Northwest Airlines Form 10-K 2007

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, 2007
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-23642
NORTHWEST AIRLINES CORPORATION
(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:
Title of each class Name of each exchange on which registered
Common Stock, par value $0.01 per share The New York Stock Exchange
Preferred Stock Purchase Rights The New York Stock Exchange
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 00 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 00
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 00 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. 00
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 l!I Accelerated filer Non-accelerated filer Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No 00
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 29, 2007 was $4.3 billion.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes 00 No
As of January 31, 2008, there were 236,427,125 shares of the registran 's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part Ill of this Form 10-K incorporates by reference certain information from the registrant's definitive Proxy Statement for its 2008
Annual Meeting of Stockholders to be filed with the Securities Exchange Commission.
PARTI
Item 1. BUSINESS
Northwest Airlines Corporation ("NWA Corp." and, together with its subsidiaries, the "Company") is the direct 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 seventh largest airline, as measured by 2007
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, Aeroflot,
Aeromexico, Alitalia, China Southern, CSA Czech Airlines, and Korean Air;
agreements with three domestic regional carriers, including Pinnacle Airlines, Inc. ("Pinnacle"), Mesaba
Aviation, Inc. ("Mesaba"), a wholly-owned subsidiary, and Compass Airlines, Inc. ("Compass"), a wholly-owned
subsidiary, all of which operate as Northwest Airlink carriers;
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").
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 20 - Geographic Regions" for a
discussion of Northwest's operations by geographic region.
Chapter 11 Proceedings
Background and General Bankruptcy Matters. The following discussion provides general background information
regarding the Company's Chapter 11 cases, and is not intended to be an exhaustive summary. Detailed information
pertaining to the bankruptcy filings may be obtained at http://www.nwa-restructuring.com. See also "Item 8. Consolidated
Financial Statements and Supplementary Data, Note 1 - Voluntary Reorganization Under Chapter 11 Proceedings."
Information contained on the Company's Web site is not incorporated into this annual report on Form 10-K.
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.
On May 18, 2007, the Bankruptcy Court entered an order approving and confirming the Debtors' First Amended Joint and
Consolidated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (as confirmed, the "Plan" or "Plan of
Reorganization"). The Plan became effective and the Debtors emerged from bankruptcy protection on May 31, 2007 (the
"Effective Date"). On the Effective Date, the Company implemented 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").
As a result of the application of fresh-start reporting in accordance with SOP 90-7 upon the Company's emergence from
bankruptcy on May 31, 2007, the financial statements prior to June 1, 2007 are not comparable with the financial statements
for periods on or after June 1, 2007. References to "Successor Company" refer to the Company on or after June 1, 2007,
after giving effect to the application of fresh-start reporting. References to "Predecessor Company" refer to the Company
prior to June 1, 2007. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 2 - Fresh-Start
Reporting" for further details.
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The Plan generally provided for the full payment or reinstatement of allowed administrative claims, priority claims, and
secured claims, and the distribution of new common stock of the Successor Company to the Debtors' creditors, employees
and others in satisfaction of allowed unsecured claims. The Plan contemplates the issuance of approximately 277 million
shares of new common stock by the Successor Company (out of the 400 million shares of new common stock authorized
under its amended and restated certificate of incorporation), as follows:
225.8 million shares of common stock are issuable to holders of certain general unsecured claims;
8.6 million shares of common stock are issuable to holders of guaranty claims;
27.8 million shares of common stock were issued pursuant to the Rights Offering and an Equity Commitment
Agreement; and
15.2 million shares of common stock are subject to awards under a management equity plan.
The new common stock is listed on the New York Stock Exchange (the "NYSE") and began trading under the symbol
"NWA" on May 31, 2007. Pursuant to the Plan of Reorganization, stockholders of NWA Corp. prior to the Effective Date
received no distributions and their stock was cancelled.
In connection with the consummation of the Plan of Reorganization, on the Effective Date, the Company's existing
$1 .225 billion Senior Corporate Credit Facility ("Bank Credit Facility") was converted into exit financing in accordance with its
terms. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 8 - Long-Term Debt and Short-Term
Borrowings" for additional information.
Operations and Route Network
Northwest and its Airlink partners operate substantial domestic and international route networks and directly serve as
many as 239 destinations in 21 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 eighth largest origination/destination hub in the United States ("U.S."). Northwest and its Airlink
carriers together serve 146 destinations from Detroit. For the six months ended June 30, 2007, they enplaned 55% of
originating passengers from Detroit, while the next largest competitor enplaned 11 %.
Minneapolis/St. Paul. Minneapolis/St. Paul is the ninth largest origination/destination hub in the U.S. Northwest and its
Airlink carriers together serve 149 destinations from Minneapolis/St. Paul. For the six months ended June 30, 2007, they
enplaned 59% of originating passengers from Minneapolis/St. Paul, while the next largest competitor enplaned 10%.
Memphis. Memphis is the sixteenth largest origination/destination hub in the U.S. Northwest and its Airlink carriers
together serve 84 destinations from Memphis. For the six months ended June 30, 2007, they enplaned 58% of originating
passengers from Memphis, while the next largest competitor enplaned 10%.
Other Domestic System Operations. Domestic "non-hub" operations include service to as many as 19 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.
International System
Northwest operates international flights to the Pacific and/or the Atlantic regions from its Detroit, Minneapolis/St. Paul
and Memphis hubs, as well as from gateway cities including Boston, Hartford, Honolulu, Los Angeles, San Francisco, Seattle,
and Portland.
Pacific. Northwest has served the Pacific market since 1947 and has one of the largest Pacific route networks of any
U.S. carrier. Northwest's Pacific operations are centered at Narita International Airport in Tokyo, where it has 375
permanent weekly takeoffs and landings ("slots") as of December 31, 2007, the most for any non-Japanese carrier. Under
the U.S. - Japan bilateral aviation agreement, Northwest is one of two U.S. carriers with the right to operate unlimited
frequencies between any point in the U.S. and Japan. Northwest also enjoys "fifth freedom" rights that 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 its slots and bilateral 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, Honolulu, and Saipan.
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Recently, the Company was awarded new route authorities to provide nonstop service from Detroit to Shanghai
beginning in March 2009. When combined with our existing China route authorities and our slot position at Narita
International Airport, the Company is well positioned to meet growing demand in China and maintain our leadership position
in the Pacific.
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 18 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 65 European, eight Middle Eastern, 14 African, eight Asian and 184
North American 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. The Northwest-
KLM joint venture can be terminated by either party 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. On June 28, 2007, Northwest and KLM,
together with Air France, Delta, Alitalia, and CSA Czech Airlines filed a joint application for antitrust immunity with the U.S.
Department of Transportation ("DOr). If approved, this application would enable Northwest, KLM, Delta and Air France to
cooperate under an expanded transatlantic joint venture. On October 18, 2007, the DOT entered a scheduling order which
establishes a timeline for consideration of Northwest's application for expanded antitrust immunity with its SkyTeam alliance
partners KLM, Air France, Delta, Alitalia, and CSA Czech Airlines.
In April 2007, the U.S. and the European Union ("E.U.") approved an "open skies" air services agreement that provides
airlines from the U.S. and E.U. Member States open access to each others' markets, with freedom of pricing and unlimited
rights to fly beyond the U.S. and beyond each E.U. Member State. Under the open skies agreement, which goes into
effect on March 30, 2008, every U.S. and E.U. airline is authorized to operate between airports in the U.S. and London's
Heathrow, Gatwick and other airports. As a result of the open skies agreement, the Company announced an expansion of
its transatlantic route network with three new daily nonstop flights to London Heathrow from Detroit, Minneapolis/St. Paul and
Seattle. Scheduled to begin in the spring of 2008, the Company's new nonstop service will provide its passenger's access to
Heathrow for the first time.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 20 - Geographic Regions" for a
discussion of Northwest's operations by geographic region.
Alliances
In addition to its transatlantic joint venture with KLM, Northwest has strengthened its network through other alliance
partnerships. Long-term alliances are an effective way for Northwest to enter markets that it would not be able to serve
alone. Alliance relationships can include codesharing, reciprocal frequent flyer programs, "through" luggage check-in,
reciprocal airport lounge access, joint marketing, sharing of airport facilities and joint procurement of certain goods and
services.
Since 1998, Northwest and Continental have been in a domestic and international commercial alliance that connects the
two carriers' networks and includes extensive codesharing, frequent flyer program reciprocity and other cooperative
marketing programs. The alliance agreement has a term through December 31, 2025.
In August 2002, the Company entered into a commercial alliance agreement with Continental and Delta. This
agreement is designed to connect the three carriers' domestic and international networks and provides for codesharing,
reciprocity of frequent flyer programs, airport club use and other cooperative marketing programs. The comb~ned 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, 2013, and contemplates a five year renewal term.
In September 2004, Northwest, together with KLM and Continental, joined the global SkyTeam Alliance. The addition of
Northwest, KLM and Continental made SkyTeam the world's second largest airline alliance. The eleven members of the
SkyTeam Alliance, Northwest, KLM, Continental, Delta, Air France, Alitalia, Aeromexico, China Southern, CSA Czech
Airlines, Korean Air, and Aeroflot and three associate members - Air Europa, Copa Airlines, and Kenya Airways currently
serve over 427 million passengers annually with more than 16,400 daily departures to 841 destinations in 162 countries.
