**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

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

**OF THE SECURITIESEXCHANGE ACT OF 1934**

**For the quarterly period ended March 31, 2007**

**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 **ý     No o

**Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and 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 March 31, 2007, there were 87,398,705 sharesof the registrant’s Common Stock outstanding.**

 

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**NORTHWEST AIRLINESCORPORATION**

**(DEBTOR-IN-POSSESSION)**
|                                | **Page No.**                                                                                                                                                                             |
|--------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| PART I. FINANCIAL  INFORMATION |                                                                                                                                                                                     |
|                           |                                                                                                                                                                                     |
| Item 1.                        | Financial Statements.                                                                                                                                                                    |   |
|                           |                                                                                                                                                                                     |   |
|                           | Condensed  Consolidated Statements of Operations – Three months ended

March 31, 2007  and 2006                                                                                     | 3 |
|                           |                                                                                                                                                                                     |   |
|                           | Condensed  Consolidated Balance Sheets – March 31, 2007 and December 31, 2006                                                                                                       | 4 |
|                           |                                                                                                                                                                                     |   |
|                           | Condensed  Consolidated Statements of Cash Flows – Three months ended

March 31, 2007  and 2006                                                                                     | 5 |
|                           |                                                                                                                                                                                     |   |
|                           | Notes to  Condensed Consolidated Financial Statements                                                                                                                                    | 6 |
|                           |                                                                                                                                                                                     |   |
|                           | The Computations of Ratio of Earnings to Fixed  Charges and Ratio of Earnings to Fixed Charges and Preferred Stock  Requirements are attached hereto and filed as Exhibits 12.1 and 12.2 |   |
|                           |                                                                                                                                                                                     |   |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations.                                                                                             | 22 |
|                           |                                                                                                                                                                                     |   |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk.                                                                                                                             | 34 |
|                           |                                                                                                                                                                                     |   |
| Item 4.                        | Controls and  Procedures.                                                                                                                                                                | 34 |
|                           |                                                                                                                                                                                     |   |
| PART II. OTHER  INFORMATION    |                                                                                                                                                                                     |
|                           |                                                                                                                                                                                     |
| Item 1.                        | Legal Proceedings.                                                                                                                                                                       | 34 |
|                           |                                                                                                                                                                                     |   |
| Item 1A.                       | Risk  Factors.                                                                                                                                                                           | 34 |
|                           |                                                                                                                                                                                     |   |
| Item 6.                        | Exhibits.                                                                                                                                                                                | 34 |
|                           |                                                                                                                                                                                     |   |
| SIGNATURE                      |                                                                                                                                                                                     | 35 |
|                           |                                                                                                                                                                                     |   |
| EXHIBIT  INDEX                 | 35                                                                                                                                                                                       |

 

2

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PART I.  FINANCIAL INFORMATION

**Item 1. Financial Statements.**

**NORTHWESTAIRLINES CORPORATION(DEBTOR-IN-POSSESSION)**

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

 
| ** **                                                                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **March 31**                | ** ** |
| **(Unaudited, in millions except per share amounts)** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Operating Revenues**                                                              |       |                             |       |   |   |
| Passenger                                                                           |       | $                                | 2,202      |   | $ | 2,049 |   |
| Regional carrier  revenues                                                          |       | 292                              |       | 339 |   |
| Cargo                                                                               |       | 189                              |       | 214 |   |
| Other                                                                               |       | 190                              |       | 288 |   |
| Total operating  revenues                                                           |       | 2,873                            |       | 2,890 |   |
|                                                                                |       |                             |       |   |   |
| **Operating Expenses**                                                              |       |                             |       |   |   |
| Aircraft fuel  and taxes                                                            |       | 704                              |       | 744 |   |
| Salaries, wages  and benefits                                                       |       | 615                              |       | 676 |   |
| Selling and  marketing                                                              |       | 191                              |       | 194 |   |
| Aircraft  maintenance materials and repairs                                         |       | 184                              |       | 189 |   |
| Other rentals  and landing fees                                                     |       | 141                              |       | 143 |   |
| Depreciation and  amortization                                                      |       | 121                              |       | 134 |   |
| Aircraft rentals                                                                    |       | 96                               |       | 68 |   |
| Regional carrier  expenses                                                          |       | 211                              |       | 366 |   |
| Other                                                                               |       | 409                              |       | 391 |   |
| Total operating  expenses                                                           |       | 2,672                            |       | 2,905 |   |
|                                                                                |       |                             |       |   |   |
| **Operating Income (Loss)**                                                         |       | 201                              |       | (15 | ) |
|                                                                                |       |                             |       |   |   |
| **Other Income (Expense)**                                                          |       |                             |       |   |   |
| Interest  expense, net                                                              |       | (132                             | )          | (138 | ) |
| Investment  income                                                                  |       | 31                               |       | 18 |   |
| Reorganization  items, net                                                          |       | (393                             | )          | (975 | ) |
| Other, net                                                                          |       | —                           |       | 6 |   |
| Total other  income (expense)                                                       |       | (494                             | )          | (1,089 | ) |
|                                                                                |       |                             |       |   |   |
| **Income (Loss) Before Income  Taxes**                                              |       | (293                             | )          | (1,104 | ) |
|                                                                                |       |                             |       |   |   |
| Income tax  expense (benefit)                                                       |       | (1                               | )          | — |   |
|                                                                                |       |                             |       |   |   |
| **Net Income (Loss)**                                                               |       | (292                             | )          | (1,104 | ) |
|                                                                                |       |                             |       |   |   |
| Preferred stock  requirements                                                       |       | —                           |       | — |   |
|                                                                                |       |                             |       |   |   |
| **Net Income (Loss) Applicable to  Common Stockholders**                            |       | $                                | (292       | ) | $ | (1,104 | ) |
|                                                                                |       |                             |       |   |   |
| Earnings (loss) per  common share:                                                  |       |                             |       |   |   |
| *Basic  and Diluted*                                                                |       | $                                | (3.34      | ) | $ | (12.65 | ) |
|                                                                                |       |                             |       |   |   |
| Average shares used in  computation:                                                |       |                             |       |   |   |
| *Basic and Diluted*                                                                 |       | 87                               |       | 87 |   |

 

*Seeaccompanying notes.*

3

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**NORTHWESTAIRLINES CORPORATION(DEBTOR-IN-POSSESSION)**

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                     | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| **(Unaudited, in millions)**                                         | ** ** | **2007**          | ** ** | **2006**             | ** ** |
| **Assets**                                                                     |       |              |       |                 |       |
|                                                                           |       |              |       |                 |       |
| **Current  Assets**                                                            |       |              |       |                 |       |
| Cash and cash equivalents                                                      |       | $                 | 1,800      |                 | $          | 1,461 |   |
| Unrestricted short-term investments                                            |       | 626               |       | 597                  |       |
| Restricted cash, cash equivalents and short-term  investments                  |       | 543               |       | 424                  |       |
| Accounts receivable, less allowance (2007—$4,  2006—$14)             |       | 687               |       | 638                  |       |
| Flight equipment spare parts, less allowance  (2007—$255, 2006—$255) |       | 101               |       | 104                  |       |
| Prepaid expenses and other                                                     |       | 415               |       | 342                  |       |
| Total current assets                                                           |       | 4,172             |       | 3,566                |       |
|                                                                           |       |              |       |                 |       |
| **Property  and Equipment**                                                    |       |              |       |                 |       |
| Flight equipment, net                                                          |       | 7,855             |       | 7,609                |       |
| Other property and equipment, net                                              |       | 563               |       | 571                  |       |
| Total property and equipment                                                   |       | 8,418             |       | 8,180                |       |
|                                                                           |       |              |       |                 |       |
| **Flight  Equipment Under Capital Leases, net**                                |       | 12                |       | 12                   |       |
|                                                                           |       |              |       |                 |       |
| **Other  Assets**                                                              |       |              |       |                 |       |
| International routes                                                           |       | 634               |       | 634                  |       |
| Investments in affiliated companies                                            |       | 22                |       | 42                   |       |
| Other                                                                          |       | 484               |       | 781                  |       |
| Total other assets                                                             |       | 1,140             |       | 1,457                |       |
| **Total Assets**                                                               |       | $                 | 13,742     |                 | $          | 13,215 |   |
|                                                                           |       |              |       |                 |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**                       |       |              |       |                 |       |
|                                                                           |       |              |       |                 |       |
| **Current  Liabilities**                                                       |       |              |       |                 |       |
| Air traffic liability                                                          |       | $                 | 1,865      |                 | $          | 1,557 |   |
| Accounts payable and other liabilities                                         |       | 1,541             |       | 1,441                |       |
| Current maturities of long-term debt                                           |       | 223               |       | 213                  |       |
| Total current liabilities                                                      |       | 3,629             |       | 3,211                |       |
|                                                                           |       |              |       |                 |       |
| **Long-Term  Debt**                                                            |       | 4,233             |       | 3,899                |       |
|                                                                           |       |              |       |                 |       |
| **Deferred  Credits and Other Liabilities**                                    |       |              |       |                 |       |
| Long-term pension and postretirement health care  benefits                     |       | 88                |       | 86                   |       |
| Other                                                                          |       | 164               |       | 161                  |       |
| Total deferred credits and other liabilities                                   |       | 252               |       | 247                  |       |
|                                                                           |       |              |       |                 |       |
| **Liabilities  Subject to Compromise**                                         |       | 13,633            |       | 13,572               |       |
|                                                                           |       |              |       |                 |       |
| **Preferred  Redeemable Stock Subject to Compromise**                          |       | 275               |       | 277                  |       |
|                                                                           |       |              |       |                 |       |
| **Common  Stockholders’ Equity (Deficit)**                                |       |              |       |                 |       |
| Common stock                                                                   |       | 1                 |       | 1                    |       |
| Additional paid-in capital                                                     |       | 1,507             |       | 1,505                |       |
| Accumulated deficit                                                            |       | (7,676            | )          | (7,384               | )          |
| Accumulated other comprehensive income (loss)                                  |       | (1,099            | )          | (1,100               | )          |
| Treasury stock                                                                 |       | (1,013            | )          | (1,013               | )          |
| Total common stockholders’ equity (deficit)                               |       | (8,280            | )          | (7,991               | )          |
| **Total  Liabilities and Stockholders’ Equity (Deficit)**                 |       | $                 | 13,742     |                 | $          | 13,215 |   |

 

*Seeaccompanying notes.*

4

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**NORTHWESTAIRLINES CORPORATION(DEBTOR-IN-POSSESSION)**

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                                 | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **March 31**                | ** ** |
| **(Unaudited, in millions)**                                                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                                                       |       |                             |       |   |   |
| **Cash  Flows from Operating Activities**                                                  |       |                             |       |   |   |
| Net income (loss)                                                                          |       | $                                | (292       | ) | $ | (1,104 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                              |       | 121                              |       | 134 |   |
| Pension and other postretirement benefit  contributions less than (greater than) expense   |       | (10                              | )          | 73 |   |
| Changes in certain assets and liabilities                                                  |       | 234                              |       | 300 |   |
| Long-term vendor deposits/holdbacks                                                        |       | 176                              |       | (57 | ) |
| Reorganization items, net                                                                  |       | 393                              |       | 975 |   |
| Other, net                                                                                 |       | 12                               |       | (1 | ) |
| Net cash provided by (used in) operating activities                                        |       | 634                              |       | 320 |   |
|                                                                                       |       |                             |       |   |   |
| **Cash  Flows from Reorganization Activities**                                             |       |                             |       |   |   |
| Net cash provided by (used in) reorganization  activities                                  |       | 33                               |       | (9 | ) |
|                                                                                       |       |                             |       |   |   |
| **Cash  Flows from Investing Activities**                                                  |       |                             |       |   |   |
| Capital expenditures                                                                       |       | (72                              | )          | (137 | ) |
| Purchase of short-term investments                                                         |       | (31                              | )          | (18 | ) |
| Proceeds from sales of short-term investments                                              |       | 10                               |       | — |   |
| Decrease (increase) in restricted cash, cash  equivalents and short-term investments       |       | (89                              | )          | (52 | ) |
| Other, net                                                                                 |       | 1                                |       | (1 | ) |
| Net cash provided by (used in) investing activities                                        |       | (181                             | )          | (208 | ) |
|                                                                                       |       |                             |       |   |   |
| **Cash  Flows from Financing Activities**                                                  |       |                             |       |   |   |
| Proceeds from long-term debt                                                               |       | —                           |       | 72 |   |
| Payments of long-term debt                                                                 |       | (147                             | )          | (182 | ) |
| Net cash provided by (used in) financing activities                                        |       | (147                             | )          | (110 | ) |
|                                                                                       |       |                             |       |   |   |
| **Increase  (Decrease) in Cash and Cash Equivalents**                                      |       | 339                              |       | (7 | ) |
|                                                                                       |       |                             |       |   |   |
| Cash and cash  equivalents at beginning of period                                          |       | 1,461                            |       | 684 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                | 1,800      |   | $ | 677 |   |
|                                                                                       |       |                             |       |   |   |
| Cash and cash  equivalents and unrestricted short-term investments at end of period        |       | $                                | 2,426      |   | $ | 1,279 |   |
|                                                                                       |       |                             |       |   |   |
| Supplemental  Cash Flow Information:                                                       |       |                             |       |   |   |
| Interest paid                                                                              |       | $                                | 110        |   | $ | 120 |   |
|                                                                                       |       |                             |       |   |   |
| Investing and  Financing Activities Not Affecting Cash:                                    |       |                             |       |   |   |
| Manufacturer  financing of aircraft and other non-cash transactions                        |       | $                                | 167        |   | $ | 117 |   |

 

*Seeaccompanying notes.*

5

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**NORTHWESTAIRLINES CORPORATION(DEBTOR-IN-POSSESSION)**

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

 

 

**Note 1 –Basis of Presentation**

The condensedconsolidated financial statements of Northwest Airlines Corporation (“NWA Corp.”),a holding company whose principal indirect operating subsidiary is NorthwestAirlines, Inc. (“Northwest”), include the accounts of NWA Corp. and allconsolidated subsidiaries (collectively, the “Company”).  Unless otherwise indicated, the terms “we,” “us,”and “our” refer to NWA Corp. and all consolidated subsidiaries.  The condensed consolidated financialstatements included herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  The information and footnote disclosuresnormally included in annual financial statements prepared in accordance withU.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed oromitted as permitted by such rules and regulations. These financial statementsand related notes should be read in conjunction with the financial statementsand notes included in the Company’s audited consolidated financial statements,which are provided in the Company’s Annual Report on Form 10-K for the yearended December 31, 2006, as amended by Form 10-K/A filings dated April 6, 2007and April 30, 2007 (collectively, the “2006 Form 10-K”).  The Company’s accounting and reportingpolicies are summarized in “Note 2 – Summary of Significant Accounting Policies”in the 2006 Form 10-K.

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 more favorabledue to increased leisure travel on domestic and international routes during thespring and summer months.

