9                                    |       | 100-125      |       | 103            |       | —      |       | — |   | 103 |   | — |   |
| DC10                                   |       | 273          |       | 13             |       | —      |       | 1 |   | 14 |   | — |   |
|                                   |       |         |       | 299            |       | 1           |       | 53 |   | 353 |   | 37 |   |
|                                   |       |         |       |           |       |        |       |   |   |   |   |   |   |
| **Freighter Aircraft**                 | ** ** | ** **   | ** ** | ** **     | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boeing 747F                            |       |         |       | 11             |       | —      |       | 3 |   | 14 |   | — |   |
| **Total  Northwest Operated Aircraft** | ** ** | ** **   | ** ** | **310**        | ** ** | **1**       | ** ** | **56** | ** ** | **367** | ** ** | **37** | ** ** |
| ** **                             | ** ** | ** **   | ** ** | ** **     | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Regional Aircraft**                  | ** ** | ** **   | ** ** | ** **     | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Avro RJ85                              |       | 69           |       | 10             |       | —      |       | 13 |   | 23 |   | — |   |
| CRJ-200/440                            |       | 44-50        |       | —         |       | —      |       | 126 |   | 126 |   | 13 |  (1) |
| Saab 340                               |       | 30-34        |       | —         |       | —      |       | 49 |   | 49 |   | — |   |
|                                   |       |         |       |           |       |        |       |   |   |   |   |   |   |
| **Total Airlink Operated Aircraft**    | ** ** | ** **   | ** ** | **10**         | ** ** | **—**  | ** ** | **188** | ** ** | **198** | ** ** | **13** | ** ** |
|                                   |       |         |       |           |       |        |       |   |   |   |   |   |   |
| **Total Aircraft**                     | ** ** | ** **   | ** ** | **320**        | ** ** | **1**       | ** ** | **244** | ** ** | **565** | ** ** | **50** | ** ** |

 

----

(1)   TheCompany entered into these aircraft commitments prior to its Chapter 11 filing;the applicable agreements have not yet been affirmed as part of the Company’soverall plan of reorganization.

 

TheCompany took delivery of two Airbus A330-200 aircraft during the three monthsended March 31, 2006. In connection with the acquisition of these two aircraft,the Company entered into long-term debt arrangements. Under such arrangements,the aggregate amount of debt incurred totaled $143 million.

 

14

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

 

Comprehensive income (loss) consisted of thefollowing:

 

| ** **                                                       | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                       | ** ** | **March 31**           | ** ** |
| **(In millions)**                                           | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Net income (loss)                                                | ** ** | **$**                  | **(1,104** | **)** | $ | (529 | ) |
| Change in unrealized gain/loss on available-for-sale  securities | ** ** | **2**                  | ** ** | (3 | ) |
| Change in deferred gain/loss from hedging activities             | ** ** | **1**                  | ** ** | 3 |   |
| Foreign currency translation adjustments                         | ** ** | **—**             | ** ** | (3 | ) |
| Comprehensive  income (loss)                                     | ** ** | **$**                  | **(1,101** | **)** | $ | (532 | ) |

 

**Note 13 – Pension and Other Postretirement Health Care Benefits**

 

TheCompany has several defined benefit pension plans or defined contribution 401(k)-type plans covering substantially allof its employees. The benefits for these plans are based primarily on years ofservice and, in some cases, employee compensation. It is the Company’s policyto fund annually at least the minimum contribution as required by the EmployeeRetirement Income Security Act of 1974, as amended (“ERISA”). However, as aresult of the commencement of the Company’s Chapter 11 case, the Company didnot make minimum cash contributions to its defined benefit pension plans thatwere due in 2005 after September 14, 2005. Effective August 31, 2005 andJanuary 31, 2006 the Company froze future benefit accruals under the NorthwestAirlines Pension Plans for Salaried and Pilot Employees, respectively. Replacementpension coverage will be provided for these employees through 401(k)-typedefined contribution plans.

 

TheCompany sponsors various contributory and noncontributory medical, dental andlife insurance benefit plans covering certain eligible retirees and theirdependents. The expected future cost of providing such postretirement benefitsis accrued over the service lives of active 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 ofthe cost of medical and dental coverage is based on a combination of years ofservice and age at retirement. Medical and dental benefit plans are unfundedand 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.

 

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

* *
| ** **                                      | ** ** | **Three months ended March 31** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **Pension Benefits**            | ** ** | **Other Benefits** | ** ** |
| **(In millions)**                               | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Defined benefit plan costs                      |       |                            |       |   |   |   |   |   |   |
| Service cost                                    | ** ** | **$**                           | **35**     |   | $ | 73 | ** ** | **$** | **9** |   | $ | 9 |   |
| Interest cost                                   | ** ** | **132**                         |       | 137 | ** ** | **15** |   | 14 |   |
| Expected return  on plan assets                 | ** ** | **(120**                        | **)**      | (128 | ) | **—** |   | — |   |
| Amortization of  prior service cost             | ** ** | **10**                          |       | 19 | ** ** | **(2** | **)** | (3 | ) |
| Recognized net  actuarial loss and other events | ** ** | **28**                          |       | 36 | ** ** | **9** |   | 7 |   |
| Net periodic  benefit cost                      | ** ** | **85**                          |       | 137 | ** ** | **31** |   | 27 |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| Defined contribution plan costs                 | ** ** | **13**                          |       | — | ** ** | **—** |   | — |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| Total benefit cost                              | ** ** | **$**                           | **98**     | ** ** | $ | 137 | ** ** | **$** | **31** | ** ** | $ | 27 | ** ** |

 

For the quarter ended March31, 2006 the Company recorded a $49 million pension curtailment gain related tothe Northwest Airlines Pension Plan for Pilots. This curtailment gain wasrecorded as a reorganization related item.

 

On April 15, 2003, the InternalRevenue Service (“IRS”) approved the application submitted by the Company toreschedule, over a five year period beginning in April 2004, the $454 millionin 2003 plan year contributions under the pension plans for contract andsalaried employees. The Company satisfied the conditions for rescheduling planyear 2003 contributions by granting the plans liens on certain assets of theCompany (including domestic and foreign slots, international routes, aircraftand engines).

