**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

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

**OF THE SECURITIESEXCHANGE ACT OF 1934**

**For thequarterly period ended**June 30, 2007

**Commission File Number:**0-23642

**NORTHWEST AIRLINES CORPORATION**

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

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

 

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

 

**(612) 726-2111**

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

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

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

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

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

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequentto the distribution of securities under a plan confirmed by a court.Yes  x     No o

**As of June 30, 2007, there were 195,762,184 sharesof the registrant’s Common Stock outstanding.**

 

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**NORTHWEST AIRLINES CORPORATION**
|                                    | **Page No** |
|------------------------------------|-------------|
| **PART I. FINANCIAL  INFORMATION** | ** **  |
| ** **                         | ** **  | ** ** |
|                               | Item 1.     | Financial Statements. |   |
|                               |        |   |   |
|                               |        | Condensed Consolidated Statements of Operations | 3 |
|                               |        |   |   |
|                               |        | Condensed Consolidated Balance Sheets | 5 |
|                               |        |   |   |
|                               |        | Condensed Consolidated Statements of Cash Flows | 7 |
|                               |        |   |   |
|                               |        | Condensed Consolidated Statement of Common  Stockholders’ Equity (Deficit) | 8 |
|                               |        |   |   |
|                               |        | Notes to Condensed Consolidated Financial Statements | 9 |
|                               |        |   |   |
|                               |        | 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. | 39 |
|                               |        |   |   |
|                               | Item 3.     | Quantitative  and Qualitative Disclosures About Market Risk. | 52 |
|                               |        |   |   |
|                               | Item 4.     | Controls and  Procedures. | 52 |
|                               |        |   |   |
| PART  II. OTHER INFORMATION        |        |
|                               |        |
|                               | Item 1.     | Legal Proceedings. | 52 |
|                               |        |   |   |
|                               | Item  1A.   | Risk  Factors. | 52 |
|                               |        |   |   |
|                               | Item 6.     | Exhibits. | 52 |
|                               |        |   |   |
| SIGNATURE                          | 53          |
|                               |        |
| EXHIBIT  INDEX                     | 53          |
|                                    |             |  |  |  |

 

2

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PART I. FINANCIAL INFORMATION

**Item 1. Financial Statements.**

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

 
| ** **                                                                          | ** ** | **Successor**                                                  | ** ** | **Predecessor**                                                | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **(Unaudited, in millions except per share amounts)** | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  April 1 to  May 31,  2007** | ** ** | **Three Months   Ended June 30,  2006** | ** ** |
| **Operating Revenues**                                                              | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| Passenger                                                                           |       | $                                                              | 861        |                                                           | $          | 1,566 |   | $ | 2,425 |   |
| Regional carrier  revenues                                                          |       | 135                                                            |       | 229                                                            |       | 396 |   |
| Cargo                                                                               |       | 69                                                             |       | 129                                                            |       | 236 |   |
| Other                                                                               |       | 65                                                             |       | 127                                                            |       | 234 |   |
| Total operating  revenues                                                           |       | 1,130                                                          |       | 2,051                                                          |       | 3,291 |   |
| ** **                                                                          | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| **Operating Expenses**                                                              | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| Aircraft fuel and taxes                                                             |       | 267                                                            |       | 582                                                            |       | 886 |   |
| Salaries, wages and  benefits                                                       |       | 205                                                            |       | 412                                                            |       | 675 |   |
| Selling and marketing                                                               |       | 65                                                             |       | 124                                                            |       | 190 |   |
| Aircraft maintenance materials  and repairs                                         |       | 64                                                             |       | 119                                                            |       | 183 |   |
| Other rentals and  landing fees                                                     |       | 46                                                             |       | 94                                                             |       | 142 |   |
| Depreciation and  amortization                                                      |       | 39                                                             |       | 85                                                             |       | 134 |   |
| Aircraft rentals                                                                    |       | 31                                                             |       | 64                                                             |       | 54 |   |
| Regional carrier  expenses                                                          |       | 63                                                             |       | 134                                                            |       | 366 |   |
| Other                                                                               |       | 155                                                            |       | 275                                                            |       | 366 |   |
| Total operating  expenses                                                           |       | 935                                                            |       | 1,889                                                          |       | 2,996 |   |
| **Operating Income (Loss)**                                                         |       | 195                                                            |       | 162                                                            |       | 295 |   |
| ** **                                                                          | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| **Other Income (Expense)**                                                          | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| Interest expense, net                                                               |       | (40                                                            | )          | (87                                                            | )          | (138 | ) |
| Investment income                                                                   |       | 17                                                             |       | 25                                                             |       | 25 |   |
| Reorganization items,  net                                                          |       | —                                                         |       | 1,944                                                          |       | (464 | ) |
| Other, net                                                                          |       | 3                                                              |       | (2                                                             | )          | (3 | ) |
| Total other income  (expense)                                                       |       | (20                                                            | )          | 1,880                                                          |       | (580 | ) |
| **Income (Loss) Before Income  Taxes**                                              |       | 175                                                            |       | 2,042                                                          |       | (285 | ) |
|                                                                                |       |                                                           |       |                                                           |       |   |   |
| Income tax expense  (benefit)                                                       |       | 69                                                             |       | (1                                                             | )          | — |   |
|                                                                                |       |                                                           |       |                                                           |       |   |   |
| **Net Income (Loss) Applicable to  Common Stockholders**                            | ** ** | $                                                              | 106        | ** **                                                     | $          | 2,043 | ** ** | $ | (285 | ) |
|                                                                                |       |                                                           |       |                                                           |       |   |   |
| Earnings (loss) per  common share:                                                  |       |                                                           |       |                                                           |       |   |   |
| *Basic*                                                                             | * *   | $                                                              | 0.41       |                                                           | $          | 23.37 |   | $ | (3.27 | ) |
| * *                                                                            |       |                                                           |       |                                                           |       |   |   |
| *Diluted*                                                                           | * *   | $                                                              | 0.41       |                                                           | $          | 16.87 |   | $ | (3.27 | ) |
|                                                                                |       |                                                           |       |                                                           |       |   |   |
| Average shares used in  computation:                                                |       |                                                           |       |                                                           |       |   |   |
| *Basic*                                                                             | * *   | 262                                                            |       | 87                                                             |       | 87 |   |
| *Diluted*                                                                           | * *   | 262                                                            |       | 113                                                            |       | 87 |   |

 

*Seeaccompanying notes.*

3

----

 

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

 
| ** **                                                                          | ** ** | **Successor**                                                  | ** ** | **Predecessor**                                                  | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **(Unaudited, in millions except per share amounts)** | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  January 1 to  May 31,  2007** | ** ** | **Six Months  Ended June 30,  2006** | ** ** |
|                                                                                |       |                                                           |       |                                                             |       |   |   |
| **Operating  Revenues**                                                             | ** ** | ** **                                                     | ** ** | ** **                                                       | ** ** | ** ** | ** ** |
| Passenger                                                                           |       | $                                                              | 861        |                                                             | $          | 3,768 |   | $ | 4,474 |   |
| Regional carrier revenues                                                           |       | 135                                                            |       | 521                                                              |       | 735 |   |
| Cargo                                                                               |       | 69                                                             |       | 318                                                              |       | 450 |   |
| Other                                                                               |       | 65                                                             |       | 317                                                              |       | 522 |   |
| Total operating revenues                                                            |       | 1,130                                                          |       | 4,924                                                            |       | 6,181 |   |
| **Operating  Expenses**                                                             | ** ** | ** **                                                     | ** ** | ** **                                                       | ** ** | ** ** | ** ** |
| Aircraft fuel and taxes                                                             |       | 267                                                            |       | 1,286                                                            |       | 1,630 |   |
| Salaries, wages and benefits                                                        |       | 205                                                            |       | 1,027                                                            |       | 1,351 |   |
| Selling and marketing                                                               |       | 65                                                             |       | 315                                                              |       | 384 |   |
| Aircraft maintenance materials and repairs                                          |       | 64                                                             |       | 303                                                              |       | 372 |   |
| Other rentals and landing fees                                                      |       | 46                                                             |       | 235                                                              |       | 285 |   |
| Depreciation and amortization                                                       |       | 39                                                             |       | 206                                                              |       | 268 |   |
| Aircraft rentals                                                                    |       | 31                                                             |       | 160                                                              |       | 122 |   |
| Regional carrier expenses                                                           |       | 63                                                             |       | 345                                                              |       | 732 |   |
| Other                                                                               |       | 155                                                            |       | 684                                                              |       | 757 |   |
| Total operating expenses                                                            |       | 935                                                            |       | 4,561                                                            |       | 5,901 |   |
| **Operating  Income (Loss)**                                                        |       | 195                                                            |       | 363                                                              |       | 280 |   |
| **Other  Income (Expense)**                                                         | ** ** | ** **                                                     | ** ** | ** **                                                       | ** ** | ** ** | ** ** |
| Interest expense, net                                                               |       | (40                                                            | )          | (219                                                             | )          | (276 | ) |
| Investment income                                                                   |       | 17                                                             |       | 56                                                               |       | 43 |   |
| Reorganization items, net                                                           |       | —                                                         |       | 1,551                                                            |       | (1,439 | ) |
| Other, net                                                                          |       | 3                                                              |       | (2                                                               | )          | 3 |   |
| Total other income (expense)                                                        |       | (20                                                            | )          | 1,386                                                            |       | (1,669 | ) |
| **Income  (Loss) Before Income Taxes**                                              |       | 175                                                            |       | 1,749                                                            |       | (1,389 | ) |
| Income tax expense (benefit)                                                        |       | 69                                                             |       | (2                                                               | )          | — |   |
| **Net  Income (Loss) Applicable to Common Stockholders**                            | ** ** | $                                                              | 106        | ** **                                                       | $          | 1,751 | ** ** | $ | (1,389 | ) |
|                                                                                |       |                                                           |       |                                                             |       |   |   |
| Earnings (loss)  per common share:                                                  |       |                                                           |       |                                                             |       |   |   |
| *Basic*                                                                             |       | $                                                              | 0.41       |                                                             | $          | 20.03 |   | $ | (15.92 | ) |
|                                                                                |       |                                                           |       |                                                             |       |   |   |
| *Diluted*                                                                           |       | $                                                              | 0.41       |                                                             | $          | 14.28 |   | $ | (15.92 | ) |
|                                                                                |       |                                                           |       |                                                             |       |   |   |
| Average shares  used in computation:                                                |       |                                                           |       |                                                             |       |   |   |
| *Basic*                                                                             |       | 262                                                            |       | 87                                                               |       | 87 |   |
| *Diluted*                                                                           |       | 262                                                            |       | 113                                                              |       | 87 |   |

 

*See accompanying notes.*

4

----

**NORTHWESTAIRLINES CORPORATION**
|                                       |
|---------------------------------------|
| CONDENSED CONSOLIDATED BALANCE SHEETS |
|                                  |

 
| ** **                                                                            | ** ** | **Successor**           | ** ** | **Predecessor**             | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **(Unaudited, in millions)**                                                | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
| ** **                                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                  |       |                    |       |                        |       |
| **CURRENT  ASSETS**                                                                   | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                                                             | ** ** | **$**                   | **2,678**  |                        | $          | 1,461 |   |
| Unrestricted short-term investments                                                   | ** ** | **632**                 |       | 597                         |       |
| Restricted cash, cash equivalents and short-term  investments                         | ** ** | **706**                 |       | 424                         |       |
| Accounts receivable, less allowance (2007–$5; 2006–$14)                     | ** ** | **742**                 |       | 638                         |       |
| Flight equipment spare parts, less allowance (2007–$2;  2006–$255)          | ** ** | **136**                 |       | 104                         |       |
| Maintenance and operating supplies                                                    | ** ** | **120**                 |       | 130                         |       |
| Prepaid expenses and other                                                            | ** ** | **182**                 |       | 212                         |       |
| Total current assets                                                                  | ** ** | **5,196**               |       | 3,566                       |       |
|                                                                                  |       |                    |       |                        |       |
| **PROPERTY  AND EQUIPMENT**                                                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Flight equipment                                                                      | ** ** | **6,884**               |       | 10,424                      |       |
| Less accumulated depreciation                                                         | ** ** | **41**                  |       | 2,815                       |       |
|                                                                                  | ** ** | **6,843**               |       | 7,609                       |       |
|                                                                                  |       |                    |       |                        |       |
| Other property and equipment                                                          | ** ** | **556**                 |       | 1,674                       |       |
| Less accumulated depreciation                                                         | ** ** | **9**                   |       | 1,103                       |       |
|                                                                                  | ** ** | **547**                 |       | 571                         |       |
| Total property and equipment, net                                                     | ** ** | **7,390**               |       | 8,180                       |       |
|                                                                                  |       |                    |       |                        |       |
| **FLIGHT  EQUIPMENT UNDER CAPITAL LEASES**                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Flight equipment                                                                      | ** ** | **8**                   |       | 24                          |       |
| Less accumulated amortization                                                         | ** ** | **—**              |       | 12                          |       |
| Total flight equipment under capital leases                                           | ** ** | **8**                   |       | 12                          |       |
|                                                                                  |       |                    |       |                        |       |
| **OTHER  ASSETS**                                                                     | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Goodwill                                                                              | ** ** | **6,188**               |       | 8                           |       |
| International routes, less accumulated amortization  (2007–$0; 2006–$334)   | ** ** | **2,977**               |       | 634                         |       |
| Other intangibles, less accumulated amortization (2007–$7;  2006–$0)        | ** ** | **2,180**               |       | 30                          |       |
| Investments in affiliated companies                                                   | ** ** | **166**                 |       | 42                          |       |
| Other, less accumulated depreciation and amortization  (2007–$1; 2006–$914) |       | **466**                 |       | 743                         |       |
| Total other assets                                                                    | ** ** | **11,977**              |       | 1,457                       |       |
| **Total Assets**                                                                      | ** ** | **$**                   | **24,571** |                        | $          | 13,215 |   |

 

*See accompanying notes.*

5

----

 

**NORTHWESTAIRLINES CORPORATION**
|                                       |
|---------------------------------------|
| CONDENSED CONSOLIDATED BALANCE SHEETS |
|                                  |

 
| ** **                                                                                                                                 | ** ** | **Successor**           | ** ** | **Predecessor**             | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **(Unaudited, in millions)**                                                                                                     | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|                                                                                                                                       |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                    | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                                                                       |       |                    |       |                        |       |
| **CURRENT  LIABILITIES**                                                                                                                   | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Air traffic liability/deferred frequent flyer  liability                                                                                   | ** ** | **$**                   | **2,290**  |                        | $          | 1,557 |   |
| Accrued compensation and benefits                                                                                                          | ** ** | **389**                 |       | 301                         |       |
| Accounts payable                                                                                                                           | ** ** | **829**                 |       | 624                         |       |
| Collections as agent                                                                                                                       | ** ** | **206**                 |       | 138                         |       |
| Accrued aircraft rent                                                                                                                      | ** ** | **17**                  |       | 49                          |       |
| Other accrued liabilities                                                                                                                  | ** ** | **467**                 |       | 329                         |       |
| Current maturities of long-term debt                                                                                                       | ** ** | **513**                 |       | 213                         |       |
| Current maturities of capital lease obligations                                                                                            | ** ** | **9**                   |       | —                      |       |
| Total current liabilities                                                                                                                  | ** ** | **4,720**               |       | 3,211                       |       |
|                                                                                                                                       |       |                    |       |                        |       |
| **LONG-TERM  DEBT**                                                                                                                        | ** ** | **6,138**               |       | 3,899                       |       |
|                                                                                                                                       |       |                    |       |                        |       |
| **LONG-TERM  OBLIGATIONS UNDER CAPITAL LEASES**                                                                                            | ** ** | **119**                 |       | —                      |       |
|                                                                                                                                       |       |                    |       |                        |       |
| **DEFERRED  CREDITS AND OTHER LIABILITIES**                                                                                                | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Long-term pension and postretirement health care  benefits                                                                                 | ** ** | **3,449**               |       | 86                          |       |
| Deferred frequent flyer liability                                                                                                          | ** ** | **1,550**               |       | —                      |       |
| Deferred income taxes                                                                                                                      | ** ** | **1,131**               |       | —                      |       |
| Other                                                                                                                                      | ** ** | **178**                 |       | 161                         |       |
| Total deferred credits and other liabilities                                                                                               | ** ** | **6,308**               |       | 247                         |       |
|                                                                                                                                       |       |                    |       |                        |       |
| **LIABILITIES  SUBJECT TO COMPROMISE**                                                                                                     | ** ** | **—**              |       | 13,572                      |       |
|                                                                                                                                       |       |                    |       |                        |       |
| **PREFERRED  REDEEMABLE STOCK SUBJECT TO COMPROMISE**                                                                                      | ** ** | **—**              |       | 277                         |       |
|                                                                                                                                       |       |                    |       |                        |       |
| **COMMITMENTS  AND CONTINGENCIES**                                                                                                         | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                                                                       |       |                    |       |                        |       |
| **COMMON  STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Predecessor Company common stock, $.01 par value;  shares authorized–315,000,000; shares issued–111,374,977 at December 31, 2006 |       | **—**              |       | 1                           |       |
| Successor Company common stock, $.01 par value;  shares authorized–400,000,000; shares issued–195,188,600 at June 30, 2007       |       | **2**                   |       | —                      |       |
| Additional paid-in capital                                                                                                                 | ** ** | **7,178**               |       | 1,505                       |       |
| Retained earnings (accumulated deficit)                                                                                                    | ** ** | **106**                 |       | (7,384                      | )          |
| Accumulated other comprehensive income (loss)                                                                                              | ** ** | **—**              |       | (1,100                      | )          |
| Predecessor Company Treasury stock (2006–24,024,317  shares)                                                                          | ** ** | **—**              |       | (1,013                      | )          |
| Total common stockholders' equity (deficit)                                                                                                | ** ** | **7,286**               |       | (7,991                      | )          |
| **Total Liabilities and  Stockholders’ Equity (Deficit)**                                                                             | ** ** | **$**                   | **24,571** |                        | $          | 13,215 |   |

 

*See accompanying notes.*

6

----

**NORTHWEST AIRLINES CORPORATION**
|                                                 |
|-------------------------------------------------|
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
|                                            |

 
| ** **                                                                                                                                    | ** ** | **Successor**                                                  | ** ** | **Predecessor**                                                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **(Unaudited, in millions)**                                                                                                        | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  January 1 to  May 31,  2007** | ** ** | **Six Months  Ended June 30,  2006** | ** ** |
| * *                                                                                                                                      | * *   | * *                                                       | * *   | * *                                                         | * *   | * * | * * |
| **Cash  Flows from Operating Activities**                                                                                                     | ** ** | ** **                                                     | ** ** | ** **                                                       | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                                             |       | $                                                              | 106        |                                                             | $          | 1,751 |   | $ | (1,389 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities:                                                    |       |                                                           |       |                                                             |       |   |   |
| Depreciation and amortization                                                                                                                 |       | 39                                                             |       | 206                                                              |       | 268 |   |
| Income tax expense (benefit)                                                                                                                  |       | 69                                                             |       | (2                                                               | )          | — |   |
| Pension and other postretirement benefit  contributions less than (greater than) expense                                                      |       | —                                                         |       | 3                                                                |       | 149 |   |
| Stock-based compensation                                                                                                                      |       | 10                                                             |       | —                                                           |       | 1 |   |
| Reorganization items, net                                                                                                                     |       | —                                                         |       | (1,551                                                           | )          | 1,439 |   |
| Increase (decrease) in cash flows from operating  assets and liabilities, excluding the effects of the acquisition of Mesaba  Aviation, Inc.: |       |                                                           |       |                                                             |       |   |   |
| Changes in certain assets and liabilities                                                                                                     |       | (61                                                            | )          | 441                                                              |       | 394 |   |
| Long-term vendor deposits/holdbacks                                                                                                           |       | 147                                                            |       | 163                                                              |       | (116 | ) |
| Post-emergence reorganization payments                                                                                                        |       | (67                                                            | )          | —                                                           |       | — |   |
| Other, net                                                                                                                                    |       | (4                                                             | )          | 13                                                               |       | 12 |   |
| Net cash provided by (used in) operating activities                                                                                           |       | 239                                                            |       | 1,024                                                            |       | 758 |   |
| **Cash  Flows from Reorganization Activities**                                                                                                | ** ** | ** **                                                     | ** ** | ** **                                                       | ** ** | ** ** | ** ** |
| Net cash provided by (used in) reorganization  activities                                                                                     |       | —                                                         |       | 5                                                                |       | 12 |   |
| **Cash  Flows from Investing Activities**                                                                                                     | ** ** | ** **                                                     | ** ** | ** **                                                       | ** ** | ** ** | ** ** |
| Capital expenditures                                                                                                                          |       | (128                                                           | )          | (312                                                             | )          | (186 | ) |
| Purchase of short-term investments                                                                                                            |       | —                                                         |       | (44                                                              | )          | (18 | ) |
| Proceeds from sales of short-term investments                                                                                                 |       | 9                                                              |       | 15                                                               |       | 10 |   |
| Decrease (increase) in restricted cash, cash  equivalents and short-term investments                                                          |       | (7                                                             | )          | (74                                                              | )          | (74 | ) |
| Cash and cash equivalents acquired in acquisition of  Mesaba Aviation, Inc.                                                                   |       | —                                                         |       | 16                                                               |       | — |   |
| Other, net                                                                                                                                    |       | (1                                                             | )          | 1                                                                |       | (1 | ) |
| Net cash provided by (used in) investing activities                                                                                           |       | (127                                                           | )          | (398                                                             | )          | (269 | ) |
| **Cash  Flows from Financing Activities**                                                                                                     | ** ** | ** **                                                     | ** ** | ** **                                                       | ** ** | ** ** | ** ** |
| Proceeds from long-term debt                                                                                                                  |       | 67                                                             |       | 326                                                              |       | 72 |   |
| Payments of long-term debt and capital lease  obligations                                                                                     |       | (59                                                            | )          | (610                                                             | )          | (278 | ) |
| Proceeds from equity rights offering                                                                                                          |       | 750                                                            |       | —                                                           |       | — |   |
| Other, net                                                                                                                                    |       | 1                                                              |       | (1                                                               | )          | — |   |
| Net cash provided by (used in) financing activities                                                                                           |       | 759                                                            |       | (285                                                             | )          | (206 | ) |
| **Increase  (Decrease) in Cash and Cash Equivalents**                                                                                         |       | 871                                                            |       | 346                                                              |       | 295 |   |
| Cash and cash  equivalents at beginning of period                                                                                             |       | 1,807                                                          |       | 1,461                                                            |       | 684 |   |
| Cash and cash  equivalents at end of period                                                                                                   |       | $                                                              | 2,678      |                                                             | $          | 1,807 |   | $ | 979 |   |
|                                                                                                                                          |       |                                                           |       |                                                             |       |   |   |
| Available to be  borrowed under credit facilities                                                                                             |       | $                                                              | 127        |                                                             | $          | 127 |   | $ | 9 |   |
|                                                                                                                                          |       |                                                           |       |                                                             |       |   |   |
| **Cash  and cash equivalents and unrestricted short-term investments at end of period**                                                       | ** ** | **$**                                                          | **3,310**  | ** **                                                       | **$**      | **2,445** | ** ** | **$** | **1,576** | ** ** |
| Supplemental  Cash Flow Information:                                                                                                          |       |                                                           |       |                                                             |       |   |   |
| Interest paid                                                                                                                                 |       | $                                                              | 53         |                                                             | $          | 208 |   | $ | 125 |   |
| Investing and  Financing Activities Not Affecting Cash:                                                                                       |       |                                                           |       |                                                             |       |   |   |
| Manufacturer  financing of aircraft and other non-cash transactions                                                                           |       | $                                                              | 84         |                                                             | $          | 167 |   | $ | 117 |   |

 

*See accompanying notes.*

7

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**NORTHWEST AIRLINES CORPORATION**
|                                                                                 |
|---------------------------------------------------------------------------------|
| CONDENSED CONSOLIDATED STATEMENT OF COMMON  STOCKHOLDERS’ EQUITY (DEFICIT) |
|                                                                            |

 
| ** **                                                                                                   | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Treasury**           | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|------------------------|------------|------------|------------|
| **(Unaudited, in millions)**                                                                       | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**                          | ** ** | **Deficit)**                          | ** ** | **Income (Loss)** | ** ** | **Stock**  | ** ** | **Total** | ** ** |
| **Balance  at January 1, 2007**                                                                              |       | 111.4                 |       | $                       | 1          |                                 | $          | 1,505                                 |       | $                      | (7,384     | )          | $          | (1,100 | ) | $ | (1,013 | ) | $ | (7,991 | ) |
| (Predecessor Company)                                                                                        |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
|                                                                                                         |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Series C  Preferred Stock converted to common stock                                                          |       | —                |       | —                  |       | 2                                    |       | —                                |       | —                 |       | —     |       | 2 |   |
|                                                                                                         |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Net income  (loss) from January 1 to May 31, 2007                                                            |       | —                |       | —                  |       | —                               |       | 1,751                                 |       | —                 |       | —     |       | 1,751 |   |
|                                                                                                         |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Other  comprehensive income (loss)                                                                           |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Foreign currency                                                                                             |       | —                |       | —                  |       | —                               |       | —                                |       | (1                     | )          | —     |       | (1 | ) |
| Unrealized gain/(loss) on investments                                                                        |       | —                |       | —                  |       | —                               |       | —                                |       | 1                      |       | —     |       | 1 |   |
| Total                                                                                                        |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       | — |   |
| **Balance  at May 31, 2007**                                                                                 |       | 111.4                 |       | 1                       |       | 1,507                                |       | (5,633                                | )          | (1,100                 | )          | (1,013     | )          | (6,238 | ) |
| (Predecessor Company)                                                                                        |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
|                                                                                                         |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Fresh start  adjustments:                                                                                    |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Cancellation of the  Predecessor Company’s preferred and common stock                                   |       | (111.4                | )          | (1                      | )          | (1,507                               | )          | —                                |       | —                 |       | 1,013      |       | (495 | ) |
|                                                                                                         |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Elimination of the  Predecessor Company’s accumulated deficit and accumulated other comprehensive  loss |       | —                |       | —                  |       | —                               |       | 5,633                                 |       | 1,100                  |       | —     |       | 6,733 |   |
|                                                                                                         |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Reorganization  value ascribed to the Successor Company                                                      |       | 167.4                 |       | 2                       |       | 6,448                                |       | —                                |       | —                 |       | —     |       | 6,450 |   |
|                                                                                                         |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Issuance of new  equity interests in connection with emergence from Chapter 11                               |       | 27.8                  |       | —                  |       | 728                                  |       | —                                |       | —                 |       | —     |       | 728 |   |
| **Balance  at June 1, 2007**                                                                                 |       | 195.2                 |       | 2                       |       | 7,176                                |       | —                                |       | —                 |       | —     |       | 7,178 |   |
| (Successor Company)                                                                                          |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
|                                                                                                         |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Net income from  June 1 to June 30, 2007                                                                     |       | —                |       | —                  |       | —                               |       | 106                                   |       | —                 |       | —     |       | 106 |   |
|                                                                                                         |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Other  comprehensive income (loss)  Deferred gain/(loss) from hedging activities                             |       | —                |       | —                  |       | —                               |       | —                                |       | 1                      |       | —     |       | 1 |   |
| Unrealized gain/(loss) on investments                                                                        |       | —                |       | —                  |       | —                               |       | —                                |       | (1                     | )          | —     |       | (1 | ) |
| Total                                                                                                        |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       | — |   |
|                                                                                                         |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |       |       |   |   |
| Compensation  expense associated with equity awards                                                          |       | —                |       | —                  |       | 2                                    |       | —                                |       | —                 |       | —     |       | 2 |   |
| **Balance at June 30, 2007**                                                                                 | ** ** | **195.2**             | ** ** | **$**                   | **2**      | ** **                           | **$**      | **7,178**                             | ** ** | **$**                  | **106**    | ** ** | **$**      | **—** | ** ** | **$** | **—** | ** ** | **$** | **7,286** | ** ** |

 

*See accompanying notes.*

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**NORTHWEST AIRLINES CORPORATION**
|                                                      |
|------------------------------------------------------|
| 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 operating subsidiary is Northwest Airlines, Inc. (“Northwest”),include the accounts of NWA Corp. and all consolidated subsidiaries(collectively, the “Company”).  Unlessotherwise indicated, the terms “we,” “us,” and “our” refer to NWA Corp. and allconsolidated subsidiaries.  The condensedconsolidated financial statements included herein have been prepared pursuantto the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information and footnote disclosuresnormally included in annual financial statements prepared in accordance withU.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed oromitted as permitted by such rules and regulations. These financial statementsand related notes should be read in conjunction with the financial statementsand notes included in the Company’s audited consolidated financial statements,which are provided in the Company’s Annual Report on Form 10-K for the yearended December 31, 2006, as amended by Form 10-K/A filings dated April 6, 2007and April 30, 2007 (collectively, the “2006 Form 10-K”).