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

The Company believesthat the material risks and uncertainties that could affect the outlook of anairline operating under Chapter 11 and in a global economy include, amongothers, the ability of the Company to continue as a going concern, the abilityof the Company to obtain and maintain any necessary financing for operationsand other purposes, the ability of the Company to maintain adequate liquidity,the ability of the Company to absorb escalating fuel costs, the Company’sability to obtain court approval with respect to motions in the Chapter 11proceedings prosecuted by it from time to time, the ability of the Company todevelop, confirm and consummate a plan of reorganization with respect to itsChapter 11 proceedings, risks associated with third parties seeking andobtaining court approval to terminate or shorten the exclusivity period for theCompany to propose and confirm a plan of reorganization, to appoint aChapter 11 trustee

6

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or to convert the casesto Chapter 7 cases, the ability of the Company to obtain and maintain normalterms with vendors and service providers, the Company’s ability to maintaincontracts that are critical to its operations, the ability of the Company torealize assets and satisfy liabilities without substantial adjustments and/orchanges in ownership, the potential adverse impact of the Chapter 11proceedings on the Company’s liquidity or results of operations, the ability ofthe Company to operate pursuant to the terms of its financing facilities(particularly the related financial covenants), the ability of the Company toattract, motivate and/or retain key executives and associates, the future levelof air travel demand, the Company’s future passenger traffic and yields, theairline industry pricing environment, increased costs for security, the costand availability of aviation insurance coverage and war risk coverage, thegeneral economic condition of the United States and other regions of the world,the price and availability of jet fuel, the war in Iraq, the possibility ofadditional terrorist attacks or the fear of such attacks, concerns about SARS,Avian flu or other influenza or contagious illnesses, labor strikes, workdisruptions, labor negotiations both at other carriers and the Company, lowcost carrier expansion, capacity decisions of other carriers, actions of theU.S. and foreign governments, foreign currency exchange rate fluctuations,inflation and other factors discussed herein. The Company also believes thatthe material risks and uncertainties that could affect us as we emerge frombankruptcy include, among others, that NWA Corp.’s actual financial results mayvary significantly from the projections filed with the Bankruptcy Court, thatour consolidated financial statements will reflect fresh-start accountingadjustments made upon emergence from bankruptcy, that financial information inour future financial statements will not be comparable to NWA Corp.’s financialinformation from prior periods. Additional information with respect to these factors and other eventsthat could cause differences between forward-looking statements and futureactual results is contained in “Item 1A. Risk Factors” in the Company’s 2006Form 10-K.

*Presentation of Regional Carrier Related Revenue andExpense Items.*  In conjunction with the Amended AirlineServices Agreement with Pinnacle Airlines, Inc. (“Amended Pinnacle ASA”) andthe Stock Purchase and Reorganization Agreement with Mesaba Aviation, Inc. (“Mesaba”),the Company changed its presentation of certain regional carrier relatedrevenue and expense items effective January 1, 2007.  This change in presentation had no impact onthe Company’s first quarter 2007 operating income.

If this change in presentation was retroactively applied to prior yearfinancial statements, Other Operating Revenues would have decreased $50million, Depreciation and Amortization Expense would have increased by $1million, Aircraft Rentals Expense would have increased $52 million, RegionalCarrier Expenses would have decreased $103 million, and the Operating Loss wouldhave been unchanged for the three months ended March 31, 2006.

**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 thecaption “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 condensed consolidated financial statements shown herein includecertain subsidiaries that did not file to reorganize under Chapter 11.  The assets and liabilities of thesesubsidiaries are not considered material to the consolidated financialstatements.

*FinancialStatement Presentation.** ***Ourcondensed consolidated financial statements have been prepared in accordancewith GAAP on a going concern basis, which contemplates the realization ofassets and the satisfaction of liabilities in the normal course ofbusiness.  Accordingly, our condensedconsolidated financial statements do not include any adjustments relating tothe recoverability of assets and classification of liabilities that might benecessary should we be unable to continue as a going concern.  Due to our Chapter 11 proceedings, therealization of assets and the satisfaction of liabilities, without substantialadjustments and/or changes in ownership, are subject to uncertainty, andaccordingly, there is substantial doubt about the current financial reportingentity’s ability to continue as a going concern.  Upon emergence from bankruptcy, we expect toadopt fresh start reporting in accordance with SOP 90-7 which will result inour becoming a new entity for financial reporting purposes.  The condensed consolidated financialstatements do not reflect, among other things, any effects of the transactionscontemplated by the Plan or fresh-start accounting.  This financial information may not berepresentative of the Company’s results of operation or financial conditionafter the effective date of the Plan.

7

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*Plan of Reorganization.* On January 12, 2007, NWA Corp. and 13 of itsdirect and indirect subsidiaries, including Northwest, filed with theBankruptcy Court the Debtors’ Joint and Consolidated Plan of ReorganizationUnder Chapter 11 of the Bankruptcy Code. On January 12, 2007, the Bankruptcy Court granted the Companyan extension until February 15, 2007 to file the related Disclosure Statementwith respect to Debtors’ Joint and Consolidated Plan of Reorganization underChapter 11 of the Bankruptcy Code (as subsequently amended, the “DisclosureStatement”).  Subsequently, on February 15, 2007, the Company filed itsDisclosure Statement and the First Amended Joint and Consolidated Plan ofReorganization under Chapter 11 of the Bankruptcy Code (as subsequentlyamended, the “Plan” or “Plan of Reorganization”).

On March 2, 2007, the Company filed a motion with theBankruptcy Court, requesting that its exclusivity period for filing areorganization plan be extended to June 29, 2007.  On March 15, 2007, the Bankruptcy Courtapproved the extension of the Company’s exclusivity period.  During the exclusivity period only theCompany can propose a reorganization plan.

The Plan provides for the treatment of claims ofcreditors, the implementation of agreements with key labor groups, lenders, andsuppliers, as well as the raising of new equity capital by NWA Corp.  The Plan proposes to restructure the Company’sbalance sheet through the elimination of all pre-petition unsecured debt. In exchange for their allowed claims, unsecured creditors will receive CommonStock of the reorganized NWA Corp. and the right to purchase additional CommonStock in a rights offering. Because all unsecured creditor claims will not besatisfied in full, the pre-petition equity holders’ interests in NWA Corp.’sCommon and Preferred Stock will be cancelled, and those holders will notreceive a distribution.

On March 30, 2007, the Bankruptcy Court approved the adequacy ofinformation in the Disclosure Statement and authorized the Company to send theDisclosure Statement, Plan, and ballots to creditors entitled to vote on thePlan.  The Disclosure Statement containsdetailed information about the Plan, the Bankruptcy Court’s order approving theDisclosure Statement, notice of the time for filing acceptance or rejection ofthe Plan and timing of the hearing to consider confirmation of the Plan, therights offering, financial projections and financial estimates regarding theDebtors’ reorganized business enterprise value. The information contained inthe Disclosure Statement is subject to change, whether as a result ofamendments to the Plan, actions of third parties or otherwise.  The deadline for voting on the Company’s Planwas May 7, 2007.  The preliminary,unofficial vote tally indicates that 96.9 percent of the airline’s creditors,who voted, representing 98.4 percent of the dollar amount of the claims thatvoted, approved the Plan.  A hearing to confirm the Plan (“ConfirmationHearing”) is scheduled for May 16, 2007. The Plan will become effective only if it receives the requisiteapproval and is confirmed by the Bankruptcy Court, which the Company currentlyexpects to occur during the second quarter of 2007.  However, there can be no assurance that theBankruptcy Court will confirm the Plan or that the Plan will be implementedsuccessfully.

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

*Plan Supplement.*  On May 4, 2007, the Company filed with theBankruptcy Court a supplement (the “Plan Supplement”) to the Plan.  In the Plan Supplement, the Debtors filedwith the Bankruptcy Court copies of the Company’s proposed Amended Bylaws andAmended Certificate of Incorporation, a copy of the proposed Management EquityPlan, and a copy of the proposed stockholder rights plan, all of which areexpected to be effective upon the Company’s emergence from Chapter 11.

*Restructuring**Goals. *The Company identified three major elements essential to transformingits business and has substantially completed the actions necessary to achieveits targeted business improvements.  Thethree major elements included:

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

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

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

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

*LaborCost Restructuring. *The Company has ratified collectivebargaining agreements (“CBAs”) or implemented contractual terms and conditionswhich collectively provide for approximately $1.4 billion in annual labor costsavings.  The Company has reachedconsensual agreement on CBAs with the Air Line Pilots Association (“ALPA”), theInternational Association of Machinists and Aerospace Workers (“IAM”), theAircraft Technical Support Association (“ATSA”), the Transport Workers Union ofAmerica (“TWU”), and the Northwest Airlines Meteorologists Association (“NAMA”).  The agreements with ALPA, the IAM, ATSA, TWU,and NAMA were implemented on or before August 1, 2006.  Two rounds of salaried and managementemployee pay and benefit cuts have also been achieved and implemented.   In addition, the Company imposed contractterms on its technicians represented by the Aircraft Mechanics FraternalAssociation (“AMFA”) in August 2005 and, under Section 1113(c) of theBankruptcy Code, imposed contract terms on its flight attendants represented bythe Association of Flight Attendants-Communication Workers of

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America (“AFA-CWA”) onJuly 31, 2006.  On November 6, 2006, theCompany reached a ratified agreement with AMFA to end the labor dispute withthe airline’s technicians.  The agreementmaintains the necessary annual labor cost savings from AMFA-representedemployees.

Section1113(c) of the Bankruptcy Code permits a debtor to move to reject its CBAs ifthe debtor first satisfies a number of statutorily prescribed substantive andprocedural prerequisites and obtains the Bankruptcy Court’s approval of therejection or the expiration of the statutorily prescribed time period.  After bargaining in good faith and sharingrelevant information with its unions, a debtor must make proposals to modifyits existing CBAs based on the most complete and reliable information availableat the time.  The proposed modificationsmust be necessary to permit the reorganization of a debtor and must providethat all the affected parties are treated fairly and equitably.  Ultimately, rejection of the CBAs isappropriate if the unions refuse to agree to a debtor’s necessary proposal “withoutgood cause” and the Bankruptcy Court determines that the balance of theequities favors rejection.   In October2005, the Company commenced Section 1113(c) proceedings with ALPA, the IAM andthe Professional Flight Attendants Association (“PFAA”) and has subsequentlyreached consensual agreement with ALPA and the IAM.

Withrespect to the Company’s flight attendants, the Company reached a tentativeagreement 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 the 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 the Bankruptcy Court’s June 29, 2006ruling, the Company and the PFAA commenced negotiations to reach a newagreement.  On July 6, 2006, the Company’sflight attendants voted to change their union representation from the PFAA tothe AFA-CWA.  Subsequently, the Companyand the AFA-CWA continued negotiations to reach a new agreement, and on July17, 2006, the parties announced that they reached a new tentative agreement(the “July TA”).  On July 31, 2006, theAFA-CWA announced 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 flightattendants’ failure to ratify a second proposed CBA and the Company’ssubsequent imposition of new contract terms for the flight attendants, theAFA-CWA provided the Company with a 15-day notice of its intent to strike orengage in other work actions, including CHAOS (Create Havoc Around OurSystem).  In response, on August 1, 2006,the Company filed a motion with the Bankruptcy Court seeking to obtain aninjunction against such activities.  TheAFA-CWA subsequently extended the strike deadline by 10 days to August 25,2006, in response to terrorist threats against air travel to and within theUnited States.  On August 17, 2006, theBankruptcy Court denied the Company’s request for an injunction.  On August 18, 2006, the Company filed anappeal of the Bankruptcy Court’s decision with the United States District Courtfor the Southern District of New York (“U.S. District Court”). On August 25,2006, the U.S. District Court issued an injunction pending appeal which temporarilyprevented any work action by the AFA-CWA while the court considered the Company’sappeal.  The U.S. District Court reversedthe Bankruptcy Court’s decision on September 15, 2006, and granted the Company’srequest for a preliminary injunction to prevent a threatened strike or workaction by the AFA-CWA.  Subsequently, theAFA-CWA appealed the U.S. District Court’s ruling to the U.S. Second CircuitCourt of Appeals (the “Second Circuit”). On March 29, 2007, the Second Circuit affirmed the grant of thepreliminary injunction by the U.S. District Court.

On February 12, 2007, the AFA-CWA filed a motionwith the Bankruptcy Court seeking reconsideration of the Bankruptcy Court’sdecision to grant the Debtors’ Section 1113(c) motion to reject the Debtors’CBA with the flight attendants. On April 13, 2007, the Bankruptcy Court issueda Memorandum of Opinion denying the AFA-CWA’s motion for relief from the orderauthorizing the Debtors to reject its CBA with the AFA-CWA.

On April 26, 2007, the Company announced that itreached a tentative contract agreement with the AFA-CWA.  The tentative agreement, which requiresBankruptcy Court approval, maintains the necessary annual labor cost savingsfrom the AFA-CWA represented employees and allows the flight attendants a $182million unsecured claim in the Company’s bankruptcy court proceedings.  The tentative agreement has been submitted tothe flight attendant members for a ratification vote.

On April 18, 2007, the Company reached anagreement with the Section 1114 Retiree Committee to continue retireehealthcare benefits.  As part of theagreement, the Section 1114 Committee received an allowed unsecured claim of$120 million.  The proceeds from thisclaim are anticipated to be contributed to a Voluntary Employees BeneficiaryAssociation Trust.  The Trust proceedsare expected to be used to fund a portion of the required retiree contributionsunder this proposed agreement.  Thisagreement was approved by the Bankruptcy Court on April 26, 2007.

On May 2, 2007, the Bankruptcy Court grantedthe joint motion of the Company, the IAM, and the IBT to treat the judgment inthe Series C Litigation in the approximate amount of $277 million as anunsecured claim in the Company’s bankruptcy case.

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*Non-labor Cost Restructuring*.  TheCompany continues to pursue reductions in non-labor costs consistent with itscurrent target of $350 million in annual savings.  The Company expects to realize such savingsthrough restructured agreements with our regional airline affiliates, reductionin properties and facilities costs, reduced fuel burn, lower distribution,insurance and interest costs and optimization of other contractualrelationships.  The Company estimates itrealized approximately $100 million of the targeted savings in 2006, with anadditional $190 million expected to be realized in 2007 and the balancetargeted to be realized during 2008.

*Fleet Optimization. *The Companyright-sized and re-optimized its fleet and network in conjunction with itsrestructured business plan.  The Companyhas also reached new agreements and affirmed existing arrangements on newaircraft as part of its fleet optimization. The Company has affirmed its deliveries of Airbus A330 aircraft and nowhas one of the youngest transatlantic fleets in the industry.  The Company also affirmed its position as theNorth American service launch airline of the new Boeing 787 with deliveriesbeginning in August 2008, and has ordered 72 76-seat regional jets that will beintroduced beginning in the second quarter of 2007.  The dual class regional jets are optimallysized for many domestic markets and will give the Company potential growthopportunities over time.  In addition,the Company has retired the DC10 and Avro RJ85 fleets and has accelerated theretirement of the Boeing 747-200 wide-body aircraft.

