**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

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

**For the quarterly period ended June 30, 2006**

**Commission File Number: 0-23642**

**NORTHWEST AIRLINES CORPORATION****(DEBTOR-IN-POSSESSION)**

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

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

 

**(612) 726-2111**(Registrant’stelephone number, including area code)

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

**Indicate by check mark whetherthe 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

**As of June 30, 2006, there were87,286,503 shares of the registrant’s Common Stock outstanding.**

 

 

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**NORTHWEST AIRLINES CORPORATION(DEBTOR-IN-POSSESSION)**
|                                |                                                                                                                                                                                     | **Page No.** |
|--------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|
| PART I. FINANCIAL  INFORMATION |                                                                                                                                                                                     |         |
|                           |                                                                                                                                                                                     |         |
| Item 1.                        | Financial Statements.                                                                                                                                                                    |         |   |
|                           |                                                                                                                                                                                     |         |   |
|                           | Condensed Consolidated Statements of Operations –  Three months and six months ended June 30, 2006 and 2005                                                                         |         | 3 |
|                           |                                                                                                                                                                                     |         |   |
|                           | Condensed Consolidated Balance Sheets – June 30, 2006  and December 31, 2005                                                                                                        |         | 4 |
|                           |                                                                                                                                                                                     |         |   |
|                           | Condensed Consolidated Statements of Cash Flows – Six  months ended June 30, 2006 and 2005                                                                                          |         | 5 |
|                           |                                                                                                                                                                                     |         |   |
|                           | Notes to Condensed Consolidated Financial Statements                                                                                                                                     |         | 6 |
|                           |                                                                                                                                                                                     |         |   |
|                           | The Computations of Ratio of Earnings to Fixed  Charges and Ratio of Earnings to Fixed Charges and Preferred Stock  Requirements are attached hereto and filed as Exhibits 12.1 and 12.2 |         |   |
|                           |                                                                                                                                                                                     |         |   |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations.                                                                                             |         | 20 |
|                           |                                                                                                                                                                                     |         |   |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk.                                                                                                                             |         | 30 |
|                           |                                                                                                                                                                                     |         |   |
| Item 4.                        | Controls and  Procedures.                                                                                                                                                                |         | 30 |
|                           |                                                                                                                                                                                     |         |   |
| PART  II. OTHER INFORMATION    |                                                                                                                                                                                     |         |
|                           |                                                                                                                                                                                     |         |
| Item 1.                        | Legal Proceedings.                                                                                                                                                                       |         | 30 |
|                           |                                                                                                                                                                                     |         |   |
| Item 1A.                       | Risk  Factors.                                                                                                                                                                           |         | 30 |
|                           |                                                                                                                                                                                     |         |   |
| Item 6.                        | Exhibits.                                                                                                                                                                                |         | 30 |
|                           |                                                                                                                                                                                     |         |   |
| SIGNATURE                      |                                                                                                                                                                                     | 31           |
|                           |                                                                                                                                                                                     |         |   |
| EXHIBIT INDEX                  |                                                                                                                                                                                     | 31           |

 

2

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PART I.  FINANCIAL INFORMATION

**Item 1. Financial Statements.**

**NORTHWEST AIRLINES CORPORATION**

**(DEBTOR-IN-POSSESSION)**

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

 
| ** **                                                                                      | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| **(Unaudited, in millions except per share amounts)**             | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating Revenues**                                                                          | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Passenger                                                                                       |       | $                                              | 2,425      |                                         | $          | 2,347 |   | $ | 4,474 |   | $ | 4,382 |   |
| Regional carrier  revenues                                                                      |       | 396                                            |       | 344                                          |       | 735 |   | 620 |   |
| Cargo                                                                                           |       | 236                                            |       | 239                                          |       | 450 |   | 445 |   |
| Other                                                                                           |       | 234                                            |       | 265                                          |       | 522 |   | 546 |   |
| Total operating  revenues                                                                       |       | 3,291                                          |       | 3,195                                        |       | 6,181 |   | 5,993 |   |
| **Operating Expenses**                                                                          | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Aircraft fuel  and taxes                                                                        |       | 886                                            |       | 790                                          |       | 1,630 |   | 1,420 |   |
| Salaries, wages  and benefits                                                                   |       | 675                                            |       | 969                                          |       | 1,351 |   | 1,933 |   |
| Selling and  marketing                                                                          |       | 190                                            |       | 223                                          |       | 384 |   | 428 |   |
| Aircraft  maintenance materials and repairs                                                     |       | 183                                            |       | 157                                          |       | 372 |   | 301 |   |
| Other rentals  and landing fees                                                                 |       | 142                                            |       | 168                                          |       | 285 |   | 324 |   |
| Depreciation and  amortization                                                                  |       | 134                                            |       | 142                                          |       | 268 |   | 280 |   |
| Aircraft rentals                                                                                |       | 54                                             |       | 135                                          |       | 122 |   | 239 |   |
| Regional carrier  expenses                                                                      |       | 366                                            |       | 392                                          |       | 732 |   | 748 |   |
| Other                                                                                           |       | 366                                            |       | 409                                          |       | 757 |   | 811 |   |
| Total operating  expenses                                                                       |       | 2,996                                          |       | 3,385                                        |       | 5,901 |   | 6,484 |   |
| **Operating Income (Loss)**                                                                     |       | 295                                            |       | (190                                         | )          | 280 |   | (491 | ) |
| **Other Income (Expense)**                                                                      | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense, net                                                                          |       | (138                                           | )          | (159                                         | )          | (276 | ) | (310 | ) |
| Investment  income                                                                              |       | 25                                             |       | 22                                           |       | 43 |   | 38 |   |
| Reorganization  items, net                                                                      |       | (464                                           | )          | —                                       |       | (1,439 | ) | — |   |
| Other, net                                                                                      |       | (3                                             | )          | 101                                          |       | 3 |   | 82 |   |
| Total other  income (expense)                                                                   |       | (580                                           | )          | (36                                          | )          | (1,669 | ) | (190 | ) |
| **Income (Loss) Before Income  Taxes and Cumulative Effect of Accounting Change**               |       | (285                                           | )          | (226                                         | )          | (1,389 | ) | (681 | ) |
| Income tax  expense (benefit)                                                                   |       | —                                         |       | —                                       |       | — |   | 5 |   |
| **Income (Loss) Before Cumulative  Effect of Accounting Change**                                |       | (285                                           | )          | (226                                         | )          | (1,389 | ) | (686 | ) |
| Cumulative  effect of accounting change                                                         |       | —                                         |       | —                                       |       | — |   | (69 | ) |
| **Net Income (Loss)**                                                                           |       | (285                                           | )          | (226                                         | )          | (1,389 | ) | (755 | ) |
| Preferred stock  requirements                                                                   |       | —                                         |       | (8                                           | )          | — |   | (16 | ) |
| **Net Income (Loss) Applicable to  Common Stockholders**                                        |       | $                                              | (285       | )                                            | $          | (234 | ) | $ | (1,389 | ) | $ | (771 | ) |
| Earnings (loss) per  common share:                                                              |       |                                           |       |                                         |       |   |   |   |   |
| *Basic  and Diluted*                                                                            | * *   | * *                                       | * *   | * *                                     | * *   | * * | * * | * * | * * |
| Income (loss)  applicable to common stockholders before cumulative effect of accounting  change |       | $                                              | (3.27      | )                                            | $          | (2.69 | ) | $ | (15.92 | ) | $ | (8.08 | ) |
| Cumulative  effect of accounting change                                                         |       | —                                         |       | —                                       |       | — |   | (.80 | ) |
| Net income  (loss) applicable to common stockholders                                            |       | $                                              | (3.27      | )                                            | $          | (2.69 | ) | $ | (15.92 | ) | $ | (8.88 | ) |
| Average shares used in  computation:                                                            |       |                                           |       |                                         |       |   |   |   |   |
| *Basic and Diluted*                                                                             |       | 87                                             |       | 87                                           |       | 87 |   | 87 |   |

 

*See accompanying notes.*

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**NORTHWEST AIRLINES CORPORATION**

**(DEBTOR-IN-POSSESSION)**

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                          | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| **(Unaudited, in millions)**                              | ** ** | **2006**         | ** ** | **2005**             | ** ** |
| **Assets**                                                          |       |             |       |                 |       |
| **Current  Assets**                                                 |       |             |       |                 |       |
| Cash and cash equivalents                                           |       | $                | 979        |                 | $          | 684 |   |
| Unrestricted short-term investments                                 |       | 597              |       | 578                  |       |
| Restricted cash, cash equivalents and short-term  investments       |       | 674              |       | 600                  |       |
| Accounts receivable, net                                            |       | 718              |       | 592                  |       |
| Flight equipment spare parts, net                                   |       | 123              |       | 136                  |       |
| Prepaid expenses and other                                          |       | 423              |       | 403                  |       |
| Total current assets                                                |       | 3,514            |       | 2,993                |       |
| ** **                                                          |       |             |       |                 |       |
| **Property  and Equipment**                                         |       |             |       |                 |       |
| Flight equipment, net                                               |       | 7,262            |       | 7,394                |       |
| Other property and equipment, net                                   |       | 741              |       | 753                  |       |
| Total property and equipment                                        |       | 8,003            |       | 8,147                |       |
| ** **                                                          |       |             |       |                 |       |
| **Flight  Equipment Under Capital Leases, net**                     |       | 22               |       | 100                  |       |
| ** **                                                          |       |             |       |                 |       |
| **Other  Assets**                                                   |       |             |       |                 |       |
| Intangible pension asset                                            |       | 363              |       | 363                  |       |
| International routes                                                |       | 634              |       | 634                  |       |
| Investments in affiliated companies                                 |       | 38               |       | 41                   |       |
| Other                                                               |       | 1,061            |       | 805                  |       |
| Total other assets                                                  |       | 2,096            |       | 1,843                |       |
| **Total Assets**                                                    |       | $                | 13,635     |                 | $          | 13,083 |   |
| ** **                                                          |       |             |       |                 |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**            |       |             |       |                 |       |
| ** **                                                          |       |             |       |                 |       |
| **Current  Liabilities**                                            |       |             |       |                 |       |
| Air traffic liability                                               |       | $                | 2,002      |                 | $          | 1,586 |   |
| Accounts payable and other liabilities                              |       | 1,397            |       | 1,119                |       |
| Current maturities of long-term debt and capital  lease obligations |       | 110              |       | 85                   |       |
| Total current liabilities                                           |       | 3,509            |       | 2,790                |       |
| ** **                                                          |       |             |       |                 |       |
| **Long-Term  Debt**                                                 |       | 1,401            |       | 1,085                |       |
| ** **                                                          |       |             |       |                 |       |
| **Deferred  Credits and Other Liabilities**                         |       |             |       |                 |       |
| Long-term pension and postretirement health care  benefits          |       | 131              |       | 292                  |       |
| Other                                                               |       | 110              |       | 102                  |       |
| Total deferred credits and other liabilities                        |       | 241              |       | 394                  |       |
| ** **                                                          |       |             |       |                 |       |
| **Liabilities  Subject to Compromise**                              |       | 15,215           |       | 14,162               |       |
| ** **                                                          |       |             |       |                 |       |
| **Preferred  Redeemable Stock Subject to Compromise**               |       | 279              |       | 280                  |       |
| ** **                                                          |       |             |       |                 |       |
| **Common  Stockholders’ Equity (Deficit)**                     |       |             |       |                 |       |
| Common stock                                                        |       | 1                |       | 1                    |       |
| Additional paid-in capital                                          |       | 1,503            |       | 1,500                |       |
| Accumulated deficit                                                 |       | (5,938           | )          | (4,548               | )          |
| Accumulated other comprehensive income (loss)                       |       | (1,563           | )          | (1,568               | )          |
| Treasury stock                                                      |       | (1,013           | )          | (1,013               | )          |
| Total common stockholders’ equity (deficit)                    |       | (7,010           | )          | (5,628               | )          |
| **Total  Liabilities and Stockholders’ Equity (Deficit)**      |       | $                | 13,635     |                 | $          | 13,083 |   |

 

*See accompanying notes.*

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**NORTHWEST AIRLINES CORPORATION**

**(DEBTOR-IN-POSSESSION)**

 

