(Mark One)
l!1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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
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.RS. Employer Identification No.)
2700 Lone Oak Parkway, Eagan, Minnesota
(Address of principal executive offices)
55121
(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 l&I No
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 No l&I
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 l&I No
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 Ill of this
Form 10-K or any amendment to this Form 10-K.
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 Accelerated filer l&I Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ~
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 Ill of this Form 10-K will be provided in accordance with General Instruction G3 no
later than April 30, 2007.
PARTI
Item 1. BUSINESS
Northwest Airlines Corporation ("NWA Corp. n
and, together with its subsidiaries, the "Companyn) 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,
Aeromexico, 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-restructurinq.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 lnstitute 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 Northwesfa 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 1AM, 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.
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
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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 causen 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 1AM and the Professional Flight Attendants Association ("PFAA") and has subsequently
reached consensual agreement with ALPA and the 1AM.
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.
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
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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.
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 -
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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 CUNOLs") 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 Airfink
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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lntemational 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, th~ 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, AeroMexico, 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
World Perks accounts and enjoy travel on any flight operated by a SkyT earn 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.
7
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
later in 2007, it will initially operate one 50-seat CRJ200 aircraft. Thereafter, Northwest expects to place up to 36 76-seat
8
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 7 47-200 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 ofTransportation ("DOr) 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, AeroMexico 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. ("ML r), an indirect wholly-owned subsidiary of NWA Corp., is among the largest vacation
wholesale companies in the United States. ML T develops and markets Worry-Free Vacations that include air
transportation, hotel accommodations and car rentals. In addition to its Worry-Free Vacations charter programs, ML T
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, ML T 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.
9
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
Pilots
Agents and Clerks
Equipment Service Employees and
Stock Clerks
Flight Attendants
Approximate
Number of
Full-time
Equivalent
Employees
Covered
4,500
6,300
5,000
7,400
Amendable
Union Date
Air Line Pilots Association, International ("ALPA") 12/31/2011
International Association of Machinists & Aerospace
Workers ("IAM") 12/31/2011
International Association of Machinists & Aerospace
Workers ("IAM") 12/31/2011
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.
lntemational 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.
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.
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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.
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.
11
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.
12
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 seff-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 1AM, 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
13
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 hann 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
14
insurance 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(1)(5) or Section 382(1)(6) of the Internal Revenue Code apply instead
of the general Section 382 limitation rules. In general terms, Sections 382(1)(5) or (1)(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(1)(5) of the Internal Revenue Code, or whether we will instead rely on Section 382(1)(6) of the Internal Revenue
Code. Assuming we rely on Section 382(1)(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(1)(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 1 B. 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 Tlpe Capaci!l 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 15 50 15.8
757-300 224 16 16 3.8
747-200 353-430 2 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 Airfink Operated Aircraft 174 174 72
Total Aircraft 309 1 235 545 105
--
( 1} On January 8, 2007, the last DC 10-30 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 bane reconsideration before the Sixth Circuit. On
April 13, 2006, the Sixth Circuit denied Northwest's request for en bane 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 1AM 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 ofTennessee, 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-
lntemational, 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 REGISTRANTS 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.
Plan category
Equity compensation plans
approved by NWA Corp.'s
stockholders ( 1 )
Equity compensation plans
not approved by NWA
Corp. 's stockholders (2)
Total
Equity Compensation Plan lnfonnation
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
2,133,902
5,293,673
7,427,575
Weighted-average exercise
price of outstanding options,
warrants and rights
(b)
9.46
10.83
10.43
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
5,981,154
3,761 ,638
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
21
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.
22
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.
Perfonnance Graph
0 -+---------.------....--------.---------------1
Dec01 Dec02 Dec03 Dec04 Dec05 Dec06
I-+-Northwest Airlines Corporation -e- S&P 500 _._ AMEX Airline Index
I
Northwest Airlines Corporation
S&P 500
AMEX Airline Index (1)
12/31/01
$ 100
$ 100
$ 100
12/31/02
$ 47
78
44
12/31/03
$ 81
100
70
12/31/04
$ 70
111
68
12/31/05
$ 3
117
62
12/31/06
$ 26
135
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.
23
Item 6. SELECTED FINANCIAL DATA
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
Year Ended December 31
2006 2005 2004 2003 2002
Statements of Operations (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.
24
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
ML T Inc. - net of intercompany eliminations 193 193 192 197 260
Regional carriers 1,406 1,576 1,210 567 487
Pinnacle Airlines, Inc. - net of
intercompany 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.
25
%


%







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 ML T is the most significant. The following discussion pertains primarily
to Northwest and, where indicated, ML T.
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 (" AS Ms"), 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
26
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 1AM, ATSA, TWU, and NAMA. The agreements with ALPA, the 1AM, 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
27
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 1AM and the Professional Flight Attendants Association ("PFAA") and has subsequently
reached consensual agreement with ALPA and the 1AM.
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
28
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:
2006
Passenger revenues (in millions)
Increase (Decrease) from 2005:
Passenger revenues (in millions)
Percent
Scheduled service ASMs ( capacity)
Scheduled service RPMs (traffic}
Passenger load factor
Yield
Passenger RASM
As indicated in the above table:
S)!tem
$ 9,230
328
3.7 %
(6.7) %
(4.2} %
2.2 pts.
8.3 %
11 .1 %
Domestic Pacific Atlantic
$ 5,990 $ 2,065 $ 1,175
216 78 34
3.8 % 3.9 % 3.0 %
(7.9} % (3.8) % (7.0} %
(4.3} % (3.3) % (5.5) %
3.1 pts. 0.4 pts. 1.5 pts.
8.4 % 7.4 % 8.9 %
12.6 % 7.9 % 10.7 %
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.
Other revenues, the principal components of which are ML T, 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.
29
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 Chanae 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)
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 tosses as additional fuel expense,
including $2.7 million of unrealized losses related to fuel derivative contracts that wilt 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 tower 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 teases.
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.
t. Other expenses (which include ML T 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.
Tax Expense (Benefit). Given recent toss experience, the Company provides a valuation allowance against tax
benefits, principally for net operating tosses 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.
30
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:
S~tem 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 7 4 7-200 freighter aircraft.
Other reve.nues, 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.
31
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 Chanae 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
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 ML T 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.
32
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.
33
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:
Airbus A330-200
Airbus A330-300
Investing Activities
Affecting Cash Flows
2
3
Non-cash Transactions
and Leasing Activities
2
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.
34
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)
Long-term debt ( 1)
Capital leases (2)
Operating leases: (3)
2007 2008 2009 2010 2011
$ 350
Thereafter
$ 2,022
Total
$ 529 $ 1,997 $ 433 $ 356 $ 5,687
Aircraft
Non-aircraft
356
15
1,441
38
362
15
1,990
17
357
14
582
15
363
14
771
12
309
13
80
13
1,955
24
26
3,702
95
4,864
121
Aircraft commitments (4)
Other purchase obligations (5)
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.
35
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 1AM represented employees, the 1AM 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 197 4, 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.
36
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 Policiesn 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. 144n). 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. 142n). 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 freedomn 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. 8r), 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 1AM represented employees, the 1AM National Multi-
Employer Plan. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 15 - Pension and Other
Postretirement Health Care Benefitsn for additional discussion of actuarial assumptions used in determining pension
liability and expense.
37
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
38
discount rate used to measure plan liabilities by 0.25% would decrease/increase pension expense by approximately $4
million in 2007.
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 b.alance 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.
39
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
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.
40
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
41
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.
42
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.
~-fHL'
Minneapolis, Minnesota
March 13, 2007
43
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(In millions)
CURRENT ASSETS
Cash and cash equivalents
Unrestricted short-term investments
ASSETS
Restricted cash, cash equivalents and short-term investments
Accounts receivable, less allowance (2006-$14; 2005-$12)
Flight equipment spare parts, less allowance (2006-$255; 2005-$243)
Maintenance and operating supplies
Prepaid expenses and other
Total current assets
PROPERTY AND EQUIPMENT
Flight equipment
Less accumulated depreciation
Other property and equipment
Less accumulated depreciation
Total property and equipment
FLIGHT EQUIPMENT UNDER CAPITAL LEASES
Flight equipment
Less accumulated amortization
Total flight equipment under capital leases
OTHER ASSETS
Intangible pension asset
International routes
Investments in affiliated companies
Other
Total other assets
Total Assets
s
December 31
2006 2005
1,461
597
424
638
104
130
212
3,566
10,424
2,815
7,609
1,674
1,103
571
8,180
24
12
12
634
42
781
1,457
$ 684
578
600
592
136
128
275
2,993
10,055
2,661
7,394
1,792
1,039
753
8,147
180
80
100
363
634
41
805
1,843
$ 13,215 $ 13,083
The accompanying notes are an integral part of these consolidated financial statements.
44
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Air traffic liability
Accrued compensation and benefits
Accounts payable
Collections as agent
Accrued aircraft rent
Other accrued liabilities
Current maturities of long-term debt
Total current liabilities
LONG-TERM DEBT
DEFERRED CREDITS AND OTHER LIABILITIES
Long-term pension and postretirement health care benefits
Other
Total deferred credits and other liabilities
LIABILITIES SUBJECT TO COMPROMISE
PREFERRED REDEEMABLE STOCK SUBJECT TO COMPROMISE
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; shares authorized--315,000,000; shares
issued (2006--111 ,374,977 shares; 2005--111 ,280,322 shares)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Treasury stock (2006-24,024,317 shares; 2005-24,024,989 shares)
Total common stockholders' equity (deficit)
Total Liabilities and Stockholders' Equity (Deficit)
$
$
December 31
2006 2005
1,557
301
624
138
49
329
213
3,211
3,899
86
161
247
13,572
277
1
1,505
(7,384)
(1,100)
(1,013)
(7,991)
13,215
$ 1,586
303
342
116
74
295
74
2,790
1,085
126
102
228
14,328
280
1
1,500
(4,548)
(1,568}
(1 ,013)
(5,628)
$ 13,083
The accompanying notes are an integral part of these consolidated financial statements.
45
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Year Ended December 31
OPERA TING REVENUES
Passenger
Regional carrier revenues
Cargo
Other
Total operating revenues
OPERA TING EXPENSES
Aircraft fuel and taxes
Salaries, wages and benefits
Aircraft maintenance materials and repairs
Selling and marketing
Other rentals and landing fees
Depreciation and amortization
Aircraft rentals
Regional carrier expenses
Other
Total operating expenses
OPERATING INCOME (LOSS)
OTHER INCOME (EXPENSE)
Interest expense
Interest capitalized
Investment income
Earnings of affiliated companies
Reorganization items, net
Other, net
Total other income (expense)
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE
2006 2005 2004
$ 9,230
1,399
946
993
12,568
3,386
2,662
796
759
562
519
226
1,406
1,512
11,828
740
(565)
10
109
1
(3,165)
6
(3,604)
(2,864)
$ 8,902
1,335
947
1,102
12,286
3,132
3,721
703
811
627
552
429
1,576
1,654
13,205
(919)
(610)
10
80
(14)
(1 ,081)
77
{1 ,538)
(2,457)
$ 8,432
1,083
830
934
11,279
2,203
3,796
463
847
596
731
446
1,210
1,492
11 ,784
(505)
(543)
8
51
8
120
(356)
(861)
Income tax expense (benefit) (29) 7
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (2,835) (2,464) (862)
Cumulative effect of accounting change ____ (69)
NET INCOME (LOSS) (2,835) (2,533) (862)
Preferred stock requirements ____ (22) (29)
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (2,835) $ (2,555) $ (891 )
=====
EARNINGS (LOSS) PER COMMON SHARE:
Basic and Diluted
Income (loss) applicable to common stockholders
before cumulative effect of accounting change
Cumulative effect of accounting change
Net Income (loss) applicable to common stockholders
$ (32.48) $ (28.57) $ (10.32)
(0.79)
$ (32.48) $ (29.36) $ (10.32)
The accompanying notes are an integral part of these consolidated financial statements.
46
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31
2006 2005 2004
CASH FLOWS FROM OPERA TING ACTIVITIES
Net income (loss) $ (2,835) $ (2,533) $ (862)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Reorganization items, net 3,165 1,081
Depreciation and amortization 519 552 731
Income tax expense (benefit) (29) 7 1
Net receipts (payments) of income taxes 2 (3) (3)
Pension and other postretirement benefit contributions less than expense 261 457 190
Net loss (earnings) of affiliates (1) 14 (8)
Net loss (gain) on disposition of property, equipment and other 16 (80) (95)
Other, net (16) 20 78
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable (3) (102) 46
Decrease (increase) in flight equipment spare parts 23 (3) 7
Decrease (increase) in vendor deposits/holdbacks (35) (290)
Decrease (increase) in supplies, prepaid expenses and other 67 (34) (57)
Increase (decrease) in air traffic liability (33) 144 186
Increase (decrease) in accounts payable 287 206 33
Increase (decrease) in other liabilities (164) 127 29
Net cash provided by ( used in) operating activities 1,224 (437) 276
NET CASH PROVIDED BY (USED IN) REORGANIZATION ACTIVITIES 21
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (527) (359) (480)
Purchases of short-term investments (21) (301) (241)
Proceeds from sales of short-term investments 28 1,606 128
Decrease (increase) in restricted cash, cash equivalents and
short-term investments 176 (444) (34)
Proceeds from sale of property, equipment and other assets 7 6 160
Proceeds from sale of Pinnacle note receivable 102
Investments in affiliated companies and other, net 9 (1) (6)
Net cash provided by (used in) investing activities (328) 609 (473)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt (2,372) (606) (1,664)
Proceeds from long-term debt 2,281 448 1,512
Payment of capital lease obligations (14) (16) (70)
Payment of short-term borrowings (14) (13)
Other, net (35) i8i (7l
Net cash provided by (used in) financing activities (140) i196} (242)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7TT (23) (439)
Cash and cash equivalents at beginning of period 684 707 1,146
Cash and cash equivalents at end of period
s ~.~,~ $ ~~4 $ 707
Available to be borrowed under credit facilities $ $ $
Cash and cash eguivalents and unrestricted short-term investments at end of eeriod $ 2,058 $ 1,262 $ 2,459
Supplemental Cash Flow Information:
Interest paid $ 569 $ 529 $ 505
Investing and Financing Activities Not Affecting Cash:
Manufacturer financing of aircraft and other non-cash transactions $ 280 $ 344 $ 705
The accompanying notes are an integral part of these consolidated financial statements.