*Balance Sheet Restructuring*.  Under the Plan, the Companywill reduce its total pre-petition debt by approximately $4.2 billion throughthe elimination of unsecured debt and restructuring of aircraft and othersecured obligations.  Additionally, theCompany refinanced its Bank Term Loan with the DIP/Exit financing facility,providing a significant interest expense savings.  The aircraft restructurings will result in anestimated $400 million reduction in ownership costs including interest, rentand depreciation expense.  Theelimination of the unsecured debt will drive an additional interest expensereduction of approximately $150 million annually.  See “Item 8. Consolidated FinancialStatements and Supplementary Data, Note 6 – Liabilities Subject to Compromise”in the Company’s 2006 Form 10-K, for additional information.

*Airlink Operations*.  OnJanuary 11, 2007, the Bankruptcy Court approved the Amended Pinnacle ASAbetween the Company and Pinnacle Airlines. The Amended Pinnacle ASA provides that Pinnacle will continue to be along-term partner of Northwest through at least 2017.  In addition to reaching terms on an amendedairline services agreement, Northwest granted Pinnacle an allowed generalunsecured claim of $377.5 million for full and final satisfaction of any andall claims filed against the Debtors, which resulted in an incremental chargeto reorganization expense of $306.7 million during the first quarter of2007.  The Amended Pinnacle ASA andrelated agreements provide Northwest with, among other things, certainty ofPinnacle Airlines’ performance at rates consistent with Northwest’s costsavings targets and resolution of the Pinnacle Airlines claims.

On January 22, 2007, the Debtors entered into a Stock Purchase andReorganization Agreement with Mesaba under which the Debtors agreed to purchaseall of the equity interests in Mesaba following its reorganization underChapter 11 and granted the Mesaba estate a general unsecured claim of $145million for full and final satisfaction of any and all claims filed against theDebtors.  The Debtors also agreed toresolve all outstanding claims with Mesaba’s parent, MAIR Holdings, Inc. (“MAIR”)and to sell MAIR all of Northwest’s stock in MAIR.  Mesaba filed its plan of reorganization (the “MesabaPlan”) and its disclosure statement with respect to the Mesaba Plan (the “MesabaDisclosure Statement”) with the United States Bankruptcy Court for the Districtof Minnesota on January 22, 2007 and January 24, 2007, respectively.  The Mesaba Plan was confirmed on April 10,2007.  In conjunction with the consummationof Mesaba’s Plan, Mesaba was acquired by Northwest Airlines on April 24,2007 and became a wholly-owned consolidated subsidiary.

*General Bankruptcy Matters*.  As required by the BankruptcyCode, the United States Trustee for the Southern District of New York appointedon September 30, 2005 an Official Committee of Unsecured Creditors (the “Creditors’Committee”).  The Creditors’ Committeeand its legal representatives have a right to be heard on all matters that comebefore the Bankruptcy Court concerning the reorganization.  There can be no assurance that the Creditors’Committee will support the Company’s positions.

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With the exception of the Company’s non-debtorsubsidiaries, the Company continues to operate its business as “debtor-in-possession”under the jurisdiction of the Bankruptcy Court and in accordance with theapplicable provisions of the Bankruptcy Code, the Federal Rules of BankruptcyProcedure and applicable court orders. In general, as debtor-in-possession, the Company is authorized underChapter 11 to continue to operate as an ongoing business, but may not engage intransactions outside the ordinary course of business without the prior approvalof the Bankruptcy Court.  In conjunction withthe commencement of the Chapter 11 case, the Debtors obtained several ordersfrom the Bankruptcy Court that were intended to enable the Debtors to operatein the normal 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) permitthe Debtors to operate their consolidated cash management system during theChapter 11 case in substantially the same manner as it was operated prior tothe 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 have recorded liability amounts for theclaims that can be reasonably estimated and which we believe are probable ofbeing allowed by the Bankruptcy Court and we have classified these asliabilities subject to compromise in the condensed consolidated balancesheets.  See “Note 8 – LiabilitiesSubject to Compromise” for additional information.  The Company expects that additionalliabilities subject to compromise will arise in the future as a result ofdamage claims resulting from the rejection of certain executory contracts andunexpired leases by the Debtors. However, the Company expects that the assumption of certain executorycontracts and unexpired leases may convert liabilities subject to compromise toliabilities not subject to compromise. In addition, other claims may be recorded as a result of the Debtorsclaims resolution process.

*Appointment of NewBoard of Directors. *On April20, 2007, the Company announced the 12 individuals who will serve on its boardof directors upon its emergence from bankruptcy.  The new board will be composed of thefollowing individuals: Roy Bostock (who will serve as Chairman),David Brandon, Mike Durham, John Engler, Mickey Foret, Robert Friedman, DorisKearns Goodwin, Jeffrey Katz, James Postl, Rodney Slater, Douglas Steenland,and William Zoller.  The current boardwill continue to serve until the reorganization is completed.

*Securities TradingMatters. *On October28, 2005, and April 12, 2007, the Bankruptcy Court entered orders that restrictthe trading of the Common Stock and debt interests in the Company.  The purpose of these orders is to ensure thatthe Company does not lose the benefit of its net operating loss carryforwards (“NOLs”)for tax purposes.  Under federal andstate income tax law, NOLs can be used to offset future taxable income, andthus are a valuable asset of the Debtors’ estate.  Certain trading in the Company’s stock (ordebt when the Company is in bankruptcy) could adversely affect the Company’sability to use the NOLs.  Thus, theCompany obtained orders that enable it to closely monitor certain transfers ofstock and claims and restrict those transfers that may compromise the Company’sability to use its NOLs.  See “Note 6 –Income Taxes” for further information related to the Company’s NOLs.

The Company’s Common Stock ceased trading on the NASDAQ stock market onSeptember 26, 2005 and now trades in the “over-the-counter” market under thesymbol NWACQ.PK.  However, under theCompany’s Plan, no value is ascribed to the Company’s outstanding Common Stock,Preferred Stock or other equity securities. Upon the effective date of the Plan, the outstanding Common andPreferred Stock of the Company will be cancelled for no consideration andtherefore the Company’s stockholders will no longer have any interest asstockholders in the Company by virtue of their ownership of the Company’sCommon or Preferred Stock prior to emergence from bankruptcy.

The New York Stock Exchange (the“NYSE”) 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.

On May 7, 2007, theCompany announced that it had filed an application with the NYSE to list itsnew common stock to be issued in connection with the consummation of its Plan.  Subject to the approval of the Company’slisting application and its emergence from bankruptcy, the Company expects thatits newly-issued common stock will begin trading on the NYSE under the tickersymbol “NWA.”

*Request for Equity Committee. *On or about November 22, 2006, certain equity holders of the Debtorsrequested, by letter, that the United States Trustee appoint a committee ofequity security holders.  By lettersdated December 26, 2006, the United States Trustee denied this request.  On January 11, 2007, an ad hoc committee ofequity security holders filed a motion in the Bankruptcy Court seeking tocompel the United States Trustee to appoint an equity committee.  On February 28, 2007, the equity holderswithdrew their request to appoint an equity committee.  Subsequently, they sought the appointment ofan examiner to investigate the Company’s plans regarding industry

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consolidation.  On March 27, 2007, the Bankruptcy Courtordered the appointment of an examiner pursuant to Section 1104(c) of theBankruptcy Code.  The Bankruptcy Courtstated that there is no evidence that an examiner is needed because the Debtorshave done something wrong or that there is probable cause that they have doneso.  Rather, the examiner was appointedbecause the Bankruptcy Court interpreted the language of Section 1104(c) of theBankruptcy Code to provide that appointment of an examiner is mandatory inlarge cases.  The examiner’s duties willbe limited to determining whether the Debtors, including their professionals,have used customary and appropriate processes and procedures to value theirassets and businesses for purposes of Section 1129(b) of the Bankruptcy Codeor, on the contrary, have employed improper processes and procedures in orderto arrive at a materially reduced valuation of their assets and businesses forpurposes of Section 1129 of the Bankruptcy Code.  Further, the Bankruptcy Court emphasized thatthe examiner must complete its duties within the time already scheduled by theBankruptcy Court.  The examiner’s reportis expected to be issued prior to commencement of the Confirmation Hearing.

**Note 3 – Recent Accounting Pronouncements**

In September 2006, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 157, *Fair ValueMeasurements*(“SFAS No. 157”). This Statement provides a singledefinition of fair value, a framework for measuring fair value, and expandeddisclosures concerning fair value. Previously, different definitions of fair value were contained invarious accounting pronouncements creating inconsistencies in measurement anddisclosures. SFAS No. 157 applies to those previously issuedpronouncements that prescribe fair value as the relevant measure of value,except SFAS No. 123 (Revised2004), *Share-Based Payment* (“SFASNo. 123R”) and related interpretations and pronouncements thatrequire or permit measurement similar to fair value but are not intended tomeasure fair value. This pronouncement is effective for fiscal years beginningafter November 15, 2007; however, the Company, in accordance with therequirements of SOP 90-7, will be required to adopt SFAS No. 157 in conjunctionwith adopting fresh-start reporting upon our emergence from bankruptcy.  The Company is currently evaluating theimpact of adopting SFAS No. 157 on its financial statements.

In June 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(“FIN48”), which clarifies FASB Statement No. 109, *Accountingfor Income Taxes*(“SFAS No. 109”). FIN 48 prescribes a consistent recognition threshold and criteria formeasurement of uncertain tax positions for financial statement purposes.  FIN 48 requires the financial statementrecognition of an income tax benefit when the Company determines that it is “morelikely than not” the tax position will be ultimately sustained.  The Company adopted FIN 48 as of January 1,2007, and no change was required to its reserve for uncertain income taxpositions under FIN 48.

**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 for the three months ended March 31:
| (In millions)          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Domestic                    |       | **$**    | **1,942**  |     | $          | 2,012 |   |
| Pacific,  principally Japan | ** ** | **638**  |       | 614      |       |
| Atlantic                    | ** ** | **293**  |       | 264      |       |
| Total operating  revenues   | ** ** | **$**    | **2,873**  |     | $          | 2,890 |   |

 

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 of assetsand liquidation of post-petition liabilities in the ordinary course ofbusiness.  In accordance with SOP 90-7,the financial statements for the periods presented distinguish transactions andevents that are directly associated with the reorganization from the ongoingoperations of the Company.

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Reorganizationitems recorded during the three months ended March 31, 2007, largely consistedof charges associated with the Company’s implementation of the Amended PinnacleASA, charges associated with the Company’s Stock Purchase and ReorganizationAgreement with Mesaba, aircraft rejection charges, professional fees, aircraftrestructurings, and net gains from the sale of assets.  In connection with entering into the AmendedPinnacle ASA and the Stock Purchase and Reorganization Agreement with Mesaba,the Company granted Pinnacle and Mesaba allowed general unsecured claims of$377.5 million and $145 million, respectively, for full and final satisfactionof any and all claims filed against the Debtors.  These agreements with Pinnacle and Mesabaresulted in incremental charges to reorganization expense of $306.7 million and$55 million, respectively, during the first quarter of 2007.  Aircraft rejection charges are non-cash coststhat include the estimated allowable claims, net of gains on the sale and/orsettlement of residual value guarantees, resulting from the Company’s rejectionof certain aircraft leases and/or return of aircraft as part of the bankruptcyprocess.  These claims remain subject tofuture adjustments arising from negotiated settlements, actions of theBankruptcy Court, the determination as to the value of any collateral securingclaims, proofs of claim or other events. The charges for professional fees include only those professional feesrelated to the bankruptcy process.  Thecharges for restructuring aircraft leases/debt are primarily non-cash coststhat include the estimated claims resulting from the Company’s renegotiation ofcertain aircraft obligations.  Gainsrecognized as asset sales consisted primarily of the sale of eight DC10-30 aircraftand the sale of MAIR stock held by the Company.

Inaddition to the charges disclosed above, reorganization items for the threemonths ended March 31, 2006, were partially offset by a pension curtailmentgain related to the Northwest Airlines Pension Plan for Pilots.

Netreorganization items, as shown on the Condensed Consolidated Statements ofOperations, consisted of the following:
|                                           | ** ** | **Three months ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **March 31**                | ** ** |
| **(In millions)**                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Regional carrier claims                   | ** ** | **$**                            | **362**    |   | $ | — |   |
| Aircraft rejection  charges, net          | ** ** | **48**                           |       | 25 |   |
| Professional fees                         | ** ** | **17**                           |       | 14 |   |
| Restructured aircraft  lease/debt charges | ** ** | **2**                            |       | 975 |   |
| Pension plan  curtailment gain            | ** ** | **—**                       |       | (49 | ) |
| Asset sales                               | ** ** | **(29**                          | **)**      | — |   |
| Other                                     | ** ** | **(7**                           | **)**      | 10 |   |
| Reorganization  items, net                | ** ** | **$**                            | **393**    |   | $ | 975 |   |

 

**Note 6 – Income Taxes**

The Company adopted FIN 48 on January 1, 2007.  As a result of the adoption, no adjustmentwas required to its reserve for uncertain tax positions.  As of March 31, 2007, the Company hadunrecognized tax benefits of approximately $3 million, which, if recognized,would impact the effective tax rate in future periods.  During the quarter, the Company recognized $1million of previously unrecognized tax benefits as a result of resolutions ofstate tax controversies during the quarter.

Subject to the impact of the Company’s bankruptcy filing, open tax yearsfor federal income tax purposes are 1992 through 2006 and for state income taxpurposes generally are 2005 and 2006.

The Company’s continuing practice is to recognize interest and penaltiesrelated to income tax matters in income tax expense.  The Company had $11 million accrued forinterest and nothing accrued for penalties at March 31, 2007.

The Company accounts for income taxes in accordance with SFAS No. 109,which requires that deferred tax assets and liabilities be recognized, usingenacted tax rates, for the tax effect of temporary differences between thefinancial reporting and tax bases of recorded assets and liabilities.  SFAS No. 109 also requires that deferred taxassets be reduced by a valuation allowance if it is more likely than not thatsome or all of the deferred tax assets will not be realized.  Based on the consideration of all availableevidence, the Company has provided a valuation allowance on deferred tax assetsrecorded beginning in the first quarter 2003. The Company continues to record a full valuation allowance against itsdeferred tax assets due to the uncertainty regarding the ultimate realizationof those assets.  The Company’s firstquarter net loss therefore 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 NOLs that were generated prior to the changein ownership could be substantially limited. The amount of limitation, if any, will be determined at the time of itsemergence from Chapter 11. On October28, 2005, and April 12, 2007, the Bankruptcy Court entered orders that restrict

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the trading of the common stock and debt interestsin the Company.  The purpose of theseorders is to ensure the Company does not lose the benefit of its NOLs for taxpurposes. Under federal and state income tax law, NOLs can be used to offsetfuture taxable income, and thus are a valuable asset of the Debtors’estate.  Certain trading in the Company’sstock (or debt when the Company is in bankruptcy) could adversely affect theCompany’s ability to use the NOLs.  Thus,the Company obtained orders that enable it to closely monitor certain transfersof stock and claims and restrict those transfers that may compromise theCompany’s ability to use its NOLs.