Northwest’soperations account for approximately 99% of the Company’s consolidatedoperating revenues and expenses. Northwest is a major air carrier engaged principally in the commercialtransportation of passengers and cargo, directly serving more than 240 citiesin 26 countries in North America, Asia and Europe.  Northwest’s global airline network includesdomestic hubs at Detroit, Minneapolis/St. Paul and Memphis, an extensivePacific route system with a hub in Tokyo, a transatlantic joint venture withKLM Royal Dutch Airlines (“KLM”), which operates through a hub in Amsterdam, adomestic and international alliance with Continental Airlines, Inc. (“Continental”)and Delta Air Lines, Inc. (“Delta”), membership in SkyTeam, a global airlinesalliance with KLM, Continental, Delta, Air France, Alitalia, Aeroméxico, CSACzech Airlines, Korean Air and Aeroflot, exclusive marketing agreements withthree domestic regional carriers, Pinnacle Airlines, Inc. (“Pinnacle”), MesabaAviation, Inc. (“Mesaba”) and Compass Airlines, Inc. (“Compass”), whichcurrently operate as Northwest Airlink carriers and a cargo business thatincludes a dedicated fleet of freighter aircraft that operate through hubs inAnchorage and Tokyo.

As a result of theapplication of fresh-start reporting in accordance with American Institute ofCertified Public Accountants’ Statement of Position 90-7, *Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code* (“SOP 90-7”), the financial statementsprior to June 1, 2007 are not comparable with the financial statements forperiods on or after June 1, 2007. References to “Successor Company” refer tothe Company on or after June 1, 2007, after giving effect to the application offresh-start reporting. References to “Predecessor Company” refer to the Companyprior to June 1, 2007. See “Note 3 – Fresh-Start Reporting” for furtherdetails.

The Company maintains aWeb site at *http://www.nwa.com*.  Information contained on the Company’s Website is not incorporated into this quarterly report on Form 10-Q.  Annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, all amendments to thosereports and other information about the Company are available free of chargethrough this Web site at *http://ir.nwa.com*as soon as reasonably practicable after those reports are electronically filedwith or furnished to the SEC.

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’ssecond and third quarter operating results have historically been morefavorable due to increased leisure travel on domestic and international routesduring the spring and summer months.

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

*Background and GeneralBankruptcy Matters.*  The following discussion provides generalbackground information regarding the Company’s Chapter 11 cases, and is notintended to be an exhaustive summary. Detailed information pertaining to the bankruptcy filings may beobtained at *http://www.nwa-restructuring.com*.

On September 14, 2005(the “Petition Date”), NWA Corp. and 12 of its direct and indirect subsidiaries(collectively, the “Debtors”) filed voluntary petitions for relief underChapter 11 of the United States Bankruptcy Code with the United StatesBankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).  Subsequently, on September 30, 2005, NWAAircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed avoluntary petition for relief under Chapter 11. On May 18, 2007, the Bankruptcy Court entered an order approving andconfirming the Debtors’ First

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Amended Joint andConsolidated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (asconfirmed, the “Plan” or “Plan of Reorganization”).  The Plan became effective and the Debtorsemerged from bankruptcy protection on May 31, 2007 (the “Effective Date”).  On the Effective Date, the Companyimplemented fresh-start reporting in accordance with SOP 90-7.

The Plan generally providedfor the full payment or reinstatement of allowed administrative claims,priority claims, and secured claims, and the distribution of new common stockof the Successor Company to the Debtors’ creditors, employees and others insatisfaction of allowed unsecured claims. The Plan contemplated the issuance of approximately 277 million shares of new common stock by the SuccessorCompany (out of the 400 million shares of new common stock authorized under itsamended and restated certificate of incorporation).  The new common stock is listed on the New YorkStock Exchange (the “NYSE”) and began “regular way” trading under the symbol “NWA”on May 31, 2007.  The distributions ofthe Successor Company’s common stock, which are subject to certain holdbacks asdescribed in the Plan, were authorized under the Plan as follows:

·                  225.8 million shares of common stock areissuable to holders of certain general unsecured claims;

·                  8.6 million shares of common stock are issuabeto holders who also held a guaranty from a Debtor;

·                  15.2 million shares of common stock aresubject to awards under a management equity plan; and

·                  27.8 million shares of common stock wereissued in the Rights Offering and Equity Commitment Agreement.

Pursuant to the Plan ofReorganization, stockholders of NWA Corp. prior to the Effective Date receivedno distributions and their stock was cancelled.

In connection with theconsummation of the Plan of Reorganization, on the Effective Date, the Company’sexisting $1.225 billion Super Priority Debtor in Possession and Exit CreditGuarantee Agreement (the “DIP/Exit Facility”) was converted into exit financingin accordance with its terms.  See “Note10 – Long-Term Debt and Short-Term Borrowings” for additional information.

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

*Claims Resolution Process*.  Aspermitted under the bankruptcy process, many of the Debtors’ creditors filedproofs of claim with the Bankruptcy Court. Through the claims resolutionprocess, many claims were disallowed by the Bankruptcy Court because they wereduplicative, amended or superseded by later filed claims, were without merit,or were otherwise overstated. Throughout the Chapter 11 proceedings, theCompany also resolved many claims through settlements or by Bankruptcy Courtorders following the filing of an objection. The Company will continue to settle claims and file additionalobjections with the Bankruptcy Court.

Withrespect to unsecured claims, once a claim is allowed consistent with the claimsresolution process, the claimant is entitled to a distribution of new commonstock.  Pursuant to the terms of the Plan of Reorganization, approximately167.8 million shares of new common stock were issued and distributed on orabout May 31, 2007 and July 16, 2007 as part of the initial distributions inrespect of valid unsecured claims totaling $7.6 billion.  Additionally,approximately 7.0 million shares of new common stock were distributed inrespect of valid unsecured guaranty claims.  In total, there areapproximately 59.7 million remaining shares of new common stock held in reserveunder the terms of the Plan of Reorganization.  Of these shares,approximately 58.0 million are being held in reserve relating to disputedunsecured claims totaling $2.6 billion and 1.6 million are being held inreserve relating to unsecured guaranty claims totaling $737 million.

TheCompany estimates that the probable range of unsecured claims to be allowedwill be between $8.2 and $8.8 billion. Based on the current status of theclaims resolution process, the actual results are expected to fall towards thelow end of this range.  Differencesbetween claim amounts filed and the Company’s estimates are being investigatedand will be resolved in connection with the claims resolution process. However,there will be no further financial impact to the Company associated with thesettlement of such unsecured claims, as the holders of all allowed unsecuredclaims against the Predecessor Company will receive under the Plan ofReorganization only their pro rata share of the distribution of the newlyissued Common Stock of the Successor Company.

10

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Withrespect to administrative and priority claims, pursuant to the terms of thePlan of Reorganization these claims will be satisfied with cash. Manyadministrative and priority claims still remain unpaid, and the Company willcontinue to settle claims or file objections with the Bankruptcy Court toeliminate or reduce such claims. All of these claims have been accrued by theSuccessor Company based upon the best available estimates of amounts to bepaid. However, it should be noted that the claims resolution process isuncertain and could result in material adjustments to the Successor Company’sfinancial statements.

Additionally,secured claims were deemed unimpaired under the Plan of Reorganization.  Pursuant to the Plan of Reorganization thoseclaims were satisfied upon either reinstatement of the obligations in theSuccessor Company, surrendering the collateral to the secured party, or bymaking full payment in cash.  However,certain disputes still remain with respect to the valuation of some securityinterests that may result in material future adjustments to the Company’sfinancial results.

*Equity Commitment Agreement. *On March 27, 2007, the Bankruptcy Court approved the Equity CommitmentAgreement dated February 12, 2007 (“ECA”) among NWA Corp., together withNorthwest, as guarantor, and JP Morgan Securities Inc. (“JP Morgan”), pursuantto which, among other things, JP Morgan agreed to backstop the rights offering(the “Rights Offering”) to creditors of NWA Corp., Northwest and theDebtors.  The Company raised a total of$750 million in new capital through the sale of 27,777,778 shares of new commonstock pursuant to the Rights Offering and JP Morgan’s commitments under theECA.

*Restructuring Goals. *As part of itsrestructuring in Chapter 11, the Company identified three major elementsessential to transforming its business and substantially completed the actionsnecessary to achieve its targeted business improvements.  The three major elements included:

·      Achieving approximately $2.4 billion in annual cost reductions,including both labor and non-labor costs;

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

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

The Company used theprovisions of Chapter 11 and other changes implemented in its business toachieve its targeted restructuring improvements.  Outlined below is an overview of significanttransactions related to labor and non-labor cost restructuring, fleetoptimization, and the Company’s balance sheet restructuring efforts.

*LaborCost Restructuring. *The Company has ratified collectivebargaining agreements (“CBAs”) which collectively provide for approximately$1.4 billion in annual labor cost savings. The Company has reached consensual agreement on CBAs with the Air LinePilots Association (“ALPA”), the International Association of Machinists andAerospace Workers (“IAM”), the Association of Flight Attendants – CommunicationWorkers of America (“AFA-CWA”), the Aircraft Mechanics Fraternal Association (“AMFA”),the Aircraft Technical Support Association (“ATSA”), the Transport WorkersUnion of America (“TWU”), and the Northwest Airlines Meteorologists Association(“NAMA”).  The agreements with ALPA, theIAM, ATSA, TWU, and NAMA were implemented on or before August 1, 2006.  Subsequently, agreements with AMFA and theAFA-CWA were ratified, and thereafter, implemented.  Two rounds of salaried and managementemployee pay and benefit cuts have also been achieved and implemented.

OnApril 18, 2007, the Company reached an agreement with the Section 1114 RetireeCommittee to continue retiree healthcare benefits.  As part of the agreement, the Section 1114Committee received an allowed unsecured claim of $120 million.  This agreement was approved by the BankruptcyCourt on April 26, 2007.  The proceedsfrom this claim were contributed to a Voluntary Employees Beneficiary Association(“VEBA”) Trust.  The Trust proceeds areexpected to be used to fund a portion of the required retiree contributionsunder this proposed agreement.

OnMay 16, 2007, the Bankruptcy Court granted the joint motion of the Company, theIAM, and the IBT to allow as an unsecured claim the judgment in the Series CLitigation in the approximate amount of $277 million.  On May 31, 2007, upon the Company’s emergencefrom bankruptcy and in accordance with the Company’s Plan of Reorganization,the Company distributed approximately 6.1 million shares (valued atapproximately $154.5 million at distribution) of the successor Company’s commonstock against the above allowed claims. Subsequent distributions of the successor Company’s common stock may bedistributed to the above claimants based on the final aggregate amount ofunsecured claims allowed by the Company or approved by the Bankruptcy Court.

*Non-labor Cost Restructuring.*  The Company has implemented themajority of its non-labor cost reduction initiatives and is on target to meetour goal of $350 million in annual savings.  The Company has achievednon-labor cost reductions through the implementation of new regional airlineaffiliate agreements, reduced properties and facilities related costs, implementedfuel burn reduction initiatives, lower distribution, insurance and interestrelated costs and optimized other contractual relationships.

11

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*Fleet Optimization. *The Companyright-sized and re-optimized its fleet and network in conjunction with itsrestructured business plan.  The Companyhas also reached new agreements and affirmed existing arrangements on newaircraft as part of its fleet optimization. The Company has affirmed its deliveries of Airbus A330 aircraft and nowhas one of the youngest transatlantic fleets in the industry.  The Company also affirmed its position as theNorth American service launch airline of the new Boeing 787 with deliveriesbeginning in August 2008, and ordered 72 76-seat regional jets, deliveries ofwhich began in the second quarter of 2007. The dual-class regional jets are optimally sized for many domesticmarkets and will give the Company potential growth opportunities overtime.  In addition, the Company hasretired the DC10 and Avro RJ85 fleets and has accelerated the retirement of theBoeing747-200 passenger wide-body aircraft.

*Balance Sheet Restructuring*.  Under the Plan, the Companyreduced its total pre-petition debt by approximately $4.2 billion through theelimination of unsecured debt and restructuring of aircraft and other securedobligations.  Additionally, the Companyrefinanced its Bank Term Loan with the DIP/Exit financing facility, providing asignificant interest expense savings. The aircraft restructurings achieved an estimated $400 million annualreduction in ownership costs including interest, rent and depreciationexpense.  The elimination of theunsecured debt will drive additional interest expense reductions.  See “Item 8. Consolidated FinancialStatements and Supplementary Data, Note 6 – Liabilities Subject to Compromise”in the Company’s 2006 Form 10-K, for additional information.

*Airlink Operations*.  OnJanuary 11, 2007, the Bankruptcy Court approved the Amended Airline ServicesAgreement with Pinnacle (“Amended Pinnacle ASA”) between the Company and Pinnacle.  The Amended Pinnacle ASA provides thatPinnacle will continue to be a long-term partner of Northwest through at least2017.  In addition to reaching terms onan amended airline services agreement, Northwest granted Pinnacle an allowedgeneral unsecured claim of $377.5 million for full and final satisfaction ofany and all claims filed against the Predecessor Company.  The Amended Pinnacle ASA and relatedagreements provide Northwest with, among other things, certainty of Pinnacle’sperformance at rates consistent with Northwest’s cost savings targets andresolution of the Pinnacle claims.

OnJanuary 22, 2007, the Predecessor Company entered into a Stock Purchase andReorganization Agreement with Mesaba under which the Debtors agreed to purchaseall of the equity interests in Mesaba following its reorganization underChapter 11 and granted the Mesaba estate a general unsecured claim of $145million for full and final satisfaction of any and all claims filed against theDebtors.  The Debtors also agreed toresolve all outstanding claims with Mesaba’s parent, MAIR Holdings, Inc. (“MAIR”)and to sell MAIR all of Northwest’s stock in MAIR.  The Mesaba plan of reorganization wasconfirmed on April 10, 2007.  Inconjunction with the consummation of Mesaba’s plan of reorganization, Mesabawas acquired by Northwest on April 24, 2007 and became a wholly-ownedconsolidated subsidiary.

*Appointment of New Board of Directors. *On the effective date of thePlan of Reorganization, the following individuals became directors of theSuccessor Company: Roy Bostock (who serves as Chairman), David Brandon, MikeDurham, John Engler, Mickey Foret, Robert Friedman, Doris Kearns Goodwin,Jeffrey Katz, James Postl, Rodney Slater, Douglas Steenland, and William Zoller.

*Restrictions onthe Transfer of Common Stock.* To reduce the risk of a limitation underSection 382 of the Internal Revenue Code on the Company’s ability to use itsnet operating loss carryforwards (“NOLs”), the Amended and Restated Certificateof Incorporation restricts certain transfers of common stock for two yearsafter the Company’s emergence from bankruptcy. Such restrictions can be extended thereafter for three consecutive oneyear periods (to June 2012) upon, each time, the affirmative vote of theCompany’s stockholders.  During the twoyear period, these restrictions generally provide that any attempted transferof common stock prior to the expiration of the term of the transferrestrictions will be prohibited and void if such transfer would cause thetransferee’s ownership interest in the Company to increase to 4.95% or above,including an increase in a transferee’s ownership interest from 4.95% or aboveto a greater ownership interest, unless approved by the Board of Directors onthe basis that the transfer does not increase the risk of an ownershipchange.  In the event that theserestrictions are extended beyond the two year period, the Board of Directorswill approve proposed transfers that, taking into account all prior transfers,do not result in an aggregate owner shift under Section 382 of more than30%.  If the aggregate owner shift as ofany date after the two year period exceeds 30%, the Board of Directors has thediscretion to approve any subsequent transfers subject to the standards applicableduring the two year period until the earlier of the date on which the aggregateowner shift no longer exceeds 30%, or the restriction is no longer in effect.

ThePredecessor Company’s common stock ceased trading on the NASDAQ stock market onSeptember 26, 2005 and began trading in the “over-the-counter” market under thesymbol NWACQ.PK.  Upon the effective dateof the Plan, the outstanding common and preferred stock of the PredecessorCompany was cancelled for no consideration and the Predecessor Company’sstockholders no longer have any interest as stockholders in the SuccessorCompany by virtue of their ownership of the Predecessor Company’s common orpreferred stock prior to emergence from bankruptcy.

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**Note 3 – Fresh-Start Reporting**

Upon emergence from its Chapter 11 proceedingson May 31, 2007, the Company adopted fresh-start reporting in accordance withSOP 90-7.  The Company’s emergence fromChapter 11 resulted in a new reporting entity with no retained earnings oraccumulated deficit.  Accordingly, theCompany’s consolidated financial statements for periods prior to June 1, 2007are not comparable to consolidated financial statements presented on or afterJune 1, 2007.

Fresh-start reporting reflects the value ofthe Company as determined in the confirmed Plan of Reorganization. Underfresh-start reporting, the Company’s asset values are remeasured and allocatedin conformity with Statement of Financial Accounting Standards (“SFAS”) No.141, *Business Combinations* (“SFASNo. 141”). The excess of reorganization value over the fair value of tangibleand identifiable intangible assets is recorded as goodwill in the accompanyingCondensed Consolidated Balance Sheets. In addition, fresh-start reporting alsorequires that all liabilities, other than deferred taxes and pension and otherpostretirement benefit obligations, should be stated at fair value or at thepresent values of the amounts to be paid using appropriate market interestrates. Deferred taxes are determined in conformity with SFAS No. 109, *Accounting for Income Taxes* (“SFAS No. 109”).

Preliminary estimates of fair value included in the Successor Companyfinancial statements represent the Company’s best estimates based onindependent appraisals and valuations and, where the foregoing have not yetbeen completed or are not available, industry data and trends and by referenceto relevant market rates and transactions. The foregoing estimates and assumptions are inherently subject tosignificant uncertainties and contingencies beyond the control of theCompany.  Accordingly, we cannot provideassurance that the estimates, assumptions, and values reflected in thevaluations will be realized, and actual results could vary materially.  In accordance with SFAS No. 141, thepreliminary allocation of the reorganization value is subject to additionaladjustment within one year after emergence from bankruptcy when additional orimproved information on asset and liability valuations becomes available.Future adjustments may result from:

·                  Completion of valuation reports associatedwith long-lived tangible and intangible assets which may drive furtheradjustments or recording of additional assets or liabilities.

·                  Adjustments to deferred tax assets andliabilities, which may be based upon additional information, includingadjustments to fair value estimates of underlying assets or liabilities and thedetermination of cancellation of indebtedness income.

·                  Adjustmentsto recorded fair values which could change the amount of recorded goodwill.

To facilitate the calculation of theenterprise value of the Successor Company, Northwest’s financial advisorsassisted management in the preparation of a valuation analysis for theSuccessor Company’s common stock to be distributed as of the Effective Date tothe unsecured creditors.  The valuationmethods included (i) a comparison of the Company and its projected performanceto the market values of comparable companies; and (ii) two variants ofdiscounted cash flow analysis which were weighted 40 and 60 percent in thecalculation of the baseline valuation range.

The estimated enterprise value, andcorresponding equity value, is highly dependent upon achieving the futurefinancial results set forth in the five-year financial projections included inthe Company’s Plan of Reorganization, as well as the realization of certainother assumptions.  The equity value ofthe Company was calculated to be a range of approximately $6.45 billion to$7.55 billion.  Based on claims tradingprior to the Company’s Effective Date and the trading value of the Company’scommon stock post emergence, the equity value of the Company was estimated tobe $6.45 billion for purposes of preparing the Company’s financialstatements.  The estimates andassumptions made in this valuation are inherently subject to significantuncertainties and the resolution of contingencies beyond the reasonable controlof the Company.  Accordingly, there canbe no assurance that the estimates, assumptions, and amounts reflected in thevaluations will be realized, and actual results could vary materially.  Moreover,the market value of the Company’s common stock may differ materially from theequity valuation.

As part of the provisions of SOP 90-7, we wererequired to adopt on June 1, 2007 all accounting guidance that was going to beeffective within the subsequent twelve-month period.  See “Note 4 — Summary of SignificantAccounting Policies, New Accounting Standards.”

The following Fresh-Start CondensedConsolidated Balance Sheet illustrates the financial effects on the Company ofthe implementation of the Plan of Reorganization and the adoption offresh-start reporting.  This Fresh-StartCondensed Consolidated Balance Sheet reflects the effect of the consummation ofthe transactions contemplated in the Plan of Reorganization, includingsettlement of various liabilities, issuance of certain securities, incurrenceof new indebtedness, repayment of old indebtedness, and other cash payments.