Northwest customers are now able to accrue and redeem frequent flyer miles in their WorldPerks accounts and enjoy travel
on any flight operated by a SkyTeam Alliance member carrier. This alliance affords customers the benefits and service
options when traveling on multiple airlines while being treated similarly to a customer traveling on a single airline. The
alliance agreement has a term through June 12, 2012, and if not terminated on that date, continues in effect for five more
years.
4
Northwest also has domestic frequent flyer and codesharing agreements with several other airlines including Alaska
Airlines, Horizon Air, Hawaiian Airlines, American Eagle, Midwest Airlines, and Gulfstream International Airlines. In the
Pacific, Northwest has frequent flyer agreements with Malaysia Airlines, Japan Airlines, Jet Airways of India, Cebu Pacific
Airlines, Air Tahiti Nui, Kingfisher Airlines, and China Airlines. In the Atlantic, in addition to its extensive relationship with
KLM, Northwest has a frequent flyer agreement with Malev Hungarian Airlines.
Regional Partnerships
Northwest has airline services agreements ("ASAs") with three regional carriers: Pinnacle, Mesaba and Compass.
Pursuant to the ASAs, these regional carriers are required to operate their flights under the Northwest "NW" code and
operate as Northwest Airlink. The purpose of these ASAs 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, Mesaba and Compass flights. Northwest is 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 137 of Northwest's fleet of Bombardier Canadair Regional Jet ("CRJ") CRJ200
aircraft as of December 31, 2007. As of December 31, 2006, the Company owned 11.4% of the Common Stock of Pinnacle
Airlines Corp. and accounted for this investment under the equity method of accounting. On November 29, 2007, the
Company entered into a stock redemption agreement with Pinnacle Airlines Corp., pursuant to which Pinnacle repurchased
the Company's 11.4% equity interest in Pinnacle common stock for $32.9 million. The Company recorded a loss on the sale
of common stock of $14.2 million in the fourth quarter 2007.
In January 2008, Northwest sold its Class A Preferred share to Pinnacle for a purchase price of $20 million. The Class
A Preferred share was marked-to-market upon Northwest's adoption of fresh-start reporting; therefore, no gain or loss was
recognized upon the sale.
On January 11, 2007, the Bankruptcy Court approved the Amended Airline Services Agreement with Pinnacle
("Amended Pinnacle ASA") between the Predecessor Company and Pinnacle. 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 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 Predecessor Company, which resulted in an incremental
charge to reorganization expense of $306.7 million during the first quarter of 2007. The Amended Pinnacle ASA and related
agreements provide Northwest with, among other things, certainty of Pinnacle's performance at rates consistent with
Northwest's cost savings targets and resolution of the Pinnacle claims.
Mesaba. As of December 31, 2007, Mesaba was the operator of 49 Saab 340 turbo-prop aircraft, four CRJ200 aircraft,
and 13 CRJ900 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)).
On January 22, 2007, the Predecessor Company entered into a Stock Purchase and Reorganization Agreement with
Mesaba under which the Predecessor Company agreed to purchase all of the equity interests in Mesaba following its
reorganization under Chapter 11 and granted the Mesaba estate a general unsecured claim of $145 million for full and final
satisfaction of any and all claims filed against the Predecessor Company. The Predecessor Company 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.
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. The Mesaba Plan was confirmed on April 10, 2007. In conjunction with the
consummation of Mesaba's Plan, Mesaba was acquired by Northwest Airlines on April 24, 2007 and became a wholly-owned
consolidated subsidiary.
Compass. Compass Airlines, Inc., a wholly-owned indirect subsidiary of NWA Corp., operates as a Northwest Airlink
carrier. Compass received its Federal Aviation Administration certification to begin commercial passenger operations on
April 5, 2007, and commenced flight operations on May 2, 2007, with its first CRJ200 revenue flight. Subsequently, on
August 21, 2007, Compass completed its first revenue flight with the new dual class 76-seat Embraer 175 regional jet aircraft.
As of December 31, 2007, Compass was the operator of nine Embraer 175 aircraft.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 19 - Related Party Transactions"
regarding the Company's transactions with Pinnacle.
5
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 2007, cargo accounted for 6.7% of the Company's operating revenues, with approximately
76% of its cargo revenues resulting from cargo originating in or destined for Asia. Through its cargo hubs in Anchorage and
Tokyo, the Company serves most major air freight markets between the U.S. and Asia with a fleet of dedicated Boeing 747-
200 freighter aircraft. In addition to revenues earned from the dedicated freighter fleet, the Company also generates cargo
revenues in domestic and international markets through the use of cargo space on its passenger aircraft.
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 Czech Airlines Cargo, Delta Air Logistics, KLM Cargo, and Korean Air Cargo, currently serve
more than 728 destinations in more than 149 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. ML T Inc. ("ML r), an indirect wholly-owned subsidiary of NWA Corp., is among the largest vacation wholesale
companies in the U.S. MLT develops and markets Worry-Free Vacations that include air transportation, hotel
accommodations and car rentals. In addition to its Worry-Free Vacations charter programs, 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 2007, ML T
had $506 million in operating revenues.
Frequent Flyer Program. Northwest operates a frequent flyer loyalty program known as "WorldPerks.n WorldPerks is
designed to retain and increase traveler loyalty by offering incentives to travelers 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 and alliance partners. WorldPerks members accumulate mileage in their accounts and later redeem mileage for
free or upgraded travel on Northwest and alliance partners. WorldPerks members that achieve certain mileage thresholds
also receive enhanced service benefits from Northwest such as special service lines, advance flight boarding and upgrades.
6
Employees
The airline industry is labor-intensive and as of December 31, 2007, the Company had approximately 34,000 full-time
equivalent employees of whom approximately 1,900 were foreign nationals working primarily in Asia. Unions represent
approximately 80% of the Company's employees. Collective bargaining agreements ("CBAs") provide standards for wages,
hours of work, working conditions, settlement of disputes and other matters. The major agreements with domestic
employees will become amendable on various dates as follows:
Approximate
Number of
Full-time
Equivalent
Employees Amendable
Employee Group Covered Union Date
Northwest Airlines, Inc.
Pilots 4,500 Air Line Pilots Association, International ("ALPA") 12/31/2011
International Association of Machinists & Aerospace
Agents and Clerks 6,000 Workers ("IAM") 12/31/2011
Equipment Service Employees and International Association of Machinists & Aerospace
Stock Clerks 5,000 Workers ("IAM") 12/31/2011
Association of Flight Attendants - Communication
Flight Attendants 7,700 Workers of America ("AFA-CWA") 12/31/2011
Mechanics and Related Employees 900 Aircraft Mechanics Fraternal Association ("AMFA") 12/31/2011
Mesaba Aviation, Inc.
Pilots 1,000 Air Line Pilots Association, International ("ALPA") 12/1/2010
Association of Flight Attendants - Communication
Flight Attendants 400 Workers of America ("AFA-CWA") 12/1/2010
Mechanics and Related Employees 200 Aircraft Mechanics Fraternal Association ("AMFA") 12/1/2010
Compass Airlines, Inc.
Pilots 150 Air Line Pilots Association, International ("ALPA") 4/1/2013
* Assumes the Company will exercise its contractual right to unilaterally extend this agreement one year past its original
amendable date of December 31, 2010.
Regulation
General. The Airline Deregulation Act of 1978, as amended, eliminated domestic economic regulation of passenger and
freight air transportation in many regards. Nevertheless, the industry remains regulated in a number of areas. The DOT has
jurisdiction over international route authorities and various consumer protection matters, such as advertising, denied
boarding compensation, baggage liability and access for persons with disabilities. Northwest is subject to regulations of the
DOT and the Federal Aviation Administration ("FAA") because it holds certificates of public convenience and necessity, air
carrier operating certificates and other authority granted by those agencies. The FAA regulates flight operations, including
air space control and aircraft standards, maintenance, ground facilities, transportation of hazardous materials and other
technical matters. The Department of Justice ("DOJ") has jurisdiction over airline competition matters, including mergers and
acquisitions, under federal antitrust laws. The Transportation Security Administration ("TSA") regulates airline and airport
security. Other federal agencies have jurisdiction over postal operations, use of radio facilities by aircraft and certain other
aspects of Northwest's operations.
International Service. Northwest operates its international routes under route certificates and other authorities issued by
the DOT. Many of Northwest's international route certificates are permanent and do not require renewal by the DOT.
Certain other international route certificates and other authorities are temporary and subject to periodic renewal. Northwest
requests renewals of these certificates and other authorities when and as appropriate. The DOT typically renews temporary
authorities on routes when the authorized carrier is providing a reasonable level of service. With respect to foreign air
transportation, the DOT must approve agreements between air carriers, including codesharing agreements, and may grant
antitrust immunity for those agreements in some situations.
7
*
*
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 cancelled, 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.
On March 30, 2008, a new Air Transport Agreement between the U.S. and the E.U. Member States will go into effect.
