10-K 1 a07-5449_110k.htm 10-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

(Mark One)

 

 

x

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

FOR THE TRANSITION PERIOD FROM             TO             

 

Commission file number 0-23642


NORTHWEST AIRLINES CORPORATION

(DEBTOR-IN-POSSESSION)

(Exact name 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)

Registrant’s telephone number, including area code (612) 726-2111

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x     No  o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  
o     No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2006 was $49 million.

As of January 31, 2007, there were 87,381,308 shares of the registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required to be included in Part III of this Form 10-K will be provided in accordance with General Instruction G3 no later than April 30, 2007.

 

 




PART I

Item 1.  BUSINESS

Northwest Airlines Corporation (“NWA Corp.” and, together with its subsidiaries, the “Company”) is the indirect parent corporation of Northwest Airlines, Inc. (“Northwest”).  Unless otherwise indicated, the terms “we,” “us,” and “our” refer to NWA Corp. and all consolidated subsidiaries.  Northwest operates the world’s sixth largest airline, as measured by 2006 revenue passenger miles (“RPMs”), and is engaged in the business of transporting passengers and cargo.  Northwest began operations in 1926.  Northwest’s business focuses on the operation of a global airline network through its strategic assets that include:

·                  domestic hubs at Detroit, Minneapolis/St. Paul and Memphis;

·                  an extensive Pacific route system with a hub in Tokyo;

·                  a transatlantic joint venture with KLM Royal Dutch Airlines (“KLM”), which operates through a hub in Amsterdam;

·                  a domestic and international alliance with Continental Airlines, Inc. (“Continental”) and Delta Air Lines, Inc. (“Delta”);

·                  membership in SkyTeam, a global airline alliance with KLM, Continental, Delta, Air France, Alitalia, Aeroméxico, CSA Czech Airlines, Korean Air and Aeroflot;

·                  agreements with three domestic regional carriers, including Pinnacle Airlines, Inc. (“Pinnacle Airlines”) and Mesaba Aviation, Inc. (“Mesaba”), each of which operates as Northwest Airlink, and Compass Airlines, Inc. (“Compass”), a wholly-owned subsidiary, which will operate as a Northwest Airlink carrier;

·                  a cargo business that operates a dedicated freighter fleet of aircraft through hubs in Anchorage and Tokyo.

Northwest’s business strategies are designed to utilize these assets to the Company’s competitive advantage.

The Company maintains a Web site at http://www.nwa.com.  Information contained on the Company’s Web site is not incorporated into this annual report on Form 10-K.  Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports and other information about the Company are available free of charge through its Web site at http://ir.nwa.com as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).  For information or questions concerning the Company’s Chapter 11 restructuring see: http://www.nwa-restructuring.com.

See “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” for a discussion of trends and factors affecting the Company and the airline industry.  The Company is managed as one cohesive business unit, but employs various strategies specific to the geographic regions in which it operates.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 19 — Geographic Regions” for a discussion of Northwest’s operations by geographic region.

Chapter 11 Proceedings

On September 14, 2005 (the “Petition Date”), NWA Corp. and 12 of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).  Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed a voluntary petition for relief under Chapter 11.  The Bankruptcy Court is jointly administering these cases under the caption “In re Northwest Airlines Corporation, et al., Case No. 05-17930 (ALG)” (the “Chapter 11 case”).  Accordingly, the accompanying consolidated financial statements have been prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (“SOP 90-7”), and on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of post-petition liabilities in the ordinary course of business.  In accordance with SOP 90-7, the financial statements for the periods presented distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the Company.  The consolidated financial statements shown herein include certain subsidiaries that did not file to reorganize under Chapter 11.  The assets and liabilities of these subsidiaries are not considered material to the consolidated financial statements.

Due to our Chapter 11 proceedings, the realization of assets and the satisfaction of liabilities, without substantial adjustments and/or changes in ownership, are subject to uncertainty, and accordingly, there is substantial doubt about the current financial reporting entity’s ability to continue as a going concern.  Upon emergence from bankruptcy, we expect to adopt fresh start reporting in accordance with SOP 90-7 which will result in our becoming a new entity for financial reporting purposes.  The adoption of fresh start reporting will have a material impact on the consolidated financial statements of the new financial reporting entity.

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Plan of Reorganization.  On January 12, 2007, NWA Corp. and thirteen of its direct and indirect subsidiaries, including Northwest, filed with the Bankruptcy Court the Debtors’ Joint and Consolidated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code.  On January 12, 2007, the Bankruptcy Court granted the Company an extension until February 15, 2007 to file the related Disclosure Statement with respect to Debtors’ Joint and Consolidated Plan of Reorganization under Chapter 11 of the Bankruptcy Code (“Disclosure Statement”).  Subsequently, on February 15, 2007, the Company filed its Disclosure Statement and the First Amended Joint and Consolidated Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Plan” or “Plan of Reorganization”).  Copies of the Plan and the Disclosure Statement were attached as Exhibits 99.2 and 99.3, respectively, to our Current Report on Form 8-K dated February 16, 2007.

On March 2, 2007, the Company filed a motion with the Bankruptcy Court, requesting that its exclusivity period for filing a reorganization plan be extended to June 29, 2007.  During the exclusivity period, which is currently set to expire March 16, 2007, only the Company can propose a reorganization plan.

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

A hearing on the adequacy of information in the Disclosure Statement is scheduled for March 26, 2007.  After approval by the Bankruptcy Court, the Company will distribute the Plan and Disclosure Statement to its creditors and begin a period of solicitation of creditors for acceptance of the Plan.  The Disclosure Statement contains detailed information about the Plan, the Bankruptcy Court’s order approving the Disclosure Statement, notice of the time for filing acceptance or rejection of the Plan and timing of the hearing to consider confirmation of the Plan, the rights offering, financial projections and financial estimates regarding the Debtors’ reorganized business enterprise value. The information contained in the Disclosure Statement is subject to change, whether as a result of amendments to the Plan, actions of third parties or otherwise.

Nothing contained in this Form 10-K is intended to be, nor should it be construed as, a solicitation for a vote on the Plan. The Plan will become effective only if it receives the requisite approval and is confirmed by the Bankruptcy Court, which the Company currently expects to occur during the second quarter of 2007.  However, there can be no assurance that the Bankruptcy Court will confirm the Plan or that the Plan will be implemented successfully.

Restructuring Goals.  The Company identified three major elements essential to transforming its business and has substantially completed the actions necessary to achieve its targeted business improvements.  The three major elements included:

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

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

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

The Company used the provisions of Chapter 11 and other changes implemented in its business to achieve its targeted restructuring improvements.  Outlined below is an overview of significant transactions related to labor and non-labor cost restructuring, fleet optimization, and the Company’s balance sheet restructuring efforts.

Labor Cost Restructuring.  The Company has ratified collective bargaining agreements (“CBAs”) or implemented contractual terms and conditions which collectively provide for approximately $1.4 billion in annual labor cost savings.  The Company has reached consensual agreement on CBAs with the Air Line Pilots Association (“ALPA”), the International Association of Machinists and Aerospace Workers (“IAM”), the Aircraft Technical Support Association (“ATSA”), the Transport Workers Union of America (“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 management employee pay and benefit cuts have also been achieved and implemented.   In addition, the Company imposed contract terms on its technicians represented by the Aircraft Mechanics Fraternal Association (“AMFA”) in August 2005 and, under Section 1113(c) of the Bankruptcy Code, imposed contract terms on its flight attendants represented by the Association of Flight Attendants-Communication Workers of America (“AFA-CWA”) on July 31, 2006.  On November 6, 2006, the Company reached a ratified agreement with AMFA to end the labor dispute with the airline’s technicians.  The agreement maintains the necessary annual labor cost savings from AMFA-represented employees.

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Section 1113(c) of the Bankruptcy Code permits a debtor to move to reject its CBAs if the debtor first satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court’s approval of the rejection or the expiration of the statutorily prescribed time period.  After bargaining in good faith and sharing relevant information with its unions, a debtor must make proposals to modify its existing CBAs based on the most complete and reliable information available at the time.  The proposed modifications must be necessary to permit the reorganization of a debtor and must provide that all the affected parties are treated fairly and equitably.  Ultimately, rejection of the CBAs is appropriate if the unions refuse to agree to a debtor’s necessary proposal “without good cause” and the Bankruptcy Court determines that the balance of the equities favors rejection.   In October 2005, the Company commenced Section 1113(c) proceedings with ALPA, the IAM and the Professional Flight Attendants Association (“PFAA”) and has subsequently reached consensual agreement with ALPA and the IAM.

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

Following the Bankruptcy Court’s June 29, 2006 ruling, the Company and the PFAA commenced negotiations to reach a new agreement.  On July 6, 2006, the Company’s flight attendants voted to change their union representation from the PFAA to the AFA-CWA.  Subsequently, the Company and the AFA-CWA continued negotiations to reach a new agreement, and on July 17, 2006, the parties announced that they reached a new tentative agreement (the “July TA”).  On July 31, 2006, the AFA-CWA announced that its members failed to approve the July TA.  As a result of the flight attendants’ failure to ratify the July TA, and in accordance with the Bankruptcy Court’s previous authorization, effective July 31, 2006 the Company implemented new contract terms and conditions for its flight attendants, consistent with the terms and conditions of the March TA.

On July 31, 2006, following the flight attendants’ failure to ratify a second proposed CBA and the Company’s subsequent imposition of new contract terms for the flight attendants, the AFA-CWA provided the Company with a 15-day notice of its intent to strike or engage in other work actions, including CHAOS (Create Havoc Around Our System).  In response, on August 1, 2006, the Company filed a motion with the Bankruptcy Court seeking to obtain an injunction against such activities.  The AFA-CWA subsequently extended the strike deadline by 10 days to August 25, 2006, in response to terrorist threats against air travel to and within the United States.  On August 17, 2006, the Bankruptcy Court denied the Company’s request for an injunction.  On August 18, 2006, the Company filed an appeal of the Bankruptcy Court’s decision with the United States District Court for 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 temporarily prevented any work action by the AFA-CWA while the court considered the Company’s appeal.  The U.S. District Court reversed the Bankruptcy Court’s decision on September 15, 2006, and granted the Company’s request for a preliminary injunction to prevent a threatened strike or work action by the AFA-CWA.  Subsequently, the AFA-CWA appealed the U.S. District Court’s ruling to the U.S. Second Circuit Court of Appeals.  Arguments related to this matter were heard on November 28, 2006 and the appeal is pending.  In addition, the Company is currently in mediated negotiations with the AFA-CWA and representatives of the National Mediation Board (“NMB”).  The AFA-CWA has requested that it be released from further negotiations by the NMB; to date the NMB has not granted this request.   A strike or other form of self-help could have a material adverse effect on the Company.  In addition, if the Company does not achieve the targeted level of savings under a flight attendant agreement, the amount of labor savings achieved through its other ratified CBAs would be subject to reduction.

On February 12, 2007, the AFA-CWA filed a motion with the Bankruptcy Court seeking reconsideration of the Bankruptcy Court’s decision to grant the Debtors’ Section 1113(c) motion to reject the Debtors’ CBA with the flight attendants. The Debtors believe the motion is without merit and will oppose the AFA-CWA’s motion in the Bankruptcy Court.

The Company has also commenced proceedings under Section 1114 of the Bankruptcy Code, pursuant to which the Company is seeking reductions in the costs it incurs to provide medical benefits to retirees.  Negotiations with the committee formed to represent the Company’s retirees are ongoing.

Non-labor Cost Restructuring.  The Company continues to pursue reductions in non-labor costs consistent with its current target of $350 million in annual savings.  The Company expects to realize such savings through restructured agreements with our regional airline affiliates, reduction in properties and facilities costs, reduced fuel burn, lower distribution, insurance and interest costs and optimization of other contractual relationships.  The Company estimates it has realized approximately $100 million of the targeted savings in 2006, with the majority of the remaining savings expected to be realized in 2007.

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Fleet Optimization.  The Company right-sized and re-optimized its fleet and network by reducing system-wide capacity by 9.2 percent during the first year in bankruptcy.  For the full year 2006, the Company reduced its system-wide consolidated available seat miles by 7.5 percent.  The Company also reached new agreements and affirmed existing  arrangements on new aircraft as part of its fleet optimization.  The Company affirmed its deliveries of Airbus A330 aircraft and now has one of the youngest transatlantic fleets in the industry.  The Company also affirmed its position as the North American service launch airline of the new Boeing 787 with deliveries beginning in August 2008, and ordered 72 76-seat regional jets that will be introduced in 2007.  The dual class regional jets are optimally sized for many domestic markets and will give the Company potential growth opportunities over time.  In addition, the Company accelerated the retirement of the DC10 and Boeing 747-200 wide-body aircraft as well as the Avro RJ85 fleet.

Balance Sheet Restructuring.  Under the Plan, the Company will reduce its total pre-petition debt by approximately $4.2 billion through the elimination of unsecured debt and restructuring of aircraft and other secured obligations.  Additionally, the Company refinanced its Bank Term Loan with the DIP/Exit financing facility, providing a significant interest expense savings.  The aircraft restructurings will result in an estimated $400 million reduction in ownership costs including interest, rent and depreciation expense.  The elimination of the unsecured debt will drive an additional interest expense reduction of approximately $150 million annually.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 6 — Liabilities Subject to Compromise” for additional information.

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

With the exception of the Company’s non-debtor subsidiaries, the Company continues to operate its business as “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders.  In general, as debtor-in-possession, the Company is authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.  In conjunction with the commencement of the Chapter 11 case, the Debtors obtained several orders from the Bankruptcy Court that were intended to enable the Debtors to operate in 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-petition employee salaries, wages, incentive compensation and benefits, and (iii) permit the Debtors to operate their consolidated cash management system during the Chapter 11 case in substantially the same manner as it was operated prior to the commencement of the Chapter 11 case.

The bankruptcy filing triggered defaults on substantially all the Company’s debt and lease obligations.  Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect pre-petition indebtedness or to exercise 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 the plan of reorganization.

The Debtors have endeavored to notify all of their known or potential creditors whose claims are subject to the Chapter 11 case.  Subject to certain exceptions under the Bankruptcy Code, the Chapter 11 filings automatically stayed the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the time of filing on September 14, 2005.  The deadline for creditors to file proofs of claim with the Bankruptcy Court (the “Bar Date”) was August 16, 2006.  A proof of claim arising from the rejection of an executory contract must be filed the later of the Bar Date or 30 days from the effective date of the authorized rejection.  As of December 31, 2006, the dollar amount of all claims filed against the Debtors, as reflected on the claims register, totaled approximately $129 billion. Differences in amount between claims filed by creditors and liabilities shown in our records continue to be investigated and resolved in connection with our claims resolution process. The Debtors believe that many of these claims are subject to objection as being duplicative, overstated, based upon contingencies that have not occurred, or because they otherwise do not state a valid claim.  The foregoing amount does not include claims that were filed without a specified dollar amount, referred to as unliquidated claims, and claims that were filed after the Bar Date.  While significant progress has been made to date, the Debtors are still in the process of resolving claims in accordance with the claims resolution procedures approved by the Court; however, completion of this process will likely occur well after confirmation of the Debtors’ Plan.  The Debtors believe that the aggregate dollar amount of unsecured claims currently appearing on the claims register far exceeds the total dollar amount of unsecured claims that will ultimately be allowed against the Debtors in the cases.  Although the ultimate dollar amount of such claims is not known at this time, the Debtors estimate that the amount of unsecured claims will be in the range of $8.75 billion to $9.5 billion.  This estimate is subject to significant uncertainties relating to the resolution of various claims, including the resolution of contingent and unliquidated claims such as litigation.  As a result, there can be no assurance that the ultimate amount of such allowed claims will not exceed $9.5 billion.

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The Debtors have recorded liability amounts for the claims that can be reasonably estimated and which we believe are probable of being allowed by the Bankruptcy Court, and we have classified these as liabilities subject to compromise in the Consolidated Balance Sheets.   See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 6 — Liabilities Subject to Compromise” for additional information.  The Company expects that additional liabilities subject to compromise will arise in the future as a result of damage claims resulting from the rejection of certain executory contracts and unexpired leases by the Debtors.  However, the Company expects that the assumption of certain executory contracts and unexpired leases may convert liabilities subject to compromise to liabilities not subject to compromise.  In addition, other claims may be recorded as a result of the Debtors claims resolution process.

Securities Trading Matters.  On October 28, 2005, the Bankruptcy Court entered an order that restricts the trading of the Common Stock and debt interests in the Company.  The purpose of the order is to ensure that the Company does not lose the benefit of its net operating loss carryforwards (“NOLs”) for tax purposes.  Under federal and state income tax law, NOLs can be used to offset future taxable income, and thus are a valuable asset of the Debtors’ estate.  Certain trading in the Company’s stock (or debt when the Company is in bankruptcy) could adversely affect the Company’s ability to use the NOLs.  Thus, the Company obtained an order that enables it to closely monitor certain transfers of stock and claims and restrict those transfers that may compromise the Company’s ability to use its NOLs.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 12 — Income Taxes” for further information related to the Company’s NOLs.

The Company’s Common Stock ceased trading on the NASDAQ stock market on September 26, 2005 and now trades in the “over-the-counter” market under the symbol NWACQ.PK.  However, under the Company’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 and Preferred Stock of the Company will be cancelled for no consideration and therefore the Company’s stockholders will no longer have any interest as stockholders in the Company by virtue of their ownership of the Company’s Common or Preferred Stock prior to emergence from bankruptcy.

The New York Stock Exchange advised the Company on September 15, 2005 that trading in Northwest’s 10.5% 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 due August 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 or paying interest.

Request for Equity Committee.  On or about November 22, 2006, certain equity holders of the Debtors requested, by letter, that the United States Trustee appoint a committee of equity security holders.  By letters dated December 26, 2006, the United States Trustee denied this request.  On January 11, 2007, an ad hoc committee of equity security holders filed a motion in the Bankruptcy Court seeking to compel the United States Trustee to appoint an equity committee.  On February 28, 2007, the equity holders withdrew their request to appoint an equity committee.  Subsequently, they have sought the appointment of an examiner to investigate the Company’s plans regarding industry consolidation.  The Debtors do not believe this request is appropriate, and will oppose it in the Bankruptcy Court.

Operations and Route Network

Northwest and its Airlink partners operate substantial domestic and international route networks and directly serve more than 240 destinations in 26 countries in North America, Asia and Europe.

Domestic System

Northwest operates its domestic system through its hubs at Detroit, Minneapolis/St. Paul and Memphis.

Detroit.  Detroit is the ninth largest origination/destination hub in the U.S.  Northwest and its Airlink carriers together serve over 150 destinations from Detroit.  For the six months ended June 30, 2006, they enplaned 56% of originating passengers from Detroit, while the next largest competitor enplaned 13%.

Minneapolis/St. Paul.  Minneapolis/St. Paul is the eighth largest origination/destination hub in the U.S.  Northwest and its Airlink carriers together serve over 160 destinations from Minneapolis/St. Paul.  For the six months ended June 30, 2006, they enplaned 61% of originating passengers from Minneapolis/St. Paul, while the next largest competitor enplaned 13%.