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                                 | ** ** | **Six months ended  June 30** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(Unaudited, in millions)**                                                     | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| **Cash  Flows from Operating Activities**                                                  |       |                                         |       |   |   |
| Net income (loss)                                                                          |       | $                                            | (1,389     | ) | $ | (755 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                                         |       |   |   |
| Cumulative effect of accounting change                                                     |       | —                                       |       | 69 |   |
| Depreciation and amortization                                                              |       | 268                                          |       | 280 |   |
| Pension and other postretirement benefit  contributions less than expense                  |       | 149                                          |       | 22 |   |
| Changes in certain assets and liabilities                                                  |       | 394                                          |       | 455 |   |
| Long-term vendor deposits/holdbacks                                                        |       | (116                                         | )          | — |   |
| Reorganization items, net                                                                  |       | 1,439                                        |       | — |   |
| Other, net                                                                                 |       | 13                                           |       | (52 | ) |
| Net cash provided by (used in) operating activities                                        |       | 758                                          |       | 19 |   |
|                                                                                       |       |                                         |       |   |   |
| **Cash  Flows from Reorganization Activities**                                             |       |                                         |       |   |   |
| Net cash provided by (used in) reorganization  activities                                  |       | 12                                           | ** ** | **—** | ** ** |
|                                                                                       |       |                                         |       |   |   |
| **Cash  Flows from Investing Activities**                                                  |       |                                         |       |   |   |
| Capital expenditures                                                                       |       | (186                                         | )          | (260 | ) |
| Purchase of short-term investments                                                         |       | (18                                          | )          | (192 | ) |
| Proceeds from sales of short-term investments                                              |       | 10                                           |       | 401 |   |
| Decrease (increase) in restricted cash, cash  equivalents and short-term investments       |       | (74                                          | )          | (340 | ) |
| Proceeds from sale of Pinnacle note receivable                                             | ** ** | **—**                                   |       | 102 |   |
| Proceeds from sale of Prudential Financial Inc.  demutualization shares                    | ** ** | **—**                                   |       | 102 |   |
| Other, net                                                                                 |       | (1                                           | )          | 6 |   |
| Net cash provided by (used in) investing activities                                        |       | (269                                         | )          | (181 | ) |
|                                                                                       |       |                                         |       |   |   |
| **Cash  Flows from Financing Activities**                                                  |       |                                         |       |   |   |
| Proceeds from long-term debt                                                               |       | 72                                           |       | 443 |   |
| Payments of long-term debt and capital lease  obligations                                  |       | (278                                         | )          | (383 | ) |
| Other, net                                                                                 |       | —                                       |       | (20 | ) |
| Net cash provided by (used in) financing activities                                        |       | (206                                         | )          | 40 |   |
|                                                                                       |       |                                         |       |   |   |
| **Increase  (Decrease) in Cash and Cash Equivalents**                                      |       | 295                                          |       | (122 | ) |
|                                                                                       |       |                                         |       |   |   |
| Cash and cash  equivalents at beginning of period                                          |       | 684                                          |       | 707 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                            | 979        |   | $ | 585 |   |
|                                                                                       |       |                                         |       |   |   |
| Cash and cash  equivalents and unrestricted short-term investments at end of period        |       | $                                            | 1,576      |   | $ | 2,144 |   |
|                                                                                       |       |                                         |       |   |   |
| Supplemental  Cash Flow Information:                                                       |       |                                         |       |   |   |
| Interest paid                                                                              |       | $                                            | 125        |   | $ | 293 |   |
|                                                                                       |       |                                         |       |   |   |
| Investing and  Financing Activities Not Affecting Cash:                                    |       |                                         |       |   |   |
| Manufacturer financing of aircraft and other  non-cash transactions                        |       | $                                            | 117        |   | $ | 204 |   |

 

*Seeaccompanying notes.*

5

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**NORTHWEST AIRLINES CORPORATION(DEBTOR-IN-POSSESSION)**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1 – Basis ofPresentation**

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

As discussed in Note 2,on September 14, 2005 (the “Petition Date”), NWA Corp. and certain of itsdirect and indirect subsidiaries (collectively, the “Debtors”) filed voluntarypetitions for relief under Chapter 11 of the United States Bankruptcy Code withthe United States Bankruptcy Court for the Southern District of New York (the “BankruptcyCourt”).  Subsequently, on September 30,2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWA Corp., alsofiled a voluntary petition for relief under Chapter 11.  The Bankruptcy Court is jointly administeringthese cases under the caption “In re Northwest Airlines Corporation, et al.,Case No. 05-17930 (ALG)” (the “Chapter 11 case”).  Accordingly, the accompanying condensedconsolidated financial statements have been prepared in accordance with theAmerican Institute of Certified Public Accountants Statement of Position 90-7, *Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code* (“SOP 90-7”), and on a going concernbasis, which contemplates continuity of operations, realization of assets andliquidation of post-petition liabilities in the ordinary course ofbusiness.  In accordance with SOP 90-7,the financial statements for the periods presented distinguish transactions andevents that are directly associated with the reorganization from the ongoingoperations of the Company.

The Company maintains aWeb site at *http://www.nwa.com*.  Information contained on the Company’s Website is not incorporated into this quarterly report on Form 10-Q.  Annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, all amendments to thosereports and other information about the Company are available free of chargethrough this Web site at *http://ir.nwa.com*as soon as reasonably practicable after those reports are electronically filedwith or furnished to the SEC.  Forinformation or questions concerning the Company’s Chapter 11 restructuring see:*http://www.nwa-restructuring.com*.

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

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

The Company believes that the material risks and uncertainties thatcould affect the outlook of an airline operating under Chapter 11 and in aglobal economy include, among others, the ability of the Company to continue asa going concern, the ability of the Company to obtain and maintain anynecessary financing for operations and other purposes, whetherdebtor-in-possession financing or other financing, the ability of the Companyto maintain adequate liquidity, the ability of the Company to absorb escalatingfuel costs, the Company’s ability to obtain court approval with respect tomotions in the Chapter 11 proceedings prosecuted by it from time to time,the ability of the Company to develop, confirm and consummate a plan ofreorganization with respect to its Chapter 11 proceedings, risksassociated with third parties seeking and obtaining court approval to terminateor shorten the exclusivity period for the Company to propose and confirm a planof reorganization, to appoint a Chapter 11 trustee or to convert the casesto Chapter 7 cases, the ability of the Company to obtain and maintain normalterms with vendors and service providers, the Company’s ability to maintaincontracts that are critical to its operations, the ability of the Company torealize assets and satisfy liabilities without substantial adjustments and/orchanges in ownership, the potential adverse impact of the Chapter 11proceedings on the Company’s liquidity or results of operations, the ability ofthe Company to operate pursuant to the terms of its financing facilities(particularly the related financial covenants), the ability of the Company toattract, motivate and/or retain key

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executivesand associates, the future level of air travel demand, the Company’s futurepassenger traffic and yields, the airline industry pricing environment,increased costs for security, the cost and availability of aviation insurancecoverage and war risk coverage, the general economic condition of the UnitedStates and other regions of the world, the price and availability of jet fuel,the aftermath of the war in Iraq, the possibility of additional terroristattacks or the fear of such attacks, concerns about SARS, Avian flu or otherinfluenza or contagious illnesses, labor strikes, work disruptions, labornegotiations both at other carriers and the Company, low cost carrierexpansion, capacity decisions of other carriers, actions of the U.S. andforeign governments, foreign currency exchange rate fluctuations, inflation andother factors discussed herein. Additional information with respect to these factors and other eventsthat could cause differences between forward-looking statements and futureactual results is contained in “Item 1. Business – Risk Factors Related toNorthwest and the Airline Industry” in the Company’s Annual Report on Form 10-Kfor 2005.

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

*Background and GeneralBankruptcy Matters.*  On September 14, 2005, NWA Corp. and 12 ofits direct and indirect subsidiaries filed voluntary petitions for relief underChapter 11 of the United States Bankruptcy Code with the United StatesBankruptcy Court for the Southern District of New York.  Subsequently, on September 30, 2005, NWAAircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed avoluntary petition for relief under Chapter 11. The Bankruptcy Court is jointly administering these cases under the caption“In re Northwest Airlines Corporation, et al., Case No. 05-17930 (ALG)”.  Accordingly, the accompanying consolidatedfinancial statements have been prepared in accordance with SOP 90-7, and on agoing concern basis, which contemplates continuity of operations, realizationof assets and liquidation of post-petition liabilities in the ordinary courseof business.  In accordance with SOP90-7, the financial statements for the periods presented distinguishtransactions and events that are directly associated with the reorganizationfrom the ongoing operations of the Company. The consolidated financial statements shown herein include certainsubsidiaries that did not file to reorganize under Chapter 11.  The assets and liabilities of thesesubsidiaries are not considered material to the consolidated financialstatements.

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

The Company intends touse the provisions of Chapter 11 to reorganize its business, targeting $2.5billion in annual business improvements, in order to return to profitability ona sustained basis.  The Chapter 11process will allow the Company to realize three major elements essential to itstransformation including:

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

·          Resizingand optimization of the Company’s fleet to better serve Northwest’s markets;

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

The Company has taken a number of actions necessary to achieve theseobjectives.  These actions are outlinedbelow and in “Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Overview.”  In addition, any business plan that forms thebasis for a plan of reorganization will have to produce sufficient returns topermit the Company to have adequate access to the capital markets.  Any plan will likely require profit improvementsand/or cost reductions beyond those elements identified above.  The Company will continue to refine itsChapter 11 related goals and objectives in response to market conditions.

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

7

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

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

The Debtors’ rights topossess and operate certain qualifying aircraft, aircraft engines and otheraircraft-related equipment that are leased or subject to a security interest orconditional sale contract are governed by Section 1110 of the BankruptcyCode.  Section 1110 provides that unlessthe Debtors take certain action within 60 days after the Petition Date or suchlater date as is agreed by the applicable lessor, secured party, or conditionalvendor, the contractual rights of such financier to take possession of suchequipment and to enforce any of its other rights or remedies under theapplicable agreement are not limited or otherwise affected by the automaticstay or any other provision of the Bankruptcy Code.

The Section 1110 deadline for the Debtors wasNovember 14, 2005.  The Debtor hastargeted to restructure approximately 50% of its fleet count and is currentlyon track to realize projected annual cost reductions of $400 million primarilyrelated to reduced aircraft ownership costs including interest, rent anddepreciation expense.  Agreements are inplace or have been tentatively reached for the majority of these targetedsavings.

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

Under Section 365 ofthe Bankruptcy Code, debtors may assume, assume and assign, or reject certainexecutory contracts and unexpired leases, including leases of real property,aircraft, and aircraft engines, subject to the approval of the Bankruptcy Courtand other conditions.  In general,rejection of an unexpired lease or executory contract is treated as apre-petition breach of the lease or contract in question.  Subject to certain exceptions, this rejectionrelieves debtors of performing their future obligations under that lease orcontract but entitles the lessor or contract counterparty to a pre-petitiongeneral unsecured claim for damages caused by the deemed breach.  These pre-petition general unsecured claimsfor damages, where appropriate, are reflected in the Debtors’ liabilitiessubject to compromise.  See “Note 8 –Liabilities Subject to Compromise” for additional information.  The Company expects that additional liabilitiessubject to compromise will arise in the future as a result of damage claimsresulting from the rejection of certain executory contracts and unexpiredleases by the Debtors.  However, theCompany expects that the assumption of certain executory contracts andunexpired leases may convert liabilities subject to compromise to liabilitiesnot subject to compromise.  Due to theuncertain nature of many of the potential rejection and abandonment relatedclaims, the Company is unable to project the magnitude of these overall claimswith any degree of certainty at this time.

*LaborCost Restructuring.*  The Bankruptcy Code provides specialtreatment for collective bargaining agreements (“CBAs”).  In particular, Section 1113(c) of theBankruptcy Code permits the Company to move to reject its CBAs if the Companyfirst satisfies a number of statutorily prescribed substantive and proceduralprerequisites and obtains the Bankruptcy Court’s approval of the rejection orthe expiration of the statutorily prescribed time period.  After bargaining in good faith and sharingrelevant information with its unions, a debtor must make proposals to modifyits existing CBAs based on the most complete and reliable information availableat the time.  The proposed modificationsmust be necessary to permit the reorganization of a debtor and must providethat all the affected parties are treated fairly and equitably.  Ultimately, rejection of the CBAs isappropriate if the unions refuse to agree to a debtor’s necessary proposal “withoutgood cause” and the Bankruptcy Court determines that the balance of theequities favors rejection.  In October2005, the Company commenced Section 1113(c) proceedings with the ProfessionalFlight Attendants Association

8

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(“PFAA”), the Air LinePilots Association (“ALPA”), and the International Association of Machinistsand Aerospace Workers (“IAM”), and has subsequently completed these hearings.