**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** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **March 31**                | ** ** |
| **(In millions, except per share data)**                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Numerator:**                                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                   | ** ** | **$**                            | **(292**   | **)** | $ | (1,104 | ) |
| Preferred stock  requirements                                                        | ** ** | **—**                       |       | — |   |
| Net income  (loss) applicable to common stockholders                                 | ** ** | **$**                            | **(292**   | **)** | $ | (1,104 | ) |
|                                                                                 |       |                             |       |   |   |
| **Denominator:**                                                                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Weighted-average  shares outstanding for basic and diluted earnings (loss) per share | ** ** | **87,383,106**                   |       | 87,264,542 |   |
|                                                                                 |       |                             |       |   |   |
| **Earnings (loss) per common  share:**                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
|                                                                                 |       |                             |       |   |   |
| Net income  (loss)                                                                   | ** ** | **$**                            | **(3.34**  | **)** | $ | (12.65 | ) |
| Preferred stock  requirements                                                        | ** ** | **—**                       |       | — |   |
| Net income (loss)  applicable to common stockholders                                 | ** ** | **$**                            | **(3.34**  | **)** | $ | (12.65 | ) |

 

For both the three months ended March 31, 2007 and 2006, 19.1 million incremental shares relatedto dilutive securities were not included in the diluted earnings per sharecalculation because the Company reported a net loss for these periods.  Incremental shares related to dilutivesecurities have an anti-dilutive impact on earnings per share when a net lossis reported and therefore are not included in the calculation.

Additionally, 6.2 million and 6.3 million shares of Series C PreferredStock were excluded from the effect of dilutive securities for the three monthsended March 31, 2007 and 2006, respectively, because the Company reported a netloss for these periods.

Total employee stock options outstanding of7.3 million and 7.8 million as of March 31, 2007 and 2006, respectively, werenot included in diluted securities because the Company reported a net loss forthe three months ended March 31, 2007 and 2006.

**Note 8 – Liabilities Subject to Compromise**

The Debtors have endeavored to notify all of their known or potentialcreditors whose claims are subject to the Chapter 11 case.  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”) was August 16, 2006.  A proof of claim arising from the rejectionof an executory contract must be filed the later of the Bar Date or 30 days fromthe effective date of the authorized rejection. As of March 31, 2007, the dollar amount of all claims filed against theDebtors, as reflected on the claims register, totaled approximately $131billion.  Differences in amount betweenclaims filed by creditors and liabilities shown in our records continue to beinvestigated and resolved in connection with our claims resolution process. TheDebtors believe that many of these claims are subject to objection as beingduplicative, overstated, based upon contingencies that have not occurred, orbecause they otherwise do not state a valid claim.  The foregoing amount does not include claimsthat were filed without a specified dollar amount, referred to as unliquidatedclaims, and claims that were filed after the Bar Date.  While significant progress has been made todate, the Debtors are still in the process of resolving claims in accordancewith the claims resolution procedures approved by the Court; however,completion of this process will likely occur well after confirmation of theDebtors’ Plan.  The Debtors believe thatthe aggregate dollar amount of unsecured claims currently appearing on theclaims register far exceeds the total dollar amount of unsecured claims thatwill ultimately be allowed against the Debtors in the cases.  Although the ultimate dollar amount of suchclaims is not known at this time, the Debtors estimate that the amount ofunsecured claims will be in the range of $8.2 billion to $8.8 billion.  This estimate is subject to significant uncertaintiesrelating to the resolution of various claims,

14

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includingthe resolution of contingent and unliquidated claims such as litigation.  As a result, there can be no assurance thatthe ultimate amount of such allowed claims will not exceed $8.8 billion.

Liabilities subject to compromise refers to both secured and unsecuredobligations that will be accounted for under a plan of reorganization,including claims incurred prior to the Petition Date.  These liabilities represent the estimatedamount expected to be allowed on known or potential claims to be resolvedthrough the Chapter 11 process, and remain subject to future adjustmentsarising from negotiated settlements, actions of the Bankruptcy Court, rejectionof executory contracts and unexpired leases, the determination as to the valueof any collateral securing claims, proofs of claim, or other events.  Liabilities subject to compromise alsoincludes certain items that may be assumed under the Debtors’ Plan.  The Company had liabilities subject to compromiseof $13.6 billion at both March 31, 2007 and December 31, 2006, consisting ofthe following:
|                                                              | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| **(In millions)**                                       | ** ** | **2007**          | ** ** | **2006**             | ** ** |
| Debt, including accrued  interest                            | ** ** | **$**             | **4,300**  |                 | $          | 4,604 |   |
| Pension, postretirement  and other employee related expenses | ** ** | **3,892**         |       | 3,902                |       |
| Aircraft-related  accruals and deferrals                     | ** ** | **2,984**         |       | 2,962                |       |
| Capital lease  obligations, including accrued interest       | ** ** | **238**           |       | 238                  |       |
| Accounts payable and  other liabilities                      | ** ** | **2,219**         |       | 1,866                |       |
| Total liabilities  subject to compromise                     | ** ** | **$**             | **13,633** |                 | $          | 13,572 |   |

 

Subsequent to its Chapter 11 filing, the Company recorded post-petitioninterest expense on pre-petition obligations only to the extent it believes theinterest will be paid during the bankruptcy proceeding or that it is probablethat the interest will be an allowed claim. Had the Company recorded interest expense based on all of itspre-petition contractual obligations, interest expense would have increased by$35.4 million and $48.2 million during the three months ended March 31, 2007and 2006, respectively.

In addition to the $13.6 billion ofliabilities subject to compromise itemized above, the Company’s $275 million ofPreferred Redeemable Stock is also subject to compromise.  This preferred security is not presented as aliability on the Company’s Condensed Consolidated Balance Sheets due to itsconversion features, as required by the provisions of SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.

**Note 9** -**Long-termDebt 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, 2011, are as follows (inmillions):
| remainder of   2007 |   | $     | 182    |   |
|-------------------------------|--------|-------|--------|--------|
| 2008                          |   | 1,577 | *      |
| 2009                          |   | 295   |   |
| 2010                          |   | 238   |   |
| 2011                          |   | 251   |   |

 

----

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

On August 21, 2006, the Company entered into a $1.225 billion SuperPriority Debtor in Possession and Exit Credit and Guarantee Agreement (the “DIP/ExitFacility”), consisting of a $1.05 billion term loan facility and a $175 millionrevolving credit facility, which is required to be fully drawn during theCompany’s bankruptcy proceeding.  Thematurity of the DIP/Exit Facility is the earlier of the Company’s exit frombankruptcy or two years.  The DIP/ExitFacility is secured by a first lien on the Company’s Pacific route authoritieswhich were last appraised in January 2006 at $3.3 to $4.1 billion.  Additionally, the Company’s obligations tothe lenders have super-priority status while the Company is in bankruptcy.  The DIP/Exit Facility received a creditrating of BBB- from Standard & Poor’s Rating Services (“S&P”) and a Ba2from Moody’s Investors Service, Inc. (“Moody’s”).

The DIP/Exit Facilityinitially bore an interest rate of LIBOR plus 2.50%; however, on March 9, 2007,the Company and the lenders amended the facility to, among other things, reducethe margin applicable to loans by 50 basis points as well as eliminate minimumcredit rating and collateral coverage margin-increase thresholds. The interestrate as of March 31, 2007 was 7.35%. The amendment also permits Northwest togrant liens on the collateral securing obligations under the

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DIP/Exit Facility to supportup to $150 million of Northwest’s obligations under fuel, interest rate and/orcurrency exchange hedging agreements with any lender that is a party to theDIP/Exit Facility.

Subject to the Companymeeting certain conditions, including emerging from bankruptcy on or prior toAugust 21, 2008, the DIP/Exit Facility can be converted to exit financing (“ExitFacility”).  The final maturity, in suchevent, will be August 21, 2013. Principal on the term loan portion of the Exit Facility will be repaidat 1.0% per year (as is the case under the DIP/Exit Facility) with the balanceof 94% due at maturity.  Loans drawnunder the revolving credit facility may be borrowed and repaid at the Company’sdiscretion.  Up to $75 million of therevolving credit facility may be utilized by the Company as a letter of creditfacility.  Both loan facilities under theExit Facility will continue to bear interest at LIBOR plus 2.00%.  Letter of credit fees will be charged at thesame credit spread as on the borrowings plus 12.5 basis points.  To the extent that the revolving creditfacility is not utilized, the Company is required to pay an undrawn commitmentfee of 50 basis points per annum.

The conditions to convert the DIP/Exit Facility to exit financing onemergence from bankruptcy include, among other items, a confirmed plan ofreorganization with projections that reflect pro-forma financial covenantcompliance for the term of the facility, labor savings and pension relief, aminimum of $2.0 billion in unrestricted cash and available committed creditfacilities, a collateral coverage ratio of at least 1.50 to 1.00, and ratingscoverage of the Exit Facility by S&P and Moody’s.

Both the DIP/Exit Facility and, upon its conversion, the Exit Facilityrequire ongoing compliance with the following financial covenants:

·  Unrestrictedcash of at least $750 million

·  Collateralcoverage ratio of at least 1.50 to 1.00

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

 

As of March 31, 2007, theCompany was in compliance with all required financial covenants.

16

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**Note 10 – Fleet Informationand Commitments**

As shown in the following table, Northwestoperated a fleet of 375 aircraft at March 31, 2007, consisting of 317narrow-body and 58 wide-body aircraft. Northwest’s purchase commitments for aircraft as of March 31, 2007 arealso provided.
|                                       | ** ** | ** **   | ** ** | **In Service** | ** ** | **Aircraft** | ** ** |
|---------------------------------------|------------|--------------|------------|---------------------|------------|--------------|------------|
| ** **                            | ** ** | **Seating**  | ** ** | ** **          | ** ** | **Capital**  | ** ** | **Operating** | ** ** | ** ** | ** ** | **on Firm** | ** ** |
| **Aircraft Type**                | ** ** | **Capacity** | ** ** | **Owned**           | ** ** | **Lease**    | ** ** | **Lease** | ** ** | **Total** | ** ** | **Order** | ** ** |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Passenger Aircraft**                |       |         |       |                |       |         |       |   |   |   |   |   |   |
| Airbus:                               |       |         |       |                |       |         |       |   |   |   |   |   |   |
| A319                                  |       | 124          |       | 64                  |       | —       |       | 1 |   | 65 |   | 5 |   |
| A320                                  |       | 148          |       | 45                  |       | —       |       | 28 |   | 73 |   | 2 |   |
| A330-200                              |       | 243          |       | 11                  |       | —       |       | — |   | 11 |   | — |   |
| A330-300                              |       | 298          |       | 15                  |       | —       |       | — |   | 15 |   | 6 |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| Boeing:                               |       |         |       |                |       |         |       |   |   |   |   |   |   |
| 787-8                                 |       | 221          |       | —              |       | —       |       | — |   | — |   | 18 |   |
| 757-200                               |       | 180-184      |       | 38                  |       | 1            |       | 16 |   | 55 |   | — |   |
| 757-300                               |       | 224          |       | 16                  |       | —       |       | — |   | 16 |   | — |   |
| 747-200                               |       | 353-430      |       | 2                   |       | —       |       | 1 |   | 3 |   | — |   |
| 747-400                               |       | 403          |       | 4                   |       | —       |       | 12 |   | 16 |   | — |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| McDonnell Douglas:                    |       |         |       |                |       |         |       |   |   |   |   |   |   |
| DC9                                   |       | 100-125      |       | 108                 |       | —       |       | — |   | 108 |   | — |   |
|                                  |       |         |       | 303                 |       | 1            |       | 58 |   | 362 |   | 31 |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Freighter Aircraft**                |       |         |       |                |       |         |       |   |   |   |   |   |   |
| Boeing 747F                           |       |         |       | 10                  |       | —       |       | 3 |   | 13 | (1) | — |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Total Northwest Operated Aircraft** | ** ** | ** **   | ** ** | **313**             | ** ** | **1**        | ** ** | **61** | ** ** | **375** | ** ** | **31** | ** ** |
| ** **                            | ** ** | ** **   | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Regional Aircraft**                 |       |         |       |                |       |         |       |   |   |   |   |   |   |
| CRJ200                                |       | 44-50        |       | —              |       | —       |       | 140 |   | 140 |   | — |   |
| Saab 340                              |       | 30-34        |       | —              |       | —       |       | 49 |   | 49 |   | — |   |
| CRJ900                                |       | 76           |       | —              |       | —       |       | — |   | — |   | 36 |   |
| Embraer 175                           |       | 76           |       | —              |       | —       |       | — |   | — |   | 36 |   |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Total Airlink Operated Aircraft**   | ** ** | ** **   | ** ** | **—**          | ** ** | **—**   | ** ** | **189** | ** ** | **189** | ** ** | **72** | ** ** |
|                                  |       |         |       |                |       |         |       |   |   |   |   |   |   |
| **Total Aircraft**                    | ** ** | ** **   | ** ** | **313**             | ** ** | **1**        | ** ** | **250** | ** ** | **564** | ** ** | **103** | ** ** |

 

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(1)          On February 2, 2007, one Boeing 747F aircraft was removed from scheduledservice, and the Company intends to remove an additional Boeing 747F aircraftfrom scheduled service during the remainder of 2007.

The Company took delivery of two Airbus A330-300 aircraft during thethree months ended March 31, 2007.  Inconnection with the acquisition of these aircraft, the Company entered intolong-term debt arrangements.  Under sucharrangements, the aggregate amount of debt incurred totaled $167 million.

17

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**Note 11 – Aircraft Impairments**

In the first quarter of 2007, the Companyrecorded $13.3 million related to the impairment of three owned aircraft, whichwere permanently removed from service. These charges reflect the Company’s decision to park three DC9-30aircraft permanently, consistent with the Company’s ongoing review of itsaircraft fleet plan in conjunction with its overall route structure andcapacity requirements.  The first quarter2007 impairment charges were recorded as reorganization expenses.

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

Comprehensive income (loss) consisted of thefollowing:
|                                                                    | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **March 31**                | ** ** |
| **(In millions)**                                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income (loss)                                                  | ** ** | **$**                            | **(292**   | **)** | $ | (1,104 | ) |
| Change in unrealized  gain (loss) on available-for-sale securities | ** ** | **1**                            |       | 2 |   |
| Change in deferred gain  (loss) from hedging activities            | ** ** | **—**                       |       | 1 |   |
| Comprehensive income  (loss)                                       | ** ** | **$**                            | **(291**   | **)** | $ | (1,101 | ) |

 

**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.  Northwest froze future benefit accruals forits defined benefit Pension Plans for Salaried Employees, Pilot Employees, andContract Employees effective August 31, 2005, January 31, 2006, and September30, 2006, respectively.  Replacementcoverage was or will be provided for these employees through 401(k)-typedefined contribution plans or in the case of IAM represented employees, the IAMNational Multi-Employer Plan.