This Agreement will create new competitive opportunities and competition on routes between the U.S. and Europe and,
among other things, will enable Northwest to commence services to London Heathrow Airport, subject to the availability of
slots.
Consumer Protection. In November 2007, the DOT issued a proposal to increase by 100 percent the minimum amount
of compensation that airlines must pay to consumers who have been denied boarding on oversold flights. That rulemaking
proceeding is pending.
In December 2007, a U.S. District Court ruled that passenger "bill of rights" legislation enacted by New York State,
which imposes requirements on airlines additional to those imposed by federal law and regulation, was not preempted by
federal law. An appeal of that decision has been filed with a U.S. Court of Appeals and is pending.
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 estimated that the industry-wide aviation
security costs were underreported, suggesting that some carriers may not have paid the appropriate air carrier fee. The
industry, through the Air Transport Association, raised strong objections to the GAO's conclusions and the methodologies
used in reaching such conclusions. In January 2006, the TSA adopted the GAO's findings and assessed the Company and
a number of U.S. and foreign carriers with a substantial increase in the additional security fee which would be imposed
retroactively to the beginning of 2005, and continuing into 2006 and future years. In February 2006, the affected carriers
protested the fee increase through an administrative proceeding at the TSA. In May 2007, the TSA issued Final Decisions
ordering the Company and the other affected carriers to pay the additional assessments for 2005 and 2006. Under protest
and reserving its rights of appeal, the Company paid the accrued assessments in July 2007 and is paying them going
forward. The Company and other affected carriers have requested judicial review of the TSA's fee assessment in federal
court. 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, and in August 2007 the TSA issued a rulemaking notice regarding
implementation of the program. 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. In
October 2006, new TSA requirements for security of cargo on passenger and all-cargo aircraft went into effect. In August
2007, the president signed into law the Implementing Recommendations of the 9/11 Commission Act of 2007, which requires
the TSA to establish, within three years, a system for screening 100 percent of cargo transported on passenger aircraft to,
from or within the U.S.
On April 7, 2005, the Bureau of Customs and Border Protection ("CBP") issued a rule requiring airtines, for security
screening purposes, to electronically transmit passenger and crew data to the CBP before flights arrive in or depart from the
U.S. In August 2007, the CBP issued a new rule establishing methods and new procedures for the transmission of
passenger data, effective February 2008. The CBP also published a final rule in December 2003 requiring airtines to
electronically transmit cargo data before cargo arrives in and departs from the U.S.
8
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.n 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 the outcome of an FAA 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 also set hourly caps at Kennedy International beginning March 15, 2008 continuing through 2009. Newark
Liberty Airport has been designated by the FAA as a "level 3 coordinated airport" for the summer 2008 season, requiring
airlines to seek advance schedule approval from the FAA. The FAA permits the buying, selling, trading or leasing of slots
subject to certain restrictions.
In January 2008, the Secretary of Transportation proposed a new policy intended to ease airport congestion by
encouraging U.S. airports to change their method of calculating landing fees from a weight-based method to a method that
allows variable charges based on time of day and traffic volume factors. This proposed change to existing policy is pending.
Labor. The Railway Labor Act ("RLN) 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 seven 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. Mesaba has CBAs with three unions representing three separate employee groups. Compass has a CBA
with one union representing one employee group.
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 Factorsn 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.
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.
9
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.
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 U.S.
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 U.S. 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, 2007 and ending
September 30, 2008, 18 Boeing 747-200/400 passenger aircraft, 16 Boeing 757-300 passenger aircraft, ten Boeing 757-200
passenger aircraft, 17 Airbus A330-300 passenger aircraft, 11 Airbus A330-200 passenger aircraft and 13 Boeing 7 4 7-200
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. Transportation Command to call on some or all of
these 85 contractually committed Northwest aircraft and their crews to supplement military airlift capabilities.
10
Item 1A. RISK FACTORS
Risk Factors Related to Northwest and the Airline Industry
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 $1.4
million per month (based on our 2007 mainline and regional aircraft fuel consumption). The Company's mainline fuel
expense per available seat mile excluding mark-to-market adjustments related to fuel derivative contracts that settle in future
periods was 3.43 cents, on average, for 2007 and 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 February 29, 2008, the Company had hedged the price of approximately 18% of
its estimated 2008 fuel requirements. As of February 28, 2007, the Company had hedged the price of approximately 40% of
its estimated 2007 fuel requirements.
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.
In addition, several of our U.S. competitors, including US Airways, United, Delta and several small U.S. competitors,
have recently reorganized under bankruptcy protection. Other carriers could file for bankruptcy or threaten to do so to reduce
their costs. Carriers operating under bankruptcy protection can operate in a manner that could be adverse to the Company
and could emerge from bankruptcy as more vigorous competitors.
From time to time the U.S. airline industry has undergone consolidations, as in the recent merger of US Airways and
America West, and may experience additional consolidation in the future. If other airlines participate in merger activity, those
airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them
stronger competitors of Northwest.
The airline industry is sensitive to global events.
Global events have also significantly impacted airline industry revenue. The commencement of the war in Iraq
depressed air travel, particularly on international routes. The outbreak of Severe Acute Respiratory Syndrome ("SARS") also
depressed travel on international routes and sensitized passengers to the potential for air travel to facilitate the spread of
contagious diseases. An escalation of the war in the Middle East, 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.
11
Our actual financial results may vary significantly from the projections filed with the Bankruptcy Court.
In connection with the Company's Plan, the Debtors were required to prepare projected financial information to
demonstrate to the Bankruptcy Court the feasibility of the Plan and the ability of the Debtors to continue operations upon
emergence from bankruptcy. As filed with the Bankruptcy Court on February 15, 2007, as part of the initial form of the
disclosure statement, which also was filed with the SEC, and as part of the disclosure statement approved by the Bankruptcy
Court, the projections reflected numerous assumptions concerning anticipated future performance and prevailing and
anticipated market and economic conditions that were and continue to be beyond our control and that may not materialize.
For example, the projections included an assumption regarding the timing of deliveries of Boeing 787-8 aircraft which is no
longer accurate as a result of announced delays in the Boeing 787-8 production program. Projections are inherently subject
to uncertainties and to a wide variety of significant business, economic and competitive risks. Our actual results may vary
from those contemplated by the projections and the variations may be material.
Because our consolidated financial statements following our emergence from bankruptcy reflect fresh-start
reporting adjustments, financial information in our financial statements following emergence will not be comparable
to NWA Corp. 's financial information from periods prior to emergence from bankruptcy.
Following our reorganization, we adopted fresh-start reporting in accordance with SOP 90-7, pursuant to which our
reorganization value, which represented the fair value of the entity before considering liabilities and approximated the
amount a willing buyer would pay for the assets of the entity immediately after the reorganization, has been allocated to the
fair value of assets in conformity with Statement of Financial Accounting Standards ("SFASn) No. 141, Business
Combinations ("SFAS No. 141n), using the purchase method of accounting for business combinations. We stated liabilities,
other than deferred taxes and pension and other post-retirement benefit obligations, at fair value or at the present values of
the amounts to be paid. The amount remaining after allocation of the reorganization value to the fair value of identified
tangible and intangible assets has been reflected as goodwill, which is subject to periodic evaluation for impairment. In
addition, under fresh-start reporting the accumulated deficit has been eliminated. Thus, our balance sheets and results of
operations are not comparable in many respects to balance sheets and consolidated statements of operations data for
periods prior to the adoption of fresh-start reporting.
Additional terrorist attacks or the fear of such attacks, even if not made directly on the airline industry, could
negatively affect the Company and the airline industry.
The terrorist attacks of September 11, 2001 involving commercial aircraft severely and adversely affected the
Company's financial condition and results of operations, as well as prospects for the airline industry generally. Among the
effects experienced from the September 11, 2001 terrorist attacks were substantial flight disruption costs caused by the FAA,
a division of the DOT, which imposed a temporary grounding of the U.S. airline industry's fleet, significantly increased
security costs and associated passenger inconvenience, increased insurance costs, substantially higher ticket refunds and
significantly decreased traffic and revenue per revenue passenger mile ("yieldn).
Additional terrorist attacks, even if not made directly on the airline industry, or the fear of or the precautions taken in
anticipation of such attacks (including elevated national threat warnings or selective cancellation or redirection of flights)
could materially and adversely affect the Company and the airline industry. The war in Iraq and additional international
hostilities could also have a material adverse impact on the Company's financial condition, liquidity and results of operations.
The Company's financial resources might not be sufficient to absorb the adverse effects of any further terrorist attacks or an
increase in post-war unrest in Iraq or other international hostilities involving the U.S.
Additional security requirements may increase the Company's costs and decrease its traffic.
Since September 11, 2001, the U.S. Department of Homeland Security ("DHSn) and the TSA have implemented
numerous security measures that affect airline operations and costs, and are likely to implement additional measures in the
future. In addition, foreign governments have also begun to institute additional security measures at foreign airports
Northwest serves. A substantial portion of the costs of these security measures is borne by the airlines and their passengers,
increasing the Company's costs and/or reducing its revenue.
Security measures imposed by the U.S. and foreign governments after September 11, 2001 have increased
Northwest's costs and may further adversely affect the Company and its financial results. Additional measures taken to
enhance either passenger or cargo security procedures and/or to recover associated costs in the future may result in similar
adverse effects.