47
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(In millions)
Accumulated
Additional Other
Common Stock Paid-In Accumulated Comprehensive Treasury
Shares Amount Capital Deficit Income (Loss) Stock Total
Balance January 1, 2004 110.9 $ $ 1,460 $ (1 ,083) $ (1,340) $ (1 ,049) $ (2,011)
Net income (loss) (862) (862)
Other comprehensive income (loss)
Foreign currency 3 3
Deferred gain/(loss) from hedging activities 8 8
Unrealized gain/(loss) on investments 4 4
Minimum pension liability adjustments (222) (222)
Total (1,069)
Series C Preferred Stock dividends accrued (29) (29)
Series C Preferred Stock converted to
Common Stock 0.1 2 2
Stock options expensing 0.1 7 7
Issuance of Treasury Stock (25) 36 11
Other 2 2
Balance December 31, 2004 111 .1 1,471 (1,999) (1,547) (1,013) (3,087)
Net income (loss) (2,533) (2,533)
Other comprehensive income (loss)
Foreign currency (7) (7)
Deferred gain/(loss) from hedging activities 11 11
Unrealized gain/(loss) on investments (9) (9)
Minimum pension liability adjustments (16) (16)
Total (2,554)
Series C Preferred Stock dividends accrued (22) (22)
Series C Preferred Stock converted to
Common Stock 0.2 16 16
Stock options expensing 13 13
Issuance of Treasury Stock 6 6
Other
Balance December 31, 2005 111 .3 1,500 (4,548) (1,568) (1,013) (5,628)
Net income (loss) (2,835) (2,835)
Other comprehensive income (loss)
Foreign currency
Deferred gain/(loss) from hedging activities (10) (10)
Unrealized gain/(loss) on investments 3 3
Minimum pension liability adjustments 699 699
Total (2,143)
Series C Preferred Stock dividends accrued
Series C Preferred Stock converted to
Common Stock 0.1 3 3
Stock options expensing 2 2
Issuance of Treasury Stock
Other (1) (1)
Adjustment to Adopt SFAS No. 158 (224) (224)
Balance December 31, 2006 111.4 $ $ 1,505 $ (7,384) $ (1,100) $ (1,013) $ {7,991)
The accompanying notes are an integral part of these consolidated financial statements.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Voluntary Reorganization Under Chapter 11 Proceedings
Bankruptcy 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"). 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.
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").
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
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Transport Workers Union of America ("TWU"), and the Northwest Airlines Meteorologists Association ("NAMA"). The
agreements with ALPA, the 1AM, 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.
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 1AM and the Professional Flight Attendants Association ("PFAA") and has subsequently
reached consensual agreement with ALPA and the 1AM.
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.
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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.
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 "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 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 "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,
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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 "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.
Note 2-Summary of Significant Accounting Policies
Financial Statement Presentation: The Company's consolidated financial statements have been prepared in
accordance with Generally Accepted Accounting Principles ("GAAP") on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, our consolidated
financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities
that might be necessary should we be unable to continue as a going concern. 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 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"), 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.
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
Business: Northwest's operations account for approximately 98% of the Company's consolidated operating revenues
and expenses. Northwest is a major air carrier engaged principally in the commercial transportation of passengers and
cargo, directly serving more than 240 cities in 26 countries in North America, Asia and Europe. Northwest's global airline
network includes 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, which operates through a hub in Amsterdam, a domestic and
international alliance with Continental and Delta, membership in SkyTeam, a global airlines alliance with KLM, Continental,
Delta, Air France, Alitalia, Aeromexico, CSA Czech Airlines, Korean Air and Aeroflot, exclusive marketing agreements with
three domestic regional carriers, Pinnacle Airlines and Mesaba, both of which currently operate as Northwest Airlink
carriers, and Compass which will operate as Northwest Airlink, and a cargo business that includes a dedicated fleet of
freighter aircraft that operate through hubs in Anchorage and Tokyo.
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Basis of Consolidation: 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. All significant
intercompany transactions have been eliminated. Investments in 20% to 50% owned companies, as well as Pinnacle
Airlines, are accounted for by the equity method. Other investments are accounted for by the cost method.
Certain prior year amounts have been reclassified to conform to the current year financial statement presentation.
Cash and Cash Equivalents: Cash equivalents are carried at cost and consist primarily of cash and unrestricted
money market funds. These highly liquid instruments approximate fair value due to their short maturities. The Company
classifies investments with a maturity of more than three months as short-term investments.
Restricted Cash: During 2006 the restricted cash balance decreased $176 million to $424 million as of December 31,
2006 from $600 million as of December 31, 2005. The decrease was primarily due to a $153 million decrease in a
receivables financing required cash collateral balance, a $6 million decrease in the Company's irrevocable trust fund
balance and a $17 million decrease in other restricted cash items. As a result of the Company filing for bankruptcy, a
receivables financing required the Company to establish a cash collateral account, the balance of which was $153 million
as of December 31, 2005. As a result of restructuring the receivables financing with the lender, the need for this account
was eliminated and the balance was reclassified to unrestricted cash. The Company in the ordinary course of business
collects funds from passengers and withholdings from employees that are required to be paid to various taxing authorities,
in addition to certain taxes that are self assessed. These collections include U.S. transportation taxes, passenger facility
charges, and fuel taxes, which are collected in the capacity of an agent and are presented on a net basis. Withholdings
include the employee portion of payroll taxes, among others. The Company established an irrevocable trust in 2002 and
since then has made regular deposits to the trust from which payments are issued to the taxing authorities.
Use of Estimates: The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in its consolidated financial statements
and accompanying notes. Actual results could differ from those estimates.
Operating Revenues: Passenger and cargo revenues are recognized when the transportation is provided, or when
the ticket expires, or is expected to expire, unused. The main component of air traffic liability represents the estimated
value of sold but unused tickets. 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. Other revenues include ML T, transportation fees and charter revenues, and are
recognized when the service or transportation is provided.
Property, Equipment and Depreciation: Owned property and equipment are stated at cost. Property and equipment
acquired under capital leases are stated at the lower of the present value of minimum lease payments or fair market value
at the inception of the lease. Property and equipment are depreciated to residual values using the straight-line method
over the estimated useful lives of the assets, which generally range from four to 25 years for flight equipment and three to
32 years for other property and equipment. Leasehold improvements are generally amortized over the remaining period of
the lease or the estimated service life of the related asset, whichever is less. Property and equipment under capital leases
are amortized over the lease terms or the estimated useful lives of the assets.
The Company accounts for certain airport leases under the EITF Issue No. 99-13, Application of EITF Issue No. 97-10,
The Effect of Lessee Involvement in Asset Construction, and FASB Interpretation No. 23, Leases of Certain Property
Owned by a Governmental Unit or Authority to Entities that Enter into Leases with Governmental Entities, which requires
the financing related to certain guaranteed airport construction projects committed to after September 23, 1999, be
recorded on the balance sheet. Capitalized expenditures of $234.9 million at December 31, 2006 that relate to airport
improvements at Minneapolis/St. Paul, Memphis, Knoxville and Seattle are recorded in other property and equipment, with
the corresponding obligations included in liabilities subject to compromise.
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Impairment of Long-Lived Assets: 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 or reorganization 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 recognized.
In the fourth quarter 2006, the Company recorded $33.5 million as additional reorganization expense for the
impairment of certain Boeing 747-200 passenger and freighter aircraft and DC9-30 aircraft. See "Note 5- Reorganization
Related Items." The Company also recorded an aircraft impairment of $5.8 million as additional depreciation expense for
one DC9-30.
In the second quarter of 2006, the Company recorded $28 million related to the impairment of six owned aircraft and
related inventory and equipment, which were permanently removed from service. These charges reflect the Company's
decision to accelerate the retirement of its DC10 aircraft and to permanently park three DC9 aircraft. The impairment
charges were recorded as reorganization expenses and are included in "Note 5 - Reorganization Related Items."
In December 2005, as part of the implementation of its restructuring driven fleet plan, the Company removed 18 DC9-
30 aircraft from operations and determined that the Avro RJ85 fleet would be removed from service by the end of 2006. As
a result, the Company recorded, as reorganization expense, impairment charges of $153 million for the DC9-30 aircraft
and the 1 O owned Avro RJ85 aircraft in the fourth quarter of 2005.
In June 2005, the Company recorded $48 million for the impairment and other charges related to nine owned and two
leased aircraft of various types that it did not intend to return to service. Of the $48 million recorded, approximately $40
million related to acceleration of aircraft rent expense and other charges on the two leased aircraft and $8 million was
attributable to aircraft impairments on the nine owned aircraft.
In June 2004, as part of a revised fleet plan, the Company determined that it did not intend to return to service 1 O
Boeing 747-200 passenger aircraft that had been temporarily removed from operations. As a result, the Company
recorded, as additional depreciation expense, impairment charges of $104 million associated with these aircraft and
related inventory in the second quarter of 2004. In December 2004, additional impairment charges of $99 million were
recorded in conjunction with a new aircraft order and the related early retirement of certain DC 10-30 aircraft, and the
accelerated retirement of the Company's DC9-10 fleet, as part of a revised fleet plan.
Flight Equipment Spare Parts: Flight equipment spare parts are carried at lower of average cost or market and are
expensed when consumed in operations. An allowance for depreciation is provided at rates that depreciate cost, less
residual value, over the estimated useful lives of the related aircraft. Inventory sales at amounts greater or less than their
carried values are recorded as an adjustment to the allowance for depreciation and therefore do not generate gain or loss
recognition for income statement purposes.
Airframe and Engine Maintenance: Routine maintenance, airframe and engine overhauls are charged to expense as
incurred or accrued when a contractual obligation exits, such as induction of an asset at a vendor for service or on the
basis of hours flown for certain costs covered by power-by-the-hour type agreements. Modifications that enhance the
operating performance or extend the useful lives of airframes or engines are capitalized and amortized over the remaining
estimated useful life of the asset.
International Routes: Certain of the Company's international routes result 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 from
Japan to 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 from its U.S. hub and gateway airports indefinitely. In accordance with SFAS No.
142, Goodwill and Other Intangible Assets, the Company does not amortize these intangible assets, but instead tests the
balance for impairment annually and/or when an impairment indicator exists.
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
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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.
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 to other airlines
for WorldPerks members' redemption travel 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 World Perks 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. These changes in estimates resulted in a liability increase of $77 million, due primarily to the higher
cost of awards redeemed on reciprocal frequent flyer programs versus Northwest's incremental cost for carriage, partially
offset by a higher projection of unused award miles. While the average cost of an award increased as a result of these
revised estimates, the total number of awards expected to be redeemed declined substantially. The number of estimated
travel awards outstanding and expected to be redeemed at December 31, 2006, 2005, and 2004 was approximately 3.6,
3.6, and 3.8 million, respectively. 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 number of travel awards used for travel on Northwest and Airlink operations during the years ended December 31,
2006, 2005 and 2004 was approximately 1,491,000, 1,492,000 and 1,380,000, representing an estimated 7.3%, 7.3%, and
6.9% of total RPMs for each such year, respectively. Including travel allowed on Northwest, Airlink and alliance partner
airlines, travel awards represented an estimated 9.3%, 8.9%, and 8.5% of system-wide consolidated RPMs for December
31, 2006, 2005 and 2004 respectively. Northwest believes displacement of revenue passengers is minimal based on the
low ratio of WorldPerks award usage to revenue passenger miles and the Company's ability to manage frequent flyer
inventory through seat allocations.
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.
Advertising: Advertising costs, included in selling and marketing expenses, are expensed as incurred and were $62
million, $63 million, and $72 million in 2006, 2005, and 2004, respectively.
Stock Based Compensation: As of December 31, 2006, the Company maintains stock incentive plans for officers and
key employees of the Company (the "Management Plans") and a stock option plan for pilot employees (the "Pilot Plan").
See "Note 10 - Stock Based Compensation" for additional discussion of stock based compensation. The Company
adopted SFAS No. 123 (Revised 2004), Share-Based Payment ("SFAS No. 123R"), using the modified-prospective
transition method, effective January 1, 2006. In addition to requiring supplemental disclosures, SFAS No. 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
55
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.
Foreign Currency: Assets and liabilities denominated in foreign currency are remeasured at current exchange rates
with resulting gains and losses generally included in net income.
Deferred Tax Assets: 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.
New Accounting Standards: 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
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.
56
Note 3-Change in Accounting for Certain Pension Plan Administrative Expenses
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 (UPBGC"), all of which previously were reflected as
a reduction in the market value of plan assets and therefore amortized with other asset gains and losses. The Company
believes this 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 was $69.1 million,
which was retroactively recorded as of January 1, 2005, and was included in the Company's Consolidated Statements of
Operations for the year ended December 31, 2005. The impact of this change on the year ended December 31, 2005, was
an increase in net periodic benefit cost of $37.7 million.