Memphis.  Memphis is the seventeenth largest origination/destination hub in the U.S.  Northwest and its Airlink carriers together serve 90 destinations from Memphis.  For the six months ended June 30, 2006, they enplaned 60% of originating passengers from Memphis, while the next largest competitor enplaned 12%.

Other Domestic System Operations.  Domestic “non-hub” operations include service to as many as 16 destinations from Indianapolis, service from several heartland cities to New York, Washington D.C. and Florida destinations, and service from several west coast gateway cities to Hawaii.

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International System

Northwest operates international flights to the Pacific and/or the Atlantic regions from its Detroit, Minneapolis/St. Paul and Memphis hubs, as well as from gateway cities including Boston, Honolulu, Los Angeles, San Francisco, Seattle, and Portland.

        Pacific.  Northwest has served the Pacific market since 1947 and has one of the world’s largest Pacific route networks.  Northwest’s Pacific operations are concentrated at Narita International Airport in Tokyo, where it has 376 permanent weekly takeoffs and landings (“slots”) as of December 31, 2006, the most for any non-Japanese carrier.  Under the U.S. — Japan bilateral aviation agreement, Northwest has the right to operate unlimited frequencies between any point in the U.S. and Japan as well as extensive “fifth freedom” rights.  Fifth freedom rights allow Northwest to operate service from any gateway in Japan to points beyond Japan and to carry Japanese originating passengers.  Northwest and United Airlines, Inc. (“United”) are the only U.S. passenger carriers that have fifth freedom rights from Japan.  Northwest uses these slots and rights to operate a network linking seven U.S. gateways and 12 Asian destinations via Tokyo.  The Asian destinations served via Tokyo are Bangkok, Beijing, Busan, Guam, Guangzhou, Hong Kong, Manila, Nagoya, Saipan, Seoul, Shanghai, and Singapore.  Additionally, Northwest flies nonstop between Detroit and Osaka and Nagoya, and uses its fifth freedom rights to fly beyond Osaka to Taipei and beyond Nagoya to Manila.  Northwest also operates nonstop service between Nagoya and Guam and Saipan and between Osaka and Guam and Honolulu.

        Atlantic.  Northwest and KLM operate an extensive transatlantic network pursuant to a commercial and operational joint venture.  This joint venture benefits from having antitrust immunity, which allows for coordinated pricing, scheduling, product development and marketing.  In 1992, the U.S. and the Netherlands entered into an “open-skies” bilateral aviation treaty, which authorizes the airlines of each country to provide international air transportation between any U.S. — Netherlands city pair and to operate connecting service to destinations in other countries.  Northwest and KLM operate joint service between Amsterdam and 17 cities in the U.S., Canada and Mexico, as well as between Amsterdam and India.  Codesharing between Northwest and KLM has been implemented on flights to 59 European, seven Middle Eastern, 13 African, five Asian and 176 U.S. cities.  Codesharing is an agreement whereby an airline’s flights can be marketed under the two-letter designator code of another airline, thereby allowing the two carriers to provide joint service with one aircraft.  After September 2007, the Northwest-KLM joint venture can be terminated on three years’ notice.  In May 2004, Air France acquired KLM, and KLM and Air France became wholly-owned subsidiaries of a new holding company.

        See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 19 — Geographic Regions” for a discussion of Northwest’s operations by geographic region.

Alliances

 

        In addition to its transatlantic joint venture with KLM, Northwest has strengthened its network through other alliance partnerships.  Long-term alliances are an effective way for Northwest to enter markets that it would not be able to serve alone.  Alliance relationships can include codesharing, reciprocal frequent flyer programs, “through” luggage check-in, reciprocal airport lounge access,  joint marketing, sharing of airport facilities and joint procurement of certain goods and services.

        Since 1998, Northwest and Continental have been in a domestic and international commercial alliance that connects the two carriers’ networks and includes extensive codesharing, frequent flyer program reciprocity and other cooperative marketing programs.  The alliance agreement has a term through December 31, 2025.

In August 2002, the Company entered into a commercial alliance agreement with Continental and Delta.  This agreement is designed to connect the three carriers’ domestic and international networks and provides for codesharing, reciprocity of frequent flyer programs, airport club use and other cooperative marketing programs.  The combined network has increased Northwest’s presence in the South, East and Mountain West regions of the U.S., as well as in Latin America.  The alliance agreement has a term through June 12, 2012, and if not terminated on that date, continues in effect for five more years.

In September 2004, Northwest, together with KLM and Continental Airlines, joined the global SkyTeam Alliance.  The addition of Northwest, KLM and Continental made SkyTeam the world’s second largest airline alliance.  The ten members of the SkyTeam alliance, Northwest, KLM, Continental, Delta, Air France, Alitalia, AeroMéxico, CSA Czech Airlines, Korean Air, and Aeroflot currently serve over 372 million passengers annually with more than 14,600 daily departures to 728 destinations in 149 countries.  Northwest customers are now able to accrue and redeem frequent flyer miles in their WorldPerks accounts and enjoy travel on any flight operated by a SkyTeam Alliance member carrier.  This alliance affords customers the benefits and service options when traveling on multiple airlines while being treated similarly to a customer traveling on a single airline.  The alliance agreement has a term through June 12, 2012, and if not terminated on that date, continues in effect for five more years.

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Northwest also has domestic frequent flyer and codesharing agreements with several other airlines including Alaska Airlines, Horizon Air, Hawaiian Airlines, American Eagle, Gulfstream International Airlines, and Big Sky Airlines.  In Central America, Northwest has a frequent flyer agreement with Copa Airlines.  In the Pacific, Northwest has frequent flyer agreements with Malaysia Airlines, Japan Airlines, Jet Airways of India, Garuda Indonesia, Cebu Pacific Airlines, Air Tahiti Nui, and China Southern.  In the Atlantic, in addition to its extensive relationship with KLM, Northwest has frequent flyer agreements with KLM cityhopper, Air Europa, Kenya Airways and Malev Hungarian Airlines.

Northwest and its SkyTeam Alliance and other travel partners currently provide a global network to over 900 cities in more than 160 countries on six continents.

Regional Partnerships

Northwest has airline services agreements with three regional carriers: Pinnacle Airlines, Mesaba and Compass.  Pursuant to the airline service agreements, these regional carriers are required to operate their flights under the Northwest “NW” code and operate as Northwest Airlink.  The purpose of these airline services agreements is to provide service to small cities and more frequent service to larger cities, increasing connecting traffic at Northwest’s domestic hubs.  The business terms of these agreements involve capacity purchase arrangements.  Under these arrangements, Northwest controls the scheduling, pricing, reservations, ticketing and seat inventories for Pinnacle Airlines and Mesaba flights.  Northwest is generally entitled to all ticket, cargo and mail revenues associated with these flights.  The regional carriers are paid based on operations for certain expenses and receive reimbursement for other expenses.

Pinnacle Airlines.  Pinnacle operated 124 of Northwest’s fleet of Bombardier Canadair Regional Jet (“CRJ”) CRJ200 aircraft as of December 31, 2006.  The Company owns 11.4% of the Common Stock of Pinnacle Airlines Corp. and accounts for this investment under the equity method of accounting.  The Pinnacle Airlines Corp. Common Stock had a market value of $42.0 million and a book value of $11.8 million as of December 31, 2006.

On December 21, 2006, the Debtors’ filed a motion for entry into an amended airline services agreement (“Amended Pinnacle ASA”) and related agreements with Pinnacle Airlines.  On January 11, 2007, the Court entered an order granting the motion.  The Amended Pinnacle ASA provides that Pinnacle Airlines will continue to be a long-term partner of Northwest through at least 2017.  In addition to reaching terms of an amended Pinnacle ASA, Northwest granted Pinnacle Airlines an allowed general unsecured claim of $377.5 million for full and final satisfaction of any and all claims filed against the Debtors, which resulted in an incremental charge to reorganization expense of $306.7 million in January 2007.  The Amended Pinnacle ASA and related agreements provide Northwest with, among other things, certainty of Pinnacle Airlines’ performance at rates consistent with Northwest’s cost savings targets and resolution of the Pinnacle Airlines claims.

Mesaba.  Mesaba, a wholly-owned subsidiary of MAIR Holdings, Inc. (“MAIR”), is the operator of 49 SAAB 340 turbo-prop aircraft and one CRJ200 aircraft.  On October 13, 2005, Mesaba filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Minnesota (Case No. 05-39258 (GFK)).  In accordance with the provisions of the Bankruptcy Code, Mesaba continues to operate its business as a debtor-in-possession.  As of December 31, 2006, the Debtors owned 27.5% of MAIR’s Common Stock.  The market value of this investment as of December 31, 2006 was $40.6 million and the book value was $19.8 million.

On January 22, 2007, the Debtors entered in to a Stock Purchase and Reorganization Agreement with Mesaba and a Stock Purchase Agreement with Mesaba’s parent, MAIR; these agreements were subsequently approved by the Bankruptcy Court.  Pursuant to the agreement, the Debtors’ agreed to purchase all of the equity interests in Mesaba following its reorganization under Chapter 11 and granted a general unsecured claim of $145 million for full and final satisfaction of any and all claims filed against the Debtors.  The Debtors’ also agreed to resolve all outstanding claims with MAIR and to sell to MAIR all of Northwest’s stock in MAIR.  Northwest intends to enter into a new airline services agreement with Mesaba pursuant to which Mesaba will continue to provide Northwest Airlink services to Northwest at rates consistent with Northwest’s cost savings targets. Northwest has entered into an agreement to acquire Mesaba and has announced its intention, subject to consummation of the transaction, to have Mesaba operate 36 76-seat CRJ900 aircraft, which are currently on order.

Additionally, Mesaba filed its plan of reorganization (the “Mesaba Plan”) and its disclosure statement with respect to the Mesaba Plan (the “Mesaba Disclosure Statement”) with the United States Bankruptcy Court for the District of Minnesota on January 22, 2007 and January 24, 2007, respectively.  On February 28, 2007, the Mesaba Disclosure Statement was approved.  A confirmation hearing is scheduled for April 9, 2007.

See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 18 — Related Party Transactions” regarding the Company’s transactions with Pinnacle Airlines and Mesaba.

Compass.  Compass Airlines, Inc., a wholly-owned indirect subsidiary of NWA Corp., was established on March 15, 2006 to operate as a Northwest Airlink carrier.  When Compass commences flight operations, which is expected to occur

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later in 2007, it will initially operate one 50-seat CRJ200 aircraft.  Thereafter, Northwest expects to place up to 36 76-seat Embraer 175 regional jet aircraft, which are currently on order, at Compass to be operated by Compass under an airline services agreement with Northwest.

Cargo

The Company is the largest cargo carrier among U.S. passenger airlines based on revenue, and the only one to operate a dedicated freighter fleet.  In 2006, cargo accounted for 7.5% of the Company’s operating revenues, with approximately 80% of its cargo revenues resulting from cargo originating in or destined for Asia.  Through its cargo hubs in Anchorage and Tokyo, the Company serves most major air freight markets between the U.S. and Asia with a fleet of dedicated Boeing 747-200 freighter aircraft.  In addition to revenues earned from the dedicated freighter fleet, the Company also generates cargo revenues in domestic and international markets through the use of cargo space on its passenger aircraft.

In 2004, the United States and the People’s Republic of China agreed to a series of amendments to the 1980 U.S. — China Air Transport Agreement.  The amendments provide for a significant expansion of air services between the two countries.  On September 3, 2004, the Department of Transportation (“DOT”) awarded Northwest six additional U.S. — China all-cargo frequencies, which the Company is using for freighter service to Shanghai, via its cargo hubs in Anchorage and Tokyo.  Additionally, on February 22, 2005, the DOT awarded Northwest three additional U.S. — China all-cargo frequencies that became available on March 25, 2006.  The Company used these frequencies to start up new freighter all-cargo service to Guangzhou via the Tokyo hub.  On August 24, 2006, the DOT awarded Northwest four additional US — China all-cargo frequencies that will become available on March 25, 2007.  The Company intends to use these frequencies to expand the Guangzhou freighter service.

Effective September 30, 2005, Northwest Airlines Cargo joined SkyTeam Cargo.  SkyTeam Cargo is the largest global airline cargo alliance.  The eight members of SkyTeam Cargo, Northwest Airlines Cargo, AeroMéxico Cargo, Air France Cargo, Alitalia Cargo, CSA Cargo, Delta Air Logistics, KLM Cargo, and Korean Air Cargo, currently serve more than 900 cities in more than 229 countries on six continents.  This alliance offers customers a consistent standard of performance, quality and detailed attention to service.

Other Travel Related Activities

MLT Inc.  MLT Inc. (“MLT”), an indirect wholly-owned subsidiary of NWA Corp., is among the largest vacation wholesale companies in the United States.  MLT develops and markets Worry-Free Vacations that include air transportation, hotel accommodations and car rentals.  In addition to its Worry-Free Vacations charter programs, MLT markets and supports Northwest’s WorldVacations travel packages to destinations throughout the U.S., Canada, Mexico, the Caribbean, Europe and Asia, primarily on Northwest.  These vacation programs, in addition to providing a competitive and quality tour product, increase the sale of Northwest services and promote and support new and existing Northwest destinations.  In 2006, MLT had $495 million in operating revenues.

Frequent Flyer Program.  Northwest operates a frequent flyer loyalty program known as “WorldPerks.”  WorldPerks is designed to retain and increase traveler loyalty by offering incentives for their continued patronage.  Under the WorldPerks program, miles are earned by flying on Northwest or its alliance partners and by using the services of program partners for such things as credit card use, hotel stays, car rentals and other activities.  Northwest sells mileage credits to the program partners.  WorldPerks members accumulate mileage in their accounts and later redeem mileage for free or upgraded travel on Northwest and other participating airlines.  WorldPerks members that achieve certain mileage thresholds also receive enhanced service benefits from Northwest like special service lines, advance flight boarding and upgrades.

 

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Employees

The airline industry is labor-intensive and as of December 31, 2006, the Company had approximately 30,000 full-time equivalent employees of whom approximately 1,900 were foreign nationals working primarily in Asia. Unions represent approximately 85% of the Company’s employees. CBAs provide standards for wages, hours of work, working conditions, settlement of disputes and other matters. The major agreements with domestic employees became amendable or will become amendable on various dates as follows:

Employee Group

 

Approximate
Number of
Full-time
Equivalent
Employees 
Covered

 

Union

 

Amendable
Date

 

 

 

 

 

 

 

 

 

Pilots

 

4,500

 

Air Line Pilots Association, International (“ALPA”)

 

12/31/2011

 

 

 

 

 

 

 

 

 

Agents and Clerks

 

6,300

 

International Association of Machinists & Aerospace
Workers (“IAM”)

 

12/31/2011

 

 

 

 

 

 

 

 

 

Equipment Service Employees and Stock Clerks

 

5,000

 

International Association of Machinists & Aerospace
Workers (“IAM”)

 

12/31/2011

 

 

 

 

 

 

 

 

 

Flight Attendants

 

7,400

 

Assocation of Flight Attendants - Communication
Workers of America (“AFA-CWA”)

 

(a)

 

 

 

 

 

 

 

 

 

Mechanics and Related Employees

 

1,000

 

Aircraft Mechanics Fraternal Assocation (“AMFA”)

 

12/31/2011

 


(a)        See “Item 1A. Risk Factors - Risk Factors Related to Northwest and the Airline Industry” for additional information pertaining to the status of labor discussions with the Flight Attendants.

Regulation

General.  The Airline Deregulation Act of 1978, as amended, eliminated domestic economic regulation of passenger and freight air transportation in many regards.  Nevertheless, the industry remains regulated in a number of areas.  The DOT has jurisdiction over international route authorities and various consumer protection matters, such as advertising, denied boarding compensation, baggage liability and access for persons with disabilities.  Northwest is subject to regulations of the DOT and the Federal Aviation Administration (“FAA”) because it holds certificates of public convenience and necessity, air carrier operating certificates and other authority granted by those agencies.  The FAA regulates flight operations, including air space control and aircraft standards, maintenance, ground facilities, transportation of hazardous materials and other technical matters.  The Department of Justice (“DOJ”) has jurisdiction over airline competition matters, including mergers and acquisitions, under federal antitrust laws.  The Transportation Security Administration (“TSA”) regulates airline and airport security.  Other federal agencies have jurisdiction over postal operations, use of radio facilities by aircraft and certain other aspects of Northwest’s operations.

International Service.  Northwest operates its international routes under route certificates and other authorities issued by the DOT.  Many of Northwest’s international route certificates are permanent and do not require renewal by the DOT.  Certain other international route certificates and other authorities are temporary and subject to periodic renewal.  Northwest requests renewals of these certificates and other authorities when and as appropriate.  The DOT typically renews temporary authorities on routes when the authorized carrier is providing a reasonable level of service.  With respect to foreign air transportation, the DOT must approve agreements between air carriers, including codesharing agreements, and may grant antitrust immunity for those agreements in some situations.

Northwest’s right to operate to foreign countries, including Japan, China and other countries in Asia and Europe, is governed by aviation agreements between the U.S. and the respective foreign countries.  Many aviation agreements permit an unlimited number of carriers to operate between the U.S. and a specific foreign country, while others limit the number of carriers and flights on a given international route.  From time to time, the U.S. or its foreign country counterpart may seek to renegotiate or cancel an aviation agreement.  In the event an aviation agreement is amended or canceled, such a change could adversely affect Northwest’s ability to maintain or expand air service to the relevant foreign country.

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Operations to and from foreign countries are subject to the applicable laws and regulations of those countries.  There are restrictions on the number and timing of operations at certain international airports served by Northwest, including Tokyo.  Additionally, slots for international flights are subject to certain restrictions on use and transfer.

Aviation Security.  The TSA regulates civil aviation security under the Aviation and Transportation Security Act (“Aviation Security Act”).  This law federalized substantially all aspects of civil aviation security and requires, among other things, the implementation of certain security measures by airlines and airports, such as the requirement that all passenger bags be screened for explosives.  Since the events of September 11, 2001, Congress has mandated, and the TSA has implemented, numerous security procedures that have imposed and will continue to impose additional compliance responsibilities and costs on airlines.  Funding for airline and airport security under the law is provided in part by a $2.50 per segment passenger security fee, subject to a limit of $10 per roundtrip.  In addition, the law authorizes the TSA to impose an air carrier fee, capped by the aggregate of costs paid by all air carriers in calendar year 2000 for screening passengers and property.  The per-carrier limit is capped at the amount expended by that individual air carrier in calendar year 2000.  This cap is to remain in effect until the TSA revises the per-carrier limit by market share or any other appropriate method.  In the fiscal year 2005 Department of Homeland Security Appropriations Act, Congress required the Government Accountability Office (“GAO”) to conduct a review of the carrier reported costs; as a result of this review, the GAO concluded that the industry-wide aviation security costs were underreported, leaving an uncollected air carrier fee.  In January 2006, the Company and a number of U.S. and foreign carriers were notified by the TSA that a substantial increase in the additional security fee would be imposed retroactively to the beginning of 2005, and continuing into 2006 and future years.  The Company, together with many other affected carriers, is currently disputing this fee assessment.  It is expected that aviation security laws and processes will continue to be under review and subject to change by the federal government in the future.