The Company hasachieved its target of approximately $1.4 billion in annual labor cost savingsand has reached consensual CBAs with ALPA and the IAM.  The Company implemented the ALPA and IAMagreements on August 1, 2006.  TheCompany has also implemented new labor agreements with the Aircraft TechnicalSupport Association (“ATSA”), the Transport Workers Union of America (“TWU”),and the Northwest Airlines Meteorologists Association (“NAMA”), and has imposedcontract terms on the Aircraft Mechanics Fraternal Association (“AMFA”).  Two rounds of salaried and managementemployee pay and benefit cuts have also been achieved and implemented.

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

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

On July 31, 2006,following the Company’s imposition of new contract terms, and in accordancewith the parties’ prior agreement, the AFA-CWA provided the Company with a15-day notice of its intent to strike or engage in work actions.  In response, on August 1, 2006, the Companyfiled a motion with the Bankruptcy Court seeking to obtain an injunctionagainst such activities.  Failure toobtain such an injunction could lead to a strike or other form of self-help,which could have a material adverse effect on the Company.

The Company has also commenced proceedings underSection 1114 of the Bankruptcy Code, pursuant to which the Company is seekingreductions in the costs it incurs to provide medical benefits to retirees.

*SecuritiesTrading Matters. *On October 28, 2005, the Bankruptcy Courtentered an order that restricts the trading of the common stock and debtinterests in the Company.  The purpose ofthe order is to ensure that the Company does not lose the benefit of its netoperating loss carryforwards (“NOLs”) for tax purposes.  Under federal and state income tax law, NOLscan be used to offset future taxable income, and thus are a valuable asset ofthe Debtors’ estate.  Certain trading inthe Company’s stock (or debt when the Company is in bankruptcy) could adverselyaffect the Company’s ability to use the NOLs. Thus, the Company obtained an order that enables it to closely monitorcertain transfers of stock and claims and restrict those transfers that maycompromise the Company’s ability to use its NOLs.  See “Note 6 – Income Taxes” for furtherinformation related to the Company’s NOLs.

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

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

*Planof Reorganization. *In order to exit Chapter 11 successfully,the Company must propose, and obtain confirmation by the Bankruptcy Court of, aplan of reorganization that satisfies the requirements of the BankruptcyCode.  A plan of reorganization wouldresolve, among other things, the Debtors’ pre-petition obligations and set forththe revised capital structure of the newly reorganized entity.  The Debtors have the exclusive right for 120days from the Petition Date to file a plan of reorganization and, if they doso, 60 additional days to obtain necessary acceptance of the plan.  The Bankruptcy Court has entered orders whichhave extended the deadline of the Debtors’ exclusive right to file a plan

9

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of reorganization andthe deadline to obtain necessary acceptance of the plan to January 16, 2007 andMarch 16, 2007, respectively.

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

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

**Note 3 – Recent Accounting Pronouncements**

In June 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 defines thethreshold for recognizing tax benefits in the Company’s financial statementsand promotes consistency in recognizing and measuring the tax benefits.  FIN 48 provides that tax benefits are to berecognized if the Company’s tax return positions will “more likely than not” besustained by a taxing authority.  Inaddition, FIN 48 requires an annual disclosure in the Company’s financialstatements of the beginning and ending balances of unrecognized taxbenefits.  At this time, the impact ofadopting FIN 48 to the Company has not yet been determined.  FIN 48 is effective for the quarter beginningJanuary 1, 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.  In addition to requiringsupplemental disclosures, SFAS No. 123R eliminated the option to apply theintrinsic value measurement provisions of APB No. 25, *Accounting for Stock Issued to Employees* (“APBNo. 25”), to stock compensation awards issued to employees.  Furthermore, the Statement required theCompany to recognize compensation cost for the portion of outstanding awardspreviously accounted for under the provisions of APB No. 25 for which therequisite service had not been rendered as of the adoption date for thisStatement.  Because the Companyvoluntarily adopted the fair value method prescribed by SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFASNo. 123”) using the prospective method, effective January 1, 2003,the unvested awards still accounted for under the provisions of APBNo. 25, and therefore subject to the provisions of SFAS No. 123R,were minimal.  The Statement alsorequired the Company to estimate forfeitures of stock compensation awards as ofthe grant date of the award.  The Company’sprevious policy was to recognize forfeitures as they occurred, and the requiredadjustment to estimate forfeitures as of the grant date of the award foroutstanding awards that were not fully vested as of December 31, 2005 wasimmaterial.

**Note 4 – Geographic Regions**

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

|                             | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|-----------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| **(In millions)**      | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Domestic                    | ** ** | **$**                                          | **2,304**  |                                         | $          | 2,172 | ** ** | **$** | **4,322** |   | $ | 4,103 |   |
| Pacific,  principally Japan | ** ** | **643**                                        |       | 667                                          | ** ** | **1,253** |   | 1,259 |   |
| Atlantic                    | ** ** | **344**                                        |       | 356                                          | ** ** | **606** |   | 631 |   |
| Total operating  revenues   |       | **$**                                          | **3,291**  |                                         | $          | 3,195 | ** ** | **$** | **6,181** |   | $ | 5,993 |   |

 

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

**Note5 – Reorganization Related Items**

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

Reorganization items recorded during the threeand six months ended June 30, 2006, largely consisted of charges related to therestructuring of aircraft leases, debt restructuring, net aircraft rejectioncharges, and professional fees, partially offset by a curtailment gain relatedto freezing a nonqualified pilot pension plan. Additionally, the Company recognized impairment charges on six ownedaircraft, and related inventory and equipment, which were permanently removedfrom service; see “Note 11 – Aircraft Impairments” for additionalinformation.  Restructured aircraftlease/debt charges are primarily non-cash costs that include the estimatedclaims resulting from the Company’s renegotiation of certain aircraftobligations.  Aircraft rejection chargesare non-cash costs that include the estimated allowable claims, net of gains onresidual value guarantees, resulting from the Company’s rejection of certainaircraft leases and return of aircraft as part of the bankruptcy process.  These claims remain subject to futureadjustments arising from negotiated settlements, actions of the BankruptcyCourt, the determination as to the value of any collateral securing claims,proofs of claim or other events.  Thecharges for professional fees include only those professional fees related tothe bankruptcy process.

Net reorganization items, as shown on theCondensed Consolidated Statements of Operations, consist of the following:

|                                           | ** ** | Three months ended | ** ** | **Six months ended** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| **(In millions)**                    | ** ** | **June 30, 2006**  | ** ** | **June 30, 2006**    | ** ** |
| Restructured  aircraft lease/debt charges | ** ** | **$**                        | **348**    | ** **                     | **$**      | **1,323** | ** ** |
| Aircraft  rejection charges, net          | ** ** | **86**                       | ** ** | **111**                        | ** ** |
| Aircraft and  aircraft related impairment | ** ** | **28**                       | ** ** | **28**                         | ** ** |
| Pension plan  curtailment gain            | ** ** | **—**                   | ** ** | **(49**                        | **)**      |
| Professional  fees                        | ** ** | **11**                       | ** ** | **25**                         | ** ** |
| Other                                     | ** ** | **(9**                       | **)**      | **1**                          | ** ** |
| Reorganization  items, net                | ** ** | **$**                        | **464**    | ** **                     | **$**      | **1,439** | ** ** |

 

**Note 6 – Income Taxes**

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

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

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

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

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

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

|                                                                                      | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| **(In millions, except per share data)**                    | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Numerator:**                                                                       |       |                                           |       |                                         |       |   |   |   |   |
| Net income  (loss) before cumulative effect of accounting change                     | ** ** | **$**                                          | **(285**   | **)**                                        | $          | (226 | ) | **$** | **(1,389** | **)** | $ | (686 | ) |
| Cumulative  effect of accounting change                                              | ** ** | **—**                                     |       | —                                       | ** ** | **—** |   | (69 | ) |
| Preferred stock  requirements                                                        | ** ** | **—**                                     |       | (8                                           | )          | **—** |   | (16 | ) |
| Net income  (loss) applicable to common stockholders                                 | ** ** | **$**                                          | **(285**   | **)**                                        | $          | (234 | ) | **$** | **(1,389** | **)** | $ | (771 | ) |
|                                                                                 |       |                                           |       |                                         |       |   |   |   |   |
| **Denominator:**                                                                     |       |                                           |       |                                         |       |   |   |   |   |
| Weighted-average  shares outstanding for basic and diluted earnings (loss) per share | ** ** | **87,280,293**                                 |       | 86,889,597                                   | ** ** | **87,272,504** |   | 86,810,022 |   |
| Earnings (loss)  per common share:                                                   |       |                                           |       |                                         |       |   |   |   |   |
| Income (loss)  before cumulative effect of accounting change                         | ** ** | **$**                                          | **(3.27**  | **)**                                        | $          | (2.60 | ) | **$** | **(15.92** | **)** | $ | (7.90 | ) |
| Cumulative  effect of accounting change                                              | ** ** | **—**                                     |       | —                                       | ** ** | **—** |   | (0.80 | ) |
| Preferred stock  requirements                                                        | ** ** | **—**                                     |       | (0.09                                        | )          | **—** |   | (0.18 | ) |
| Net income (loss)  applicable to common stockholders                                 | ** ** | **$**                                          | **(3.27**  | **)**                                        | $          | (2.69 | ) | **$** | **(15.92** | **)** | $ | (8.88 | ) |

 

Incremental shares related to dilutive securities were notincluded in the diluted earnings per share calculation because the Companyreported a net loss for these periods. These incremental shares included 19,096,699 shares for both the threeand six months ended June 30, 2006, and 19,557,057 and 19,488,053 for the threeand six months ended June 30, 2005, respectively.  Incremental shares related to dilutivesecurities have an anti-dilutive impact on earnings per share when a net lossis reported and therefore are not included in the calculation.

Additionally, 6,284,519 and 6,417,876 shares of Series C Preferred Stockwere excluded from the effect of dilutive securities for the three and sixmonths ended June 30, 2006 and 2005, respectively, because the Company reporteda net loss for these periods.

Total employee stock options outstanding of7,622,744 and total employee stock options and restricted shares outstanding of9,786,668 as of June 30, 2006 and 2005, respectively, were not included indiluted securities because the Company reported a net loss for the three andsix months ended June 30, 2006 and 2005. There were no restricted shares outstanding as of June 30, 2006.

**Note 8 – Liabilities Subject to Compromise**

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

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

Differences between liability amounts the Company has estimated andfuture claims to be filed by its creditors will be examined by the Debtors and,if necessary, will be subject to a final determination of the allowable claimsby the Bankruptcy Court.  Thedetermination of how these liabilities will ultimately be treated will not beknown until an approved plan of reorganization is confirmed by the BankruptcyCourt and the claims resolution process is complete.  Completion of the claims resolution processmay occur well after confirmation of a plan of reorganization.  The Company will continue to evaluate the amountsof these liabilities through the remainder of the Chapter 11 process.  To the extent that the

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Companyidentifies additional amounts subject to compromise, they will be recognizedaccordingly.  As a result, the amount ofliabilities subject to compromise is subject to change.

Subsequentto its Chapter 11 filing, the Company recorded post-petition interest expenseon pre-petition obligations only to the extent it believed the interest wouldbe paid during the bankruptcy proceeding or that it was probable that theinterest would be an allowed claim.  Hadthe Company recorded interest expense based on its pre-petition contractualobligations, interest expense would have been higher by $48.5 million duringthe second quarter of 2006 and $96.8 million for the six months ended June 30,2006.