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The effects of the Plan of Reorganization and fresh-start reporting on theCompany’s Condensed Consolidated Balance Sheet are as follows (in millions):
| ** **                                                                       | ** ** | ** **                                | ** ** | **(a)**                                              | ** ** | **(b)**                                                | ** ** | **(c)**                 | ** ** | **(d)**                      | ** ** | ** **                                           | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|------------------------------------------------------|------------|
| **(in millions)**                                                           | ** ** | **(Predecessor)  May 31, 2007** | ** ** | **Debt Discharge &  Reclassification** | ** ** | **New Credit  Facility  Financing  Transactions** | ** ** | **New  Equity  Issued** | ** ** | **Fresh-Start  Adjustments** | ** ** | **(Successor)  Reorganized  June 1, 2007** | ** ** |
| **ASSETS**                                                                       | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
| ** **                                                                       | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
| **CURRENT  ASSETS**                                                              | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
| Cash, cash equivalents and unrestricted short-term  investments                  |       | $                                    | 2,465      |                                                 | $     | (20                                                    | )          | $                  | —     |                         | $     | 750                                                  |       | $  | — |   | $  | 3,195 |   |
| Restricted cash, cash equivalents and short-term  investments                    |       | 974                                       |       | —                                               |       | —                                                 |       | —                  |       | 170                          |       | 1,144                                                |       |
| Accounts receivable, less allowance                                              |       | 587                                       |       | —                                               |       | —                                                 |       | —                  |       | (9                           | )          | 578                                                  |       |
| Flight equipment spare parts and maintenance and  operating supplies             |       | 217                                       |       | —                                               |       | —                                                 |       | —                  |       | 31                           |       | 248                                                  |       |
| Prepaid expenses and other                                                       |       | 254                                       |       | —                                               |       | —                                                 |       | (22                     | )          | (51                          | )          | 181                                                  |       |
| Total current assets                                                             |       | 4,497                                     |       | (20                                                  | )          | —                                                 |       | 728                     |       | 141                          |       | 5,346                                                |       |
|                                                                             |       |                                      |       |                                                 |       |                                                   |       |                    |       |                         |       |                                                 |       |
| **PROPERTY  AND EQUIPMENT**                                                      | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
| Net flight equipment and net flight equipment under  capital leases              |       | 7,767                                     |       | —                                               |       | —                                                 |       | —                  |       | (1,068                       | )          | 6,699                                                |       |
| Other property and equipment, net                                                |       | 477                                       |       | —                                               |       | —                                                 |       | —                  |       | 69                           |       | 546                                                  |       |
| Total property and equipment, net                                                |       | 8,244                                     |       | —                                               |       | —                                                 |       | —                  |       | (999                         | )          | 7,245                                                |       |
|                                                                             |       |                                      |       |                                                 |       |                                                   |       |                    |       |                         |       |                                                 |       |
| **OTHER  ASSETS**                                                                | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
| Goodwill                                                                         |       | 18                                        |       | —                                               |       | —                                                 |       | —                  |       | 6,239                        |       | 6,257                                                |       |
| International routes and other intangible assets                                 |       | 653                                       |       | —                                               |       | —                                                 |       | —                  |       | 4,513                        |       | 5,166                                                |       |
| Investments in affiliated companies                                              |       | 54                                        |       | —                                               |       | —                                                 |       | —                  |       | 111                          |       | 165                                                  |       |
| Other                                                                            |       | 707                                       |       | —                                               |       | —                                                 |       | —                  |       | (235                         | )          | 472                                                  |       |
| Total other assets                                                               |       | 1,432                                     |       | —                                               |       | —                                                 |       | —                  |       | 10,628                       |       | 12,060                                               |       |
|                                                                             |       |                                      |       |                                                 |       |                                                   |       |                    |       |                         |       |                                                 |       |
| **Total  Assets**                                                                |       | $                                         | 14,173     |                                                 | $          | (20                                                    | )          | $                       | —     |                         | $          | 728                                                  |       | $ | 9,770 |   | $ | 24,651 |   |
|                                                                             |       |                                      |       |                                                 |       |                                                   |       |                    |       |                         |       |                                                 |       |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY**                                        | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
|                                                                             | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
| **CURRENT  LIABILITIES**                                                         | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
|                                                                             |       |                                      |       |                                                 |       |                                                   |       |                    |       |                         |       |                                                 |       |
| Air traffic liability/deferred frequent flyer  liability                         |       | $                                         | 2,006      |                                                 | $          | —                                                 |       | $                       | —     |                         | $          | —                                               |       | $ | 274 |   | $ | 2,280 |   |
| Accrued compensation and benefits                                                |       | 445                                       |       | 4                                                    |       | —                                                 |       | —                  |       | (20                          | )          | 429                                                  |       |
| Accounts payable                                                                 |       | 1,538                                     |       | 179                                                  |       | —                                                 |       | —                  |       | 5                            |       | 1,722                                                |       |
| Current maturities of long-term debt and capital  lease obligations              |       | 218                                       |       | 305                                                  |       | (10                                                    | )          | —                  |       | —                       |       | 513                                                  |       |
| Current maturities of long-term debt - exit financing                            |       | —                                    |       | —                                               |       | 10                                                     |       | —                  |       | —                       |       | 10                                                   |       |
| Other                                                                            |       | 87                                        |       | —                                               |       | —                                                 |       | —                  |       | (49                          | )          | 38                                                   |       |
| Total current liabilities                                                        |       | 4,294                                     |       | 488                                                  |       | —                                                 |       | —                  |       | 210                          |       | 4,992                                                |       |
|                                                                             |       |                                      |       |                                                 |       |                                                   |       |                    |       |                         |       |                                                 |       |
| **LONG-TERM  OBLIGATIONS**                                                       | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
| Long-term debt and obligations under capital leases                              |       | 4,149                                     |       | 1,993                                                |       | (1,215                                                 | )          | —                  |       | 22                           |       | 4,949                                                |       |
| Exit financing                                                                   |       | —                                    |       | —                                               |       | 1,215                                                  |       | —                  |       | —                       |       | 1,215                                                |       |
| Total long-term obligations                                                      |       | 4,149                                     |       | 1,993                                                |       | —                                                 |       | —                  |       | 22                           |       | 6,164                                                |       |
|                                                                             |       |                                      |       |                                                 |       |                                                   |       |                    |       |                         |       |                                                 |       |
| **DEFERRED  CREDITS AND OTHER LIABILITIES**                                      | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
| Long-term pension and postretirement health care  benefits                       |       | 86                                        |       | 3,786                                                |       | —                                                 |       | —                  |       | (426                         | )          | 3,446                                                |       |
| Deferred frequent flyer liability                                                |       | —                                    |       | —                                               |       | —                                                 |       | —                  |       | 1,549                        |       | 1,549                                                |       |
| Deferred income taxes                                                            |       | 4                                         |       | —                                               |       | —                                                 |       | —                  |       | 1,127                        |       | 1,131                                                |       |
| Other                                                                            |       | 275                                       |       | 125                                                  |       | —                                                 |       | —                  |       | (209                         | )          | 191                                                  |       |
| Total deferred credits and other liabilities                                     |       | 365                                       |       | 3,911                                                |       | —                                                 |       | —                  |       | 2,041                        |       | 6,317                                                |       |
|                                                                             |       |                                      |       |                                                 |       |                                                   |       |                    |       |                         |       |                                                 |       |
| **LIABILITIES  SUBJECT TO COMPROMISE**                                           |       | 14,350                                    |       | (14,350                                              | )          | —                                                 |       | —                  |       | —                       |       | —                                               |       |
| ** **                                                                       |       |                                      |       |                                                 |       |                                                   |       |                    |       |                         |       |                                                 |       |
| **PREFERRED  REDEEMABLE STOCK SUBJECT TO COMPROMISE**                            | ** ** | 275                                       | ** ** | (275                                                 | )          | —                                                 | ** ** | —                  | ** ** | —                       | ** ** | —                                               | ** ** |
| ** **                                                                       | ** ** |                                      | ** ** |                                                 |       |                                                   | ** ** |                    | ** ** |                         | ** ** |                                                 | ** ** |
| **COMMON  STOCKHOLDERS’ EQUITY (DEFICIT)**                                  | ** ** | ** **                                | ** ** | ** **                                           | ** ** | ** **                                             | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                                           | ** ** |
| Predecessor Company common stock, additional paid-in  capital and treasury stock |       | 495                                       |       | —                                               |       | —                                                 |       | —                  |       | (495                         | )          | —                                               |       |
| Retained earnings (accumulated deficit)                                          |       | (8,655                                    | )          | 1,763                                                |       | —                                                 |       | —                  |       | 6,892                        |       | —                                               |       |
| Accumulated other comprehensive income (loss)                                    |       | (1,100                                    | )          | —                                               |       | —                                                 |       | —                  |       | 1,100                        |       | —                                               |       |
| Successor Company common stock and additional paid-in  capital                   |       | —                                    |       | 6,450                                                |       | —                                                 |       | 728                     |       | —                       |       | 7,178                                                |       |
| Total common stockholders' equity (deficit)                                      |       | (9,260                                    | )          | 8,213                                                |       | —                                                 |       | 728                     |       | 7,497                        |       | 7,178                                                |       |
|                                                                             |       |                                      |       |                                                 |       |                                                   |       |                    |       |                         |       |                                                 |       |
| **Total  Liabilities and Stockholders' Equity (Deficit)**                        | ** ** | $                                    | 14,173     | ** **                                           | $     | (20                                                    | )          | $                  | —     | ** **                   | $     | 728                                                  | ** ** | $  | 9,770 | ** ** | $  | 24,651 | ** ** |

 

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(a)          *Debt Discharge andReclassification: *This column reflects the discharge of $8.2billion of liabilities subject to compromise pursuant to the terms of the Planof Reorganization.  Pursuant to the Plan,the holders of general unsecured claims and guaranty claims together willreceive approximately 234 million common shares of the Successor Company in satisfactionof such claims.

This column also reflects theSuccessor Company’s reinstatement of $6.4 billion of secured liabilities whichhad been classified as liabilities subject to compromise on the PredecessorCompany’s balance sheet, consisting of the following:

·                  $3.8 billion represents the reinstatement ofpension and other post-retirement benefit plan liabilities;

·                  $2.3 billion reflects the reinstatement ofsecured debt, including accrued interest; and

·                  $0.3 billion is associated with accruals forpriority payments and other payments required under the Plan.

Additionally, this column reflects the paymentof $20 million for cash cures and convenience class payments to certainunsecured creditors pursuant to the Plan, and the reclassification of $125million of pre-petition deferred liabilities and credits that were reclassifiedout of liabilities subject to compromise, and subsequently written off as partof the fresh-start adjustments.

(b)         *New Credit Facility FinancingTransactions*.  In connection with the Plan ofReorganization, on the Effective Date, the Company’s existing $1.225 billion DIP/ExitFacility was converted into the Exit Facility in accordance with itsterms.  See “Note 10 - Long-term Debt andShort-Term Borrowings” for further details.

(c)          *New Equity Issued*.  Thiscolumn reflects $750 million in gross proceeds received on the Effective Datefrom the Company’s Rights Offering, offset by associated transaction costs of$22 million.

(d)         *Fresh-Start Adjustments*. Fresh-start adjustments were recorded on the Effective Date to reflectasset values at their estimated fair values and liabilities at their estimatedfair value or the present value of amounts to be paid, including the following:

·                  $4.5 billion of incremental intangible assetswere recorded in conjunction with the estimated fair value of  the Company’s international routeauthorities, slots and other intangible assets;

·                  $1.5 billion was recorded to recognize theadditional estimated fair value of the Company’s frequent flyer liability;

·                  The balance of the Company’s flight equipmentwas decreased by $1.1 billion to its estimated fair value;

·                  The Company’s deferred tax liability balancewas increased by $1.1 billion in conjunction with recording the estimated fairvalue of certain indefinite-lived intangible assets;

·                  The pension and OPEB liability balances werereduced by $0.4 billion;

·                  The Company’s air traffic liability balancewas increased by $0.3 billion to its estimated fair value; and

·                  Entries were recorded to eliminate thePredecessor Company’s equity balances and establish the opening equity balancesof the Successor Company.

Additionally, goodwill of $6.2 billion wasrecorded to reflect the excess of the Successor Company’s reorganization valueover the value of tangible and identifiable intangible assets.  Changes in the fair values of these assetsand liabilities from the current estimatedvalues, as well as changes in other assumptions, could significantly impact thereported value of goodwill.  Accordingly,there can be no assurance that the estimates, assumptions, and values reflectedin the valuations will be realized, and actual results could vary materially.  Moreover, the market value of the Company’scommon stock may differ materially from the equity valuation.

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**Note 4 – Significant Accounting Policies**

*Basis ofConsolidation:*  NWA Corp. is a holding company whoseoperating subsidiary is Northwest.  Theconsolidated financial statements include the accounts of NWA Corp. and allconsolidated subsidiaries.  Allsignificant intercompany transactions have been eliminated.  Investments in 20% to 50% owned companies, aswell as Pinnacle, are accounted for by the equity method.  Other investments are accounted for by thecost method.

*Cash andCash Equivalents:* Cash equivalents are carried at cost andconsist primarily of cash and unrestricted money market funds.  These highly liquid instruments approximatefair value due to their short maturities. The Company classifies investments with a maturity of more than threemonths as short-term investments.

*Restricted Cash:*  The Company in the ordinary course ofbusiness collects funds from passengers and withholdings from employees thatare required to be paid to various taxing authorities, in addition to certaintaxes that are self assessed.  These collections include U.S.transportation taxes, passenger facility charges and fuel taxes, which arecollected in the capacity of an agent and are presented on a net basis.  Withholdings include the employee portion ofpayroll taxes, among others.  The Company has also established anirrevocable tax trust and a VEBA trust; cash held in these trusts is includedin restricted cash.

Various taxes and feesassessed on the sale of tickets to end customers are collected by the Companyas an agent and remitted to the respective taxing authority.  These taxes and fees have been presented on anet basis in the accompanying consolidated statements of operations, and recordedas a liability until remitted to the respective taxing authority.

*Use of Estimates: *The preparation of consolidated financial statements in conformity withGAAP requires management to make estimates and assumptions that affect theamounts reported in its consolidated financial statements and accompanyingnotes.  Actual results could differ fromthose estimates.

Under fresh-start reporting, the Company’sasset values were remeasured using fair value, which was allocated inconformity with SFAS No. 141.  Inaddition, fresh-start reporting also requires that all liabilities, other thandeferred taxes and pension and other postretirement benefit obligations, bereported at fair value or the present values of the amounts to be paid usingappropriate market interest rates. Deferred taxes are reported in conformity with SFAS No. 109.

Estimates of fair value represent the Company’sbest estimates based on appraisals and valuations and, where the foregoing havenot yet been completed or are not available, industry data and trends and byreference to relevant market rates and transactions.  The estimates and assumptions are inherentlysubject to significant uncertainties and contingencies beyond the control ofthe Company.  Accordingly, we cannotprovide assurance that the estimates, assumptions, and values reflected in thevaluations will be realized, and actual results could vary materially.  In accordance with SFAS No. 141, thepreliminary allocation of the fair value of assets and liabilities is subjectto additional adjustment within one year after emergence from bankruptcy, asfinal appraisals and valuations of certain assets and liabilities arecompleted.  Any adjustments to therecorded fair values of these assets and liabilities may impact the amount ofrecorded goodwill.

*Presentation of Regional Carrier Related Revenue andExpense Items.*  In conjunction with the effectiveness of theAmended Pinnacle ASA and the Stock Purchase and Reorganization Agreement withMesaba Aviation, Inc. (“Mesaba”), the Company changed its presentation ofcertain regional carrier related revenue and expense items effective January 1,2007.  This change in presentation had noimpact on the Company’s first or second quarter 2007 operating income.

Ifthis change in presentation was retroactively applied to prior year financialstatements, Other Operating Revenues would have decreased $54 million,Depreciation and Amortization Expense would have increased by $1 million,Aircraft Rentals Expense would have increased $47 million, Regional CarrierExpenses would have decreased $102 million, and the Operating Loss would havebeen unchanged for the three months ended June 30, 2006.

Ifthis change in presentation was retroactively applied to prior year financialstatements, Other Operating Revenues would have decreased $104 million,Depreciation and Amortization Expense would have increased by $2 million,Aircraft Rentals Expense would have increased $99 million, Regional CarrierExpenses would have decreased $205 million, and the Operating Loss would havebeen unchanged for the six months ended June 30, 2006.

*Operating Revenues:* The value of unused passengertickets, miscellaneous change orders (“MCO’s”) and travel credit vouchers (“TCV’s”)are included in current liabilities as air traffic liability.  Passenger and cargo revenues are recognizedwhen the transportation is provided or when the ticket expires.  Unused domestic passenger tickets generallyexpire one year from scheduled travel. Unused international passenger tickets generally expire one year fromticket issuance.   On the Effective Date,the Company revised the accounting method used to recognize revenue for unusedtickets, adopting the delayed recognition approach.  Under the delayed recognition approach, norevenue is recognized on an unused ticket until the validity period has expiredand the ticket can no longer be used. Prior to the Effective Date,

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theCompany recognized breakage associated with unused passenger tickets based onestimates of future breakage based on historical breakage trends.

*Frequent Flyer Program*: Northwest operates a frequent flyer loyalty program known as “WorldPerks.”  WorldPerks is designed to retain and increasetraveler loyalty by offering incentives to travelers for their continuedpatronage.  Under the WorldPerks program,miles are earned by flying on Northwest or its alliance partners and by usingthe services of program partners for such things as credit card use, hotelstays, car rentals and other activities. Northwest sells mileage credits to the program and alliancepartners.  WorldPerks members accumulatemileage in their accounts and later redeem mileage for free or upgraded travelon Northwest and alliance partners. WorldPerks members that achieve certain mileage thresholds also receiveenhanced service benefits from Northwest such as special servicelines, advance flight boarding and upgrades.

TheCompany adopted a deferred revenue method to recognize frequent flyer revenueson the Effective Date.  Under thismethod, we account for miles earned and sold as separate deliverables in amultiple element arrangement as prescribed by EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables*(“EITF No. 00-21”).  Therefore, mileagecredits earned on or after June 1, 2007 are now deferred based upon the pricewe sell mileage credits to other airlines (“deferred mileage credits”), whichwe believe represents the best evidence of their fair value in accordance withEITF No. 00-21.  The revenue on deferredfrequent flyer miles will be recognized when the miles are ultimately redeemedthrough flight, upgrades or other means, or when it becomes remote that themiles will ever be used.  Estimatingdeferred mileage credits that will not be redeemed requires significantmanagement judgment. Based on current program rules and historical redemptiontrends, the Company records passenger revenue associated with deferred mileagecredits if the mile is unredeemed seven years after issuance. 

Wepreviously accounted for frequent flyer miles earned on Northwest flights on anincremental cost basis as an accrued liability and as operating expense, whilemiles sold to airline and non-airline businesses were accounted for on adeferred revenue basis.  Also inconjunction with the adoption of the new accounting policy, Northwest beganrecording a component of the payments received from non-airline marketingpartners in Other Revenue rather than in Passenger Revenue.  The component recognized as Other Revenue isthe portion of the payment received that represents the amount paid by themarketing partner in excess of the value of the deferred mileage credits.

As a result of theapplication of fresh-start reporting, the WorldPerks frequent flyer obligationwas revalued at the Effective Date to reflect the estimated fair value of milesto be redeemed in the future. Outstanding miles earned by flying Northwest orits partner carriers were revalued using a weighted-average per-mile equivalentticket value, taking into account such factors as class of service and domesticand international ticket itineraries, which can be reflected in awards flown byWorldPerks members.  At June 30, 2007,the Company had recorded deferred revenue for its frequent flyer programtotaling $2.0 billion. At March 31, 2007, the Company had recorded anincremental cost liability and deferred revenue for its frequent flyer programtotaling $412 million.

*Other Revenues*:  Otherrevenues include MLT revenues, transportation related fees, charter revenues,and non-transportation related partner payments.  These receipts are recognized as otherrevenue when the service is provided. Transportation related fees include the fees charged in association withchanges or extensions to passenger tickets and are recognized in other revenueat the time the fee is incurred.  Changefees are non-refundable and are considered a separate transaction from the airtransportation; revenue is recognized at the time the fees are incurred as allservices related to the ticket exchange were completed at the time of theexchange.

*Property,Equipment and Depreciation:*  Owned operating property andequipment and equipment under capital leases used in operations were remeasuredat fair values in accordance with SFAS No. 141, as of the Effective Date. TheCompany records additions to property and equipment at cost when acquired.  Property and equipment under capital lease,and related obligations for future lease payments, are recorded at amountsequal to the initial present value of those lease payments.

Depreciation is based on thestraight-line method over assets’ estimated useful lives.  Leasehold improvements are amortized over theremaining term of the lease, including estimated renewal options when renewalis reasonably assured, or the estimated useful life of the related asset,whichever is less.  At the EffectiveDate, aircraft lives ranged from 1 to 26 years; building lives ranged from 1 to25 years; and other property and equipment lives ranged from 1 to 25 years.

On the Effective Date, theSuccessor Company increased the depreciable lives of certain wide-body aircraftto better reflect the period over which those assets will be used.  Future purchases of aircraft will bedepreciated to estimated salvage values, over lives of 20 to 30 years;buildings will be depreciated over 31.5 years; and other property and equipmentwill be depreciated over lives of 3 to 15 years.

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The Company accounts forcertain airport leases under EITF Issue No. 99-13, *Application of EITF Issue No. 97-10, The Effect of Lessee Involvementin Asset Construction, and FASB Interpretation No. 23, Leases of CertainProperty Owned by a Government Unit or Authority to Entities that Enter intoLeases with Government Entities*, which require the financing relatedto certain guaranteed airport construction projects committed to afterSeptember 23, 1999, be recorded on the balance sheet.  Capitalized expenditures of $89.4 million atJune 30, 2007 which relate to airport improvements at Memphis, Knoxville,Seattle and Detroit are recorded in other property and equipment, with thecorresponding obligations included in long-term obligations under capitalleases and other liabilities.  During constructionof the Detroit airport project, capital expenditures are reflected in otherproperty and equipment with a corresponding liability on the balancesheet.  This amount totaled $3.5 millionat June 30, 2007.  Upon completion of theproject, the corresponding asset and obligation will be removed from thebalance sheet and will be accounted for as an operating lease.

*Impairment of Long-Lived Assets:*  TheCompany evaluates long-lived tangible assets and definite-lived intangibleassets for potential impairments in compliance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, (“SFAS No. 144”).  The Company records impairment losses onlong-lived assets when events and circumstances indicate the assets might beimpaired and the undiscounted cash flows estimated to be generated by thoseassets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assetsto their carrying amounts.  Indetermining the need to record impairment charges, the Company is required tomake certain estimates regarding such things as the current fair market valueof the assets and future net cash flows to be generated by the assets.  The current fair market value is determinedby independent appraisal or published sales values of similar assets and thefuture net cash flows are based on assumptions such as asset utilization,expected remaining useful lives, future market trends and projected salvagevalues.  Impairment charges are recordedin depreciation and amortization expense on the Company’s CondensedConsolidated Statements of Operations. If there are subsequent changes in these estimates, or if actual resultsdiffer from these estimates, additional impairment charges may be recognized.

*FlightEquipment Spare Parts:*On the Effective Date, flight equipment spare parts were remeasured at currentreplacement cost in accordance SFAS No. 141. Inventories are expensed when consumed in operations or scrapped. Anallowance for obsolescence is provided based on calculations defined by thetype of spare part.  This obsolescencereserve is recorded over the useful life of the associated aircraft.

*Airframe and Engine Maintenance:* Routine maintenance, airframe and engine overhauls are charged toexpense as incurred or accrued when a contractual obligation exits, such asinduction of an asset at a vendor for service or on the basis of hours flownfor certain costs covered by power-by-the-hour type agreements. Modifications that enhance the operating performance or extend the useful livesof airframes or engines are capitalized and amortized over the remainingestimated useful life of the asset.

*Intangibles:* Goodwill represents the excess of the reorganization value of theSuccessor Company over the fair value of tangible assets and identifiableintangible assets resulting from the application of SOP 90-7. Identifiableintangible assets consist primarily of international route authorities, tradenames, the WorldPerks customer database, airport slots/airport operatingrights, certain partner contracts and other items. International routeauthorities, certain airport slots/airport operating rights and trade-names areindefinite-lived and, as such, are not amortized.  The Company’s definite-lived intangibleassets are amortized on a straight-line basis over the estimated lives of therelated assets, which span periods of 4 to 30 years.

18

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The following table presents information about ourintangible assets, including goodwill, at June 30, 2007 and December 31, 2006:
| ** **                                                | ** ** | ** **          | ** ** | **Successor June 30, 2007** | ** ** | **Predecessor December 31, 2006** | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|--------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                   | ** ** | **Asset Life** | ** ** | **Gross Carrying  Amount**            | ** ** | **Accumulated  Amortization**                    | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| SkyTeam alliance  & other code share partners         |       | 30                  |       | $                                     | 461,900    |                                             | $     | (1,283 | ) | $  | — |   | $  | — |   |
| England routes                                            |       | 5                   |       | 16,000                                     |       | (267                                             | )          | — |   | — |   |
| NWA customer  relationships                               |       | 9                   |       | 530,000                                    |       | (4,907                                           | )          | — |   | — |   |
| WorldPerks  affinity card contract                        |       | 15                  |       | 195,700                                    |       | (1,087                                           | )          | — |   | — |   |
| WorldPerks  marketing partner relationships               |       | 22                  |       | 43,000                                     |       | (163                                             | )          | — |   | — |   |
| Visa contract                                             |       | 4                   |       | 11,900                                     |       | (199                                             | )          | — |   | — |   |
| Gates                                                     |       |                |       | —                                     |       | —                                           |       | 90,675 |   | (78,326 | ) |
|                                                      |       |                |       |                                       |       |                                             |       |   |   |   |   |
| Pacific routes  and Narita slots/airport operating rights |       | Indefinite          |       | 2,961,700                                  |       | —                                           |       | 967,639 |   | (333,679 | ) |
| NWA trade name  and other                                 |       | Indefinite          |       | 663,700                                    |       | —                                           |       | 1,500 |   | — |   |
| Slots/airport  operating rights                           |       | Indefinite          |       | 283,300                                    |       | —                                           |       | 30,457 |   | (11,248 | ) |
| Goodwill                                                  |       | Indefinite          |       | 6,188,387                                  |       | —                                           |       | 7,740 |   | — |   |
|                                                      |       |                |       | $                                          | 11,355,587 |                                             | $          | (7,906 | ) | $ | 1,098,011 |   | $ | (423,253 | ) |

 

Total amortization expense recognized was approximately $7.9 million forthe one month period ended June 30, 2007, $0.3 million for the two month periodended May 31, 2007, and $0.4 million for the three month period ended June 30,2006.  Amortization expense of $0.6million and $0.8 million was recognized for the five month period ended May 31,2007 and the six months ended June 30, 2006, respectively.  We expect to record amortization expense of$47.7 million for the six months ended December 31, 2007, and $95.5 million peryear from 2008 through 2011.

In accordance with SFAS No. 142, *Goodwilland Other Intangible Assets* (“SFAS No. 142”), we will apply a fairvalue-based impairment test to the net book value of goodwill andindefinite-lived intangible assets on an annual basis or on an interim basiswhen a triggering event occurs. The Company intends to use October 1st as its annual impairment test datefor our goodwill and indefinite-lived intangible assets. We have not performedimpairment testing on amounts of goodwill or indefinite-lived intangible assetssubsequent to June 1, 2007, as there have been no events or changes that wouldindicate that such assets are impaired.

SFAS No. 142 requires that a two-step impairment test be performed ongoodwill. In the first step, the Company compares the fair value of each reportingunit to its carrying value. If the fair value of a reporting unit, asdefined in SFAS No. 142, exceeds the carrying value of the net assets of thereporting unit, goodwill is not impaired and the Company is not required toperform further testing. If the carrying value of the net assets of a reportingunit exceeds the fair value of the reporting unit, then the Company mustperform the second step in order to determine the implied fair value of thegoodwill and compare it to the carrying value of the goodwill.  If the carrying value of goodwill exceeds itsimplied fair value, the Company is required to record an impairment chargeequal to such difference.

We expect to assess the fair value of the enterprise considering both themarket and income approaches. Under the market approach, the fair value of theenterprise is based on the aggregate fair market value of the Successor Company’scommon stock.  Under the income approach,the fair value of the reportable segment is based on the present value of estimatedfuture cash flows. The income approach is dependent on a number of factorsincluding estimates of future capacity, passenger yield, passenger traffic, jetfuel and other operating costs, appropriate discount rates and other relevantfactors.

*Advertising: *Advertising costs, included in selling andmarketing expenses, are expensed as incurred.

*Stock Based Compensation: *Prior to the Effective Date, the Companymaintained stock incentive plans for officers and key employees of the Company(the “Prior Management Plans”) and a stock option plan for pilot employees (the“Pilot Plan”).  On the Effective Date,outstanding awards under the Prior Management Plans and Pilot Plan werecancelled in accordance with the terms of the Plan.  On the Effective Date, the Management EquityPlan of the Successor Company provided for in the Plan of Reorganization becameeffective.  See “Note 15 – Stock-BasedCompensation” for additional information. The Company adopted SFAS No. 123(Revised 2004), *Share-Based Payment*(“SFAS No. 123R”), using the modified-prospective transition method, effectiveJanuary 1, 2006.  Under SFAS No. 123R,

19

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non-cash compensation expense for equity awards isrecognized over thevesting period, generally the required service period.  The Company uses straight-line recognition forawards subject to graded vesting.  SFASNo. 123R also requires the Company to estimate forfeitures of stockcompensation awards as of the grant date of the award.

*Foreign Currency:*  Assets and liabilitiesdenominated in foreign currency are remeasured at current exchange rates withresulting gains and losses included in net income.

*DeferredTax Assets:*  TheCompany accounts for income taxes utilizing the liability method. Deferred income taxes are primarily recorded to reflect the tax consequences ofdifferences between the tax and financial reporting bases of assets andliabilities.  Under the provisions of SFAS No. 109, the realization of thefuture tax benefits of a deferred tax asset is dependent on future taxable incomeagainst which such tax benefits can be applied.  All available evidencemust be considered in the determination of whether sufficient future taxableincome will exist.  Such evidence includes, but is not limited to, thecompany’s financial performance, the market environment in which the companyoperates, the utilization of past tax credits, and the length of relevantcarryback and carryforward periods.  Sufficient negative evidence, such ascumulative net losses during a three-year period that includes the current yearand the prior two years, may require that a valuation allowance be establishedwith respect to existing and future deferred tax assets.  As a result, itis more likely than not that future deferred tax assets will require avaluation allowance to be recorded to fully reserve against the uncertaintythat those assets would be realized.  On the Effective Date, the Company restateddeferred taxes based on the remeasured values of the Successor Company and inaccordance with SFAS No. 109.