 

15

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On April 10, 2004, thePresident signed into law the Pension Funding Equity Act, which reduced theCompany’s required 2004 and 2005 plan year contributions through twomechanisms: (1) certain companies were permitted to elect partial relief fromthe deficit reduction contribution requirements that otherwise would haveapplied, an election the Company made; and (2) the applicable discount rateused to determine funding was increased to reflect yields on indices of highquality corporate bonds instead of 30-year U.S. Treasury rates. Including theeffect of the Pension Funding Equity Act, the Company’s 2005 calendar year cashcontributions to qualified defined benefit pension plans were expected toapproximate $411 million. Through September 14, 2005, the Company hadcontributed $268 million to these plans. As a result of the Company’svoluntarily filing for Chapter 11 on September 14, 2005, the Company did notmake scheduled minimum cash contributions to its qualified defined benefit pensionplans due after its bankruptcy filing. The Company currently intends, however,to continue timely to pay the normal cost component of the plans’ minimumfunding requirements relating to service rendered post-petition and certaininterest payments associated with its 2003 contract and salaried plan yearwaiver.

 

TheCompany has appointed an independent fiduciary for all of its tax-qualifieddefined benefit pension plans, who is charged with pursuing, on behalf of theplans, claims to recover minimum funding contributions due under federal law,to the extent that the Debtors are not continuing to fund the plans due tobankruptcy prohibitions. The plans’ level of underfunding is expected toincrease during the Chapter 11 cases.

 

TheU.S. Senate passed a pension reform bill in November 2005 that would allow airlinesto amortize pension liabilities over a twenty-year period. The pension reformbill passed by the U.S. House of Representatives in December 2005 did notinclude a similar provision. The bills were sent to a conference committee inMarch 2006. The Company supports passage of pension reform legislation thatincludes the airline provisions in the U.S. Senate bill. The Company cannotpredict what pension reform legislation will be enacted, if any.

 

Thefunding requirement to meet the normal cost component of the qualified plans’minimum funding requirements related to post-petition service is currentlyestimated at approximately $75 million for calendar year 2006. Due touncertainties regarding several significant assumptions involved in estimatingfuture required contributions to its defined benefit pension plans, such as theamount and timing of asset returns, interest rate levels, the Company’s Chapter11 proceedings, and in particular, the impact of proposed pension legislationrelated to funding requirements, the Company is not able to reasonably estimateits future required contributions beyond 2006. If the Company is unable toobtain sufficient legislative pension funding relief, termination of thedefined benefit plans would become inevitable.

 

**Note 14 – Stock-Based Compensation**

 

Asof March 31, 2006, the Company maintains stock incentive plans for officers andkey employees of the Company (the “Management Plans”) and a stock option planfor pilot employees (the “Pilot Plan”). The Company adopted SFAS No. 123 (Revised 2004), *Share-Based Payment* (“SFAS No. 123R”),using the modified-prospective transition method, effective January 1,2006. In addition to requiring supplemental disclosures, SFAS No. 123Reliminated the option to apply the intrinsic value measurement provisions ofAPB No. 25, *Accounting for Stock Issuedto Employees* (“APB No. 25”), to stock compensation awards issued toemployees. 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 theCompany voluntarily adopted the fair value method prescribed by SFASNo. 123, *Accounting for Stock-BasedCompensation* (“SFAS No. 123”) using the prospective method,effective January 1, 2003, the unvested awards still accounted for underthe provisions of APB No. 25, and therefore subject to the provisions ofSFAS 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 was to recognize forfeitures as they occurred,and the required adjustment to estimate forfeitures as of the grant date of theaward for outstanding awards that were not fully vested as of December 31, 2005was immaterial.

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions:  risk-free interest rate, stock pricevolatility, and expected life. The Company establishes the risk-free interest rateusing the U.S. Treasury yield curve as of the grant date. The expectedvolatility assumption is set based primarily on historical volatility. Theexpected life assumption is set based on past exercise behavior of optionholders. There were no options granted during the three months ended March 31,2006 or 2005; therefore, the Black-Scholes assumptions for those periods havenot been presented.

 

16

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Areconciliation of the number of options outstanding and exercisable under theManagement Plan as of March 31, 2006, and changes during the quarter thenended, are as follows:

 

| ** **                | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
|---------------------------|------------|------------|------------|---------------|------------|
| ** **                | ** ** | ** ** | ** ** | **Average**   | ** ** |
| ** **                | ** ** | ** ** | ** ** | **Exercise**  | ** ** |
| **(shares in thousands)** | ** ** | **Shares** | ** ** | **Price**     | ** ** |
| Outstanding at 12/31/2005 | ** ** | **2,815**  |       | $             | 12.64      |   |
| Granted                   | ** ** | **—** |       | —        |       |
| Forfeited                 | ** ** | **(57**    | **)**      | 15.07         |       |
| Exercised                 | ** ** | **—** |       | —        |       |
| Outstanding at 3/31/06    | ** ** | **2,758**  |       | 12.54         |       |
|                      |       |       |       |          |       |
| Exercisable at 3/31/06    | ** ** | **2,085**  |       | 14.19         |       |
|                           |            |            |            |               |            |  |

 

**At March 31, 2006:**

** **

| ** **                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                | ** ** | ** **              | ** ** | **Weighted-Average**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                | ** ** | ** **              | ** ** | **Remaining**           | ** ** | **Weighted-Average** | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
| **(shares in thousands)** | ** ** | **Shares**              | ** ** | **Contractual Life**    | ** ** | **Exercise Price** | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Range of Exercise  Prices |       |                    |       |                    |       |   |   |   |   |   |   |
|                      |       |                    |       |                    |       |   |   |   |   |   |   |
| $ 4.61 to $24.59 (1) |       | 2,441                   |       | 6.5 years               |       | $ | 9.52 |   | 1,769 |   | $ | 10.31 |   |
| 26.16 to 39.31            |       | 291                     |       | 2.0 years               |       | 34.55 |   | 291 |   | 34.55 |   |
| 43.56 to 51.97            |       | 26                      |       | 2.8 years               |       | 50.49 |   | 26 |   | 50.49 |   |
|                           |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

(1)   1.8 million of the 2.4 million sharesoutstanding had an exercise price of $8.31, and approximately 1.3 million ofthese shares were exercisable.