12
Union disputes, employee strikes and other labor-related disruptions may adversely affect the Company's
operations.
Unions represent approximately 80% of the Company's employees. The Railway Labor Act ("RLA") governs the labor
relations of employers and employees engaged in the airline industry. The RLA contains detailed procedures that must be
exhausted before a lawful work stoppage may occur. Pursuant to the RLA, the Company has CBAs with seven domestic
unions representing separate employee groups.
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. In addition to the risks associated with self-help there is also
the risk that dissatisfied employees, either with or without union involvement, could engage in illegal slowdowns, work
stoppages, or other actions that may disrupt operations.
The loss of skilled employees upon whom the Company depends to operate its business or the inability to
attract additional qualified personnel could adversely affect its results of operations.
The Company believes that its future success will depend in large part on its ability to attract and retain highly qualified
management, technical and other personnel. The Company may not be successful in retaining key personnel or in attracting
and retaining other highly qualified personnel. Any inability to retain or attract significant numbers of qualified management
and other personnel could adversely affect its business.
The Company's degree of leverage may limit its financial and operating activities.
The Company continues to have significant indebtedness even after its exit from bankruptcy. 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. In addition, 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 Bank Credit Facility may restrict the Company's activities and require
satisfaction of certain financial tests.
The Company's Bank Credit Facility contains a number of covenants and other provisions that may restrict the
Company's ability to engage in various financing transactions and operating activities. The Bank Credit Facility also requires
the Company to satisfy certain financial tests. The ability of the Company to meet these financial covenants may be affected
by events beyond its control. If the 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. For example, current proposals to
address congestion at and around airports could limit our operations, reduce our revenues and/or increase our costs. The
ability of U.S. carriers to operate international routes is subject to change because the appropriate landing slots or facilities
may not be available, or because applicable arrangements between the U.S. and foreign governments may be amended
from time to time. If an open skies policy were to be adopted for any of these routes, such an event could have a material
adverse impact on the Company's financial position and results of operations and could result in the impairment of material
amounts of related tangible assets. Recently, the U.S. and the European Union entered into an "open skies" agreement that
will become effective at the end of March 2008. We cannot give assurance that laws or regulations enacted in the future will
not adversely affect the industry or the Company.
13
Our insurance costs have increased substantially and further increases could harm our business.
Following September 11, 2001, aviation insurers significantly increased airline insurance premiums and reduced the
maximum amount of coverage available to airlines for certain types of claims. In addition, other insurance costs increased
significantly following the 2005 Hurricane Katrina and Hurricane Rita events. Our total aviation and other insurance
expenses were $36 million higher in 2007 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 March 30, 2008. While the government may again extend the period that it provides excess war risk
coverage, there is no assurance that this will occur, or if it does, how long the extension will last, what will be included in the
coverage, or at what cost the coverage will be provided. Should the U.S. government stop providing war risk insurance 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 an accident, 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 U.S. From time to time, we use financial instruments to hedge our exposure to
foreign currencies. However, these hedging strategies may not always be effective. As of December 31, 2007, the
Company had hedged approximately 42.6 percent of its 2008 anticipated yen-denominated sales. The 2008 Japanese yen
hedges consist of forward contracts which hedge approximately 32.7 percent of yen-denominated sales at an average rate of
109.3 yen per U.S. dollar and collar options which hedge approximately 9.9 percent of yen-denominated sales with a rate
range between 102.4 and 116.4 yen per U.S. dollar. As of December 31, 2006, the Company had no forward contracts or
collar options outstanding related to its anticipated 2007 yen-denominated sales. As of December 31, 2007, the Company
had also hedged approximately 66.4 percent of its 2008 anticipated Canadian dollar denominated sales with forward
contracts at an average rate of 1.0008 Canadian dollars per U.S. dollar. As of December 31, 2006, the Company had no
forward contracts outstanding related to its anticipated 2007 Canadian dollar denominated sales.
We are exposed to changes in interest rates.
We had $7.1 billion of debt and capital lease obligations that were accruing interest as of December 31, 2007 and $3.8
billion of total balance sheet cash, cash equivalents, and short-term investments as of December 31, 2007. Of the
indebtedness, 70% 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, 2007 the Company had entered into individual interest rate cap hedges related to
three floating rate debt instruments, with a total cumulative notional amount of $429 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.
14
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, 2007, the
Company had approximately $3.6 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 was 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 are eligible for, and 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 imposed
restrictions on certain transfers of our common stock.
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.
The Company relies heavily on automated systems to operate its business and any significant failure of these
systems could harm its business.
The Company depends on automated systems to operate its business, including its internal airline reservation systems,
flight operations systems, telecommunication systems and commercial Web sites, including nwa.com. Northwest's Web site
and reservation systems must be able to accommodate a high volume of traffic and deliver important flight information, as
well as process critical financial transactions. Substantial or repeated Web site, reservations systems or telecommunication
systems failures could reduce the attractiveness of Northwest's services versus its competitors and materially impair its
ability to market its services and operate its flights.
The Company's business relies extensively on third-party providers. Failure of these parties to perform as
expected, or unexpected interruptions in the Company's relationships with these providers or their provision of
services to the Company, could have an adverse effect on its financial condition and results of operations.
The Company has engaged a growing number of third-party service providers to perform a large number of functions
that are integral to its business, such as the operation of certain of its regional carriers, provision of information technology
infrastructure and services, provision of maintenance and repairs and performance of aircraft fueling operations, among
other vital functions and services. The Company does not directly control these third-party providers, although it does enter
into agreements with many of them that define expected service performance. Any of these third-party providers, however,
may materially fail to meet their service performance commitments to the Company. The failure of these providers to
adequately perform their service obligations, or other unexpected interruptions of services, may reduce the Company's
revenues and increase its expenses or prevent Northwest from operating its flights and providing other services to its
customers. In addition, the Company's business and financial performance could be materially harmed if its customers
believe that its services are unreliable or unsatisfactory.
15
Forward-Looking Statements
Certain of the statements made in "Item 1 . Business, n
"Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operationsn and elsewhere in this annual report on Form 10-K are forward-looking statements and
are based upon information available to the Company on the date the statements are made. 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 in a
global economy include, among others, 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 U.S. 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 Severe Acute Respiratory
Syndrome (SARS) and 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 and inflation. 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 lndustryn above.
Developments in any of these areas, as well as other risks and uncertainties detailed from time to time in our 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 mainline fleet of 356 aircraft at December 31, 2007, consisting of
295 narrow-body and 61 wide-body aircraft. Northwest's purchase commitments for aircraft as of December 31, 2007 are
also provided.
In Service
Average Aircraft
Seating Capital Operating Age on Firm
Aircraft Tipe Capaci~ Owned lease lease Total (Years) Order
Passenger Aircraft
Airbus:
A319 124 55 2 57 5.8 5
A320 148 45 28 73 13.0 2
A330-200 243 11 11 2.7
A330-300 298 21 21 2.3
Boeing:
787-8 TBD 18
757-200 160-184 38 1 16 55 16.5
757-300 224 16 16 4.8
747-400 403 4 12 16 14.1
McDonnell Douglas:
DC9 100-125 94 94 35.6
284 1 58 343 25
Freighter Aircraft
Boeing 747F 10 3 13 25.1
Total Northwest Operated Aircraft 294 1 61 356 17.5 (1) 25
Regional Aircraft
CRJ200 50 141 141 4.5
Saab 340 33 49 49 10.1
CRJ900 76 13 13 0.3 23
Embraer 175 76 9 9 0.2 27
Total Airlink Operated Aircraft 22 190 212 50
Total Aircraft 316 1 251 568 75
(1) Excluding DC9 aircraft, the average age of Northwest-operated aircraft is 11.1 years.
In total, the Company took delivery of eight Airbus A330-300, 13 CRJ900 and nine Embraer 175 aircraft during the
twelve months ended December 31, 2007. In connection with the acquisition of these 30 aircraft, the Company entered into
long-term debt arrangements. Under such arrangements, the aggregate amount of debt incurred totaled $1.1 billion.
During 2007, the Company sold 57 aircraft including nine A319, nine DC10-30, seven Boeing 747-200 and 32 DC9
aircraft. Proceeds from these sales totaled $279 million.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 14 - Commitmentsff for further
information related to the Company's aircraft and commitments.
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.
17
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.
The Company is currently managing and supervising the design and construction of a $60 million luggage system
security expansion project at the Detroit Metropolitan Wayne County Airport, scheduled to be operationally complete in late
2008.
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. Other owned facilities include reservations centers in Baltimore, Maryland,
Tampa, Florida, Minot, North Dakota 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, Seattle and Sioux City, Iowa.