In November 2004, the TSA implemented a test of a passenger pre-screening program, named “Secure Flight,” utilizing passenger data provided to the TSA by U.S. airlines.  On December 17, 2004, the president signed into law the Intelligence Reform and Terrorism Prevention Act of 2004, which requires the TSA to take additional actions regarding passenger and air cargo security.

On April 7, 2005, the Bureau of Customs and Border Protection (“CBP”) issued a rule requiring airlines, for security screening purposes, to electronically transmit passenger and crew data to the CBP before flights arrive in or depart from the U.S.  The CBP also published a final rule in December 2003 requiring airlines to electronically transmit cargo data before cargo arrives in and departs from the U.S.

Airport Access.  Four of the nation’s airports, Chicago O’Hare, LaGuardia (New York), Kennedy International (New York) and Ronald Reagan National (Washington, D.C.), were designated by the FAA as “high density traffic airports.”  The number of takeoff and landing slots at these airports was limited during certain peak demand time periods.  Legislation passed in March 2000 resulted in the elimination of slot restrictions, effective July 2002 at Chicago O’Hare and January 2007 at LaGuardia and Kennedy International.  In August 2004, the FAA implemented temporary restrictions at Chicago O’Hare to limit congestion.  The Chicago O’Hare restrictions became a Final Rule effective October 2006 and will continue through October 2008.  The FAA also decided not to eliminate slot restrictions at LaGuardia as planned due to continued congestion; carriers are currently operating under a Final Order at LaGuardia, pending a proposed rulemaking process.  The Final Order will remain in effect until at least November 2008, the earliest that a Final Rule at LaGuardia could be put in place.  The FAA permits the buying, selling, trading or leasing of slots subject to certain restrictions.

Labor.  The Railway Labor Act (“RLA”) governs the labor relations of employers and employees engaged in the airline industry.  Comprehensive provisions are set forth in the RLA establishing the right of airline employees to organize and bargain collectively along craft or class lines and imposing a duty upon air carriers and their employees to exert every reasonable effort to make and maintain collective bargaining agreements.  The RLA contains detailed procedures that must be exhausted before a lawful work stoppage may occur.  Pursuant to the RLA, Northwest has CBAs with six domestic unions representing nine separate employee groups.  In addition, Northwest has agreements with four unions representing its employees in countries throughout Asia.  These agreements are not subject to the RLA, although Northwest is subject to local labor laws.

Under the RLA, an amendable labor contract continues in effect while the parties negotiate a new contract.  In addition to direct contract negotiations, the RLA also provides for mediation, potential arbitration of unresolved issues and a 30-day “cooling-off” period after the end of which either party can resort to self-help.  The self-help remedies include, but are not limited to, a strike by the members of the labor union and the imposition of proposed contract amendments and, in the event of a strike, the hiring of replacement workers by the Company.   See “Item 1A. Risk Factors” for additional labor discussion.

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Noise Abatement.  The Airport Noise and Capacity Act of 1990 (“ANCA”) recognizes the right of airport operators with special noise problems to implement local noise abatement procedures as long as such procedures do not interfere unreasonably with the interstate and foreign commerce of the national air transportation system.  As a result of litigation and pressure from airport area residents, airport operators have taken local actions over the years to reduce aircraft noise.  These actions include restrictions on night operations, frequency of aircraft operations and various other procedures for noise abatement.  While Northwest has sufficient operational and scheduling flexibility to accommodate current local noise restrictions, its operations could be adversely affected if locally imposed regulations become more restrictive or widespread.

Under the direction of the United Nations International Civil Aviation Organization (the “ICAO”), world governments, including the U.S., continue to consider more stringent aircraft noise certification standards than that contained in the ANCA.  A new ICAO noise standard (Chapter 4) was adopted in 2001 that established more stringent noise requirements for newly manufactured aircraft after January 1, 2006.  As adopted, the new rule is not accompanied by a mandatory phase-out of in-service Chapter 3 aircraft, including certain aircraft operated by Northwest.  FAA reauthorization legislation, known as “Vision 100 — Century of Aviation Reauthorization Act” and signed into law by the president on December 12, 2003, required the FAA to issue regulations implementing Chapter 4 noise standards consistent with ICAO recommendations.  In July 2005, the FAA issued a rule adopting Chapter 4 standards.  All of the Company’s aircraft will be in compliance with these new FAA rules either as Stage 3 or Stage 4 aircraft.

Safety.  The Company is subject to FAA jurisdiction pertaining to aircraft maintenance and operations, including equipment, dispatch, communications, training, flight personnel and other matters affecting air safety.  To ensure compliance with its regulations, the FAA requires all U.S. airlines to obtain operating, airworthiness and other certificates, which are subject to suspension or revocation for cause.

Under FAA regulations, the Company has established, and the FAA has approved, maintenance programs for all aircraft operated by Northwest.  These programs provide for the ongoing maintenance of Northwest’s aircraft, ranging from frequent routine inspections to major overhauls.  Northwest’s aircraft require various levels of maintenance or “checks” and periodically undergo complete overhauls.  Maintenance programs are monitored closely by the FAA, with FAA representatives routinely present at Northwest’s maintenance facilities.  The FAA issues Airworthiness Directives (“ADs”), which mandate changes to an air carrier’s maintenance program.  These ADs (which include requirements for structural modifications to certain aircraft) are issued to ensure that the nation’s transport aircraft fleet remains airworthy.  Northwest is currently, and expects to remain, in compliance with all applicable requirements under all ADs and the FAA approved maintenance programs.  The Company is in the process of completing its operating certificate requirements for Compass with the FAA.

A combination of FAA and Occupational Safety and Health Administration regulations on both the federal and state levels apply to all of Northwest’s ground-based operations in the United States.

Environmental.  The Company is subject to regulation under various environmental laws and regulations, including the Clean Air Act, the Clean Water Act and Comprehensive Environmental Response, Compensation and Liability Act of 1980.  In addition, many state and local governments have adopted environmental laws and regulations to which the Company’s operations are subject.  Environmental laws and regulations are administered by numerous federal and state agencies.

In November 2005, the Environmental Protection Agency (the “EPA”) issued a rule implementing the aircraft emissions standards previously approved by the ICAO, of which the United States is a member. Following issuance of the EPA rule, a lawsuit was filed in the U.S. Court of Appeals for the District of Columbia Circuit on behalf of state and local air regulators against the EPA challenging its rule regulating aircraft emissions on the grounds that the international emissions standards codified by the EPA rule are not stringent enough.  Northwest believes it is in compliance with the emissions standards that were codified by the EPA rule.

Northwest, along with other airlines, has been identified as a potentially responsible party at various environmental sites.  Management believes that Northwest’s share of liability for the cost of the remediation of these sites, if any, will not have a material adverse effect on the Company’s financial statements.

Civil Reserve Air Fleet Program.  Northwest renewed its participation in the Civil Reserve Air Fleet Program (“CRAF”), pursuant to which Northwest has agreed to make available, during the period beginning October 1, 2006 and ending September 30, 2007, 19 Boeing 747-200/400 passenger aircraft, 16 Boeing 757-300 passenger aircraft, 13 Airbus A330-300 passenger aircraft, 11 Airbus A330-200 passenger aircraft and 12 Boeing 747-200 freighter aircraft for use by the U.S. military under certain stages of readiness related to national emergencies.  The program is a standby arrangement that allows the U.S. Department of Defense U.S. Air Force Air Mobility Command to call on some or all of these 71 contractually committed Northwest aircraft and their crews to supplement military airlift capabilities.

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Item 1A.  RISK FACTORS

Risk Factors Related to Northwest and the Airline Industry

The airline industry is intensely competitive.

The airline industry is intensely competitive.  Our competitors include other major domestic airlines as well as foreign, regional and new entrant airlines, some of which have more financial resources and/or lower cost structures than ours.  In most of our markets we compete with at least one of these carriers.  Our revenues are sensitive to numerous factors, and the actions of other carriers in the areas of pricing, scheduling and promotions can have a substantial adverse impact on our revenues.

Industry revenues are also impacted by growth of low cost airlines and the use of internet travel Web sites.  Using the advantage of low unit costs, driven in large part by lower labor costs, low cost carriers and carriers who have achieved lower labor costs are able to operate profitably while offering substantially lower fares.  Internet travel Web sites have driven significant distribution cost savings for airlines, but have also allowed consumers to become more efficient at finding lower fare alternatives than in the past by providing them with more powerful pricing information.  Such factors become even more significant in periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to protect market share, or raise cash quickly, irrespective of the impact to long-term profitability.

Global events have also significantly impacted airline industry revenue.  The war in Iraq depressed air travel, particularly on international routes.  The outbreak of Severe Acute Respiratory Syndrome (“SARS”) sensitized passengers to the potential for air travel to facilitate the spread of contagious diseases.  An escalation of the war in Iraq, or another outbreak of SARS, Avian flu, or other influenza-type illness, if it were to persist for an extended period, could again materially affect the airline industry and the Company by reducing revenues and impacting travel behavior.

Approval of the Company’s Plan of Reorganization is not assured.

In order to exit Chapter 11 successfully, the Company must propose, and obtain confirmation by the Bankruptcy Court of, a plan of reorganization that satisfies the requirements of the Bankruptcy Code.  The Plan must be voted on by holders of impaired claims, and must satisfy certain requirements of the Bankruptcy Code and be confirmed by the Bankruptcy Court.  Although we have filed our Plan for emergence from Chapter 11, there can be no assurance that the Plan will be approved by claim holders or confirmed by the Bankruptcy Court.

A strike or other form of self-help by the flight attendants could have a material adverse effect on the Company.

Labor has always been a critical issue for major airlines, including the Company.   Approximately 85% of our employees are represented by unions.  Salary and benefit costs are our second largest operating expense and reducing these expenses by approximately $1.4 billion was a major goal of our restructuring plan.  In connection with its labor cost restructuring, the Company has been successful in implementing new labor agreements with the majority of its labor groups including ALPA, the IAM, ATSA, TWU, NAMA and AMFA.

The Company has not reached a ratified consensual agreement with respect to its flight attendants, represented by the AFA-CWA.  For additional labor discussion, including background on the Company’s collective bargaining negotiations with its flight attendants and legal actions taken by the flight attendants, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Chapter 11 Proceedings.”  In accordance with the Bankruptcy Court’s previous authorization, the Company implemented new contract terms and conditions for its flight attendants.  The Company is currently in mediated negotiations with the AFA-CWA and representatives of the National Mediation Board (“NMB”).  The AFA-CWA has requested that it be released from further negotiations by the NMB; to date the NMB has not granted this request.

Under the RLA, an amendable labor contract continues in effect while the parties negotiate a new contract.  In addition to direct contract negotiations, the RLA also provides for mediation, potential arbitration of unresolved issues and a 30-day “cooling-off” period after the end of which either party can resort to self-help.  The self-help remedies include, but are not limited to, a strike by the members of the labor union and the imposition of proposed contract amendments and, in the event of a strike, the hiring of replacement workers by the Company.

The Company cannot predict, at this time, the outcome of the AFA-CWA’s appeal of the U.S. District Court’s ruling regarding the flight attendants’ right to strike or to engage in other job actions, nor can we predict the outcome of the negotiations with the AFA-CWA or when the AFA-CWA may be released by the NMB.  A strike or other form of self-help could have a material adverse effect on the Company.  In addition, if the Company does not achieve the targeted level of

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savings under a flight attendant agreement, the amount of labor savings achieved through its other ratified CBAs would be subject to reduction.

The Company’s degree of leverage may limit its financial and operating activities.

The Company will have significant indebtedness even after the Plan is consummated.  Further, our historical capital requirements have been significant and our future capital requirements are significant; these requirements may also be affected by general economic conditions, industry trends, performance, and many other factors that are not within our control. The Company cannot ensure that we will be able to obtain financing in the future.  Even if the Plan is approved and consummated, the Company cannot ensure that we will not experience losses in the future.  Our profitability and ability to generate cash flow will likely depend upon our ability to implement successfully our business strategy.  However, the Company cannot ensure that we will be able to accomplish these results.

The covenants in the Company’s exit facility may restrict the reorganized Company’s activities and will require satisfaction of certain financial tests.

The Company’s exit facility will contain a number of covenants and other provisions that may restrict the reorganized Company’s ability to engage in various financing transactions and operating activities. The exit facility also will require the reorganized Company to satisfy certain financial tests.  The ability of the reorganized Company to meet these financial covenants may be affected by events beyond its control.  If the reorganized Company defaults under any of these requirements, the lenders could declare all outstanding borrowings, accrued interest and fees to be due and payable.  If that were to occur, there can be no assurance that the Company would have sufficient liquidity to repay or refinance this indebtedness or any of its other debt.

Changes in government regulations could increase our operating costs and limit our ability to conduct our business.

Airlines are subject to extensive regulatory requirements in the U.S. and internationally.  In the last several years, Congress has passed laws and the FAA has issued a number of maintenance directives and other operating regulations that impose substantial costs on airlines.  Additional laws, regulations, taxes and airport charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce revenues.  The ability of U.S. carriers to operate international routes is subject to change because the applicable arrangements between the U.S. and foreign governments may be amended from time to time, or because appropriate landing slots or facilities may not be available.  We cannot give assurance that laws or regulations enacted in the future will not adversely affect the industry or the Company.

We are vulnerable to increases in aircraft fuel costs.

Because fuel costs are a significant portion of our operating costs, substantial changes in fuel costs would materially affect our operating results.  Fuel prices continue to be susceptible to, among other factors, political unrest in various parts of the world, Organization of Petroleum Exporting Countries (“OPEC”) policy, the rapid growth of economies in China and India, the levels of inventory carried by industries, the amounts of reserves built by governments, disruptions to production and refining facilities and weather.  In 2005 Hurricane Katrina and Hurricane Rita caused widespread disruption to oil production, refinery operations and pipeline capacity in portions of the U.S. Gulf Coast.  As a result of these disruptions, the price of jet fuel increased significantly and the availability of jet fuel supplies diminished during the fall of 2005.  These and other factors that impact the global supply and demand for aircraft fuel may affect our financial performance due to its high sensitivity to fuel prices.  A one-cent change in the cost of each gallon of fuel would impact operating expenses by approximately $1.5 million per month (based on our 2006 mainline and regional aircraft fuel consumption).  The Company’s mainline fuel expense per available seat mile increased from 2.99 cents to 3.43 cents, on average, from 2005 to 2006.  From time to time, we hedge some of our future fuel purchases to protect against potential spikes in price.  However, these hedging strategies may not always be effective and can result in losses depending on price changes.  As of January 31, 2007, the Company has hedged the price of approximately 40% of its estimated 2007 fuel requirements, compared to no fuel hedges being in place at December 31, 2005.

Our insurance costs have increased substantially and further increases could harm our business.

Following September 11, 2001, aviation insurers significantly increased airline insurance premiums and reduced the maximum amount of coverage available to airlines for certain types of claims.  Our total aviation and other insurance expenses were $48 million higher in 2006 than in 2000.  The FAA is currently providing aviation war risk insurance as required by the Homeland Security Act of 2002 as amended by the Consolidated Appropriations Act of 2005 and subsequently by the Continuing Appropriations Resolution 2007.  However, following multiple extensions, this coverage is scheduled to expire on August 31, 2007.  While the government may again extend the period that it provides excess war risk coverage, there is no assurance that this will occur, or if it does, how long the extension will last, what will be included in the coverage, or at what cost the coverage will be provided.  Should the U.S. government stop providing war risk insurance

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in its current form to the U.S. airline industry, it is expected that the premiums charged by commercial aviation insurers for this coverage, if available at all, would be substantially higher than the premiums currently charged by the government, the maximum amount of coverage available would be reduced, and the type of coverage could be more restrictive.  Commercial aviation insurers could further increase insurance premiums and reduce or cancel coverage, in the event of a new terrorist attack or other events adversely affecting the airline industry.  Significant increases in insurance premiums could negatively impact our financial condition and results of operations.  If we are unable to obtain adequate war risk insurance, our business could be materially and adversely affected.

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

We are exposed to foreign currency exchange rate fluctuations.

We conduct a significant portion of our operations in foreign locations.  As a result, we have operating revenues and, to a lesser extent, operating expenses, as well as assets and liabilities, denominated in foreign currencies, principally the Japanese yen.  Fluctuations in foreign currencies can significantly affect our operating performance and the value of our assets and liabilities located outside of the United States.  From time to time, we use financial instruments to hedge our exposure to the Japanese yen.  However, these hedging strategies may not always be effective.  As of December 31, 2006, the Company has no forward contracts outstanding related to its anticipated 2007 yen-denominated sales.

We are exposed to changes in interest rates.

We had $6.9 billion of debt and capital lease obligations that were accruing interest as of December 31, 2006 and $2.5 billion of total balance sheet cash, cash equivalents, and short-term investments as of December 31, 2006.  Of the indebtedness, 67% bears interest at floating rates.  An increase in interest rates would have an overall negative impact on our earnings as increased interest expense would only be partially offset by increased interest income.  From time to time, we use financial instruments to hedge our exposure to interest rate fluctuations.  However, these hedging strategies may not always be effective.  As of December 31, 2006 the Company had entered into individual interest rate cap hedges related to three floating rate debt instruments, with a total cumulative notional amount of $504 million.  The objective of the interest rate cap hedges is to protect the anticipated payments of interest (cash flows) on the designated debt instruments from adverse market interest rate changes.

Any “ownership change” could limit our ability to utilize our net operating loss carryforwards.

Under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), a corporation is generally allowed a deduction in any taxable year for net operating losses carried over from prior years.  As of December 31, 2006, the Company had approximately $3.3 billion of federal and state net operating loss (“NOL”) carryforwards.

A corporation’s use of its NOL carryforwards is generally limited under Section 382 of the Internal Revenue Code if a corporation undergoes an “ownership change.”  However, when an “ownership change” occurs pursuant to the implementation of a plan of reorganization under the Bankruptcy Code (as will be the case on the effective date of the Company’s Plan), special rules in either Section 382(l)(5) or Section 382(l)(6) of the Internal Revenue Code apply instead of the general Section 382 limitation rules.  In general terms, Sections 382(l)(5) or (l)(6) allow for a more favorable utilization of a company’s NOL carryforwards than would otherwise have been available following an “ownership change” not in connection with a plan of reorganization.  We have not yet determined whether we will be eligible for, or will rely on, Section 382(l)(5) of the Internal Revenue Code, or whether we will instead rely on Section 382(l)(6) of the Internal Revenue Code.  Assuming we rely on Section 382(l)(5) of the Internal Revenue Code, a second “ownership change” within two years from the effective date of the Plan would eliminate completely our ability to utilize our NOL carryforwards.  Even if we rely on Section 382(l)(6) of the Internal Revenue Code, an “ownership change” after the effective date of the Plan could significantly limit our ability to utilize our NOL carryforwards for taxable years including or following the subsequent “ownership change.”  To avoid a potential adverse effect on our ability to utilize our NOL carryforwards after the effective date of the Plan, we have proposed restrictions on certain transfers of Common Stock of the reorganized NWA Corp.

Due to industry seasonality, operating results for any interim periods are not necessarily indicative of those for the entire year.

The airline industry is seasonal in nature.  Due to seasonal fluctuations, operating results for any interim period are not necessarily indicative of those for the entire year.  Our second and third quarter operating results have historically been more favorable due to increased leisure travel on domestic and international routes during the summer months.