 

Areconciliation of the number of options outstanding and exercisable under thePilot Plan as of March 31, 2006, and changes during the quarter then ended, isas follows:

 

| ** **                | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
|---------------------------|------------|------------|------------|---------------|------------|
| ** **                | ** ** | ** ** | ** ** | **Average**   | ** ** |
| ** **                | ** ** | ** ** | ** ** | **Exercise**  | ** ** |
| **(shares in thousands)** | ** ** | **Shares** | ** ** | **Price**     | ** ** |
| Outstanding at 12/31/2005 | ** ** | **5,064**  |       | $             | 9.96       |   |
| Granted                   | ** ** | **—** |       | —        |       |
| Forfeited                 | ** ** | **—** |       | —        |       |
| Exercised                 | ** ** | **—** |       | —        |       |
| Outstanding at 3/31/06    | ** ** | **5,064**  |       | 9.96          |       |
|                      |       |       |       |          |       |
| Exercisable at 3/31/06    | ** ** | **4,603**  |       | 10.03         |       |
|                           |            |            |            |               |            |  |

 

**At March 31, 2006:**

** **

| ** **                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                | ** ** | ** **              | ** ** | **Weighted-Average**    | ** ** | ** ** | ** ** |
| ** **                | ** ** | ** **              | ** ** | **Remaining**           | ** ** | ** ** | ** ** |
| **(shares in thousands)** | ** ** | **Shares**              | ** ** | **Contractual Life**    | ** ** | **Shares** | ** ** |
| Exercise Prices           |       |                    |       |                    |       |   |   |
| $7.325                    |       | 3,500                   |       | 8.5 years               |       | 3,500 |   |
| 9.185                     |       | 926                     |       | 7.3 years               |       | 465 |   |
| 19.62                     |       | 134                     |       | 5.5 years               |       | 134 |   |
| 24.688                    |       | 123                     |       | 3.5 years               |       | 123 |   |
| 27.875                    |       | 381                     |       | 3.5 years               |       | 381 |   |

 

17

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Duringthe first quarter 2006, the total stock-based compensation expense for allcompensation related to stock-based plans was $509,000, which includes $409,000of stock option expense. In thefirst quarter of 2005, the Company recognized stock-based compensation expenseof $3,634,396, which includes $3,023,278 of stock option expense. There was nocorresponding tax benefit in 2006 or 2005 related to this stock-basedcompensation, as the Company records a full valuation allowance against itsdeferred tax assets due to the uncertainty regarding the ultimate realizationof those assets. As of March 31, 2006, the Company has approximately $1.7million of total unrecognized compensation expense related to nonvested awards.The Company expects to recognize this expense over a weighted average period ofapproximately 1.0 years.

 

18

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**Item 2.****   ****Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

 

**Overview**

 

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, NWAAircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed avoluntary petition for relief under Chapter 11. The Bankruptcy Court is jointlyadministering these cases under the caption “In re Northwest AirlinesCorporation, et al., Case No. 05-17930 (ALG)”. The consolidated financialstatements shown herein include certain subsidiaries that did not file toreorganize under Chapter 11. The assets and liabilities of these subsidiariesare not considered material to the consolidated financial statements. See “Note2 – Voluntary Reorganization Under Chapter 11” for additional informationrelated to the Company’s rights, risks and obligations under the Chapter 11filing.

 

The Company intends touse the provisions of Chapter 11 to reorganize its business in order to returnto profitability on a sustained basis. The Chapter 11 process will allow theCompany to realize three major elements essential to its transformationincluding:

 

•  Achieving $2.5 billion in annual businessimprovements, including $2.2 billion in annual reductions in both labor andnon-labor costs, $1.7 billion of which is incremental to year-end 2005 results;

•  Resizing and optimization of the Company’sfleet to better serve Northwest’s markets;

•  Restructuring and recapitalization of theCompany’s balance sheet, including a targeted reduction in debt and leaseobligations of approximately $4.2 - $4.4 billion, providing debt and equitylevels consistent with long-term profitability.

 

*Labor Cost Restructuring.*The Company is making progress in achievingits target of approximately $1.35 billion (which excludes pension savings) inannual labor cost savings through a combination of agreements negotiated withits employee labor groups, savings generated by the imposed Aircraft MechanicsFraternal Association (“AMFA”) contract, reductions in retiree medical benefitcosts, and pay and benefit reductions from its management employees.

 

TheBankruptcy Code provides special treatment for CBAs. In particular, Section1113(c) of the Bankruptcy Code permits the Company to move to reject its CBAsif the Company first satisfies a number of statutorily prescribed substantiveand procedural prerequisites and obtains the Bankruptcy Court’s approval of therejection or the expiration of the statutorily prescribed time period. Afterbargaining in good faith and sharing relevant information with its unions, adebtor must make proposals to modify its existing CBAs based on the mostcomplete and reliable information available at the time. The proposedmodifications must be necessary to permit the reorganization of a debtor andmust provide that all the affected parties are treated fairly and equitably. Ultimately,rejection of the CBAs is appropriate if the unions refuse to agree to a debtor’snecessary proposal “without good cause” and the Bankruptcy Court determinesthat the balance of the equities favors rejection. In October 2005, the Companycommenced Section 1113(c) proceedings with the PFAA, ALPA, andthe IAM, and has subsequently completed the Section 1113(c) hearing with thePFAA and ALPA.

 

In2004, as a first step toward achieving labor savings, the Company reached abridge agreement with its pilots. The bridge agreement, effective December 1,2004, generated $285 million in annual labor cost savings from the Company’spilot and management employees.

 

On August 19, 2005, the AMFA, which represents mechanics, cleaners andcustodians at Northwest, declined to send the terms of the Company’s finalcontract offer to its membership for ratification and called a strike againstthe Company.  As a result, the Company implemented its previouslydeveloped contingency plans. Since August 19, the Company has heldmultiple negotiations with AMFA, but no resolution has been reached. TheCompany has subsequently replaced the aircraft mechanics and cleaners who wenton strike with a combination of newly hired personnel, AMFA members who crossedthe picket lines to reclaim their jobs, and third party contractors.

 

The Company reached consensual agreements onpermanent wage and benefit reductions with employees represented by three ofits union groups, the Aircraft Technical Support Association (“ATSA”), theNorthwest Airlines Meteorology Association (“NAMA”) and the Transport WorkersUnion of America (“TWU”), in November 2005. The Company implemented managementand salaried pay and benefit reductions on December 1, 2005.

 

InNovember 2005, the Company obtained interim wage reductions either consensuallyor through Section 1113(e), which will remain in place until consensualagreements are reached or until the resolution of the Section 1113(c) process.