The following table illustrates pro forma amounts as of December 31, assuming the new accounting method is applied
retroactively:
(In millions, except per share amounts)
Net Income (Loss) Applicable to Common Stockholders
Basic and Diluted
Earnings (loss) per common share:
Basic and Diluted
57
2006 2005 2004
$ (2,835) $ (2,486) $ (929)
$ (32.48) $ (28.57) $ (10.75)
Note 4-Earnings (Loss) Per Share Data
The following table sets forth the computation of basic and diluted earnings (loss) per common share for the years
ended December 31 :
(In millions, except share data) 2006 2005 2004
Numerator:
Net income (loss) before cumulative effect of
accounting change $ (2,835) $ (2,464) $ (862)
Cumulative effect of accounting change (69)
Preferred stock requirements (22) (29)
Net income (loss) applicable to common stockholders $ (2,835) $ (2,555) $ (891)
Denominator:
Weighted-average shares outstanding for basic
earnings (loss) per share 87,289,184 87,003,280 86,403,384
Effect of dilutive securities (1)
Adjusted weighted-average shares outstanding and
assumed conversions for diluted earnings (loss) per share 87,289,184 87,003,280 86,403,384
Basic and Diluted earnings (loss) per common share:
Net income (loss) before cumulative effect of
accounting change $ (32.48) $ (28.32) $ (9.98)
Cumulative effect of accounting change (0.79)
Preferred stock requirements (0.25) (0.34)
Net income (loss) applicable to common stockholders $ (32.48) $ (29.36) $ (10.32)
(1) For the twelve months ended December 31, 2006, 2005 and 2004, 19.1 million, 19.3 million and 19.8 million
incremental shares related to dilutive securities, respectively, were not included in the diluted earnings per share
calculation because the Company reported a net loss for these periods. Incremental shares related to dilutive
securities have an anti-dilutive impact on earnings per share when a net loss is reported and therefore are not
included in the calculation.
Additionally, 6.2 million, 6.3 million and 6.5 million shares of Series C Preferred Stock were excluded from the
effect of dilutive securities for the years ended December 31 , 2006, 2005 and 2004, respectively, because the
Company reported a net loss for these periods and the inclusion of these shares would have had an anti-dilutive
effect on the earnings per share calculation.
The dilutive securities do not include 7.4 million, 7.9 million and 1.3 million employee stock options and restricted
shares for the years ended December 31 , 2006, 2005 and 2004, respectively, because the exercise prices of these
options were greater than the average market price of the Common Stock for the period or the amount of assumed
proceeds for the restricted shares did not result in incremental dilutive shares under the treasury method. Total
employee stock options and restricted shares outstanding of 7.4 million, 7.9 million and 9.4 million as of December
31 , 2006, 2005 and 2004, respectively, were not included in diluted securities because the Company reported a
net loss for the years ended December 31 , 2006, 2005 and 2004.
Note 5-Reorganization Related Items
The consolidated financial statements have been prepared in accordance with SOP 90-7 and on a going concern
basis that 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.
Reorganization items recorded during the twelve months ended December 31 , 2006, largely consisted of aircraft
restructurings, employee claims, pension plan curtailment charges, rejection charges, professional fees, and aircraft
impairment charges. The charges for restructuring aircraft leases/debt are primarily non-cash costs that include the
estimated claims resulting from the Company's renegotiation of certain aircraft obligations. The employee claims resulted
from negotiations associated with the Company's implementation of new contract terms with ALPA, the 1AM, ATSA, TWU
and NAMA. The pension plan curtailment charges are non-cash costs associated with the freezing of the ALPA and
58
contract pension plans. Aircraft rejection charges are non-cash costs that include the estimated allowable claims, net of
gains on the sale and/or settlement of residual value guarantees, resulting from the Company's rejection of certain aircraft
leases and/or return of aircraft as part of the bankruptcy process. These claims remain subject to future adjustments
arising from negotiated settlements, actions of the Bankruptcy Court, the determination as to the value of any collateral
securing claims, proofs of claim or other events. The charges for professional fees include only those professional fees
related to the bankruptcy process. Aircraft impairment charges are non-cash write-downs of owned aircraft that were
rejected or permanently grounded as part of the Company's fleet restructuring.
In addition to the charges disclosed above, reorganization items for the twelve months ended December 31 , 2005,
included debt and lease valuation adjustments. Debt and lease valuation adjustments represent one time non-cash
charges related to the write-off of issuance costs, and discounts related to the Company's debt and leases classified as
liabilities subject to compromise.
Net reorganization items, as shown on the Consolidated Statement of Operations, consist of the following:
(In millions) 2006 2005
Restructured aircraft lease/debt charges $ 1,598 $ 498
Employee claims, net 1,053
Pension plan curtailments, net 283 127
Aircraft rejection charges, net 133 128
Professional fees 63 23
Aircraft and aircraft related impairment 62 153
Asset sale (27)
Debt and lease valuation adjustments 144
Other 8
Reorganization items, net $ 3,165 $ 1,081
Note 6-Liabilities Subject to Compromise
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.
59
Liabilities subject to compromise refers to both secured and unsecured obligations that will be accounted for under a
plan of reorganization, including claims incurred prior to the Petition Date. These liabilities represent the estimated amount
expected to be allowed on known or potential claims to be resolved through the Chapter 11 process, and remain subject to
future adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection of executory contracts
and unexpired leases, the determination as to the value of any collateral securing claims, proofs of claim, or other events.
Liabilities subject to compromise also includes certain items that may be assumed under the Debtors' Plan. At December
31 , 2006 and December 31, 2005, the Company had liabilities subject to compromise of $13.6 billion and $14.3 billion,
respectively, consisting of the following:
(In millions)
Long-term debt ( 1)
Accrued interest on long-term debt
Pension, postretirement and other employee related expenses
Aircraft-related accruals, deferrals, and claims (2)
Capital lease obligations, including accrued interest (3)
Accounts payable and other liabilities
Total Liabilities Subject to Compromise
2006
$ 4,556
48
3,902
2,962
238
1,866
$ 13,572
2005
$ 7,348
63
4,114
1,455
350
998
$ 14,328
(1) Long-term debt subject to compromise includes pre-petition and post-petition accrued interest and unpaid
principal for financings that remain subject to negotiations that may ultimately result in a return of collateral,
settlement or a renegotiated agreement. It also includes estimated unsecured damage claims to be resolved
through the Company's Chapter 11 settlement process, resulting from debt agreements that have been
restructured subsequent to the petition date. Refer to "Note 7 - Long-Term Debt and Short-Term Borrowings" for
information related to the Company's debt not classified as subject to compromise. At December 31, the
Company's long-term debt subject to compromise was as follows:
(In millions) 2006 2005
Aircraft Enhanced Equipment Trust Certificates (a)(b) $ 1,554 $ 1,987
Aircraft Secured Loans (a)(c) 784 2,156
Term Loan (d) 975
Other Secured Notes (a) 220 528
Other Secured Debt (a) 1 1
Unsecured Notes 1,313 1,313
Convertible Unsecured Notes 375 375
Unsecured Debt 2 2
Pre-Petition Claims (e) 307 11
Total Debt Liabilities Subject to Compromise (f) $ 4,556 $ 7,348
(a) On certain secured financings that are classified as subject to compromise, the Company continues to make
principal and interest payments, either through Bankruptcy Court approval or interim payment agreements
negotiated with the related creditors.
(b) At December 31, 2006, direct obligations of Northwest included the $1 .55 billion of equipment notes
underlying the pass-through trust certificates issued for 62 aircraft.
(c) At December 31, 2006, the $784 million of secured loans were secured by 36 aircraft.
(d) The Bank Term Loan had an initial principal amount of $975 million and was comprised of three tranches.
On August 21, 2006, the Company paid off the term loan and took on additional debt in the form of DIP/Exit
financing. Refer to "Note 7 - Long-Term Debt and Short-Term Borrowings."
(e) As a result of restructuring debt for aircraft subsequent to the filing date, the Company has recorded an
unsecured pre-petition claim of $307 million.
(f) Assets having an aggregate book value of $4.1 billion at December 31 , 2006, consisting principally of aircraft,
were pledged under various loan agreements. See "Note 7 - Long-Term Debt and Short-Term Borrowings"
for further information on debt obligations not classified as subject to compromise.
60
(2) Includes estimated unsecured creditor claims of $2.84 billion related to post-petition restructured operating and
capital leases. This amount also includes accrued rent for leases still in the process of being renegotiated. Refer
to "Note 8 - Leases" for information related to the Company's leases not subject to compromise.
(3) Capital lease obligations subject to compromise includes accrued interest and unpaid principal for financings that
remain subject to negotiations that may ultimately result in a return of collateral, settlement or a renegotiated
agreement.
Subsequent to its Chapter 11 filing, the Company recorded 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. Had the Company recorded interest expense based on its pre-petition contractual obligations,
interest expense would have increased by $178.7 million and $59.2 million during the years ended December 31 , 2006
and 2005, respectively.
In addition to the $13.6 billion of liabilities subject to compromise itemized above, the Company's $277 million of
Preferred Redeemable Stock is also subject to compromise. This preferred security is not presented as a liability on the
Company's Consolidated Balance Sheets due to its conversion features, as required by the provisions of SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
Note 7-Long-Tenn Debt and Short-Tenn Borrowings
Long-term debt classified as not subject to compromise as of December 31 consisted of the following (with interest
rates as of December 31, 2006):
(In millions)
Aircraft enhanced equipment trust certificates due through 2012, 9.8% weighted-average rate (2)
Aircraft secured loans due through 2024, 7.7% weighted-average rate (3)
DIP/Exit facility due 2007 through 2008 (4)
Other secured notes due through 2011, 7.6% weighted-average rate
Other secured debt through 2031, 2.4% weighted-average rate
Total secured debt
Total unsecured debt
Total debt
Less current maturities
Total Long-term debt
2006 (1)
s 168
2,215
1,225
410
94
4,112
4,112
213
$ 3,899
2005 (1)
$ 182
671
195
111
1,159
1,159
74
$ 1,085
(1) The financings listed in the table above are considered "not subject to compromise" either due to Bankruptcy
Court-approved post-petition negotiated agreements or due to the fact that the debt represents obligations of
Non-Debtor consolidated subsidiaries. Assets having an aggregate book value of $4.3 billion at December 31 ,
2006, consisting principally of aircraft and Pacific route authorities, were pledged under various loan agreements.
Refer to "Note 6 - Liabilities Subject to Compromise" for information related to long-term debt and short-term
borrowings that are classified as liabilities subject to compromise.
(2) At December 31 , 2006, direct obligations of Northwest included the $168 million of equipment notes underlying
the pass-through trust certificates issued for 13 aircraft. Interest on the pass-through trust certificates is payable
quarterly or semi-annually.
(3) The Company took delivery of and financed four Airbus A330-200 and two Airbus A330-300 aircraft during the
twelve months ended December 31, 2006, resulting in an increase of $444 million aircraft secured loans. At
December 31 , 2006, the $2.2 billion of the secured loans issued for 57 aircraft are direct obligations of Northwest.
On December 22, 2006, the Company entered an aircraft financing facility for $778.8 million. Proceeds of the
financing were used to finance and refinance 11 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.
(4) On August 21 , 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 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
61
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.
The DIP Facility consists of a $1.05 billion term loan facility, and a $175 million revolving credit facility which is
required to be fully drawn during the Company's bankruptcy proceeding. The maturity of the DIP Facility is the
earlier of the Company's exit from bankruptcy or two years, and the DIP Facility bears an interest rate of LIBOR
plus 2.50%, which as of December 31 , 2006 was 7.85%. The DIP Facility is secured by a first lien on the
Company's Pacific route authorities which were last appraised in January 2006 at $3.3 to $4.1 billion. Additionally,
the Company's obligations to the lenders have super-priority status while the Company is in bankruptcy. The DIP
Facility has a credit rating of BBB- from Standard & Poor's Rating Services ("S&P") and a Ba2 from Moody's
Investors Service, Inc. ("Moody's").
Subject to the Company meeting certain conditions, including emerging from bankruptcy on or prior to August 21 ,
2008, the DIP Facility can be converted to exit financing ("Exit Facility"). The final maturity, in such event, will be
August 21, 2013. Principal on the term loan portion of the Exit Facility will be repaid at 1.0% per year (as is the
case under the DIP Facility) with the balance of 94% due at maturity. Loans drawn under the revolving credit
facility may be borrowed and repaid at the Company's discretion. Up to $75 million of the revolving credit facility
may be utilized by the Company as a letter of credit facility. Both loan facilities under the exit financing will
continue to bear interest at LIBOR plus 2.50%, subject to certain potential adjustments described below. Letter of
credit fees will be charged at the same credit spread as on the borrowings plus 12.5 basis points. To the extent
that the revolving credit facility is not utilized, the Company is required to pay an undrawn commitment fee of 50
basis points per annum.
The conditions to convert the DIP Facility to exit financing on emergence from bankruptcy include, among other
items, a confirmed plan of reorganization with projections that reflect pro-forma financial covenant compliance for
the term of the facility, labor savings and pension relief, a minimum of $2.0 billion in unrestricted cash and
available committed credit facilities, a collateral coverage ratio of at least 1.50 to 1.00, and continuation of ratings
coverage of the exit financing by S&P and Moody's. At conversion, the interest rate of LIBOR plus 2.50% remains
in place for the exit financing, but is subject to the following potential increases:
0.50% per annum for so long as either S&P's rating or Moody's rating of the facility is less than BB- or
Ba3, respectively
0.50% per annum for so long as the collateral coverage ratio is 1. 75 to 1.00 or less
Both the DIP Facility and, upon its conversion, the Exit Facility require ongoing compliance with the following
financial covenants:
Unrestricted cash of at least $750 million
Collatera I coverage ratio of at least 1. 50 to 1. 00
Fixed charge coverage ratio as set forth below:
Four Consecutive Fiscal Quarters Ending
December 31, 2006 ... ... ............... .. ... ... ....... ... .................. .. . ..
March 31, 2007 ... ... ........ ....... .... ............. .... ................... .... . .
June 30, 2007 ...... .. ..... .... .............. .. ...... ..... ... ..... ..... ... ...... .. .
September 30, 2007 ... ...... ... ... ... .. ... ......... .... .................. .. .... .
December 31, 2007 and each quarter ending thereafter ............ . .
Minimum Ratio of
EBITDARto
Consolidated
Fixed Charges
1.15 to 1.00
1.20 to 1.00
1.30to 1.00
1.40 to 1.00
1.50 to 1.00
As of December 31, 2006 the Company was in compliance with all required financial covenants. See "Note 21 -
Subsequent Events (Unaudited)" for information related to the amendment of the DIP/Exit financing facility.