Northwest also sponsors various contributoryand noncontributory medical, dental and life insurance benefit plans coveringcertain eligible retirees and their dependents. The expected future cost of providing such postretirement benefits isaccrued over the service lives of active employees.  Retired employees are not offered Company-paidmedical and dental benefits after age 64, with the exception of certain employeeswho retired prior to 1987 and receive lifetime Company-paid medical and dentalbenefits.  Prior to age 65, the retireeshare of the cost of medical and dental coverage is based on a combination ofyears of service and age at retirement. Medical and dental benefit plans are unfunded and costs are paid asincurred.  The pilot group is providedCompany-paid decreasing life insurance coverage.

The Pension Protection Act of 2006 (“2006 Pension Act”) was signed intolaw on August 17, 2006.  The 2006 PensionAct allows commercial airlines to elect special funding rules for definedbenefit plans that are frozen.  Theunfunded liability for a frozen defined benefit plan may be amortized over afixed 17-year period. The unfunded liability is defined as the actuarialliability calculated using an 8.85% interest rate minus the fair market valueof plan assets.  Northwest elected thespecial funding rules for frozen defined benefit plans under the 2006 PensionAct effective October 1, 2006.  As aresult of this election (1) the funding waivers that Northwest received for the2003 plan year contributions were deemed satisfied under the 2006 Pension Act,and (2) the funding standard account for each Plan has no deficiency as ofSeptember 30, 2006.  However, new contributionsthat come due under the 2006 Pension Act funding rules must be paid even whileNorthwest is in bankruptcy.  If the newcontributions are not paid, the future funding deficiency that would developwill be based on the regular funding rules rather than the special fundingrules.

It is Northwest’s policy tofund annually at least the minimum contribution as required by the EmployeeRetirement Income Security Act of 1974, as amended (“ERISA”).  However, as a result of the commencement ofNorthwest’s Chapter 11 case, Northwest did not make minimum cash contributionsto its defined benefit pension plans that were due after September 14,2005.  Subsequent to Northwest’sbankruptcy filing and prior to its election under the 2006 Pension Act,Northwest paid the normal cost component of the plans’ minimum fundingrequirements relating to service rendered post-petition and certain interestpayments associated with its 2003 Contract Plan and Salaried Plan yearwaivers.  As noted above, effectiveOctober 1, 2006, Northwest elected the special funding rules available tocommercial airlines.

Asa result of Northwest’s Chapter 11 filing, we appointed an independentfiduciary for all of our tax-qualified defined benefit pension plans to pursue,on behalf of the plans, claims to recover minimum funding contributions dueunder federal law, to the extent that Northwest is not continuing to fund theplans due to bankruptcy prohibitions. The independent fiduciary subsequentlywithdrew all of the claims that the independent fiduciary filed in our Chapter11 Case following our election of the special funding rules under the 2006Pension Act.

18

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Northwest’s 2007 calendaryear contributions to its frozen defined benefit plans under the provisions ofthe 2006 Pension Act and the replacement plans will approximate $130 million.

***Components of net periodic benefit cost of definedbenefit plans and defined contribution plan costs:***
|                                                 | ** ** | **Three months ended March 31** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **Pension Benefits**                           | ** ** | **Other Benefits** | ** ** |
| **(In millions)**                          | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Defined benefit plan  costs                     |       |                                                |       |   |   |   |   |   |   |
| Service cost                                    | ** ** | **$**                                               | **11**     |   | $ | 35 |   | **$** | **6** |   | $ | 9 |   |
| Interest cost                                   | ** ** | **135**                                             |       | 132 |   | **13** |   | 15 |   |
| Expected return  on plan assets                 | ** ** | **(124**                                            | **)**      | (120 | ) | **—** |   | — |   |
| Amortization of  prior service cost             | ** ** | **—**                                          |       | 10 |   | **(9** | **)** | (2 | ) |
| Recognized net  actuarial loss and other events | ** ** | **11**                                              |       | 28 |   | **10** |   | 9 |   |
| Net periodic  benefit cost                      | ** ** | **33**                                              |       | 85 |   | **20** |   | 31 |   |
|                                            | ** ** | ** **                                          |       |   |   | ** ** |   |   |   |
| Defined contribution  plan costs                | ** ** | **16**                                              |       | 13 |   | **—** |   | — |   |
|                                            | ** ** | ** **                                          |       |   |   | ** ** |   |   |   |
| Total benefit cost                              | ** ** | **$**                                               | **49**     |   | $ | 98 |   | **$** | **20** |   | $ | 31 |   |

 

For the quarter ended March 31,2006, Northwest recorded a $49 million pension curtailment gain related to theNorthwest Airlines Pension Plan for Pilots. The curtailment gain was recorded as a reorganization related item.

**Note 14 – Stock-Based Compensation**

As of March 31, 2007, the Company maintains stock incentive plans forofficers and key employees of the Company (the “Management Plans”) and a stockoption plan for pilot employees (the “Pilot Plan”).  TheCompany adopted SFAS No. 123R, using the modified-prospective transitionmethod, effective January 1, 2006. In addition to requiring supplemental disclosures, SFAS No. 123Reliminated the option to apply the intrinsic value measurement provisions ofAPB No. 25, *Accounting for Stock Issuedto Employees* (“APB No. 25”), to stock compensation awards issued toemployees.  Furthermore, SFAS No. 123Rrequired the Company to recognize compensation cost for the portion ofoutstanding awards previously accounted for under the provisions of APB No. 25for which the requisite service had not been rendered as of the adoption datefor this Statement.  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.  SFAS No. 123R alsorequired the Company to estimate forfeitures of stock compensation awards as ofthe grant date of the award.  The Company’sprevious policy was to recognize forfeitures as they occurred, and the requiredadjustment to estimate forfeitures as of the grant date of the award foroutstanding awards that were not fully vested as of December 31, 2005 wasimmaterial.  The Company’s forfeitureestimate in the first quarter 2007 was 10% for all options under the ManagementPlan.

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.  There were no options granted during thethree months ended March 31, 2007 or 2006; therefore, the Black-Scholesassumptions for those periods have not been presented.

19

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***Stock Option Plan forManagement: ***A reconciliation of the number of optionsoutstanding and exercisable under the Management Plan as of March 31, 2007, andchanges during the quarter then ended, are as follows:
|                                     | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
|-------------------------------------|------------|------------|------------|---------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**   | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Exercise**  | ** ** |
| **(shares in thousands)** | ** ** | **Shares** | ** ** | **Price**     | ** ** |
| Outstanding at  12/31/2006          | ** ** | **2,364**  |       | $             | 11.45      |   |
| Granted                             | ** ** | **—** |       | —        |       |
| Forfeited                           | ** ** | **(142**   | **)**      | 34.02         |       |
| Exercised                           | ** ** | **—** |       | —        |       |
| Outstanding at 3/31/07              | ** ** | **2,222**  |       | 10.02         |       |
|                                |       |       |       |          |       |
| Exercisable at 3/31/07              | ** ** | **2,071**  |       | 10.35         |       |
|                                     |            |            |            |               |            |  |

 

A summary of the number ofoptions outstanding and exercisable under the Management Plan categorized byrange of exercise prices as of March 31, 2007, are as follows:
|                          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **                   | ** ** | **Weighted-**                | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted-** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Average** | ** ** | **Weighted-** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Remaining** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Shares**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Shares** | ** ** | **Contractual** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | ***(000s)***                 | ** ** | **Life**                     | ** ** | **Price** | ** ** | ***(000s)*** | ** ** | **Life** | ** ** | **Price** | ** ** |
|                     |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| $ 4.61 to $24.59    | (1)        | 2,142                        |       | 5.6 years                    |       | $ | 8.97 |   | 1,991 |   | 5.6 years |   | $ | 9.24 |   |
| $ 26.16 to $37.44   |       | 54                           |       | 2.4 years                    |       | 32.10 |   | 54 |   | 2.4 years |   | 32.10 |   |
| $ 43.56 to $51.97   |       | 26                           |       | 1.8 years                    |       | 50.49 |   | 26 |   | 1.8 years |   | 50.49 |   |
|                     |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
|                          |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  1.7 million of the 2.2 million sharesoutstanding and exercisable had an exercise price of $8.31.

***Stock Option Plan for Pilots: ***A reconciliation of the number of options outstanding and exercisableunder the Pilot Plan as of March 31, 2007, and changes during the quarter thenended, is as follows:
|                                     | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
|-------------------------------------|------------|------------|------------|---------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**   | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Exercise**  | ** ** |
| **(shares in thousands)** | ** ** | **Shares** | ** ** | **Price**     | ** ** |
| Outstanding at  12/31/2006          | ** ** | **5,064**  |       | $             | 9.96       |   |
| Granted                             | ** ** | **—** |       | —        |       |
| Forfeited                           | ** ** | **—** |       | —        |       |
| Exercised                           | ** ** | **—** |       | —        |       |
| Outstanding at 3/31/07              | ** ** | **5,064**  |       | 9.96          |       |
|                                |       |       |       |          |       |
| Exercisable at 3/31/07              | ** ** | **4,834**  |       | 9.99          |       |
|                                |       |       |       |          |       |
|                                     |            |            |            |               |            |  |

 

20

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A summary of the number ofoptions outstanding and exercisable under the Pilot Plan categorized byexercise price as of March 31, 2007, is as follows:
|                                     | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | ** ** | ** ** | **Remaining** | ** ** |
| **(shares in thousands)** | ** ** | **Shares**                   | ** ** | **Contractual Life**    | ** ** | **Shares** | ** ** | **Contractual Life** | ** ** |
| Exercise Prices                     |       |                         |       |                         |       |   |   |   |   |
|                                |       |                         |       |                         |       |   |   |   |   |
| $7.33                               |       | 3,500                        |       | 7.5 years                    |       | 3,500 |   | 7.5 years |   |
| $9.19                               |       | 926                          |       | 6.3 years                    |       | 696 |   | 6.3 years |   |
| $19.62                              |       | 134                          |       | 4.5 years                    |       | 134 |   | 4.5 years |   |
| $24.69                              |       | 123                          |       | 2.5 years                    |       | 123 |   | 2.5 years |   |
| $27.88                              |       | 254                          |       | 1.5 years                    |       | 254 |   | 1.5 years |   |
| $27.88                              |       | 127                          |       | 3.5 years                    |       | 127 |   | 3.5 years |   |

 

During the first quarter 2007, the total stock-based compensationexpense for all compensation related to stock-based plans was a reduction tocompensation expense of $1.1 million, which includes $1.2 million inmark-to-market adjustments for certain stock incentive plans and $0.1 millionof stock option expense.  In the first quarter of 2006, theCompany recognized stock-based compensation expense of $0.5 million, whichincludes $0.4 million of stock option expense. There were no shares exercised in first quarter 2007 or 2006.  There was no corresponding tax benefit in2007 or 2006 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 March 31, 2007, the Company hadapproximately $0.3 million of total unrecognized compensation expense relatedto nonvested awards.

**Note 15 – SubsequentEvents**

*Settlement Amendment Relating to Series 1995 SpecialAirport Facilities Revenue Refunding Bonds.*  On May 2, 2007, the Bankruptcy Courtapproved an amended settlement agreement (the “Settlement Agreement”) amongNorthwest, NWA Corp., U.S. Bank National Association, in its capacity astrustee for certain special facility revenue refunding bonds (the “Trustee”),and the Wayne County Airport Authority (the “WCAA”) relating to certainfacilities leased by Northwest at the Detroit Metropolitan Wayne County Airport(the “Airport”) pursuant to a special facilities lease with the WCAA, for whichthe costs of construction were funded with the proceeds of such refunding bonds.  Under the Settlement Agreement, the Trusteewas allowed (i) a general unsecured claim against Northwest in the amount of$70,894,250 on account of the special facilities lease, (ii) a generalunsecured claim against NWA Corp. in the amount of $70,894,250 with respect tothe Trustee’s claim on account of a guarantee issued by NWA Corp. in favor ofthe Trustee, which claim will be treated as a guarantee claim under theCompany’s Plan of Reorganization, and (iii) to retain $2 million of specialfacilities charges paid by Northwest to the Trustee after the petition date andcertain other amounts held by the Trustee pursuant to the bond ordinance. Underthe terms of the Settlement Agreement, Northwest will be repaid approximately$6.7 million in special facilities charges paid by Northwest to the Trusteeafter the petition date and interest earned in such amounts, and Northwest, NWACorp. and the WCAA will be released from all claims relating to the specialfacilities lease and the refunding bonds.

21

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

**FirstQuarter 2007 Results**

For the quarter ended March 31, 2007, theCompany recorded a net loss applicable to common stockholders of $292million.  This compares to a firstquarter 2006 net loss applicable to common stockholders of $1.1 billion.  Excluding reorganization items, the Companyreported a 2007 first quarter net profit of $101 million.  This compares to a prior year first quarternet loss of $129 million, excluding reorganization items.

Operating revenues in the first quarterdecreased 0.6 percent versus the first quarter of 2006 to $2.9 billion.  System passenger revenue increased 7.5percent to more than $2.2 billion on 4.7 percent additional mainline availableseat miles (“ASMs”), resulting in a 2.7 percent improvement in unitrevenue.  Regional carrier revenuesdecreased 13.9 percent primarily due to a 13.6 percent capacity reduction.

Operating expenses in the quarter decreased8.0 percent year-over-year to $2.7 billion, while mainline unit costs,excluding fuel, decreased by 7.5 percent. Salaries, wages and benefits decreased 9.0 percent, primarily due tosavings generated through restructuring efforts.  Regional carrier expenses decreased 42.3percent year-over-year, primarily attributable to reduced capacity and thechange in presentation of regional carrier related revenue and expense items,as described below.  Aircraft fuel andtaxes during the first quarter of 2007 decreased 5.4 percent compared with thefirst quarter of 2006, primarily due to a reduction in price.  Fuel price for the quarter ended March 31,2007 includes $22.6 million in net fuel derivative contract gains, consistingof $28.5 million in mark-to-market gains related to fuel derivative contractsthat settle in future periods and charges of $5.9 million for contracts thatsettled in the current period.

*Presentation of Regional Carrier Related Revenue andExpense Items.*  In conjunction with the Amended AirlineServices Agreement with Pinnacle Airlines, Inc. (“Amended Pinnacle ASA”) andthe Stock Purchase and Reorganization Agreement with Mesaba Aviation, Inc. (“Mesaba”),the Company changed its presentation of certain regional carrier relatedrevenue and expense items effective January 1, 2007.  This change in presentation had no impact onthe Company’s first quarter 2007 operating income.

If this change in presentation was retroactively applied to prior yearfinancial statements, Other Operating Revenues would have decreased $50million, Depreciation and Amortization Expense would have increased by $1million, Aircraft Rentals Expense would have increased $52 million, RegionalCarrier Expenses would have decreased $103 million, and the Operating Loss wouldhave been unchanged for the three months ended March 31, 2006.

**SignificantCompany Announcements**

*Service Expansion.*With the launch of the Company’s transatlantic fleet of Boeing 757-200aircraft, the Company expanded its service between its WorldGateway at Detroit andFrankfurt during the peak summer season by adding a second daily nonstop flighton the route beginning May 7, 2007 through October 27, 2007.  The additional Detroit-Frankfurt service ispart of the Company’s transatlantic expansion in cooperation with joint venturepartner KLM Royal Dutch Airlines. Additionally, the newly launched transatlantic Boeing 757-200 fleet willsupport expanded service between its WorldGateway at Detroit and Düsseldorf,Germany and Brussels, Belgium, as well as nonstop service between Hartford, Connecticutand Amsterdam, the Netherlands.  InJanuary, the Company completed the retirement of the DC10 fleet and customersbegan enjoying the comforts and amenities of modern A330 aircraft on dailynonstop service between the Minneapolis/St. Paul hub and Honolulu.