At June 30, 2006 and December 31, 2005, theCompany had liabilities subject to compromise of $15.2 billion and $14.2billion, respectively, consisting of the following:
|                                                              | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| **(In millions)**                                       | ** ** | **2006**         | ** ** | **2005**             | ** ** |
| Debt, including accrued  interest                            | ** ** | **$**            | **7,011**  |                 | $          | 7,411 |   |
| Pension, postretirement  and other employee related expenses | ** ** | **4,229**        |       | 3,948                |       |
| Aircraft-related  accruals and deferrals                     | ** ** | **2,848**        |       | 1,455                |       |
| Capital lease  obligations, including accrued interest       | ** ** | **239**          |       | 350                  |       |
| Accounts payable and  other liabilities                      | ** ** | **888**          |       | 998                  |       |
| Total liabilities  subject to compromise                     | ** ** | **$**            | **15,215** |                 | $          | 14,162 |   |

 

In addition to the $15.2billion of liabilities subject to compromise as of June 30, 2006, itemizedabove, the Company’s $279 million of Preferred Redeemable Stock (“Series CPreferred Stock”) is also subject to compromise.  This preferred security is not presented as aliability on the Company’s Condensed Consolidated Balance Sheets due to itsconversion features, as required by the provisions of SFAS 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.

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

The bankruptcy filing triggered defaults onsubstantially all the Company’s debt and lease obligations.  Long-term pre-petition debt obligations,which are classified as liabilities subject to compromise, are included in “Note8 – Liabilities Subject to Compromise.” Maturities of long-term debt not subject to compromise, excludingcapital lease obligations, through December 31, 2010, are as follows (inmillions):

| remainder of 2006 |   |   | $   | 49     |   |
|-------------------|--------|--------|-----|--------|--------|
| 2007              |   |   | 112 |   |
| 2008              |   |   | 307 |   |
| 2009              |   |   | 172 |   |
| 2010              |   |   | 118 |   |

 

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**Note 10 – Fleet Informationand Commitments**

As shown in the following table, Northwest operateda fleet of 371 aircraft at June 30, 2006, consisting of 306 narrow-body and 65wide-body aircraft.  Northwest’s purchasecommitments for aircraft as of June 30, 2006 are also provided.

 

|                                       | ** ** | ** **   | ** ** | **In Service** | ** ** | **Aircraft** | ** ** |
|---------------------------------------|------------|--------------|------------|---------------------|------------|--------------|------------|
| ** **                            | ** ** | **Seating**  | ** ** | ** **          | ** ** | **Capital**  | ** ** | **Operating** | ** ** | ** ** | ** ** | **on Firm** | ** ** |
| **Aircraft Type**                | ** ** | **Capacity** | ** ** | **Owned**           | ** ** | **Lease**    | ** ** | **Lease** | ** ** | **Total** | ** ** | **Order** | ** ** |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Passenger Aircraft**                |       |         |       |                |       |         |       |   |   |   |   |   |   |
| Airbus:                               |       |         |       |                |       |         |       |   |   |   |   |   |   |
| A319                                  |       | 124          |       | 64                  |       | —       |       | 2 |   | 66 |   | 5 |   |
| A320                                  |       | 148          |       | 45                  |       | —       |       | 28 |   | 73 |   | 2 |   |
| A330-200                              |       | 243          |       | 9                   |       | —       |       | — |   | 9 |   | 2 | ** ** |
| A330-300                              |       | 298          |       | 11                  |       | —       |       | — |   | 11 |   | 10 | ** ** |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| Boeing:                               |       |         |       |                |       |         |       |   |   |   |   |   |   |
| 787-800                               |       | 221          |       | —              |       | —       |       | — |   | — |   | 18 | (1) |
| 757-200                               |       | 180-184      |       | 32                  |       | 1            |       | 13 |   | 46 |   | — |   |
| 757-300                               |       | 224          |       | 16                  |       | —       |       | — |   | 16 |   | — |   |
| 747-200                               |       | 353-430      |       | 2                   |       | —       |       | 1 |   | 3 |   | — |   |
| 747-400                               |       | 403          |       | 4                   |       | —       |       | 12 |   | 16 |   | — |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| McDonnell Douglas:                    |       |         |       |                |       |         |       |   |   |   |   |   |   |
| DC9                                   |       | 100-125      |       | 105                 |       | —       |       | — |   | 105 |   | — |   |
| DC10                                  |       | 273          |       | 12                  |       | —       |       | — |   | 12 |   | — |   |
|                                  |       |         |       | 300                 |       | 1            |       | 56 |   | 357 |   | 37 |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Freighter Aircraft**                |       |         |       |                |       |         |       |   |   |   |   |   |   |
| Boeing 747F                           |       |         |       | 11                  |       | —       |       | 3 |   | 14 |   | — |   |
| **Total Northwest Operated Aircraft** | ** ** | ** **   | ** ** | **311**             | ** ** | **1**        | ** ** | **59** | ** ** | **371** | ** ** | **37** | ** ** |
| ** **                            | ** ** | ** **   | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Regional Aircraft**                 |       |         |       |                |       |         |       |   |   |   |   |   |   |
| Avro RJ85                             |       | 69           |       | 7                   |       | —       |       | 9 |   | 16 |   | — |   |
| CRJ-200/440                           |       | 44-50        |       | —              |       | —       |       | 126 |   | 126 |   | 13 | (1) |
| Saab 340                              |       | 30-34        |       | —              |       | —       |       | 49 |   | 49 |   | — |   |
| **Total Airlink Operated Aircraft**   | ** ** | ** **   | ** ** | **7**               | ** ** | **—**   | ** ** | **184** | ** ** | **191** | ** ** | **13** |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Total Aircraft**                    | ** ** | ** **   | ** ** | **318**             | ** ** | **1**        | ** ** | **243** | ** ** | **562** | ** ** | **50** |   |

 

----

(1) The Company entered intothese aircraft commitments prior to its Chapter 11 filing; the applicableagreements have not yet been affirmed as part of the Company’s overall plan ofreorganization.

The Company took delivery of two Airbus A330-200 aircraft during the sixmonths ended June 30, 2006.  Inconnection with the acquisition of these two aircraft, the Company entered intolong-term debt arrangements.  Under sucharrangements, the aggregate amount of debt incurred totaled $143 million.

**Note 11 – Aircraft Impairments**

In the second quarter of 2006, the Companyrecorded $28 million related to the impairment of six owned aircraft, andrelated inventory and equipment, which were permanently removed from service.  These charges reflect the Company’s decisionto accelerate the retirement of its DC10 aircraft and to permanently park threeDC9 aircraft, consistent with the Company’s ongoing review of its aircraftfleet plan in conjunction with its overall route structure and capacityrequirements.  The second quarter 2006impairment charges were recorded as reorganization expenses and are included in“Note 5 – Reorganization Related Items.” In the second quarter of 2005, the Company recorded impairment charges totaling$48 million associated with aircraft and related equipment on nine owned andtwo leased aircraft of various types.

14

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

Comprehensive income (loss) consisted of thefollowing:
|                                                                  | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| **(In millions)**                                           | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income (loss)                                                | ** ** | **$**                                          | **(285**   | **)**                                        | $          | (226 | ) | **$** | **(1,389** | **)** | $ | (755 | ) |
| Change in unrealized  gain/loss on available-for-sale securities | ** ** | **(1**                                         | **)**      | —                                       | ** ** | **1** |   | (3 | ) |
| Change in deferred  gain/loss from hedging activities            | ** ** | **1**                                          |       | 10                                           | ** ** | **2** |   | 13 |   |
| Foreign currency  translation adjustments                        | ** ** | **2**                                          |       | (2                                           | )          | **2** |   | (5 | ) |
| Comprehensive income  (loss)                                     | ** ** | **$**                                          | **(283**   | **)**                                        | $          | (218 | ) | **$** | **(1,384** | **)** | $ | (750 | ) |

 

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

The Company has several defined benefitpension plans and defined contribution401(k)-type plans covering substantially all of its employees.  The benefits for these plans are basedprimarily on years of service and employee compensation.  It is the Company’s policy to fund annuallyat least the minimum contribution as required by the Employee Retirement IncomeSecurity Act of 1974, as amended (“ERISA”). However, as a result of the commencement of the Company’s Chapter 11case, the Company did not make minimum cash contributions to its definedbenefit pension plans that were due after September 14, 2005.  Effective August 31, 2005 and January 31,2006, the Company froze future benefit accruals under the Northwest AirlinesPension Plans for Salaried Employees and Pilot Employees, respectively.  Replacement pension coverage will be providedfor these employees through 401(k)-type defined contribution plans. The Companycurrently intends, however, to continue timely to pay the normal cost componentto the plans’ minimum funding requirements relating to service renderedpost-petition and certain interest payments associated with its 2003 contractand salaried plan year waiver.

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

***Components of net periodic benefit cost of definedbenefit plans and defined contribution plan costs:***
|                                                 | ** ** | **Three months ended June 30** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **Pension Benefits**                          | ** ** | **Other Benefits** | ** ** |
| **(In millions)**                          | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Defined benefit plan costs                      | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                    | ** ** | **$**                                              | **34**     |   | $ | 73 | ** ** | **$** | **9** |   | $ | 8 |   |
| Interest cost                                   | ** ** | **132**                                            |       | 137 | ** ** | **17** |   | 14 |   |
| Expected return  on plan assets                 | ** ** | **(120**                                           | **)**      | (128 | ) | **—** |   | — |   |
| Amortization of  prior service cost             | ** ** | **10**                                             |       | 19 | ** ** | **(2** | **)** | (2 | ) |
| Recognized net  actuarial loss and other events | ** ** | **29**                                             |       | 41 | ** ** | **10** |   | 8 |   |
| Net periodic  benefit cost                      | ** ** | **85**                                             |       | 142 | ** ** | **34** |   | 28 |   |
| ** **                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Defined contribution  plan costs                | ** ** | **13**                                             |       | — | ** ** | **—** |   | — |   |
| ** **                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total benefit cost                              | ** ** | **$**                                              | **98**     |   | $ | 142 | ** ** | **$** | **34** |   | $ | 28 |   |

** **

15

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|                                                 | ** ** | **Six months ended June 30** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **Pension Benefits**                        | ** ** | **Other Benefits** | ** ** |
| **(In millions)**                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Defined benefit plan  costs                     | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                    | ** ** | **$**                                            | **69**     |   | $ | 146 | ** ** | **$** | **18** |   | $ | 17 |   |
| Interest cost                                   | ** ** | **264**                                          |       | 275 | ** ** | **32** |   | 28 |   |
| Expected return  on plan assets                 | ** ** | **(240**                                         | **)**      | (255 | ) | **—** |   | — |   |
| Amortization of  prior service cost             | ** ** | **20**                                           |       | 37 | ** ** | **(5** | **)** | (5 | ) |
| Recognized net  actuarial loss and other events | ** ** | **57**                                           |       | 76 | ** ** | **20** |   | 15 |   |
| Net periodic  benefit cost                      | ** ** | **170**                                          |       | 279 | ** ** | **65** |   | 55 |   |
| ** **                                      | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Defined contribution  plan costs                | ** ** | **26**                                           |       | — | ** ** | **—** |   | — |   |
| ** **                                      | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total benefit cost                              | ** ** | **$**                                            | **196**    |   | $ | 279 | ** ** | **$** | **65** |   | $ | 55 |   |

 

For the quarter ended March 31, 2006 theCompany recorded a $49 million pension curtailment gain related to freezing theNorthwest Airlines Pension Plan for Pilots. This curtailment gain was recorded as a reorganization related item.  Upon the freezing of the Northwest Airlines PensionPlan for Contract Employees, an additional non-cash curtailment charge ofapproximately $350 million would be recorded.

OnApril 15, 2003, the Internal Revenue Service (“IRS”) approved the applicationsubmitted by the Company to reschedule, over a five year period beginning inApril 2004, the $454 million in 2003 plan year contributions under the pensionplans for contract and salaried employees. The Company satisfied the conditions for rescheduling plan year 2003contributions by granting the plans liens on certain assets of the Company(including domestic and foreign slots, international routes, aircraft andengines).