Item 3. LEGAL PROCEEDINGS
On September 14, 2005, NWA Corp. arid 12 of its direct and indirect subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. On September 30, 2005, NWA Aircraft
Finance, Inc., an indirect subsidiary of NWA Corp., also filed a voluntary petition for relief under Chapter 11. On May 18,
2007, the Bankruptcy Court entered an order (the "Confirmation Order") approving and confirming the Debtors' First
Amended Joint and Consolidated Plan of Reorganization under Chapter 11 of the Bankruptcy Code. On May 31, 2007, the
Debtors emerged from bankruptcy. The reorganization cases were jointly administered under the caption "In re NWA Corp.,
et al., Case No. 05-17930 (ALG)." The Confirmation Order provided for the discharge upon the Effective Date of the Debtors
from all Claims (as defined in the Plan) based upon acts or omissions that occurred prior to the Effective Date. In addition,
as established by the Confirmation Order, holders of pre-Effective Date claims are enjoined from commencing or continuing
any action or proceeding against the Reorganized Debtors with respect to such claims, except as otherwise permitted by the
Bankruptcy Court for purposes of determining the amount of their respective claims. The legal proceedings outstanding
against the Company as of the Petition Date are subject to the injunction established by the Confirmation Order.
Northwest Airlines, Inc. v. Filipas, et al. (U.S. Dist. Ct. Minnesota, Case 07-CIV-4803 (JNEIJJG)). On December 12,
2007, Northwest Airlines, Inc. filed a declaratory judgment action against six of its employee pilots seeking a declaration that
its recently implemented Target Benefit Pension Plan (collectively bargained for with the Air Line Pilots Association) does not
violate any applicable prohibitions against age discrimination, including under ERISA. In its complaint, Northwest asks the
court to certify a defendant class of all employee pilots who will receive less under the new target plan than they would have
received under the predecessor plan that provided benefits to pilots on a "flat percentage" or "pro rata to pay" basis.
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.
18
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 2007.
MANAGEMENT
Executive Officers of the Registrant
t
Douglas M. Steenland, age 56, 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 47, was elected Executive Vice President - Strategy, International and Chief Executive Officer of
Regional Airlines of Northwest effective May 31, 2007. He served as Executive Vice President & Chief Financial Officer of
NWA Corp. and Northwest from May 2005 through May 2007. Prior to rejoining Northwest in May 2005, 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, including Senior Vice President and Treasurer and Vice President- Market
Planning.
David M. Davis, age 41, was elected Executive Vice President & Chief Financial Officer of NWA Corp. and Northwest
effective May 31, 2007. He served as Senior Vice President- Finance & Controller of Northwest from August 2005 through
May 2007. From November 2004 to August 2005, Mr. Davis served as Chief Financial Officer of Kraton Polymers LLC, and
from April 2002 to November 2004, he served in senior finance roles at US Airways, including as Executive Vice President -
Finance and Chief Financial Officer from May 2004 to November 2004. From 2000 to 2002, he served as Vice President -
Financial Planning and Analysis of Budget Group, Inc. and prior to 2000 he served in a number of finance positions at Delta
Air Lines and at Northwest.
J. Timothy Griffin, age 56, 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.
Andrew C. Roberts, age 47, 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.
19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Predecessor Company's common stock ceased trading on the NASDAQ stock market on September 26, 2005 and
began trading in the "over-the-counter'' market under the symbol NWACQ.PK. Upon the Effective Date of the Plan, the
outstanding common and preferred stock of the Predecessor Company was cancelled for no consideration and the
Predecessor Company's stockholders no longer have any interest as stockholders in the Successor Company by virtue of
their ownership of the Predecessor Company's common or preferred stock prior to emergence from bankruptcy.
The Successor Company's common stock is listed on the NYSE and began trading under the symbol "NWA" on May 31,
2007. The Plan contemplates the issuance of approximately 277 million shares of new common stock by the Successor
Company (out of the 400 million shares of new common stock authorized under its amended and restated certificate of
incorporation), as follows:
225.8 million shares of common stock are issuable to holders of certain general unsecured claims;
8.6 million shares of common stock are issuable to holders of guaranty claims;
27 .8 million shares of common stock were issued pursuant to the Rights Offering and an Equity Commitment
Agreement; and
15.2 million shares of common stock are subject to awards under a management equity plan.
Financial results of the Successor Company are not comparable with the results of the Predecessor Company, as
discussed in "Item 8. Consolidated Financial Statements and Supplementary Data, Note 2 - Fresh-Start Reporting." The
table below shows the high and low sales prices for the Company's common stock during 2007 and 2006.
2007:
High
Low
2006:
High
Low
Predecessor Successor
Period from Period from
April 1 to May 31 to
1st Quarter Mal30 June 30 3rd Quarter
$ 5.55 $ 0.77 $ 26.33 $ 23.95
$ 0.56 $ 0.00 $ 22.13 $ 14.91
Predecessor
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
$
$
0.56 $ 0.65 $
0.44 $
0.85 $ 6.55
0.61
0.34 $ 0.47 $
4th Quarter
$ 20.25
$ 14.26
As of January 31, 2008, there were 2,653 stockholders of record of our Successor Company common stock.
Since 1989, NWA Corp. has not declared or paid any dividends on the Predecessor Company's common stock and
does not currently anticipate paying dividends on the Successor Company's common stock. Under the provisions of the
Company's Bank Credit Facility, NWA Corp.'s ability to pay dividends on or repurchase its common stock is restricted. Any
future determination to pay cash dividends will be at the discretion of the Board of Directors, subject to applicable limitations
under Delaware law, and will be dependent upon the Company's results of operations, financial condition, contractual
restrictions and other factors deemed relevant by the Board of Directors.
Stockholder Rights Plan. Pursuant to the Stockholder Rights Plan (the "Rights Plan"), each share of common stock has
attached to it a right and, until the rights expire or are redeemed, each new share of common stock issued by NWA Corp.,
will include one right. Once exercisable, each right entitles the holder (other than the acquiring person or group) to purchase
one one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $120, subject to
adjustment. The rights become exercisable upon the occurrence of certain events, including the acquisition by any air
carrier with passenger revenues in excess of approximately $1 billion per year (as such amount may be increased based on
increases in the Consumer Price Index from 2000) (a "Major Carrier"), a holding company of a Major Carrier or any of their
respective affiliates acquires beneficial ownership of 20% or more of NWA Corp.'s outstanding common stock or commences
a tender or exchange offer that would result in such person or group acquiring beneficial ownership of 20% or more of NWA
Corp.'s outstanding common stock. The rights expire on May 31, 2017, and may be redeemed by NWA Corp. at a price of
$.01 per right prior to the time they become exercisable.
20
Issuer Purchases of Equity Securities
Common stock repurchases in the fourth quarter of fiscal year 2007 were as follows:
Period
10101107-10/31107
11101/07-11130107
12101107-12131107
Total number
of shares
purchased (a)
274
Average price
paid
per share
$19.91
Total number of
shares purchased
as part of publicly
announced plans
or programs
NIA
NIA
NIA
Maximum number of
shares (or approximate
dollar value of shares)
that may yet be
purchased under the
plans or programs (b)
NIA
N/A
NIA
(a) Consisted of vested shares under the Management Equity Plan that were forfeited due to the Company's disgorgement
provision.
(b) The Management Equity Plan provides that the Company may permit the withholding of shares to satisfy tax obligations
due upon the vesting of restricted stock. The Management Equity Plan does not specify a maximum number of shares
that may be withheld.
21
Item 6. SELECTED FINANCIAL DATA
NORTHWEST AIRLINES CORPORATION
(In millions, except per share data)
Successor Predecessor
Period from Period from
June 1 to January 1 to
December 31, May 31, Year Ended December 31
2007 2007 2006 2005 2004 2003
Statements of Operations
Operating revenues
Passenger $ 5,660 $ 3,768 $ 9,230 $ 8,902 $ 8,432 $ 7,632
Regional carrier 884 521 1,399 1,335 1,083 860
Cargo 522 318 946 947 830 752
Other 538 317 993 1,102 934 833
Total operating revenues 7,604 4,924 12,568 12,286 11,279 10,077
Operating expenses 6,863 4,561 11,828 13,205 11,784 10,342
Operating income (loss) 741 363 740 (919) (505) (265)
Operating margin 9.7 % 7.4 % 5.9 % (7.5) % (4.5) % (2.6) %
Net income (loss) before cumulative
effect of accounting change 342 1,751 (2,835) (2,464) (862) 248
Cumulative effect of accounting
change (69)
Net income (loss) $ 342 $ 1,751 $ (2,835) $ (2,533) $ (862) $ 248
Earnings (loss) per common share:
Basic $ 1.30 $ 20.03 $ (32.48) $ (29.36) $ (10.32) $ 2.75
Diluted $ 1.30 $ 14.28 $ (32.48) $ (29.36) $ (10.32) $ 2.62
Successor Predecessor
December 31, December31
2007 2006 2005 2004 2003
Balance Sheets
Cash, cash equivalents and
unrestri"cted short-term
investments $ 3,034 $ 2,058 $ 1,262 $ 2,459 $ 2,757
Total assets 24,517 13,215 13,083 14,042 14,008
Long-term debt, including
current maturities 6,961 4,112 1,159 8,411 7,866
Long-term obligations under
capital leases,
including current obligations 127 11 361 419
Long-term pension and
postretirement health
care benefits, including
current obligations 3,720 185 264 4,095 3,756
Liabilities subject to compromise 13,572 14,328
Preferred redeemable
stock subject to compromise 277 280 263 236
Common stockholders'
equity (deficit) 7,377 (7,991) (5,628) (3,087) (2,011)
"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.