*New Accounting Standards:*  In September 2006, the SECOffice of the Chief Accountant and the Divisions of Corporation Finance andInvestment Management released Staff Accounting Bulletin (“SAB”) No. 108, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*(“SABNo. 108”), which provides interpretive guidance on how the effects of thecarryover or reversal of prior year misstatements should be considered inquantifying a current year misstatement. The SEC staff believes that registrants should quantify errors usingboth a balance sheet and an income statement approach and evaluate whethereither approach results in quantifying a misstatement that, when all relevantquantitative and qualitative factors are considered, is material.  This pronouncement is effective for fiscalyears ending after November 15, 2006. The Company adopted SAB No. 108 effective the beginning of2007.  The adoption of SAB No. 108did not have a material impact on the Company’s financial statements.

InJune 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, *Accounting forUncertainty in Income Taxes*(“FIN 48”), which clarifies FASBStatement No. 109, *Accounting for IncomeTaxes*.  FIN 48 prescribes aconsistent recognition threshold and criteria for measurement of uncertain taxpositions for financial statement purposes. FIN 48 requires the financial statement recognition of an income taxbenefit when the Company determines that it is “more likely than not” the taxposition will be ultimately sustained. FIN 48 also requires expanded disclosure with respect to the uncertaintyin income taxes.  The Company adopted FIN48 as of January 1, 2007, and no change was required to its reserve foruncertain income tax positions under FIN 48.

InFebruary 2007, the FASB issued SFAS No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities*.  This statement permits all entities to electto measure eligible financial instruments at fair value on a recurringbasis.  SFAS No. 159 is effective forfiscal years beginning after November 15, 2007, and may not be appliedretrospectively to prior fiscal years. The Successor Company did not elect to measure any eligible financialinstruments at fair value under this guidance.

**Note 5 – Fair Value Measurements**

SOP 90-7 requires that the Company adopt newaccounting standards that have been issued and will become effective within thenext year.  In accordance with thisguidance, the Company adopted SFAS No. 157, *FairValue Measurements*, on the Effective Date. SFAS No. 157 definesfair value, establishes a consistent framework for measuring fair value andexpands disclosure requirements about fair value measurements. SFAS No.157 requires, among other things, the Company’s valuation techniques used tomeasure fair value to maximize the use of observable inputs and minimize theuse of unobservable inputs.  This standard was applied prospectively tothe valuation of assets and liabilities on and after the Effective Date.

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

(A)      Market approach – Uses prices and otherrelevant information generated by market transactions involving identical orcomparable assets or liabilities;

(B)        Cost approach – Based on the amount that currently would be required toreplace the service capacity of an asset (replacement cost); and

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(C)        Income approach – Uses valuation techniques to convert future amounts toa single present amount based on current market expectations about the futureamounts (includes present value techniques, option-pricing models, and excessearnings method).  Net present value isan income approach where a stream of expected cash flows is discounted at anappropriate market interest rate.  Excessearnings method is a variation of the income approach where the value of aspecific asset is isolated from its contributory assets.

Forassets and liabilities measured at fair value on a recurring basis during theperiod, SFAS No. 157 requires quantitative disclosures about the fair valuemeasurements separately for each major category of assets and liabilities.  There were no changes in the valuationtechniques used to measure the fair values of assets measured on a recurringbasis during the period.  Assets measuredat fair value on a recurring basis during the period included:
| ** **                                                     | ** ** | **Successor Company**                   | ** ** | ** **                                                                                          | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **(in millions)**                                         | ** ** | **As of June 30,  2007** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs (Level 3)** | ** ** | **Valuation  Technique** | ** ** |
| **ASSETS**                                                     |       |                                    |       |                                                                                                |       |   | ** ** | ** ** |   |   |   |
| Cash and cash  equivalents                                     |       | $                                       | 2,678      |                                                                                                | $          | 2,678 |   | $ | — | ** ** | **$** | **—** |   | (A | ) |
| Restricted cash, cash equivalents,  and short-term investments |       | 706                                     |       | 706                                                                                                 |       | — |   | — |   | (A | ) |
| Available for sale  securities                                 |       | 632                                     |       | 632                                                                                                 |       | — |   | — |   | (A | ) |
| Derivatives                                                    |       | 36                                      |       | 36                                                                                                  |       | — |   | — |   | (A | ) |
| Total                                                          |       | $                                       | 4,052      |                                                                                                | $          | 4,052 |   | $ | — |   | $ | — |   |   |   |

 

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Fairvalue information for each major category of assets and liabilities measured ona nonrecurring basis during the period is listed in the following table.  The Company remeasured its assets andliabilities at fair value on the Effective Date as required by SOP 90-7 usingthe guidance for measurement found in SFAS No. 141.  The gains and losses related to these fairvalue adjustments were recorded on the Predecessor Company.  Where two valuation techniques are notedbelow, either individual assets were valued using one technique, while otherassets in the same category were valued using a different technique, or acombination of the two techniques was used to measure individual assets withinthe category.  Assets and liabilitiesmeasured at fair value on a nonrecurring basis during the period included:
| ** **                                                           | ** ** | **Successor  Company**                     | ** ** | ** **                                                                                          | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **(in millions)**                                               | ** ** | **As of June 1, 2007** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Total Gains  (Losses)** | ** ** | **Valuation  Technique** | ** ** |
| **ASSETS**                                                           |       |                                       |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| Flight Equipment                                                     |       | $                                          | 6,699      |                                                                                                | $          | — |   | $ | 6,699 |   | $ | — |   | $ | (1,068 | ) | (A),(B) |   |
| Goodwill (1)                                                         |       | 6,257                                      |       | —                                                                                              |       | — |   | 6,257 |   | — |   | (C) |   |
| International  routes and other intangible assets (2)                |       | 5,166                                      |       | —                                                                                              |       | 946 |   | 4,220 |   | 4,513 |   | (B),(C) |   |
| Other property  and equipment                                        |       | 546                                        |       | —                                                                                              |       | 546 |   | — |   | 69 |   | (A),(B) |   |
| Non-operating  flight equipment and property leased to others        |       | 282                                        |       | —                                                                                              |       | 282 |   | — |   | (47 | ) | (A),(B) |   |
| Flight equipment  spare parts and maintenance and operating supplies |       | 248                                        |       | —                                                                                              |       | 248 |   | — |   | 31 |   | (A),(B) |   |
| Equity  investments                                                  |       | 124                                        |       | —                                                                                              |       | 124 |   | — |   | 111 |   | (A),(C) |   |
| Computer software                                                    |       | 120                                        |       | —                                                                                              |       | 120 |   | — |   | 46 |   | (B) |   |
| Other                                                                |       | 147                                        |       | —                                                                                              |       | 147 |   | — |   | 21 |   | (A) |   |
| Prepaid rents and  deferred costs                                    |       | 37                                         |       | —                                                                                              |       | 37 |   | — |   | (56 | ) | (A) |   |
|                                                                 |       |                                       |       |                                                                                                |       |   |   |   |   | $ | 3,620 |   |   |   |
|                                                                      |            |                                            |            |                                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                              | ** ** | **Successor  Company**                     | ** ** | ** **                                                                                               | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **(in millions)**                  | ** ** | **As of June 1, 2007** | ** ** | **Quoted Prices in  Active Markets for  Identical Liabilities  (Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Total Gains  (Losses)** | ** ** | **Valuation  Technique** | ** ** |
| **LIABILITIES**                         |       |                                       |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Debt and  obligations under capital     |       |                                       |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| leases                                  |       | $                                          | 6,687      |                                                                                                     | $          | — |   | $ | 6,687 |   | $ | — |   | $ | (22 | ) | (C) |   |
| Deferred  frequent flyer liability (3)  |       | 1,972                                      |       | —                                                                                                   |       | — |   | 1,972 |   | (1,559 | ) | (C) |   |
| Air traffic  liability                  |       | 1,857                                      |       | —                                                                                                   |       | 1,857 |   | — |   | (259 | ) | (A) |   |
| Deferred credits  and other liabilities |       | 125                                        |       | —                                                                                                   |       | 125 |   | — |   | 158 |   | (A) |   |
|                                    |       |                                       |       |                                                                                                     |       |   |   |   |   | $ | (1,682 | ) |   |   |
|                                         |            |                                            |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Goodwill represents the excess of the fairvalue of the Company assets over the allocated values of the identifiableassets as determined under the guidance of SFAS No. 141.  Northwest’s financial advisors assistedmanagement in the preparation of a valuation analysis for the Successor Company’scommon stock to be distributed to Unsecured Creditors under the Plan.  In its valuation analysis, Northwest’sfinancial advisors estimated the fair value of the Successor Company’s CommonStock as of the Effective Date.

(2)          Other Intangible Assets are identified by type in “Note 4 — SignificantAccounting Policies.”  With the exceptionof the value of Northwest’s trademarks and trade names, these valuationsincluded significant unobservable inputs (Level 3), which generally includedthe Company’s five-year Business Plan, 12-months of historical revenues and expensesby city pair, and Company projections of available seat miles, revenuepassenger miles, load factors, and operating costs per available seatmile.  The valuations also includedmarket verifiable sources, such as licensing information, royalty rates andmacroeconomic factors.

(3)          The frequent flyer liability was measured at fair value based on ananalysis of how a hypothetical transaction to transfer this liability might benegotiated in the market.  Assumptionsused in this measurement include the price of a frequent flyer mile based onactual ticket prices for similarly restricted tickets, estimates about thenumber of miles that will never be used by customers, and projections of thetiming when the miles will be used.

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**Note 6 – Geographic Regions**

The Company is managed as one cohesive businessunit, of which revenues are derived primarily from the commercialtransportation of passengers and cargo. Operating revenues from flight segments serving a foreign destinationare classified into the Pacific or Atlantic regions, as appropriate.  The following table shows the operatingrevenues for each region:
|                             | ** ** | **Successor**                                                  | ** ** | **Predecessor**                                                | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **(In millions)**      | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  April 1 to  May 31,  2007** | ** ** | **Three Months  Ended June 30,  2006** | ** ** |
| Domestic                    | ** ** | **$**                                                          | **751**    | ** **                                                     | **$**      | **1,404** |   | $ | 2,299 |   |
| Pacific,  principally Japan | ** ** | **231**                                                        | ** ** | **425**                                                        |       | 646 |   |
| Atlantic                    | ** ** | **148**                                                        | ** ** | **222**                                                        |       | 346 |   |
| Total operating  revenues   | ** ** | **$**                                                          | **1,130**  | ** **                                                     | **$**      | **2,051** |   | $ | 3,291 |   |

 
|                             | ** ** | **Successor**                                                  | ** ** | **Predecessor**                                                  | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **(In millions)**      | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  January 1 to  May 31,  2007** | ** ** | **Six Months  Ended June 30,  2006** | ** ** |
| Domestic                    | ** ** | **$**                                                          | **751**    | ** **                                                       | **$**      | **3,346** |   | $ | 4,311 |   |
| Pacific,  principally Japan | ** ** | **231**                                                        | ** ** | **1,064**                                                        |       | 1,260 |   |
| Atlantic                    | ** ** | **148**                                                        | ** ** | **514**                                                          |       | 610 |   |
| Total operating  revenues   | ** ** | **$**                                                          | **1,130**  | ** **                                                       | **$**      | **4,924** |   | $ | 6,181 |   |

 

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

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**Note7 – Reorganization Related Items**

In accordance with SOP 90-7, the financial statementsfor the periods presented distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of theCompany.  In connection with itsbankruptcy proceedings, implementation of our Plan of Reorganization andadoption of fresh-start accounting, the Company recorded the following largelynon-cash reorganization income/(expense) items:
| ** **                                         | ** ** | **Predecessor**                                                | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **(In millions)**                             | ** ** | **Period from  April 1 to  May 31,  2007** | ** ** | **Three Months  Ended  June 30,  2006** | ** ** | **Period from  January 1 to  May 31,  2007** | ** ** | **Six Months  Ended  June 30,  2006** | ** ** |
| Discharge of  unsecured claims and liabilities (a) | ** ** | **$**                                                          | **1,763**  |   | $ | — | ** ** | **$** | **1,763** |   | $ | — |   |
| Revaluation of  frequent flyer obligations (b)     | ** ** | **(1,559**                                                     | **)**      | — | ** ** | **(1,559** | **)** | — |   |
| Revaluation of  other assets and liabilities (c)   | ** ** | **2,816**                                                      |       | — | ** ** | **2,816** |   | — |   |
| Employee-related  charges (d)                      | ** ** | **(308**                                                       | **)**      | 6 | ** ** | **(312** | **)** | 47 |   |
| Abandonment of  aircraft and buildings (d)         | ** ** | **(275**                                                       | **)**      | (111 | ) | **(323** | **)** | (137 | ) |
| Restructured  aircraft lease/debt charges (d)      | ** ** | **(72**                                                        | **)**      | (323 | ) | **(74** | **)** | (1,298 | ) |
| Professional  Fees                                 | ** ** | **(43**                                                        | **)**      | (11 | ) | **(60** | **)** | (26 | ) |
| Other (d)                                          | ** ** | **(378**                                                       | **)**      | (25 | ) | **(700** | **)** | (25 | ) |
| Reorganization items, net                          | ** ** | **$**                                                          | **1,944**  |   | $ | (464 | ) | **$** | **1,551** |   | $ | (1,439 | ) |

 

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(a)          The gain on discharge of unsecured claims and liabilities relates to theCompany’s unsecured claims as of the Petition Date and the discharge ofunsecured claims established as part of the bankruptcy process.  In accordance with the Plan ofReorganization, the Company discharged its estimated $8.2 billion in unsecuredcreditor obligations in exchange for the distribution of approximately 234 millioncommon shares of the Successor Company valued at emergence at $6.45billion.  Accordingly, the Companyrecognized a non-cash reorganization gain of approximately $1.8 billion.

(b)         The Company revalued its frequent flyer miles to estimated fair value asa result of fresh-start reporting, which resulted in a $1.6 billion non-cashreorganization charge.

(c)          In accordance with fresh-start reporting, the Company revalued itsassets at their estimated fair value and revalued its liabilities at estimatedfair value or the present value of amounts to be paid.  This resulted in a non-cash reorganizationgain of $2.8 billion, primarily as a result of newly recognized intangibleassets, offset partially by reductions in the fair value of tangible propertyand equipment.

(d)         Prior to emergence the Company recorded its final provisions for allowedor projected unsecured claims including employee-related AFA-CWA contractrelated claims, other employee related claims, claims associated withrestructured aircraft lease/debt, and municipal bond obligation relatedsettlements.

**Note 8 – Income Taxes**

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

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Significant components of the Company’s deferred tax assets andliabilities as of June 30, 2007 and December 31, 2006 are as follows:
|                                                               | ** ** | **Successor**     | ** ** | **Predecessor**       | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **(In millions)**                                        | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Deferred tax liabilities:                                     |       |              |       |                  |       |
| Accounting basis of assets in excess of  tax basis            | ** ** | **$**             | **1,696**  |                  | $          | 2,219 |   |
| Accounting basis of intangible assets in  excess of tax basis | ** ** | **1,892**         |       | —                |       |
| Other                                                         | ** ** | **91**            |       | 71                    |       |
| Total deferred tax liabilities                                | ** ** | **3,679**         |       | 2,290                 |       |
|                                                          |       |              |       |                  |       |
| Deferred tax assets:                                          |       |              |       |                  |       |
| Expenses not yet deducted for tax  purposes                   | ** ** | **215**           |       | 253                   |       |
| Reorganization charges not yet deducted  for tax purposes     | ** ** | **1,184**         |       | 1,526                 |       |
| Pension and postretirement benefits                           | ** ** | **1,335**         |       | 1,476                 |       |
| Deferred revenue                                              | ** ** | **572**           |       | —                |       |
| Air traffic liability                                         | ** ** | **94**            |       | —                |       |
| Travel award programs                                         | ** ** | **104**           |       | 104                   |       |
| Net operating loss carryforward                               | ** ** | **1,191**         |       | 1,216                 |       |
| Alternative minimum tax credit  carryforward                  | ** ** | **134**           |       | 134                   |       |
| Other                                                         | ** ** | **55**            |       | 17                    |       |
| Total deferred tax assets                                     | ** ** | **4,884**         |       | 4,726                 |       |
| Valuation allowance for deferred tax  assets                  | ** ** | **(2,336**        | **)**      | (2,436                | )          |
| Net deferred tax assets                                       | ** ** | **2,548**         |       | 2,290                 |       |
| Net deferred tax liability                                    | ** ** | **$**             | **1,131**  |                  | $          | — |   |

 

At June 30, 2007, the Company has certain federal deferred tax assetsavailable for use in the regular tax system and the alternative minimum tax (“AMT”)system.  The deferred tax assetsavailable in the regular tax system include: NOLs of $3.3 billion, AMT credits of $134 million, general business taxcredits of $7 million and foreign tax credits of $11 million.  The deferred tax assets available in the AMTsystem are:  NOLs of $3.3 billion andforeign tax credits of $9 million.  AMTcredits available in the regular tax system have an unlimited carryforwardperiod and all other deferred tax assets in both systems are available foryears beyond 2007, expiring in 2008 through 2027.

The Company also has the following deferred tax assets available at June30, 2007, for use in certain states: NOLs with a tax benefit value of approximately $81 million are availablefor years beyond 2007, expiring in 2008 through 2027, and state job tax creditsof $7 million are available for years beyond 2007, expiring in 2008 through2011.

The valuation allowance recorded against our net deferred tax assets infresh-start reporting will be reversed against goodwill when the Companyreports income in future periods.  As aresult, the Company will generally report income tax expense and reducegoodwill.  However, our NOLs willgenerally offset most income taxes otherwise payable until the NOLs are fullyconsumed or expire unused.

The Company adopted FIN 48 on January 1, 2007.  As of June 30, 2007, the Company hadunrecognized tax benefits of approximately $1 million, which, if recognized,would impact the effective tax rate in future periods. During the quarter, as aresult of a resolution of a state tax controversy the Company recognized abankruptcy-related gain of $1 million, which was previously an unrecognized taxbenefit.

Subject to the impact of the Company’s bankruptcy filing, open tax yearsfor federal income tax purposes are 1996 through 2006 and for state income taxpurposes generally are 2005 and 2006.

The Company’s continuing practice is to recognize interest and penaltiesrelated to income tax matters in income tax expense.  The Company had $12 million accrued forinterest and nothing accrued for penalties at June 30, 2007.

25

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

The following table sets forth the computationof basic and diluted earnings (loss) per common share:
|                                                                                                             | ** ** | **Successor**           | ** ** | **Predecessor**          | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                                                                                  | ** ** | **Period from**    | ** ** | **Period from**     | ** ** | **Three Months** | ** ** |
| ** **                                                                                                  | ** ** | **June 1 to** | ** ** | **April 1 to** | ** ** | **Ended** | ** ** |
| ** **                                                                                                  | ** ** | **June 30,**       | ** ** | **May 31,**         | ** ** | **June 30,** | ** ** |
| **(In millions, except share and per share data)**                       | ** ** | **2007**                | ** ** | **2007**                 | ** ** | **2006** | ** ** |
| **Numerator:**                                                                                              |       |                    |       |                     |       |   |   |
| Net income (loss) applicable to common  stockholders                                                        | ** ** | **$**                   | **106**    | ** **               | **$**      | **2,043** |   | $ | (285 | ) |
|                                                                                                        |       |                    |       |                     |       |   |   |
| Effect of dilutive securities:                                                                              |       |                    |       |                     |       |   |   |
| Gain on discharge of convertible debt                                                                       | ** ** | **—**              | ** ** | **(82**                  | )          | — |   |
| Gain on discharge of Series C Preferred Stock                                                               | ** ** | **—**              | ** ** | **(60**                  | )          | — |   |
| Adjusted net income for diluted earnings  (loss) per share                                                  | ** ** | **$**                   | **106**    | ** **               | **$**      | **1,901** |   | $ | (285 | ) |
|                                                                                                        |       |                    |       |                     |       |   |   |
| **Denominator:**                                                                                            |       |                    |       |                     |       |   |   |
| Weighted-average shares outstanding for  basic and diluted earnings (loss) per share                        |       | **262,189,086**         |       | **87,401,526**           |       | 87,280,293 |   |
|                                                                                                        |       |                    |       |                     |       |   |   |
| Effect of dilutive securities:                                                                              |       |                    |       |                     |       |   |   |
| Contingently convertible debt                                                                               | ** ** | **—**              | ** ** | **19,096,027**           |       | — |   |
| Shares held in non-qualified rabbi  trusts                                                                  | ** ** | **—**              | ** ** | **364**                  |       | — |   |
| Series C Preferred Stock                                                                                    | ** ** | **—**              | ** ** | **6,169,130**            |       | — |   |
| Adjusted weighted-average shares  outstanding and assumed conversions for diluted earnings (loss) per share |       | **262,189,086**         |       | **112,667,047**          |       | 87,280,293 |   |
|                                                                                                        |       |                    |       |                     |       |   |   |
| **Basic earnings (loss) per common share:**                                                                 |       |                    |       |                     |       |   |   |
|                                                                                                        |       |                    |       |                     |       |   |   |
| Net income (loss) applicable to common  stockholders                                                        | ** ** | **$**                   | **0.41**   | ** **               | **$**      | **23.37** |   | $ | (3.27 | ) |
|                                                                                                        |       |                    |       |                     |       |   |   |
| **Diluted earnings (loss) per common share:**                                                               |       |                    |       |                     |       |   |   |
| Net income (loss) applicable to common  stockholders                                                        | ** ** | **$**                   | **0.41**   | ** **               | **$**      | **16.87** |   | $ | (3.27 | ) |

 

26

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|                                                                                                             | ** ** | **Successor**           | ** ** | **Predecessor**            | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                  | ** ** | **Period from**    | ** ** | **Period from**       | ** ** | **Six Months** | ** ** |
| ** **                                                                                                  | ** ** | **June 1 to** | ** ** | **January 1 to** | ** ** | **Ended** | ** ** |
| ** **                                                                                                  | ** ** | **June 30,**       | ** ** | **May 31,**           | ** ** | **June 30,** | ** ** |
| **(In millions, except share and per share data)**                       | ** ** | **2007**                | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| **Numerator:**                                                                                              |       |                    |       |                       |       |   | ** ** |
| Net income (loss) applicable to common  stockholders                                                        | ** ** | **$**                   | **106**    | ** **                 | **$**      | **1,751** |   | $ | (1,389 | ) |
|                                                                                                        |       |                    |       |                       |       |   |   |
| Effect of dilutive securities:                                                                              |       |                    |       |                       |       |   |   |
| Gain on discharge of convertible debt                                                                       | ** ** | **—**              | ** ** | **(82**                    | **)**      | — |   |
| Gain on discharge of Series C Preferred Stock                                                               | ** ** | **—**              | ** ** | **(60**                    | **)**      | — |   |
| Adjusted net income for diluted earnings  (loss) per share                                                  | ** ** | **$**                   | **106**    | ** **                 | **$**      | **1,609** |   | $ | (1,389 | ) |
|                                                                                                        |       |                    |       |                       |       |   |   |
| **Denominator:**                                                                                            |       |                    |       |                       |       |   |   |
| Weighted-average shares outstanding for  basic and diluted earnings (loss) per share                        |       | **262,189,086**         |       | **87,390,474**             |       | 87,272,504 |   |
|                                                                                                        |       |                    |       |                       |       |   |   |
| Effect of dilutive securities:                                                                              |       |                    |       |                       |       |   |   |
| Contingently convertible debt                                                                               | ** ** | **—**              | ** ** | **19,096,027**             |       | — |   |
| Shares held in non-qualified rabbi  trusts                                                                  | ** ** | **—**              | ** ** | **364**                    |       | — |   |
| Series C Preferred Stock                                                                                    | ** ** | **—**              | ** ** | **6,180,182**              |       | — |   |
| Adjusted weighted-average shares  outstanding and assumed conversions for diluted earnings (loss) per share |       | **262,189,086**         |       | **112,667,047**            |       | 87,272,504 |   |
|                                                                                                        |       |                    |       |                       |       |   |   |
| **Basic earnings (loss) per common share:**                                                                 |       |                    |       |                       |       |   |   |
| Net income (loss) applicable to common  stockholders                                                        | ** ** | **$**                   | **0.41**   | ** **                 | **$**      | **20.03** |   | $ | (15.92 | ) |
|                                                                                                        |       |                    |       |                       |       |   |   |
| **Diluted earnings (loss) per common share:**                                                               |       |                    |       |                       |       |   |   |
| Net income (loss) applicable to common  stockholders                                                        | ** ** | **$**                   | **0.41**   | ** **                 | **$**      | **14.28** |   | $ | (15.92 | ) |

 

*Successor EPS*. The Plan contemplated the issuance ofapproximately 277 million shares of new common stock by the Successor Company(out of the 400 million shares of new common stock authorized under its amendedand restated certificate of incorporation). The new common stock is listed on the NYSE and began “regular way”trading under the symbol “NWA” on May 31, 2007. The distributions of the Successor Company’s common stock, which are subjectto certain holdbacks as described in the Plan, were authorized under the Planas follows:

·                  225.8 million shares of common stock areissuable to holders of certain general unsecured claims;

·                  8.6 million shares of common stock are issuabeto holders who also held a guaranty from a Debtor;

·                  15.2 million shares of common stock aresubject to awards under a management equity plan; and

·                  27.8 million shares of common stock wereissued in the Rights Offering and Equity Commitment Agreement.

In accordance with Statement of FinancialAccounting Standards No. 128, Earnings per Share (“SFAS No. 128”), basic anddiluted earnings per share were computed by dividing net income by theweighted-average number of shares of common stock outstanding for the one monthperiod ending June 30, 2007.  SFAS No.128 requires that the entire 234.4 million shares to be issued to holders ofunsecured and guaranty claims be considered outstanding for purposes ofcalculating earnings per share as these shares will ultimately be issued tounsecured creditors once the allocation of disputed unsecured claims iscompleted.  The 15.2 million sharessubject to awards under the Management Equity Plan were excluded from thecomputation of diluted earnings per share because the effect of including theshares would have been anti-dilutive.

At June 30, 2007, stock options to purchase approximately 3.6 millionshares of the Successor Company’s common stock were outstanding as were 9.5million restricted stock units but excluded from the computation of dilutedearnings per share because the effect of including the shares would have beenanti-dilutive.

*Predecessor EPS.*  Predecessorbasic earnings per share was computed based on the Predecessor’s finalweighted-average shares outstanding.

For the three and six months ended June 30, 2006, 19.1 million incremental shares related to dilutive securitieswere not included in the diluted earnings per share calculation because theCompany reported a net loss for this period.

27

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At May 31, 2007, stock options to purchase approximately 7.3 millionshares of common stock were outstanding but excluded from the computation ofdiluted earnings per share because the effect of including the shares wouldhave been anti-dilutive.

Additionally, 6.3 million shares of Series C Preferred Stock wereexcluded from the effect of dilutive securities for the three months ended June30, 2006 and 6.4 million shares for the six months ended June 30, 2006, becausethe Company reported a net loss for this period.

Total employee stock options outstanding of7.6 million as of June 30, 2006 were not included in diluted securities becausethe Company reported a net loss for the three months and six months ended June30, 2006.