15




Forward-Looking Statements

Certain of the statements made in “Item 1.  Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report are forward-looking and are based upon information available to the Company on the date hereof.  The Company, through its management, may also from time to time make oral forward-looking statements.  In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company.  Any such statement is qualified by reference to the following cautionary statements.

The Company believes that the material risks and uncertainties that could affect the outlook of an airline operating under Chapter 11 and in a global economy include, among others, the ability of the Company to continue as a going concern, the ability of the Company to obtain and maintain any necessary financing for operations and other purposes, the ability of the Company to maintain adequate liquidity, the ability of the Company to absorb escalating fuel costs, the Company’s ability to obtain court approval with respect to motions in the Chapter 11 proceedings prosecuted by it from time to time, the ability of the Company to develop, confirm and consummate a plan of reorganization with respect to its Chapter 11 proceedings, risks associated with third parties seeking and obtaining court approval to terminate or shorten the exclusivity period for the Company to propose and confirm a plan of reorganization, to appoint a Chapter 11 trustee or to convert the cases to Chapter 7 cases, the ability of the Company to obtain and maintain normal terms with vendors and service providers, the Company’s ability to maintain contracts that are critical to its operations, the ability of the Company to realize assets and satisfy liabilities without substantial adjustments and/or changes in ownership, the potential adverse impact of the Chapter 11 proceedings on the Company’s liquidity or results of operations, the ability of the Company to operate pursuant to the terms of its financing facilities (particularly the related financial covenants), the ability of the Company to attract, motivate and/or retain key executives and associates, the future level of air travel demand, the Company’s future passenger traffic and yields, the airline industry pricing environment, increased costs for security, the cost and availability of aviation insurance coverage and war risk coverage, the general economic condition of the United States and other regions of the world, the price and availability of jet fuel, the war in Iraq, the possibility of additional terrorist attacks or the fear of such attacks, concerns about SARS, Avian flu or other influenza or contagious illnesses, labor strikes, work disruptions, labor negotiations both at other carriers and the Company, low cost carrier expansion, capacity decisions of other carriers, actions of the U.S. and foreign governments, foreign currency exchange rate fluctuations, inflation and other factors discussed herein.  Additional information with respect to these factors and these and other events that could cause differences between forward-looking statements and future actual results is contained in “Risk Factors Related to Northwest and the Airline Industry” above.

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

Item 1B.  UNRESOLVED STAFF COMMENTS

None.

16




Item 2.  PROPERTIES

Flight Equipment

As shown in the following table, Northwest operated a fleet of 371 aircraft at December 31, 2006, consisting of 312 narrow-body and 59 wide-body aircraft.  Northwest’s purchase commitments for aircraft as of December 31, 2006 are also provided.

 

 

 

 

In Service

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

Aircraft

 

 

 

Seating

 

 

 

Capital

 

Operating

 

 

 

Age

 

on Firm

 

Aircraft Type

 

Capacity

 

Owned

 

Lease

 

Lease

 

Total

 

(Years)

 

Order

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Passenger Aircraft

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Airbus:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A319

 

124

 

64

 

 

2

 

66

 

4.5

 

5

 

A320

 

148

 

45

 

 

28

 

73

 

12.0

 

2

 

A330-200

 

243

 

11

 

 

 

11

 

1.7

 

 

A330-300

 

298

 

13

 

 

 

13

 

2.3

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boeing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

787-8

 

221

 

 

 

 

 

 

18

 

757-200

 

180-184

 

34

 

1

 

15

 

50

 

15.8

 

 

757-300

 

224

 

16

 

 

 

16

 

3.8

 

 

747-200

 

353-430

 

2

 

 

1

 

3

 

25.2

 

 

747-400

 

403

 

4

 

 

12

 

16

 

13.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

McDonnell Douglas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DC9

 

100-125

 

107

 

 

 

107

 

35.1

 

 

DC10-30

 

273

 

2

 

 

 

2

 

29.0

(1)

 

 

 

 

 

298

 

1

 

58

 

357

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Freighter Aircraft

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boeing 747F

 

 

 

11

 

 

3

 

14

 

24.6

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Northwest Operated Aircraft

 

 

 

309

 

1

 

61

 

371

 

17.6

(3)

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regional Aircraft

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRJ200

 

44-50

 

 

 

125

 

125

 

3.7

 

 

Saab 340

 

30-34

 

 

 

49

 

49

 

9.1

 

 

CRJ900

 

76

 

 

 

 

 

 

36

 

Embraer 175

 

76

 

 

 

 

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Airlink Operated Aircraft

 

 

 

 

 

174

 

174

 

 

 

72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Aircraft

 

 

 

309

 

1

 

235

 

545

 

 

 

105

 


(1)   On January 8, 2007, the last DC10-30 aircraft retired from scheduled service.

(2)   The Company intends to remove two Boeing 747F aircraft from scheduled service in early 2007.

(3)   Excluding DC9 and DC10-30 aircraft, the average age of Northwest-operated aircraft is 10.3 years.

In total, the Company took delivery of two Airbus A330-300 and four A330-200 aircraft during the twelve months ended December 31, 2006.  The Company entered into debt agreements on the six aircraft with an aggregate amount of debt incurred of $444 million.

In the quarter ended December 31, 2006, the Company reached agreements with the applicable lenders to restructure the existing 126 CRJ200 aircraft fleet.  This agreement included the return of 15 previously rejected CRJ200 aircraft into the Northwest Airlink fleet bringing the Airlink CRJ200 fleet total to 141 aircraft.

See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 13 — Commitments” for further information related to the Company’s aircraft and commitments.

17




Airport Facilities

Northwest leases the majority of its airport facilities.  The associated lease terms cover periods up to 30 years and contain provisions for periodic adjustment of lease payments.  At most airports that it serves, Northwest has entered into agreements that provide for the non-exclusive use of runways, taxiways, terminals and other facilities.  Landing fees under these agreements normally are based on the number of landings and weight of the aircraft.

In certain cases, the Company has constructed facilities on leased land that revert to the lessor upon expiration of the lease.  These facilities include cargo buildings in Boston, Los Angeles, Seattle and Honolulu; support buildings at the Minneapolis/St. Paul International Airport; a line maintenance hangar in Seattle; and several hangars in Detroit.  In addition, we have a maintenance base under operating lease located in Minneapolis/St. Paul.

The Company was responsible for managing and supervising the design and construction of the $1.4 billion McNamara terminal at Detroit Metropolitan Wayne County Airport.  Phase One was completed in February 2002 and included 97 gates, 106 ticket-counter positions, 22 security check points, nearly 85 shops and restaurants, four WorldClubs, an 11,500-space parking facility, covered curbside drop-off areas, 18 luggage carousels and a 404-room hotel.  Phase Two was completed in July 2006 which provided 25 additional gates and an expanded west concourse WorldClub.  The Company is also managing and supervising the design and construction of a $60 million luggage system security expansion project, scheduled to be operationally complete in late 2008.

Minneapolis/St. Paul International Airport has substantially completed a $2.9 billion construction program that began in 1998.  The major components completed include a new north/south runway, an additional 15 mainline jet gates, 30 commuter gates, a 50% increase in vehicle parking and new automated people movers.  Northwest currently has 66 mainline and 35 commuter gates at the airport.  The airport is also considering a three-phase $860 million plan to expand terminal facilities to meet air service demand through the year 2020.

Other Property and Equipment

Northwest’s primary offices are located near the Minneapolis/St. Paul International Airport, including its corporate offices located on a 160-acre site east of the airport.  Owned facilities include reservations centers in Baltimore, Tampa and Chisholm, Minnesota, and a data processing center in Eagan, Minnesota.  The Company also owns property in Tokyo, including a 1.3-acre site in downtown Tokyo and a 33-acre land parcel, 512-room hotel and flight kitchen located near Tokyo’s Narita International Airport.  In addition, the Company leases reservations centers in or near Minneapolis/St. Paul and Seattle.

Item 3.  LEGAL PROCEEDINGS

On September 14, 2005, NWA Corp. and certain of its direct and indirect subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York.  Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed a voluntary petition for relief under Chapter 11.  The Bankruptcy Court is jointly administering these cases under the caption “In re Northwest Airlines Corporation, et al., Case No. 05-17930 (ALG)”.  Each of the Debtors continues to operate its business and manage its property as a debtor-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.  As a result of the current Chapter 11 filings, attempts to collect, secure or enforce remedies with respect to pre-petition claims against the Debtors are subject to the automatic stay provisions of Section 362(a) of the Bankruptcy Code, including the litigation described below.

Chase v. Northwest Airlines and Airline Reporting Corporation (U.S. D.C. Eastern District of Michigan, Civ. Action No. 96-74711).  In October 1996, an antitrust class action, Chase v. Northwest Airlines and Airline Reporting Corporation (the “Chase Action”) was filed against Northwest, among other airlines, in the United States District Court for the Eastern District of Michigan.  The action purported to be brought on behalf of a class defined as all persons who purchased tickets on certain routes into Northwest’s hubs at Detroit, Minneapolis/St. Paul and Memphis from October 11, 1992 to the present.  The complaint alleged that Northwest’s imposition of restrictions prohibiting the sale of “hidden city” tickets constitutes monopolization in violation of the Sherman Act.  The complaint sought injunctive relief, unspecified damages for the class, and costs and attorneys’ fees.  The attorneys for the plaintiff in the Chase Action filed three additional class actions in the same court against other airlines and Northwest with parallel allegations similar to those in Chase, including allegations that the defendant airlines conspired to deter hidden city ticketing.  These cases are: Keystone Business Machines, Inc. v. U.S. Airways and Northwest Airlines (U.S. D.C. Eastern District of Michigan, Civ. Action No. 99-72474), BLT Contracting, Inc. v. U.S. Airways, Northwest Airlines and the Airline Reporting Corporation (U.S. D.C. Eastern District of Michigan, Civ. Action No. 99-72988), and Volk and Nitrogenous Industries Corp. v. U.S. Airways, Northwest Airlines, Delta Air Lines, and the Airline Reporting Corporation (U.S. D.C. Eastern District of Michigan, Civ. Action No. 99-72987).  All three actions were assigned to the judge in the Chase Action.  On August 21, 2006, the plaintiffs voluntarily dismissed the litigation against Northwest and the other defendants and on August 25, 2006, the plaintiffs withdrew their proof of claim.

18




Spirit Airlines v. Northwest Airlines (U.S. D.C. Eastern District of Michigan, Civ. Action No. 00-71535).  In March 2000, Spirit Airlines filed a Sherman Act monopolization complaint against Northwest in the U.S. District Court for the Eastern District of Michigan alleging that Northwest had monopolized, or attempted to monopolize, air transportation service between Detroit and Philadelphia and between Detroit and Boston in 1996 by engaging in predatory pricing and other actions to exclude Spirit from those markets.  Northwest believes the case to be without merit and intends to defend against the claim.  On March 31, 2003, the Court granted Northwest’s motion for summary judgment.  In October 2005, the Bankruptcy Court approved a stipulation to lift the stay for the limited purpose of permitting the Sixth Circuit to issue its opinion.  On November 9, 2005, the Sixth Circuit issued a decision in which it reversed the trial court’s grant of summary judgment in favor of Northwest.  Northwest has filed a petition for en banc reconsideration before the Sixth Circuit.  On April 13, 2006, the Sixth Circuit denied Northwest’s request for en banc review.  On October 2, 2006 the Supreme Court denied Northwest’s petition for certiorari.

Series C Preferred Stock Litigation.  In June 2003, the IBT and certain related parties commenced litigation against Northwest Airlines Corporation in New York state court, International Brotherhood of Teamsters, Local 2000 et al. v. Northwest Airlines Corporation (New York Sup. Ct., Case No. 601742/03).  In August 2003, the IAM and a related party also commenced litigation against Northwest Airlines Corporation in New York state court, International Association of Machinists and Aerospace Workers et al. v. Northwest Airlines Corporation (New York Sup. Ct., Case No. 602476/03)  (together with the IBT’s action, the “Series C Preferred Stock Actions”). Both lawsuits challenged the Company’s decision not to purchase its Series C Preferred Stock and sought to compel the Company to repurchase the Series C Preferred Stock that had been put to the Company.  The Company announced on August 1, 2003, that the Board of Directors had determined that the Company could not legally repurchase the outstanding Series C Preferred Stock at that time because the Board was unable to determine that the Company had adequate surplus to repurchase the outstanding Series C Preferred Stock.  Before discovery was complete, plaintiffs filed motions for summary judgment.  On March 24, 2005, the court ruled that the Company had breached the arrangements related to the Series C Preferred Stock, and indicated that a trial on damages would be necessary.  On August 24, 2005, Northwest and the plaintiffs reached an agreement, among other things, to cancel the trial and to establish the amount of damages owed to employees represented by the plaintiffs should the trial court’s liability determination be upheld (nearly $277 million).  The agreement also established the procedural process for Northwest to appeal the trial court’s liability judgment and to seek a stay of enforcement of the judgment.  The plaintiffs also agreed not to take any action to enforce the judgment unless and until the New York State Appellate Division denies Northwest’s motion to stay enforcement of the judgment.  The Plan as filed provides that the trial court’s liability judgment in respect of this litigation will be treated as an allowed unsecured claim.

In re Northwest Airlines Privacy Litigation  (U.S.D.C. District of Minnesota, Civ. File No. 04-126).  In 2004, several purported class actions were filed, and subsequently consolidated, in federal court in Minnesota alleging violations by Northwest of the Electronic Communications Privacy Act, the Fair Credit Reporting Act and various state laws in connection with the release by Northwest of certain passenger records to the National Aeronautics and Space Administration in late 2001.  Similar purported class actions were filed in federal court in North Dakota, Dyer v. Northwest Airlines Corp. (U.S.D.C. District of North Dakota, Case No. A1-04-033), and in federal court in Tennessee, Copeland v. Northwest Airlines Corp. (U.S.D.C. Western District of Tennessee, Civil File No. 04-CV-2156).  On June 6, 2004, the District Court in the Minnesota action granted Northwest’s motion for summary judgment on all claims and that decision is on appeal before the U.S. Court of Appeals for the Eighth Circuit.  On September 8, 2004, the District Court in the North Dakota action granted Northwest’s motion for summary judgment on all claims and the plaintiffs did not seek appellate review.  On February 28, 2005, the Tennessee District Court dismissed the Tennessee case and plaintiffs did not appeal.

In addition, in the ordinary course of its business, the Company is party to various other legal actions which the Company believes are incidental to the operation of its business.  The Company believes that the outcome of the proceedings to which it is currently a party (including those described above) will not have a material adverse effect on the Company’s consolidated financial statements taken as a whole.

19




Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company’s security holders during the fourth quarter of 2006.

MANAGEMENT

Executive Officers of the Registrant

Douglas M. Steenland, age 55, has served as President and Chief Executive Officer of NWA Corp. and Northwest since October 2004 and was elected a director of both companies in September 2001. He has served in a number of executive positions since joining Northwest in 1991, including President from April 2001 to October 2004, Executive Vice President and Chief Corporate Officer from September 1999 to April 2001, Executive Vice President-Alliances, General Counsel and Secretary from January 1999 to September 1999, Executive Vice President, General Counsel and Secretary from June 1998 to January 1999, and Senior Vice President, General Counsel and Secretary from July 1994 to June 1998. Prior to joining Northwest, Mr. Steenland was a senior partner at the Washington, D.C. law firm of  Verner, Liipfert, Bernhard, McPherson and Hand.

Neal S. Cohen, age 46, has served as Executive Vice President and Chief Financial Officer of the Company since May 2005.  Prior to rejoining the Company, Mr. Cohen served at US Airways as Executive Vice President and Chief Financial Officer from April 2002 to April 2004, and served as Chief Financial Officer for Conseco Finance from April 2001 to March 2002.  Prior to his position at Conseco Finance, Mr. Cohen served as Chief Financial Officer for Sylvan Learning Systems.  From 1991 to 2000, Mr. Cohen held a number of senior marketing and finance positions at Northwest Airlines, including Senior Vice President and Treasurer and Vice President Market Planning.

J. Timothy Griffin, age 55, has served as Executive Vice President-Marketing and Distribution of Northwest since January 1999.  From June 1993 to January 1999, he served as Senior Vice President-Market Planning and Systems.  Prior to joining Northwest in 1993, Mr. Griffin held senior positions with Continental Airlines and American Airlines.

Philip C. Haan, age 51, has served as Executive Vice President-International, Alliances and Information Technology of Northwest since October 2004.  From January 1999 to October 2004, he served as Executive Vice President-International, Sales and Information Services.  Mr. Haan formerly held positions of Senior Vice President-International Services, Vice President-Pricing and Area Marketing, Vice President-Inventory Sales and Systems and Vice President-Revenue Management.  Prior to joining Northwest in 1991 he was with American Airlines for nine years.

Andrew C. Roberts, age 46, has served as Executive Vice President — Operations since November 2004.  He has served in a number of executive positions since joining Northwest in 1997, including Senior Vice President — Technical Operations from August 2001 to November 2004, Vice President — Materials Management from April 1999 to August 2001, and Managing Director — Minneapolis/St. Paul Engine Operations from September 1997 to April 1999.  Prior to joining Northwest, Mr. Roberts held senior positions with Pratt & Whitney and Aviall, Inc.

20




PART II

Item 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common Stock ceased trading on the NASDAQ stock market on September 26, 2005 and now trades in the “over-the-counter” market under the symbol NWACQ.PK.  However, under the Company’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 and Preferred Stock of the Company will be cancelled for no consideration and therefore the Company’s stockholders will no longer have any interest as stockholders in the Company by virtue of their ownership of the Company’s Common or Preferred Stock prior to emergence from bankruptcy.

The table below shows the high and low sales prices for the Company’s Common Stock during 2006 and 2005:

 

2006

 

2005

Quarter

 

High

 

Low

 

High

 

Low

1st

 

0.56

 

0.34

 

11.29

 

6.51

2nd

 

0.65

 

0.44

 

7.18

 

4.20

3rd

 

0.85

 

0.47

 

5.97

 

0.59

4th

 

6.55

 

0.61

 

0.74

 

0.30

As of January 31, 2007, there were 3,276 stockholders of record.

The following table provides information regarding our equity compensation plans as of December 31, 2006. In November 2005 NWA Corp. cancelled all unvested restricted stock and some phantom stock awards outstanding under NWA Corp.’s stock plans. In addition, it is expected that all stock options and remaining awards under such plans will be cancelled upon NWA Corp.’s emergence from Chapter 11 bankruptcy protection.

Equity Compensation Plan Information


Plan category

 


Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)

 


Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

 

Number of securities
 remaining available for
 future issuance under
equity compensation
plans (excluding
securities
reflected in column (a))
(c)

 

Equity compensation plans approved by NWA Corp.’s stockholders (1)

 

2,133,902

 

9.46

 

5,981,154

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by NWA Corp.’s stockholders (2)

 

5,293,673

 

10.83

 

3,761,638

 

 

 

 

 

 

 

 

 

Total

 

7,427,575

 

10.43

 

9,742,792

 


(1)           Includes outstanding stock options granted pursuant to NWA Corp.’s 2001 Stock Incentive Plan.