62
Debt Maturity Table:
Maturities of long-term debt classified as not subject to compromise for the five years subsequent to December 31 ,
2006 are as follows:
(In millions) 2007 2008 2009 2010 2011 Thereafter Total
Aircraft enhanced equipment
trust certificates $ 24 $ 25 $ 24 $ 25 $ 35 $ 35 $ 168
Aircraft secured loans 140 339 133 142 144 1,317 2,215
DIP facility (a) 10 1,215 1,225
Other secured notes 37 161 114 49 49 410
Other secured debt 2 92 94
Total secured debt 213 1,740 271 216 228 1,444 4,112
Total unsecured debt
Total long-term debt $ 213 $ 1,740 $ 271 $ 216 $ 228 $ 1,444 $ 4,112
(a) $1 .215 billion represents the amount due under the Company's DIP Facility (as described above) in 2008; if the DIP Facility is
converted to exit financing the maturity date will be extended five years with $1 .162 billion due in 2013.
As of December 31 , 2006 and December 31, 2005 there were no short-term borrowings. The weighted-average
interest rate on short-term borrowings outstanding at December 31, 2004 was 3.73%.
Note8-Leases
The Company leases aircraft, space in airport terminals, land and buildings at airports, ticket, sales and reservations
offices, and other property and equipment, which expire in various years through 2032. As allowed under Section 365 of
the Bankruptcy Code, the Company may assume, assume and assign, or reject certain executory contracts and unexpired
leases, including leases of real property, aircraft and aircraft engines, subject to the approval of the Bankruptcy Court and
certain other conditions. Consequently, the majority of the Company's non-aircraft operating leases and materially all of
the Company's capital leases are currently classified as subject to compromise. See "Note 6 - Liabilities Subject to
Compromise" for information related to operating leases and capital leases that are classified as liabilities subject to
compromise.
At December 31, 2006, future minimum lease payments for non-cancelable operating leases that are not subject to
compromise, primarily due to post-petition Bankruptcy Court approved agreements, with initial or remaining terms of more
than one year are as follows:
(In millions) Aircraft Non-aircraft
2007 $ 356 $ 15
2008 362 15
2009 357 14
2010 363 14
2011 309 13
Thereafter 1,955 24
3,702 95
Less sublease rental income from regional carriers 1,419
Total minimum operating lease payments (1) $ 2,283 $ 95
(1) As of December 31 , 2006, the Company had future minimum lease payments for non-cancelable operating
leases classified as subject to compromise in the amount of $1 .9 billion, net of sublease rental income of $30
million. Included in this amount are $252.4 million of obligations related to facility bonds issued by airport
authorities and/or municipal agencies in Minneapolis/St. Paul, Detroit, Memphis, and Duluth for which the
Company is the guarantor. The lease terms for these obligations end between 2011 and 2029.
Rental expense for all operating leases for the years ended December 31 consisted of the following (in millions):
(In millions)
Gross rental expense
Sublease rental income
Net rental expense
$
$
2006
727 $
(338)
389 $
63
2005
991 $
(371)
620 $
2004
928
(314)
614
====
At December 31 , 2006 Northwest leased 62 of the 371 aircraft it operates; of these 62 leases, one was a capital lease
and 61 were operating leases.
Note 9-Redeemable Preferred Stock
Series C Preferred Stock: As part of labor agreements reached in 1993, NWA Corp. issued to trusts for the benefit
of participating employees 9.1 million shares of a new class of Series C cumulative, voting, convertible, redeemable
preferred stock, par value of $.01 per share (the "Series C Preferred Stock"), and 17.5 million shares of Common Stock
and provided the union groups with three positions on the Board of Directors. NWA Corp. has authorized 25 million shares
of Series C Preferred Stock. The Series C Preferred Stock ranks senior to Common Stock with respect to liquidation and
certain dividend rights. Each share of the Series C Preferred Stock is convertible at any time into 1.364 shares of
Common Stock. As of December 31, 2006, 4.5 million shares of Series C Preferred Stock have been converted into
Common Stock and the remaining 4.6 million shares outstanding are convertible into 6.2 million shares of Common Stock.
During 2006, 69,392 shares of Series C Preferred Stock were converted into 94,651 shares of Common Stock.
During the 60-day period ending on August 1, 2003 (the "Put Date"), holders of the Series C Preferred Stock had the
right to put their shares of the Series C Preferred Stock to NWA Corp. Under the terms of the Series C Preferred Stock,
NWA Corp. was required to elect, prior to the commencement of such 60-day period, the form of payment it would use for
repurchasing such shares of the Series C Preferred Stock. On May 30, 2003, NWA Corp. elected to repurchase such
shares of the Series C Preferred Stock for cash equal to the Put Price. The "Put Price" of the Series C Preferred Stock is
equal to a pro rata portion of the actual savings resulting from labor cost savings agreements entered into in 1993
(approximately $226 million as of August 1, 2003, the Put Date) plus any accrued and unpaid dividends on the Series C
Preferred Stock.
On August 1, 2003, the Company announced that its Board of Directors had determined that the Company could not
legally repurchase the outstanding Series C Preferred Stock at that time because the Board of Directors was unable to
determine that the Company had adequate legally available surplus to repurchase the outstanding Series C Preferred
Stock. As a result, quarterly dividends began accruing August 1, 2003, at 12% per annum and the employee unions are
entitled to three additional Board of Directors positions. Effective with the petition date, the Company discontinued accruing
additional unpaid dividends.
In June 2003, the IBT and certain related parties commenced litigation against NWA Corp. in New York state court. In
August 2003, the 1AM and a related party also commenced litigation against NWA Corp. in New York state court. Both
lawsuits challenge the Company's decision not to purchase its Series C Preferred Stock during 2003 and seek to compel
the Company to repurchase the Series C Preferred Stock that had been put to the Company. On March 24, 2005, the New
York state court judge 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. Further proceedings in
this litigation have been stayed following the Company's Chapter 11 filing.
The financial statement carrying value of the Series C Preferred Stock that accreted over 10 years commencing
August 1993 to the ultimate put price, was $277 million at December 31 , 2006, including approximately $62 million of
unpaid dividends accrued from August 1, 2003 through September 14, 2005 (the petition date). This balance was
considered subject to compromise as of December 31 , 2006. As provided in the Company's Plan filed on February 15,
2007, no value will be ascribed to the Company's outstanding Common Stock, or the Series C Preferred Stock. Upon the
effective date of the Plan, the outstanding Common Stock and the Series C 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 Common Stock or the Series C Preferred Stock prior to emergence from
bankruptcy. However, the Plan as filed provides that the trial court's liability judgment in respect of the Series C litigation
will be treated as an allowed unsecured claim.
64
Note 10-Stock Based Compensation
As of December 31 , 2006, the Company maintains stock incentive plans for officers and key employees of the
Company (the "Management Plans") and a stock option plan for pilot employees (the "Pilot Plan"). The Company adopted
SFAS No. 123 (Revised 2004), Share-Based Payment ("SFAS No. 123R"), using the modified-prospective transition
method, effective January 1, 2006. In addition to requiring supplemental disclosures, SFAS No. 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, SFAS No. 123R 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. SFAS No. 123R 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. The Company's forfeiture estimate in 2006 was 10% for all options under the
Management Plans.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions: risk-free interest rate, stock price volatility, and expected life. The Company establishes the
risk-free interest rate using the U.S. Treasury yield curve as of the grant date. The expected volatility assumption is set
based primarily on historical volatility. The expected life assumption is set based on past exercise behavior of option
holders.
Stock Option Plan for Management: The fair value of options granted under the Management Plan was estimated
on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Weighted average risk-free interest rate
Stock price volatility
Expected lives in years
2006
NIA
NIA
NIA
2005
4.0%
50.0%
6.0
2004
NIA
NIA
NIA
A reconciliation of the number of options outstanding and exercisable under the Management Plan as of December
31, 2006, 2005, and 2004, are as follows:
2006 2005 2004
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(shares in thousands) Shares Price Shares Price Shares Price
Outstanding at
beginning of year 2,815 $ 12.59 2,948 $ 12.64 3,507 $ 12.06
Granted 185 4.71
Forfeited (451) 18.56 (303) 8.79 (343) 9.40
Exercised (15) 5.71 (216) 8.31
Outstanding at end of year 2,364 11 .45 2,815 12.59 2,948 12.64
Exercisable at end of year 1,765 12.78 1,690 15.80 1,154 19.18
Available for future grants 9,743 9,291 8,392
65
A summary of the number of options outstanding and exercisable under the Management Plan categorized by range
of exercise prices as of December 31 , 2006, are as follows:
Options Outstanding Options Exercisable
(shares in thousands)
Range of
Exercise Prices
Shares
Weighted-Average
Remaining
Contractual Life
Weighted-Average
Exercise Price Shares
Weighted-Average
Remaining
Contractual Life
Weighted-Average
Exercise Price
$4.61 to $24.59 (1)
26.16 to 39.31
43.56 to 51 .97
2,157
181
26
5.9 years
1.5 years
2.1 years
$ 9.08
34.22
50.49
1,558
181
26
5.8 years
1.5 years
2.1 years
$ 9.66
34.22
50.49
( 1) 1. 7 million of the 2.2 million shares outstanding had an exercise price of $8.31 , and approximately 1.3 million of these
shares were exercisable.
There was no aggregate intrinsic value for either outstanding or exercisable options under the Management Plans, as
the exercise prices for all grants were greater than the market price of the Company's Common Stock at December 31 ,
2006. The weighted-average fair value of options granted during 2005 was $2.63 per option. There were no options
granted under the Management Plans in 2006 or 2004. The aggregate intrinsic value of options exercised was immaterial
during 2005 and 2004. There were no options exercised in 2006.
Stock Option Plan for Pilots: The Pilot Plan was established in September 1998, in conjunction with the labor
agreement reached between Northwest and the Air Line Pilots Association, International. In addition, in October 2004, in
conjunction with the agreement with ALPA providing for labor cost restructuring, the Company granted 3.5 million
additional stock options to pilot employees. Since at the time this agreement was reached there were no shares that
remained available for grant under the Pilot Plan, the 3.5 million additional options were granted under the Management
Plans.
The fair value of options granted under the Pilot Plan was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
2006 2005 2004
Weighted average risk-free
interest rate NIA NIA 3.5%
Stock price volatility NIA NIA 50%
Expected lives in years NIA NIA 6
A reconciliation of the number of options outstanding and exercisable under the Pilot Plans as of December 31 , 2006,
2005, and 2004, are as follows:
2006 2005 2004
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(shares in thousands) Shares Price Shares Price Shares Price
Outstanding at
beginning of year 5,064 $ 9.96 5,064 $ 9.96 1,564 $ 15.85
Granted 3,500 7.33
Cancelled
Exercised
Outstanding at end of year 5,064 9.96 5,064 9.96 5,064 9.96
Exercisable at end of year 4,829 10.00 2,854 11.69 871 21 .15
66
A summary of the number of options outstanding and exercisable under the Pilot Plan categorized by exercise price
as of December 31 , 2006, are as follows:
Oetions OutstandinS Oetions Exercisable
Remaining Remaining
(shares in thousands) Shares Contractual Life Shares Contractual Life
Exercise Prices
$ 7.33 3,500 7.8 years 3,497 7.8 years
$ 9.19 926 6.6 years 695 6.6 years
$ 19.62 134 4.7 years 134 4.7 years
$ 24.69 123 2.7 years 123 2.7 years
$ 27.88 254 1.7 years 254 1.7 years
$ 27.88 127 3.7 years 127 3.7 years
There was no aggregate intrinsic value for either outstanding or exercisable options under the Pilot Plan, as the
exercise prices for all grants were greater than the market price of the Company's Common Stock at December 31 , 2006.
The weighted-average fair value of options granted during 2004 was $3.78 per option. There were no options granted
under the Pilot Plan in 2006 or 2005.
Restricted Stock: Shares of Restricted Stock were awarded at no cost to certain officers and key employees in 2005
and 2004. These shares are subject to forfeiture until vested and the shares are issued or released upon vesting.
Unearned compensation, representing the fair market value of the stock on the measurement date, is amortized over the
applicable vesting period. The total fair value of shares vested in 2005 and 2004 was $3.5 million and $7.4 million,
respectively. All outstanding shares of Restricted Stock were cancelled during the fourth quarter of 2005, and the
remaining $8.4 million of unamortized compensation expense related to these awards was recognized as a reorganization
item.
Phantom Stock Awards: Phantom Stock awards were granted pursuant to the Management Plans to certain officers
and other key employees. In 2005 and 2004, a total of 0.7 million and 2.1 million Phantom Stock units, respectively, were
granted. The Phantom Stock vests over either a three or four year period based on continued employment of the
participant during such periods, and in some cases, upon satisfaction of certain established performance standards. Each
unit represents the right to receive a cash payment equal to the market value of the Company's Common Stock as defined
in the plan. No Phantom Stock awards were issued during 2006.
During the twelve months ended December 31, 2006, the total compensation expense for all compensation related to
stock-based plans was $4.1 million, which includes $1.9 million of stock option expense. In the twelve months ended
December 31, 2005 and 2004, the Company recognized stock-based compensation expense of $18.1 million and $18.9
million respectively, which includes $13.0 million and $7.5 million of stock option expense. Cash received from the
exercise of stock options for the years ended 2005 and 2004 was approximately $0.1 million and $2.4 million, respectively.
There were no shares exercised in 2006. There was no corresponding tax benefit in 2006, 2005, or 2004 related to this
stock-based compensation, as the Company records a full valuation allowance against its deferred tax assets due to the
uncertainty regarding the ultimate realization of those assets. As of December 31 , 2006, the Company had approximately
$0.4 million of total unrecognized compensation expense related to nonvested awards. The Company expects to
recognize this expense over a weighted average period of approximately 0.3 years.