**Note 10** -**Long-termDebt and Short-Term Borrowings**

In accordance with the Planof Reorganization, the Company converted the DIP/Exit Facility into the ExitFacility, reinstated certain secured aircraft debt and entered into other debtagreements negotiated during the bankruptcy process.  Long-term debt as of June 30, 2007 consistedof the following (with interest rates as of June 30, 2007):
|                                                                                                  | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| **(In millions)**                                                                           | ** ** | **2007**          | ** ** |
| Aircraft enhanced equipment trust  certificates due through 2022, 7.0% weighted-average rate (1) | ** ** | **$**             | **1,632**  | ** ** |
| Aircraft secured loans due through 2025,  7.3% weighted-average rate (2)                         | ** ** | **3,228**         | ** ** |
| Exit facility due 2013, 7.3%  weighted-average rate (3)                                          | ** ** | **1,225**         | ** ** |
| Other secured notes due through 2020,  7.4% weighted-average rate                                | ** ** | **439**           | ** ** |
| Other secured debt through 2031, 3.5%  weighted-average rate                                     | ** ** | **123**           | ** ** |
| Total secured debt                                                                               | ** ** | **6,647**         | ** ** |
|                                                                                             |       |              |       |
| Add net unamortized valuation premium                                                            | ** ** | **4**             | ** ** |
|                                                                                             |       |              |       |
| Total long-term debt                                                                             | ** ** | **6,651**         | ** ** |
|                                                                                             |       |              |       |
| Less current maturities                                                                          | ** ** | **513**           | ** ** |
|                                                                                             |       |              |       |
| Long-term debt                                                                                   | ** ** | **$**             | **6,138**  | ** ** |

 

----

(1)          At June 30, 2007, direct obligations of Northwest included the $1.6billion of equipment notes underlying the pass-through trust certificatesissued for 75 aircraft.  Interest on thepass-through trust certificates is payable quarterly or semi-annually.

(2)          The Company took delivery of and financed four Airbus A330-300, twoCRJ900 and one Embraer 175 during the six months ended June 30, 2007, resultingin an increase of $390 million in aircraft secured loans.  At June 30, 2007, the $3.2 billion of thesecured loans issued for 98 aircraft were direct obligations of Northwest.

(3)          On August 21, 2006, the Predecessor Company entered into the DIP/ExitFacility, consisting of a $1.05 billion term loan facility and a $175 millionrevolving credit facility which has been fully drawn.

The DIP/Exit Facility initially bore an interest rate of LIBOR plus2.50%; however, on March 9, 2007, theCompany and the lenders amended the facility to, among other things,reduce the margin applicable to loans by 50 basis points to LIBOR plus 2.0% aswell as eliminate minimum credit rating and collateral coverage margin-increasethresholds. The amendment also permits Northwest to grant liens on thecollateral securing obligations under the DIP/Exit Facility to support up to$150 million of Northwest’s obligations under fuel, interest rate and/orcurrency exchange hedging agreements with any lender that is a party to theDIP/Exit Facility.

Simultaneous with emergence on the EffectiveDate, the Successor Company converted the DIP/Exit Facility into the ExitFacility.  The final maturity will beAugust 21, 2013.  Principal on the termloan portion of the Exit Facility will be repaid at 1.0% per year with thebalance (94%) due at maturity.  Loansdrawn under the $175 million revolving credit facility may be borrowed andrepaid at the Company’s discretion.  Upto $75 million of the revolving credit facility may be utilized by the Companyas a letter of credit facility.  Bothloan facilities under the Exit Facility will continue to bear interest at LIBORplus 2.00%.  Letter of credit fees willbe charged at the same credit spread as on the borrowings plus 12.5 basispoints.  To the extent that the revolvingcredit facility is not utilized, the Company is required to pay an undrawncommitment fee of 50 basis points per annum. The Exit Facility received a credit rating of BB from Standard &Poor’s Rating Services (“S&P”) and a Ba3 from Moody’s Investors Service,Inc. (“Moody’s”) and is secured by a first lien on the Company’s Pacific routeauthorities.  The interest rate as ofJune 30, 2007 was 7.34% on the term loan facility and 7.32% on the revolvingcredit facility.

28

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TheExit Facility requires ongoing compliance with the following financialcovenants:

·                  Unrestricted cash of at least $750 million;

·                  Collateral coverage ratio of at least 1.50 to1.00; and

·                  Fixed charge coverage ratio as set forthbelow:
| Four Consecutive Fiscal Quarters Ending | ** ** | **Minimum Ratio of   EBITDAR to   Consolidated   Fixed Charges (1)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| June 30, 2007                                               |       | 1.30 to 1.00                                                                                                 |       |
| September 30, 2007                                          |       | 1.40 to 1.00                                                                                                 |       |
| December 31, 2007 and each quarter  ending thereafter       |       | 1.50 to 1.00                                                                                                 |       |

----

(1)             For purposes ofcalculating this ratio, EBITDAR is defined as operating income adjusted toexclude the effects of depreciation, amortization and aircraft rents and toinclude the effects of interest income and governmental reimbursements forlosses resulting from developments affecting the aviation industry.  Earnings also exclude non-recurring non-cashcharges (subject to the inclusion of any cash payments then or thereafter madewith respect thereto) and are determined without giving effect to anyacceleration of rental expense.  Fixedcharges are defined as interest expense and aircraft rents (without givingeffect to any acceleration of rental expense).

As of June 30, 2007, theCompany was in compliance with all required financial covenants.

***Debt Maturity Table:***

Asof June 30, 2007, maturities of long-term debt, excluding capital leaseobligations, were as follows:
| ** **                                      | ** ** | **Remainder of** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| **(In millions)**                          | ** ** | **2007**              | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Aircraft enhanced equipment trust  certificates |       | $                     | 68         |       | $          | 165        |       | $          | 176        |       | $          | 128            |       | $          | 304        |   | $ | 791 |   | $ | 1,632 |   |
| Aircraft secured loans                          |       | 104                   |       | 352        |       | 207        |       | 221        |       | 221        |       | 2,123          |       | 3,228      |       |
| Exit facility                                   |       | 11                    |       | 10         |       | 11         |       | 10         |       | 11         |       | 1,172          |       | 1,225      |       |
| Other secured notes                             |       | 18                    |       | 35         |       | 111        |       | 52         |       | 60         |       | 163            |       | 439        |       |
| Other secured debt                              |       | —                |       | 33         |       | —     |       | —     |       | —     |       | 90             |       | 123        |       |
| Total secured debt                              |       | 201                   |       | 595        |       | 505        |       | 411        |       | 596        |       | 4,339          |       | 6,647      |       |
|                                            |       |                  |       |       |       |       |       |       |       |       |       |           |       |       |       |
| Add net unamortized premium (discount)          |       | —                |       | (3         | )          | (3         | )          | —     |       | 1          |       | 9              |       | 4          |       |
|                                            |       |                  |       |       |       |       |       |       |       |       |       |           |       |       |       |
| Total  long-term debt                           |       | $                     | 201        |       | $          | 592        |       | $          | 502        |       | $          | 411            |       | $          | 597        |   | $ | 4,348 |   | $ | 6,651 |   |

 

As of June 30, 2007, there were no short-term borrowings.

**Note 11 – Leases**

The Company leases aircraft, space in airport terminals, land andbuildings at airports, ticket, sales and reservations offices, and otherproperty and equipment, which expire in various years through 2032.  As allowed under Section 365 of theBankruptcy Code, during our restructuring we assumed, assumed and assigned, orrejected certain executory contracts and unexpired leases, including leases ofreal property, aircraft and aircraft engines, subject to the approval of theBankruptcy Court and certain other conditions.

29

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At June 30, 2007, future minimum lease payments for capital leases andnon-cancelable operating leases, with initial or remaining terms of more thanone year were as follows:
|                                                         | ** ** | **Capital** | ** ** | **Operating Leases** | ** ** |
|---------------------------------------------------------|------------|-------------|------------|---------------------------|------------|
| **(In millions)**                                  | ** ** | **Leases**  | ** ** | **Aircraft**              | ** ** | **Non-aircraft** | ** ** |
| Remainder of 2007                                       |       | $           | 5          |                      | $          | 180 |   | $ | 97 |   |
| 2008                                                    |       | 15          |       | 386                       |       | 187 |   |
| 2009                                                    |       | 9           |       | 382                       |       | 175 |   |
| 2010                                                    |       | 9           |       | 390                       |       | 154 |   |
| 2011                                                    |       | 8           |       | 329                       |       | 130 |   |
| Thereafter                                              |       | 211         |       | 2,206                     |       | 861 |   |
|                                                    |       | 257         |       | 3,873                     |       | 1,604 |   |
| Less sublease rental income                             |       |        |       | 1,081                     |       | 29 |   |
| Total minimum operating lease payments                  |       |        |       | $                         | 2,792      |   | $ | 1,575 |   |
| Less amounts representing interest                      |       | 148         |       |                      |       |   |   |
| Present value of future minimum capital lease  payments |       | 109         |       |                      |       |   |   |
| Add unamortized valuation premium                       |       | 19          |       |                      |       |   |   |
| Total capital leases                                    |       | 128         |       |                      |       |   |   |
| Less current obligations under capital  leases          |       | 9           |       |                      |       |   |   |
| Long-term  obligations under capital leases             |       | $           | 119        |                      |       |   |   |   |

 

At June 30, 2007, 252 of the 563 operating aircraft were leased; ofthese 252 leases, one was a capital lease and 251 were operating leases.

30

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**Note 12 – Fleet Informationand Commitments**

As shown in the following table, Northwestoperated a mainline fleet of 372 aircraft at June 30, 2007, consisting of 314narrow-body and 58 wide-body aircraft. Northwest’s purchase commitments for aircraft as of June 30, 2007 arealso provided.
|                                       | ** ** | ** **            | ** ** | **In Service** | ** ** | **Aircraft**       | ** ** |
|---------------------------------------|------------|-----------------------|------------|---------------------|------------|--------------------|------------|
| **Aircraft Type**                | ** ** | **Seating  Capacity** | ** ** | **Owned**           | ** ** | **Capital  Lease** | ** ** | **Operating  Lease** | ** ** | **Total** | ** ** | **on Firm  Order** | ** ** |
|                                  |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| **Passenger Aircraft**                |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| Airbus:                               |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| A319                                  |       | 124                   |       | 59                  |       | —             |       | 2 |   | 61 |   | 5 |   |
| A320                                  |       | 148                   |       | 45                  |       | —             |       | 28 |   | 73 |   | 2 |   |
| A330-200                              |       | 243                   |       | 11                  |       | —             |       | — |   | 11 |   | — |   |
| A330-300                              |       | 298                   |       | 17                  |       | —             |       | — |   | 17 |   | 4 |   |
|                                  |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| Boeing:                               |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| 787-8                                 |       | 221                   |       | —              |       | —             |       | — |   | — |   | 18 |   |
| 757-200                               |       | 160-184               |       | 38                  |       | 1                  |       | 16 |   | 55 |   | — |   |
| 757-300                               |       | 224                   |       | 16                  |       | —             |       | — |   | 16 |   | — |   |
| 747-200                               |       | 353-430               |       | 2                   |       | —             |       | — |   | 2 |   | — |   |
| 747-400                               |       | 403                   |       | 4                   |       | —             |       | 12 |   | 16 |   | — |   |
|                                  |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| McDonnell Douglas:                    |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| DC9                                   |       | 100-125               |       | 109                 |       | —             |       | — |   | 109 |   | — |   |
|                                  |       |                  |       | 301                 |       | 1                  |       | 58 |   | 360 |   | 29 |   |
|                                  |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| **Freighter Aircraft**                |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| Boeing 747F                           |       |                  |       | 9                   |       | —             |       | 3 |   | 12 |   | — |   |
|                                  |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| **Total Mainline Operated  Aircraft** | ** ** | ** **            | ** ** | 310                 |       | 1                  |       | 61 |   | 372 |   | 29 |   |
| ** **                            | ** ** | ** **            | ** ** | ** **          | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Regional Aircraft**                 |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| CRJ200                                |       | 50                    |       | —              |       | —             |       | 141 |   | 141 |   | — |   |
| Saab 340                              |       | 30-34                 |       | —              |       | —             |       | 49 |   | 49 |   | — |   |
| CRJ900                                |       | 76                    |       | 1                   |       | —             |       | — |   | 1 |   | 34 |   |
| Embraer 175                           |       | 76                    |       | —              |       | —             |       | — |   | — |   | 35 |   |
|                                  |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| **Total Airlink Operated  Aircraft**  | ** ** |                  |       | 1                   |       | —             |       | 190 |   | 191 |   | 69 |   |
|                                  |       |                  |       |                |       |               |       |   |   |   |   |   |   |
| **Total Aircraft**                    | ** ** |                  |       | 311                 |       | 1                  |       | 251 |   | 563 |   | 98 |   |

 

The Company took delivery of four Airbus A330-300, two CRJ900, and oneEmbraer 175 aircraft during the six months ended June 30, 2007.  One CRJ900 and the Embraer 175 had not beenplaced in service before June 30, 2007. In connection with the acquisition of these seven aircraft, the Companyentered into long-term debt arrangements. Under such arrangements, the aggregate amount of debt incurred totaled $390 million.

31

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**Note 13 – Comprehensive Income (Loss)**

Comprehensive income (loss) consisted of thefollowing:
| ** **                                                         | ** ** | **Successor**                                                  | ** ** | **Predecessor**                                                | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **(In millions)**                                             | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  April 1 to  May 31,  2007** | ** ** | **Three Months  Ended  June 30,  2006** | ** ** |
| Net income (loss)                                                  | ** ** | **$**                                                          | **106**    |                                                           | **$**      | **2,043** | ** ** | $ | (285 | ) |
| Change in unrealized gain (loss) on  available-for-sale securities | ** ** | **(1**                                                         | **)**      | **—**                                                     | ** ** | (1 | ) |
| Change in deferred gain (loss) from  hedging activities            | ** ** | **1**                                                          |       | **—**                                                     | ** ** | 1 |   |
| Foreign currency translation adjustments                           | ** ** | **—**                                                     |       | **(1**                                                         | **)**      | 2 |   |
| Comprehensive income (loss)                                        |       | **$**                                                          | **106**    | ** **                                                     | **$**      | **2,042** | ** ** | $ | (283 | ) |

 
| ** **                                                         | ** ** | **Successor**                                                  | ** ** | **Predecessor**                                                  | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **(In millions)**                                             | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  January 1 to  May 31,  2007** | ** ** | **Six Months  Ended  June 30,  2006** | ** ** |
| Net income (loss)                                                  | ** ** | **$**                                                          | **106**    |                                                             | **$**      | **1,751** | ** ** | $ | (1,389 | ) |
| Change in unrealized gain (loss) on  available-for-sale securities | ** ** | **(1**                                                         | **)**      | **1**                                                            | ** ** | 1 |   |
| Change in deferred gain (loss) from  hedging activities            | ** ** | **1**                                                          |       | **—**                                                       | ** ** | 2 |   |
| Foreign currency translation adjustments                           | ** ** | **—**                                                     |       | **(1**                                                           | **)**      | 2 |   |
| Comprehensive income (loss)                                        |       | **$**                                                          | **106**    | ** **                                                       | **$**      | **1,751** | ** ** | $ | (1,384 | ) |

 

# **Note 14 – Pension and OtherPostretirement Health Care Benefits**

The Company has several defined benefitpension plans and defined contribution401(k)-type plans covering substantially all of its employees.  Northwest froze future benefit accruals forits defined benefit Pension Plans for Salaried Employees, Pilot Employees, andContract Employees effective August 31, 2005, January 31, 2006, and September30, 2006, respectively.  Replacementcoverage was provided for these employees through 401(k)-type definedcontribution plans or in the case of IAM represented employees, the IAM NationalMulti-Employer Plan.

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

The Pension Protection Act of 2006 (“2006Pension Act”) was signed into law on August 17, 2006.  The 2006 Pension Act allows commercialairlines to elect special funding rules for defined benefit plans that arefrozen.  The unfunded liability for afrozen defined benefit plan may be amortized over a fixed 17-year period. Theunfunded liability is defined as the actuarial liability calculated using an8.85% interest rate minus the fair market value of plan assets.  Northwest elected the special funding rulesfor frozen defined benefit plans under the 2006 Pension Act effective October1, 2006.  As a result of this election(1) the funding waivers that Northwest received for the 2003 plan yearcontributions were deemed satisfied under the 2006 Pension Act, and (2) thefunding standard account for each Plan has no deficiency as of September 30,2006.  New contributions that came dueunder the 2006 Pension Act funding rules were paid while Northwest was inbankruptcy and must continue to be paid going forward.  If the new contributions are not paid, thefuture funding deficiency that would develop will be based on the regularfunding rules rather than the special funding rules.

It is Northwest’s policy to fund annually atleast the minimum contribution as required by the Employee Retirement IncomeSecurity Act of 1974, as amended (“ERISA”). However, as a result of the commencement of Northwest’s Chapter 11 case,Northwest did not make minimum cash contributions to its defined benefitpension plans that were due after September 14, 2005.  Subsequent to Northwest’s bankruptcy filingand prior to its election under the 2006 Pension Act, Northwest paid the normalcost component of the plans’ minimum funding requirements relating to servicerendered

32

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post-petition and certain interest payments associated with its 2003Contract Plan and Salaried Plan year waivers. As noted above, effective October 1, 2006, Northwest elected the specialfunding rules available to commercial airlines.

As a result of Northwest’s Chapter 11 filing,we appointed an independent fiduciary for all of our tax-qualified definedbenefit pension plans to pursue, on behalf of the plans, claims to recoverminimum funding contributions due under federal law, to the extent thatNorthwest is not continuing to fund the plans due to bankruptcy prohibitions.The independent fiduciary subsequently withdrew all of the claims that theindependent fiduciary filed in our Chapter 11 Case following our election ofthe special funding rules under the 2006 Pension Act.

Upon emergence from Chapter 11, the Companyadopted fresh-start reporting in accordance with SOP 90-7. The Company’sdefined benefit and postretirement health care plans were remeasured inconformity with SFAS No. 141. This remeasurement resulted in a $409 millionreduction in the defined benefit pension plan liabilities as well as a $35million reduction in postretirement health care plan liabilities.Postretirement health care plan liabilities were reduced by an additional $120million as a result of the discharge of liabilities subject to compromisepursuant to the Plan.

Northwest’s 2007 calendar year contributionsto its frozen defined benefit plans under the provisions of the 2006 PensionAct and the replacement plans will approximate $128 million.

***The following is a reconciliation of the beginning and ending balancesof the benefit obligations, the fair value of plan assets, and the fundedstatus as of June 30, 2007 and December 31, 2006:***
|                                                   | ** **   | **Pension Benefits** | ** **   | **Other Benefits** | ** **   |
|---------------------------------------------------|--------------|---------------------------|--------------|-------------------------|--------------|
| **(In millions)**                            | ** **   | **2007**                  | ** **   | **2006**                | ** **   | **2007** | ** ** | **2006** | ** ** |
| ***Change in benefit  obligations:***             | *** *** | *** ***              | *** *** | *** ***            | *** *** | *** *** | *** *** | *** *** | *** *** |
| Benefit obligations at beginning of year          | ** **   | **$**                     | **9,373**    |                    | $            | 9,472 | ** ** | **$** | **898** |   | $ | 1,051 |   |
| Service cost                                      | ** **   | **22**                    |         | 116                     | ** **   | **12** |   | 30 |   |
| Interest cost                                     | ** **   | **273**                   |         | 533                     | ** **   | **26** |   | 59 |   |
| Plan amendments                                   | ** **   | **—**                |         | (3                      | )            | **(119** | **)** | (270 | ) |
| Actuarial loss and other                          | ** **   | **(116**                  | **)**        | (265                    | )            | **(34** | **)** | 91 |   |
| Transfer of liability out of plan (1)             | ** **   | **—**                |         | (8                      | )            | **—** |   | — |   |
| Benefits paid                                     | ** **   | **(228**                  | **)**        | (472                    | )            | **(37** | **)** | (63 | ) |
| Benefit obligations at end of period              | ** **   | **9,324**                 |         | 9,373                   | ** **   | **746** |   | 898 |   |
|                                              |         |                      |         |                    |         |   |   |   |   |
| ***Change in plan assets:***                      | *** *** | *** ***              | *** *** | *** ***            | *** *** | *** *** | *** *** | *** *** | *** *** |
| Fair value of plan assets at beginning  of year   | ** **   | **6,278**                 |         | 5,794                   | ** **   | **5** |   | 5 |   |
| Actual return on plan assets                      | ** **   | **545**                   |         | 870                     | ** **   | **—** |   | — |   |
| Employer contributions                            | ** **   | **40**                    |         | 86                      | ** **   | **36** |   | 63 |   |
| Benefits paid                                     | ** **   | **(227**                  | **)**        | (472                    | )            | **(36** | **)** | (63 | ) |
| Fair value of plan assets at end of  period       | ** **   | **6,636**                 |         | 6,278                   | ** **   | **5** |   | 5 |   |
|                                              |         |                      |         |                    |         |   |   |   |   |
| Funded Status at end of period - net  underfunded | ** **   | **$**                     | **(2,688**   | **)**                   | $            | (3,095 | ) | **$** | **(741** | **)** | $ | (893 | ) |

 

----

(1)          The Companytransferred the liability associated with certain long-term disability benefitspreviously provided in the Northwest Airlines Pension Plan for Pilots to aself-funded long-term disability plan that provides substantially similarbenefits.

The accumulated benefit obligations for all defined benefit pensionplans were $9.3 billion and $9.4 billion at June 30, 2007 and December 31,2006, respectively.  The Company’spension plans with accumulated benefit obligations in excess of plan assets asof June 30, 2007 and December 31, 2006 were as follows:
| (In millions)              | ** ** | **2007**  | ** ** | **2006** | ** ** |
|---------------------------------|------------|-----------|------------|----------|------------|
| Projected benefit obligations   | ** ** | **$**     | **9,304**  |     | $          | 9,352 |   |
| Accumulated benefit obligations | ** ** | **9,290** |       | 9,338    |       |
| Fair  value of plan assets      | ** ** | **6,607** |       | 6,251    |       |
|                                 |            |           |            |          |            |  |  |

 

33

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***Amounts recognized in the statement offinancial position as of June 30, 2007 and December 31, 2006 consist of:***
|                                                              | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|--------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **(In millions)**                                       | ** ** | **2007**                  | ** ** | **2006**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Assets                                                       |       |                      |       | ** **              | ** ** |   |   |   |   |
| Noncurrent assets                                            | ** ** | **$**                     | **8**      | ** **              | $          | 6 |   | $ | — |   | $ | — |   |
| Total assets                                                 | ** ** | **$**                     | **8**      | ** **              | $          | 6 |   | **$** | **—** | ** ** | $ | — |   |
|                                                         |       |                      |       |                    |       |   |   |   |   |
| Liabilities                                                  |       |                      |       |                    |       |   |   |   |   |
| Current liability                                            | ** ** | **$**                     | **(28**    | **)**                   | $          | (28 | ) | **$** | **(42** | **)** | $ | (64 | ) |
| Noncurrent liability                                         | ** ** | **(2,668**                | **)**      | (3,073                  | )          | **(699** | **)** | (829 | ) |
| Total liabilities                                            | ** ** | **$**                     | **(2,696** | **)**                   | $          | (3,101 | ) | **$** | **(741** | **)** | $ | (893 | ) |
|                                                         |       |                      |       |                    |       |   |   |   |   |
| Accumulated other comprehensive  loss (income), pre-tax |       |                      |       |                    |       |   |   |   |   |
| Net loss (gain)                                              | ** ** | **$**                     | **—** | ** **              | $          | 1,621 |   | **$** | **—** | ** ** | $ | 619 |   |
| Prior service cost (credit)                                  | ** ** | **—**                | ** ** | (1                      | )          | **—** | ** ** | (333 | ) |
| Total other comprehensive income                             | ** ** | **$**                     | **—** | ** **              | $          | 1,620 |   | **$** | **—** | ** ** | $ | 286 |   |

 

***Weighted-average assumptions used todetermine benefit obligations for pension and other benefits at June 30, 2007and December 31, 2006:***
|                                          | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **(In millions)**                   | ** ** | **2007**                  | ** ** | **2006**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Discount rate                            | ** ** | **6.17**                  | **%**      | 5.93                    | %          | **6.17** | **%** | 5.93 | % |
| Rate of future compensation increase (1) | ** ** | **3.50**                  | **%**      | 3.50                    | %          | n/a |   | n/a |   |

 

----

(1) Not applicable to frozen plans.