 

19

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On January 13, 2006, the IAM, which represents theCompany’s ground employees, customer service agents and reservation agents, agreedto submit the Company’s contract settlement proposal to its members forratification. As a result of the IAM’s agreement, the Company did not begin theSection 1113(c) hearing related to the IAM collective bargaining agreements. OnMarch 7, 2006, the IAM announced that the contract proposal, covering theCompany’s customer service and reservations employees, was ratified by amajority of its members. However, the Company’s contract proposal was not ratifiedby the IAM-represented ESEs. As a result of the ESE ratification vote, theCompany will begin the Section 1113(c) hearing related to the collectivebargaining agreement for the ESE members of the IAM on May 15, 2006.

 

OnMarch 1, 2006, the Company reached a tentative consensual agreement on a newcontract with its flight attendants represented by the PFAA. The flight attendant agreement is subjectto ratification by the Company’s PFAA-represented employees. Voting is expectedto be completed by early June 2006 on the PFAA tentative agreement. On March 3,2006, the Company reached a tentative consensual agreement on a new contractwith its pilots, represented by ALPA. The pilot agreement was ratified by Northwest’s pilots on May 3, 2006. Currently,all of the tentative or ratified agreements with the PFAA, ALPA and the IAM,are conditioned on the other agreements becoming effective or on the Company’sobtaining the contemplated savings through implementation of new contractterms. As a result of the tentative agreements with the PFAA and ALPA, thejudge has not ruled on the Company's Section 1113(c) motions and is notexpected to rule with respect to an employee group that ratifies a newcollective bargaining agreement.

 

Ifa tentative agreement is not ratified, the Company would seek to impose newcontract terms pursuant to the Section 1113(c) process. Certain of the Company’sunions have threatened to strike were new contract terms to be imposed. TheCompany believes that the impacted employee groups are not permitted to strikeor engage in self-help remedies under the RLA. In the event the Company were toimpose new contract terms under Section 1113(c) and the impacted union soughtto strike or engage in self-help, the Company would attempt to obtain aninjunction against such activities, although there is no controlling judicialauthority that specifically addresses this issue. Failure to obtain such aninjunction could lead to a strike or other form of self-help which could have amaterial adverse effect on the Company.

 

TheCompany has also commenced proceedings under Section 1114 of the BankruptcyCode in conjunction with its Section 1113(c) hearings pursuant to which theCompany is seeking reductions in the costs it incurs to provide medical benefitsto retirees.

 

*Non-labor Cost Restructuring*. Since 2001, the Company has achievedapproximately $1.4 billion of operating improvements through cost reductionsand revenue enhancement initiatives. The Company intends to obtain additionalsavings of $150 million annually through further reductions in non-labor costs.Areas targeted for reduction include technology related costs, distributionexpenses, procurement costs and other items. Additionally, cost reductionsthrough restructuring of the Company’s agreements with its regional carrierswill be pursued.

 

*Balance Sheet Restructuring*. In the face of mounting losses and prior to its bankruptcy filing, theCompany sustained its operations largely through a strategy that includedborrowing cash and selling assets. This strategy had the consequence of leavingthe Company with a debt burden of $14 billion, which included $5 billion ofaircraft-related operating lease present value commitments. To successfullyrestructure and exit bankruptcy, the Company must eliminate excess debt andrecapitalize its balance sheet.

 

TheSection 1110 deadline for the Debtors was November 14, 2005. The Debtor hastargeted to restructure approximately 50% of its fleet count and is currentlyon track to realize a projected reduction of approximately $2.6 billion inbalance sheet debt and present value of operating lease payments related tothese assets. The statement of operations improvements associated with theseefforts will also drive annual cost reductions of $400 million primarilyrelated to reduced aircraft ownership costs including interest, rent anddepreciation expense. Agreements are in place or have been tentatively reachedfor the majority of these targeted savings.

 

The Debtors’ balance sheet debt as of December31, 2005 included $1.7 billion in unsecured pre-petition debt obligations. Theseobligations are reflected in the Debtors’ liabilities subject to compromise. See “Item 8. Consolidated Financial Statementsand Supplementary Data, Note 6 – Liabilities Subject to Compromise” in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005, foradditional information. As outlined in SOP 90-7, the Company no longer recordspost-petition interest expense on these pre-petition unsecured debt obligations.The interest expense reduction associated with this unsecured debt is projectedto drive $150 million of annual savings.

 

20

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**OperatingStatistics – Three months ended March 31, 2006 and 2005**

 

Information with respect to the Company’s operatingstatistics follows:

 

| ** **                                                 | ** ** | **Three months ended** | ** **   | ** **  | ** ** |
|------------------------------------------------------------|------------|------------------------|--------------|-------------|------------|
| ** **                                                 | ** ** | **March 31**           | ** **   | **Percent** | ** ** |
| ** **                                                 | ** ** | **2006**               | ** **   | **2005**    | ** ** | **Change** | ** ** |
| **Scheduled service - Consolidated:**  (1)                 |       |                   |         |        |       |   |   |
| Available seat  miles (ASM) (millions)                     | ** ** | **22,219**             |         | 24,826      |       | (10.5 | ) |
| Revenue passenger  miles (RPM) (millions)                  | ** ** | **18,289**             |         | 19,464      |       | (6.0 | ) |
| Passenger load  factor                                     | ** ** | **82.3**               | **%**        | 78.4        | %          | 3.9 |  pts. |
| Revenue  passengers (millions)                             | ** ** | **15.7**               |         | 16.5        |       | (4.8 | ) |
| Passenger  revenue per RPM (yield)                         | ** ** | **13.05**              | ***¢*** | 11.87       | *¢*   | 9.9 | * * |
| Passenger  revenue per ASM (RASM)                          | ** ** | **10.75**              | ***¢*** | 9.31        | *¢*   | 15.5 | * * |
|                                                       |       |                   |         |        |       |   |   |
| **Scheduled service - Mainline:**  (2)                     |       |                   |         |        |       |   |   |
| Available seat  miles (ASM) (millions)                     | ** ** | **20,302**             |         | 22,765      |       | (10.8 | ) |
| Revenue  passenger miles (RPM) (millions)                  | ** ** | **16,942**             |         | 18,168      |       | (6.7 | ) |
| Passenger load  factor                                     | ** ** | **83.5**               | **%**        | 79.8        | %          | 3.7 |  pts. |
| Revenue passengers  (millions)                             | ** ** | **12.6**               | ** **   | 13.5        |       | (6.7 | ) |
| Passenger  revenue per RPM (yield)                         | ** ** | **12.09**              | ***¢*** | 11.20       | *¢*   | 7.9 |   |
| Passenger  revenue per ASM (RASM)                          | ** ** | **10.09**              | ***¢*** | 8.94        | *¢*   | 12.9 |   |
|                                                       |       |                   | ** **   |        |       |   |   |
| Total operating  ASM (millions)                            | ** ** | **20,330**             | ** **   | 22,825      |       | (10.9 | ) |
|                                                       |       |                   | ** **   |        |       |   |   |
| Passenger  service operating expense per total ASM (3) (4) | ** ** | **11.16**              | ***¢*** | 11.01       | *¢*   | 1.4 |   |
| Mainline fuel  expense per ASM                             | ** ** | **3.19**               | ***¢*** | 2.47        | *¢*   | 29.1 |   |
|                                                       |       |                   | ** **   |        |       |   |   |
| Cargo ton miles  (millions)                                | ** ** | **526**                | ** **   | 542         |       | (3.0 | ) |
| Cargo revenue  per ton mile                                | ** ** | **40.67**              | ***¢*** | 38.10       | *¢*   | 6.7 | * * |
| Fuel gallons  consumed (millions)                          | ** ** | **377**                | ** **   | 432         |       | (12.7 | ) |
| Average fuel  cost per gallon, excluding taxes             | ** ** | **187.05**             | ***¢*** | 137.91      | *¢*   | 35.6 | * * |
| Number of  operating aircraft at end of period             | ** ** | **367**                | ** **   | 432         |       | (15.0 | ) |
| Full-time  equivalent employees at end of period           | ** ** | **31,318**             | ** **   | 39,105      |       | (19.9 | ) |
|                                                       |       |                   | ** **   |        |       |   |   |