22
NORTHWEST AIRLINES CORPORATION
Year Ended December 31
2007 2006 2005 2004 2003
Operating Statistics
Scheduled service - Consolidated: (1)
Available seat miles (ASM) (millions) 93,328 92,944 100,461 98,591 94,211
Revenue passenger miles (RPM) (millions) 78,320 78,044 81,914 78,130 72,032
Passenger load factor 83.9 % 84.0 % 81.5 % 79.2 % 76.5
Revenue passengers (millions) 66.4 67.6 70.3 67.2 62.1
Passenger revenue per RPM (yield) 13.83 13.62 12.50 12.18 11.79
Passenger revenue per scheduled ASM (RASM) 11.61 11.44 10.19 9.65 9.01
Fuel gallons consumed - Consolidated (millions) (1) 1,720 1,780 1,976 1,958 1,842
Scheduled service - Mainline: (2)
Available seat miles (ASM) (millions) 86,142 85,603 91,775 91,378 88,593
Revenue passenger miles (RPM) (millions) 72,924 72,606 75,820 73,312 68,476
Passenger load factor 84.7 % 84.8 % 82.6 % 80.2 % 77.3
Revenue passengers (millions) 53.7 54.8 56.5 55.4 51.9
Passenger revenue per RPM (yield) 12.93 12.71 11.74 11.50 11.15
Passenger revenue per scheduled ASM (RASM) 10.94 10.78 9.70 9.23 8.61
Fuel gallons consumed - Mainline (millions) (2) 1,545 1,593 1,745 1,766 1,752
(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.
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Consolidated Financial
Statements and Supplementary Data" are integral to understanding the selected financial' data presented in the table above.
23
%


%


NORTHWEST AIRLINES CORPORATION
Mainline Operating Statistical Results (1)
Total available seat miles (ASM) (millions)
Passenger service operating expense
per total ASM (2)(3)(4)
Aircraft impairment, curtailment charge, severance
expense and other per total ASM (4)
Mainline fuel expense per ASM
Mark-to-market gains (losses) per total ASM
related to fuel derivative contracts that settle
2007
86,310
10.75
-
3.41
Year Ended December 31
2006 2005 2004
85,738 91,937 91,531
10.95 11.53 10.62
0.03 0.14 0.31
3.43 2.99 2.14
in future periods 0.02 - - -
Mainline fuel expense per total ASM, excluding
mark-to-market gains (losses) related to fuel
derivative contracts that settle in future periods
Cargo ton miles (millions)
Cargo revenue per ton mile
Fuel gallons consumed (millions)
Average fuel cost per gallon, excluding taxes
Mark-to-market gains (losses) per fuel gallons
3.43
2,067
40.65
1,545
205.41
3.43
2,269
41.71
1,593
202.47
2.99 2.14
2,397 2,338
39.51 35.48
1,745 1,766
170.73 118.17
consumed related to fuel derivative contracts
that settle in future periods 1.18 (0.17) - -
Average fuel cost per gallon, excluding
fuel taxes and mark-to-market gains (losses)
related to fuel derivative contracts that settle in
future periods
Number of operating aircraft at year end
Full-time equivalent employees at year end
206.59
356
30,306
202.30
371
30,484
170.73
379
32,460
118.17
435
39,342
(1) Mainline statistics exclude Northwest Airlink regional carriers, which is consistent with how the Company
reports statistics to the DOT.
(2) This financial measure excludes non-passenger service expenses. The Company believes that providing
financial measures directly related to passenger service operations allows investors to evaluate and compare
the Company's core operating results to those of the industry.
(3) Passenger service operating expense excludes the following items unrelated to passenger service operations:
(In millions) 2007 2006 2005 2004
Regional carrier expenses $ 1,259 $ 1,406 $ 1,576 $ 1,210
747 Freighter operations 654 804 791 608
ML T Inc. - net of intercompany eliminations 177 193 193 192
Other 56 43 43 56
(4) Passenger service operating expense per ASM includes the following items:
(In millions) 2007 2006 2005 2004
Aircraft and aircraft related write-downs $ $ $ 48 $ 203
Curtailment charges 82
Severance expenses 23
Other 77
2003
89,158
9.87
0.11
1.53
-
1.53
2,184
34.42
1,752
80.68
-
80.68
430
39,100
2003
$ 822
497
197
26
2003
$ 21
58
20
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operationsn and "Item 8. Consolidated Financial
Statements and Supplementary Data" are integral to understanding the selected financial data presented in the table above.
24
,
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
NWA Corp. is a holding company whose 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 operating subsidiary, Northwest, which accounted for approximately 99% of the Company's
2007 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.
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.
On May 18, 2007, the Bankruptcy Court entered an order approving and confirming the Debtors' First Amended Joint and
Consolidated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (as confirmed, the "Plan" or "Plan of
Reorganization"). The Plan became effective and the Debtors emerged from bankruptcy protection on May 31, 2007 (the
"Effective Date").
On the Effective Date, the Company implemented fresh-start reporting in accordance with SOP 90-7. Thus the
consolidated financial statements prior to June 1, 2007 reflect results based upon the historical cost basis of the Company
while the post-emergence consolidated financial statements reflect the new basis of accounting incorporating the fair value
adjustments made in recording the effects of fresh-start reporting. Therefore, the post-emergence periods are not
comparable to the pre-emergence periods. However, for discussions on the results of operations, the Company has
combined the results for the five months ended May 31, 2007 with the seven months ended December 31, 2007. The
combined period has been compared to the twelve months ended December 31, 2006. The Company believes that the
combined financial results provide management and investors a better perspective of the Company's core business and on-
going operational financial performance and trends for comparative purposes.
Full Year 2007 Results
The Company reported net income applicable to common stockholders of $2.1 billion for the combined year ended
December 31, 2007, compared to a net loss applicable to common stockholders of $2.8 billion in 2006. In 2007, the
Company reported operating income of $1.1 billion, compared with operating income of $740 million in 2006.
Operating revenues for the full year 2007 decreased 0.3 percent versus 2006 to $12.5 billion. System consolidated
passenger revenue increased 1.9 percent to more than $10.8 billion on 0.4 percent additional available seat miles ("ASMs"),
resulting in a 1.5 percent increase in unit revenue. Excluding the impact of fresh-start reporting, system consolidated
passenger revenue increased 2.8 percent due to a 2.4 percent improvement in unit revenue.
Operating expenses decreased 3.4 percent year-over-year to $11 .4 billion, resulting in a 2.0 percent decrease in
mainline unit costs, excluding fuel and unusual items.
Full year 2007 results included $1.5 billion of net unusual and reorganization related gains. Unusual non-operating
items consisted of a $14 million loss on the sale of Pinnacle Airlines Corp. common stock and $1.6 billion of reorganization
related gains. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 7 - Reorganization Related
Items" for further information related to the Company's reorganization items.
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 Supplementary Data,
Note 7 - Reorganization Related Items" for further information related to the Company's reorganization items.
Full year 2005 results included $1.2 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 $1.1 billion. The
Company also recorded a cumulative effect of accounting change in the amount of $69 million during 2005.
25
Results of Operations-2007 Compared to 2006
Operating Revenues. Operating revenues decreased 0.3% ($40 million), as a result of reductions in cargo revenue and
other revenue, partially offset by higher system passenger revenue and regional carrier revenue.
System Passenger Revenues. In the following analysis by region, mainline statistics exclude Northwest Airlink regional
carriers, which is consistent with how the Company reports statistics to the DOT. On the Effective Date, in conjunction with
implementing fresh-start reporting, the Company changed its policies pertaining to the accounting for frequent flyer
obligations and breakage of passenger tickets. Frequent flyer obligations are now recognized on a deferred revenue method
versus an incremental cost method. The impact of the changes to accounting for frequent flyer obligations on the Successor
Company was a reduction of $58.9 million in mainline passenger revenue and an increase of $9.5 million in regional carrier
revenue for the seven months ended December 31, 2007. Adjustments to air traffic liability are now recognized as revenue
based on the delayed recognition approach, when the validity period of the ticket has expired, versus the use of historical
trends and estimates. The overall impact of this change on passenger revenue was a reduction of $44.7 million for the
seven months ended December 31, 2007. The following analysis by region outlines the Company's year-over-year
performance as reported and excluding fresh-start related changes:
Mainline Total
As reported: Domestic Pacific Atlantic Mainline Consolidated
2007
Passenger revenues (in millions) $ 5,867 $ 2,186 $ 1,375 $ 9,428 $ 10,833
Increase (Decrease) from 2006:
Passenger revenues (in millions) $ (123) $ 121 $ 200 $ 198 $ 204
Percent (2.1) % 5.9 % 17.0 % 2.1 % 1.9 %
Scheduled service ASMs (capacity) (2.3) % 1.6 % 11 .0 % 0.6 % 0.4 %
Scheduled service RPMs (traffic) (1.3) % 0.3 % 7.4 % 0.4 % 0.4 %
P.assenger load factor 0.9 pts. (1.1) pts. (2.9) pts. (0.1) pts. (0.1) pts.