 

***Components of net periodic benefitcost of defined benefit plans and defined contribution plan costs:***
| ** **                                      | ** ** | **Pension Benefits**                                      | ** ** | **Other Benefits**                                        | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Successor**                                                  | ** ** | **Predecessor**                                                | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| **(In millions)**                          | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  April 1 to  May 31,  2007** | ** ** | **Three Months  Ended  June 30,  2006** | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  April 1 to  May 31,  2007** | ** ** | **Three Months  Ended  June 30,  2006** | ** ** |
| Defined benefit plan costs                      |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Service cost                                    |       | **$**                                                          | **4**      | ** **                                                     | **$**      | **8** |   | $ | 34 | ** ** | **$** | **2** | ** ** | **$** | **4** |   | $ | 9 |   |
| Interest cost                                   |       | **46**                                                         | ** ** | **90**                                                         |       | 132 | ** ** | **4** | ** ** | **9** |   | 17 |   |
| Expected return on plan assets                  |       | **(48**                                                        | **)**      | **(83**                                                        | **)**      | (120 | ) | **—** | ** ** | **—** |   | — |   |
| Amortization of prior service cost              |       | **—**                                                     | ** ** | **—**                                                     |       | 10 | ** ** | **—** | ** ** | **(6** | **)** | (2 | ) |
| Recognized net actuarial loss and other  events |       | **—**                                                     |       | **7**                                                          |       | 29 |   | **—** |   | **6** |   | 10 |   |
| Net periodic benefit cost                       |       | **2**                                                          | ** ** | **22**                                                         |       | 85 | ** ** | **6** | ** ** | **13** |   | 34 |   |
|                                            |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Defined contribution plan costs                 | ** ** | **4**                                                          | ** ** | **7**                                                          |       | 13 | ** ** | **—** | ** ** | **—** |   | — |   |
|                                            |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Total  benefit cost                             | ** ** | **$**                                                          | **6**      | ** **                                                     | **$**      | **29** |   | $ | 98 | ** ** | **$** | **6** | ** ** | **$** | **13** |   | $ | 34 |   |

 

34

----

 
| ** **                                      | ** ** | **Pension Benefits**                                      | ** ** | **Other Benefits**                                          | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Successor**                                                  | ** ** | **Predecessor**                                                  | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| **(In millions)**                          | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  January 1 to  May 31,  2007** | ** ** | **Six Months  Ended  June 30,  2006** | ** ** | **Period from  June 1 to  June 30,  2007** | ** ** | **Period from  January 1 to  May 31,  2007** | ** ** | **Six Months  Ended  June 30,  2006** | ** ** |
| Defined benefit plan costs                      |       |                                                           |       |                                                             |       |   |   |   |   |   |   |   |   |
| Service cost                                    |       | **$**                                                          | **4**      | ** **                                                       | **$**      | **19** |   | $ | 69 | ** ** | **$** | **2** | ** ** | **$** | **10** |   | $ | 18 |   |
| Interest cost                                   |       | **46**                                                         | ** ** | **225**                                                          |       | 264 | ** ** | **4** | ** ** | **22** |   | 32 |   |
| Expected return on plan assets                  |       | **(48**                                                        | **)**      | **(207**                                                         | **)**      | (240 | ) | **—** | ** ** | **—** |   | — |   |
| Amortization of prior service cost              |       | **—**                                                     | ** ** | **—**                                                       |       | 20 | ** ** | **—** | ** ** | **(15** | **)** | (5 | ) |
| Recognized net actuarial loss and other  events |       | **—**                                                     |       | **18**                                                           |       | 57 |   | **—** |   | **16** |   | 20 |   |
| Net periodic benefit cost                       |       | **2**                                                          | ** ** | **55**                                                           |       | 170 | ** ** | **6** | ** ** | **33** |   | 65 |   |
|                                            |       |                                                           |       |                                                             |       |   |   |   |   |   |   |   |   |
| Defined contribution plan costs                 | ** ** | **4**                                                          | ** ** | **23**                                                           |       | 26 | ** ** | **—** | ** ** | **—** |   | — |   |
|                                            |       |                                                           |       |                                                             |       |   |   |   |   |   |   |   |   |
| Total  benefit cost                             | ** ** | **$**                                                          | **6**      | ** **                                                       | **$**      | **78** |   | $ | 196 | ** ** | **$** | **6** | ** ** | **$** | **33** |   | $ | 65 |   |

 

Relatedto the freezing of Northwest’s defined benefit plans covering domesticemployees in 2006, Northwest recorded pension curtailment charges andgains.  Curtailment charges and gainshave been recorded as a component of net reorganization expense.  Northwest has recorded the following pensioncurtailment amounts:

|                            | ** ** | **Successor**               | ** ** | **Predecessor**            | ** ** |
|----------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **Period from**        | ** ** | **Period from**       | ** ** | **Three Months** | ** ** | **Period from** | ** ** | **Six Months** | ** ** |
| ** **                 | ** ** | **June 1 to**     | ** ** | **April 1 to**   | ** ** | **Ended ** | ** ** | **January 1 to** | ** ** | **Ended** | ** ** |
| **(In millions)**     | ** ** | **June 30, 2007** | ** ** | **May 31, 2007** | ** ** | **June 30, 2006 ** | ** ** | **May 31, 2007** | ** ** | **June 30, 2006** | ** ** |
| Curtailment charge  (gain) |       |                        |       |                       |       |   |   |   |   |   |   |
| Pilot Plan                 | ** ** | $                           | —     |                       | $          | — |   | $ | — |   | $ | — |   | $ | (49 | ) |
|                            |            |                             |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |

 

With the Company’s adoption of fresh-start reporting, entries were madeto eliminate all balances related to other comprehensive income therefore,there are no amounts to be amortized into net periodic benefit cost for theremainder of 2007.

***Weighted-averageassumptions used to determine net periodic pension and other benefit costs forthe periods ended June 30, 2007 and December 31, 2006:***
|                                           | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **2007**  (1)   | ** ** | **2006**                | ** ** | **2007**  (1) | ** ** | **2006** | ** ** |
| Discount rate                             | ** ** | **6.17**                  | **%**      | 5.71                    | %          | **6.17** | **%** | 5.71 | % |
| Expected long-term return on plan assets  | ** ** | **9.00**                  | **%**      | 9.00                    | %          | **5.00** | **%** | 5.00 | % |
| Rate of  future compensation increase (2) | ** ** | **3.50**                  | **%**      | 3.50                    | %          | **n/a** | ** ** | n/a |   |

 

----

(1)The discount rate used for the period fromJanuary 2007 through May 2007 was 5.93%.

(2) Not applicable to frozen plans.

The Company has adopted and implemented an investment policy for thedefined benefit pension plans that incorporates a strategic asset allocationmix designed to best meet the Company’s long-term pension obligations.  This asset allocation policy mix is reviewedevery 2-3 years and, on a regular basis, actual allocations are rebalancedtoward the prevailing targets.  Nomaterial changes have occurred to the investment policy or the asset allocationmix from December 31, 2006 to June 30, 2007.

For measurement purposes, an 8.5% annual rate of increase in the per capitacost of covered health care benefits was assumed for 2007.  The rate was assumed to decrease 0.5% peryear for seven years to 5.0% in 2014 and remain at that level thereafter.  Assumed health care cost trend rates have asignificant impact on the amounts reported under other benefits, above, for thehealth care plans.

35

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***As of June 30, 2007, a one percent-changein assumed health care cost trend rates would have the following effects:***
| **(In millions)**                                         | ** ** | **One Percentage-  Point Increase** | ** ** | **One Percentage-  Point Decrease** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| Effect on total of service and interest  cost components  | ** ** | **$**                                         | **0.6**    | ** **                                    | **$**      | **(0.5** | **)** |
| Effect on accumulated postretirement  benefit obligations | ** ** | **66.4**                                      | ** ** | **(58.5**                                     | **)**      |
|                                                           |            |                                               |            |                                               |            |  |  |

 

***The future benefitpayments expected to be made by the pension and other postretirement benefitplans are shown below:***
| (In millions)                                | ** ** | ** **            | ** ** | ** **                                                        | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-------------------------------------------------------------------|------------|
| **Estimated Future  Benefit Payments:** | ** ** | **Pension  Benefits** | ** ** | **Employer   Provided Other  Postretirement  Benefits** | ** ** |
| 2007 (1)                                          | ** ** | **$**                 | **457**    | ** **                                                        | **$**      | **46** | ** ** |
| 2008                                              | ** ** | **476**               | ** ** | **47**                                                            | ** ** |
| 2009                                              | ** ** | **494**               | ** ** | **49**                                                            | ** ** |
| 2010                                              | ** ** | **519**               | ** ** | **51**                                                            | ** ** |
| 2011                                              | ** ** | **539**               | ** ** | **53**                                                            | ** ** |
| Years 2012-2016                                   | ** ** | **3,077**             | ** ** | **289**                                                           | ** ** |
|                                                   |            |                       |            |                                                                   |            |  |  |

 

----

| (1) Reflects  expected benefit payments for calendar year 2007 |
|----------------------------------------------------------------|

 

**Note 15 – Stock-Based Compensation**

Prior to the Effective Date, the Company maintained stock incentiveplans for officers and key employees of the Company (the “Prior ManagementPlans”) and a stock option plan for pilot employees (the “Pilot Plan”).  On the Effective Date, outstanding awardsunder the Prior Management Plans and Pilot Plan were cancelled in accordancewith the terms of the Plan.  On theEffective Date, the Management Equity Plan (“the 2007 Plan”) of the SuccessorCompany provided for in the Plan of Reorganization became effective.   The 2007 Plan is a stock-based incentivecompensation plan, under which the Compensation Committee of the Board ofDirectors has the authority to grant cash awards and/or the following type ofequity-based awards: (1) stock options, (2) stock appreciation rights, (3)restricted stock, (4) restricted stock units, and/or (5) other stock-basedawards, including performance-based awards. Each of these awards may be granted alone, in conjunction with, or intandem with other awards under the 2007 Plan. Awards may be to any employee of the Company or its subsidiaries.  The number of participants participating inthe 2007 Plan will vary from year to year. The aggregate number of shares of common stock of the successor Companyavailable for issuance under the 2007 Plan is 21.3 million of which 13.1million have been granted and 8.2 million shares remained available for futureawards under the 2007 Plan as of June 30, 2007. The Company adopted SFAS No. 123 (Revised 2004), *Share-Based Payment*(“SFAS No. 123R”),using the modified-prospective transition method, effective January 1,2006.  Under SFAS No. 123R, non-cash compensationexpense for equity awards is recognized over the vesting period, generally therequired service period.  In connectionwith the Company’s emergence from bankruptcy, a portion of the awards vestedimmediately with the remaining vesting in one year or over four years; inaddition these emergence related awards that vest on or before May 2008 arealso subject to a repayment provision until May 2008.  Thus under SFAS No. 123R the correspondingexpense is recognized over this implied service period.  Given this requirement, the tables belowexclude awards vested subject to this repayment provision.   The Company uses straight-line recognitionfor awards subject to graded vesting. SFAS No. 123R also requires the Company to estimate forfeitures of stockcompensation awards as of the grant date of the award.

The compensation expense related to stock options and restricted stockunits granted to management employees in connection with the Company’semergence from bankruptcy, which is quantified below, does not representpayments actually made to these employees. Rather, the amounts represent the non-cash compensation expenserecognized by the Company in connection with these awards for financialreporting purposes.  The actual value ofthese awards to the recipients will depend on the trading price of theCompany’s stock when the awards vest.

***Stock Options:***  Stockoption awards are granted with an exercise price equal to the closing salesprice of the Company’s common stock on the date of grant.  Generally, outstanding employee stock optionawards vest over four years and have a 10-year term.

The fair value of option awards are estimated on the date of grant usingthe Black-Scholes option pricing model based on several assumptions.  The risk-free interest rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of grant. The dividend yield on our common stock is assumed to be zero since inthe past the Company has not paid dividends and has no current plans to do soin the future.  The expected market pricevolatility assumption was developed considering both historical and impliedvolatilities of other airlines. Volatility data was not considered for the Company due to itsbankruptcy.  The expected life of theoptions was developed using SAB No. 107, Topic 14, *Share-Based Payments*.

36

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The weighted-average fair value of options granted in connection withthe Company’s emergence from bankruptcy was determined based on the followingassumptions:
|                                  | ** ** | **June 30, 2007** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| Risk-free interest rate          |       | 4.99% - 5.11                | %          |
|                             |       |                        |       |
| Dividend yield                   |       | 0.0                         | %          |
|                             |       |                        |       |
| Expected market price volatility |       | 54.0                        | %          |
|                             |       |                        |       |
| Expected life of options (years) |       | 6                           |       |

 

A summary of the option activity under the 2007 Plan as of June 30, 2007and changes during the quarter then ended are presented below:
| (shares in thousands)              | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|
| Outstanding at beginning of period           |       | —     |       | $                                       | —     |                                                 |       |   |
| Granted                                      |       | 3,565      |       | 22.47                                   |       |                                                 |       |
| Exercised                                    |       | —     |       | —                                  |       |                                                 |       |
| Forfeited or expired                         |       | —     |       | —                                  |       |                                                 |       |
| Outstanding at end of period                 |       | 3,565      |       | 22.47                                   |       | 9.98                                                 |       |
|                                         |       |       |       |                                    |       |                                                 |       |
| Vested or expected to vest at end of  period |       | 3,212      |       | 22.47                                   |       | 9.92                                                 |       |
|                                              |            |            |            |                                         |            |                                                      |            |  |

 

The weighted-average grant-date fair value of options granted inconnection with the Company’s emergence from bankruptcy was $12.75.  There were no options exercised during June2007.  Due to the Company’s repaymentprovision discussed above there were no stock options exercisable as of June30, 2007 under SFAS No. 123R.  Excludingthis repayment provision, approximately 396,000 options would be exercisableper the grant.  The aggregate intrinsicvalue of options outstanding was zero at June 30, 2007.  The Company had $40.6 million of unrecognizednon-cash compensation expense related to nonvested options.  The Company expects to recognize this expenseover a weighted-average period of approximately 2.1 years.

***Restricted Stock Units:***** **The fair value of Restricted Stock Units (“RSUs”) is determined based onthe closing sales price of the Company’s common stock on the date ofgrant.  Generally, outstanding RSUs vestin one year or over four years.

A summary of the status of the Company’s RSUs as of June 30, 2007, andchanges during the quarter then ended, are presented below:
| (shares in thousands)  | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** | **Weighted-  Average  Remaining   Contractual  Term** | ** ** |
|----------------------------------|------------|------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Nonvested at beginning of period |       | —     |       | $                                                        | —     |                                                       |       |   |
| Granted                          |       | 9,513      |       | 25.15                                                    |       |                                                       |       |
| Vested                           |       | —     |       | —                                                   |       |                                                       |       |
| Forfeited                        |       | (2         | )          | 25.15                                                    |       |                                                       |       |
| Nonvested  at end of period      |       | 9,511      |       | 25.15                                                    |       | 9.92                                                       |       |
|                                  |            |            |            |                                                          |            |                                                            |            |  |

 

As of June 30, 2007, there was $210.3 million of total unrecognizednon-cash compensation cost related to RSUs granted under the Plan.  The compensation cost is expected to berecognized over a weighted-average period of approximately 2.0 years.  There are no vested RSUs due to SFAS No. 123Rrepayment provisions discussed previously.

37

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Excludingthis provision, approximately 891,000 RSUs were vested as of June 30, 2007 andthe total fair value of these RSUs was $22.4 million.

***Other Awards:***  TheCompany also issued certain awards that are accounted for as a liability in theCondensed Consolidated Balance Sheet because such awards provide for settlementin cash.  In June 2007, the Companygranted approximately 264,000 RSUs to be settled in cash and approximately 61,000Stock Appreciation Rights (“SARs”).  EachRSU represents the right to receive a cash payment equal to the closing salesprice of the Company’s common stock multiplied by the number of shares subjectto the award on the applicable vesting date. SARs provide participants the right to receive the excess (if any) ofthe fair market value of the number of shares of common stock subject to theaward at the time of exercise over the exercise price of the SAR.  The RSUs vest in one year or over four yearsand the SARs vest over a four year period.  The Company had $6.3 million of unrecognized compensation cost relatedto liability awards.  The Company expectsto recognize this expense over a weighted-average period of approximately 1.6years.

During the month of June 2007, the total stock-based non-cashcompensation expense related to stock-based plans was $9.5 million.  Additionally, the Company recorded $0.3million in stock-based compensation expense related to liability awards.  There was no corresponding tax benefit in2007 or 2006 related to the stock-based compensation, as the Company records afull valuation allowance against its deferred tax assets due to the uncertaintyregarding the ultimate realization of those assets.   See “Note 8 – Income Taxes” for additionalinformation.

**Note 16 – Subsequent Events**

During the month of July 2007, the Company closed on the sale of nineA319 aircraft, consistent with a letter agreement signed in May 2007.  Consistent with the Company’s business plan,the sale of the aircraft further optimized the Company’s current fleet.

In July 2007, the Company closed on the refinancing of its 1994 NWATrust No. 2 Senior Aircraft Notes (“Trust 2”). In conjunction with the refinancing, the Company agreed with noteholdersto redeem $168 million of notes at par plus accrued interest.  Additionally, the Company allowed noteholdersan unsecured bankruptcy claim representing a pre-payment premium on thenotes.  Upon redeeming the notes, theCompany refinanced the 13 A320 aircraft previously financed under Trust 2,along with two other A320 aircraft in a privately placed financing transaction.

38

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**Item 2.****          ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

**Overview**

On September 14, 2005 (the “Petition Date”),NWA Corp. and 12 of its direct and indirect subsidiaries (collectively, the “Debtors”)filed voluntary petitions for relief under Chapter 11 of the United StatesBankruptcy Code with the United States Bankruptcy Court for the SouthernDistrict of New York (the “Bankruptcy Court”). Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., anindirect subsidiary of NWA Corp., also filed a voluntary petition for reliefunder Chapter 11.  On May 18, 2007, theBankruptcy Court entered an order approving and confirming the Debtors’ FirstAmended Joint and Consolidated Plan of Reorganization Under Chapter 11 of theBankruptcy Code (as confirmed, the “Plan” or “Plan of Reorganization”).  The Plan became effective and the Debtorsemerged from bankruptcy protection on May 31, 2007 (the “Effective Date”).

On the Effective Date, the Company implementedfresh-start reporting in accordance with SOP 90-7.  Thus the consolidated financial statementsprior to June 1, 2007 reflect results based upon the historical cost basis ofthe Company while the post-emergence consolidated financial statements reflectthe new basis of accounting incorporating the fair value adjustments made inrecording the effects of fresh-start reporting. Therefore, the post-emergence periods are not comparable to thepre-emergence periods.  However, fordiscussions on the results of operations, the Company has combined the resultsfor the two and five months ended May 31, 2007 with the one month ended June30, 2007.  The combined periods have beencompared to the three and six months ended June 30, 2006.  The Company believes that the combinedfinancial results provide management and investors a better perspective of theCompany’s core business and on-going operational financial performance andtrends for comparative purposes.

**SecondQuarter 2007 Results**

For the combined quarter ended June 30, 2007,the Company recorded net income applicable to common stockholders of $2.1billion.  This compares to a secondquarter 2006 net loss applicable to common stockholders of $285 million.  Excluding reorganization and related items,the Company reported a combined second quarter 2007 pre-tax profit of $273million.  This compares to a prior yearsecond quarter pre-tax profit of $179 million, excluding reorganization items.

Operating revenues in the second quarterdecreased 3.3 percent versus the second quarter of 2006 to $3.2 billion.  System consolidated passenger revenueincreased 0.1 percent to more than $2.8 billion on 0.9 percent additionalavailable seat miles (“ASMs”), resulting in a 0.8 percent decrease in unitrevenue, excluding fresh-start adjustments.

Operating expenses in the quarter decreased5.7 percent year-over-year to $2.82 billion, while mainline unit costs,excluding fuel, decreased by 5.2 percent on 1.6 percent more ASMs.  During the second quarter, fuel averaged$2.04 per gallon, excluding taxes and mark-to-market expense related to futureperiod fuel derivative contracts, down 2.7 percent versus the second quarter oflast year.

The Company’s operational performance in Juneand July was negatively impacted by flight cancellations.  The Company has implemented various measures,including reaching an agreement with its pilot union to address various pilotstaffing concerns, that the Company believes should improve the Company’soperational reliability.  However, thefailure of the Company to improve its operational reliability from that of theJune and July operational results could have a material adverse impact on theCompany’s business and future financial performance.

The Company recorded a non-cash income taxexpense in the combined second quarter of 2007 of $68 million.  Because of its net operating losscarryforwards, the Company expects to pay minimal cash taxes for theforeseeable future.

As of June 30, 2007, the Company’s totalliquidity, consisting of unrestricted cash, cash equivalents and short-terminvestments, was $3.3 billion.  Thisamount excludes $706 million of restricted short-term investments (which mayinclude amounts held as cash).  Includedin the Company’s restricted cash balance on June 30, 2007 were cash proceeds of$157 million related to the sale of unsecured claims on behalf of certainemployees which were subsequently distributed.

39

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**OperatingStatistics – Three and six months ended June 30, 2007 and 2006**

Information with respect to the Company’soperating statistics follows:
|                                                                      |
|----------------------------------------------------------------------|
| **PASSENGER  AND REGIONAL CARRIER REVENUES AND STATISTICAL RESULTS** |
| ** **                                                           |

 
| ** **                                 | ** ** | **Three months ended  June 30** | ** **   | **Percent** | ** ** | **Six months ended  June 30** | ** ** | **Percent** | ** **   |
|--------------------------------------------|------------|------------------------------------------------|--------------|-------------|------------|----------------------------------------------|------------|-------------|--------------|
| ** **                                 | ** ** | **2007**                                       | ** **   | **2006**    | ** ** | **Change**                                   | ** ** | **2007**    | ** **   | **2006** | ** ** | **Change** | ** ** |
| **Scheduled  service - Consolidated: (1)** |       |                                           |         |        |       |                                         |       |        |         |   |   |   |   |
| Available seat miles (ASM) (millions)      | ** ** | **23,656**                                     | ** **   | 23,437      |       | 0.9                                          | ** ** | **46,549**  | ** **   | 45,640 |   | 2.0 |   |
| Revenue passenger miles (RPM) (millions)   | ** ** | **20,192**                                     | ** **   | 20,246      |       | (0.3                                         | )          | **38,810**  | ** **   | 38,531 |   | 0.7 |   |
| Passenger load factor                      | ** ** | **85.4**                                       | **%**        | 86.4        | %          | (1.0                                         | )pts.      | **83.4**    | **%**        | 84.4 | % | (1.0 | )pts. |
| Revenue passengers (millions)              | ** ** | **17.4**                                       | ** **   | 17.8        |       | (2.2                                         | )          | **33.0**    | ** **   | 33.5 |   | (1.5 | ) |
| Passenger revenue per RPM (yield)          | ** ** | **13.82**                                      | ***¢*** | 13.94       | *¢*   | (0.9                                         | )          | **13.62**   | ***¢*** | 13.52 | *¢* | 0.7 |   |
| Passenger revenue per ASM (RASM)           | ** ** | **11.80**                                      | ***¢*** | 12.04       | *¢*   | (2.0                                         | )          | **11.35**   | ***¢*** | 11.41 | *¢* | (0.5 | ) |
|                                       |       |                                           | ** **   |        |       |                                         |       |        | ** **   |   |   |   |   |
| **Scheduled  service - Mainline: (2)**     |       |                                           | ** **   |        |       |                                         |       |        | ** **   |   |   |   |   |
| Available seat miles (ASM) (millions)      | ** ** | **21,897**                                     | ** **   | 21,559      |       | 1.6                                          | ** ** | **43,148**  | ** **   | 41,861 |   | 3.1 |   |
| Revenue passenger miles (RPM) (millions)   | ** ** | **18,811**                                     | ** **   | 18,769      |       | 0.2                                          | ** ** | **36,303**  | ** **   | 35,711 |   | 1.7 |   |
| Passenger load factor                      | ** ** | **85.9**                                       | **%**        | 87.1        | %          | (1.2                                         | )pts.      | **84.1**    | **%**        | 85.3 | % | (1.2 | )pts. |
| Revenue passengers (millions)              | ** ** | **14.1**                                       | ** **   | 14.3        |       | (1.4                                         | )          | **27.0**    | ** **   | 26.9 |   | 0.4 |   |
| Passenger revenue per RPM (yield)          | ** ** | **12.90**                                      | ***¢*** | 12.92       | *¢*   | (0.2                                         | )          | **12.75**   | ***¢*** | 12.53 | *¢* | 1.8 |   |
| Passenger  revenue per ASM (RASM)          | ** ** | **11.08**                                      | ***¢*** | 11.25       | *¢*   | (1.5                                         | )          | **10.73**   | ***¢*** | 10.69 | *¢* | 0.4 |   |

 

----

| (1) | Consolidated statistics include Northwest Airlink  regional carriers.                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Mainline  statistics exclude Northwest Airlink regional carriers, which is consistent  with how the Company reports statistics to the Department of Transportation  (“DOT”). |

 

40

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|                                                 |
|-------------------------------------------------|
| **MAINLINE  OPERATING STATISTICAL RESULTS (1)** |
|                                            |

 
| ** **                                                                                                                                       | ** ** | **Three months ended  June 30** | ** **    | **Percent** | ** ** | **Six months ended  June 30** | ** ** | **Percent** | ** **   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|---------------|-------------|------------|----------------------------------------------|------------|-------------|--------------|
| ** **                                                                                                                                       | ** ** | **2007**                                       | ** **    | **2006**    | ** ** | **Change**                                   | ** ** | **2007**    | ** **   | **2006** | ** ** | **Change** | ** ** |
| Total operating  ASM (millions)                                                                                                                  | ** ** | **21,921**                                     |          | 21,569      |       | 1.6                                          | ** ** | **43,188**  |         | 41,899 |   | 3.1 |   |
|                                                                                                                                             |       |                                           |          |        |       |                                         |       |        |         |   |   |   |   |
| Passenger  service operating expense per total ASM (2) (3)                                                                                       |       | **10.47**                                      | ***¢***  | 10.99       | *¢*   | (4.7                                         | )          | **10.39**   | ***¢*** | 11.07 | *¢* | (6.1 | ) |
| Mainline fuel  expense per total ASM                                                                                                             | ** ** | **3.42**                                       | ***¢***  | 3.55        | *¢*   | (3.7                                         | )          | **3.19**    | ***¢*** | 3.38 | *¢* | (5.6 | ) |
|                                                                                                                                             |       |                                           | ** **    |        |       |                                         |       |        | ** **   |   |   |   |   |
| Mark-to-market  gains (losses) per total ASM related to fuel derivative contracts that settle  in future periods                                 |       | **(0.03**                                      | **)*¢*** | —      | *¢*   | n/m                                          |       | **0.04**    | ***¢*** | — | *¢* | n/m |   |
|                                                                                                                                             |       |                                           | ** **    |        |       |                                         |       |        | ** **   |   |   |   |   |
| Mainline fuel  expense per total ASM, excluding mark-to-market gains related to fuel  derivative contracts that settle in future periods         |       | **3.39**                                       | ***¢***  | 3.55        | *¢*   | (4.5                                         | )          | **3.23**    | ***¢*** | 3.38 | *¢* | (4.4 | ) |
|                                                                                                                                             |       |                                           | ** **    |        |       |                                         |       |        | ** **   |   |   |   |   |
| Cargo ton miles  (millions)                                                                                                                      | ** ** | **505**                                        | ** **    | 587         |       | (14.0                                        | )          | **962**     | ** **   | 1,113 |   | (13.6 | ) |
| Cargo revenue  per ton mile                                                                                                                      | ** ** | **39.19**                                      | ***¢***  | 40.15       | *¢*   | (2.4                                         | )          | **40.24**   | ***¢*** | 40.40 | *¢* | (0.4 | ) |
| Fuel gallons  consumed (millions)                                                                                                                | ** ** | **390**                                        | ** **    | 402         |       | (3.0                                         | )          | **769**     | ** **   | 779 |   | (1.3 | ) |
| Average fuel  cost per gallon, excluding taxes                                                                                                   | ** ** | **205.89**                                     | ***¢***  | 209.52      | *¢*   | (1.7                                         | )          | **191.74**  | ***¢*** | 198.65 | *¢* | (3.5 | ) |
|                                                                                                                                             |       |                                           | ** **    |        |       |                                         |       |        | ** **   |   |   |   |   |
| Mark-to-market  gains (losses) per fuel gallons consumed related to fuel derivative contracts   that settle in future periods               |       | **(2.01**                                      | **)*¢*** | —      | *¢*   | n/m                                          |       | **2.70**    | ***¢*** | — | *¢* | n/m |   |
|                                                                                                                                             |       |                                           | ** **    |        |       |                                         |       |        | ** **   |   |   |   |   |
| Average fuel  cost per gallon, excluding fuel taxes and mark-to-market gains related to  fuel derivative contracts that settle in future periods |       | **203.88**                                     | ***¢***  | 209.52      | *¢*   | (2.7                                         | )          | **194.44**  | ***¢*** | 198.65 | *¢* | (2.1 | ) |
|                                                                                                                                             |       |                                           |          |        |       |                                         |       |        | ** **   |   |   |   |   |
| Number of  operating aircraft at end of period                                                                                                   | ** ** | ** **                                     |          |        |       |                                         |       | **372**     | ** **   | 371 |   | 0.3 |   |
| Full-time  equivalent employees at end of period                                                                                                 | ** ** | ** **                                     |          |        |       |                                         |       | **29,589**  | ** **   | 30,796 |   | (3.9 | ) |

 

----

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

 
|                                              | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| **(In millions)**                       | ** ** | **2007**                                       | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| Regional carrier  expenses (a)               | ** ** | **$**                                          | **305**    |                                         | $          | 366 | ** ** | **$** | **579** |   | $ | 732 |   |
| Freighter  operations                        | ** ** | **154**                                        |       | 198                                          | ** ** | **288** |   | 388 |   |
| MLT Inc. - net  of intercompany eliminations | ** ** | **50**                                         |       | 51                                           | ** ** | **105** |   | 115 |   |
| Other                                        | ** ** | **19**                                         |       | 10                                           | ** ** | **35** |   | 26 |   |
|                                              |            |                                                |            |                                              |            |  |  |  |  |  |  |  |  |

 

41

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**Results ofOperations – Three months ended June 30, 2007 and 2006**

*Operating Revenues*.  Operating revenues decreased 3.3% ($110million), the result of reductions in regional carrier revenues, cargo revenue,and other revenue, partially offset by higher system passenger revenue.