(2)           Includes outstanding stock options and stock appreciation rights granted pursuant to NWA Corp.’s 1999 Stock Incentive Plan and 1998 Pilots Stock Option Plan.

See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 10—Stock Based Compensation” for additional information regarding NWA Corp.’s equity compensation plans.

The Northwest Airlines Corporation 1999 Stock Incentive Plan (the “1999 Plan”) is a stock-based incentive compensation plan under which NWA Corp. may grant non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, other stock-based awards and performance-based awards to employees of NWA Corp. and its affiliates who are selected to receive an award under the 1999 Plan. The 1999 Plan was adopted by the Board of Directors in 1999 and is administered by the Compensation Committee of the Board.  As amended, a total of 9,000,000 shares of Common Stock were available for grants or awards under the 1999 Plan. Of that amount, approximately 3,761,638 shares remain available for distribution in connection with new awards. Shares issued pursuant to the 1999 Plan must be shares of Common Stock held by NWA Corp. in its treasury. The Committee has sole authority, among other things, to designate participants to receive awards under the 1999 Plan, to determine the type of awards to be granted to participants under the 1999 Plan, to determine the terms and conditions of each award, and to interpret and administer the 1999 Plan.  If an award granted pursuant to the 1999 Plan entitles the participant to receive or purchase shares of Common Stock, the number of shares covered by the award or to which the award relates is deducted on the date of grant of the award from the total number of shares available for grant under the 1999 Plan.  If shares covered by an award are not purchased or are forfeited, or if an award otherwise terminates without delivery of any shares, then such shares will again be available for future distribution under the 1999 Plan.  In the event of certain changes in NWA Corp.’s structure affecting the Common Stock, the Committee may make appropriate adjustments in the number of shares that may be awarded, the number of shares covered by options and other awards then outstanding under the 1999 Plan and, where applicable, the exercise price of outstanding awards under the 1999 Plan. No participant may receive stock options, stock appreciation rights, restricted stock and/or other stock-based awards under the 1999 Plan in any fiscal year for an aggregate of more than 1,000,000 shares and no participant may receive performance-based awards not denominated in shares totaling more than $10 million under the 1999 Plan. The Board of Directors may amend the 1999 Plan, but it may not, without approval of NWA Corp.’s stockholders, (i) increase the maximum number of shares of Common Stock that may be issued under the 1999 Plan or the number of shares of Common Stock that may be issued to any one participant, (ii) extend the term of the 1999 Plan or options or SARs granted under the 1999 Plan, (iii) grant options with an exercise price below the fair market value of the Common Stock on the date of grant, or (iv) take any other action that requires stockholder approval to comply with any tax or regulatory requirement.

      The Northwest Airlines Corporation 1998 Pilots Stock Option Plan (the “Pilots Plan”) was adopted in 1998 pursuant to the collective bargaining agreement entered into between Northwest and ALPA.  Under the terms of the Pilots Plan, in September of 1998, 1999, 2000 and 2001 NWA Corp. awarded four annual non-qualified stock option grants or SARs (the “Original Options”) to eligible pilots covering a total of 2,500,000 shares of NWA Corp.’s Common Stock.  The Original Options had an exercise price equal to the fair market value of the Common Stock on the applicable grant date, became exercisable on the first business day following the applicable grant date, and have a term of ten years.  In June 2003, pursuant to an agreement between Northwest and ALPA and an amendment to the Pilots Plan, NWA Corp. offered all participants holding outstanding unexercised options or SARs under the Pilots Plan the opportunity to exchange all of their outstanding options and SARs for a designated number of replacement options or SARs (as applicable) (the “Replacement Options”).  For every two shares subject to option or a SAR surrendered by a participant, one share subject to a Replacement Option was granted to the participant.  The Replacement Options were granted subject to a new vesting schedule under which the Replacement Options became exercisable over four years in equal annual installments of 25 percent each.  The Replacement Options had an exercise price equal to the fair market value of the Common Stock on the grant date and a term of ten years.  As a result of NWA Corp.’s exchange offer, Original Options covering a total of 1,849,753 shares of Common Stock were surrendered to NWA Corp. and Replacement Options covering a total of 926,080 shares of Common Stock were granted to participants.  No additional awards may be granted under the Pilots Plan following consummation of NWA Corp.’s exchange offer.

21




The following graph compares the cumulative total stockholder return on NWA Corp.’s Common Stock for the last five fiscal years with the cumulative total return for the same period of the Standard & Poor’s 500 Stock Index and the AMEX Airline Index.  The graph assumes the investment of $100 on December 31, 2001 and reinvestment of all dividends.

Performance Graph

 

 

 

12/31/01

 

12/31/02

 

12/31/03

 

12/31/04

 

12/31/05

 

12/31/06

 

Northwest Airlines Corporation

 

$

100

 

$

47

 

$

81

 

$

70

 

$

3

 

$

26

 

S&P 500

 

$

100

 

78

 

100

 

111

 

117

 

135

 

AMEX Airline Index (1)

 

$

100

 

44

 

70

 

68

 

62

 

66

 


(1)        As of December 31, 2006, the AMEX Airline Index consisted of AirTran Holdings Inc., Alaska Air Group Inc., AMR Corporation, Continental Airlines, Inc., ExpressJet Holdings Inc., Frontier Airlines Holdings, Inc., JetBlue Airways Corporation, Mesa Air Group Inc., SkyWest Inc., Southwest Airlines Co, and UAL Corporation.

22




 

Item 6.  SELECTED FINANCIAL DATA

NORTHWEST AIRLINES CORPORATION

(DEBTOR-IN-POSSESSION)

 

 

 

Year Ended December 31

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Statements of Operationa (In millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

Passenger

 

$

9,230

 

$

8,902

 

$

8,432

 

$

7,632

 

$

7,823

 

Regional carrier

 

1,399

 

1,335

 

1,083

 

860

 

689

 

Cargo

 

946

 

947

 

830

 

752

 

735

 

Other

 

993

 

1,102

 

934

 

833

 

729

 

 

 

12,568

 

12,286

 

11,279

 

10,077

 

9,976

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

11,828

 

13,205

 

11,784

 

10,342

 

10,822

 

Operating income (loss)

 

740

 

(919

)

(505

)

(265

)

(846

)

 

 

 

 

 

 

 

 

 

 

 

 

Operating margin

 

5.9

%

(7.5

)%

(4.5

)%

(2.6

)%

(8.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) before cumulative effect of accounting change

 

(2,835

)

(2,464

)

(862

)

248

 

(798

)

Cumulative effect of accounting change

 

 

(69

)

 

 

 

Net income (loss)

 

$

(2,835

)

$

(2,533

)

$

(862

)

$

248

 

$

(798

)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(32.48

)

$

(29.36

)

$

(10.32

)

$

2.75

 

$

(9.32

)

Diluted

 

$

(32.48

)

$

(29.36

)

$

(10.32

)

$

2.62

 

$

(9.32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheets (In millions)

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and unrestricted short-term investments

 

$

2,058

 

$

1,262

 

$

2,459

 

$

2,757

 

$

2,097

 

Total assets

 

13,215

 

13,083

 

14,042

 

14,008

 

13,184

 

Long-term debt, including current maturities

 

4,112

 

1,159

 

8,411

 

7,866

 

6,531

 

Long-term obligations under capital leases, including current obligations

 

 

11

 

361

 

419

 

451

 

Long-term pension and postretirement health care benefits

 

86

 

126

 

3,593

 

3,228

 

3,050

 

Liabilities subject to compromise

 

13,572

 

14,328

 

 

 

 

Mandatorily redeemable security

 

 

 

 

 

553

 

Preferred redeemable stock subject to compromise

 

277

 

280

 

263

 

236

 

226

 

Common stockholders’ equity (deficit)

 

(7,991

)

(5,628

)

(3,087

)

(2,011

)

(2,262

)

 

“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Consolidated Financial Statements and Supplementary Data” are integral to understanding the selected financial data presented in the table above.

23




 

NORTHWEST AIRLINES CORPORATION

(DEBTOR-IN-POSSESSION)

 

 

Year Ended December 31

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Operating Statistics

 

 

 

 

 

 

 

 

 

 

 

Scheduled service - Consolidated: (1)

 

 

 

 

 

 

 

 

 

 

 

Available seat miles (ASM) (millions)

 

92,944

 

100,461

 

98,591

 

94,211

 

97,378

 

Revenue passenger miles (RPM) (millions)

 

78,044

 

81,914

 

78,130

 

72,032

 

74,724

 

Passenger load factor

 

84.0

%

81.5

%

79.2

%

76.5

%

76.7

%

Revenue passengers (millions)

 

67.6

 

70.3

 

67.2

 

62.1

 

61.2

 

Passenger revenue per RPM (yield)

 

13.62

¢

12.50

¢

12.18

¢

11.79

¢

11.39

¢

Passenger revenue per scheduled ASM (RASM)

 

11.44

¢

10.19

¢

9.65

¢

9.01

¢

8.74

¢

 

 

 

 

 

 

 

 

 

 

 

 

Scheduled service - Mainline: (2)

 

 

 

 

 

 

 

 

 

 

 

Available seat miles (ASM) (millions)

 

85,603

 

91,775

 

91,378

 

88,593

 

93,417

 

Revenue passenger miles (RPM) (millions)

 

72,606

 

75,820

 

73,312

 

68,476

 

72,027

 

Passenger load factor

 

84.8

%

82.6

%

80.2

%

77.3

%

77.1

%

Revenue passengers (millions)

 

54.8

 

56.5

 

55.4

 

51.9

 

52.7

 

Passenger revenue per RPM (yield)

 

12.71

¢

11.74

¢

11.50

¢

11.15

¢

10.86

¢

Passenger revenue per scheduled ASM (RASM)

 

10.78

¢

9.70

¢

9.23

¢

8.61

¢

8.37

¢

 

 

 

 

 

 

 

 

 

 

 

 

Total available seat miles (ASM) (millions)

 

85,738

 

91,937

 

91,531

 

89,158

 

93,583

 

 

 

 

 

 

 

 

 

 

 

 

 

Passenger Service operating expense per total ASM (3)(4)(5)

 

10.95

¢

11.53

¢

10.62

¢

9.87

¢

9.96

¢

Aircraft impairment, curtailment charge, severance expense and other per total ASM (5)

 

0.03

¢

0.14

¢

0.31

¢

0.11

¢

0.46

¢

Mainline fuel expense per ASM

 

3.43

¢

2.99

¢

2.14

¢

1.53

¢

1.38

¢

 

 

 

 

 

 

 

 

 

 

 

 

Cargo ton miles (millions)

 

2,269

 

2,397

 

2,338

 

2,184

 

2,221

 

Cargo revenue per ton mile

 

41.71

¢

39.51

¢

35.48

¢

34.42

¢

33.08

¢

 

 

 

 

 

 

 

 

 

 

 

 

Fuel gallons consumed (millions)

 

1,593

 

1,745

 

1,766

 

1,752

 

1,896

 

Average fuel cost per gallon, excluding taxes

 

202.47

¢

170.73

¢

118.17

¢

80.68

¢

69.33

¢

Number of operating aircraft at year end

 

371

 

379

 

435

 

430

 

439

 

Full-time equivalent employees at year end

 

30,484

 

32,460

 

39,342

 

39,100

 

44,323

 


(1)    Consolidated statistics include Northwest Airlink regional carriers.

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

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

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

 

(In millions)

 

2006

 

2005

 

2004

 

2003

 

2002

 

747 Freighter operations

 

$

804

 

$

791

 

$

608

 

$

497

 

$

486

 

MLT Inc. - net of intercompany eliminations

 

193

 

193

 

192

 

197

 

260

 

Regional carriers

 

1,406

 

1,576

 

1,210

 

567

 

487

 

Pinnacle Airlines, Inc. - net ofintercompany eliminations (a)

 

 

 

 

255

 

230

 

Other

 

43

 

43

 

56

 

26

 

35

 


(a)        Pinnacle Airlines’ results were consolidated with the Company’s financial statements prior to the initial public offering of Pinnacle Airlines Corp. on November 24, 2003.

 

(5)    Passenger service operating expense per ASM includes the following items:

 

(In millions)

 

2006

 

2005

 

2004

 

2003

 

2002

 

Aircraft and aircraft related write-downs

 

$

 

$

48

 

$

203

 

$

21

 

$

366

 

Curtailment charges

 

 

82

 

 

58

 

16

 

Severance expenses

 

23

 

 

 

20

 

17

 

Other

 

 

 

77

 

 

36

 

 

“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Consolidated Financial Statements and Supplementary Data” are integral to understanding the selected financial data presented in the table above.

24




Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

NWA Corp. is a holding company whose principal indirect operating subsidiary is Northwest.  The Consolidated Financial Statements include the accounts of NWA Corp. and all consolidated subsidiaries.  Substantially all of the Company’s results of operations are attributable to its principal indirect operating subsidiary, Northwest, which accounted for approximately 98% of the Company’s 2006 consolidated operating revenues and expenses.  The Company’s results of operations also include other subsidiaries of which MLT is the most significant.  The following discussion pertains primarily to Northwest and, where indicated, MLT.

The Company reported a net loss applicable to common stockholders of $2.8 billion for the year ended December 31, 2006, compared to a net loss applicable to common stockholders of $2.6 billion in 2005.  The basic and diluted loss per common share was $32.48 in 2006, compared with the basic and diluted loss per common share of $29.36 in 2005.  In 2006, the Company reported operating income of $740 million, compared with an operating loss of $919 million in 2005.

Operating revenues for the full year 2006 increased 2.3 percent versus 2005.  System passenger revenue increased 3.7 percent to more than $9.2 billion on 6.7 percent fewer mainline available seat miles (“ASMs”), resulting in an 11.1 percent improvement in unit revenue.  Regional carrier revenues increased 4.8 percent on 15.5 percent fewer ASMs, resulting in a 24.0 percent improvement in unit revenue.

Operating expenses decreased 10.4 percent year-over-year to $11.8 billion, resulting in a 10.8 percent decrease in mainline unit costs, excluding fuel and unusual items.  Salaries, wages and benefits decreased 28.5 percent, primarily due to consensually agreed upon CBAs, wage reductions imposed under Section 1113, mechanic pay and headcount reductions, the reduced level of flying, and the freezing of the pension plans.  Aircraft rentals decreased 47.3 percent primarily due to restructured and rejected aircraft leases.

Full year 2006 results included $3.2 billion of net unusual and reorganization related losses.  Operating expenses included $23 million in severance charges related to the Company’s ratified contract agreement with AMFA.  Reorganization expenses recorded during 2006 totaled $3.2 billion.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 5 — Reorganization Related Items” for further information related to the Company’s reorganization items.

Full year 2005 results included $1.20 billion of net unusual and reorganization related losses.  Operating expenses included $130 million of unusual items related to pension curtailment charges and aircraft and aircraft related write-downs.  Unusual non-operating items consisted of an $18 million loss on the sale of the Company’s Pinnacle Airlines note to Pinnacle Airlines Corp. and a gain of $102 million from the sale of the Prudential Financial Inc. Common Stock received in conjunction with Prudential’s demutualization.  Reorganization expenses recorded during 2005 totaled $1.08 billion.  The Company also recorded a cumulative effect of accounting change in the amount of $69 million during 2005.

Full year 2004 results included $165 million of net unusual charges, principally comprised of $104 million attributable to write-downs associated with a revised Boeing 747-200 aircraft fleet plan, write-downs of $99 million related to certain DC9-10 and DC10-30 aircraft and a $77 million charge resulting from an increase in frequent flyer liability, partially offset by a $115 million gain from the sale of the Company’s investment in Orbitz.

Chapter 11 Proceedings

Background and General Bankruptcy Matters.  On September 14, 2005, NWA Corp. and 12 of its direct and indirect subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York.  Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed a voluntary petition for relief under Chapter 11.  The Bankruptcy Court is jointly administering these cases under the caption “In re Northwest Airlines Corporation, et al., Case No. 05-17930 (ALG)”.  The consolidated financial statements shown herein include certain subsidiaries that did not file to reorganize under Chapter 11.  The assets and liabilities of these subsidiaries are not considered material to the consolidated financial statements.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 1 — Voluntary Reorganization Under Chapter 11” for additional information related to the Company’s rights, risks and obligations under the Chapter 11 filing.

Due to our Chapter 11 proceedings, the realization of assets and the satisfaction of liabilities, without substantial adjustments and/or changes in ownership, are subject to uncertainty, and accordingly, there is substantial doubt about the current financial reporting entity’s ability to continue as a going concern.  Upon emergence from bankruptcy, we expect to adopt fresh start reporting in accordance with SOP 90-7 which will result in our becoming a new entity for financial

25




reporting purposes.  The adoption of fresh start reporting will have a material impact on the consolidated financial statements of the new financial reporting entity.

Plan of Reorganization.  On January 12, 2007, NWA Corp. and thirteen of its direct and indirect subsidiaries, including Northwest, filed with the Bankruptcy Court the Debtors’ Joint and Consolidated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code.  On January 12, 2007, the Bankruptcy Court granted the Company an extension until February 15, 2007 to file the related Disclosure Statement with respect to Debtors’ Joint and Consolidated Plan of Reorganization under Chapter 11 of the Bankruptcy Code (“Disclosure Statement”).  Subsequently, on February 15, 2007, the Company filed its Disclosure Statement and the First Amended Joint and Consolidated Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Plan” or “Plan of Reorganization”).  Copies of the Plan and the Disclosure Statement were attached as Exhibits 99.2 and 99.3, respectively, to our Current Report on Form 8-K dated February 16, 2007.

On March 2, 2007, the Company filed a motion with the Bankruptcy Court, requesting that its exclusivity period for filing a reorganization plan be extended to June 29, 2007.  During the exclusivity period, which is currently set to expire March 16, 2007, only the Company can propose a reorganization plan.

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

A hearing on the adequacy of information in the Disclosure Statement is scheduled for March 26, 2007.  After approval by the Bankruptcy Court, the Company will distribute the Plan and Disclosure Statement to its creditors and begin a period of solicitation of creditors for acceptance of the Plan.  The Disclosure Statement contains detailed information about the Plan, the Bankruptcy Court’s order approving the Disclosure Statement, notice of the time for filing acceptance or rejection of the Plan and timing of the hearing to consider confirmation of the Plan, the rights offering, financial projections and financial estimates regarding the Debtors’ reorganized business enterprise value. The information contained in the Disclosure Statement is subject to change, whether as a result of amendments to the Plan, actions of third parties or otherwise.

Nothing contained in this Form 10-K is intended to be, nor should it be construed as, a solicitation for a vote on the Plan. The Plan will become effective only if it receives the requisite approval and is confirmed by the Bankruptcy Court, which the Company currently expects to occur during the second quarter of 2007.  However, there can be no assurance that the Bankruptcy Court will confirm the Plan or that the Plan will be implemented successfully.

Request for Equity Committee.  On or about November 22, 2006, certain equity holders of the Debtors requested, by letter, that the United States Trustee appoint a committee of equity security holders.  By letters dated December 26, 2006, the United States Trustee denied this request.  On January 11, 2007, an ad hoc committee of equity security holders filed a motion in the Bankruptcy Court seeking to compel the United States Trustee to appoint an equity committee.  On February 28, 2007, the equity holders withdrew their request to appoint an equity committee.  Subsequently, they have sought the appointment of an examiner to investigate the Company’s plans regarding industry consolidation.  The Debtors do not believe this request is appropriate and will oppose it in the Bankruptcy Court.