 

(1)       Consolidated statistics include NorthwestAirlink regional carriers.

 

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

 

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

 

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

 

| ** **                                  | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **March 31**           | ** ** |
| **(In millions)**                           | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Freighter operations                        | ** ** | **$**                  | **190**    |   | $ | 154 |   |
| MLT Inc. - net of intercompany eliminations | ** ** | **64**                 |       | 64 |   |
| Regional carriers                           | ** ** | **366**                |       | 356 |   |
| Other                                       | ** ** | **16**                 |       | 12 |   |
|                                             |            |                        |            |  |  |  |  |

 

21

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**Results of Operations—Three months ended March 31, 2006 and2005**

 

*Operating Revenues*. Operating revenuesincreased 3.3% ($92 million), the result of higher regional carrier, cargo,system passenger, and other revenues.

 

System passenger revenues increased 0.7% ($14million). The following analysis by region is based on information reported tothe DOT and excludes regional carriers:

 
| ** **                         | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2006**                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** |
| Passenger  revenues (in millions)  |       | $          | 2,049      |         | $          | 1,375       |       | $            | 456        |   | $ | 218 |   |
|                               |       |       |       |         |       |        |       |         |       |
| **Increase (Decrease) from 2005:** | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** |
| Passenger  revenues (in millions)  |       | $          | 14         |         | $          | 19          |       | $            | 1          |   | $ | (6 | ) |
| Percent                            |       | 0.7        | %          | 1.4          | %          | 0.2         | %          | (2.7         | )%         |
|                               |       |       |       |         |       |        |       |         |       |
| Scheduled  service ASMs (capacity) |       | (10.8      | )%         | (12.5        | )%         | (7.0        | )%         | (10.3        | )%         |
| Scheduled  service RPMs (traffic)  |       | (6.7       | )%         | (7.6         | )%         | (4.2        | )%         | (7.9         | )%         |
| Passenger load  factor             |       | 3.7        |  pts. | 4.3          |  pts. | 2.6         |  pts. | 2.2          |  pts. |
| Yield                              |       | 7.9        | %          | 9.7          | %          | 4.8         | %          | 5.6          | %          |
| Passenger RASM                     |       | 12.9       | %          | 15.8         | %          | 7.9         | %          | 8.6          | %          |

 

Asindicated in the above table:

•      Domestic passenger revenues increasedslightly, primarily due to improved yields on reduced capacity.

•      Pacific passenger revenues were essentiallyunchanged versus prior year as the year-over-year capacity decrease was offsetby higher yields.

•      Atlantic passenger revenues decreased due toreductions in capacity and traffic, partially offset by improved yields.

 

Regional carrier revenues increased 22.8% ($63million) to $339 million due to improved yield on a 7% capacity reduction.

 

Cargo revenues increased 3.9% ($8 million) to $214million due to 6.7% higher yields. Other revenue increased 2.5% ($7 million) asa result of increased ticket change fees and other non-transportation servicefees.

 

*Operating Expenses*. Operating expensesdecreased 6.3% ($194 million) for the three months ended March 31, 2006. Thefollowing table and notes present operating expenses for the three months endedMarch 31, 2006 and 2005 and describe significant year-over-year variances:

 
| ** **                                  | ** ** | **Three months ended** | ** ** | **Increase**   | ** ** | ** **    | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------|------------|---------------|------------|------------|------------|
| ** **                                  | ** ** | **March 31**           | ** ** | **(Decrease)** | ** ** | **Percent**   | ** ** | ** ** | ** ** |
| **(In millions)**                           | ** ** | **2006**               | ** ** | **2005**       | ** ** | **from 2005** | ** ** | **Change** | ** ** | **Note** | ** ** |
| **Operating  Expenses**                     | ** ** | ** **             | ** ** | ** **     | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages  and benefits               | ** ** | **$**                  | **676**    |           | $          | 964           |       | $          | (288       | ) | (29.9 | )% | A |   |
| Aircraft fuel  and taxes                    | ** ** | **744**                |       | 630            |       | 114           |       | 18.1       |       | B |   |
| Selling and  marketing                      | ** ** | **194**                |       | 205            |       | (11           | )          | (5.4       | )          | C |   |
| Aircraft  maintenance materials and repairs | ** ** | **189**                |       | 144            |       | 45            |       | 31.3       |       | D |   |
| Other rentals  and landing fees             | ** ** | **143**                |       | 156            |       | (13           | )          | (8.3       | )          | E |   |
| Depreciation and  amortization              | ** ** | **134**                |       | 138            |       | (4            | )          | (2.9       | )          | F |   |
| Aircraft rentals                            | ** ** | **68**                 |       | 104            |       | (36           | )          | (34.6      | )          | G |   |
| Regional carrier  expenses                  | ** ** | **366**                |       | 356            |       | 10            |       | 2.8        |       | H |   |
| Other                                       | ** ** | **391**                |       | 402            |       | (11           | )          | (2.7       | )          | I |   |
| **Total  operating expenses**               | ** ** | **$**                  | **2,905**  |           | $          | 3,099         |       | $          | (194       | ) | (6.3 | )% |   |   |

 

22

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A.    Salaries, wages and benefits decreasedprimarily due to reduced AMFA pay and headcount, as well as interim wagereductions which were achieved either consensually or through Section 1113(e), andwhich were effective in November 2005.