Yield (0.8) % 5.6 % 8.9 % 1.7 _% 1.5 %
Passenger RASM 0.3 % 4.2 % 5.5 % 1.5 % 1.5 %
Excluding fresh-start related changes:
2007
Passenger revenues (in millions) $ 5,952 $ 2,213 $ 1,367 $ 9,532 $ 10,927
Increase (Decrease) from 2006:
Passenger revenues (in millions) $ (38) $ 148 $ 192 $ 302 $ 298
Percent (0.6) % 7.2 % 16.3 % 3.3 % 2.8 %
Yield 0.6 % 6.9 % 8.4 % 2.8 % 2.4 %
Passenger RASM 1.7 % 5.5 % 4.8 % 2.6 % 2.4 %
Regional Carrier Revenues. Regional carrier revenues increased 0.4% ($6 million) to $1.4 billion, primarily due to a
1.2% yield improvement on a 2.1 % capacity reduction.
Cargo Revenues. Cargo revenues decreased 11.2% ($106 million) to $840 million due to an 8.9% reduction in cargo
ton miles and a 2.5% reduction 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. Other Revenues, the principal components of which are ML T, other transportation fees, partner
revenues, and charter revenues, decreased 13.9% ($138 million). The year-over-year decrease was due to the change in
presentation of regional carrier related revenue and expense items, as described in "Items 8. Consolidated Financial
Statements and Supplementary Data, Note 3 - Summary of Significant Accounting Policies," partially offset by the portion of
payments received for frequent flyer miles that is now recorded in Other Revenues.
26
Operating Expenses. Operating expenses decreased 3.4% ($404 million) for 2007. As a result of the adoption of fresh-
start reporting, the Company's financial statements on or after June 1, 2007 are not comparable with its pre-emergence
financial statements because they are, in effect, those of~ new entity. In addition to the fair value adjustments required for
fresh-start reporting, the Company changed its policies pertaining to the accounting for frequent flyer obligations and
breakage of passenger tickets. The effects of fresh-start reporting, the policy changes and the impact of exit-related stock
compensation expense on the Company's Consolidated Statements of Operations are itemized in column (1). On April 24,
2007, Mesaba Aviation, Inc. was acquired by the Company and became a wholly-owned consolidated subsidiary, the impact
of which is itemized in column (2). In conjunction with the Amended Airline Services Agreement with Pinnacle and the Stock
Purchase and Reorganization Agreement with Mesaba, the Company changed its presentation of certain regional carrier
related revenue and expense items effective January 1, 2007. This change in presentation had no impact on the Company's
operating income for the year ended December 31, 2007 and is itemized in column (3). Excluding the items described
above, the comparable year-over-year operating performance variances are itemized in column (4). The following table and
notes present operating expenses for the years ended December 31, 2007 and 2006 and describe significant year-over-year
variances:
Increase (Decrease) Due To:
YearEnded (1) (2) (3) (4)
Combined Fresh-Start/ Mesaba Regional Total o/o
December 31, December 31, Exit-Related Net of Carrier Iner (Deer) Iner
(In millions) 2007 2006 StkComp Exp Elim Reclass Operations from 2006 ~
OPERATING EXPENSES
Aircraft fuel and taxes $ 3,378 $ 3,386 $ - $ 11 $ - $ (19) A $ (8) (0.2) %
Salaries, wages and benefits 2,568 2,662 20 79 (193) B (94) (3.5)
Aircraft maintenance materials
and repairs 811 796 20 (5) C 15 1.9
Selling and marketing 751 759 (11) 3 C (8) (1.1)
Other rentals and landing fees 539 562 10 (33) D (23) (4.1)
Depreciation and amortization 495 519 (5) 7 3 (29) E (24) (4.6)
Aircraft rentals 378 226 188 (36) F 152 67.3
Regional carrier expenses 776 1,406 (138) (400) (92) G (630) (44.8)
Other 1,728 1,512 32 184 H 216 14.3
Total operating expenses $ 11 ,424 $ 11,828 $ 4 $ 21 $ (209) $ (220) $ (404) (3.4) %
A. Aircraft fuel and taxes decreased primarily due to gains related to fuel derivative contracts and a reduction in fuel gallons
consumed, partially offset by higher fuel prices. During 2007, we recognized $112.9 million of fuel derivative net gains
as reductions to fuel expense, including $18.7 million of unrealized gains related to fuel derivative contracts that will
settle in 2008. During 2006, we recognized $39.3 millio(l of fuel derivative net losses as additional fuel expense. Total
mainline gallons consumed decreased 3.0 percent, while the average fuel price per gallon increased 1.5 percent.
B. Salaries, wages and benefits were lower year-over-year primarily due to reductions in employee benefit costs,
outsourcing of certain station operations, and severance charges recorded in 2006 for a ratified contract agreement with
AMFA, partially offset by increases related to employee profit sharing and performance incentive plans.
C. Aircraft maintenance materials and repairs and selling and marketing expenses were relatively flat year-over-year.
D. Other rentals and landing fees decreased due to a favorable settlement with the Metropolitan Airports Commission and
fewer overall landings.
E. Depreciation and amortization expense reductions were largely due to the retirement of the DC10 fleet and reductions in
the DC9 fleet, partially offset by incremental deliveries of A330, CRJ900 and Embraer 175 aircraft.
F. Aircraft rentals expense decreased primarily due to restructured and rejected aircraft leases.
G. Regional carrier expense decreased year-over-year primarily due to the reduction in regional carrier capacity and
restructured agreements with our regional airline affiliates. In addition, the Company recorded fuel and fuel related
expenses for its wholly-owned subsidiaries, Compass and Mesaba, in Aircraft Fuel and Taxes and Other in 2007.
H. Other expenses (which include ML T operating expenses, outside services, insurance, passenger food, personnel
expenses, communication expenses and supplies) were higher versus prior year due largely to an increase in outside
services with the shift to third party vendors versus internally staffed station operations which is offset in salaries, wages
and benefits. Increased passenger claims, professional fees, and personnel expenses also contributed to the variance.
27
Other Income and Expense. Non-operating expense decreased $4.8 billion primarily due to a $1.8 billion gain on debt
discharge, $1.3 billion in net gains associated with revaluing our assets and liabilities at fresh-start, and a $1.7 billion year-
over-year reduction in other reorganization-related expenses. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 7 - 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 13- Income Taxes" for additional
discussion of the Company's tax accounts.
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. In the following analysis by region, mainline statistics exclude Northwest Airlink regional
carriers, which is consistent with how the Company reports statistics to the DOT.
Mainline Total
Domestic Pacific Atlantic Mainline Consolidated
2006
Passenger revenues (in millions) $ 5,990 $ 2,065 $ 1,175 $ 9,230 $ 10,629
Increase (Decrease) from 2005:
Passenger revenues (in millions) $ 216 $ 78 $ 34 $ 328 $ 392
Percent 3.8 % 3.9 % 3.0 % 3.7 % 3.8 %
Scheduled service ASMs ( capacity) (7.9) % (3.8) % (7.0) % (6.7) % (7.5) %
Scheduled service RPMs (traffic) (4.3) % (3.3) % (5.5) % (4.2) % (4.7) %
Passenger load factor 3.1 pts. 0.4 pts. 1.5 pts. 2.2 pts. 2.5 pts.
Yield 8.4 % 7.4 % 8.9 % 8.3 % 9.0 %
Passenger RASM 12.6 % 7.9 % 10.7 % 11.1 % 12.3 %
Regional Carrier Revenues. 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. 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. 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.
28
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 Chan9e 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 mainline gallons consumed
decreased 8.7%. During 2006, we recognized $39.3 million of fuel derivative net losses as additional fuel expense,
including $2.7 million of unrealized losses related to fuel derivative contracts that will settle in 2007. During 2005, we
recognized $20.9 million of fuel derivative net gains as a reduction to fuel expense.
B. Salaries, wages and benefits decreased primarily due to consensually agreed upon CBAs, wage reductions imposed
under Section 1113, reduced mechanic pay and headcount, the reduced level of flying, the freezing of the pension plans,
and curtailment charges recorded as pension expense in 2005. Pension curtailment charges in 2006 were recorded as
reorganization expense and not included in operating expense.
C. The increase in aircraft maintenance materials and repairs expense was largely due to the shift to third party
maintenance vendors versus internally completed maintenance work.
D. Selling and marketing expense decreases were primarily due to a decline in enplanements, a shift in the volume of
bookings made by travel agents through computer reservation systems ("CRS") to nwa.com, and lower booking fee
rates.
E. Other rentals and landing fees increased due to reduced facility rents and fewer overall landings.
F. Depreciation and amortization expense is lower as a result of owned aircraft, and related inventory and equipment,
permanently removed from service.
G. Aircraft rentals expense decreased primarily due to restructured and rejected aircraft leases.
H. The decrease in regional carrier expenses was due primarily to the reduction in regional carrier capacity which drove
decreases in payments to regional carriers and fuel requirements of $147 million and $23 million, respectively.
I. Other expenses (which include 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 7 - 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. 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 13 - Income Taxes" for additional discussion of the Company's tax accounts.