On April 10, 2004, the president signed into law the Pension FundingEquity Act, which reduced the Company’s required 2004 and 2005 plan yearcontributions through two mechanisms: (1) certain companies were permitted toelect partial relief from the deficit reduction contribution requirements thatotherwise would have applied, an election the Company made; and (2) theapplicable discount rate used to determine funding was increased to reflectyields on indices of high quality corporate bonds instead of 30-year U.S.Treasury rates.  Including the effect ofthe Pension Funding Equity Act, the Company’s 2005 calendar year cashcontributions to qualified defined benefit pension plans were expected toapproximate $411 million.  ThroughSeptember 14, 2005, the Company had contributed $268 million to theseplans.  As a result of the Company’svoluntarily filing for Chapter 11 on September 14, 2005, the Company did notmake scheduled minimum cash contributions to its qualified defined benefitpension plans due after its bankruptcy filing. The Company currently intends, however, to continue timely to pay thenormal cost component of the plans’ minimum funding requirements relating toservice rendered post-petition and certain interest payments associated withits 2003 contract and salaried plan year waiver.

The Company has appointed an independent fiduciary for all of itstax-qualified defined benefit pension plans, who is charged with pursuing, onbehalf of the plans, claims to recover minimum funding contributions due underfederal law, to the extent that the Debtors are not continuing to fund theplans due to bankruptcy prohibitions. The plans’ level of underfunding is expected to increase during theChapter 11 cases.

The U.S. Senate passed a pension reform bill inNovember 2005 that would allow airlines to amortize pension liabilities over atwenty-year period.  The pension reformbill passed by the U.S. House of Representatives in December 2005 did notinclude a similar provision. The bills were sent to a conference committee inMarch 2006. On July 28, 2006, the U.S. House of Representative passed thePension Protection Act of 2006 [H.R. 4] (the “Protection Act”). On August 3,2004, the Protection Act was passed, without modifications, by the U.S. Senate.To become law, the Protection Act now must be signed by the president. TheProtection Act contains comprehensive pension funding reform provisions as wellas many other benefit-related provisions. The Protection Act also containsspecific airline relief, including allowing airlines with frozen plans to fundtheir unfunded liabilities over 17 years. The Company supports approval of thislegislation.  The White House announcedin a press release on August 4, 2006 that the president would sign thelegislation.

The funding requirement tomeet the normal cost component of the qualified plans’ minimum fundingrequirements related to post-petition service is estimated, excluding theimpact of any new legislation, at approximately $75 million for calendaryear 2006 of which $34 million had been paid as of June 30, 2006.  Due to uncertainties regarding severalsignificant assumptions involved in estimating future required contributions toits defined benefit pension plans, such as the amount and timing of assetreturns, interest rate levels, the Company’s Chapter 11 proceedings, and inparticular, the impact of proposed pension legislation related to fundingrequirements, the Company is not able to reasonably estimate

16

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its future required contributions beyond 2006. If sufficientlegislative pension funding relief is not approved, termination of the Company’sdefined benefit plans would become inevitable.

**Note 14 – Stock-Based Compensation**

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

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

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions:
|                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                      |       |                                               |       |                                             |       |   |   |   |   |
| Weighted average  risk-free interest rate | ** ** | **N/A**                                            |       | 3.9                                              | %          | **N/A** |   | 3.9 | % |
|                                      |       |                                               |       |                                             |       |   |   |   |   |
| Stock price volatility                    | ** ** | **N/A**                                            |       | 50.0                                             | %          | **N/A** |   | 50.0 | % |
|                                      |       |                                               |       |                                             |       |   |   |   |   |
| Expected lives in years                   | ** ** | **N/A**                                            |       | 6.0                                              | ** ** | **N/A** |   | 6.0 |   |

 

A reconciliation of the number of options outstandingand exercisable under the Management Plans as of June 30, 2006, and changesduring the six months then ended, are as follows:
|                                     | ** ** | ** ** | ** ** | Weighted-    | ** ** |
|-------------------------------------|------------|------------|------------|--------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**  | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| **(shares in thousands)** | ** ** | **Shares** | ** ** | **Price**    | ** ** |
| Outstanding at 12/31/05             | ** ** | **2,815**  |       | $            | 12.59      |   |
| Granted                             | ** ** | **—** |       | —       |       |
| Forfeited                           | ** ** | **(256**   | **)**      | 14.78        |       |
| Exercised                           | ** ** | **—** |       | —       |       |
| Outstanding at 6/30/06              | ** ** | **2,559**  |       | 12.37        |       |
|                                |       |       |       |         |       |
| Exercisable at 6/30/06              | ** ** | **1,935**  |       | 13.92        |       |
|                                     |            |            |            |              |            |  |

 

17

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**At June 30, 2006:**
|                                     | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **(shares in thousands)** | ** ** | ** **                   | ** ** | **Weighted-Average**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Range of**                        | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Weighted-Average** | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
| **Exercise  Prices**                | ** ** | **Shares**                   | ** ** | **Contractual Life**    | ** ** | **Exercise Price** | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
|                                |       |                         |       |                         |       |   |   |   |   |   |   |
| $4.61 to $24.59 (1)                 |       | 2,276                        |       | 6.3  years                   |       | $ | 9.43 |   | 1,652 |   | $ | 10.14 |   |
| 26.16 to 39.31                      |       | 257                          |       | 1.7  years                   |       | 34.60 |   | 257 |   | 34.60 |   |
| 43.56 to 51.97                      |       | 26                           |       | 2.6 years                    |       | 50.49 |   | 26 |   | 50.49 |   |
|                                     |            |                              |            |                              |            |  |  |  |  |  |  |  |  |

 

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(1)             1.7million of the 2.3 million shares outstanding had an exercise price of $8.31,and approximately 1.3 million of these shares were exercisable.

A reconciliation of the number of options outstanding and exercisableunder the Pilot Plan as of June 30, 2006, and changes during the six monthsthen ended, is as follows:
|                                     | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
|-------------------------------------|------------|------------|------------|---------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**   | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Exercise**  | ** ** |
| **(shares in thousands)** | ** ** | **Shares** | ** ** | **Price**     | ** ** |
| Outstanding at  12/31/05            | ** ** | **5,064**  |       | $             | 9.96       |   |
| Granted                             | ** ** | **—** |       | —        |       |
| Forfeited                           | ** ** | **—** |       | —        |       |
| Exercised                           | ** ** | **—** |       | —        |       |
| Outstanding at  6/30/06             | ** ** | **5,064**  |       | 9.96          |       |
|                                |       |       |       |          |       |
| Exercisable at 6/30/06              | ** ** | **4,603**  |       | 10.03         |       |
|                                     |            |            |            |               |            |  |

 

**At June 30, 2006:**
|                                     | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | ** **                   | ** ** | **Weighted-Average**         | ** ** | ** ** | ** ** |
| **(shares in thousands)** | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | ** ** | ** ** |
| **Exercise Prices**                 | ** ** | **Shares**                   | ** ** | **Contractual Life**    | ** ** | **Shares** | ** ** |
|                                |       |                         |       |                         |       |   |   |
| $7.325                              |       | 3,500                        |       | 8.3  years                   |       | 3,500 |   |
| 9.185                               |       | 926                          |       | 7.1  years                   |       | 465 |   |
| 19.62                               |       | 134                          |       | 5.2  years                   |       | 134 |   |
| 24.688                              |       | 123                          |       | 3.2  years                   |       | 123 |   |
| 27.875                              |       | 381                          |       | 3.2years                     |       | 381 |   |

 

During the three and sixmonths ended June 30, 2006, the total stock-based compensation expense for allcompensation related to stock-based plans was $899,000 and $1,408,000,respectively, which includes $571,000 and $980,000 of stock option expense.  Inthe three and six months ended June 30, 2005, the Company recognizedstock-based compensation expense of $5,085,000 and $8,719,000 respectively,which includes $2,478,000 and $5,501,000 of stock option expense.  There was no corresponding tax benefit in2006 or 2005 related to this stock-based compensation, as the Company records afull valuation allowance against its deferred tax assets due to the uncertaintyregarding the ultimate realization of those assets.  As of June 30, 2006, the Company hadapproximately $1.3 million of total unrecognized compensation expense relatedto nonvested awards.  The Company expectsto recognize this expense over a weighted average period of approximately 0.8years.

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**Note 15 – Subsequent Events**

As discussed in Note 2, the Company has implemented the terms of its newlabor agreements with the AFA-CWA, ALPA, and the IAM.  In conjunction with this implementation,certain related accounting accruals will be recorded which will materiallyimpact the Company’s third quarter 2006 financial results.   In particular, changes mandated by the newcontractual terms require the Company to record net reorganization expenses inthe third quarter 2006 of approximately $1.1 - $1.3 billion.  These reorganization expenses are drivenprimarily by the unsecured pre-petition claims allowed to certain union groupsand net expenses related to severance and changes to other employee benefitobligations.  These unsecuredpre-petition claims do not arise until the effective date of the Company’s planof reorganization and have no vote to accept or reject any plan ofreorganization.

19

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

**Overview**

On September 14, 2005, NWA Corp. and 12 of its direct and indirectsubsidiaries filed voluntary petitions for relief under Chapter 11 of theUnited States Bankruptcy Code with the United States Bankruptcy Court for theSouthern District of New York. Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., anindirect subsidiary of NWA Corp., also filed a voluntary petition for reliefunder Chapter 11.  The Bankruptcy Courtis jointly administering these cases under the caption “In re NorthwestAirlines Corporation, et al., Case No. 05-17930 (ALG)”.  The consolidated financial statements shownherein include certain subsidiaries that did not file to reorganize underChapter 11.  The assets and liabilitiesof these subsidiaries are not considered material to the consolidated financialstatements.  See “Note 2 – VoluntaryReorganization Under Chapter 11” for additional information related to theCompany’s rights, risks and obligations under the Chapter 11 filing.

The Company intends touse the provisions of Chapter 11 to reorganize its business, targeting $2.5billion in annual business improvements, in order to return to profitability ona sustained basis.  The Chapter 11process will allow the Company to realize three major elements essential to itstransformation including:

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

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

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

*LaborCost Restructuring.*  The Bankruptcy Code provides specialtreatment for collective bargaining agreements (“CBAs”).  In particular, Section 1113(c) of theBankruptcy Code permits the Company to move to reject its CBAs if the Companyfirst satisfies a number of statutorily prescribed substantive and proceduralprerequisites and obtains the Bankruptcy Court’s approval of the rejection orthe expiration of the statutorily prescribed time period.  After bargaining in good faith and sharingrelevant information with its unions, a debtor must make proposals to modifyits existing CBAs based on the most complete and reliable information availableat the time.  The proposed modificationsmust be necessary to permit the reorganization of a debtor and must providethat all the affected parties are treated fairly and equitably.  Ultimately, rejection of the CBAs isappropriate if the unions refuse to agree to a debtor’s necessary proposal “withoutgood cause” and the Bankruptcy Court determines that the balance of theequities favors rejection.  In October2005, the Company commenced Section 1113(c) proceedings with the ProfessionalFlight Attendants Association (“PFAA”), the Air Line Pilots Association (“ALPA”),and the International Association of Machinists and Aerospace Workers (“IAM”),and has subsequently completed these hearings.

The Company hasachieved its target of approximately $1.4 billion in annual labor cost savingsand has reached consensual CBAs with ALPA and the IAM.  The Company implemented the ALPA and IAMagreements on August 1, 2006.  TheCompany has also implemented new labor agreements with the Aircraft TechnicalSupport Association (“ATSA”), the Transport Workers Union of America (“TWU”),and the Northwest Airlines Meteorologists Association (“NAMA”), and has imposedcontract terms on the Aircraft Mechanics Fraternal Association (“AMFA”).  Two rounds of salaried and managementemployee pay and benefit cuts have also been achieved and implemented.

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

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

On July 31, 2006,following the Company’s imposition of new contract terms, and in accordancewith the parties’ prior agreement, the AFA-CWA provided the Company with a15-day notice of its intent to strike or engage in work actions.  In response, on August 1, 2006,

20

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the Company filed amotion with the Bankruptcy Court seeking to obtain an injunction against suchactivities.  Failure to obtain such aninjunction could lead to a strike or other form of self-help, which could have amaterial adverse effect on the Company.

The Company has also commenced proceedings underSection 1114 of the Bankruptcy Code, pursuant to which the Company is seekingreductions in the costs it incurs to provide medical benefits to retirees.