B.    Aircraft fuel and taxes were higher due to a35.6% increase in the average fuel cost per gallon to $1.87, partially offsetby 12.7% fewer****gallons consumed.

C.    Selling and marketing expenses were lowerprimarily due to a year-over-year reduction in enplanements and reduced rate oncomputerized reservations service fees.

D.    Aircraft maintenance materials and repairsexpense increased largely due to higher maintenance volume compared to 2005 andthe shift to third party maintenance vendors versus internally completedmaintenance work.

E.     Other rentals and landing fees decreased dueto reduced landed weights across the system.

F.     Depreciation expense is substantiallyunchanged year-over-year.

G.    Aircraft rental expense decreased primarilydue to restructured and rejected aircraft leases.

H.    Regional carrier expense increased primarily dueto higher fuel costs, more than offsetting reduced capacity.

I.      Other expenses (which include MLT operatingexpenses, outside services, insurance, passenger food, personnel expenses,communication expenses and supplies) decreased primarily due to volume reductions.

 

*Other Income and Expense.*Non-operating expense increased $935 million primarily due to reorganizationexpenses that totaled $975 million. See “Note 6 – Reorganization Related Items”for additional information related to reorganization expenses.

 

**Liquidity and Capital Resources**

 

Thematters described in “Liquidity and Capital Resources,” to the extent that theyrelate to future events or expectations, may be significantly affected by theCompany’s Chapter 11 filing. The Chapter 11 proceedings will involve, or mayresult in, various restrictions on the Company’s activities, limitations onfinancing, the need to obtain Bankruptcy Court approval for various matters anduncertainty as to relationships with vendors, suppliers, customers and otherswith whom the Company may conduct or seek to conduct business.

 

As of March 31, 2006, the Company’s total liquidity,consisting of unrestricted balance sheet cash, cash equivalents and short-terminvestments, was $1.28 billion. This amount excludes $652 million of restrictedshort-term investments (which may include amounts held as cash).

 

*Cash Flows.* Liquidity increasedby $17 million during the three months ended March 31, 2006.

 

*Operating Activities.*Net cash provided byoperating activities for the three months ended March 31, 2006, was $320million, which compares with $7 million of cash provided by operatingactivities for the three months ended March 31, 2005. Net cash provided byoperations increased primarily due to a lower net loss, excludingreorganization items, than 2005. Reorganization expenses are comprised ofmainly non-cash items.

 

*Investing Activities.*Investing activitiesduring the three months ended March 31, 2006, consisted primarily of thepurchase of one A330-200 aircraft and other related costs. Other related costsinclude engine purchases, costs to commission aircraft before entering revenueservice, deposits on ordered aircraft, facility improvements and groundequipment purchases. Investing activities for the three months ended March 31,2006 also included additional funding to the Company’s irrevocable tax trustand increased vendor holdback amounts, which increased the Company’s restrictedcash, cash equivalents and short-term investments balance. Investing activitiesfor the three months ended March 31, 2005, other than aircraft and relatedcosts, included the sale of short-term investments and proceeds of $102 millionfrom the sale of the Company’s note receivable from Pinnacle Airlines.

 

*Financing Activities.*Financing activitiesduring the three months ended March 31, 2006, consisted primarily of financingone Airbus A330-200 aircraft with long-term debt and the $100 millionrepurchase of EETC notes (related to six of the Company's 757-200 aircraft),representing a 42% discount off the outstanding balance of the notes. Financingactivities for the three months ended March 31, 2005, consisted primarily ofthe repayment of $188 million unsecured notes due in March 2005, plus paymentof other debt and capital lease obligations.

 

In addition to the one A330-200 aircraft financedwith debt proceeds described above, the Company also took delivery of oneAirbus A330-200 aircraft during the three months ended March 31, 2006. TheAirbus A330-200 aircraft was acquired largely through non-cash transactionswith the manufacturer, which is reflected as long-term debt on the Company’sconsolidated balance sheets, but is not classified as a cash flow activity. Inconnection with the acquisition of these aircraft, the Company entered intolong-term debt arrangements. Under these arrangements, the aggregate amount ofdebt incurred totaled approximately $143 million.

 

23

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Investing activities affecting cash flows andnon-cash transactions and leasing activities related to the initial acquisitionof aircraft consisted of the following for the three months ended March 31:

 

| ** **           | ** ** | **Investing Activities  Affecting Cash Flows** | ** ** | **Non-cash  Transactions and  Leasing Activities** | ** ** |
|----------------------|------------|------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **           | ** ** | **2006**                                       | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|                 |       |                                           |       |                                               |       |   |   |   |   |
| Airbus A319          | ** ** | —                                         |       | —                                             | ** ** | — |   | 2 |   |
| Airbus A330-200      | ** ** | **1**                                          |       | —                                             |       | **1** |   | — |   |
| Bombardier CRJ - 440 | ** ** | —                                         |       | —                                             |       | — |   | 2 |   |
| Bombardier CRJ - 200 | ** ** | —                                         |       | —                                             |       | — |   | 4 |   |
| ** **           |       | **1**                                          |       | —                                             |       | **1** |   | 8 |   |

 

*Debt*. The bankruptcy filing triggered defaults on substantially all theCompany’s debt and lease obligations. Long-term pre-petition debt obligations,which are classified as liabilities subject to compromise, are included in “Note9 – Liabilities Subject to Compromise.” Maturities of long-term debt not subject to compromise, excludingcapital lease obligations, through December 31, 2010, are as follows (inmillions):

 
| 2006 |   | $   | 77     |   |
|------|--------|-----|--------|--------|
| 2007 |   | 112 |   |
| 2008 |   | 307 |   |
| 2009 |   | 172 |   |
| 2010 |   | 119 |   |

 

*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 |   | $      | 401    |   |
|-------------------|--------|--------|--------|--------|
| 2007              |   | 836    |   |
| 2008              |   | — |   |
| 2009              |   | 93     |   |
| 2010              |   | 109    |   |

 

Duringthe first quarter, the Company concluded agreements with Airbus and Pratt &Whitney that permit continued delivery and financing of the remaining 12 A330-300and A330-200 wide body aircraft that Northwest had on order. Airbus agreed to providefinancing for 9 of the 12 A330s, and Pratt & Whitney will provide financingfor the remainder.