*Compass Airlines. *On April 5, 2007, Compass Airlines, Inc. (“Compass”)received its Federal Aviation Administration certification to begin commercialpassenger operations using a 50-seat Bombardier CRJ200 aircraft.  Compass began providing scheduled servicebetween Minneapolis/St. Paul and Dulles International Airport on May 2, 2007.

**RestructuringOverview**

On September 14, 2005, NWA Corp. and 12 of its direct and indirectsubsidiaries filed voluntary petitions for relief under Chapter 11 of the UnitedStates Bankruptcy Code with the United States Bankruptcy Court for the SouthernDistrict of New York.  Subsequently, onSeptember 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWACorp., also filed a voluntary petition for relief under Chapter 11.  The Bankruptcy Court is jointly administeringthese cases under the caption “In re Northwest Airlines Corporation, et al.,Case No. 05-17930 (ALG)”.  Theconsolidated financial statements shown herein include certain subsidiariesthat did not file to reorganize under Chapter 11.  The assets and liabilities of thesesubsidiaries are not considered material to the consolidated financialstatements.  See “Item 1. FinancialStatements, Note 2 – Voluntary Reorganization Under Chapter 11” for additionalinformation related to the Company’s rights, risks and obligations under theChapter 11 filing.

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*Plan of Reorganization.* On January 12, 2007, NWA Corp. and 13 of itsdirect and indirect subsidiaries, including Northwest, filed with theBankruptcy Court the Debtors’ Joint and Consolidated Plan of ReorganizationUnder Chapter 11 of the Bankruptcy Code. On January 12, 2007, the Bankruptcy Court granted the Companyan extension until February 15, 2007 to file the related Disclosure Statementwith respect to Debtors’ Joint and Consolidated Plan of Reorganization underChapter 11 of the Bankruptcy Code (as subsequently amended, the “DisclosureStatement”).  Subsequently, on February 15, 2007, the Company filed itsDisclosure Statement and the First Amended Joint and Consolidated Plan ofReorganization under Chapter 11 of the Bankruptcy Code (as subsequentlyamended, the “Plan” or “Plan of Reorganization”).

On March 2, 2007, the Company filed a motion with theBankruptcy Court, requesting that its exclusivity period for filing areorganization plan be extended to June 29, 2007.  On March 15, 2007, the Bankruptcy Courtapproved the extension of the Company’s exclusivity period.  During the exclusivity period only theCompany can propose a reorganization plan.

The Plan provides for the treatment of claims ofcreditors, the implementation of agreements with key labor groups, lenders, andsuppliers, as well as the raising of new equity capital by NWA Corp.  The Plan proposes to restructure the Company’sbalance sheet through the elimination of all pre-petition unsecured debt. In exchange for their allowed claims, unsecured creditors will receive CommonStock of the reorganized NWA Corp. and the right to purchase additional CommonStock in a rights offering. Because all unsecured creditor claims will not besatisfied in full, the pre-petition equity holders’ interests in NWA Corp.’sCommon and Preferred Stock will be cancelled, and those holders will notreceive a distribution.

On March 30, 2007, the Bankruptcy Courtapproved the adequacy of information in the Disclosure Statement and authorizedthe Company to send the Disclosure Statement, Plan, and ballots to creditorsentitled to vote on the Plan.  TheDisclosure Statement contains detailed information about the Plan, theBankruptcy Court’s order approving the Disclosure Statement, notice of the timefor filing acceptance or rejection of the Plan and timing of the hearing toconsider confirmation of the Plan, the rights offering, financial projectionsand financial estimates regarding the Debtors’ reorganized business enterprisevalue. The information contained in the Disclosure Statement is subject tochange, whether as a result of amendments to the Plan, actions of third partiesor otherwise.  The deadline for voting onthe Company’s Plan was May 7, 2007. The preliminary, unofficial vote tally indicates that 96.9percent of the airline’s creditors, who voted, representing 98.4 percent of thedollar amount of the claims that voted, approved the Plan.  Ahearing to confirm the Plan is scheduled for May 16, 2007.  The Plan will become effective only if itreceives the requisite approval and is confirmed by the Bankruptcy Court, whichthe Company currently expects to occur during the second quarter of 2007.  However, there can be no assurance that theBankruptcy Court will confirm the Plan or that the Plan will be implementedsuccessfully.

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

*PlanSupplement.*  On May 4,2007, the Company filed with the Bankruptcy Court a supplement (the “PlanSupplement”) to the Plan.  In the PlanSupplement, the Debtors filed with the Bankruptcy Court copies of the Company’sproposed Amended Bylaws and Amended Certificate of Incorporation, a copy of theproposed Management Equity Plan, and a copy of the proposed stockholder rightsplan, all of which are expected to be effective upon the Company’s emergencefrom Chapter 11.

*Restructuring Goals. *The Company identified three major elements essential to transformingits business and has substantially completed the actions necessary to achieveits targeted business improvements.  Thethree major elements included:

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

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

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

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

*LaborCost Restructuring. *The Company has ratified collectivebargaining agreements (“CBAs”) or implemented contractual terms and conditionswhich collectively provide for approximately $1.4 billion in annual labor costsavings.  The Company has reachedconsensual agreement on CBAs with the Air Line Pilots Association (“ALPA”), theInternational Association of Machinists and Aerospace Workers (“IAM”), theAircraft Technical Support Association (“ATSA”), the Transport Workers Union ofAmerica (“TWU”), and the Northwest Airlines Meteorologists Association (“NAMA”).  The agreements with ALPA, the IAM, ATSA, TWU,and NAMA were implemented on or before August 1, 2006.  Two rounds of salaried and managementemployee pay and benefit cuts have also been achieved and implemented.   In addition, the Company imposed contractterms on its technicians represented by the Aircraft Mechanics FraternalAssociation (“AMFA”) in August 2005 and, under Section 1113(c) of theBankruptcy Code, imposed contract terms on its flight attendants represented bythe Association of Flight Attendants-Communication Workers of

23

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America (“AFA-CWA”) onJuly 31, 2006.  On November 6, 2006, theCompany reached a ratified agreement with AMFA to end the labor dispute withthe airline’s technicians.  The agreementmaintains the necessary annual labor cost savings from AMFA-representedemployees.

Section1113(c) of the Bankruptcy Code permits a debtor to move to reject its CBAs ifthe debtor first satisfies a number of statutorily prescribed substantive andprocedural prerequisites and obtains the Bankruptcy Court’s approval of therejection or the expiration of the statutorily prescribed time period.  After bargaining in good faith and sharingrelevant information with its unions, a debtor must make proposals to modifyits existing CBAs based on the most complete and reliable information availableat the time.  The proposed modificationsmust be necessary to permit the reorganization of a debtor and must providethat all the affected parties are treated fairly and equitably.  Ultimately, rejection of the CBAs isappropriate if the unions refuse to agree to a debtor’s necessary proposal “withoutgood cause” and the Bankruptcy Court determines that the balance of theequities favors rejection.   In October2005, the Company commenced Section 1113(c) proceedings with ALPA, the IAM andthe Professional Flight Attendants Association (“PFAA”) and has subsequentlyreached consensual agreement with ALPA and the IAM.

Withrespect to the Company’s flight attendants, the Company reached a tentativeagreement 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 the 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 the Bankruptcy Court’s June 29, 2006ruling, the Company and the PFAA commenced negotiations to reach a newagreement.  On July 6, 2006, the Company’sflight attendants voted to change their union representation from the PFAA tothe AFA-CWA.  Subsequently, the Companyand the AFA-CWA continued negotiations to reach a new agreement, and on July17, 2006, the parties announced that they reached a new tentative agreement(the “July TA”).  On July 31, 2006, theAFA-CWA announced 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.

OnJuly 31, 2006, following the flight attendants’ failure to ratify a secondproposed CBA and the Company’s subsequent imposition of new contract terms forthe flight attendants, the AFA-CWA provided the Company with a 15-day notice ofits intent to strike or engage in other work actions, including CHAOS (CreateHavoc Around Our System).  In response,on August 1, 2006, the Company filed a motion with the Bankruptcy Court seekingto obtain an injunction against such activities.  The AFA-CWA subsequently extended the strikedeadline by 10 days to August 25, 2006, in response to terrorist threatsagainst air travel to and within the United States.  On August 17, 2006, the Bankruptcy Courtdenied the Company’s request for an injunction. On August 18, 2006, the Company filed an appeal of the Bankruptcy Court’sdecision with the United States District Court for the Southern District of NewYork (“U.S. District Court”). On August 25, 2006, the U.S. District Courtissued an injunction pending appeal which temporarily prevented any work actionby the AFA-CWA while the court considered the Company’s appeal.  The U.S. District Court reversed theBankruptcy Court’s decision on September 15, 2006, and granted the Company’srequest for a preliminary injunction to prevent a threatened strike or workaction by the AFA-CWA.  Subsequently, theAFA-CWA appealed the U.S. District Court’s ruling to the U.S. Second CircuitCourt of Appeals (the “Second Circuit”). On March 29, 2007, the Second Circuit affirmed the grant of thepreliminary injunction by the U.S. District Court.

OnFebruary 12, 2007, the AFA-CWA filed a motion with the Bankruptcy Court seekingreconsideration of the Bankruptcy Court’s decision to grant the Debtors’Section 1113(c) motion to reject the Debtors’ CBA with the flight attendants.On April 13, 2007, the Bankruptcy Court issued a Memorandum of Opinion denyingthe AFA-CWA’s motion for relief from the order authorizing the Debtors to rejectits CBA with the AFA-CWA.

On April 26, 2007, theCompany announced that it reached a tentative contract agreement with theAFA-CWA.  The tentative agreement, whichrequires Bankruptcy Court approval, maintains the necessary annual labor cost savingsfrom the AFA-CWA represented employees and allows the flight attendants a $182million unsecured claim in the Company’s bankruptcy court proceedings.  The tentative agreement has been submitted tothe flight attendant members for a ratification vote.

OnApril 18, 2007, the Company reached an agreement with the Section 1114 RetireeCommittee to continue retiree healthcare benefits.  As part of the agreement, the Section 1114Committee received an allowed unsecured claim of $120 million.  The proceeds from this claim are anticipatedto be contributed to a Voluntary Employees Beneficiary Association Trust.  The Trust proceeds are expected to be used tofund a portion of the required retiree contributions under this proposedagreement.  This agreement was approvedby the Bankruptcy Court on April 26, 2007.

OnMay 2, 2007, the Bankruptcy Court granted the joint motion of the Company, theIAM, and the IBT to treat the judgment in the Series C Litigation in theapproximate amount of $277 million as an unsecured claim in the Company’sbankruptcy case.

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*Non-labor Cost Restructuring*.  TheCompany continues to pursue reductions in non-labor costs consistent with itscurrent target of $350 million in annual savings.  The Company expects to realize such savingsthrough restructured agreements with our regional airline affiliates, reductionin properties and facilities costs, reduced fuel burn, lower distribution,insurance and interest costs and optimization of other contractualrelationships.  The Company estimates itrealized approximately $100 million of the targeted savings in 2006, with anadditional $190 million expected to be realized in 2007 and the balancetargeted to be realized during 2008.

*Fleet Optimization. *The Companyright-sized and re-optimized its fleet and network in conjunction with itsrestructured business plan.  The Companyhas also reached new agreements and affirmed existing arrangements on newaircraft as part of its fleet optimization. The Company has affirmed its deliveries of Airbus A330 aircraft and nowhas one of the youngest transatlantic fleets in the industry.  The Company also affirmed its position as theNorth American service launch airline of the new Boeing 787 with deliveriesbeginning in August 2008, and has ordered 72 76-seat regional jets that will beintroduced beginning in the second quarter of 2007.  The dual class regional jets are optimallysized for many domestic markets and will give the Company potential growthopportunities over time.  In addition,the Company has retired the DC10 and Avro RJ85 fleets and has accelerated theretirement of the Boeing 747-200 wide-body aircraft.

*Balance Sheet Restructuring*.  Under the Plan, the Companywill reduce its total pre-petition debt by approximately $4.2 billion through theelimination of unsecured debt and restructuring of aircraft and other securedobligations.  Additionally, the Companyrefinanced its Bank Term Loan with the DIP/Exit financing facility, providing asignificant interest expense savings. The aircraft restructurings will result in an estimated $400 millionreduction in ownership costs including interest, rent and depreciationexpense.  The elimination of theunsecured debt will drive an additional interest expense reduction ofapproximately $150 million annually.  See“Item 8. Consolidated Financial Statements and Supplementary Data, Note 6 —Liabilities Subject to Compromise” in the Company’s 2006 Form 10-K, foradditional information.

*Airlink Operations*.  OnJanuary 11, 2007, the Bankruptcy Court approved the Amended Pinnacle ASAbetween the Company and Pinnacle Airlines. The Amended Pinnacle ASA provides that Pinnacle will continue to be along-term partner of Northwest through at least 2017.  In addition to reaching terms on an amendedairline services agreement, Northwest granted Pinnacle an allowed generalunsecured claim of $377.5 million for full and final satisfaction of any andall claims filed against the Debtors, which resulted in an incremental chargeto reorganization expense of $306.7 million during the first quarter of2007.  The Amended Pinnacle ASA andrelated agreements provide Northwest with, among other things, certainty ofPinnacle Airlines’ performance at rates consistent with Northwest’s costsavings targets and resolution of the Pinnacle Airlines claims.

On January 22, 2007, the Debtors entered into a Stock Purchase andReorganization Agreement with Mesaba under which the Debtors agreed to purchaseall of the equity interests in Mesaba following its reorganization underChapter 11 and granted the Mesaba estate a general unsecured claim of $145million for full and final satisfaction of any and all claims filed against theDebtors.  The Debtors also agreed toresolve all outstanding claims with Mesaba’s parent, MAIR Holdings, Inc. (“MAIR”)and to sell MAIR all of Northwest’s stock in MAIR.  Mesaba filed its plan of reorganization (the “MesabaPlan”) and its disclosure statement with respect to the Mesaba Plan (the “MesabaDisclosure Statement”) with the United States Bankruptcy Court for the Districtof Minnesota on January 22, 2007 and January 24, 2007, respectively.  The Mesaba Plan was confirmed on April 10, 2007.  In conjunction with the consummation ofMesaba’s Plan, Mesaba was acquired by Northwest Airlines on April 24, 2007and became a wholly-owned consolidated subsidiary.