Restructuring Goals.  The Company identified three major elements essential to transforming its business and has substantially completed the actions necessary to achieve its targeted business improvements.  The three major elements included:

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

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

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

The Company used the provisions of Chapter 11 and other changes implemented in its business to achieve its targeted restructuring improvements.  Outlined below is an overview of significant transactions related to labor and non-labor cost restructuring, fleet optimization, and the Company’s balance sheet restructuring efforts.

Labor Cost Restructuring.  The Company has ratified CBAs or implemented contractual terms and conditions which collectively provide for approximately $1.4 billion in annual labor cost savings.  The Company has reached consensual agreement on CBAs with ALPA, the IAM, ATSA, TWU, and NAMA.  The agreements with ALPA, the IAM, ATSA, TWU, and NAMA were implemented on or before August 1, 2006.  Two rounds of salaried and management employee pay and

26




benefit cuts have also been achieved and implemented.   In addition, the Company imposed contract terms on its technicians represented by AMFA in August 2005 and, under Section 1113(c) of the Bankruptcy Code, imposed contract terms on its flight attendants represented by the AFA-CWA on July 31, 2006.  On November 6, 2006, the Company reached a ratified agreement with AMFA to end the labor dispute with the airline’s technicians.  The agreement maintains the necessary annual labor cost savings from AMFA-represented employees.

Section 1113(c) of the Bankruptcy Code permits a debtor to move to reject its CBAs if the debtor first satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court’s approval of the rejection or the expiration of the statutorily prescribed time period.  After bargaining in good faith and sharing relevant information with its unions, a debtor must make proposals to modify its existing CBAs based on the most complete and reliable information available at the time.  The proposed modifications must be necessary to permit the reorganization of a debtor and must provide that all the affected parties are treated fairly and equitably.  Ultimately, rejection of the CBAs is appropriate if the unions refuse to agree to a debtor’s necessary proposal “without good cause” and the Bankruptcy Court determines that the balance of the equities favors rejection.   In October 2005, the Company commenced Section 1113(c) proceedings with ALPA, the IAM and the Professional Flight Attendants Association (“PFAA”) and has subsequently reached consensual agreement with ALPA and the IAM.

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

Following the Bankruptcy Court’s June 29, 2006 ruling, the Company and the PFAA commenced negotiations to reach a new agreement.  On July 6, 2006, the Company’s flight attendants voted to change their union representation from the PFAA to the AFA-CWA.  Subsequently, the Company and the AFA-CWA continued negotiations to reach a new agreement, and on July 17, 2006, the parties announced that they reached a new tentative agreement (the “July TA”).  On July 31, 2006, the AFA-CWA announced that its members failed to approve the July TA.  As a result of the flight attendants’ failure to ratify the July TA, and in accordance with the Bankruptcy Court’s previous authorization, effective July 31, 2006 the Company implemented new contract terms and conditions for its flight attendants, consistent with the terms and conditions of the March TA.

On July 31, 2006, following the flight attendants’ failure to ratify a second proposed CBA and the Company’s subsequent imposition of new contract terms for the flight attendants, the AFA-CWA provided the Company with a 15-day notice of its intent to strike or engage in other work actions, including CHAOS (Create Havoc Around Our System).  In response, on August 1, 2006, the Company filed a motion with the Bankruptcy Court seeking to obtain an injunction against such activities.  The AFA-CWA subsequently extended the strike deadline by 10 days to August 25, 2006, in response to terrorist threats against air travel to and within the United States.  On August 17, 2006, the Bankruptcy Court denied the Company’s request for an injunction.  On August 18, 2006, the Company filed an appeal of the Bankruptcy Court’s decision with the United States District Court for 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 temporarily prevented any work action by the AFA-CWA while the court considered the Company’s appeal.  The U.S. District Court reversed the Bankruptcy Court’s decision on September 15, 2006, and granted the Company’s request for a preliminary injunction to prevent a threatened strike or work action by the AFA-CWA.  Subsequently, the AFA-CWA appealed the U.S. District Court’s ruling to the U.S. Second Circuit Court of Appeals.  Arguments related to this matter were heard on November 28, 2006 and the appeal is pending.  In addition, the Company is currently in mediated negotiations with the AFA-CWA and representatives of the National Mediation Board (“NMB”).  The AFA-CWA has requested that it be released from further negotiations by the NMB; to date the NMB has not granted this request.   A strike or other form of self-help could have a material adverse effect on the Company.  In addition, if the Company does not achieve the targeted level of savings under a flight attendant agreement, the amount of labor savings achieved through its other ratified CBAs would be subject to reduction.

On February 12, 2007, the AFA-CWA filed a motion with the Bankruptcy Court seeking reconsideration of the Bankruptcy Court’s decision to grant the Debtors’ Section 1113(c) motion to reject the Debtors’ CBA with the flight attendants. The Debtors believe the motion is without merit and will oppose the AFA-CWA’s motion in the Bankruptcy Court.

The Company has also commenced proceedings under Section 1114 of the Bankruptcy Code, pursuant to which the Company is seeking reductions in the costs it incurs to provide medical benefits to retirees.  Negotiations with the committee formed to represent the Company’s retirees are ongoing.

27




Non-labor Cost Restructuring.  The Company continues to pursue reductions in non-labor costs consistent with its current target of $350 million in annual savings.  The Company expects to realize such savings through restructured agreements with our regional airline affiliates, reduction in properties and facilities costs, reduced fuel burn, lower distribution, insurance and interest costs and optimization of other contractual relationships.  The Company estimates it has realized approximately $100 million of the targeted savings in 2006, with the majority of the remaining savings expected to be realized in 2007.

Fleet Optimization.  The Company right-sized and re-optimized its fleet and network by reducing system-wide capacity by 9.2 percent during the first year in bankruptcy.  For the full year 2006, the Company reduced its system-wide consolidated available seat miles by 7.5 percent.  The Company also reached new agreements and affirmed existing  arrangements on new aircraft as part of its fleet optimization.  The Company affirmed its deliveries of Airbus A330 aircraft and now has one of the youngest transatlantic fleets in the industry.  The Company also affirmed its position as the North American service launch airline of the new Boeing 787 with deliveries beginning in August 2008, and ordered 72 76-seat regional jets that will be introduced in 2007.  The dual class regional jets are optimally sized for many domestic markets and will give the Company potential growth opportunities over time.  In addition, the Company accelerated the retirement of the DC10 and Boeing 747-200 wide-body aircraft as well as the Avro RJ85 fleet.

Balance Sheet Restructuring.  Under its Plan, the Company will reduce its total pre-petition debt by approximately $4.2 billion through the elimination of unsecured debt and restructuring of aircraft and other secured obligations.  Additionally, the Company refinanced its Bank Term Loan with the DIP/Exit financing facility, providing a significant interest expense savings.  The aircraft restructurings will result in an estimated $400 million reduction in ownership costs including interest, rent and depreciation expense. The elimination of the unsecured debt will drive an additional interest expense reduction of approximately $150 million annually.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 6 — Liabilities Subject to Compromise” for additional information.

Results of Operations—2006 Compared to 2005

Operating Revenues.  Operating revenues increased 2.3% ($282 million), the result of higher system passenger and regional carrier revenue.

System passenger revenues increased 3.7% ($328 million).  The increase in system passenger revenues was primarily attributable to an 8.3% increase in yield and a 6.7% reduction in capacity.  The following analysis by region is based on information reported to the DOT and excludes regional carriers:

 

 

 

System

 

Domestic

 

Pacific

 

Atlantic

 

2006

 

 

 

 

 

 

 

 

 

Passenger revenues (in millions)

 

$

9,230

 

$

5,990

 

$

2,065

 

$

1,175

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) from 2005:

 

 

 

 

 

 

 

 

 

Passenger revenues (in millions)

 

328

 

216

 

78

 

34

 

Percent

 

3.7

%

3.8

%

3.9

%

3.0

%

 

 

 

 

 

 

 

 

 

 

Scheduled service ASMs (capacity)

 

(6.7

)%

(7.9

)%

(3.8

)%

(7.0

)%

Scheduled service RPMs (traffic)

 

(4.2

)%

(4.3

)%

(3.3

)%

(5.5

)%

Passenger load factor

 

2.2

pts.

3.1

pts.

0.4

pts.

1.5

pts.

Yield

 

8.3

%

8.4

%

7.4

%

8.9

%

Passenger RASM

 

11.1

%

12.6

%

7.9

%

10.7

%

 

As indicated in the above table:

·                  Domestic passenger revenues increased primarily due to improved yield on reduced capacity.  The year-over-year decrease in capacity was driven by capacity reductions in the first, second and third quarters of 2006.

·                  Pacific passenger revenues increased as a result of higher yield on reduced capacity.

·                  Atlantic passenger revenues increased as a result of higher yield on reduced capacity.

Regional carrier revenues increased 4.8% ($64 million) to $1.4 billion, primarily due to improved yield on a 15.5% capacity reduction.

Cargo revenues decreased 0.1% ($1 million) to $946 million due to a 5.3% reduction in cargo ton miles, partially offset by a 5.6% improvement in yield.  Cargo revenues consisted of freight and mail carried on passenger aircraft and the Company’s dedicated fleet of Boeing 747-200 freighter aircraft.

28




Other revenues, the principal components of which are MLT, other transportation fees, partner revenues, charter and rental revenues, decreased 9.9% ($109 million).  The year-over-year decrease was due primarily to a reduction in KLM related revenue.

Operating Expenses.  Operating expenses decreased 10.4% ($1.4 billion) for 2006.  The following table and notes present operating expenses for the years ended December 31, 2006 and 2005 and describe significant year-over-year variances (in millions):

 

 

Year Ended

 

Increase

 

 

 

 

 

 

 

December 31

 

(Decrease)

 

Percent

 

 

 

 

 

2006

 

2005

 

from 2005

 

Change

 

Note

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Aircraft fuel and taxes

 

$

3,386

 

$

3,132

 

$

254

 

8.1

%

A

 

Salaries, wages and benefits

 

2,662

 

3,721

 

(1,059

)

(28.5

)

B

 

Aircraft maintenance materials and repairs

 

796

 

703

 

93

 

13.2

 

C

 

Selling and marketing

 

759

 

811

 

(52

)

(6.4

)

D

 

Other rentals and landing fees

 

562

 

627

 

(65

)

(10.4

)

E

 

Depreciation and amortization

 

519

 

552

 

(33

)

(6.0

)

F

 

Aircraft rentals

 

226

 

429

 

(203

)

(47.3

)

G

 

Regional carrier expenses

 

1,406

 

1,576

 

(170

)

(10.8

)

H

 

Other

 

1,512

 

1,654

 

(142

)

(8.6

)

I

 

Total operating expenses

 

$

11,828

 

$

13,205

 

$

(1,377

)

(10.4

)%

 

 


A.           Aircraft fuel and taxes were driven by higher fuel prices, partially offset by a reduction in total gallons consumed due to capacity reductions.  The average fuel price per gallon increased 18.6% to $2.02, while total gallons consumed decreased 8.7%.  During 2006, we recognized $39.3 million of fuel derivative net losses as additional fuel expense, including $2.7 million of unrealized losses related to fuel derivative contracts that will settle in 2007.  During 2005, we recognized $20.9 million of fuel derivative net gains as a reduction to fuel expense.

B.             Salaries, wages and benefits decreased primarily due to consensually agreed upon CBAs, wage reductions imposed under Section 1113, reduced mechanic pay and headcount, the reduced level of flying, the freezing of the pension plans, and curtailment charges recorded as pension expense in 2005.  Pension curtailment charges in 2006 were recorded as reorganization expense and not included in operating expense.

C.             The increase in aircraft maintenance materials and repairs expense was largely due to the shift to third party maintenance vendors versus internally completed maintenance work.

D.          Selling and marketing expense decreases were primarily due to a decline in enplanements, a shift in the volume of bookings made by travel agents through computer reservation systems (“CRS”) to nwa.com, and lower booking fee rates.

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

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

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

H.            The decrease in regional carrier expenses was due primarily to the reduction in regional carrier capacity which drove decreases in payments to regional carriers and fuel requirements of $147 million and $23 million, respectively.

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

Other Income and Expense.  Non-operating expense increased $2.1 billion primarily due to reorganization expenses.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 5 — Reorganization Related Items” for additional information related to the Company’s reorganization items.

29




Tax Expense (Benefit).  Given recent loss experience, the Company provides a valuation allowance against tax benefits, principally for net operating losses in excess of its deferred tax liability.  It is more likely than not that future deferred tax assets will require a valuation allowance to be recorded to fully reserve against the uncertainty that those assets would be realized.  In 2006, the Company decreased its income tax reserves by $37 million to reflect the current status of the Company’s federal income tax appeal for the tax years 1996-2002.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 12 — Income Taxes” for additional discussion of the Company’s tax accounts.

Results of Operations—2005 Compared to 2004

Operating Revenues.  Operating revenues increased 8.9% ($1.0 billion), the result of higher system passenger, regional carrier, cargo and other revenue.

System passenger revenues increased 5.6% ($470 million).  The increase in system passenger revenues was primarily attributable to a 3.4% increase in traffic and a 2.1% increase in yield.  The following analysis by region is based on information reported to the DOT and excludes regional carriers:

 

 

 

System

 

Domestic

 

Pacific

 

Atlantic

 

2005

 

 

 

 

 

 

 

 

 

Passenger revenues (in millions)

 

$

8,902

 

$

5,774

 

$

1,987

 

$

1,141

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) from 2004:

 

 

 

 

 

 

 

 

 

Passenger revenues (in millions)

 

470

 

108

 

210

 

152

 

Percent

 

5.6

%

1.9

%

11.8

%

15.4

%

 

 

 

 

 

 

 

 

 

 

Scheduled service ASMs (capacity)

 

0.4

%

(1.7

)%

2.2

%

6.7

%

Scheduled service RPMs (traffic)

 

3.4

%

2.6

%

2.7

%

8.4

%

Passenger load factor

 

2.4

pts.

3.3

pts.

0.4

pts.

1.3

pts.

Yield

 

2.1

%

(0.6

)%

8.9

%

6.4

%

Passenger RASM

 

5.1

%

3.7

%

9.5

%

8.0

%

 

As indicated in the above table:

 

·                  Domestic passenger revenues increased primarily due to improved traffic.  Year-over-year decrease in capacity was driven by a 9.2% capacity reduction in the fourth quarter of 2005.

·                  Pacific passenger revenues increased as a result of stronger traffic and substantially improved yield.

·                  Atlantic passenger revenues increased significantly primarily due to improved traffic and yield.

Regional carrier revenues increased 23.3% ($252 million) to $1.3 billion, due primarily to the increased capacity from Bombardier CRJ aircraft deliveries.

Cargo revenues increased 14.1% ($117 million) to $947 million due to a 2.5% increase in cargo ton miles and an 11.4% increase in yield.  Cargo revenues consisted of freight and mail carried on passenger aircraft and the Company’s dedicated fleet of Boeing 747-200 freighter aircraft.

Other revenues, the principal components of which are MLT, other transportation fees, partner revenues, charter and rental revenues, increased 18.0% ($168 million).  This increase was primarily due to the higher rental revenue and other transportation related revenues.

30




Operating Expenses.  Operating expenses increased 12.1% ($1.4 billion) for 2005.  The following table and notes present operating expenses for the years ended December 31, 2005 and 2004 and describe significant year-over-year variances (in millions):

 

 

Year Ended

 

Increase

 

 

 

 

 

 

 

December 31

 

(Decrease)

 

Percent

 

 

 

 

 

2005

 

2004

 

from 2004

 

Change

 

Note

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Aircraft fuel and taxes

 

$

3,132

 

$

2,203

 

$

929

 

42.2

%

A

 

Salaries, wages and benefits

 

3,721

 

3,796

 

(75

)

(2.0

)

B

 

Aircraft maintenance materials and repairs

 

703

 

463

 

240

 

51.8

 

C

 

Selling and marketing

 

811

 

847

 

(36

)

(4.3

)

D

 

Other rentals and landing fees

 

627

 

596

 

31

 

5.2

 

E

 

Depreciation and amortization

 

552

 

731

 

(179

)

(24.5

)

F

 

Aircraft rentals

 

429

 

446

 

(17

)

(3.8

)

G

 

Regional carrier expenses

 

1,576

 

1,210

 

366

 

30.2

 

H

 

Other

 

1,654

 

1,492

 

162

 

10.9

 

I

 

Total operating expenses

 

$

13,205

 

$

11,784

 

$

1,421

 

12.1

%

 

 


A.           Aircraft fuel and taxes were higher due to a 44.5% increase in the average fuel cost per gallon to $1.71, net of hedging transactions.  Fuel hedge transactions reduced fuel costs by $21 million in 2005 and $29 million in 2004.

B.             Salaries, wages and benefits decreased primarily due to pilot and management wage reductions implemented in December 2004, reduced AMFA mechanic pay and headcount, and interim wage reductions, partially offset by higher pension related expense including an $82 million pension curtailment.

C.             The increase in aircraft maintenance materials and repairs expense was largely due to the shift to third party maintenance vendors versus internally completed maintenance work and higher maintenance volume compared to 2004.

D.          Selling and marketing expenses decreased, primarily due to the one-time $77 million frequent flyer liability adjustment recorded in 2004, partially offset by transaction costs on year-over-year higher revenue.

E.              Other rentals and landing fees increased due to higher rates and increased capacity.

F.              Depreciation and amortization expense decreased in 2005, primarily due to the level of aircraft impairments recorded in 2004 versus 2005.  In 2005 the Company recorded $8 million in impairments associated with certain DC10-30 and DC9-30 aircraft; in 2004, the Company recorded $203 million in write-downs on certain Boeing 747-200, DC10-30 and DC9-10 aircraft.  Additional aircraft impairments in 2005 were recorded as reorganization items.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 5 — Reorganization Related Items.”

G.             Aircraft rentals expense decreased due to the purchase of four aircraft off lease in 2004 and the rejection of aircraft leases in 2005.

H.            The increase in regional carrier expenses was primarily driven by the increase in fuel costs ($181 million) and the increase in regional carrier capacity ($185 million).

I.                 Other expenses (which include MLT operating expenses, outside services, insurance, passenger food, personnel expenses, communication expenses and supplies) increased principally due to mechanic strike contingency planning related expenses, vendor training and transition related expense, and leased freighter flying.

Other Income and Expense.  Non-operating expense increased 332% ($1.18 billion) primarily due to reorganization expenses that totaled $1.08 billion.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 5 —  Reorganization Related Items” for additional information related to the Company’s reorganization items.

Tax Expense (Benefit).  Given recent loss experience, the Company provides a valuation allowance against tax benefits, principally for net operating losses in excess of its deferred tax liability. It is more likely than not that future deferred tax assets will require a valuation allowance to be recorded to fully reserve against the uncertainty that those assets would be realized.   See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 12 - Income Taxes” for additional discussion of the Company’s tax accounts.