67
Note 11 - Accumulated Other Comprehensive Income (Loss)
The following table sets forth information with respect to accumulated other comprehensive income (loss) ("OCI"):
Foreign Deferred Minimum Adjustment Unrealized Accumulated
Currency Gain (Loss) Pension to Adopt Gain (Loss) Other
Translation on Hedging Liability SFAS on Comprehensive
(In millions) Adjustment Activities Adjustment No. 158 Investments Income (Loss)
Balance at January 1, 2004 $ (7) $ (13) $ (1,319) $ - $ (1) $ (1 ,340)
Before tax amount 3 8 (222) 4 (207)
Tax effect
Net-of-tax amount 3 8 (222) 4 (207)
Balance at December 31, 2004 (4) (5) (1 ,541) 3 (1 ,547)
Before tax amount (7) 11 (16) (9) (21)
Tax effect
Net-of-tax amount (7) 11 (16) (9) (21)
Balance at December 31, 2005 (11) 6 (1,557) (6) (1,568)
Before tax amount (10) 699 (224) 3 468
Tax Effect
Net-of-tax amount (10) 699 (224) 3 468
Balance at December 31, 2006 $ (11) $ (4) $ (858) $ (224) $ (3) $ (1,100)
Note 12- Income Taxes
Income tax expense (benefit) consisted of the following for the years ended December 31 :
(In millions) 2006 2005 2004
Current:
Federal $ $ 6 $ (3)
Foreign 8 4
State
8 7
Deferred:
Federal (37)
Foreign
State
(37)
Total income tax expense (benefit) $ (29) $ 7 $
68
Reconciliations of the statutory rate to the Company's income tax expense (benefit) for the years ended December 31
are as follows:
(In millions) 2006 2005 2004
Statutory rate applied to income (loss)
before income taxes $ (1,003) $ (860) $ (301)
Add (deduct):
Mandatorily Redeemable Preferred Security 8
State income tax expense (benefit)
net of federal benefit (45) (39) (14)
Non-deductible expenses 23 13 6
Adjustment to valuation allowance and
other income tax accruals 1,023 883 297
Other i271 10 5
Total income tax expense (benefit) $ (29) $ 7 $
Under the provisions of SFAS No. 109, Accounting for Income Taxes rsFAS 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.
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.
Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows:
(In millions) 2006 2005
Deferred tax liabilities:
Accounting basis of assets in excess of tax basis $ 2,219 $ 2,169
Expenses other than accelerated depreciation and amortization 55 16
Other 16 23
Total deferred tax liabilities 2,290 2,208
Deferred tax assets:
Expenses not yet deducted for tax purposes 253 284
Reorganization charges not yet deducted for tax purposes 1,526 384
Pension and postretirement benefits 1,476 1,320
Gains from the sale-leaseback of aircraft 18 99
Rent expense (35) 101
Travel award programs 104 95
Net operating loss carryforward 1,216 1,213
Alternative minimum tax credit carryforward 134 134
Other 34 25
Total deferred tax assets 4,726 3,655
Valuation allowance for deferred tax assets (2,436) ~1,447~
Net deferred tax assets 2,290 2,208
Net deferred tax liability $ $
The Company has certain federal deferred tax assets available for use in the regular tax system or the alternative
minimum tax ("AMT") system. The deferred tax assets available for utilization in the regular system include: AMT credits of
$134 million, net operating loss carryforwards of $3.3 billion, general business credits of $7 million and foreign tax credits
69
of $11 million. The deferred tax assets available for utilization in the AMT system are: net operating loss carryforwards of
$3.5 billion and foreign tax credits of $9 million. AMT credits available for use in the regular system have an unlimited
carryforward period and all other deferred tax assets in both systems are available for carryforward to years beyond 2006,
expiring in 2007 through 2025.
The Company also has the following deferred tax assets available at December 31, 2006 for use in certain states: net
operating losses with tax benefit value of approximately $83 million and state job credits of $7 million available for
carryforward to years beyond 2006, expiring in 2008 through 2011 .
The Company's valuation allowance increased by $1 .0 billion during 2006. In addition to the valuation allowance
recorded through continuing operations, a portion of this valuation allowance was recorded to Other Comprehensive
Income, primarily as a result of a decrease in minimum pension liabilities.
The Company's effective tax rate is impacted by income tax reserves and changes thereto that it considers
appropriate. Significant judgment is required to evaluate and adjust the reserves in light of changing facts and
circumstances, such as the progress of a tax audit or appeal. 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.
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.
Note 13 - Commitments
The Company's firm orders for 33 new aircraft to be operated by Northwest consist of scheduled deliveries for eight
Airbus A330-300 aircraft in 2007, 18 Boeing 787-8 aircraft from 2008 through 2010, two Airbus A320 aircraft in 2009 and
five Airbus A319 aircraft from 2010 through 2011. As of December 31, 2006, the Company also had firm orders, to take
delivery of 36 Bombardier CRJ900 aircraft and 36 Embraer 175 aircraft from 2007 to 2008, related to its regional aircraft
operations.
Committed expenditures for aircraft and related equipment confirmed following the commencement of the Chapter 11
case, including estimated amounts for contractual price escalations and predelivery deposits, will be approximately $1.4
billion in 2007, $2.0 billion in 2008, $582 million in 2009, $771 million in 2010, and $80 million in 2011 . Consistent with
prior practice, the Company intends to finance its aircraft deliveries through a combination of internally generated funds,
debt and long-term lease financings. The Company has firm financing commitments for all aircraft on order which have
been approved by the Bankruptcy Court.
Note 14 - Conti~gencies
Legal Contingencies: The Company is involved in a variety of legal actions relating to antitrust, contract, trade
practice, environmental and other legal matters pertaining to the Company's business. While the Company is unable to
predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters
will not have a material adverse effect on the Company's Consolidated Financial Statements taken as a whole.
General Indemnifications: The Company is the lessee under many commercial real estate leases. It is common in
these transactions for us, as the lessee, to agree to indemnify the lessor and the lessor's related parties for tort,
environmental and other liabilities that arise out of, or relate to, our use or occupancy of the leased premises. This type of
indemnity would typically make us responsible to indemnified parties for liabilities arising out of the conduct of, among
others, contractors, licensees and, in many cases, invitees at or in connection with the use or occupancy of the leased
premises. This indemnity normally excludes any liabilities caused by the gross negligence (or, in some cases, the
negligence) and willful misconduct of the indemnified parties.
The Company's aircraft and other equipment lease and financing agreements typically contain provisions requiring us,
as the lessee or obliger, to indemnify the other parties to those agreements, including certain of those parties' related
persons, against virtually any liabilities that might arise from the condition, use or operation of the aircraft or such other
equipment. The Company believes that its insurance would cover most of the exposure to such liabilities and related
indemnities associated with the types of lease and financing agreements described above, including real estate
leases. However, the Company's insurance does not typically cover environmental liabilities.
70
Certain of our aircraft and other financing transactions include provisions which require us to make payments to
preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in law or
regulations. In certain of these financing transactions, the Company also bears the risk of certain changes in tax laws that
would subject payments to non-U.S. lenders to withholding taxes.
The Company obtains letters of credit ("LOCs") from commercial banks in favor of various parties to secure obligations
of the Company to such parties. As of December 31 , 2006, the total outstanding amount of these LOCs was $90.6 million
(excluding an additional $126.7 million of LOCs that were fully secured by the Company's pledge of cash collateral). The
obligations of the Company with respect to this $90.6 million of LOCs, together with certain other obligations of the
Company, are secured by the Company's routes, certain aircraft and cash collateral.
Note 15- Pension and Other Postretirement Health Care Benefits
The Company has several defined benefit pension plans or 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 coverage will be provided for these employees through 401 (k)-type defined contribution
plans or in the case of 1AM represented employees, the 1AM National Multi-Employer Plan.
Northwest also sponsors various contributory and noncontributory medical, dental and life insurance benefit plans
covering certain eligible retirees and their dependents. The expected future cost of providing such postretirement benefits
is accrued over the service lives of active employees. Retired employees are not offered Company-paid medical and
dental benefits after age 64, with the exception of certain employees who retired prior to 1987 and receive lifetime
Company-paid medical and dental benefits. Prior to age 65, the retiree share of the cost of medical and dental coverage is
based on a combination of years of service and age at retirement. Medical and dental benefit plans are unfunded and
costs are paid as incurred. The pilot group is provided Company-paid decreasing term life insurance coverage.
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.
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 158, which amends SFAS
No. 87, Employers' Accounting for Pensions ("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
71
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. SFAS No. 158 does not
affect the results of operations.
The following is a reconciliation of the beginning and ending balances of the benefit obligations, the fair value of
plan assets, and the funded status:
(In millions) Pension Benefits Other Benefits
2006 2005 2006 2005
Change in benefit obligations:
Benefit obligations at beginning of year $ 9,472 $ 9,245 $ 1,051 $ 926
Service cost 116 278 30 34
Interest cost 533 553 59 56
Plan amendments (3) (106) (270)
Actuarial loss and other (265) 110 91 89
Transfer of liability out of plan ( 1) (8) (162)
Benefits paid (472) {446~ (63) (54)
Benefit obligations at end of year 9,373 9,472 898 1,051
Change in plan assets:
Fair value of plan assets at beginning of year 5,794 5,425 5 5
Actual return on plan assets 870 507
Employer contributions 86 308 63 54
Benefits paid (472) (446~ (63) !54~
Fair value of plan assets at end of year 6,278 5,794 5 5
Funded Status at end of year- net underfunded $ (3,095) $ (3,678) $ (893) $ (1 ,046)
(1) The Company transferred the liability associated with certain long-term disability benefits previously
provided in the Northwest Airlines Pension Plan for Pilots to a self-funded long-term disability plan
that provides substantially similar benefits.
The accumulated benefit obligations for all defined benefit pension plans were $9.36 billion and $9.45 billion at
December 31, 2006 and 2005, respectively. The Company's pension plans with accumulated benefit obligations in excess
of plan assets as of December 31 were as follows:
(In millions)
Projected benefit obligations
Accumulated benefit obligations
Fair value of plan assets
72
2006
$ 9,352
9,338
6,251
2005
$ 9,451
9,437
5,769
Amounts recognized in the statement of financial position as of December 31 consist of:
(In millions) Pension Benefits Other Benefits
2006 2005 2006 2005
Assets
Prepaid benefit costs $ n/a $ 6 $ n/a $
Noncurrent assets 6 n/a n/a
Intangible asset n/a 362 n/a
Total assets 6 368
Liabilities
Accrued benefit liability n/a (3,686) n/a (564)
Current liability (28) n/a (64) n/a
Noncurrent liability 13,073} n/a 1829} n/a
Total liabilities (3,101} i3,686l (893) (564)
Accumulated other comprehensive
loss (income), pre-tax
Net loss (gain) $ 1,621 $ 2,364 $ 619 n/a
Prior service cost ( credit) (1) (41) (333} n/a
Total other comprehensive income 1,620 2,323 286
Weighted average assumptions used to determine benertt obligations for pension and other benertts at December
31:
(In millions)
Discount rate
Rate of future compensation increase ( 1)
(1) Not applicable to frozen plans.
Pension Benefits
2006 2005
5.93%
3.50%
5.71%
3.50%
Other Benefits
2006 2005
5.93%
n/a
5.71%
n/a
Components of net periodic benerlt cost of defined benefit plans and defined contribution plan costs:
(In millions) Pension Benefits Other Benefits
2006 2005 2004 2006 2005 2004
Defined benefit plans
Service cost $ 116 $ 278 $ 239 $ 30 $ 34 $ 30
Interest cost 533 553 534 59 56 51
Expected return on plan assets (484) (518) (503)
Amortization of prior service cost 30 73 75 (21) (10) (8)
Recognized net actuarial loss
and other events 87 170 99 38 31 25
Net periodic benefit cost 282 556 444 106 111 98
Defined contribution plan costs 53 11
Total benefit cost $ 335 $ 567 $ 444 $ 106 $ 111 $ 98
73
Related to the freezing of Northwest's defined benefit plans covering domestic employees in 2005 and 2006,
Northwest recorded pension curtailment charges and gains. Curtailment charges recorded prior to Northwest's bankruptcy
filing were recorded in pension expense; curtailment charges and gains recorded after Northwest's Chapter 11 filing have
been recorded as a component of net reorganization expense. Northwest has recorded the following pension curtailment
amounts:
(In millions) 2006 2005
Curtailment charge (gain)
Salaried Plan s $ 28
Pilot Plan (49) 127
Contract Plan 332 54
Total s 283 $ 209
Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit
cost in 2007:
(In millions)
Net loss (gain)
Prior service cost ( credit)
Pension
Benefits
$ 42
$ 42
Other
Benefits
$ 40
(36)
$ 4
Weighted-average assumptions used to determine net periodic pension and other benefit costs for the years
ended December 31:
Discount rate
Expected long-term return on plan assets
Rate of future compensation increase (1)
(1) Not applicable to frozen plans.
Pension Benefits
2006 2005
5.71%
9.00%
3.50%
5.90%
9.50%
2.15%
Other Benefits
2006 2005
5.71%
5.00%
n/a
5.90%
5.00%
n/a
The Company has adopted and implemented an investment policy for the defined benefit pension plans that
incorporates a strategic asset allocation mix designed to best meet the Company's long-term pension obligations. This
asset allocation policy mix is reviewed every 2-3 years and, on a regular basis, actual allocations are rebalanced toward
the prevailing targets. The following table summarizes actual allocations as of December 31, 2006 and 2005:
Plan Assets
Asset Cate90!1 Target 2006 2005
Domestic Stocks 45.0% 47.2% 47.7%
International Stocks 25.0% 28.1% 27.5%
Private Markets 10.0% 5.1% 5.3%
Long-Duration Bonds 15.0% 14.5% 14.7%
High Yield Bonds 5.0% 5.1% 4.8%
Total 100% 100.0% 100.0%
The investment policy also emphasizes the following key objectives: (1) maintain a diversified portfolio among asset
classes and investment styles; (2) maintain an acceptable level of risk in pursuit of long-term economic benefit; (3)
maximize the opportunity for value-added returns from active management; (4) capture return opportunities from
inefficiencies in nontraditional capital markets; and (5) maintain adequate controls over administrative costs.