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**OperatingStatistics – Three months ended March 31, 2007 and 2006**

Information with respect to the Company’soperating statistics follows:
|                                                                                                                                                                                                                  | ** ** | **Three months ended** | ** ** | ** **  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------|------------|
| ** **                                                                                                                                                                                                       | ** ** | **March 31**                | ** ** | **Percent** | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | **2007**                         | ** ** | **2006**    | ** ** | **Change** | ** ** |
| **Scheduled service - Consolidated:**(1)                                                                                                                                                                         |       |                             |       |        |       |   |   |
| Available seat  miles (ASM) (millions)                                                                                                                                                                           | ** ** | **22,895**                       |       | 22,203      |       | 3.1 |   |
| Revenue  passenger miles (RPM) (millions)                                                                                                                                                                        | ** ** | **18,619**                       |       | 18,285      |       | 1.8 |   |
| Passenger load  factor                                                                                                                                                                                           | ** ** | **81.3**                         | **%**      | 82.4        | %          | (1.1 | ) pts. |
| Revenue  passengers (millions)                                                                                                                                                                                   | ** ** | **15.6**                         |       | 15.7        |       | (0.6 | ) |
| Passenger  revenue per RPM (yield)                                                                                                                                                                               | ** ** | **13.39**                        | *¢*   | 13.06       | *¢*   | 2.5 | * * |
| Passenger  revenue per ASM (RASM)                                                                                                                                                                                | ** ** | **10.89**                        | *¢*   | 10.75       | *¢*   | 1.3 | * * |
|                                                                                                                                                                                                             |       |                             |       |        |       |   |   |
| **Scheduled service - Mainline:**(2)                                                                                                                                                                             |       |                             |       |        |       |   |   |
| Available seat  miles (ASM) (millions)                                                                                                                                                                           | ** ** | **21,252**                       |       | 20,302      |       | 4.7 |   |
| Revenue  passenger miles (RPM) (millions)                                                                                                                                                                        | ** ** | **17,492**                       |       | 16,942      |       | 3.2 |   |
| Passenger load  factor                                                                                                                                                                                           | ** ** | **82.3**                         | **%**      | 83.5        | %          | (1.2 | ) pts. |
| Revenue  passengers (millions)                                                                                                                                                                                   | ** ** | **12.9**                         |       | 12.6        |       | 2.4 |   |
| Passenger  revenue per RPM (yield)                                                                                                                                                                               | ** ** | **12.59**                        | *¢*   | 12.09       | *¢*   | 4.1 | * * |
| Passenger  revenue per ASM (RASM)                                                                                                                                                                                | ** ** | **10.36**                        | *¢*   | 10.09       | *¢*   | 2.7 | * * |
|                                                                                                                                                                                                             |       |                             |       |        |       |   |   |
| Total operating  ASM (millions)                                                                                                                                                                                  | ** ** | **21,268**                       |       | 20,330      |       | 4.6 |   |
|                                                                                                                                                                                                             |       |                             |       |        |       |   |   |
| Passenger  service operating expense per total ASM (3) (4)                                                                                                                                                       | ** ** | **10.32**                        | *¢*   | 11.16       | *¢*   | (7.5 | ) |
| Mainline fuel  expense per total ASM                                                                                                                                                                             | ** ** | **2.95**                         | *¢*   | 3.19        | *¢*   | (7.5 | ) |
|                                                                                                                                                                                                             |       |                             |       |        |       |   |   |
| Mainline fuel  expense per total ASM, excluding mark-to-market gains related to fuel  derivative contracts that settle in future periods (2007 - 0.13 ¢ per ASM,  2006 - 0.00 ¢ per ASM)               |       | **3.08**                         | *¢*   | 3.19        | *¢*   | (3.4 | ) |
|                                                                                                                                                                                                             |       |                             |       |        |       |   |   |
| Cargo ton miles  (millions)                                                                                                                                                                                      | ** ** | **457**                          |       | 526         |       | (13.1 | ) |
| Cargo revenue  per ton mile                                                                                                                                                                                      | ** ** | **41.40**                        | *¢*   | 40.67       | *¢*   | 1.8 | * * |
| Fuel gallons  consumed (millions)                                                                                                                                                                                | ** ** | **378**                          |       | 377         |       | 0.3 |   |
| Average fuel  cost per gallon, excluding taxes                                                                                                                                                                   | ** ** | **177.13**                       | *¢*   | 187.05      | *¢*   | (5.3 | ) |
|                                                                                                                                                                                                             |       |                             |       |        |       |   |   |
| Average fuel  cost per gallon, excluding fuel taxes and mark-to-market gains related to  fuel derivative contracts that settle in future periods (2007 - 7.57 ¢ per  gallon, 2006 - 0.00 ¢ per gallon) |       | **184.70**                       | *¢*   | 187.05      | *¢*   | (1.3 | ) |
|                                                                                                                                                                                                             |       |                             |       |        |       |   |   |
| Number of  operating aircraft at end of period                                                                                                                                                                   | ** ** | **375**                          |       | 367         |       | 2.2 |   |
| Full-time equivalent  employees at end of period                                                                                                                                                                 | ** ** | **30,008**                       |       | 31,318      |       | (4.2 | ) |

 

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(1)          Consolidatedstatistics include Northwest Airlink regional carriers.

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

(4)          Passenger serviceoperating expense excludes the following items unrelated to passenger serviceoperations:
|                                              | ** ** | **Three months ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31**                | ** ** |
| **(In millions)**                       | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Freighter  operations                        | ** ** | **$**                            | **134**    |   | $ | 190 |   |
| MLT Inc. - net  of intercompany eliminations | ** ** | **55**                           |       | 64 |   |
| Regional carrier  expenses                   | ** ** | **211**                          |       | 366 |   |
| Regional  aircraft rent and depreciation     | ** ** | **45**                           |       | — |   |
| Other                                        | ** ** | **34**                           |       | 16 |   |
|                                              |            |                                  |            |  |  |  |  |

 

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**Results ofOperations**–**Three months ended March 31, 2007 and 2006**

*Operating Revenues*.  Operating revenues decreased 0.6% ($17million), the result of reductions in regional carrier revenues, cargo revenue,and other revenue, partially offset by higher system passenger revenue.

System passenger revenues increased 7.5% ($153million).  The following analysis by regionis based on information reported to the DOT and excludes regional carriers:

|                                    | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2007**                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** |
| Passenger  revenues (in millions)  |       | $          | 2,202      |         | $          | 1,415       |       | $            | 515        |   | $ | 272 |   |
|                               |       |       |       |         |       |        |       |         |       |
| **Increase (Decrease) from 2006:** | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** |
| Passenger  revenues (in millions)  |       | $          | 153        |         | $          | 46          |       | $            | 55         |   | $ | 52 |   |
| Percent                            |       | 7.5        | %          | 3.4          | %          | 12.0        | %          | 23.6         | %          |
|                               |       |       |       |         |       |        |       |         |       |
| Scheduled  service ASMs (capacity) |       | 4.7        | %          | 3.2          | %          | 6.7         | %          | 7.5          | %          |
| Scheduled  service RPMs (traffic)  |       | 3.2        | %          | 3.2          | %          | 2.8         | %          | 4.5          | %          |
| Passenger load  factor             |       | (1.2       | ) pts.     | —       |  pts. | (3.2        | ) pts.     | (2.4         | ) pts.     |
| Yield                              |       | 4.1        | %          | 0.1          | %          | 8.8         | %          | 18.7         | %          |
| Passenger RASM                     |       | 2.7        | %          | 0.2          | %          | 4.9         | %          | 15.4         | %          |

 

As indicated in the above table:

·      Domestic passenger revenues increased dueto additional traffic and slightly higher yield.

·      Pacific passenger revenues increasedversus prior year due to higher yield and additional traffic.

·                  Atlanticpassenger revenues increased versus prior year due to improved yield andincreased traffic.

Regional carrier revenues decreased 13.9% ($47million) to $292 million primarily due to a 2.1 point drop in load factor on a13.6% capacity reduction, offset by a 2.6% increase in yield.

Cargo revenues decreased 11.7% ($25 million)to $189 million due primarily to the termination of freighter service to HongKong and removal of one Boeing 747F from the freighter fleet which drove a13.1% reduction in cargo traffic, partially offset by 1.8% higher yield.  Other revenue decreased 34.0% ($98 million)due to reduced partner revenue and the change in presentation of regionalcarrier related revenue and expense items, as described above.

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*Operating Expenses*.  Operating expenses decreased 8.0% ($233million) for the three months ended March 31, 2007.  The following table and notes presentoperating expenses for the three months ended March 31, 2007 and 2006 anddescribe significant year-over-year variances:
| ** **                                  | ** ** | **Three months ended** | ** ** | **Increase**   | ** ** | ** **         | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|----------------|------------|--------------------|------------|------------|------------|
| ** **                                  | ** ** | **March 31**                | ** ** | **(Decrease)** | ** ** | **Percent**        | ** ** | ** ** | ** ** |
| **(In millions)**                      | ** ** | **2007**                         | ** ** | **2006**       | ** ** | **from 2006** | ** ** | **Change** | ** ** | **Note** | ** ** |
| **Operating Expenses**                      | ** ** | ** **                       | ** ** | ** **     | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Aircraft fuel and taxes                     | ** ** | **$**                            | **704**    |           | $          | 744                |       | $          | (40        | ) | (5.4 | )% | A |   |
| Salaries, wages and  benefits               | ** ** | **615**                          |       | 676            |       | (61                | )          | (9.0       | )          | B |   |
| Selling and marketing                       | ** ** | **191**                          |       | 194            |       | (3                 | )          | (1.5       | )          | C |   |
| Aircraft maintenance  materials and repairs | ** ** | **184**                          |       | 189            |       | (5                 | )          | (2.6       | )          | C |   |
| Other rentals and  landing fees             | ** ** | **141**                          |       | 143            |       | (2                 | )          | (1.4       | )          | C |   |
| Depreciation and  amortization              | ** ** | **121**                          |       | 134            |       | (13                | )          | (9.7       | )          | D |   |
| Aircraft rentals                            | ** ** | **96**                           |       | 68             |       | 28                 |       | 41.2       |       | E |   |
| Regional carrier  expenses                  | ** ** | **211**                          |       | 366            |       | (155               | )          | (42.3      | )          | F |   |
| Other                                       | ** ** | **409**                          |       | 391            |       | 18                 |       | 4.6        |       | G |   |
| **Total operating expenses**                | ** ** | **$**                            | **2,672**  |           | $          | 2,905              |       | $          | (233       | ) | (8.0 | )% |   |   |

 

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A.           Aircraft fuel andtaxes decreased due to a 5.3% decrease in the average fuel cost per gallon to$1.77 partially offset by 0.3% additional gallons consumed.  Fuel price for the quarter ended March 31,2007 includes $22.6 million in net fuel derivative contract gains, consistingof $28.5 million in mark-to-market gains related to fuel derivative contractsthat settle in future periods and charges of $5.9 million for contracts thatsettled in the current period.

B.             Salaries, wages andbenefits were lower year-over-year primarily due to savings generated throughrestructuring efforts, lower pensions and benefits expenses, partially offsetby increases in salaries as a result of an employee profit sharing program andperformance incentive plan.

C.             Selling andmarketing expense, aircraft maintenance materials and repairs expense, andother rentals and landing fees were relatively flat year-over-year.

D.            Depreciation expensereductions were largely due to the retirement of the DC10 fleet.

E.              Aircraft rentalexpense increased due to the change in presentation of regional carrier relatedrevenue and expense items, as described above, partially offset by restructuredand rejected aircraft leases.

F.              Regional carrierexpense decreased year-over-year primarily due to the reduction in regionalcarrier capacity which drove decreases in payments to regional carriers andfuel requirements of $52 million, and the change in presentation of regionalcarrier related revenue and expense items, as described above.

G.             Other expenses(which include MLT operating expenses, outside services, insurance, passengerfood, personnel expenses, communication expenses and supplies) were higherversus prior year due largely to increased outside services with the shift tothird party vendors versus internally staffed station operations which isoffset in salaries, wages and benefits, and additional deicing expense.

*Other Income and Expense.*  Non-operating expensedecreased 54.6% ($595 million) year-over-year primarily due to reducedreorganization expenses.  See “Item 1.Financial Statements, Note 5 — Reorganization Related Items” for additionalinformation related to reorganization expenses.

**Liquidity and Capital Resources**

As of March 31, 2007, the Company’s totalliquidity, consisting of unrestricted cash, cash equivalents and short-terminvestments, was $2.4 billion.  Thisamount excludes $543 million of restricted short-term investments (which mayinclude amounts held as cash).

*Cash Flows.* Liquidity increasedby $368 million during the three months ended March 31, 2007, primarily due tonet cash 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 three months ended March 31, 2007, was $634 million, which compares with$320 million of cash provided by operating activities for the three monthsended March 31, 2006.  The increase innet cash provided by operations was due to a net profit, excludingreorganization items, which are comprised mainly of non-cash items, and a $176million decrease in vendor deposits and holdbacks.

*Investing Activities.*  Investing activities during the three monthsended March 31, 2007, included increases in the Company’s restricted cash, cashequivalents and short-term investment balances due to additional funding of the

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Company’s irrevocable tax trust, and proceeds froman IAM claim sale which were distributed to employees in April.  Investing activities for the three monthsended March 31, 2007 also included the purchase of two A330-300 aircraft andother related costs.  Other related costsinclude engine purchases, costs to commission aircraft before entering revenueservice, deposits on ordered aircraft, facility improvements and groundequipment purchases.   Investingactivities for the three months ended March 31, 2006, included the purchase ofone A330-200 aircraft and other related costs.

*Financing Activities. *Financing activities during the three monthsended March 31, 2007, consisted primarily of scheduled debt payments.  Financing activities in the three months ended March 31, 2006, consisted primarilyof financing one Airbus A330-200 aircraft with long-term debt and the $100million repurchase of EETC notes (related to six of the Company’s 757-200aircraft), representing a 42% discount off the outstanding balance of thenotes.

TheCompany also financed the delivery of two Airbus A330-300 aircraft during thethree months ended March 31, 2007 through non-cash transactions with themanufacturer, which are reflected as long-term debt on the Company’s condensedconsolidated balance sheets, but are not classified as a cash flowactivity.  In connection with theacquisition of these aircraft, the Company entered into long-term debtarrangements.  Under these arrangements,the aggregate amount of debt incurred totaled approximately $167 million.