 

31




Liquidity and Capital Resources

As of December 31, 2006, the Company’s total liquidity, consisting of unrestricted balance sheet cash, cash equivalents and short-term investments, was $2.06 billion.  This amount excludes $424 million of restricted short-term investments (which may include amounts held as cash).  Liquidity increased by $0.8 billion during the year ended December 31, 2006.

Significant Liquidity Events

In December 2006, Northwest issued $778.8 million of secured debt on a subordinated superpriority basis, arranged by Citigroup Global Markets Inc. (the “A330 Financing”).  Proceeds of the debt were used to finance and refinance 11 Airbus A330, one A319, and one A320 aircraft.  The new loans will provide savings to the Company over the existing loans and financing commitments that the new loans replaced.  The new post-petition credit facility will continue beyond the Company’s emergence from bankruptcy provided certain conditions are satisfied.

In August 2006, the Company entered into a $1.225 billion Super Priority Debtor in Possession and Exit Credit and Guarantee Agreement (the “DIP/Exit Facility”) with a number of banks and institutions.  Under this agreement, Northwest is the borrower and NWA Corp., Northwest Airlines Holdings Corporation and NWA Inc. are the guarantors.  Proceeds from the financing were used to pay off the previously existing $975 million term loan with accrued interest, to pay underwriting fees and expenses for the new financing, and to set aside $59.8 million in reserve to settle disputed claims related to potential default interest and prepayment penalties asserted by the administrative agent under the previous credit agreement.  In October 2006, the Company and the administrative agent under the previous credit agreement reached an agreement as to the settlement amount to be paid by the Company.  This settlement amount was approved by the Bankruptcy Court, and paid by the Company, in November 2006.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 7 — Long-Term Debt and Short-Term Borrowings” for additional information.

In March 2006, Northwest repurchased $100 million of EETC notes related to six of the Company’s B757-200 aircraft.  The redemption of the notes represented a 42% discount off the outstanding balance of the notes, and as a result of the redemption, the Company now owns the six B757-200 aircraft free of any liens.

Cash Flow Activities

Operating Activities.  Net cash provided by operating activities for the year ended December 31, 2006 totaled $1.2 billion, a $1.7 billion increase from the $­­­437 million of cash used in operating activities for the year ended December 31, 2005.  The increase in net cash provided by operations was primarily due to a net profit, excluding reorganization items, in 2006.  Reorganization expenses are comprised of mainly non-cash items.

Investing Activities.  Investing activities during 2006 consisted primarily of aircraft capital expenditures and other related costs.  Other related costs include engine purchases, costs to commission aircraft before entering revenue service, deposits on ordered aircraft, facility improvements and ground equipment purchases.

Investing activities during 2006 also included a $153 million reduction to a cash collateral account, which decreased the Company’s restricted cash, cash equivalents and short-term investment balance and increased the Company’s unrestricted cash balance.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 2 — Summary of Significant Accounting Policies” for additional information regarding the Company’s cash collateral account.

Financing Activities.  Financing activities during 2006 consisted primarily of proceeds from debt issuances and payments on debt.  Proceeds from debt included: the issuance of the DIP/Exit facility for $1.225 billion; proceeds of $779 million from the A330 Financing that refinanced three A330-300, seven A330-200, one A319, and one A320 aircraft and financed one A330-300 aircraft; $145 million in proceeds from financing two A330-200 aircraft with a manufacturer; and $127 million of proceeds drawn down under an accounts receivable term loan that previously had been paid off.  Significant payments of debt included: a $100 million redemption of EETC notes on six B757-200 aircraft, representing a 42% discount off the outstanding balance of the notes; as part of a refinancing, a pre-payment of $127 million on a term loan secured by certain accounts receivable; a $50 million pre-payment on a term loan secured by the Company’s investment in its regional carriers; payoff of the existing $975 million Bank Term Loan in order to issue the DIP/Exit facility; and $1.1 billion of other debt and capital lease payments, including the payoff of debt on the three A330-300 and seven A330-200 aircraft in connection with the A330 Financing.

Non-Cash Flow Transactions and Leasing Activities.  In addition to the refinancing of 12 Airbus aircraft of various types and the financing of three Airbus A330 aircraft with debt and manufacturer proceeds discussed above, the Company also took delivery of one Airbus A330-300 and two Airbus A330-200 aircraft during 2006 which were acquired largely through non-cash transactions with the manufacturer and are not classified as cash flow activities.

32




Investing activities affecting cash flows and non-cash flow transactions and leasing activities related to the initial acquisition of aircraft consisted of the following for the year ended December 31, 2006:

 

Investing Activities
Affecting Cash Flows

 

Non-cash Transactions
and Leasing Activities

 

Airbus A330-200

 

2

 

2

 

Airbus A330-300

 

1

 

1

 

 

 

3

 

3

 

 

The bankruptcy filing triggered defaults on substantially all the Company’s debt and lease obligations.  For further discussion related to the Company’s long-term pre-petition debt and capital lease obligations that are classified as liabilities subject to compromise, refer to “Item 8. Consolidated Financial Statements and Supplementary Data, Note 6 — Liabilities Subject to Compromise.”  Additionally, see “Item 8. Consolidated Financial Statements and Supplementary Data, Note 7 — Long-Term Debt and Short-Term Borrowings,” and “Note 8 - Leases,” for additional information related to the Company’s debt and lease obligations that are not classified as subject to compromise.

Prior Years’ Cash Flow Activities

As of December 31, 2005, the Company’s total liquidity, consisting of unrestricted balance sheet cash, cash equivalents and short-term investments, was $1.26 billion.  This amount excludes $600 million of restricted short-term investments (which may include amounts held as cash).  As of December 31, 2004, the Company had total liquidity of $2.46 billion.

Operating Activities.  Net cash used in operating activities for the year ended December 31, 2005 totaled $437 million, a $713 million decrease from the $276 million of cash provided by operating activities for the year ended December 31, 2004.  This decrease was driven primarily by an increase in net loss in 2005 versus 2004 and a $290 million increase in vendor deposits and holdbacks.

Investing Activities.  Investing activities during 2005 consisted primarily of the sale of short-term investments, aircraft capital expenditures and other related costs.  Other related costs include engine purchases, costs to commission aircraft before entering revenue service, deposits on ordered aircraft, facility improvements and ground equipment purchases.

Investing activities during 2005 also included $277 million of additional funding to the Company’s irrevocable tax trust, which increased the Company’s restricted cash, cash equivalents and short-term investment balance.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 2 — Summary of Significant Accounting Policies” for additional information regarding the Company’s irrevocable tax trust.  Additionally, investing activities during 2005 included proceeds of $102 million from the sale of the Company’s note receivable from Pinnacle Airlines and $102 million in proceeds from the sale of the Prudential Financial Inc. Common Stock received in conjunction with Prudential’s demutualization.

Financing Activities.  Financing activities during 2005 included financing one Airbus A330-300 aircraft with long-term debt, debt proceeds of $227 million from three secured financing agreements, debt proceeds of $101 million from the financing of certain of the Company’s properties in Tokyo, repayment of $188 million unsecured notes due in March 2005, plus payment of other debt and capital lease obligations.

Non-Cash Flow Transactions and Leasing Activities.  In addition to the one Airbus A330-300 aircraft financed with debt proceeds discussed above, the Company also took delivery of six Airbus A319, two Airbus A330-300 and 24 Bombardier CRJ aircraft during 2005.  The six Airbus A319 and two Airbus A330 aircraft were acquired largely through non-cash transactions with the manufacturer, which are not classified as cash flow activities.  The Company entered into long-term operating leases on 23 CRJ aircraft.  One CRJ aircraft was acquired in 2005 as a substitute for a similar CRJ aircraft that was under a lease and was subject to an event of loss in 2004.  Subsequent to the Company’s bankruptcy filing, seven out of the 24 CRJ leases signed in 2005 were rejected.  The Company subleased 15 of the remaining Bombardier CRJ aircraft to Pinnacle Airlines, and the other two were subleased to Mesaba.

33




Contractual Obligations.  The following table summarizes the Company’s post-petition commitments to make long-term debt and minimum lease payments, aircraft purchases, and certain other obligations for the years ending December 31.  The Company is evaluating all its commitments as part of its overall plan of reorganization.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 6 — Liabilities Subject to Compromise” for additional information on liabilities stayed as part of the Company’s Chapter 11 filing.

(in millions)

 

2007

 

2008

 

2009

 

2010

 

2011

 

Thereafter

 

Total

 

Long-term debt (1)

 

$

529

 

$

1,997

 

$

433

 

$

356

 

$

350

 

$

2,022

 

$

5,687

 

Capital leases (2)

 

 

 

 

 

 

 

 

Operating leases: (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aircraft

 

356

 

362

 

357

 

363

 

309

 

1,955

 

3,702

 

Non-aircraft

 

15

 

15

 

14

 

14

 

13

 

24

 

95

 

Aircraft commitments (4)

 

1,441

 

1,990

 

582

 

771

 

80

 

 

4,864

 

Other purchase obligations (5)

 

38

 

17

 

15

 

12

 

13

 

26

 

121

 

Total (6)

 

$

2,379

 

$

4,381

 

$

1,401

 

$

1,516

 

$

765

 

$

4,027

 

$

14,469

 


(1)          Amounts represent principal and interest for long-term debt that is not subject to compromise.  Interest on variable rate debt was estimated based on the current rate in effect at December 31, 2006.  $1.279 billion represents the amount due in 2008 under the Company’s DIP Facility; if the DIP Facility is converted to exit financing the maturity date will be extended five years and come due in 2013.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 7 — Long-Term Debt and Short-Term Borrowings” for additional information.

(2)          Amounts represent principal and interest for capital leases that are not subject to compromise.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 8 — Leases” for information related to the Company’s overall lease commitments.

(3)          Amounts represent minimum lease payments for non-cancelable operating leases that are not subject to compromise with initial or remaining terms of more than one year.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 8 — Leases” for information related to these amounts and the Company’s overall lease commitments.

(4)          The amounts presented represent contractual commitments for firm-order aircraft which have been assumed post-petition.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 13 — Commitments” for a discussion of these purchase commitments.

(5)        Amounts represent non-cancelable commitments to purchase goods and services, including such items as software communications and information technology support.  In addition to the contractual cash obligations and commitments included in the table, the Company will in the ordinary course spend significant amounts of cash to operate its business.  For example, the Company will pay wages as required under its various CBAs and will be obligated to make contributions to the pension plans benefiting its employees (as discussed below); the Company will purchase capacity from its regional airline affiliates (in return for which Northwest generally retains all revenues from tickets sold in respect of that purchased capacity); and the Company will pay, among other items, credit card processing fees, CRS fees and outside services related to information technology support and engine and airframe maintenance.  While these and other expenditures may be covered by legally binding agreements, the actual payment amounts will depend on volume and other factors that cannot be predicted with any degree of certainty, and accordingly they are not included in the table.

(6)          Purchase orders made in the ordinary course of business are excluded from the table.  Any amounts for which the Company is liable under purchase orders are reflected in the consolidated balance sheets as accounts payable and accrued liabilities.

Off-Balance Sheet Arrangements. The SEC requires registrants to disclose “off-balance sheet arrangements.”  As defined by the SEC, an off-balance sheet arrangement includes any contractual obligation, agreement or transaction involving an unconsolidated entity under which a company (1) has made guarantees, (2) has retained a contingent interest in transferred assets, (3) has an obligation under derivative instruments classified as equity, or (4) has any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging or research and development services with the Company.

34




The Company has examined the structures of its contractual obligations potentially impacted by this disclosure requirement and has concluded that no arrangements of the types described above in categories 1, 2 or 3 exist that the Company believes may have a material current or future effect on its financial condition, liquidity or results of operations.  With respect to category 4, the Company has obligations arising out of variable interests in unconsolidated entities.  The Company has adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities, (“FIN 46”) as of July 1, 2003 for certain variable interests based on the current guidance provided by the FASB.

Pension Funding Obligations. The Company has several defined benefit plans and defined contribution 401(k)-type plans covering substantially all of its employees.  Northwest froze future benefit accruals for its defined benefit Pension Plans for Salaried Employees, Pilot Employees, and Contract Employees effective August 31, 2005, January 31, 2006, and September 30, 2006, respectively.  Replacement pension coverage has been provided for these employees through 401(k)-type defined contribution plans or in the case of IAM represented employees, the IAM National Multi-Employer Plan.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 15 — Pension and Other Postretirement Health Care Benefits” for additional discussion of actuarial assumptions used in determining pension liability and expense.

The Pension Protection Act of 2006 (“2006 Pension Act”) was signed into law on August 17, 2006. The 2006 Pension Act allows commercial airlines to elect special funding rules for defined benefit plans that are frozen.  The unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17-year period. The unfunded liability 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 rules for frozen defined benefit plans under the 2006 Pension Act effective October 1, 2006.  As a result of this election (1) the funding waivers that Northwest received for the 2003 plan year contributions were deemed satisfied under the 2006 Pension Act, and (2) the funding standard account for each Plan had no deficiency as of September 30, 2006.  However, new contributions that come due under the 2006 Pension Act funding rules must be paid even while Northwest is in bankruptcy.  If the new contributions are not paid, the future funding deficiency that would develop will be based on the regular funding rules rather than the special funding rules.

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

As a result of Northwest’s Chapter 11 filing, we appointed an independent fiduciary for all of our tax-qualified defined benefit pension plans to pursue, on behalf of the plans, claims to recover minimum funding contributions due under federal law, to the extent that Northwest did not continue to fund the plans due to bankruptcy prohibitions. We have been advised that the independent fiduciary intends to withdraw all of the claims that the independent fiduciary has filed in our Chapter 11 Case following the enactment of the 2006 Pension Protection Act.

Northwest’s 2006 calendar year contributions to qualified defined benefit plans and the replacement plans were approximately $112 million.  In 2007, Northwest’s calendar year contributions to its frozen defined benefit plans under the provisions of the 2006 Pension Act and the replacement plans will approximate $120 million.

Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Consolidated Financial Statements, which have been prepared in accordance with GAAP.  The preparation of the Consolidated Financial Statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements.  Actual results may differ from these estimates under different assumptions or conditions.

The accompanying consolidated financial statements have been prepared in accordance with SOP 90-7, and on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of post-petition liabilities in the ordinary course of business.  In accordance with SOP 90-7, the financial statements for the periods presented distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the Company.  While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code and subject to approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business, the Debtors may sell or otherwise dispose of assets, or liquidate and settle liabilities, for some amounts other than those reflected in the consolidated financial statements.  Upon emergence from bankruptcy, we expect to adopt fresh start reporting in accordance with SOP 90-7 which will result in our becoming a new entity for financial reporting purposes.  The adoption of fresh start reporting will have a material impact on the consolidated financial statements of the new financial reporting entity.

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Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, and could potentially reflect materially different results under different assumptions and conditions.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 2 — Summary of Significant Accounting Policies” for additional discussion of the application of these estimates and other accounting policies.  The Company’s management discussed the development of the estimates and disclosures related to each of these matters with the audit committee of the Company’s board of directors.

Revenue Recognition.  Passenger ticket revenues are recognized when the transportation is provided, or when the ticket expires, or is expected to expire, unused.  The air traffic liability account is increased at the time of sale and represents an obligation of the Company to provide air travel in the future.  Revenue is recognized, and the air traffic liability is reduced, as passengers use these tickets for transportation.  The Company regularly performs evaluations of unused tickets.  Unused tickets are recognized in passenger revenue based on current estimates, along with adjustments resulting from revisions of previous estimates.  These adjustments relate primarily to ticket usage patterns, refunds, exchanges, inter-airline transactions, and other travel obligations for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price.  While these factors generally follow predictable patterns that provide a reliable basis for estimating the air traffic liability, and the Company uses historical trends and averages in its estimates, significant changes in business conditions and/or passenger behavior that affect these estimates could have a significant impact on the Consolidated Financial Statements.

Asset Valuation and Impairments.  The Company evaluates long-lived assets for potential impairments in compliance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”).  These impairment evaluations are primarily initiated by fleet plan changes and therefore predominantly performed on fleet-related assets.  The Company records impairment losses on long-lived assets when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts.  Impairment losses are measured by comparing the fair value of the assets to their carrying amounts.  In determining the need to record impairment charges, the Company is required to make certain estimates regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets.  The current fair market value is determined by independent appraisal or published sales values of similar assets, and the future net cash flows are based on assumptions such as asset utilization, expected remaining useful lives, future market trends and projected salvage values. Impairment charges are recorded in depreciation and amortization expense on the Company’s Consolidated Statements of Operations.  If there are subsequent changes in these estimates, or if actual results differ from these estimates, additional impairment charges may be required.

Intangible Assets.  The Company accounts for intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”).  SFAS No. 142 requires that companies test goodwill and indefinite lived intangible assets for impairment on an annual basis rather than amortize such assets.  The Company adopted SFAS No. 142 as of January 1, 2002, and as a result no longer amortizes its indefinite lived intangible assets and goodwill, but instead tests the balance for impairment annually and/or when an impairment indicator exists.

The Company’s indefinite lived intangible asset derives from the U.S.-Japan bilateral aviation agreement, which establishes rights to carry traffic between Japan and the U.S., and extensive “fifth freedom” rights between Japan and India, the South Pacific and other Asian destinations.  Fifth freedom rights allow Northwest to operate service from any gateway in Japan to points beyond Japan and carry Japanese originating passengers.  These rights have no termination date, and the Company has the supporting infrastructure (airport gates, slots and terminal facility leases) in place to operate air service to Japan and beyond from its U.S. hub airports indefinitely.  Governmental policy and bilateral agreements between nations regulate international operating route authorities and alliances.  The Company’s carrying value of international route authorities was $634 million at December 31, 2006.  Should any changes occur in policies, agreements, infrastructure or economic feasibility of air service to Japan, the Company will assess this asset for impairment and re-evaluate the economic life of these international routes.  If the life is then determined to be finite, the Company would begin amortizing the asset.

Pension Liability and Expense.  The Company has several defined benefit pension plans or defined contribution 401(k)-type plans covering substantially all of its employees.  The Company accounts for its defined benefit pension plans in accordance with SFAS No. 87, Employers’ Accounting for Pensions, (“SFAS No. 87”), which requires that amounts recognized in financial statements be determined on an actuarial basis that includes estimates relating to expected return on plan assets, discount rate, and employee compensation.  Northwest froze future benefit accruals for its defined benefit Pension Plans for Salaried Employees, Pilot Employees, and Contract Employees effective August 31, 2005, January 31, 2006, and September 30, 2006, respectively.  Replacement pension coverage will be provided for these employees through 401(k)-type defined contribution plans or in the case of IAM represented employees, the IAM National Multi-Employer Plan.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 15 — Pension and Other Postretirement Health Care Benefits” for additional discussion of actuarial assumptions used in determining pension liability and expense.

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During the second quarter of 2005, the Company changed its method of recognizing certain pension plan administrative expenses associated with the Company’s defined benefit pension plans and now includes them as a service cost component of net periodic pension cost.  These expenses include trustee fees, other administrative expenses and insurance premiums paid to the Pension Benefit Guaranty Corporation (“PBGC”), all of which were previously reflected as a reduction in the market value of plan assets and therefore amortized with other asset gains and losses.  The Company believes the change is preferable because it more appropriately ascribes the expenses to the period in which they are incurred.  The cumulative effect of applying this change to net periodic pension expense in prior years is $69.1 million, which has been retroactively recorded as of January 1, 2005, and is included in the Company’s Consolidated Statements of Operations for the twelve months ended December 31, 2005.