To meet these objectives, the Company's investment policy reflects the following major themes: (1) diversify holdings
to achieve broad coverage of both stock and bond markets; (2) utilize market index funds as a core strategy, where
appropriate, to ensure broad diversification, minimal fees, and reduced risk of relative underperformance of the portfolio; (3)
use active investment managers with disciplined, clearly defined strategies, while establishing investment guidelines and
monitoring procedures for each investment manager to ensure the characteristics of the portfolio are consistent with the
74
original investment mandate; and (4) maintain an allocation to nontraditional investments, where market inefficiencies are
greatest, and use these investments primarily to enhance the overall returns.
The Company reviews its rate of return on plan asset assumptions annually. These assumptions are largely based on
the asset category rate-of-return assumptions developed annually with the Company's pension investment advisors. 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 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.
For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered health care benefits
was assumed for 2007. The rate was assumed to decrease 0.5% per year for seven years to 5.0% in 2014 and remain at
that level thereafter. Assumed health care cost trend rates have a significant impact on the amounts reported under other
benefits, above, for the health care plans.
A one percent-change in assumed health care cost trend rates would have the following effects:
(In millions)
Effect on total of service and interest cost components
Effect on accumulated postretirement benefit obligations
One Percentage- One Percentage-
Point Increase Point Decrease
$ 10.4 $ (8.8)
73.7 (65.0)
The estimated future benertt payments expected to be made by the pension and other postretirement benefit plans
are shown below:
(In millions) Employer
Provided Other
Estimated Future Pension Postretirement
Benefit Pa~ents: Benefits Benefits
2007 $ 457 $ 68
2008 476 68
2009 494 68
2010 520 69
2011 541 69
Years 2012-2016 3,082 343
Note 16 - Risk Management and Financial Instruments
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"),
which requires the Company to recognize all derivatives on the balance sheet at fair value. The Company uses derivatives
as cash flow hedges to manage the price risk of fuel and its exposure to foreign currency fluctuations. SFAS No. 133
requires that for cash flow hedges, which hedge the exposure to variable cash flows of a forecasted transaction, the
effective portion of the derivative's gain or loss be initially reported as a component of other comprehensive income (loss)
in the equity section of the balance sheet and subsequently reclassified into earnings when the forecasted transaction
affects earnings. Any ineffective portion of the derivative's gain or loss is reported in earnings immediately.
Risk Management: The Company principally uses derivative financial instruments to manage specific risks and does
not hold or issue them for trading purposes. The notional amounts of financial instruments summarized below did not
represent amounts exchanged between parties and, therefore, are not a measure of the Company's exposure resulting
from its use of derivatives.
75
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. In 2006, the Company's yen-denominated net cash inflow was approximately 86 billion yen ($7 47
million).
The Company uses forward contracts, collars or put options to hedge a portion of its anticipated yen-denominated
sales. The changes in market value of such instruments have historically been highly effective at offsetting exchange rate
fluctuations in yen-denominated sales. At December 31 , 2006, the Company had no forward contracts in place for 2007
and therefore had no balance associated with yen hedge contracts outstanding in accumulated other comprehensive
income (loss). Hedging gains or losses are recorded in revenue when transportation is provided. The Japanese yen
financial instruments utilized to hedge yen-denominated cash flows resulted in realized gains of $9 million and $11 million
in 2006 and 2005, respectively, and a realized loss of $8 million in 2004.
Counterparties to these financial instruments expose the Company to credit loss in the event of nonperformance, but
the Company does not expect any of the counterparties to fail to meet their obligations. The amount of such credit
exposure is generally the unrealized gains, if any, in such contracts. To manage credit risks, the Company selects
counterparties based on credit ratings, limits exposure to any single counterparty and monitors the market position with
each counterparty. It is the Company's practice to participate in foreign currency hedging transactions with a maximum
span of 24 months.
Aircraft Fuel: The Company is exposed to the effect of changes in the price and availability of aircraft fuel. In order
to provide a measure of control over price and supply, the Company trades and ships fuel and maintains fuel storage
facilities to support its flight operations. To further manage the price risk of fuel costs, the Company primarily utilizes
futures contracts traded on regulated futures exchanges, swap agreements and options.
As of December 31, 2006, the Company had economically hedged the price of approximately 35% of its projected fuel
requirements for 2007, through a combination of collar options and fixed price swap agreements. Including an additional
fixed price swap agreement entered into during January 2007, the Company has hedged the price of approximately 40% of
its projected fuel requirements for 2007. All of the Company's existing fuel derivative contracts will expire on or before
December 31, 2007.
The collar options, which hedge the price of approximately 30% of the Company's projected fuel requirements for
2007, consist of crude oil put options with a price range of $53 to $56. 70 per barrel, and related call options at a price of
$72 per barrel. The fixed price crude oil swap agreements, which hedge the price of approximately 10% of the Company's
projected fuel requirements for 2007, include agreements with a price range of $62 to $64.98 per barrel.
The Company currently has no fuel derivative contracts outstanding that are designated for hedge accounting
treatment, and therefore had no related unrealized gains (losses) in accumulated other comprehensive income (loss) as of
December 31, 2006. The Company records any changes in the contracts' values as mark-to-market adjustments through
the statement of operations on a monthly basis. During 2006, the Company 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 and 2004, the Company recognized $20.9 million and $28.7 million of fuel derivative net gains
as a reduction to fuel expense, respectively.
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. During June 2006, the Company 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. The maturity date of each of the interest rate cap hedges corresponds exactly with
the maturity dates of the three designated debt instruments. As of December 31 , 2006, the Company has recorded $3.5
million of unrealized losses in accumulated other comprehensive income (loss) associated with these hedges.
76
Fair Values of Financial Instruments: The financial statement carrying values equal the fair values of the
Company's cash, cash equivalents and short-term investments. As of December 31, these amounts were:
(In millions)
Cash
Available for sale securities
Total
Cash and
Cash Equivalents
2006 2005
$ 92 $ 121
1,369 563
$1,461 $ 684
$
$
Short-term Investments
Unrestricted Restricted
2006 2005 2006 2005
$
-$-- -$--
597 578 424 600
597 $ 578 $424 $600
Cash equivalents are carried at cost and consisted primarily of unrestricted money market funds as of December 31,
2006. These instruments approximate fair value due to their short maturity. The Company classifies investments with a
remaining maturity of more than three months on their acquisition date and those temporarily restricted as short-term
investments.
The financial statement carrying values and estimated fair values of the Company's financial instruments, including
current maturities, as of December 31 were:
(In millions)
Long-Term Debt
Carrying
Value
$ 4,112
2006
Fair
Value
$ 4,150
Carrying
Value
$ 1,159
2005
Fair
Value
$ 1,061
The fair values of the Company's long-term debt classified as not subject to compromise were estimated using
discounted cash flow analyses. The discount rates were based on internal estimates of market rates supported by
restructuring efforts on similar types of instruments.
Note 17- lnvestment Securities
The amortized cost, gross unrealized gains and losses, and fair value of short-term investment securities classified as
available-for-sale as of December 31 were as follows:
(In millions) 2006 2005
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Available-for-sale Securities (1) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
Mutual Funds $ 146 $ $ (2) $ 144 $ 139 $ $ (2)
U.S. Treasury securities 17 17 45
Corporate securities 60 61 65 (1)
Mortgage-backed securities 173 (2) 172 118 (2)
Asset-backed securities 212 (1) 211 213 (1)
Other securities and investments 2 2 4
Total available-for-sale securities $ 600 $ 2 $ (6) $ 697 $ 584 $ - $ (6)
(1) Available-for-sale securities are carried at fair value, with unrealized net gains or losses reported within other
comprehensive income in stockholders' equity.
$
$
As of December 31, 2006, the fair value of available-for-sale securities includes investments totaling $56 million, with
unrealized losses of $2.3 million, which have been in an unrealized loss position for greater than 12 months. The
investments consist of 62 securities that are primarily high credit quality fixed income securities. All other available-for-
sale securities, with unrealized losses of $2.3 million, which have been in an unrealized loss position for less than 12
months, have an aggregate fair value of $204 million. These securities primarily represent fixed income investments with
temporary impairments resulting from increases in interest rates since the purchase of the investments.
77
137
45
64
116
212
4
578
The following table provides information as to the amount of gross gains and losses realized through the sale of
available-for-sale investment securities for the years ending December 31 :
(In millions) 2006 2005 2004
Realized gains ( 1) $ $ 24 $ 6
Realized losses (1) (1) (27) (10)
Net realized gains (losses) $ (1) $ (3) $ (4)
(1) Realized gains and losses are identified using the specific identification method.
The contractual maturities of debt securities available-for-sale at December 31 , 2006 are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the right to recall or prepay obligations with
or without call or prepayment penalties.
Amortized
(In millions)
Within one year $
Between one and five years
Between five and ten years
After ten years
Cost
260
98
10
232
600
Total short-term investments $
::::::::::====
Note 18 - Related Party Transactions
Fair Value
$ 258
99
10
230
$ 597
Pinnacle: The Company continues to own 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.
Northwest and Pinnacle Airlines have entered into an airline services agreement, under which Northwest determines
Pinnacle Airlines' commuter aircraft scheduling and fleet composition. The agreement is structured as a capacity purchase
agreement whereby Northwest pays Pinnacle Airlines to operate the flights on Northwest's behalf and Northwest is entitled
to all revenues associated with those flights. Under this agreement, Northwest paid $596 million, $572 million and $493
million for the years ended December 31, 2006, 2005 and 2004, respectively. The Company had payables of $131 million
and $81 million to Pinnacle Airlines as of December 31, 2006 and 2005, respectively. As of December 31 , 2006, the
Company has leased 124 CRJ aircraft, which are in turn subleased to Pinnacle Airlines. As part of its overall restructuring
efforts, the Company evaluated its airline services agreements with its regional carriers, initiated a request for proposal
from its existing and other regional carrier operators, and obtained Bankruptcy Court approval of an amended and restated
Airline Services Agreement ("Amended Pinnacle ASA") between the Company and Pinnacle Airlines on January 11, 2007.
See "Note 21 - Subsequent Events (Unaudited)" for further details on the Amended Pinnacle ASA.
MAIR Holdings, Inc.: On October 13, 2005, Mesaba, a wholly owned subsidiary of MAIR, filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code in the District of Minnesota (Case No. 05-39258 (GFK)). In
accordance with the provisions of the Bankruptcy Code, Mesaba will continue to operate its business as a debtor-in-
possession.
The Company continues to own 27.5% of the Common Stock of MAIR, and accounts for this investment under the
equity method of accounting. Our investment in MAIR Common Stock had a market value of $40.6 million and a book
value of $19.8 million as of December 31, 2006. Any losses incurred by Mesaba during its bankruptcy would negatively
impact the Company's net earnings, as well as the book value of the Company's investment in MAIR. Other than noted
above, the Company is currently unable to determine the impact of Mesaba's bankruptcy on its operations or financial
condition with any certainty.
Northwest and Mesaba have entered into an airline services agreement under which Northwest determines Mesaba's
turboprop and CRJ aircraft scheduling and fleet composition. This agreement is structured as a capacity purchase
arrangement whereby Northwest pays Mesaba to operate the flights on Northwest's behalf and Northwest is entitled to all
revenues associated with those flights. Northwest paid $290 million, $393 million and $421 million for the years ended
December 31, 2006, 2005 and 2004, respectively, to Mesaba for airline services. These payments are recorded on a
gross basis as an operating expense. The Company had a payable to Mesaba of $53 million as of both December 31,
2006 and 2005. As of December 31, 2006, the Company has leased 49 Saab 340 aircraft and 1 CRJ200 aircraft which are
in tum subleased to Mesaba. Refer to "Note 21 - Subsequent Events (Unaudited)" for details on the significant changes in
the Company's relationship with Mesaba that occurred after December 31, 2006.
78
Orbitz: On December 16, 2003, Orbitz and its airline owners (Northwest, Continental, Delta, United and American)
sold approximately 12 million Orbitz shares through an initial public offering, which included 9.7% of Northwest's total
holdings. On September 29, 2004, Cendant Corporation, Orbitz and the airline owners of Orbitz entered into agreements
that provided for the acquisition by Cendant of all shares of Orbitz for $27.50 per share in cash. The sale passed
regulatory and other approvals and the transaction closed in November 2004. As a result of the sale, Northwest sold all
4,949,201 of its remaining shares of class B common stock of Orbitz and the Company recognized a gain of approximately
$115 million in the fourth quarter of 2004.
Note 19-Geographic Regions
The Company is managed as one cohesive business unit, of which revenues are derived primarily from the
commercial transportation of passengers and cargo. Operating revenues from flight segments serving a foreign
destination are classified into the Pacific or Atlantic regions, as appropriate. The following table shows the operating
revenues for each region for the years ended December 31 :
(In millions) 2006 2005 2004
Domestic $ 8,561 $ 8,274 $ 7,787
Pacific, principally Japan 2,711 2,639 2,343
Atlantic 1
1
296 1,373 1,149
Total operating revenues $ 121568 $ 121286 $ 111279
The Company's tangible assets consist primarily of flight equipment, which are utilized across geographic markets and
therefore have not been allocated.