Investing activities affecting cash flows andnon-cash transactions and leasing activities related to the initial acquisitionof aircraft consisted of the following for the three months ended March 31:
|                 | ** ** | **Investing Activities  Affecting Cash Flows** | ** ** | **Non-cash  Transactions and  Leasing Activities** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **      | ** ** | **2007**                                                      | ** ** | **2006**                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|            |       |                                                          |       |                                                         |       |   |   |   |   |
| Airbus A330-200 | ** ** | **—**                                                    |       | 1                                                            | ** ** | **—** |   | 1 |   |
| Airbus A330-300 | ** ** | **—**                                                    |       | —                                                       | ** ** | **2** |   | — |   |
| ** **      |       | **—**                                                    |       | 1                                                            | ** ** | **2** |   | 1 |   |

 

*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 “Item1. Financial Statements, Note 8 – Liabilities Subject to Compromise.”  Maturities of long-term debt not subject tocompromise, excluding capital lease obligations, through December 31, 2011, areas follows (in millions):

| remainder of 2007 |   | $      | 182    |   |
|-------------------|--------|--------|--------|--------|
| 2008              |   | 1,577  | *      |
| 2009              |   | 295    |   |
| 2010              |   | 238    |   |
| 2011              |   | 251    |   |
|              |   |   |   |

 

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

On August 21, 2006, the Company entered into a $1.225 billion SuperPriority Debtor in Possession and Exit Credit and Guarantee Agreement (the “DIP/ExitFacility”), consisting of a $1.05 billion term loan facility and a $175 millionrevolving credit facility, which is required to be fully drawn during theCompany’s bankruptcy proceeding.  Thematurity of the DIP/Exit Facility is the earlier of the Company’s exit frombankruptcy or two years.  The DIP/ExitFacility is secured by a first lien on the Company’s Pacific route authoritieswhich were last appraised in January 2006 at $3.3 to $4.1 billion.  Additionally, the Company’s obligations tothe lenders have super-priority status while the Company is in bankruptcy.  The DIP/Exit Facility received a creditrating of BBB- from Standard & Poor’s Rating Services (“S&P”) and a Ba2from Moody’s Investors Service, Inc. (“Moody’s”).

The DIP/Exit Facilityinitially bore an interest rate of LIBOR plus 2.50%; however, on March 9, 2007,the Company and the lenders amended the facility to, among other things, reducethe margin applicable to loans by 50 basis points as well as eliminate minimumcredit rating and collateral coverage margin-increase thresholds. The interestrate as of March 31, 2007 was 7.35%. The amendment also permits Northwest togrant liens on the collateral securing obligations under the DIP/Exit Facilityto support up to $150 million of Northwest’s obligations under fuel, interestrate and/or currency exchange hedging agreements with any lender that is aparty to the DIP/Exit Facility.

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Subject to the Companymeeting certain conditions, including emerging from bankruptcy on or prior toAugust 21, 2008, the DIP/Exit Facility can be converted to exit financing (“ExitFacility”).  The final maturity, in suchevent, will be August 21, 2013. Principal on the term loan portion of the Exit Facility will be repaidat 1.0% per year (as is the case under the DIP/Exit Facility) with the balanceof 94% due at maturity.  Loans drawnunder the revolving credit facility may be borrowed and repaid at the Company’sdiscretion.  Up to $75 million of therevolving credit facility may be utilized by the Company as a letter of creditfacility.  Both loan facilities under theExit Facility will continue to bear interest at LIBOR plus 2.00%.  Letter of credit fees will be charged at thesame credit spread as on the borrowings plus 12.5 basis points.  To the extent that the revolving creditfacility is not utilized, the Company is required to pay an undrawn commitmentfee of 50 basis points per annum.

The conditions to convert theDIP/Exit Facility to exit financing on emergence from bankruptcy include, amongother items, a confirmed plan of reorganization with projections that reflectpro-forma financial covenant compliance for the term of the facility, laborsavings and pension relief, a minimum of $2.0 billion in unrestricted cash andavailable committed credit facilities, a collateral coverage ratio of at least1.50 to 1.00, and ratings coverage of the Exit Facility by S&P and Moody’s.

Both the DIP/Exit Facilityand, upon its conversion, the Exit Facility require ongoing compliance with thefollowing financial covenants:

·                  Unrestricted cash of at least $750 million

·                  Collateral coverage ratio of at least 1.50 to1.00

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

 

As of March 31, 2007, the Company was in compliance with all requiredfinancial covenants.

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

| remainder of   2007 |   | $     | 1,242  |   |
|-------------------------------|--------|-------|--------|--------|
| 2008                          |   | 1,958 |   |
| 2009                          |   | 575   |   |
| 2010                          |   | 772   |   |
| 2011                          |   | 79    |   |

 

*PensionFunding Obligations.*****The Company has several defined benefit pensionplans and defined contribution 401(k)-typeplans covering substantially all of its employees.  Northwest froze future benefit accruals forits defined benefit Pension Plans for Salaried Employees, Pilot Employees, andContract Employees effective August 31, 2005, January 31, 2006, and September30, 2006, respectively.  Replacementpension coverage was or will be provided for these employees through401(k)-type defined contribution plans or in the case of IAM representedemployees, the IAM National Multi-Employer Plan.

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

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

As a result of Northwest’s Chapter 11 filing, we appointed anindependent fiduciary for all of our tax-qualified defined benefit pensionplans to pursue on behalf of the plans, claims to recover minimum fundingcontributions due under federal law, to the extent that Northwest did notcontinue to fund the plans due to bankruptcy prohibitions.  The independent fiduciary subsequentlywithdrew all of the claims that the independent fiduciary filed in our Chapter11 Case following our election of the special funding rules under the 2006Pension Act.

Northwest’s 2007 calendar year contributions to its frozen definedbenefit plans under the provisions of the 2006 Pension Act and the replacementplans will approximate $130 million.

**Other Information**

*Foreign Currency.*  TheCompany is exposed to the effect of foreign currency exchange rate fluctuationson the U.S. dollar value of foreign currency-denominated operating revenues andexpenses.  The Company’s largest exposurecomes from the Japanese yen.  From timeto time, the Company uses financial instruments to hedge its exposure to theJapanese yen.  Hedging gains or lossesare recorded in accumulated other comprehensive income (loss) until theassociated transportation is provided, at which time they are recognized as anincrease or decrease in revenue.  TheCompany did not hedge any of its yen-denominated sales during the three monthsended March 31, 2007 and 2006.  Theaverage market yen rate for the quarters ended March 31, 2007 and 2006 was119.2 and 116.8, respectively.  As ofMarch 31, 2007, the Company had no hedges in place for its anticipated 2007yen-denominated sales.  This compares to6% of its remaining anticipated 2006 yen-denominated sales hedged as of March31, 2006.

*Aircraft Fuel.*  TheCompany’s earnings are affected by changes in the price and availability ofaircraft fuel.  On an annual basis, theCompany’s mainline and regional carrier fuel consumption approximates 1.8 billion gallons, producing an $18 million variance for each one-centchange in the cost per gallon of fuel. From time to time, the Company manages the price risk of fuel costs byutilizing futures contracts traded on regulated futures exchanges, swapagreements and options.  As of March 31,2007, the Company had hedged the price of approximately 39% of its projectedfuel requirements for the remainder of 2007, through a combination of collaroptions and fixed price swap agreements. The collar options, which hedge the price of approximately 29% of theCompany’s projected fuel requirements for the remainder of 2007, consist ofcrude oil put options with a price range of $53 to $56.70 per barrel, andrelated call options at a price of $72 per barrel.  The fixed price crude oil swap agreements,which hedge the price of approximately 10% of the Company’s projected fuelrequirements for the remainder of 2007, include agreements with a price rangeof $62 to $64.98 per barrel.  The Companycurrently has no fuel derivative contracts outstanding that are designated forhedge accounting treatment, and therefore had no related unrealized gains(losses) in accumulated other comprehensive income (loss) as of March 31,2007.  The Company records any changes inthe contracts’ values as mark-to-market adjustments through the statement ofoperations on a monthly basis.  Net gainsof $22.6 million were recorded as reductions in fuel expense during the threemonths ended March 31, 2007, including $28.5 million in mark-to-market gainsrelated to fuel derivative contracts that will settle in the remainder of 2007,partially offset by charges of $5.9 million for contracts that settled in thecurrent period.  As of March 31, 2006,there were no outstanding fuel hedges or unrealized gains (losses) onoutstanding fuel hedges 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, the Companyentered into individual interest rate cap hedges related to three floating ratedebt instruments, with a total cumulative notional amount of $504 million.  The objective of the interest rate cap hedgesis to protect the anticipated payments of interest (cash flows) on thedesignated debt instruments from adverse market interest rate changes.   As of March 31, 2007, the Company hasrecorded $4.1 million of unrealized losses in accumulated other comprehensiveincome (loss) associated with those hedges.

*War Risk Insurance*. Following September 11, 2001, aviation insurers significantly increasedairline insurance premiums and reduced the maximum amount of coverage availableto airlines for certain types of claims. Our total aviation and other insurance expenses were $48 million higherin 2006 than in 2000.  The FAA iscurrently providing aviation war risk insurance as required by the HomelandSecurity Act of 2002 as amended by the Consolidated Appropriations Act of 2005and subsequently by the Continuing Appropriations Resolution 2007.  However, following multiple extensions, thiscoverage is scheduled to expire on August 31, 2007.  While the government may again extend theperiod that it provides excess war risk coverage, there is no assurance thatthis will occur, or if it does, how long the extension will last, what will beincluded in the coverage, or at what cost the coverage will be provided.  Should the U.S.

31

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governmentstop providing war risk insurance in its current form to the U.S. airlineindustry, it is expected that the premiums charged by commercial aviationinsurers for this coverage, if available at all, would be substantially higherthan the premiums currently charged by the government, the maximum amount ofcoverage available would be reduced, and the type of coverage could be morerestrictive.  Commercial aviationinsurers could further increase insurance premiums and reduce or cancelcoverage, in the event of a new terrorist attack or other events adverselyaffecting the airline industry.  Significant increases in insurance premiumscould negatively impact our financial condition and results of operations.  If we are unable to obtain adequate war riskinsurance, our business could be materially and adversely affected.

Ifwe were to be involved in an accident, we could be exposed to significant tortliability.  Although we carry insuranceto cover damages arising from such accidents, resulting tort liability could behigher than our policy limits which could negatively impact our financial condition.

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

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

The Company believes that the material risks and uncertainties thatcould affect the outlook of an airline operating under Chapter 11 and in aglobal economy include, among others, the ability of the Company to continue asa going concern, the ability of the Company to obtain and maintain anynecessary financing for operations and other purposes, the ability of theCompany to maintain adequate liquidity, the ability of the Company to absorbescalating fuel costs, the Company’s ability to obtain court approval withrespect to motions in the Chapter 11 proceedings prosecuted by it fromtime to time, the ability of the Company to develop, confirm and consummate aplan of reorganization with respect to its Chapter 11 proceedings, risksassociated with third parties seeking and obtaining court approval to terminateor shorten the exclusivity period for the Company to propose and confirm a planof reorganization, to appoint a Chapter 11 trustee or to convert the casesto Chapter 7 cases, the ability of the Company to obtain and maintain normalterms with vendors and service providers, the Company’s ability to maintaincontracts that are critical to its operations, the ability of the Company torealize assets and satisfy liabilities without substantial adjustments and/orchanges in ownership, the potential adverse impact of the Chapter 11proceedings on the Company’s liquidity or results of operations, the ability ofthe Company to operate pursuant to the terms of its financing facilities(particularly the related financial covenants), the ability of the Company toattract, motivate and/or retain key executives and associates, the future levelof air travel demand, the Company’s future passenger traffic and yields, theairline industry pricing environment, increased costs for security, the costand availability of aviation insurance coverage and war risk coverage, thegeneral economic condition of the United States and other regions of the world,the price and availability of jet fuel, the war in Iraq, the possibility ofadditional terrorist attacks or the fear of such attacks, concerns about SARS,Avian flu or other influenza or contagious illnesses, labor strikes, workdisruptions, labor negotiations both at other carriers and the Company, lowcost carrier expansion, capacity decisions of other carriers, actions of theU.S. and foreign governments, foreign currency exchange rate fluctuations,inflation and other factors discussed herein. The Company also believes thatthe material risks and uncertainties that could affect us as we emerge frombankruptcy include, among others, that NWA Corp.’s actual financial results mayvary significantly from the projections filed with the Bankruptcy Court, thatour consolidated financial statements will reflect fresh-start accountingadjustments made upon emergence from bankruptcy, that financial information inour future financial statements will not be comparable to NWA Corp.’s financialinformation from prior periods.   Additional information with respect to these factors and other eventsthat could cause differences between forward-looking statements and futureactual results is contained in “Item 1A. Risk Factors” in the Company’s 2006Form 10-K.

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 to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, 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 oral forward-

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lookingstatements attributable to the Company, or persons acting on behalf of theCompany, are expressly qualified in their entirety by the factors describedabove.

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

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

**Item 4.    Controls andProcedures.**

**Evaluationof Disclosure Controls and Procedures –** As of March 31,2007, management performed an evaluation under the supervision and with theparticipation of the Company’s President and Chief Executive Officer andExecutive Vice President and Chief Financial Officer of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedurescovered in this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief ExecutiveOfficer and Executive Vice President and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures are effective in alerting themin a timely manner to material information required to be disclosed in 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 first quarter ended March 31, 2007 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

PART II. OTHER INFORMATION

**Item 1.    LegalProceedings.**

Reference is made to “Item 3. LegalProceedings” in the Company’s Annual Report on Form 10-K for 2006.

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

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

**Item 1A.  RiskFactors.**

We are affected by risks specific to us as well as factors that affectall businesses operating in a global market. The significant factors known to us that could materially adverselyaffect our business, financial condition, or operating results are described in“Item 1A. Risk Factors” in our most recently filed Annual Report on Form 10-Kfor 2006.  There have been no materialchanges in those risk factors.

**Item 6.    Exhibits.**

(a)   Exhibits:

10.1                           First Amendment dated as of March 9, 2007 to the Super Priority Debtorin Possession and Exit Credit and Guarantee Agreement dated as of August 21,2006 among Northwest Airlines Corporation, Northwest Airlines HoldingsCorporation, NWA Inc., Northwest Airlines, Inc. and various lenders and agents

10.2                           Equity Commitment Agreement dated as of February 12, 2007 amongNorthwest Airlines Corporation, Northwest Airlines, Inc. and J.P. MorganSecurities Inc.

12.1                           Computation of Ratio of Earnings to Fixed Charges

12.2                           Computation of Ratio of Earnings to Fixed Charges and Preferred StockRequirements

31.1                           Rule 13a-14(a)/15d-14(a) Certification ofChief Executive Officer

31.2                           Rule 13a-14(a)/15d-14(a) Certification ofChief Financial Officer

32.1                           Section 1350 Certification of Chief ExecutiveOfficer

32.2                           Section 1350 Certification of Chief FinancialOfficer

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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 10th day ofMay 2007.
|        | NORTHWEST AIRLINES CORPORATION |
|--------|--------------------------------|
|   |                           |
|   | By                             | /s/ Anna M. Schaefer |   |
|   |                           | Anna M. Schaefer |   |
|   |                           | *Vice President – Finance and Chief Accounting  Officer  (principal accounting officer)* |

 

EXHIBITINDEX
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                               |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                    |
| 10.1        | ** ** | First Amendment dated as of  March 9, 2007 to the Super Priority Debtor in Possession and Exit Credit and  Guarantee Agreement dated as of August 21, 2006 among Northwest Airlines  Corporation, Northwest Airlines Holdings Corporation, NWA Inc., Northwest  Airlines, Inc. and various lenders and agents |
| 10.2        | ** ** | Equity Commitment Agreement  dated as of February 12, 2007 among Northwest Airlines Corporation, Northwest  Airlines, Inc. and J.P. Morgan Securities Inc.                                                                                                                                                    |
| 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                                                                                                                                                                                                                                                        |

 

35

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