*Non-labor Cost Restructuring*.  Since2001, the Company has achieved approximately $1.4 billion of operatingimprovements through cost reductions and revenue enhancement initiatives.  The Company intends to obtain additionalsavings of $150 million annually through further reductions in non-laborcosts.  Areas targeted for reductioninclude technology related costs, distribution expenses, procurement costs andother items.  Additionally, cost reductionsthrough restructuring of the Company’s agreements with its regional carriersare being pursued.

*BalanceSheet Restructuring*.  In the face of mounting losses and prior toits bankruptcy filing, the Company sustained its operations largely through astrategy that included borrowing cash and selling assets.  This strategy had the consequence of leavingthe Company with a debt burden of $14 billion, which included $5 billion ofaircraft-related operating lease present value commitments.  To successfully restructure and exitbankruptcy, the Company must eliminate excess debt and recapitalize its balancesheet.

The Section 1110 deadline for the Debtors wasNovember 14, 2005.  The Debtor hastargeted to restructure approximately 50% of its fleet count and is currentlyon track to realize projected annual cost reductions of $400 million primarilyrelated to reduced aircraft ownership costs including interest, rent anddepreciation expense.  Agreements are inplace or have been tentatively reached for the majority of these targetedsavings.

The Debtors’ balance sheet debt as ofDecember 31, 2005 included $1.7 billion in unsecured pre-petition debtobligations.  These obligations are reflectedin the Debtors’ liabilities subject to compromise.  See “Note 6 – Liabilities Subject to Compromise” in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005, for additionalinformation.  As outlined in SOP 90-7,the Company no longer records post-petition interest expense on thesepre-petition unsecured debt obligations. The interest expense reduction associated with this unsecured debt isprojected to drive $150 million of annual savings.

On July 18, 2006, the Company filed a motion with the Bankruptcy Courtrelated to the refinancing of some of its existing bank obligations.  The agreement will allow the Company torefinance up to $1.125 billion of existing bank obligations at more favorableterms and provide access to $250 million in incremental liquidity for a totalfinancing of up to $1.375 billion.  Inaddition, the Company is seeking Bankruptcy Court approval, as part of theagreement, to allow this new facility to be converted to permanent exitfinancing, securing part of the debt financing the Company will need to emergefrom Chapter 11 reorganization.

21

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**Operating Statistics – Three and six months ended June 30,2006 and 2005**

Information with respect to the Company’soperating statistics follows:
|                                                              | ** ** | **Three months ended  June 30** | ** ** | **Percent** | ** ** | **Six months ended  June 30** | ** ** | **Percent** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------|------------|-------------|------------|----------------------------------------------|------------|-------------|------------|
| ** **                                                   | ** ** | **2006**                                       | ** ** | **2005**    | ** ** | **Change**                                   | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| **Scheduled service -  Consolidated: (1)**                   |       |                                           |       |        |       |                                         |       |        |       |   |   |   |   |
| Available  seat miles (ASM) (millions)                       | ** ** | **23,453**                                     |       | 26,035      |       | (9.9                                         | )          | **45,672**  |       | 50,861 |   | (10.2 | ) |
| Revenue  passenger miles (RPM) (millions)                    | ** ** | **20,253**                                     |       | 21,625      |       | (6.3                                         | )          | **38,543**  |       | 41,089 |   | (6.2 | ) |
| Passenger  load factor                                       | ** ** | **86.4**                                       | **%**      | 83.1        | %          | 3.3                                          | pts.       | **84.4**    | **%**      | 80.8 | % | 3.6 | pts. |
| Revenue  passengers (millions)                               | ** ** | **17.8**                                       |       | 18.8        |       | (5.3                                         | )          | **33.5**    |       | 35.3 |   | (5.1 | ) |
| Passenger  revenue per RPM (yield)                           | ** ** | **13.93**                                      | *¢*   | 12.44       | *¢*   | 12.0                                         | ** ** | **13.51**   | *¢*   | 12.17 | *¢* | 11.0 | * * |
| Passenger  revenue per ASM (RASM)                            | ** ** | **12.03**                                      | *¢*   | 10.34       | *¢*   | 16.3                                         | ** ** | **11.41**   | *¢*   | 9.83 | *¢* | 16.1 | * * |
|                                                         |       |                                           |       |        |       |                                         |       |        |       |   |   |   |   |
| **Scheduled service - Mainline:  (2)**                       |       |                                           |       |        |       |                                         |       |        |       |   |   |   |   |
| Available  seat miles (ASM) (millions)                       | ** ** | **21,559**                                     |       | 23,772      |       | (9.3                                         | )          | **41,861**  |       | 46,537 |   | (10.0 | ) |
| Revenue  passenger miles (RPM) (millions)                    | ** ** | **18,769**                                     |       | 20,020      |       | (6.2                                         | )          | **35,711**  |       | 38,187 |   | (6.5 | ) |
| Passenger  load factor                                       | ** ** | **87.1**                                       | **%**      | 84.2        | %          | 2.9                                          | pts.       | **85.3**    | **%**      | 82.1 | % | 3.2 | pts. |
| Revenue  passengers (millions)                               | ** ** | **14.3**                                       |       | 15.1        |       | (5.3                                         | )          | **26.9**    |       | 28.6 |   | (5.9 | ) |
| Passenger  revenue per RPM (yield)                           | ** ** | **12.92**                                      | *¢*   | 11.73       | *¢*   | 10.1                                         | ** ** | **12.53**   | *¢*   | 11.48 | *¢* | 9.1 | * * |
| Passenger  revenue per ASM (RASM)                            | ** ** | **11.25**                                      | *¢*   | 9.88        | *¢*   | 13.9                                         | ** ** | **10.69**   | *¢*   | 9.42 | *¢* | 13.5 | * * |
|                                                         |       |                                           |       |        |       |                                         |       |        |       |   |   |   |   |
| Total  operating ASM (millions)                              | ** ** | **21,569**                                     |       | 23,805      |       | (9.4                                         | )          | **41,899**  |       | 46,630 |   | (10.1 | ) |
|                                                         |       |                                           |       |        |       |                                         |       |        |       |   |   |   |   |
| Passenger  service operating expense per total  ASM (3) (4)  | ** ** | **10.99**                                      | *¢*   | 11.46       | *¢*   | (4.1                                         | )          | **11.07**   | *¢*   | 11.24 | *¢* | (1.5 | ) |
| Aircraft  and aircraft related write-downs per total ASM (5) | ** ** | **—**                                     | * *   | 0.20        | *¢*   | (100.0                                       | )          | **—**  | * *   | 0.10 | *¢* | (100.0 | ) |
| Mainline  fuel expense per ASM                               | ** ** | **3.55**                                       | *¢*   | 2.90        | *¢*   | 22.4                                         | ** ** | **3.38**    | *¢*   | 2.69 | *¢* | 25.7 |   |
|                                                         |       |                                           |       |        |       |                                         |       |        |       |   |   |   |   |
| Cargo  ton miles (millions)                                  | ** ** | **587**                                        |       | 616         |       | (4.7                                         | )          | **1,113**   |       | 1,158 |   | (3.9 | ) |
| Cargo  revenue per ton mile                                  | ** ** | **40.15**                                      | *¢*   | 38.65       | *¢*   | 3.9                                          | ** ** | **40.40**   | *¢*   | 38.39 | *¢* | 5.2 | * * |
| Fuel  gallons consumed (millions)                            | ** ** | **402**                                        |       | 455         |       | (11.6                                        | )          | **779**     |       | 887 |   | (12.2 | ) |
| Average  fuel cost per gallon, excluding taxes               | ** ** | **209.52**                                     | *¢*   | 164.23      | *¢*   | 27.6                                         | ** ** | **198.65**  | *¢*   | 151.41 | *¢* | 31.2 | * * |
| Number  of operating aircraft at end of period               | ** ** | ** **                                     |       |        |       |                                         |       | **371**     |       | 433 |   | (14.3 | ) |
| Full-time equivalent  employees at end of period             | ** ** | ** **                                     |       |        |       |                                         |       | **31,267**  |       | 38,348 |   | (18.5 | ) |

----

(1)            Consolidatedstatistics include Northwest Airlink regional carriers.

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

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

(4)            Passenger serviceoperating expense excludes the following items unrelated to passenger serviceoperations:

|                                              | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| **(In millions)**                       | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Freighter  operations                        | ** ** | **$**                                          | **198**    |                                         | $          | 200 | ** ** | **$** | **388** |   | $ | 355 |   |
| MLT Inc. - net  of intercompany eliminations | ** ** | **51**                                         |       | 51                                           | ** ** | **115** |   | 115 |   |
| Regional  carriers                           | ** ** | **366**                                        |       | 392                                          | ** ** | **732** |   | 748 |   |
| Other                                        | ** ** | **10**                                         |       | 13                                           | ** ** | **26** |   | 25 |   |
|                                              |            |                                                |            |                                              |            |  |  |  |  |  |  |  |  |

 

(5)            In the secondquarter of 2006, the Company recorded $28 million related to aircraftimpairments; however, these impairments were recorded as reorganizationexpenses and, as such, are not included in operating expenses or in thestatistical results of operations.

22

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**Results of Operations—Three months ended June 30, 2006 and2005**

*Operating Revenues*.  Operating revenues increased 3.0% ($96million), the result of higher system passenger and regional carrier revenuesoffset by reductions in other revenue.

System passenger revenues increased 3.3% ($78million).  The following analysis byregion is based on information reported to the DOT and excludes regionalcarriers:
| ** **                         | ** ** | System | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|------------------------------------|------------|--------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2006**                           |       |   |       |         |       |        |       |         |       |
| Passenger  revenues (in millions)  |       | $      | 2,425      |         | $          | 1,618       |       | $            | 490        |   | $ | 317 |   |
|                               |       |   |       |         |       |        |       |         |       |
| **Increase (Decrease) from 2005:** |       |   |       |         |       |        |       |         |       |
| Passenger  revenues (in millions)  |       | $      | 78         |         | $          | 79          |       | $            | (6         | ) | $ | 5 |   |
| Percent                            |       | 3.3    | %          | 5.1          | %          | (1.2        | )%         | 1.6          | %          |
|                               |       |   |       |         |       |        |       |         |       |
| Scheduled  service ASMs (capacity) |       | (9.3   | )%         | (11.1        | )%         | (6.8        | )%         | (6.3         | )%         |
| Scheduled  service RPMs (traffic)  |       | (6.2   | )%         | (6.1         | )%         | (7.2        | )%         | (5.3         | )%         |
| Passenger load  factor             |       | 2.9    | pts.       | 4.5          | pts.       | (0.5        | )pts.      | 1.0          | pts.       |
| Yield                              |       | 10.1   | %          | 11.9         | %          | 6.5         | %          | 7.3          | %          |
| Passenger RASM                     |       | 13.9   | %          | 18.1         | %          | 6.1         | %          | 8.5          | %          |

 

Asindicated in the above table:

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

·                  Pacific passenger revenues decreased slightlyversus prior year as the year-over-year capacity and traffic decreases werepartially offset by higher yield.

·                  Atlantic passenger revenues were slightlyhigher than prior year due to improved yield on reduced capacity.

Regional carrier revenues increased 15.1% ($52million) to $396 million due to improved yield on a 16.3% capacity reduction.

Cargo revenues decreased 1.3% ($3 million) to$236 million due primarily to a 4.7% reduction in cargo traffic, partiallyoffset by stronger yield.  Other revenuedecreased 11.7% ($31 million) primarily due to reduced partner revenue.