*System Passenger Revenues.* In the followinganalysis by region, mainline statistics exclude Northwest Airlink regionalcarriers, which is consistent with how the Company reports statistics to the DOT.  Onthe Effective Date, in conjunction with implementing fresh-start reporting, theCompany changed its policies pertaining to the accounting of frequent flyerobligations and breakage of passenger tickets. Frequent flyer obligations are now recognized on a deferred revenuemethod versus an incremental cost method. The impact of the changes to accounting for frequent flyer obligationson the Successor Company was a reduction of $6.7 million in mainline passengerrevenue and an increase of $1.3 million in regional carrier revenue in June2007.  Adjustments to air trafficliability are now recognized as revenue based on the delayed recognitionapproach, when the validity period of the ticket has expired, versus the use ofhistorical trends and estimates.  Theoverall impact of this change on passenger revenue was a reduction of $27.4million in June 2007.  The followinganalysis by region outlines the Company’s year-over-year performance asreported and excluding the accounting policy changes.
| ** **                          | ** ** | **Mainline** | ** ** | **Total**   | ** ** | ** **   | ** ** |
|-------------------------------------|------------|--------------|------------|-------------|------------|--------------|------------|
| ** **                          | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** | **Mainline** | ** ** | **Consolidated** | ** ** |
| **As  reported:**                   |       |         |       |        |       |         |       |   |   |   |   |
| **2007**                            |       |         |       |        |       |         |       |   |   |   |   |
| Passenger revenues (in millions)    |       | $            | 1,548      |        | $          | 525          |       | $ | 354 |   | $ | 2,427 |   | $ | 2,791 |   |
|                                |       |         |       |        |       |         |       |   |   |   |   |
| **Increase  (Decrease) from 2006:** |       |         |       |        |       |         |       |   |   |   |   |
| Passenger revenues (in millions)    |       | $            | (65        | )           | $          | 32           |       | $ | 35 |   | $ | 2 |   | $ | (31 | ) |
| Percent                             |       | (4.0         | )%         | 6.5         | %          | 11.0         | %          | 0.1 | % | (1.1 | )% |
|                                |       |         |       |        |       |         |       |   |   |   |   |
| Scheduled service ASMs (capacity)   |       | (0.2         | )%         | 4.1         | %          | 4.2          | %          | 1.6 | % | 0.9 | % |
| Scheduled service RPMs (traffic)    |       | (0.1         | )%         | 0.9         | %          | 0.3          | %          | 0.2 | % | (0.3 | )% |
| Passenger load factor               |       | 0.1          | pts.       | (2.7        | )pts.      | (3.4         | )pts.      | (1.2 | )pts. | (1.0 | )pts. |
| Yield                               |       | (3.9         | )%         | 5.4         | %          | 10.8         | %          | (0.2 | )% | (0.9 | )% |
| Passenger RASM                      |       | (3.8         | )%         | 2.1         | %          | 6.7          | %          | (1.5 | )% | (2.0 | )% |
|                                |       |         |       |        |       |         |       |   |   |   |   |
| **Excluding  fresh-start:**         |       |         |       |        |       |         |       |   |   |   |   |
| **2007**                            |       |         |       |        |       |         |       |   |   |   |   |
| Passenger revenues (in millions)    |       | $            | 1,579      |        | $          | 529          |       | $ | 353 |   | $ | 2,461 |   | $ | 2,824 |   |
|                                |       |         |       |        |       |         |       |   |   |   |   |
| **Increase  (Decrease) from 2006:** |       |         |       |        |       |         |       |   |   |   |   |
| Passenger revenues (in millions)    |       | $            | (34        | )           | $          | 36           |       | $ | 34 |   | $ | 36 |   | $ | 2 |   |
| Percent                             |       | (2.1         | )%         | 7.3         | %          | 10.7         | %          | 1.5 | % | 0.1 | % |
|                                |       |         |       |        |       |         |       |   |   |   |   |
| Yield                               |       | (2.0         | )%         | 6.4         | %          | 10.3         | %          | 1.2 | % | 0.3 | % |
| Passenger RASM                      |       | (1.9         | )%         | 3.0         | %          | 6.2          | %          | (0.1 | )% | (0.8 | )% |

 

*Cargo Revenues*.  Cargo revenues decreased 16.1% ($38 million)to $198 million due primarily to the removal of two Boeing 747F from thefreighter fleet which drove a 14.0% reduction in cargo traffic.  In addition cargo revenue yield decreased2.4%.

*Other Revenue. *Other revenue decreased 17.9% ($42 million)due to reduced partner revenue, and the change in presentation of regionalcarrier related revenue and expense items, as described in “Item 1. FinancialStatements, Note 4 – Significant Accounting Policies,” partially offset by theportion of payments received for frequent flyer miles that is now recorded inOther Revenue.

42

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*Operating Expenses*.  Operating expenses decreased 5.7% ($172 million)for the three months ended June 30, 2007. As a result of the adoption of fresh-start reporting, the Company’sfinancial statements on or after June 1, 2007 are not comparable with itspre-emergence financial statements because they are, in effect, those of a newentity.  In addition to the fair valueadjustments required for fresh-start reporting, the Company changed itspolicies pertaining to the accounting for frequent flyer obligations andbreakage of passenger tickets.  Theeffects of fresh-start reporting and the policy changes on the Company’sCondensed Consolidated Statements of Operations are itemized in column(1).  On April 24, 2007, Mesaba Aviation,Inc. was acquired by the Company and became a wholly-owned consolidatedsubsidiary, the impact of which is itemized in column (2).  In conjunction with the Amended AirlineServices Agreement with Pinnacle Airlines, Inc. and the Stock Purchase andReorganization Agreement with Mesaba Aviation, Inc., the Company changed itspresentation of certain regional carrier related revenue and expense itemseffective January 1, 2007.  This changein presentation had no impact on the Company’s combined operating income forthe three months ended June 30, 2007 and is itemized in column (3).  Excluding the items described above, thecomparable year-over-year operating performance variances are itemized incolumn (4).  The following table andnotes present operating expenses for the three months ended June 30, 2007 and2006 and describe significant year-over-year variances:
| ** **                                 | ** ** | ** **                        | ** ** | ** **              | ** ** | **Increase (Decrease) Due To:** | ** ** | ** **                    | ** ** | ** **                     | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **Three Months Ended**  | ** ** | **(1)**                 | ** ** | **(2)**                                        | ** ** | **(3)**                       | ** ** | **(4)**                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In millions)**                     | ** ** | **Combined  June 30,  2007** | ** ** | **June 30,  2006** | ** ** | **Fresh  Start**                               | ** ** | **Mesaba  Net of  Elim** | ** ** | **Regional  Carrier  Reclass** | ** ** | **Operations** | ** ** | **Total  Incr (Decr)  from 2006** | ** ** | **Percent  Change** | ** ** |
| **OPERATING  EXPENSES**                    | ** ** | ** **                        | ** ** | ** **              | ** ** | ** **                                     | ** ** | ** **                    | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Aircraft fuel and taxes                    |       | $                                 | 849        |                    | $          | 886                                            |       | $                             | —     |                           | $          | 3 |   | $ | — |   | $ | (40 | ) A | $ | (37 | ) | (4.2 | )% |
| Salaries, wages and benefits               |       | 617                               |       | 675                     |       | (8                                             | )          | 20                            |       | —                         |       | (70 | ) B | (58 | ) | (8.6 | ) |
| Selling and marketing                      |       | 189                               |       | 190                     |       | —                                         |       | —                        |       | —                         |       | (1 | ) C | (1 | ) | (0.5 | ) |
| Aircraft maintenance materials and repairs |       | 183                               |       | 183                     |       | —                                         |       | 5                             |       | —                         |       | (5 | ) C | — |   | — |   |
| Other rentals and landing fees             |       | 140                               |       | 142                     |       | —                                         |       | 3                             |       | —                         |       | (5 | ) C | (2 | ) | (1.4 | ) |
| Depreciation and amortization              |       | 124                               |       | 134                     |       | (1                                             | )          | 2                             |       | 1                              |       | (12 | ) D | (10 | ) | (7.5 | ) |
| Aircraft rentals                           |       | 95                                |       | 54                      |       | —                                         |       | —                        |       | 47                             |       | (6 | ) C | 41 |   | 75.9 |   |
| Regional carrier expenses                  |       | 197                               |       | 366                     |       | —                                         |       | (32                           | )          | (102                           | )          | (35 | ) E | (169 | ) | (46.2 | ) |
| Other                                      |       | 430                               |       | 366                     |       | —                                         |       | 7                             |       | —                         |       | 57 |   F | 64 |   | 17.5 |   |
| Total operating expenses                   |       | $                                 | 2,824      |                    | $          | 2,996                                          |       | $                             | (9         | )                              | $          | 8 |   | $ | (54 | ) | $ | (117 | ) | $ | (172 | ) | (5.7 | )% |

 

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| A. | Aircraft fuel and taxes decreased due to a 1.7%  decrease in the average fuel cost per gallon to $2.06 and a 3.0% decrease in  gallons consumed. Fuel expense for the quarter ended June 30, 2007 includes  $6.4 million in net fuel derivative contract losses, consisting of $7.8  million in mark-to-market losses related to fuel derivative contracts that  will settle during the remainder of 2007, partially offset by gains of $1.4  million for contracts were settled in the current period.   |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| B. | Salaries and wages increased $52 million due to  increased volume, an employee profit sharing program and performance  incentive plan, stock-based compensation, partially offset by $22 million in  labor savings related to reorganization objectives. Benefit expenses decreased  $101 million due to a higher pension discount rate and improved asset  returns, lower group insurance costs per employee, and savings related to  reorganization objectives.                                         |
| C. | Selling and marketing expense, aircraft maintenance  materials and repairs expense, other rentals and landing fees, and aircraft  rentals were relatively flat year-over-year.                                                                                                                                                                                                                                                                                                                            |
| D. | Depreciation and amortization reductions were due  largely to the retirement of the DC10 fleet, partially offset by incremental  deliveries of A330 aircraft.                                                                                                                                                                                                                                                                                                                                             |
| E. | Regional carrier expense decreased year-over-year  primarily due to the reduction in regional carrier capacity and restructured  agreements with our regional airline affiliates.                                                                                                                                                                                                                                                                                                                         |
| F. | Other expenses (which include MLT operating  expenses, outside services, insurance, passenger food, personnel expenses,  communication expenses and supplies) were higher versus prior year due  largely to increased outside services with the shift to third party vendors  versus internally staffed station operations which is offset in salaries,  wages and benefits. Increased passenger claims, post-emergence bankruptcy  related fees, and increased volume also contributed to this variance. |

 

*Other Income and Expense.*  Non-operating expensedecreased $2.4 billion year-over-year, primarily due to a $1.8 billion gain ondebt discharge and $1.3 billion in net gains associated with revaluing ourassets and liabilities at fresh-start. See “Item 1. Financial Statements, Note 7 – Reorganization Related Items”for additional information related to reorganization items.

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**Results ofOperations – Six months ended June 30, 2007 and 2006**

*Operating Revenues*.  Operating revenues decreased 2.1% ($127million), the result of reductions in regional carrier revenues, cargo revenue,and other revenue, partially offset by higher system passenger revenue.

*System PassengerRevenues. *In the followinganalysis by region, mainline statistics exclude Northwest Airlink regionalcarriers, which is consistent with how the Company reports statistics to theDOT.

The following analysis by region outlines the Company’s year-over-yearperformance as reported and excluding accounting policy changes.
| ** **                          | ** ** | **Mainline** | ** ** | **Total**   | ** ** | ** **   | ** ** |
|-------------------------------------|------------|--------------|------------|-------------|------------|--------------|------------|
| ** **                          | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** | **Mainline** | ** ** | **Consolidated** | ** ** |
| **As  reported:**                   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2007**                            | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Passenger revenues (in millions)    |       | $            | 2,963      |        | $          | 1,039        |       | $ | 627 |   | $ | 4,629 |   | $ | 5,285 |   |
|                                |       |         |       |        |       |         |       |   |   |   |   |
| **Increase  (Decrease) from 2006:** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Passenger revenues (in millions)    |       | $            | (20        | )           | $          | 86           |       | $ | 89 |   | $ | 155 |   | $ | 76 |   |
| Percent                             |       | (0.7         | )%         | 9.0         | %          | 16.5         | %          | 3.5 | % | 1.5 | % |
|                                |       |         |       |        |       |         |       |   |   |   |   |
| Scheduled service ASMs (capacity)   |       | 1.4          | %          | 5.4         | %          | 5.7          | %          | 3.1 | % | 2.0 | % |
| Scheduled service RPMs (traffic)    |       | 1.4          | %          | 1.8         | %          | 2.2          | %          | 1.7 | % | 0.7 | % |
| Passenger load factor               |       | —       | pts.       | (3.0        | )pts.      | (3.0         | )pts.      | (1.2 | )pts. | (1.0 | )pts. |
| Yield                               |       | (2.1         | )%         | 7.0         | %          | 14.0         | %          | 1.8 | % | 0.7 | % |
| Passenger RASM                      |       | (2.1         | )%         | 3.5         | %          | 10.1         | %          | 0.4 | % | (0.5 | )% |
|                                |       |         |       |        |       |         |       |   |   |   |   |
| **Excluding  fresh-start:**         | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2007**                            | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Passenger revenues (in millions)    |       | $            | 2,994      |        | $          | 1,043        |       | $ | 626 |   | $ | 4,663 |   | $ | 5,318 |   |
|                                |       |         |       |        |       |         |       |   |   |   |   |
| **Increase  (Decrease) from 2006:** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Passenger revenues (in millions)    |       | $            | 11         |        | $          | 90           |       | $ | 88 |   | $ | 189 |   | $ | 109 |   |
| Percent                             |       | 0.4          | %          | 9.4         | %          | 16.4         | %          | 4.2 | % | 2.1 | % |
|                                |       |         |       |        |       |         |       |   |   |   |   |
| Yield                               |       | (1.0         | )%         | 7.5         | %          | 13.7         | %          | 2.5 | % | 1.3 | % |
| Passenger RASM                      |       | (1.1         | )%         | 4.0         | %          | 9.8          | %          | 1.1 | % | 0.1 | % |

 

*Cargo Revenues.*  Cargo revenues decreased 14.0% ($63 million)to $387 million due primarily to the removal of two Boeing 747F from thefreighter fleet which drove a 13.6% reduction in cargo traffic.  In addition cargo revenue yield decreased0.4%.

*Other Revenue.*  Other revenue decreased 26.8% ($140 million)due to reduced partner revenue, the change in presentation of regional carrierrelated revenue and expense items, as described in “Item 1. FinancialStatements, Note 4 – Significant Accounting Policies,” partially offset by theportion of payments received for frequent flyer miles that is now recorded inOther Revenue.

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*Operating Expenses*.  Operating expenses decreased 6.9% ($405million) for the six months ended June 30, 2007. As a result of the adoption offresh-start reporting, the Company’s financial statements on or after June 1,2007 are not comparable with its pre-emergence financial statements becausethey are, in effect, those of a new entity. In addition to the fair value adjustments required for fresh-startreporting, the Company changed its policies pertaining to the accounting forfrequent flyer obligations and breakage of passenger tickets.  The effects of fresh-start reporting and thepolicy changes on the Company’s Condensed Consolidated Statements of Operationsare itemized in column (1).  On April 24,2007, Mesaba Aviation, Inc. was acquired by the Company and became awholly-owned consolidated subsidiary, the impact of which is itemized in column(2).  In conjunction with the Amended AirlineServices Agreement with Pinnacle Airlines, Inc. and the Stock Purchase andReorganization Agreement with Mesaba Aviation, Inc., the Company changed itspresentation of certain regional carrier related revenue and expense itemseffective January 1, 2007.  This changein presentation had no impact on the Company’s combined operating income forthe six months ended June 30, 2007 and is itemized in column (3).  Excluding the items described above thecomparable year-over-year operating performance variances are itemized incolumn (4). The following table and notes present operating expenses for thesix months ended June 30, 2007 and 2006 and describe significant year-over-yearvariances:
| ** **                                 | ** ** | ** **                        | ** ** | ** **              | ** ** | **Increase (Decrease) Due To:** | ** ** | ** **                    | ** ** | ** **                     | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **Six Months Ended**    | ** ** | **(1)**                 | ** ** | **(2)**                                        | ** ** | **(3)**                       | ** ** | **(4)**                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In millions)**                     | ** ** | **Combined  June 30,  2007** | ** ** | **June 30,  2006** | ** ** | **Fresh  Start**                               | ** ** | **Mesaba  Net of  Elim** | ** ** | **Regional  Carrier  Reclass** | ** ** | **Operations** | ** ** | **Total  Incr (Decr)  from 2006** | ** ** | **Percent  Change** | ** ** |
| **OPERATING  EXPENSES**                    | ** ** | ** **                        | ** ** | ** **              | ** ** | ** **                                     | ** ** | ** **                    | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Aircraft fuel and taxes                    | ** ** | **1,553**                         |       | 1,630                   |       | $                                              | —     |                          | $          | 3                              |       | $ | — |   | $ | (80 | ) A | $ | (77 | ) | (4.7 | )% |
| Salaries, wages and benefits               | ** ** | **1,232**                         |       | 1,351                   |       | (8                                             | )          | 20                            |       | —                         |       | (131 | ) B | (119 | ) | (8.8 | ) |
| Selling and marketing                      | ** ** | **380**                           |       | 384                     |       | —                                         |       | —                        |       | —                         |       | (4 | ) C | (4 | ) | (1.0 | ) |
| Aircraft maintenance materials and repairs | ** ** | **367**                           |       | 372                     |       | —                                         |       | 5                             |       | —                         |       | (10 | ) C | (5 | ) | (1.3 | ) |
| Other rentals and landing fees             | ** ** | **281**                           |       | 285                     |       | —                                         |       | 3                             |       | —                         |       | (7 | ) C | (4 | ) | (1.4 | ) |
| Depreciation and amortization              | ** ** | **245**                           |       | 268                     |       | (1                                             | )          | 2                             |       | 2                              |       | (26 | ) D | (23 | ) | (8.6 | ) |
| Aircraft rentals                           | ** ** | **191**                           |       | 122                     |       | —                                         |       | —                        |       | 99                             |       | (30 | ) C | 69 |   | 56.6 |   |
| Regional carrier expenses                  | ** ** | **408**                           |       | 732                     |       | —                                         |       | (32                           | )          | (205                           | )          | (87 | ) E | (324 | ) | (44.3 | ) |
| Other                                      | ** ** | **839**                           |       | 757                     |       | —                                         |       | 7                             |       | —                         |       | 75 |   F | 82 |   | 10.8 |   |
| Total operating expenses                   | ** ** | **$**                             | **5,496**  |                    | $          | 5,901                                          |       | $                             | (9         | )                              | $          | 8 |   | $ | (104 | ) | $ | (300 | ) | $ | (405 | ) | (6.9 | )% |
|                                            |            |                                   |            |                         |            |                                                |            |                               |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| A. | Aircraft fuel and taxes decreased due to a 3.5% decrease  in the average fuel cost per gallon to $1.92 and a 1.3% decrease in gallons  consumed. Fuel expense for the six months ended June 30, 2007 includes $16.2  million in net fuel derivative contract gains, consisting of $20.7 million in  mark-to-market gains related to fuel derivative contracts that will settle  during the remainder of 2007, partially offset by losses of $4.5 million for  contracts were settled in the current period. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| B. | Salaries, wages and benefits were lower  year-over-year primarily due to savings generated through a higher pension  discount rate and improved asset returns, lower group insurance costs per  employee, and savings related to reorganization objectives, partially offset  by increases in salaries as a result of an employee profit sharing program,  performance incentive plan and stock-based compensation.                                                                                         |
| C. | Selling and marketing expense, aircraft maintenance  materials and repairs expense, other rentals and landing fees, and aircraft  rentals were relatively flat year-over-year.                                                                                                                                                                                                                                                                                                                              |
| D. | Depreciation and amortization reductions were  largely due to the retirement of the DC10 fleet, partially offset by  incremental deliveries of A330 aircraft.                                                                                                                                                                                                                                                                                                                                               |
| E. | Regional carrier expense decreased year-over-year  primarily due to the reduction in regional carrier capacity and restructured  agreements with our regional airline affiliates.                                                                                                                                                                                                                                                                                                                           |
| F. | Other expenses (which include MLT operating  expenses, outside services, insurance, passenger food, personnel expenses,  communication expenses and supplies) were higher versus prior year due  largely to increased outside services with the shift to third party vendors  versus internally staffed station operations which is offset in salaries,  wages and benefits. Increased passenger claims, post-emergence bankruptcy  related fees, and increased volume also contributed to this variance.   |

 

*Other Income and Expense.*  Non-operating expensedecreased $3.0 billion year-over-year, primarily due to a $1.8 billion gain ondebt discharge and $1.3 billion in net gains associated with revaluing ourassets and liabilities at fresh-start. See “Item 1. Financial Statements, Note 7 – Reorganization Related Items”for additional information related to reorganization items.

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**Liquidity and Capital Resources**

As of June 30, 2007, the Company’s total liquidity,consisting of unrestricted cash, cash equivalents and short-term investments,was $3.3 billion.  This amount excludes$706 million of restricted short-term investments (which may include amountsheld as cash).  Included in the Company’srestricted cash balance on June 30, 2007 were cash proceeds of $157 millionrelated to the sale of unsecured claims on behalf of certain employees whichwere subsequently distributed.

*Cash Flows.* Liquidity increasedby $1.3 billion during the six months ended June 30, 2007, primarily due to netcash provided by operating activities, return of credit card holdbacks, andproceeds from the Rights Offering, partially offset by net cash used ininvesting activities and payments of long-term debt and capital lease obligations.

*Operating Activities.*  Net cash provided by operating activities forthe six months ended June 30, 2007 was $1.3 billion, which compares with $758million of cash provided by operating activities for the six months ended June30, 2006.  The $1.3 billion in net cashprovided by operations was due to net income excluding reorganization items(which was comprised mainly of non-cash items), changes in certain assets andliabilities and a decrease in vendor deposits and holdbacks.

*Investing Activities.*  Investing activities during the six monthsended June 30, 2007 included the purchase of four A330-300, two CRJ900, and oneEmbraer 175 aircraft and other related costs. Other related costs includedengine purchases, costs to commission aircraft before entering revenue service,deposits on ordered aircraft, facility improvements and ground equipmentpurchases.   Investing activities for thesix months ended June 30, 2006 included the purchase of one A330-200 aircraftand other related costs.

*Financing Activities. *Financing activities during the six monthsended June 30, 2007 consisted primarily of $750 million in proceeds from theRights Offering, the financing of one A330-300, two CRJ900, and one Embraer 175with long-term debt, and the financing of Boeing 787 pre-delivery deposits,partially offset by debt payments and debt prepayments.  Financing activities in the six months ended June 30, 2006 consisted primarily offinancing one 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).

TheCompany also financed the delivery of three Airbus A330-300 aircraft during thesix months ended June 30, 2007 through non-cash transactions with themanufacturer, which are reflected as long-term debt on the Company’s CondensedConsolidated Balance Sheets, but are not classified as a cash flowactivity.  In connection with theacquisition of these aircraft, the Company entered into long-term debtarrangements.  Under these arrangements,the aggregate amount of debt incurred totaled approximately $251 million.

Investing activities affecting cash flows andnon-cash transactions and leasing activities related to the initial acquisitionof aircraft consisted of the following for the six months ended June 30:
|                 | ** ** | **Investing Activities  Affecting Cash Flows** | ** ** | **Non-cash  Transactions and  Leasing Activities** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **      | ** ** | **2007**                                                      | ** ** | **2006**                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|            |       |                                                          |       |                                                         |       |   |   |   |   |
| Airbus A330-200 | ** ** | **—**                                                    |       | 1                                                            | ** ** | **—** |   | 1 |   |
| Airbus A330-300 | ** ** | **1**                                                         |       | —                                                       | ** ** | **3** |   | — |   |
| CRJ900          | ** ** | **2**                                                         |       | —                                                       | ** ** | **—** |   | — |   |
| Embraer 175     | ** ** | **1**                                                         |       | —                                                       | ** ** | **—** |   | — |   |
|            | ** ** | **4**                                                         |       | 1                                                            | ** ** | **3** |   | 1 |   |

 

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*Debt*.  Maturities of long-term debt,excluding capital lease obligations, through December 31, 2011, are as follows(in millions):
| remainder of   2007 |   | $   | 201    |   |
|------------------------------------|--------|-----|--------|--------|
| 2008                               |   | 592 |   |
| 2009                               |   | 502 |   |
| 2010                               |   | 411 |   |
| 2011                               |   | 597 |   |

 

On August 21, 2006, the Predecessor Company entered into a $1.225billion Super Priority Debtor in Possession and Exit Credit and GuaranteeAgreement (the “DIP/Exit Facility”), consisting of a $1.05 billion term loanfacility and a $175 million revolving credit facility which has been fullydrawn.

The DIP/Exit Facilityinitially bore an interest rate of LIBOR plus 2.50%; however, on March 9, 2007,the Company and the lenders amended the facility to, among other things, reducethe margin applicable to loans by 50 basis points to LIBOR plus 2.0% as well aseliminate minimum credit rating and collateral coverage margin-increasethresholds.  The amendment also permitsNorthwest to grant liens on the collateral securing obligations under theDIP/Exit Facility to support up to $150 million of Northwest’s obligationsunder fuel, interest rate and/or currency exchange hedging agreements with anylender that is a party to the DIP/Exit Facility.