A significant element in determining the Company’s pension expense is the expected return on plan assets, which is based in part on historical results for similar allocations among asset classes.  The difference between the expected return and the actual return on plan assets is deferred and, under certain circumstances, amortized over the average life expectancy of plan participants.  Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense.

In developing the expected long-term rate of return assumption, the Company examines projected returns by asset category with its pension investment advisors.  Projected returns are based primarily on broad, publicly traded equity and fixed-income indices, with minor adjustments to account for the value of active management the funds have provided historically.  The advisors’ asset category return assumptions are based in part on a review of historical asset returns, but also emphasize current market conditions to develop estimates of future risk and return. Current market conditions include the yield-to-maturity and credit spreads on a broad bond market benchmark in the case of fixed income asset classes, and current prices as well as earnings and dividend growth rates in the case of equity asset classes. The assumptions are also adjusted to account for the value of active management the funds have provided historically. The Company’s expected long-term rate of return for 2007 is based on target asset allocations of ­45% domestic equities with an expected rate of return of 8.75%; 25% international equities with an expected rate of return of 8.75%; 10% private markets with an expected rate of return of 12.25%; 15% long-duration bonds with an expected rate of return of 6.0%; and 5% high yield bonds with an expected rate of return of 7.25%.  These assumptions result in a weighted geometric average rate of return of 9.0% on an annual basis.  The Company historically weighted these assumptions based on an arithmetic average.  Beginning in 2006, the Company weighted the above category rate-of-return assumptions based on a geometric average.  The Company believes this change from arithmetic to geometric is preferable to its prior method in that it incorporates the underlying volatility of various asset category rate-of-return trends.  The Company’s expected long-term rate of return on plan assets for calendar year 2006 and 2005 was 9.0% and 9.5%, respectively.

Plan assets for the Company’s pension plans are managed by external investment management organizations.  These investment management firms are prohibited by the investment policies of the plan from investing in Company securities, other than as part of a market index fund that could have a diminutive proportion of such securities.

The Company also determines the discount rate used to measure plan liabilities.  The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year.  In estimating this rate, the Company looks to rates of return on fixed-income investments of similar duration to the liabilities in the plans that hold high, investment grade ratings by recognized ratings agencies.  By applying this methodology, the Company determined a discount rate of 5.93% to be appropriate at December 31, 2006, versus the 5.71% discount rate used at December 31, 2005.

For the year ended December 31, 2006, accounting for the changes related to the Company’s pension plans resulted in a net deficit reduction of $699 million on a pre-tax basis, to accumulated other comprehensive income.  The positive impact on accumulated other comprehensive income was principally due to a 8.4% increase in the fair value of the plan assets and a 1.0% decrease in benefit obligations driven by a 0.22% increase in the discount rate from 5.71% to 5.93%.    Holding all other factors constant, a change in the discount rate used to measure plan liabilities by 0.25% would have changed accumulated other comprehensive income by $307 million on a pre-tax basis.  See the “Recent Accounting Pronouncements” section for additional information related to the Company’s adoption of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, (“SFAS No. 158”).

As of February 1, 2006 the majority of the Company’s qualified pension plans whose benefits were in part impacted by projected rate of future compensation increases were frozen. Compensation increases assumption for remaining plans does not materially impact the Company’s pension expense.

For the year ended December 31, 2006, the Company recognized consolidated pension expense of $335 million, including replacement defined contribution requirements, compared to $567 million in 2005.  Holding all other factors constant, an increase/decrease in the expected long-term rate of return on plan assets by 0.5% would decrease/increase pension expense by approximately $27 million in 2007.  Holding all other factors constant, an increase/decrease in the discount rate used to measure plan liabilities by 0.25% would decrease/increase pension expense by approximately $4 million in 2007.

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SEC Inquiry.  In October 2004, the Company received an informal request for information from the SEC in connection with an inquiry related to accounting for pension and other postretirement benefit plans.  The SEC has stated that the inquiry is not an indication that any violation of laws has occurred.  The Company believes its accounting practices in this area are appropriate and is cooperating with the inquiry, which also involves several other companies.

Frequent Flyer Accounting.  The Company utilizes a number of estimates in accounting for its WorldPerks frequent flyer program.  The Company accounts for the frequent flyer program obligations by recording a liability for the estimated incremental cost of flight awards expected to be redeemed on Northwest and other airline partners.  Customers are expected to redeem their mileage, and a liability is recorded, when their accounts accumulate the minimum number of miles needed to obtain one flight award.  Additional assumptions are made, based on past customer behavior, regarding the likelihood of customers using the miles for first-class upgrades or other premiums instead of flight awards, the expected use on other airline partners, as well as the likelihood of customers never redeeming the miles.  Estimated incremental costs of carrying a passenger flying on redeemed miles on Northwest are based on the system average cost per passenger for food and beverage, fuel, insurance, security, miscellaneous claims and WorldPerks distribution and administration expenses.  Estimated incremental cost for carriage on airline partners is based on contractual rates.

The estimated liability excludes accounts that have never attained the minimum travel award level, awards that are expected to be redeemed for upgrades, and the proportion not expected to be redeemed at all, but includes an estimate for partially earned awards on accounts that previously earned an award.  In December 2004, Northwest revised its estimates associated with (i) the future mix of redemptions involving reciprocal frequent flyer programs with other airlines; (ii) incremental costs per type of award redemption; and (iii) the likelihood of customers never redeeming their award miles. For certain reciprocal frequent flyer programs, Northwest does not record a liability for the gross payments it expects to make to other airlines for WorldPerks members’ redemption travel on those carriers until the Company meets certain contractual thresholds that are required prior to making cash payments. For other reciprocal frequent flyer arrangements with no such contractual thresholds, Northwest records a liability for the gross payments it expects to make for WorldPerks members’ redemption travel on the other airlines without regard to the payments the Company expects to receive for their frequent flyer members’ redemption travel on Northwest.  Northwest recorded a liability for these estimated awards of $269 million, $248 million, and $215 million at December 31, 2006, 2005 and 2004, respectively.

The Company also sells mileage credits to participating partners such as credit card issuers, hotels, long-distance companies, car rental firms, partner airlines, and other partners.  This revenue, a portion of which is deferred, is recognized in passenger revenue.  The deferred revenue is recognized over a 24 month period in which the credits are expected to be redeemed for travel.

Deferred Tax Asset:  The Company accounts for income taxes utilizing the liability method.  Deferred income taxes are primarily recorded to reflect the tax consequences of differences between the tax and financial reporting bases of assets and liabilities.  Under the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”), the realization of the future tax benefits of a deferred tax asset is dependent on future taxable income against which such tax benefits can be applied.  All available evidence must be considered in the determination of whether sufficient future taxable income will exist.  Such evidence includes, but is not limited to, the company’s financial performance, the market environment in which the company operates, the utilization of past tax credits, and the length of relevant carryback and carryforward periods.  Sufficient negative evidence, such as cumulative net losses during a three-year period that includes the current year and the prior two years, may require that a valuation allowance be established with respect to existing and future deferred tax assets.  As a result, it is more likely than not that future deferred tax assets will require a valuation allowance to be recorded to fully reserve against the uncertainty that those assets would be realized.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 158, which amends SFAS No. 87 and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (“SFAS No. 106”) to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects. The measurement date, the date at which the benefit obligation and plan assets are measured, is required to be the company’s fiscal year end. The Company previously utilized a fiscal year-end measurement date.  SFAS No. 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The adoption of SFAS No. 158 increased the Company’s long-term pension and other postretirement benefit liabilities, as well as the Company’s equity deficit by $224 million. SFAS No. 158 does not affect the results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). This Statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value.  Previously, different definitions of fair value were contained in various accounting pronouncements creating

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inconsistencies in measurement and disclosures. SFAS No. 157 applies to those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123 (Revised 2004), Share-Based Payment (“SFAS No. 123R”) and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS No. 157 on its financial statements.

In September 2006, the SEC Office of the Chief Accountant and Divisions of Corporation Finance and Investment Management released SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This pronouncement is effective for fiscal years ending after November 15, 2006. The Company will adopt SAB No. 108 effective the beginning of 2007. The adoption of SAB No. 108 is not expected to have a material impact on the Company’s financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies FASB Statement No. 109, Accounting for Income Taxes.  FIN 48 prescribes a consistent recognition threshold and criteria for measurement of uncertain tax positions for financial statement purposes.  FIN 48 requires the financial statement recognition of an income tax benefit when the Company determines that it is “more likely than not” the tax position will be ultimately sustained.  FIN 48 also requires expanded disclosure with respect to the uncertainty in income taxes.  The Company will adopt FIN 48 as of January 1, 2007, and is currently assessing the impact of FIN 48 on its consolidated financial statements.

The Company adopted SFAS No. 123R using the modified-prospective transition method, effective January 1, 2006.  In addition to requiring supplemental disclosures, SFAS No. 123R eliminated the option to apply the intrinsic value measurement provisions of APB No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), to stock compensation awards issued to employees.  Furthermore, the Statement required the Company to recognize compensation cost for the portion of outstanding awards previously accounted for under the provisions of APB No. 25 for which the requisite service had not been rendered as of the adoption date for this Statement.  Because the Company voluntarily adopted the fair value method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) using the prospective method, effective January 1, 2003, the unvested awards still accounted for under the provisions of APB No. 25, and therefore subject to the provisions of SFAS No. 123R, were minimal.  The Statement also required the Company to estimate forfeitures of stock compensation awards as of the grant date of the award.  The Company’s previous policy was to recognize forfeitures as they occurred, and the required adjustment to estimate forfeitures as of the grant date of the award for outstanding awards that were not fully vested as of December 31, 2005 was immaterial.

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Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The risks inherent in the Company’s market-sensitive instruments and positions are the potential losses arising from adverse changes in the price of fuel, foreign currency exchange rates and interest rates, as discussed below.  The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions management may take to mitigate its exposure to such changes.  Actual results may differ from the outcomes estimated in the analyses due to factors beyond the Company’s control.  See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 16 — Risk Management and Financial Instruments” for related accounting policies and additional information.

Aircraft Fuel.  The Company’s earnings are affected by changes in the price and availability of aircraft fuel.  From time to time, the Company manages the price risk of fuel costs by utilizing futures contracts traded on regulated futures exchanges, swap agreements and options.  A hypothetical 10% increase in the December 31, 2006 cost per gallon of fuel, assuming projected 2007 mainline and regional aircraft fuel usage, would result in an increase to aircraft fuel expense of approximately $357 million in 2007, compared to an estimated $323 million for 2006 measured at December 31, 2005.  The Company, as of January 31, 2007, had hedged the price of approximately 45% and 40% of 2007 first quarter and full year fuel requirements, respectively.  As of December 31, 2005, the Company had no fuel hedges in place for 2006.

Foreign Currency.  The Company is exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expenses.  The Company’s largest exposure comes from the Japanese yen.  From time to time, the Company uses financial instruments to hedge its exposure to the Japanese yen.  The result of a uniform 10% strengthening in the value of the U.S. dollar from December 31, 2006 levels relative to each of the currencies in which the Company’s revenues and expenses are denominated would result in a decrease in operating income of approximately $131 million for the year ending December 31, 2007, compared to an estimated decrease of $126 million for 2006 measured at December 31, 2005.  This sensitivity analysis was prepared based upon projected foreign currency-denominated revenues and expenses as of December 31, 2006 and 2005.  The variance is due to the Company’s foreign currency-denominated revenues exceeding its foreign currency-denominated expenses.

The Company also has foreign currency exposure as a result of changes to balance sheet items.  The Company is currently in a net asset position, as its foreign currency-denominated assets exceed its foreign currency-denominated liabilities. The result of a 10% strengthening in the value of the U.S. dollar would result in a decrease to other income of an estimated $2 million in 2007, caused by the remeasurement of net foreign currency-denominated assets as of December 31, 2006.  In comparison, the Company was in a net liability position in 2005, as its foreign currency-denominated liabilities exceeded its foreign currency-denominated assets.  The result of a 10% weakening in the value of the U.S. dollar would result in a decrease to other income of an estimated $1 million in 2006, caused by the remeasurement of net foreign currency-denominated liabilities as of December 31, 2005.  This sensitivity analysis was prepared based upon foreign currency-denominated assets and liabilities as of December 31, 2006 and 2005, respectively.

The Company’s operating income in 2006 was unfavorably impacted by a net $107 million due to the average yen being weaker in 2006 compared to 2005 and favorably impacted in 2005 by $1 million due to the average yen being stronger in 2005 compared to 2004.  In 2006, the Company’s yen-denominated net cash inflow was approximately 86 billion yen (approximately $747 million) and its yen-denominated liabilities exceeded its yen-denominated assets by an average of 3 billion yen (approximately $24 million).  In 2005, the Company’s yen-denominated net cash inflow was approximately 66 billion yen (approximately $610 million) and its yen-denominated assets exceeded its yen-denominated liabilities by 7 billion yen (approximately $64 million).  In general, each time the yen weakens, the Company’s operating income is unfavorably impacted due to net yen-denominated revenues exceeding expenses.  Additionally, a weakening yen results in recognition of a non-operating foreign currency gain due to the remeasurement of net yen-denominated liabilities.

Excluding the impact of hedging activities, the average yen to U.S. dollar exchange rate for the years ending December 31, 2006, 2005 and 2004 was 117, 110 and 108, respectively.  Including the impact of hedge activities, the average yen to U.S. dollar exchange rate for the years ending December 31, 2006, 2005 and 2004 was 115, 108 and 110, respectively.  The Japanese yen financial instruments utilized to hedge net yen-denominated sales resulted in a gain of $8.6 million and $10.9 million in 2006 and 2005, respectively, and a loss of $7.8 million in 2004.  As of December 31, 2006, the Company had no hedges in place for its anticipated 2007 yen-denominated sales.  This compares to 5% of its anticipated 2006 yen-denominated sales hedged as of December 31, 2005.

Interest Rates.  The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on its interest income from cash equivalents and short-term investments and its interest expense from floating rate debt instruments.

If short-term interest rates were to increase by 100 basis points for a full year, based on the Company’s cash balance at December 31, 2006 and December 31, 2005, the Company’s interest income from cash equivalents and short-term investments would increase by approximately $24 million and $19 million, respectively.  These amounts are determined by

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considering the impact of the hypothetical interest rate increase on the Company’s cash equivalent and short-term investment balances at December 31, 2006 and 2005.

Subsequent to its Chapter 11 filing, the Company records or accrues post-petition interest expense on pre-petition obligations only to the extent it believes the interest will be paid during the bankruptcy proceeding or that it is probable that the interest will be an allowed claim.  The Company’s floating rate indebtedness was approximately 67% and 66% of its total long-term debt and capital lease obligations that were accruing interest as of December 31, 2006 and 2005, respectively.  If short-term interest rates were to increase by 100 basis points throughout 2007 as measured at December 31, 2006, the Company’s interest expense would increase by approximately $46 million, compared to an estimated $42 million for 2006 measured at December 31, 2005.  These amounts are determined by considering the impact of the hypothetical interest rate increase on the Company’s floating rate indebtedness, including debt obligations subject to compromise that continue to accrue interest as of December 31, 2006 and 2005.  As of December 31, 2006 the Company had entered into individual interest rate cap hedges related to three floating rate debt instruments, with a total cumulative notional amount of $504 million.  The objective of the interest rate cap hedges is to protect the anticipated payments of interest (cash flows) on the designated debt instruments from adverse market interest rate changes.

Market risk for fixed-rate indebtedness that was not classified as subject to compromise as of December 31, 2006 is estimated as the potential decrease in fair value resulting from a hypothetical 100 basis point increase in interest rates and amounts to approximately $35 million measured at December 31, 2006.  This compares to an estimated $10 million measured at December 31, 2005.

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Item 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors

Northwest Airlines Corporation (Debtor-in-Possession)

We have audited the accompanying consolidated balance sheets of Northwest Airlines Corporation (Debtor-in-Possession) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northwest Airlines Corporation (Debtor-in-Possession) at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 1 and 2, Northwest Airlines Corporation (Debtor-in-Possession) filed for reorganization under Chapter 11 of the United States Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of bankruptcy proceedings. In particular, such financial statements do not purport to show (a) with respect to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, all amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.

The accompanying financial statements have been prepared assuming that Northwest Airlines Corporation (Debtor-in-Possession) will continue as a going concern. As more fully described in Notes 1 and 2, as a result of the bankruptcy filing, realization of assets and satisfaction of liabilities, without substantial adjustments and/or changes in ownership, are subject to uncertainty and raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan concerning these matters is also discussed in Notes 1 and 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

As discussed in Note 15 to the consolidated financial statements, effective December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

As discussed in Note 3 to the financial statements, in 2005 the Company changed its method of recognizing certain pension plan administrative expenses associated with the Company’s defined benefit pension plans.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Northwest Airlines Corporation’s (Debtor-in-Possession) internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2007, expressed an unqualified opinion thereon.

 

 

 

Minneapolis, Minnesota

March 13, 2007

 

42




NORTHWEST AIRLINES CORPORATION

(DEBTOR-IN-POSSESSION)

 

CONSOLIDATED BALANCE SHEETS

(In millions)

 

 

 

December 31

 

 

 

2006

 

2005

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$ 1,461

 

$     684

 

Unrestricted short-term investments

 

597

 

578

 

Restricted cash, cash equivalents and short-term investments

 

424

 

600

 

Accounts receivable, less allowance (2006—$14; 2005—$12)

 

638

 

592

 

Flight equipment spare parts, less allowance (2006—$255; 2005—$243)

 

104

 

136

 

Maintenance and operating supplies

 

130

 

128

 

Prepaid expenses and other

 

212

 

275

 

Total current assets

 

3,566

 

2,993

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

Flight equipment

 

10,424

 

10,055

 

Less accumulated depreciation

 

2,815

 

2,661

 

 

 

7,609

 

7,394

 

 

 

 

 

 

 

Other property and equipment

 

1,674

 

1,792

 

Less accumulated depreciation

 

1,103

 

1,039

 

 

 

571

 

753

 

Total property and equipment

 

8,180

 

8,147

 

 

 

 

 

 

 

FLIGHT EQUIPMENT UNDER CAPITAL LEASES

 

 

 

 

 

Flight equipment

 

24

 

180

 

Less accumulated amortization

 

12

 

80

 

Total flight equipment under capital leases

 

12

 

100

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Intangible pension asset

 

 

363

 

International routes

 

634

 

634

 

Investments in affiliated companies

 

42

 

41

 

Other

 

781

 

805

 

Total other assets

 

1,457

 

1,843

 

Total Assets

 

$ 13,215

 

$ 13,083

 

 

The accompanying notes are an integral part of these consolidated financial statements.

43




NORTHWEST AIRLINES CORPORATION

(DEBTOR-IN-POSSESSION)

 

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

 

 

December 31

 

 

 

2006

 

2005

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Air traffic liability

 

$ 1,557

 

$   1,586

 

Accrued compensation and benefits

 

301

 

303

 

Accounts payable

 

624

 

342

 

Collections as agent

 

138