*Operating Expenses*.  Operating expenses decreased 11.5% ($389million) for the three months ended June 30, 2006.  The following table and notes presentoperating expenses for the three months ended June 30, 2006 and 2005 and describesignificant year-over-year variances:
| ** **                                  | ** ** | **Three months ended  June 30** | ** ** | **Increase  (Decrease)** | ** ** | **Percent**        | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|--------------------------|------------|--------------------|------------|------------|------------|
| **(In millions)**                      | ** ** | **2006**                                       | ** ** | **2005**                 | ** ** | **from 2005** | ** ** | **Change** | ** ** | **Note** | ** ** |
| **Operating Expenses**                      |       |                                           |       |                     |       |               |       |       |       |   |   |
| Aircraft fuel and taxes                     | ** ** | **$**                                          | **886**    |                     | $          | 790                |       | $          | 96         |   | 12.2 | % | A |   |
| Salaries, wages and  benefits               | ** ** | **675**                                        |       | 969                      |       | (294               | )          | (30.3      | )          | B |   |
| Selling and marketing                       | ** ** | **190**                                        |       | 223                      |       | (33                | )          | (14.8      | )          | C |   |
| Aircraft maintenance  materials and repairs | ** ** | **183**                                        |       | 157                      |       | 26                 |       | 16.6       |       | D |   |
| Other rentals and  landing fees             | ** ** | **142**                                        |       | 168                      |       | (26                | )          | (15.5      | )          | E |   |
| Depreciation and  amortization              | ** ** | **134**                                        |       | 142                      |       | (8                 | )          | (5.6       | )          | F |   |
| Aircraft rentals                            | ** ** | **54**                                         |       | 135                      |       | (81                | )          | (60.0      | )          | G |   |
| Regional carrier  expenses                  | ** ** | **366**                                        |       | 392                      |       | (26                | )          | (6.6       | )          | H |   |
| Other                                       | ** ** | **366**                                        |       | 409                      |       | (43                | )          | (10.5      | )          | I |   |
| **Total operating expenses**                | ** ** | **$**                                          | **2,996**  |                     | $          | 3,385              |       | $          | (389       | ) | (11.5 | )% |   |   |

 

23

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----

A.             Aircraft fuel and taxeswere higher due to a 27.6% increase in the average fuel cost per gallon to$2.10, partially offset by 11.6% fewer****gallonsconsumed.

B.               Salaries, wages andbenefits decreased primarily due to reduced AMFA pay and headcount, as well asinterim wage reductions which were achieved either consensually or throughSection 1113(e), and which were effective in November 2005.

C.               Selling andmarketing expense decreases were primarily due to a year-over-year reduction inenplanements, a volume shift from computerized reservation services to nwa.com,reduced rate on computerized reservations service fees, and lower provision forfrequent flyer program miles.

D.              Aircraft maintenancematerials and repairs expense increased largely due to higher maintenancevolume compared to 2005 and the shift to third party maintenance vendors versusinternally completed maintenance work.

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

F.                Depreciation expensereductions were largely due to impairment write-downs of owned aircraft, andrelated inventory and equipment, permanently removed from service.

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

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

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

*Other Income and Expense.*  Non-operating expenseincreased $544 million primarily due to reorganization expenses that totaled$464 million.  See “Note 5 –Reorganization Related Items” for additional information related to reorganizationexpense.

**Results of Operations—Six months ended June 30, 2006 and 2005**

*Operating Revenues*.  Operating revenues increased 3.1% ($188million), the result of higher regional carrier, system passenger, and cargorevenue offset by reductions in other revenues.

System passenger revenues increased 2.1% ($92million).  The following analysis byregion is based on information reported to the DOT and excludes regionalcarriers:
| ** **                         | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2006**                           |       |       |       |         |       |        |       |         |       |
| Passenger  revenues (in millions)  |       | $          | 4,474      |         | $          | 2,993       |       | $            | 946        |   | $ | 535 |   |
|                               |       |       |       |         |       |        |       |         |       |
| **Increase (Decrease) from 2005:** |       |       |       |         |       |        |       |         |       |
| Passenger  revenues (in millions)  |       | $          | 92         |         | $          | 97          |       | $            | (5         | ) | $ | — |   |
| Percent                            |       | 2.1        | %          | 3.3          | %          | (0.5        | )%         | —       | %          |
|                               |       |       |       |         |       |        |       |         |       |
| Scheduled  service ASMs (capacity) |       | (10.0      | )%         | (11.8        | )%         | (6.9        | )%         | (8.2         | )%         |
| Scheduled  service RPMs (traffic)  |       | (6.5       | )%         | (6.8         | )%         | (5.8        | )%         | (6.4         | )%         |
| Passenger load  factor             |       | 3.2        | pts.       | 4.5          | pts.       | 1.1         | pts.       | 1.7          | pts.       |
| Yield                              |       | 9.1        | %          | 10.9         | %          | 5.6         | %          | 6.8          | %          |
| Passenger RASM                     |       | 13.5       | %          | 17.1         | %          | 6.9         | %          | 8.8          | %          |

 

Asindicated in the above table:

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

·                  Pacific passenger revenues decreased somewhatas the year-over-year capacity and traffic decreases were partially offset byhigher yield.

·                  Atlantic passenger revenues were flat asimproved yield offset the reductions in capacity and traffic.

Regional carrier revenues increased 18.5%($115 million) to $735 million due to improved yield on an 11.9% capacityreduction.

Cargo revenues increased 1.1% ($5 million) to$450 million due to 5.2% higher yield, partially offset by a 3.9% reduction incargo traffic.  Other revenue decreased4.4% ($24 million) as a result of reduced partner and charter revenues.

*Operating Expenses*.  Operating expenses decreased 9.0% ($583million) for the six months ended June 30, 2006.  The following table and notes presentoperating expenses for the six months ended June 30, 2006 and 2005 and describesignificant year-over-year variances:

24

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| ** **                                  | ** ** | **Six months ended** | ** ** | **Increase**   | ** ** | ** **         | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|----------------|------------|--------------------|------------|------------|------------|
| ** **                                  | ** ** | **June 30**               | ** ** | **(Decrease)** | ** ** | **Percent**        | ** ** | ** ** | ** ** |
| **(In millions)**                      | ** ** | **2006**                       | ** ** | **2005**       | ** ** | **from 2005** | ** ** | **Change** | ** ** | **Note** | ** ** |
| **Operating Expenses**                      |       |                           |       |           |       |               |       |       |       |   |   |
| Aircraft fuel and taxes                     | ** ** | **$**                          | **1,630**  |           | $          | 1,420              |       | $          | 210        |   | 14.8 | % | A |   |
| Salaries, wages and  benefits               | ** ** | **1,351**                      |       | 1,933          |       | (582               | )          | (30.1      | )          | B |   |
| Selling and marketing                       | ** ** | **384**                        |       | 428            |       | (44                | )          | (10.3      | )          | C |   |
| Aircraft maintenance  materials and repairs | ** ** | **372**                        |       | 301            |       | 71                 |       | 23.6       |       | D |   |
| Other rentals and  landing fees             | ** ** | **285**                        |       | 324            |       | (39                | )          | (12.0      | )          | E |   |
| Depreciation and  amortization              | ** ** | **268**                        |       | 280            |       | (12                | )          | (4.3       | )          | F |   |
| Aircraft rentals                            | ** ** | **122**                        |       | 239            |       | (117               | )          | (49.0      | )          | G |   |
| Regional carrier expenses                   | ** ** | **732**                        |       | 748            |       | (16                | )          | (2.1       | )          | H |   |
| Other                                       | ** ** | **757**                        |       | 811            |       | (54                | )          | (6.7       | )          | I |   |
| **Total operating expenses**                | ** ** | **$**                          | **5,901**  |           | $          | 6,484              |       | $          | (583       | ) | (9.0 | )% |   |   |

 

----

A.        Aircraft fuel and taxes were higher due to a31.2% increase in the average fuel cost per gallon to $1.99, partially offsetby 12.2% fewer****gallons consumed.

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

C.          Selling and marketing expense decreases wereprimarily due to a year-over-year reduction in enplanements, a volume shiftfrom computerized reservation services to nwa.com, reduced rate on computerizedreservations service fees, and lower provision for frequent flyer programmiles.

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

E.           Other rentals and landing fees decreased dueto reduced facility rents and fewer overall landings.

F.           Depreciation expense is lower as a result ofthe impairment write-downs of owned aircraft, and related inventory andequipment, permanently removed from service.

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

H.         Regional carrier expense droppedyear-over-year due to reduced capacity, partially offset by higher fuel costs.

I.              Other expenses (whichinclude MLT operating expenses, outside services, insurance, passenger food,personnel expenses, communication expenses and supplies) decreased primarilydue to volume reductions.

*Other Income and Expense.*  Non-operating expenseincreased $1.5 billion primarily due to reorganization expenses that totaled$1.4 billion.  See “Note 5 –Reorganization Related Items” for additional information related toreorganization expense.

**Liquidity and Capital Resources**

As of June 30, 2006, the Company’s totalliquidity, consisting of unrestricted balance sheet cash, cash equivalents andshort-term investments, was $1.58 billion. This amount excludes $674 million of restricted short-term investments(which may include amounts held as cash).

*Cash Flows.* Liquidity increasedby $314 million during the six months ended June 30, 2006, primarily due to netcash provided by operating activities, partially offset by net cash used infinancing and investing activities as discussed below.

*Operating Activities.*  Net cash provided by operating activities forthe six months ended June 30, 2006, was $758 million, which compares with $19million of cash provided by operating activities for the six months ended June30, 2005.  The increase in net cashprovided by operations was due to a net profit, excluding reorganization items,in 2006.  Reorganization expenses arecomprised of mainly non-cash items.

*Investing Activities.*  Investing activities during the six monthsended June 30, 2006, consisted primarily of the purchase of one A330-200aircraft and other related costs.  Otherrelated costs include engine purchases, costs to commission aircraft beforeentering revenue service, deposits on ordered aircraft, facility improvementsand ground equipment purchases. Investing activities for the six months ended June 30, 2006 alsoincluded additional funding to the Company’s irrevocable tax trust andincreased vendor holdback amounts, which increased the Company’s restrictedcash, cash equivalents and short-term investments balance.  Investing activities for the six months endedJune 30, 2005, other than aircraft and related purchases and short-terminvestments, included $336 million of funding to the Company’s

25

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irrevocable tax trust, proceeds of $102 million fromthe sale of the Company’s note receivable from Pinnacle Airlines, and $102million in proceeds from the sale of Prudential Financial Inc. common stock.

*Financing Activities. *Financing activities during the six monthsended June 30, 2006, consisted primarily of financing one Airbus A330-200aircraft with long-term debt and the $100 million repurchase of EETC notes(related to six of the Company’s 757-200 aircraft), representing a 42% discountoff the outstanding balance of the notes. As a result of the notes repurchased, the Company now owns the six757-200 aircraft free of any liens. Financing activities for the six months ended June 30, 2005, includedfinancing one Airbus A330 aircraft with long-term debt, debt proceeds of $227million from three secured financing agreements, debt proceeds of $101 millionfrom the financing of the Company’s properties in Tokyo, repayment of $188million unsecured notes due in March 2005, plus payment of other debt andcapital lease obligations.

Inaddition to the one A330-200 aircraft financed with debt proceeds describedabove, the Company also took delivery of one other Airbus A330-200 aircraftduring the six months ended June 30, 2006. The Airbus A330-200 aircraft was acquired largely through a non-cashtransaction with the manufacturer, which is reflected as long-term debt on theCompany’s consolidated balance sheets, but is 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 $143 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:

|                       | ** ** | ** **                         | ** ** | ** **                  | ** ** | **Non-cash** | ** ** |
|-----------------------|------------|------------------------------------|------------|-----------------------------|------------|--------------|------------|
| ** **            | ** ** | Investing Activities          | ** ** | **Transactions and**   | ** ** |
| ** **            | ** ** | **Affecting Cash Flows** | ** ** | **Leasing Activities** | ** ** |
| ** **            | ** ** | **2006**                           | ** ** | **2005**                    | ** ** | **2006**     | ** ** | **2005** | ** ** |
| Airbus A319           | ** ** | **—**                         | ** ** | **—**                  | ** ** | **—**   | ** ** | 4 | ** ** |
| Airbus A330-200       | ** ** | **1**                              | ** ** | **—**                  | ** ** | **1**        | ** ** | **—** | ** ** |
| Airbus A330-300       | ** ** | **—**                         |       | 1                           | ** ** | **—**   |       | 1 |   |
| Bombardier CRJ -  440 | ** ** | **—**                         |       | —                      | ** ** | **—**   |       | 10 |   |
| Bombardier CRJ -  200 | ** ** | **—**                         |       | —                      | ** ** | **—**   |       | 10 |   |
| ** **            |       | **1**                              |       | 1                           | ** ** | **1**        |       | 25 |   |

 

On July 18, 2006, the Company filed a motion with the Bankruptcy Courtrelated to the refinancing of some of its existing bank obligations.  The agreement will allow the Company torefinance $1.125 billion of existing bank obligations at more favorable termsand provide access to $250 million in incremental liquidity for a totalfinancing of up to $1.375 billion.  Inaddition, the Company is seeking Bankruptcy Court approval, as part of theagreement, to allow this new facility to be converted to permanent exitfinancing, securing part of the debt financing the Company will need to emergefrom Chapter 11 reorganization.