 

*PensionFunding Obligations*. TheCompany has several defined benefit pension plans or defined contribution 401(k)-type plans covering substantially allof its employees. The benefits for these plans are based primarily on years ofservice and, in some cases, employee compensation. It is the Company’s policyto fund annually at least the minimum contribution as required by the ERISA. However,as a result of the commencement of the Company’s Chapter 11 case, the Companydid not make minimum cash contributions to its defined benefit pension plansthat were due in 2005 after September 14, 2005. Effective August 31, 2005 andJanuary 31, 2006 the Company froze future benefit accruals under the NorthwestAirlines Pension Plans for Salaried and Pilot Employees, respectively. Replacementpension coverage will be provided for these employees through 401(k)-typedefined contribution plans. See “Note 16 – Pension and Other Postretirement HealthCare Benefits” in the Company’s Annual Report on Form 10-K for 2005 foradditional discussion of actuarial assumptions used in determining pensionliability and expense.

 

OnApril 15, 2003, the IRS approved the application submitted by the Company toreschedule, over a five year period beginning in April 2004, the $454 millionin 2003 plan year contributions under the pension plans for contract andsalaried employees. The Company satisfied the conditions for rescheduling planyear 2003 contributions by granting the plans liens on certain assets of theCompany (including domestic and foreign slots, international routes, aircraftand engines).

 

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OnApril 10, 2004, the President signed into law the Pension Funding Equity Act,which reduced the Company’s required 2004 and 2005 plan year contributionsthrough two mechanisms: (1) certain companies were permitted to elect partialrelief from the deficit reduction contribution requirements that otherwisewould have applied, an election the Company made; and (2) the applicablediscount rate used to determine funding was increased to reflect yields onindices of high quality corporate bonds instead of 30-year U.S. Treasury rates.Including the effect of the Pension Funding Equity Act, the Company’s 2005calendar year cash contributions to qualified defined benefit pension plans wereexpected to approximate $411 million. Through September 14, 2005, the Companyhad contributed $268 million to these plans. As a result of the Company’svoluntarily filing for Chapter 11 on September 14, 2005, the Company did notmake scheduled minimum cash contributions to its qualified defined benefitpension plans due after its bankruptcy filing. The Company currently intends,however, to continue timely to pay the normal cost component of the plans’minimum funding requirements relating to service rendered post-petition andcertain interest payments associated with its 2003 contract and salaried planyear waiver.

 

TheCompany has appointed an independent fiduciary for all of its tax-qualifieddefined benefit pension plans, who is charged with pursuing, on behalf of theplans, claims to recover minimum funding contributions due under federal law,to the extent that the Debtors are not continuing to fund the plans due tobankruptcy prohibitions. The plans’ level of underfunding is expected toincrease during the Chapter 11 cases.

 

TheU.S. Senate passed a pension reform bill in November 2005 that would allowairlines to amortize pension liabilities over a twenty-year period. The pensionreform bill passed by the U.S. House of Representatives in December 2005 didnot include a similar provision. The bills were sent to a conference committeein March 2006. The Company supports passage of pension reform legislation thatincludes the airline provisions in the U.S. Senate bill. The Company cannotpredict what pension reform legislation will be enacted, if any.

 

Thefunding requirement to meet the normal cost component of the qualified plans’minimum funding requirements related to post-petition service is currentlyestimated at approximately $75 million for calendar year 2006. Due touncertainties regarding several significant assumptions involved in estimatingfuture required contributions to its defined benefit pension plans, such as theamount and timing of asset returns, interest rate levels, the Company’s Chapter11 proceedings, and in particular, the impact of proposed pension legislationrelated to funding requirements, the Company is not able to reasonably estimateits future required contributions beyond 2006. If the Company is unable toobtain sufficient legislative pension funding relief, termination of thedefined benefit plans would become inevitable.

 

**Other Information**

 

*Expanded Services Between the U.S. and China.*On June 18, 2004,the United States and the People’s Republic of China agreed to a series ofamendments to the 1980 U.S. – China Air Transport Agreement. The amendmentsprovide for a significant expansion of air services between the two countries. OnSeptember 3, 2004, the DOT awarded Northwest six additional U.S. – Chinaall-cargo frequencies, three of which became available to Northwest on November1, 2004, and three that became available on March 25, 2005. The Company isusing these frequencies to expand its cargo service to Shanghai, via its cargohubs in Anchorage and Tokyo. Additionally, on February 22, 2005, the DOTawarded Northwest three additional U.S. – China all-cargo frequencies that becameavailable on March 25, 2006. The Company is using these frequencies to expandits cargo service to Guangzhou, via its cargo hubs in Anchorage and Tokyo.

 

*Foreign Currency.*The Company is exposed to the effect of foreign currency exchange ratefluctuations on the U.S. dollar value of foreign currency-denominated operatingrevenues and expenses. The Company’s largest exposure comes from the Japaneseyen. From time to time, the Company uses financial instruments to hedge itsexposure to the Japanese yen. Hedging gains or losses are recorded inaccumulated other comprehensive income (loss) until the associatedtransportation is provided, at which time they are recognized as an increase ordecrease in revenue. The Company did not hedge any of its yen-denominated salesin the three months ended March 31, 2006 and 2005. The average market yen ratefor the quarters ended March 31, 2006 and 2005 was 116.8 and 103.8,respectively. At March 31, 2006, the Company had hedged approximately 6% of itsremaining 2006 anticipated yen-denominated sales at an average rate of 101.4yen per U.S. dollar, and has recorded $7.8 million of unrealized gains inaccumulated other comprehensive income associated with those hedges.

 

*Aircraft Fuel.*The Company’s earnings are affected by changesin the price and availability of aircraft fuel. On an annual basis, the Company’smainline 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 managesthe price risk of fuel costs by utilizing futures contracts traded on regulatedfutures exchanges, swap agreements and options. As of March 31, 2006 and 2005,there were no outstanding fuel hedges or associated unrealized gains (losses)in accumulated other comprehensive income (loss).

 

25

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*War Risk Insurance*. As a result of the Air Transportation Safetyand System Stabilization Act (“Airline Stabilization Act”), the U.S. HomelandSecurity Act and the U.S. Emergency Wartime Supplemental Appropriations Act,the U.S. federal government assumes most war risk coverage. Following multipleextensions, this coverage is scheduled to expire on August 31, 2006. Whilethe government may again extend the period that it provides war risk coverage,there is no assurance that this will occur, or if it does, how long the extensionwill last or at what cost the coverage will be provided. Refer to “Item 1.Business - Risk Factors Related to Northwest and the Airline Industry” in theCompany’s Annual Report on Form 10-K for 2005 for additional discussionregarding war risk coverage and insurance costs.