Simultaneous with emergence on the Effective Date, the Successor Companyconverted the DIP/Exit Facility into the Exit Facility (“Exit Facility”).  The final maturity will be August 21,2013.  Principal on the term loan portionof the Exit Facility will be repaid at 1.0% per year with the balance (94%) dueat maturity.  Loans drawn under the $175million revolving credit facility may be borrowed and repaid at the Company’sdiscretion.  Up to $75 million of therevolving credit facility may be utilized by the Company as a letter of creditfacility.  Both loan facilities under theExit Facility will continue to bear interest at LIBOR plus 2.0%.  Letter of credit fees will be charged at thesame credit spread as on the borrowings plus 12.5 basis points.  To the extent that the revolving creditfacility is not utilized, the Company is required to pay an undrawn commitmentfee of 50 basis points per annum.  TheExit Facility received a credit rating of BB from Standard & Poor’s RatingServices (“S&P”) and a Ba3 from Moody’s Investors Service, Inc. (“Moody’s”)and is secured by a first lien on the Company’s Pacific route authorities.  The interest rate as of June 30, 2007 was7.34% on the term loan facility and 7.32% on the revolving credit facility.

The Exit Facility requires ongoing compliance with the followingfinancial covenants:

·      Unrestrictedcash of at least $750 million;

·      Collateralcoverage ratio of at least 1.50 to 1.00; and

·      Fixed charge coverage ratio as set forthbelow:
| Four Consecutive Fiscal Quarters Ending | ** ** | **Minimum Ratio of  EBITDAR to  Consolidated  Fixed Charges (1)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| June 30, 2007                                               |       | 1.30 to 1.00                                                                          |       |
| September 30,  2007                                         |       | 1.40 to 1.00                                                                          |       |
| December 31, 2007 and  each quarter ending thereafter       |       | 1.50 to 1.00                                                                          |       |

 

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(1)    Forpurposes of calculating this ratio, EBITDAR is defined as operating income adjustedto exclude the effects of depreciation, amortization and aircraft rents and toinclude the effects of interest income and governmental reimbursements forlosses resulting from developments affecting the aviation industry.  Earnings also exclude non-recurring non-cashcharges (subject to the inclusion of any cash payments then or thereafter madewith respect thereto) and are determined without giving effect to anyacceleration of rental expense.  Fixedcharges are defined as interest expense and aircraft rents (without givingeffect to any acceleration of rental expense).

As of June 30, 2007, the Company was in compliance with all requiredfinancial covenants.

*CreditRating Agency Actions. *Effective May 31, 2007, S&P issued a ‘B+’corporate credit rating for the Company, and Moody’s issued a ‘B1’ corporatefamily rating.  Both credit ratingagencies issued a stable ratings outlook for the Company.  Prior to the Company’s emergence frombankruptcy on May 31, 2007, the S&P corporate credit rating and Moody’scorporate family rating were ‘D’ (default) and ‘withdrawn’, respectively.

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*Aircraft Commitments.* Committed expenditures for aircraft andrelated equipment, including estimated amounts for contractual priceescalations and predelivery deposits, will be approximately (in millions):
| remainder of   2007 |   | $     | 975    |   |
|------------------------------------|--------|-------|--------|--------|
| 2008                               |   | 1,905 |   |
| 2009                               |   | 467   |   |
| 2010                               |   | 770   |   |
| 2011                               |   | 79    |   |

 

*PensionFunding Obligations.*****The Company has several defined benefitpension plans and defined contribution401(k)-type plans covering substantially all of its employees.  Northwest froze future benefit accruals forits defined benefit Pension Plans for Salaried Employees, Pilot Employees, andContract Employees effective August 31, 2005, January 31, 2006, and September30, 2006, respectively.  Replacementpension coverage is provided for these employees through 401(k)-type definedcontribution plans or in the case of IAM represented employees, the IAMNational Multi-Employer Plan.

The Pension Protection Act of 2006 (“2006 Pension Act”) was signed intolaw on August 17, 2006. The 2006 Pension Act allows commercial airlines toelect special funding rules for defined benefit plans that are frozen.  The unfunded liability for a frozen definedbenefit plan may be amortized over a fixed 17-year period. The unfundedliability is defined as the actuarial liability calculated using an 8.85%interest rate minus the fair market value of plan assets.  Northwest elected the special funding rulesfor frozen defined benefit plans under the 2006 Pension Act effective October1, 2006.  As a result of this election(1) the funding waivers that Northwest received for the 2003 plan yearcontributions were deemed satisfied under the 2006 Pension Act, and (2) thefunding****standard account for eachPlan has no deficiency as of September 30, 2006.  New contributions that came due under the2006 Pension Act funding rules were paid while Northwest was in bankruptcy andmust continue to be paid going forward. If the new contributions are not paid, the future funding deficiencythat would develop will be based on the regular funding rules rather than thespecial funding rules.

It is Northwest’s policy to fund annually at least the minimumcontribution as required by the Employee Retirement Income Security Act of1974, as amended (“ERISA”).  However, asa result of the commencement of Northwest’s Chapter 11 case, Northwest did notmake minimum cash contributions to its defined benefit pension plans that weredue after September 14, 2005.  Subsequentto Northwest’s bankruptcy filing and prior to its election under the 2006Pension Act, Northwest paid the normal cost component of the plans’ minimumfunding requirements relating to service rendered post-petition and certaininterest payments associated with its 2003 Contract Plan and Salaried Plan yearwaivers.  As noted above, effectiveOctober 1, 2006, Northwest elected the special funding rules available tocommercial airlines.

Asa result of Northwest’s Chapter 11 filing, we appointed an independentfiduciary for all of our tax-qualified defined benefit pension plans to pursueon behalf of the plans, claims to recover minimum funding contributions dueunder federal law, to the extent that Northwest did not continue to fund theplans due to bankruptcy prohibitions. The independent fiduciary subsequently withdrew all of the claims thatthe independent fiduciary filed in our Chapter 11 Case following our electionof the special funding rules under the 2006 Pension Act.

Northwest’s 2007 calendar year contributions to itsfrozen defined benefit plans under the provisions of the 2006 Pension Act andthe replacement plans will approximate $128 million.

**CriticalAccounting Estimates**

*Fresh-StartReporting.*  As previously noted, the Company’s assetvalues were remeasured on the Effective Date using fair value, which isallocated in conformity with SFAS No. 141. In addition, fresh-start reporting also requires that all liabilities,other than deferred taxes and pension and other postretirement benefitobligations, be reported at fair value or the present values of the amounts tobe paid using appropriate market interest rates.  Deferred taxes are reported in conformitywith SFAS No. 109.  In estimating fairvalue, we based our estimates and assumptions on the guidance prescribed bySFAS No. 157, which we adopted in conjunction with our adoption of fresh-startreporting.  SFAS No. 157, among otherthings, defines fair value, establishes a framework for measuring fair valueand expands disclosure about fair value measurements. 

Estimates of fair valuerepresent the Company’s best estimates based on independent appraisals andvaluations and, where the foregoing have not yet been completed or are notavailable, industry data and trends and by reference to relevant market ratesand transactions.  The estimates andassumptions are inherently subject to significant uncertainties andcontingencies beyond the control of the Company.  Accordingly, we cannot provide assurance thatthe estimates, assumptions, and values reflected in the valuations will berealized, and actual results could vary materially.  In accordance with SFAS No. 141, thepreliminary allocation of the fair value of assets and liabilities is subjectto additional

48

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adjustment within one yearafter emergence from bankruptcy.  Anyadjustments to the recorded fair values of these assets and liabilities mayimpact the amount of recorded goodwill. See “Item 1. Financial Statements, Note 5 – Fair Value Measurements” foradditional information regarding assets and liabilities remeasured at fairvalue on the Effective Date.

To facilitate the calculation of theenterprise value of the Successor Company, Northwest’s financial advisorsassisted management in the preparation of a valuation analysis for theSuccessor Company’s common stock to be distributed as of the Effective Date tothe Unsecured Creditors.  The valuationmethods included (i) a comparison of the Company and its projected performanceto the market values of comparable companies; and (ii) two variants ofdiscounted cash flow analysis which were weighted 40 and 60 percent in thecalculation of the baseline valuation range.

The estimated enterprise value, andcorresponding equity value, is highly dependent upon achieving the futurefinancial results set forth in the five-year financial projections included inthe Company’s Plan of Reorganization, as well as the realization of certain otherassumptions.  The equity value of theCompany was calculated to be a range of approximately $6.45 billion to $7.55billion.  Based on claims trading priorto the Company’s Effective Date and the trading value of the Company’s commonstock post emergence, the equity value of the Company was estimated to be $6.45billion for purposes of preparing the Company’s financial statements.  The estimates and assumptions made in thisvaluation are inherently subject to significant uncertainties and theresolution of contingencies beyond the reasonable control of the Company.  Accordingly, there can be no assurance thatthe estimates, assumptions, and amounts reflected in the valuations will berealized, and actual results could vary materially.  Moreover,the market value of the Company’s common stock may differ materially from theequity valuation.

*Frequent Flyer Program*: Northwest operates a frequent flyer loyalty program known as “WorldPerks.”  WorldPerks is designed to retain and increasetraveler loyalty by offering incentives to travelers for their continuedpatronage.  Under the WorldPerks program,miles are earned by flying on Northwest or its alliance partners and by usingthe services of program partners for such things as credit card use, hotelstays, car rentals and other activities. Northwest sells mileage credits to the program and alliancepartners.  WorldPerks members accumulatemileage in their accounts and later redeem mileage for free or upgraded travelon Northwest and alliance partners. WorldPerks members that achieve certain mileage thresholds also receiveenhanced service benefits from Northwest such as special servicelines, advance flight boarding and upgrades.

The Company adopted a deferred revenue method to recognize frequentflyer liabilities on the Effective Date. Under this method, we account for miles earned and sold as separatedeliverables in a multiple element arrangement as prescribed by EITF No. 00-21,*Revenue Arrangements with MultipleDeliverables* (“EITF No. 00-21”). Therefore, mileage credits earned on or after June 1, 2007 are nowdeferred based upon the price we sell mileage credits to other airlines (“deferredmileage credits”), which we believe represents the best evidence of their fairvalue in accordance with EITF No. 00-21. The revenue on deferred frequent flyer miles will be recognized when themiles are ultimately redeemed through flight, upgrades or other means, or whenit becomes remote that the miles will ever be used.  Estimating deferred mileage credits that willnot be redeemed requires significant management judgment. Based on currentprogram rules and historical redemption trends, the Company records passengerrevenue associated with deferred mileage credits if the mile is unredeemedseven years after issuance. 

We previously accounted for frequent flyer miles earned on Northwestflights on an incremental cost basis as an accrued liability and as operatingexpense, while miles sold to airline and non-airline businesses were accountedfor on a deferred revenue basis.  Also inconjunction with the adoption of the new accounting policy, Northwest beganrecording a component of the payments received from non-airline marketingpartners in Other Revenue rather than in Passenger Revenue.  The component recognized as Other Revenue isthe portion of the payment received that represents the amount paid by themarketing partner in excess of the value of the deferred mileage credits.

As a result of the application of fresh-start reporting, the WorldPerksfrequent flyer obligation was revalued at the Effective Date to reflect theestimated fair value of miles to be redeemed in the future. Outstanding milesearned by flying Northwest or its partner carriers were revalued using aweighted average per-mile equivalent ticket value, taking into account suchfactors as class of service and domestic and international ticket itineraries,which can be reflected in awards flown by WorldPerks members.  At June 30, 2007, the Company had recordeddeferred revenue for its frequent flyer program totaling $2.0 billion. At March31, 2007, the Company had recorded an incremental cost liability and deferredrevenue for its frequent flyer program totaling $412 million.  A hypothetical 1% increase or decrease in thenumber of outstanding miles would result in a change of approximately $19million to the deferred revenue liability.

*Operating Revenues:* The value of unused passengertickets, miscellaneous change orders (“MCO’s”) and travel credit vouchers (“TCV’s”)are included in current liabilities as air traffic liability.  Passenger and cargo revenues are recognizedwhen the transportation is provided or when the ticket expires.  Unused domestic passenger tickets generallyexpire one year from scheduled travel. Unused international passenger tickets generally expire one year fromticket issuance.  On the Effective Date,the Company revised the accounting method used to recognize revenue for unused

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tickets,adopting the delayed recognition approach. Under the delayed recognition approach, no revenue is recognized on anunused ticket until the validity period has expired and the ticket can nolonger be used; therefore, management estimates are no longer required torecognize breakage revenue.  Prior to theEffective Date, the Company recognized breakage associated with unusedpassenger tickets based on estimates of future breakage based on historicalbreakage trends.

**SignificantCompany Announcements**

*Request for New RouteAuthorities to China. *The DOT plans toaward six new China routes that become available between 2007 and 2009.  In response, the Company has filed a requestwith the DOT seeking rights to provide nonstop service between Detroit andShanghai, as well as between Detroit and Beijing.  Northwest would use Boeing 747-400 aircraftfor Detroit to Shanghai service, if selected for a 2007 award.  If selected for 2009 service, Northwest plansto use Boeing 787 Dreamliners for both routes.

*Antitrust Immunity*.  SkyTeam carriers Air France, Alitalia, CSACzech Airlines (“CSA”), Delta Air Lines, Inc. (“Delta”), KLM Royal DutchAirlines (“KLM”) and Northwest, applied with the DOT for antitrust immunity fortransatlantic routings.  Delta currentlyhas antitrust immunity with Air France, Alitalia and CSA, while Northwest hasantitrust immunity with KLM.  Included inthe application is a joint venture agreement between Air France, Delta, KLM andNorthwest that would create a comprehensive and integrated partnership amongthe four SkyTeam members across the Atlantic. This application is the first under the landmark European Union – U.S.open skies treaty.

*Airlink Operations. *On June 7, 2007, Mesaba Aviation, Inc.completed its first revenue flight with the new 76-seat Bombardier CRJ900aircraft.  The CRJ900 offers dual-classservice with 12 seats in first class, arranged in a one seat-aisle-two seatconfiguration, and 64 seats in coach class, arranged in a two seat-aisle-twoseat configuration.

**Other Information**

*Foreign Currency.*  TheCompany is exposed to the effect of foreign currency exchange rate fluctuationson the U.S. dollar value of foreign currency-denominated operating revenues andexpenses.  The Company’s largest exposurecomes from the Japanese yen.  From timeto time, the Company uses financial instruments to hedge its exposure to theJapanese yen.  Hedging gains or lossesare recorded in accumulated other comprehensive income (loss) until theassociated transportation is provided, at which time they are recognized as anincrease or decrease in revenue.  TheCompany did not hedge any of its yen-denominated sales during the three monthsended June 30, 2007 and 2006.  Theaverage market yen rate for the quarters ended June 30, 2007 and 2006 was 120.3and 115.3, respectively.  As of June 30,2007, the Company had no hedges in place for its anticipated 2007yen-denominated sales.  This compares to8.5% of its remaining anticipated 2006 yen-denominated sales hedged as of June30, 2006.

*Aircraft Fuel.*  TheCompany’s earnings are affected by changes in the price and availability ofaircraft fuel.  On an annual basis, theCompany’s mainline and regional carrier fuel consumption approximates 1.8 billion gallons, producing an $18 million variance for each one-centchange in the cost per gallon of fuel. From time to time, the Company manages the price risk of fuel costs byutilizing futures contracts traded on regulated futures exchanges, swapagreements and options.  As of June 30,2007, the Company had hedged the price of approximately 35% of its projectedfuel requirements for the remainder of 2007, through a combination of collaroptions and fixed price swap agreements. Including additional collar options entered into on August 7, 2007, theCompany has hedged the price of approximately 35% of its projected fuelrequirements for July and August 2007, and approximately 50% of its projectedfuel requirements for September through December 2007.

The collar options in place at June 30, 2007, whichhedge the price of approximately 25% of the Company’s projected fuelrequirements for the remainder of 2007, consisted of crude oil put options witha price range of $53 to $55.95 per barrel, and related call options at a priceof $72 per barrel.  The fixed price crudeoil swap agreements, which hedge the price of approximately 10% of theCompany’s projected fuel requirements for the remainder of 2007, includedagreements with a price range of $62 to $64.98 per barrel.  The collar options entered into on August 7,2007, which hedge the price of approximately 15% of the Company’s projectedfuel requirements for September through December 2007, consisted of crude oilput options with a price of $60 per barrel, and related call options at a priceof $78.70 per barrel.

The Company currently has no fuel derivativecontracts outstanding that are designated for hedge accounting treatment, andtherefore had no related unrealized gains (losses) in accumulated othercomprehensive income (loss) as of June 30, 2007.  The Company records any changes in thecontracts’ values as mark-to-market adjustments through the statement ofoperations on a monthly basis.  Netlosses of $6.4 million were recorded as increases in fuel expense during thethree months ended June 30, 2007, including $7.8 million in mark-to-marketlosses related to fuel derivative contracts that will settle in the remainderof 2007, partially offset by gains of $1.4 million for contracts that settledin the current period.  Effective June2007, the Company began allocating mark-to-market adjustments to regionalcarrier expense for fuel consumed by our Airlink partners.  For the month ended June 30, 2007, gains of$1.8 million were recorded as a reduction to regional carrier expense.  As of June 30, 2006, the Company had hedgedthe price of approximately 25% of its projected fuel requirements for thesecond half of 2006 through collar options established at a crude oil price of$65 to $79.40 per barrel, and had recorded $2.6 million of unrealized gains inaccumulated other comprehensive income (loss) associated with those hedges.

*Interest Rates.*  TheCompany’s earnings are also affected by changes in interest rates due to theimpact those changes have on its interest income from cash equivalents andshort-term investments and its interest expense from floating rate debtinstruments.  During June 2006, theCompany entered into individual interest rate cap hedges related to threefloating rate debt instruments, with a total cumulative notional amount of $504million. As of June 30, 2007, the total cumulative notional amount was $450million. The objective of the interest

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ratecap hedges is to protect the anticipated payments of interest (cash flows) onthe designated debt instruments from adverse market interest rate changes.   As of June 30, 2007, the Company hadrecorded $1.0 million of unrealized gains in accumulated other comprehensiveincome (loss) associated with those hedges.

*War Risk Insurance*. Following September 11, 2001, aviation insurers significantly increasedairline insurance premiums and reduced the maximum amount of coverage availableto airlines for certain types of claims. Our total aviation and other insurance expenses were $48 million higherin 2006 than in 2000.  The FAA iscurrently providing aviation war risk insurance as required by the HomelandSecurity Act of 2002 as amended by the Consolidated Appropriations Act of 2005and subsequently by the Continuing Appropriations Resolution 2007.  However, following multiple extensions, thiscoverage is scheduled to expire on August 31, 2007.  While the government may again extend theperiod that it provides excess war risk coverage, there is no assurance thatthis will occur, or if it does, how long the extension will last, what will beincluded in the coverage, or at what cost the coverage will be provided.  Should the U.S. government stop providing warrisk insurance in its current form to the U.S. airline industry, it is expectedthat the premiums charged by commercial aviation insurers for this coverage, ifavailable at all, would be substantially higher than the premiums currentlycharged by the government, the maximum amount of coverage available would bereduced, and the type of coverage could be more restrictive.  Commercial aviation insurers could furtherincrease insurance premiums and reduce or cancel coverage, in the event of anew terrorist attack or other events adversely affecting the airline industry.  Significant increases in insurance premiumscould negatively impact our financial condition and results of operations.  If we are unable to obtain adequate war riskinsurance, our business could be materially and adversely affected.

If we were to be involved in an accident, we could beexposed to significant tort liability. Although we carry insurance to cover damages arising from suchaccidents, resulting tort liability could be higher than our policy limitswhich could negatively impact our financial condition.

*Open Skies Air Services Agreement. *In April 2007, the United States and the European Union approved an “openskies” air services agreement that provides airlines from the United States andE.U. member states open access to each other’s markets, with freedom of pricingand unlimited rights to fly beyond the United States and beyond each E.U.member state.  Under the open skies agreement, which goes intoeffect on March 30, 2008, every U.S. and E.U. airline is authorized tooperate between airports in the United States and London’s Heathrow, Gatwickand other airports.  Given the significant uncertainty regarding howopen skies will ultimately affect its London operations, the Company is stillin the process of evaluating its course of action.

*Forward-LookingStatements.*  Certain of the statements madethroughout Management’s Discussion and Analysis of Financial Condition andResults of Operations and elsewhere in this quarterly report are not purely historical facts, includingstatements regarding our beliefs, expectations, intentions or strategies forthe future, may be “forward-looking statements” under the Private SecuritiesLitigation Reform Act of 1995.  Allforward-looking statements involve a number of risks and uncertainties thatcould cause actual results to differ materially from the plans, intentions andexpectations reflected in or suggested by the forward-looking statements.  Such risks and uncertainties include, amongothers, the ability of the company to operate pursuant to the terms of its financingfacilities (particularly the related financial covenants), the ability of thecompany to attract, motivate and/or retain key executives and associates, thefuture level of air travel demand, the company’s future passenger traffic andyields, the airline industry pricing environment, increased costs for security,the cost and availability of aviation insurance coverage and war risk coverage,the general economic condition of the U.S. and other regions of the world, theprice and availability of jet fuel, the war in Iraq, the possibility of additionalterrorist attacks or the fear of such attacks, concerns about Severe AcuteRespiratory Syndrome (SARS) and other influenza or contagious illnesses, laborstrikes, work disruptions, labor negotiations both at other carriers and thecompany, low cost carrier expansion, capacity decisions of other carriers,actions of the U.S. and foreign governments, foreign currency exchange ratefluctuations and inflation.  Additionalinformation with respect to the factors and events that could cause differencesbetween forward-looking statements and future actual results is contained inthe company’s Securities and Exchange Commission filings, including the company’sAnnual Report on Form 10-K for the year ended December 31, 2006 and anyquarterly report on Form 10-Q and current report on Form 8-K filed by theCompany since the filing of such Annual Report. We undertake no obligation to update any forward-looking statements toreflect events or circumstances that may arise after the date of this release.

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

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**Item 3.****          ****Quantitative and QualitativeDisclosures About Market Risk.**

Information required by this item is providedunder the captions “Foreign Currency” and “Aircraft Fuel” within “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis Quarterly Report on Form 10-Q.  Alsosee “Item 7a. Quantitative and Qualitative Disclosures About Market Risk” inthe Company’s Annual Report on Form 10-K for 2006.

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

**Evaluation of Disclosure Controls and Procedures –** As of June 30,2007, management performed an evaluation under the supervision and with theparticipation of the Company’s President and Chief Executive Officer andExecutive Vice President and Chief Financial Officer of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedurescovered in this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief ExecutiveOfficer and Executive Vice President and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures are effective in alerting themin a timely manner to material information required to be disclosed in the Company’speriodic reports filed with 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 second quarter ended June 30, 2007 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting, other than controls established to properlyimplement fresh-start reporting (including the adoption of certain new accountingpolicies which created material changes related to the Company’s WorldPerksfrequent flyer accounting, the method in which the Company recognizes revenuefor unused passenger tickets, and the methods used to measure the fair value ofassets and liabilities) upon emergence from bankruptcy on May 31, 2007.

PART II. OTHER INFORMATION

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

As discussed elsewhere in this Form 10-Q, onSeptember 14, 2005, NWA Corp. and 12 of its direct and indirect subsidiariesfiled voluntary petitions for reorganization under Chapter 11 of the BankruptcyCode in the Bankruptcy Court.  OnSeptember 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWACorp., also filed a voluntary petition for relief under Chapter 11.  On May 18, 2007, the Bankruptcy Court enteredan order (the “Confirmation Order”) approving and confirming the Debtors’ FirstAmended Joint and Consolidated Plan of Reorganization under Chapter 11 of theBankruptcy Code.  On May 31, 2007, theDebtors emerged from bankruptcy.  Thereorganization cases were jointly administered under the caption “In re NWACorp., et al., Case No. 05-17930 (ALG).” The Confirmation Order provided for the discharge upon the EffectiveDate of the Debtors from all Claims (as defined in the Plan) based upon acts oromissions that occurred prior to the Effective Date.  In addition, as established by theConfirmation Order, holders of pre-Effective Date claims are enjoined fromcommencing or continuing any action or proceeding against the ReorganizedDebtors with respect to such claims, except as otherwise permitted by theBankruptcy Court for purposes of determining the amount of their respectiveclaims.  The legal proceedings specificallydescribed in the Company’s Annual Report on Form 10-K for 2006 are subject tothe injunction established by the Confirmation Order.

**Item 1A.   RiskFactors.**

We are affected by risks specific to us as well as factors that affectall businesses operating in a global market. The significant factors known to us that could materially adverselyaffect our business, financial condition, or operating results are described in“Item 1A. Risk Factors” in our most recently filed Annual Report on Form 10-Kfor 2006.  There have been no materialchanges in those risk factors.
| **Item 6.** | **Exhibits.** |
|-------------|---------------|
| ** **  | ** **    |
| (a)         |          | Exhibits: |
|        |
|        | 10.1          | Description  of Compensation for Non-Employee Directors of Northwest Airlines  Corporation |
|        | 10.2          | Amendment No. 1 to the  Northwest Airlines Corporation 2007 Stock Incentive Plan |
|        | 10.3          | Form of Award Agreement for  Restricted Stock Units Granted to Directors under the Northwest  Airlines Corporation 2007 Stock Incentive Plan |
|        | 10.4          | Form of Award Agreement for  Non-Qualified Stock Options Granted to Directors under the Northwest  Airlines Corporation 2007 Stock Incentive Plan |
|        | 12.1          | Computation of Ratio of Earnings to Fixed Charges |
|        | 12.2          | Computation of Ratio of Earnings to Fixed Charges  and Preferred Stock Requirements |
|        | 31.1          | Rule 13a-14(a)/15d-14(a) Certification of Chief  Executive Officer |
|        | 31.2          | Rule 13a-14(a)/15d-14(a) Certification of Chief  Financial Officer |
|        | 32.1          | Section 1350 Certification of Chief Executive  Officer |
|        | 32.2          | Section 1350 Certification of Chief Financial  Officer |
|             |               |  |  |

 

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SIGNATURE

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized this 9th day ofAugust 2007.
|          | 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        |       | Description  of Compensation for Non-Employee Directors of Northwest Airlines  Corporation                                                   |
| 10.2        |       | Amendment No. 1 to the  Northwest Airlines Corporation 2007 Stock Incentive Plan                                                                       |
| 10.3        |       | Form of Award Agreement for  Restricted Stock Units Granted to Directors under the Northwest  Airlines Corporation 2007 Stock Incentive Plan |
| 10.4        |       | Form of Award Agreement for  Non-Qualified Stock Options Granted to Directors under the Northwest  Airlines Corporation 2007 Stock Incentive Plan |
| 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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