Note 20 - Quarterly Financial Data (Unaudited)
Unaudited quarterly results of operations for the years ended December 31 are summarized below:
(In millions, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2006:
Operating revenues $ 2,890 $ 3,291 $ 3,407 $ 2,980
Operating income (loss) (15) 295 366 94
Net income (loss) applicable to common stockholders $ (1 ,104) $ (285) $ (1,179) $ (267)
Basic and diluted earnings (loss) per common share $ (12.65) $ (3.27) $ (13.50) $ (3.06)
2005:
Operating revenues $ 2,798 $ 3,195 $ 3,378 $ 2,915
Operating income (loss) (301) (190) (167) (261)
Net income (loss) applicable to common stockholders $ (537) $ (234) $ (475) $ (1,309)
Basic and diluted earnings (loss) per common share $ (6.19) $ (2.69) $ (5.45) $ (15.01)
2004:
Operating revenues $ 2,603 $ 2,871 $ 3,052 $ 2,753
Operating income (loss) (108) (52) 79 (424)
Net income (loss) applicable to common stockholders $ (230) $ (182) $ (46) $ (433)
Basic and diluted earnings (loss) per common share $ (2.67) $ (2.11) $ (0.54) $ (5.00)
79
Unaudited quarterly net income (loss) applicable to common stockholders in the table above includes the following
unusual items:
(In millions) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2006:
Severance expenses $ $ $ $ (23)
Reorganization items (975) (464) (1,431) (295)
Impact on net income (loss) from unusual items $ (975) $ (464) $ (1,431) $ (318)
2005:
Pension curtailment charges $ $ $ (82) $
Aircraft and aircraft related write-downs (48)
Gain (loss) on sale of assets (18) 102
Reorganization items (159) (922)
Cumulative effect of change in accounting principle (69)
Impact on net income (loss) from unusual items $ (87) $ 54 $ (241) $ (922)
2004:
Aircraft impairments $ $ (104) $ $ (99)
Gain (loss) on sale of assets 115
Frequent flyer liability adjustment (77)
Impact on net income (loss) from unusual items $ $ (104) $ $ (61)
The sum of the quarterly earnings per share amounts may not equal the annual amount reported since per share
amounts are computed independently for each quarter and for the full year are based on respective weighted-average
common shares outstanding and other dilutive potential common shares.
Note 21 - Subsequent Events (Unaudited)
Amended Pinnacle ASA. On January 11 , 2007, the Bankruptcy Court approved the Amended Pinnacle ASA between
the Company and Pinnacle Airlines. The Amended Pinnacle ASA provides that Pinnacle will continue to be a long-term
partner of Northwest through at least 2017. In addition to reaching terms on an amended airline services agreement,
Northwest granted Pinnacle 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 Definitive Agreement. On January 22, 2007, the Debtors entered into a Stock Purchase and Reorganization
Agreement with Mesaba under which the Debtors agreed to purchase all of the equity interests in Mesaba following its
reorganization under Chapter 11 and granted Mesaba 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
Mesaba's parent, MAIR Holdings, Inc. ("MAIR") and to sell MAIR all of Northwest's stock in MAIR.
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.
Amended Plan and Disclosure Statement. 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 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.
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
80
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.
Amended DIP/Exit Facility. On March 9, 2007, the Company amended its $1 ,225,000,000 Super Priority Debtor in
Possession and Exit Credit and Guarantee Agreement ("DIP/Exit Facility") to, among other things, reduce the margin
applicable to loans by 50 basis points as well as eliminate minimum credit rating and collateral coverage margin-increase
thresholds. The amendment also permits Northwest to grant liens on the collateral securing obligations under the DIP/Exit
Facility to support up to $150 million of Northwest's obligations under fuel, interest rate and/or currency exchange hedging
agreements with any lender that is a party to the DIP/Exit Facility.
81
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures - As of December 31 , 2006, management performed an
evaluation under the supervision and with the participation of the Company's President and Chief Executive Officer and
Executive Vice President and Chief Financial Officer of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on this evaluation, the Company's President and Chief Executive Officer and
Executive Vice President and Chief Financial Officer concluded that the Company's disclosure controls and procedures are
effective in alerting them in a timely manner to material information required to be disclosed in the Company's periodic
reports filed with the SEC.
Management's Report on Internal Control Over Financial Reporting - The Company's management is
responsible for establishing and maintaining adequate internal control over the Company's financial reporting. The
Company's internal control system is designed to provide reasonable assurance regarding the reliability of the Company's
financial reporting and the preparation of the Company's financial statements in accordance with generally accepted
accounting principles. Management performed an evaluation under the supervision and with the participation of the
President and Chief Executive Officer and Executive Vice President and Chief Financial Officer of the effectiveness of the
Company's internal control over financial reporting as of December 31 , 2006. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-
Integrated Framework. Based on this evaluation and those criteria, the Company's management concluded that the
Company's internal control over financial reporting as of December 31 , 2006 was effective. The Company's independent
auditors have issued an attestation report on management's assessment of the Company's internal control over financial
reporting. This report appears on page 83.
Changes in Internal Control - There have been no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of their most recent evaluation.
82
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Stockholders and Board of Directors
Northwest Airlines Corporation (Debtor-in-Possession)
We have audited management's assessment, included in the accompanying Management's Report on Internal Control
Over Financial Reporting, that Northwest Airlines Corporation (Debtor-in-Possession) maintained effective 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 (the COSO criteria). The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our
audit.
We conducted our audit 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
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Northwest Airlines Corporation (Debtor-in-Possession) maintained effective
internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, Northwest Airlines Corporation (Debtor-in-Possession) maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the 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. Our report dated March 13, 2007, expressed an
unqualified opinion thereon and included explanatory paragraphs related to (i) the Company's reorganization under
Chapter 11 of the United States Bankruptcy Code, (ii) the Company's ability to continue as a going concern, (iii) the
change in accounting for defined benefit pension and other postretirement plans, and (iv) the change in method of
recognizing certain pension plan administrative expenses associated with the Company's defined benefit pension plans.
~-tMLLP
Minneapolis, Minnesota
March 13, 2007
83
Item 9B. OTHER INFORMATION
None.
PART Ill
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item will be included in this Form 10-K in accordance with General Instruction G3 no
later than April 30, 2007. Information about the Company's executive officers is included in Part I of this report under the
caption "Executive Officers of the Registrant."
Item 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in this Form 10-K in accordance with General Instruction G3 no
later than April 30, 2007.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item will be included in this Form 10-K in accordance with General Instruction G3 no
later than April 30, 2007. The information about securities authorized for issuance under equity compensation plans is
included in Part II of this report under the caption "Equity Compensation Plan Information."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item will be included in this Form 10-K in accordance with General Instruction G3 no
later than April 30, 2007.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be included in this Form 10-K in accordance with General Instruction G3 no
later than April 30, 2007.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
15 (a)(1) Financial Statements. The following is an index of the financial statements, related notes, independent
auditor's report and supplementary data that are included in this Report
Page
Consolidated Balance Sheets--December 31, 2006 and December 31 , 2005
Consolidated Statements of Operations-For the years ended December 31 , 2006,
2005 and 2004
Consolidated Statements of Cash Flows-For the years ended December 31 , 2006,
2005 and 2004
Consolidated Statements of Common Stockholders' Equity (Deficit)-For the
years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
84
44-45
46
47
48
49
15(a)(2) Financial Statement Schedules. The following is a list of the financial schedules that are included in this Report.
Schedules not included have been omitted because they are not required or because the information is included in the
consolidated financial statements or notes thereto.
Schedule II-Valuation of Qualifying Accounts and Reserves-For the years ended December 31 ,
2006, 2005 and 2004 S-1
15(a)(3) Exhibits. The following is an index of the exhibits to this Report. Nothing contained in this Report shall
constitute an assumption by NWA Corp. or Northwest (as applicable) of any of these agreements.
3.1 Restated Certificate of Incorporation of Northwest Airlines Corporation (filed as Exhibit 4.1 to the Registration
Statement on Form S-3, File No. 333-69655 and incorporated herein by reference).
3.2 Amended and Restated Bylaws of Northwest Airlines Corporation (filed as Exhibit 3.2 to NWA Corp. 's Annual
Report on Form 10-K for the year ended December 31 , 2003 and incorporated herein by reference).
3.3 Restated Certificate of Incorporation of Northwest Airlines, Inc. (filed as Exhibit 3.3 to Northwest's
Registration Statement on Form S-3, File No. 33-74772, and incorporated herein by reference).
3.4 Bylaws of Northwest Airlines, Inc. (filed as Exhibit 3.4 to NWA Corp.'s Annual Report on Form 10-K for the
year ended December 31 , 2004 and incorporated herein by reference).
4.1 Certificate of Designation of Series C Preferred Stock of Northwest Airlines Corporation (included in Exhibit
3.1 ).
4.2 The registrant hereby agrees to furnish to the Commission, upon request, copies of certain instruments
defining the rights of holders of long-term debt of the kind described in Item 601 (b) (4) of Regulation S-K.
10.1 Standstill Agreement dated as of November 15, 2000 among Continental Airlines, Inc., Northwest Airlines
Corporation, Northwest Airlines Holdings Corporation and Northwest Airlines, Inc. (filed as Exhibit 10.1 to
NWA Corp. 's Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein
by reference).
10.2 Amended and Restated Standstill Agreement dated May 1, 1998 between Koninklijke Luchtvaart
Maatschappij N.V. and Northwest Airlines Corporation (filed as Exhibit 10.2 to NWA Corp.'s Annual Report on
Form 10-K for the year ended December 31 , 2003 and incorporated herein by reference).
10.3 Airport Use and Lease Agreement dated as of June 1, 2005 between Wayne County Airport Authority and
Northwest Airlines, Inc. (filed as Exhibit 10.3 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by reference).
10.4 Airline Operating Agreement and Terminal Building Lease Minneapolis-St. Paul International Airport dated as
of January 1, 1999 between the Metropolitan Airports Commission and Northwest Airlines, Inc. (filed as
Exhibit 10.4 to NWA Corp. 's Annual Report on Form 10-K for the year ended December 31 , 2005 and
incorporated herein by reference).
10.5 Second Amended and Restated Credit and Guarantee Agreement dated as of April 15, 2005 among
Northwest Airlines Corporation, Northwest Airlines Holdings Corporation, NWA Inc., Northwest Airlines, Inc.
and various lenders and agents (filed as Exhibit 10.2 to NWA Corp.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005 and incorporated herein by reference).
10.6 Route Security Agreement dated as of October 23, 2001 between Northwest Airlines, Inc. and The Chase
Manhattan Bank, as Collateral Agent (filed as Exhibit 10.9 to NWA Corp.'s Annual Report on Form 10-K for
the year ended December 31, 2004 and incorporated herein by reference).
10. 7 Route Security Agreement dated as of November 23, 2004 between Northwest Airlines, Inc. and JPMorgan
Chase Bank, N.A., as Collateral Agent (filed as Exhibit 10.10 to NWA Corp.'s Annual Report on Form 10-K
for the year ended December 31, 2004 and incorporated herein by reference).
10.8 Aircraft Mortgage and Security Agreement dated as of October 23, 2001 between Northwest Airlines, Inc.
and The Chase Manhattan Bank, as Collateral Agent (filed as Exhibit 10.11 to NWA Corp.'s Annual Report
on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference).
85
10.9 Preliminary Confirmation and Master Agreement dated October 29, 2003 and January 15, 1997, respectively,
between Citibank, N.A. and Northwest Airlines Corporation (filed as Exhibit 10.1 to NWA Corp.'s Form 10-Q
for the quarter ended September 30, 2003 and incorporated herein by reference).
10.10 A330 Financing Letter Agreement No. 1 dated as of December 21 , 2000 between Northwest Airlines, Inc.
and AVSA S.A.R.L. (filed as Exhibit 10.19 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31 , 2004 and incorporated herein by reference; the Commission has granted confidential
treatment for certain portions of this document).
10.11 Amendment No. 1 to the A330 Financing Letter Agreement No. 1 dated as of December 20, 2002 between
Northwest Airlines, Inc. and AVSA S.A.R.L. (filed as Exhibit 10.20 to NWA Corp.'s Annual Report on Form
10-K for the year ended December 31, 2004 and incorporated herein by reference; the Commission has
granted confidential treatment for certain portions of this document).
10.12 Amendment No. 2 to the A330 Financing Letter Agreement No. 1 dated May 26, 2004, between Northwest
Airlines, Inc. and AVSA S.A.R.L. (filed as Exhibit 10.21 to NWA Corp.'s Annual Report on Form 10-K for the
year ended December 31, 2004 and incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
10.13 New A330 Financing Letter Agreement No. 1 dated as of January 21 , 2005 between Northwest Airlines, Inc.
and AVSA S.A.R.L. (filed as Exhibit 10.22 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference; the Commission has granted confidential
treatment for certain portions of this document).
10.14 Form of Credit Agreement to be entered into pursuant to Exhibits 10.10 and 10.13 (filed as Exhibit 10.23 to
NWA Corp. 's Annual Report on Form 10-K for the year ended December 31 , 2004 and incorporated herein
by reference; the Commission has granted confidential treatment for certain portions of this document).
10.15 Form of Mortgage to be entered into pursuant to Exhibits 10.10 and 10.13 (filed as Exhibit 10.24 to NWA
Corp.'s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by
reference; the Commission has granted confidential treatment for certain portions of this document).
10.16 A330 Financing Letter Agreement dated as of January 24, 2006 between Northwest Airlines, Inc. and AVSA,
S.A.R.L. (filed as Exhibit 10.3 to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31 ,
2006 and incorporated herein by reference; NWA Corp. has filed a request with the Commission for
confidential treatment as to certain portions of this document).
10.17 Form of Credit Agreement to be entered into pursuant to Exhibit 10.16 by Northwest Airlines, Inc. and Airbus
Financial Services (filed as Exhibit 10.4 to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006 and incorporated herein by reference; NWA Corp. has filed a request with the Commission
for confidential treatment as to certain portions of this document).
10.18 Purchase Agreement No. 2924 dated May 5, 2005 between The Boeing Company and Northwest Airlines,
Inc. (filed as Exhibit 10.1 to NWA Corp. 's Quarterly Report on Form 10-Q for the quarter ended June 30,
2005 and incorporated herein by reference; NWA Corp. has filed a request with the Commission for
confidential treatment as to certain portions of this document).