 

*Forward-Looking Statements.*Certain of thestatements made throughout Management’s Discussion and Analysis of FinancialCondition and Results of Operations and elsewhere in this quarterly report are forward-looking and are based upon informationavailable to the Company on the date hereof. The Company, through itsmanagement, may also from time to time make oral 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 reference to the following cautionarystatements.

 

TheCompany believes that the material risks and uncertainties that could affectthe outlook of an airline operating under Chapter 11 and in a global economyinclude, among others, the ability of the Company to continue as a goingconcern, the ability of the Company to obtain and maintain any necessaryfinancing for operations and other purposes, whether debtor-in-possessionfinancing or other financing, the ability of the Company to maintain adequateliquidity, the ability of the Company to absorb escalating fuel costs, theCompany’s ability to obtain court approval with respect to motions in theChapter 11 proceedings prosecuted by it from time to time, the ability ofthe Company to develop, confirm and consummate a plan of reorganization withrespect to its Chapter 11 proceedings, risks associated with third partiesseeking and obtaining court approval to terminate or shorten the exclusivityperiod for the Company to propose and confirm a plan of reorganization, to appointa Chapter 11 trustee or to convert the cases to Chapter 7 cases, theability of the Company to obtain and maintain normal terms with vendors andservice providers, the Company’s ability to maintain contracts that arecritical to its operations, the ability of the Company to realize assets andsatisfy liabilities without substantial adjustments and/or changes inownership, the potential adverse impact of the Chapter 11 proceedings onthe Company’s liquidity or results of operations, the ability of the Company tooperate pursuant to the terms of its financing facilities (particularly therelated financial covenants), the ability of the Company to attract, motivateand/or retain key executives and associates, the future level of air traveldemand, the Company’s future passenger traffic and yields, the airline industrypricing environment, increased costs for security, the cost and availability ofaviation insurance coverage and war risk coverage, the general economiccondition of the United States and other regions of the world, the price andavailability of jet fuel, the aftermath of 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, work disruptions, labornegotiations both at other carriers and the Company, low cost carrierexpansion, capacity decisions of other carriers, actions of the U.S. andforeign governments, foreign currency exchange rate fluctuations, inflation andother 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.

 

Developmentsin any of these areas, as well as other risks and uncertainties detailed fromtime to time in the Company’s Securities and Exchange Commission filings, couldcause the Company’s results to differ from results that have been or may beprojected by or on behalf of the Company. The Company undertakes no obligationto publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise. These statements dealwith the Company’s expectations about the future and are subject to a number offactors that could cause actual results to differ materially from the Company’sexpectations. All subsequent written or oral forward-looking statementsattributable to the Company, or persons acting on behalf of the Company, areexpressly qualified in their entirety by the factors described above.

 

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

 

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

 

26

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**Item 4.****   ****Controls and Procedures.**

 

**Evaluation of Disclosure Controls and Procedures –** As of March 31,2006, 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, theCompany’s President and Chief Executive Officer and Executive Vice Presidentand Chief Financial Officer concluded that the Company’s disclosure controlsand procedures are effective in alerting them in a timely manner to materialinformation required to be disclosed in the Company’s periodic reports filedwith the SEC as of the end of such period.

 

**Changes in Internal Control –** There was no changein the Company’s internal control over financial reporting that occurred duringthe Company’s fiscal first quarter ended March 31, 2006 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

PART II. OTHER INFORMATION

 

**Item 1.****   ****Legal Proceedings.**

 

Reference is made to “Item 3. Legal Proceedings” inthe Company’s Annual Report on Form 10-K for 2005.

 

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

 

**Item 1A. Risk Factors.**

 

Weare affected by risks specific to us as well as factors that affect allbusinesses operating in a global market. The significant factors known to usthat could materially adversely affect our business, financial condition, oroperating results are described in “Item 1. Business – Risk Factors Related toNorthwest and the Airline Industry” in our most recently filed Annual Report onForm 10-K for 2005. There have been no material changes in those risk factors.

 

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

 

(a)   Exhibits:

 
| 10.1 |   | Amendment No. 8 to A330  Purchase Agreement dated as of January 6, 2006 between AVSA, S.A.R.L. and  Northwest Airlines, Inc. (NWA Corp. has filed a request with the Commission  for confidential treatment as to certain portions of this document).     |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 |   | Amendment No. 9 to A330  Purchase Agreement dated as of January 23, 2006 between AVSA, S.A.R.L. and  Northwest Airlines, Inc. (NWA Corp. has filed a request with the Commission  for confidential treatment as to certain portions of this document).    |
| 10.3 |   | A330 Financing Letter  Agreement dated as of January 24, 2006 between Northwest Airlines, Inc. and  AVSA, S.A.R.L. (NWA Corp. has filed a request with the Commission for  confidential treatment as to certain portions of this document).               |
| 10.4 |   | Form of Credit  Agreement to be entered into pursuant to Exhibit 10.3 by Northwest Airlines,  Inc. and Airbus Financial Services (NWA Corp. has filed a request with the  Commission for confidential treatment as to certain portions of this document). |
| 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 or 15(d)of the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorizedthis 10th day of May 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            |       | Amendment No. 8 to A330  Purchase Agreement dated as of January 6, 2006 between AVSA, S.A.R.L. and  Northwest Airlines, Inc. (NWA Corp. has filed a request with the Commission  for confidential treatment as to certain portions of this document).      |
| 10.2            |       | Amendment No. 9 to A330  Purchase Agreement dated as of January 23, 2006 between AVSA, S.A.R.L. and  Northwest Airlines, Inc. (NWA Corp. has filed a request with the Commission  for confidential treatment as to certain portions of this document).     |
| 10.3            |       | A330 Financing Letter  Agreement dated as of January 24, 2006 between Northwest Airlines, Inc. and  AVSA, S.A.R.L. (NWA Corp. has filed a request with the Commission for  confidential treatment as to certain portions of this document).                |
| 10.4            |       | Form of Credit  Agreement to be entered into pursuant to Exhibit 10.3 by Northwest Airlines,  Inc. and Airbus Financial Services (NWA Corp. has filed a request with the  Commission for confidential treatment as to certain portions of this  document). |
| 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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