*Debt*.  The bankruptcy filing triggereddefaults on substantially all the Company’s debt and lease obligations.  Long-term pre-petition debt obligations,which are classified as liabilities subject to compromise, are included in “Note8 – Liabilities Subject to Compromise.” Maturities of long-term debt not subject to compromise, excludingcapital lease obligations, through December 31, 2010, are as follows (inmillions):

| remainder of 2006 |   |   | $   | 49     |   |
|-------------------|--------|--------|-----|--------|--------|
| 2007              |   |   | 112 |   |
| 2008              |   |   | 307 |   |
| 2009              |   |   | 172 |   |
| 2010              |   |   | 118 |   |

 

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*AircraftCommitments.* Committed expenditures for aircraft and relatedequipment, including estimated amounts for contractual price escalations andpredelivery deposits, which have been assumed by the Company post Chapter 11filing, will be approximately (in millions):

| remainder of 2006 |   |   | $      | 396    |   |
|-------------------|--------|--------|--------|--------|--------|
| 2007              |   |   | 837    |   |
| 2008              |   |   | — |   |
| 2009              |   |   | 93     |   |
| 2010              |   |   | 109    |   |

 

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

*Pension Funding Obligations*. The Company has several defined benefitpension plans and defined contribution401(k)-type plans covering substantially all of its employees.  The benefits for these plans are basedprimarily on years of service and employee compensation.  It is the Company’s policy to fund annuallyat least the minimum contribution as required by the ERISA.  However, as a result of the commencement ofthe Company’s Chapter 11 case, the Company did not make minimum cashcontributions to its defined benefit pension plans that were due afterSeptember 14, 2005.  Effective August 31,2005 and January 31, 2006, the Company froze future benefit accruals under theNorthwest Airlines Pension Plans for Salaried Employees and Pilot Employees,respectively.  Replacement pensioncoverage will be provided for these employees through 401(k)-type definedcontribution plans. The Company currently intends, however, to continue timelyto pay the normal cost component of the plans’ minimum funding requirementsrelating to service rendered post-potition and certain interest paymentsassociated with its 2003 contract and salaried plan year waiver.  Upon the freezing of the Northwest AirlinesPension Plan for Contract Employees, a non-cash curtailment charge ofapproximately $350 million would be recorded. See “Note 16 – Pension and Other Postretirement Health Care Benefits” inthe Company’s Annual Report on Form 10-K for 2005 for additional discussion ofactuarial assumptions used in determining pension liability and expense.

OnApril 15, 2003, the Internal Revenue Service (“IRS”) approved the applicationsubmitted by the Company to reschedule, over a five year period beginning inApril 2004, the $454 million in 2003 plan year contributions under the pensionplans for contract and salaried employees. The Company satisfied the conditions for rescheduling plan year 2003contributions by granting the plans liens on certain assets of the Company(including domestic and foreign slots, international routes, aircraft andengines).

On April 10, 2004, the president signed into law the Pension FundingEquity Act, which reduced the Company’s required 2004 and 2005 plan yearcontributions through two mechanisms: (1) certain companies were permitted toelect partial relief from the deficit reduction contribution requirements thatotherwise would have applied, an election the Company made; and (2) theapplicable discount rate used to determine funding was increased to reflectyields on indices of high quality corporate bonds instead of 30-year U.S.Treasury rates.  Including the effect ofthe Pension Funding Equity Act, the Company’s 2005 calendar year cashcontributions to qualified defined benefit pension plans were expected toapproximate $411 million.  ThroughSeptember 14, 2005, the Company had contributed $268 million to theseplans.  As a result of the Company’svoluntarily filing for Chapter 11 on September 14, 2005, the Company did notmake scheduled minimum cash contributions to its qualified defined benefitpension plans due after its bankruptcy filing. The Company currently intends, however, to continue timely to pay thenormal cost component of the plans’ minimum funding requirements relating toservice rendered post-petition and certain interest payments associated withits 2003 contract and salaried plan year waiver.

The Company has appointed an independent fiduciary for all of itstax-qualified defined benefit pension plans, who is charged with pursuing, onbehalf of the plans, claims to recover minimum funding contributions due underfederal law, to the extent that the Debtors are not continuing to fund theplans due to bankruptcy prohibitions. The plans’ level of underfunding is expected to increase during theChapter 11 cases.

The U.S. Senate passed a pension reform bill inNovember 2005 that would allow airlines to amortize pension liabilities over atwenty-year period. The pension reform bill passed by the U.S. House ofRepresentatives in December 2005 did not include a similar provision. The billswere sent to a conference committee in March 2006. On July 28, 2006, the U.S.House of Representatives passed the Pension Protection Act of 2006 [H.R. 4](the “Protection Act”). On August 3, 2004, the Protection Act was passed,without modifications, by the U.S. Senate. To become law, the Protection Actnow must be signed by the president. The Protection Act contains comprehensivepension funding reform provisions as well as many other benefit-relatedprovisions. The Protection Act also contains specific airline relief, includingallowing airlines with frozen plans to fund their unfunded liabilities over 17years. The Company supports approval of this legislation.  The White House announced in a press releaseon August 4, 2006 that the president would sign the legislation.

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The funding requirement to meet the normal costcomponent of the qualified plans’ minimum funding requirements related topost-petition service is estimated, excluding the impact of any newlegislation, at approximately $75 million for calendar year 2006 of which$34 million had been paid as of June 30, 2006. Due to uncertainties regarding several significant assumptions involvedin estimating future required contributions to its defined benefit pensionplans, such as the amount and timing of asset returns, interest rate levels,the Company’s Chapter 11 proceedings, and in particular, the impact of proposedpension legislation related to funding requirements, the Company is not able toreasonably estimate its future required contributions beyond 2006. If sufficientlegislative pension funding relief is not approved, termination of the Company’sdefined benefit plans would become inevitable.

**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 in the three monthsended June 30, 2006 and 2005.  The averagemarket yen rate for the quarters ended June 30, 2006 and 2005 was 115.3 and 107.1,respectively.  At June 30, 2006, theCompany had hedged approximately 8.5% of its remaining 2006 anticipatedyen-denominated sales at an average rate of 101.4 yen per U.S. dollar, and hasrecorded $6.0 million of unrealized gains in accumulated other comprehensiveincome (loss) associated with those hedges.

*Aircraft Fuel.*  TheCompany’s earnings are affected by changes in the price and availability ofaircraft fuel.  On an annual basis, theCompany’s mainline and regional carrier fuel consumption approximates 1.8 billion gallons, producing an $18 million variance for each one-centchange in the cost per gallon of fuel. From time to time, the Company manages the price risk of fuel costs byutilizing futures contracts traded on regulated futures exchanges, swapagreements and options.  As of June 30,2006, the Company had hedged the price of approximately 25% of its projectedfuel requirements for the second half of 2006 through collar optionsestablished at a crude oil price of $65 to $79.40 per barrel, and has recorded$2.6 million of unrealized gains in accumulated other comprehensive income(loss) associated with those hedges.  Asof June 30, 2005, there were no outstanding fuel hedges or unrealized gains(losses) in accumulated other comprehensive income (loss).

*Interest Rates.*  TheCompany’s earnings are also affected by changes in interest rates due to theimpact those changes have on its interest income from cash equivalents andshort-term investments and its interest expense from floating rate debtinstruments.  During June 2006, theCompany entered into individual interest rate cap hedges related to threefloating rate debt instruments, with a total cumulative notional amount of $504million.  The objective of the interestrate cap hedges is to protect the anticipated payments of interest (cash flows)on the designated debt instruments from adverse market interest ratechanges.   As of June 30, 2006, theCompany has recorded $0.1 million of unrealized losses in accumulated othercomprehensive income (loss) associated with those hedges.

*War Risk Insurance*.  As a result of the AirTransportation Safety and System Stabilization Act (“Airline Stabilization Act”),the U.S. Homeland Security Act and the U.S. Emergency Wartime SupplementalAppropriations Act, the U.S. federal government assumes most war riskcoverage.  Following multiple extensions,this coverage is scheduled to expire on August 31, 2006.  While the government may again extend theperiod that it provides war risk coverage, there is no assurance that this willoccur, or if it does, how long the extension will last or at what cost thecoverage will be provided.  Refer to “Item1. Business - Risk Factors Related to Northwest and the Airline Industry” inthe Company’s Annual Report on Form 10-K for 2005 for additional discussionregarding war risk coverage and insurance costs.

*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 forward-looking and are based upon informationavailable to the Company on the date hereof. The Company, through its management, may also from time to time makeoral forward-looking statements.  Inconnection with the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, the Company is hereby identifying importantfactors that could cause actual results to differ materially from thosecontained in any forward-looking statement made by or on behalf of theCompany.  Any such statement is qualifiedby reference to the following cautionary statements.

The Company believes that the material risks anduncertainties that could affect the outlook of an airline operating underChapter 11 and in a global economy include, among others, the ability of theCompany to continue as a going concern, the ability of the Company to obtainand maintain any necessary financing for operations and other purposes, whetherdebtor-in-possession financing or other financing, the ability of the Companyto maintain adequate liquidity, the ability of the Company to absorb escalatingfuel costs, the Company’s ability to obtain court approval with respect tomotions in the Chapter 11 proceedings prosecuted by it from time to time,the ability of the Company to develop, confirm and consummate a plan ofreorganization with respect to its Chapter 11 proceedings, risksassociated with third parties seeking and obtaining court approval to terminateor shorten the exclusivity period for the Company to propose and

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confirma plan of reorganization, to appoint a Chapter 11 trustee or to convertthe cases to Chapter 7 cases, the ability of the Company to obtain and maintainnormal terms with vendors and service providers, the Company’s ability tomaintain contracts that are critical to its operations, the ability of theCompany to realize assets and satisfy liabilities without substantialadjustments and/or changes in ownership, the potential adverse impact of theChapter 11 proceedings on the Company’s liquidity or results ofoperations, the ability of the Company to operate pursuant to the terms of itsfinancing facilities (particularly the related financial covenants), theability of the Company to attract, motivate and/or retain key executives andassociates, the future level of air travel demand, the Company’s futurepassenger traffic and yields, the airline industry pricing environment,increased costs for security, the cost and availability of aviation insurancecoverage and war risk coverage, the general economic condition of the UnitedStates and other regions of the world, the price and availability of jet fuel,the aftermath of the war in Iraq, the possibility of additional terroristattacks or the fear of such attacks, concerns about SARS, Avian flu or otherinfluenza or contagious illnesses, labor strikes, work disruptions, labornegotiations both at other carriers and the Company, low cost carrierexpansion, capacity decisions of other carriers, actions of the U.S. andforeign governments, foreign currency exchange rate fluctuations, inflation andother factors discussed herein. Additional information with respect to these factors and other eventsthat could cause differences between forward-looking statements and futureactual results is contained in “Item 1. Business - Risk Factors Related toNorthwest and the Airline Industry” in the Company’s Annual Report on Form 10-Kfor 2005.

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

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

 

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

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

 

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

**Changes 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, 2006 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

PART II. OTHER INFORMATION

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

 

Reference is made to “Item 3. LegalProceedings” in the Company’s Annual Report on Form 10-K for 2005.

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

**Item 1A.****            ****Risk Factors.**

 

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 1. Business – Risk Factors Related to Northwest and the Airline Industry”in our most recently filed Annual Report on Form 10-K for 2005.  There have been no material changes in thoserisk factors.

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

** **

(a)**                 **Exhibits:

 

| 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 2006.
|     | NORTHWEST AIRLINES CORPORATION |
|----------|--------------------------------|
|     |                           |
|     | By                             | /s/ Anna M. Schaefer |   |
|     |                           | Anna M. Schaefer |
| * * | * *                       | *Vice President – Finance and Chief Accounting  Officer  (principal accounting officer)* |

 

EXHIBIT INDEX

| Exhibit No. | ** ** | **Description**                                                                     |
|-------------|------------|-------------------------------------------------------------------------------------|
|        |       |                                                                                |
| 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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