10.19 Super Priority Debtor in Possession and Exit Credit and Guarantee Agreement dated as of August 21 , 2006
among Northwest Airlines Corporation, Northwest Airlines Holdings Corporation, NWA Inc., Northwest
Airlines, Inc. and various lenders and agents (filed as Exhibit 10.1 to NWA Corp.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 2006 and incorporated herein by reference).
10.20 Route Security Agreement dated as of August 21 , 2006 between Northwest Airlines, Inc. and Citicorp USA,
Inc., as Collateral Agent (filed as Exhibit 10.2 to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2006 and incorporated herein by reference).
10.21 Agreement dated May 6, 2003 by and between the United States of America (acting through the
Transportation Security Administration) and Northwest Airlines, Inc. pursuant to the Emergency Wartime
Supplemental Appropriations Act of 2003 (filed as Exhibit 4.3 to NWA Corp.'s Annual Report on Form 10-K
for the year ended December 31, 2003 and incorporated herein by reference).
86
,.
*10.22 Management Compensation Agreement dated as of September 14, 2005 between Northwest Airlines, Inc.
and Douglas M. Steenland (filed as Exhibit 10.1 to NWA Corp. 's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005 and incorporated herein by reference.
*10.23 Management Compensation Agreement dated as of January 14, 2002 between Northwest Airlines, Inc. and J.
Timothy Griffin.
*10.24 Management Compensation Agreement dated as of January 14, 2002 between Northwest Airlines, Inc. and
Philip C. Haan.
*10.25 Management Compensation Agreement dated as of May 2, 2005 between Northwest Airlines, Inc. and Neal
S. Cohen (filed as Exhibit 10.3 to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
2005 and incorporated herein by reference).
*10.26 Management Compensation Agreement dated as of April 17, 2002 between Northwest Airlines, Inc. and
Andrew C. Roberts (filed as Exhibit 10.30 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference).
*10.27 Northwest Airlines, Inc. Key Employee Annual Cash Incentive Program (filed as Exhibit 10.42 to the
registration statement on Form S-1, File No. 33-74210, and incorporated herein by reference).
*10.28 Northwest Airlines, Inc. Excess Pension Plan for Salaried Employees (2001 Restatement).
*10.29 First Amendment of Northwest Airlines Excess Pension Plan for Salaried Employees (2001 Restatement)
(filed as Exhibit 10.3 to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30,
2004 and incorporated herein by reference).
*10.30 Northwest Airlines, Inc. Supplemental Executive Retirement Plan (2001 Restatement).
*10.31 First Amendment of Northwest Airlines Supplemental Executive Retirement Plan (2001 Restatement).
*10.32 Second Amendment of Northwest Airlines Supplemental Executive Retirement Plan (2001 Restatement).
*10.33 Ancillary Agreement to the Northwest Airlines, Inc. Supplemental Executive Retirement Plan dated as of
November 7, 2002 between Northwest Airlines, Inc. and Andrew C. Roberts (filed as Exhibit 10.35 to NWA
Corp. 's Annual Report on Form 10-K for the year ended December 31 , 2004 and incorporated herein by
reference).
*10.34 Northwest Airlines Corporation 1999 Stock Incentive Plan, as amended.
*10.35 Northwest Airlines Corporation 2004 Pilots' Bridge Stock Option Plan dated as of October 12, 2004, and
Letter Agreement dated as of October 12, 2004 amending the 2004 Pilot's Bridge Stock Option Plan (filed as
Exhibit 10.38 to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31 , 2004 and
incorporated herein by reference).
*10.36 2001 Northwest Airlines Corporation Stock Incentive Plan, as amended.
*10.37 Northwest Airlines Corporation 1998 Pilots Stock Option Plan (filed as Exhibit 10.34 to NWA Corp.'s Annual
Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
*10.38 Amendment to Northwest Airlines Corporation 1998 Pilots Stock Option Plan (filed as Exhibit 10.35 to NWA
Corp. 's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by
reference).
*10.39 Form of Non-Qualified Stock Option Agreement.
*10.40 Form of Deferred Stock Award Agreement (filed as Exhibit 10.1 to NWA Corp.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 2004 and incorporated herein by reference).
*10.41 Form of Restricted Stock Award Agreement (filed as Exhibit 10.2 to NWA Corp. 's Quarterly Report on Form
10-Q for the quarter ended September 30, 2004 and incorporated herein by reference).
87
*10.42 Form of Phantom Stock Unit Award Agreement for executive officers under the 2001 Northwest Airlines
Corporation Stock Incentive Plan (filed as Exhibit 10.3 to NWA Corp.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004 and incorporated herein by reference).
*10.43 Northwest Airlines Corporation E-Commerce Incentive Compensation Program (as amended and restated),
including form of Award Agreement (filed as Exhibit 10.4 to NWA Corp.'s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004 and incorporated herein by reference).
*10.44 Letter Agreement dated as of July 1, 2005 between Northwest Airlines Corporation and J. Timothy Griffin
amending an outstanding Award under the Northwest Airlines Corporation E-Commerce Incentive
Compensation Program (filed as Exhibit 10.2 to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005 and incorporated herein by reference).
*10.45 Northwest Airlines, Inc. 2003 Long-Term Cash Incentive Plan, including form of Award Agreement (filed as
Exhibit 10.41 to NWA Corp. 's Annual Report on Form 10-K for the year ended December 31, 2003 and
incorporated herein by reference).
*10.46 Ancillary Agreement to the Northwest Airlines, Inc. Supplemental Executive Retirement Plan dated as of April
29, 2005 between Northwest Airlines, Inc. and Neal S. Cohen (filed as Exhibit 10.48 to NWA Corp.'s Annual
Report on Form 10-K for the year ended December 31 , 2005 and incorporated herein by reference)
12. 1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Requirements.
21 .1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (included in signature page).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31 .2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
* Compensatory plans in which the directors and executive officers of Northwest participate.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 16, 2007
NORTHWEST AIRLINES CORPORATION
By Isl ANNA M. SCHAEFER
Anna M. Schaefer
Vice President - Finance and Chief Accounting Officer
(principal accounting officer)
Each of the undersigned directors and officers of Northwest Airlines Corporation whose signature appears below
hereby constitutes and appoints Douglas M. Steenland, Neal S. Cohen and Anna M. Schaefer, and each of them
individually, his or her true and lawful attorneys with full power of substitution and resubstitution, for such individual and in
such individual's name, place and stead, in any and all capacities, to act on, sign and file with the Securities and Exchange
Commission any and all amendments to this report together with all schedules and exhibits thereto and to take any and all
actions which may be necessary or appropriate in connection therewith, and each such individual hereby approves, ratifies
and confirms all that such agents, proxies and attorneys-in-fact, any of them or any of his or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 16th
day of March 2007 by the following persons on behalf of the registrant and in the capacities indicated.
Isl DOUGLAS M. STEENLAND
Douglas M. Steenland
President and Chief Executive
Officer (principal executive officer)
and Director
Isl NEAL S. COHEN
Neal S. Cohen
Executive Vice President & Chief
Financial Officer (principal financial officer)
Isl ANNA M. SCHAEFER
Anna M. Schaefer
Vice President-Finance and
Chief Accounting Officer (principal
accounting officer)
Isl GARY L. WILSON
Gary L. Wilson
Chairman of the Board
Isl RAY W . BENNING, JR.
Ray W . Benning, Jr.
Director
Isl ROY BOSTOCK
Roy Bostock
Director
Isl JOHN ENGLER
John Engler
Director
Isl ROBERT L. FRIEDMAN
Robert L. Friedman
Director
Isl DORIS KEARNS GOODWIN
Doris Kearns Goodwin
Director
Isl DENNIS F. HIGHTOWER
Dennis F. Hightower
Director
Isl JEFFREY G. KATZ
Jeffrey G. Katz
Director
Isl GEORGE J. KOURPIAS
George J. Kourpias
Director
Isl FREDERIC V. MALEK
Frederic V. Malek
Director
Isl LEO M. VAN WIJK
Leo M. van Wijk
Director
Isl WILLIAM S. ZOLLER
William S. Zoller
Director
89
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
SCHEDULE II -- VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
(In millions)
Col.A Col.B Col.C Col. D
Additions
Charged to
Balance at Charged to Other
Beginning Costs and Accounts Deductions
Description of Period Expenses -- Describe -- Describe
Year Ended December 31, 2006
Allowances deducted from asset accounts:
Allowance for doubtful accounts $ 12 $ 6 $ $ 4 (1)
Accumulated allowance for depreciation
of flight equipment spare parts 243 11 4 (2) 3 (3)
Year Ended December 31, 2005
Allowances deducted from asset accounts:
Allowance for doubtful accounts $ 12 $ 10 $ $ 10 (1)
Accumulated allowance for depreciation
of flight equipment spare parts 240 9 4 (2) 10 (3)
Year Ended December 31, 2004
Allowances deducted from asset accounts:
Allowance for doubtful accounts $ 19 $ 6 $ $ 13 (1)
Accumulated allowance for depreciation
of flight equipment spare parts 202 16 28 (2) 6 (3)
(1) Uncollectible accounts written off, net of recoveries
(2) lnteraccount transfers
(3) Dispositions and write-offs
S-1
Col. E
Balance at
End
of Period
$ 14
255
$ 12
243
$ 12
240
Exhibit 12.1
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
COMPUTATION OF RA TIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Year ended December 31
2006 2005 2004
Earnings:
Income (loss) before income taxes
and cumulative effect of accounting change $ (2,864) $ (2,457) $ (861) $
Less: Income (loss) from less than 50% owned
investees (14) 8
Add:
Rent expense representative of interest ( 1) 180 255 248
Interest expense net of capitalized interest (2) 548 582 505
Interest of preferred security holder
Amortization of debt discount and expense 7 18 30
Amortization of interest capitalized 8 8 8
Adjusted earnings $ (2,122) $ (1 ,580) $ (78) $
Fixed charges:
Rent expense representative of interest ( 1) $ 180 $ 255 $ 248 $
Interest expense net of capitalized interest (2) 548 582 505
Interest of preferred security holder
Amortization of debt discount and expense 7 18 30
Capitalized interest 10 10 8
Fixed charges $ 745 $ 865 $ 791 $
Ratio of earnings to fixed charges - (3) - (3) - (3)
(1) Calculated as one-third of rentals, which is considered representative of the interest factor.
2003
218
18
253
441
25
24
10
953
253
441
25
24
10
753
1.27
(2) Subsequent to its Chapter 11 filing, the Company recorded 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.
$
$
$
$
(3) Earnings were inadequate to cover fixed charges by $2.87 billion, $2.45 billion, $869 million, and $1 .28 billion
for the years ended December 31 , 2006, 2005, 2004, and 2002 respectively.
2002
(1,220)
37
247
385
25
17
5
(578)
247
385
25
17
25
699
- (3)
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
COMPUTATION OF RA TIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK REQUIREMENTS
(Dollars in millions)
Year ended December 31
2006 2005 2004 2003
Earnings:
Income (loss) before income taxes
and cumulative effect of accounting change $ (2,864)
Less: Income (loss) from less than 50% owned
investees
Add:
Rent expense representative of interest (1)
Interest expense net of capitalized interest (2)
Interest of preferred security holder
Amortization of debt discount and expense
Amortization of interest capitalized
Adjusted earnings
180
548
7
8
$ (2,122)
Fixed charges and preferred stock requirements:
Rent expense representative of interest (1)
Interest expense net of capitalized interest (2)
Preferred stock requirements
Interest of preferred security holder
Amortization of debt discount and expense
Capitalized interest
Fixed charges and preferred
stock requirements
$
$
180
548
7
10
745
$ (2,457)
(14)
255
582
18
8
$ (1 ,580)
$
$
255
582
22
18
10
887
$ (861)
$
$
$
8
248
505
30
8
(78)
248
505
29
30
8
820
$
$
$
$
218
18
253
441
25
24
10
953
253
441
12
25
24
10
765
Ratio of earnings to fixed charges
and preferred stock requirements ====(3) ====(3) ===- (3) ==1=
.2=5 =
(1) Calculated as one-third of rentals, which is considered representative of the interest factor.
(2) Subsequent to its Chapter 11 filing, the Company recorded 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.
Exhibit 12.2
2002
$ (1,220)
37
247
385
25
17
5
$ (578)
$
$
247
385
1
25
17
25
700
====(3)
(3) Earnings were inadequate to cover fixed charges by $2.87 billion, $2.47 billion, $898 million, and $1 .28 billion
for the years ended December 31, 2006, 2005, 2004, and 2002, respectively.
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Douglas M. Steenland, certify that:
1. I have reviewed this annual report on Form 10-K of Northwest Airlines Corporation;
EXHIBIT 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting ( as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 16, 2007
Isl DOUGLAS M. STEENLAND
Douglas M. Steenland
President and Chief Executive Officer
I, Neal S. Cohen, certify that:
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
1. I have reviewed this annual report on Form 10-K of Northwest Airlines Corporation;
EXHIBIT 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls
and procedures ( as defined in Exchange Act Rules 13a-15( e) and 15d-15( e)) and internal control over financial
reporting ( as defined, in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 16, 2007
/s/ NEAL S. COHEN
Neal S. Cohen
Executive Vice President and
Chief Financial Officer

EXHIBIT 32.1
Certification by the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Northwest Airlines Corporation (the "Company") on Form 10-K for the period
ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I,
Douglas M. Steenland, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 16, 2007
Isl DOUGLAS M. STEENLAND
Douglas M. Steenland
President and Chief Executive Officer
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to
the extent that the Company specifically incorporates it by reference.
EXHIBIT 32.2
Certification by the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Northwest Airlines Corporation (the "Company") on Form 10-K for the period ending
December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Neal S. Cohen,
Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted
pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
( 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 16, 2007
/s/ NEAL S. COHEN
Neal S. Cohen
Executive Vice President and
Chief Financial Officer
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall
not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the
Company specifically incorporates it by reference.