29
Liquidity and Capital Resources
At December 31, 2007, the Company had cash and cash equivalents of $2.9 billion, unrestricted short-term investments
of $95 million, and borrowing capacity under an undrawn credit facility of $101 million, providing total available liquidity of
$3.1 billion. This amount excludes $725 million of restricted short-term investments (which may include amounts held as
cash). Liquidity increased by $1.1 billion during the year ended December 31, 2007.
Significant Liquidity Events
In May, as part of the Company's Plan of Reorganization, the Company raised net proceeds of $728 million in capital
through the sale of new common stock pursuant to the Rights Offering and an Equity Commitment Agreement.
In June, the Company reclassified $325 million of deposits and holdbacks from restricted to unrestricted cash. Such
amounts were previously held by certain vendors under contracts entitling the vendors to retain cash to secure obligations
under those contracts.
In November, the Company closed on an accounts receivable financing facility. The facility size is $150 million and as
of December 31, 2007, the facility was undrawn. The new facility replaces an existing receivables facility that was
terminated in November. The facility that was replaced was undrawn upon termination as the Company prepaid, in full, $106
million of debt under that facility in May 2007.
The Company sold certain assets throughout 2007 including 57 aircraft, the Company's remaining equity investment in
Pinnacle Airlines Corp. common stock, and the liquidation of its holdings in Aeronautical Radio, Inc. ("ARINC"). Proceeds
from the sales of the aircraft, which included DC9, A319, DC10, and Boeing 747-200 aircraft, and investments totaled $279
million and $130 million, respectively. Proceeds from the sale of the A319 aircraft were primarily used to pre-pay debt
originally issued to finance the aircraft.
In August, the Company deposited into an escrow account $213 million related to Northwest's pending investment in
Midwest Air Group, LLC, a company formed by Northwest, TPG Midwest US V, LLC, and TPG Midwest International V, LLC
for purposes of acquiring Midwest Air Group, Inc. The deposit was classified as restricted cash as of December 31, 2007
and was subsequently withdrawn upon the closing of the transaction in January 2008.
Cash Flow Activities
Operating Activities. Net cash provided by operating activities for the year ended December 31, 2007 totaled $1.4 billion,
a $0.2 billion increase from the $1.2 billion of cash provided by operating activities for the year ended December 31, 2006.
The increase in net cash provided by operations was primarily due to an increased net profit, excluding reorganization items,
in 2007. Reorganization expenses are comprised of mainly non-cash items.
Investing Activities. Investing activities during 2007 included the purchase of eight A330-300, 13 CRJ900, and nine
Embraer 175 aircraft, proceeds from the sale of Pinnacle Airlines Corp. common stock and ARING, 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.
Financing Activities. Financing activities during 2007 consisted primarily of $728 million in net proceeds from the Rights
Offering, the financing of two A330-300, 13 CRJ900, and nine Embraer 175 aircraft with long-term debt, and the financing of
Boeing 787 aircraft pre-delivery deposits, partially offset by debt payments and debt prepayments.
Non-Cash Flow Transactions and Leasing Activities. The Company also financed the delivery of six Airbus A330-300
aircraft during 2007 through non-cash transactions with the manufacturer, which are reflected as long-term debt on the
Company's Consolidated Balance Sheet, but are not classified as a cash flow activity. In connection with the acquisition of
these aircraft, the Company entered into long-term debt arrangements. Under these arrangements, the aggregate amount of
debt incurred totaled approximately $502 million.
30
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, 2007:
Airbus A330-300
Embraer 175
CRJ900
Investing Activities
Affecting Cash Flows
2
9
13
24
Non-cash Transactions
and Leasing Activities
6
6
For further discussion related to the Company's long-term debt and capital lease obligations, see "Item 8. Consolidated
Financial Statements and Supplementary Data, Note 8- Long-Term Debt and Short-Term Borrowings and Note 9 - Leases,"
for additional information.
Prior Years' Cash Flow Activities
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.
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. This
increase in net cash provided by operations was primarily due to a net profit, excluding reorganization items and other non-
cash expenses 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.
Financing Activities. Financing activities during 2006 consisted primarily of proceeds from debt issuances and
payments on debt. Proceeds from the 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 8757-200 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.
31
Contractual Obligations. The following table summarizes the Company's commitments to make long-term debt and
minimum lease payments, aircraft purchases, and certain other obligations for the years ending December 31.
(In millions) 2008 2009 2010 2011 2012 Thereafter Total
Long-term debt (1) $ 953 $ 1,080 $ 895 $ 1,028 $ 822 $ 5,949 $ 10,727
Capital leases (2) 10 14 9 9 8 203 253
Operating leases: (3)
Aircraft 385 382 393 339 303 1,902 3,704
Non-aircraft 184 176 154 128 115 902 1,659
Aircraft commitments (4) 1,205 1,167 770 79 97 3,318
Other purchase obligations (5) 28 20 13 12 11 19 103
Total (6) $ 2,765 $ 2,839 $ 2,234 $ 1,595 $1,356 $ 8,975 $ 19,764
(1) Amounts represent principal and interest for long-term debt. Interest on variable rate debt was estimated based on the
current rate in effect at December 31, 2007. See "Item 8. Consolidated Financial Statements and Supplementary Data,
Note 8 - Long-Term Debt and Short-Term Borrowings" for additional information.
The above table also includes principal and interest obligations related to $454 million of aircraft enhanced equipment
trust certificates ("2007-1 EETC") issued on October 10, 2007. The 2007-1 EETC proceeds were placed in escrow to
pre-fund the financing of 27 new Embraer 175 aircraft expected to be delivered in 2008. Interest on the Certificates will
be payable semiannually on May 1 and November 1 of each year, beginning on May 1, 2008. The 2007-1 EETC
proceeds will finance aircraft deliveries in 2008 and are, therefore, not included in "Item 8. Consolidated Financial
Statements and Supplementary Data, Note 8 - Long-Term Debt and Short-Term Borrowings."
(2) Amounts represent principal and interest for capital leases. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 9 - Leases" for information related to the Company's overall lease commitments.
(3) Amounts represent minimum lease payments for non-cancelable operating leases with initial or r.emaining terms of more
than one year. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 9 - 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 and are net of previously paid
purchase deposits. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 14- 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.
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 exist that may have a material current or
future effect on its financial condition, liquidity or results of operations.
32
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 is 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 16 - 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. New contributions that came due under the 2006 Pension Act funding rules were paid while Northwest was in
bankruptcy and must continue to be paid going forward. 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"). Northwest's 2007 calendar year contributions to its frozen defined
benefit plans under the provisions of the 2006 Pension Act and the replacement plans were approximately $130 million. In
2008, 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 $140 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.
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 3 - Summary of Significant Accounting Policies" for additional
discussion of the application of these estimates and other accounting policies. The Company's management discussed the
development of the estimates and disclosures related to each of these matters with the Audit Committee of the Company's
Board of Directors.
Fresh-Start Reporting. Upon emergence from its Chapter 11 proceedings on May 31, 2007, the Company adopted
fresh-start reporting in accordance with SOP 90-7. The Company's emergence from Chapter 11 resulted in a new reporting
entity with no retained earnings or accumulated deficit. Accordingly, the Company's consolidated financial statements for
periods prior to June 1, 2007 are not comparable to consolidated financial statements presented on or after June 1, 2007.
Fresh-start reporting reflects the value of the Company as determined in the confirmed Plan of Reorganization. Under
fresh-start reporting, the Company's asset values were remeasured and allocated in conformity with SFAS No. 141 . The
excess of reorganization value over the fair value of net tangible and identifiable intangible assets was recorded as goodwill
in the accompanying Consolidated Balance Sheet. In addition, fresh-start reporting also required that all liabilities, other than
deferred taxes and pension and other postretirement benefit obligations, be stated at fair value or at the present values of
the amounts to be paid using appropriate market interest rates. Deferred taxes were determined in conformity with SFAS No.
109, Accounting for Income Taxes ("SFAS No. 109"). In estimating fair value, we based our estimates and assumptions on
the guidance prescribed by SFAS No. 157, Fair Value Measurements ("SFAS No. 157"), which we adopted in conjunction
with our emergence from bankruptcy and adoption of fresh-start reporting. SFAS No. 157, among other things, defines fair
value, establishes a framework for measuring fair value and expands disclosure about fair value measurements.
Estimates of fair value represent the Company's best estimates based on its valuation models, which incorporated
industry data and trends and relevant market rates and transactions. The estimates and assumptions are inherently subject
to significant uncertainties and contingencies beyond the control of the Company. Accordingly, we cannot provide
assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could
vary materially. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 4- Fair Value
Measurements" for additional information regarding assets and liabilities remeasured at fair value on the Effective Date.
33
To facilitate the calculation of the enterprise value of the Successor Company, Northwest's financial advisors assisted
management in the preparation of a valuation analysis for the Successor Company's common stock to be distributed as of
the Effective Date to the unsecured creditors. The enterprise valuation included (i) a 40% weighting towards a comparable
company analysis based on financial ratios and multiples of comparable companies, which were then applied to the financial
projections developed by the Company to arrive at an enterprise value; and (ii) a 60% weighting towards a discounted cash
flow analysis which measures the projected multi-year, unlevered free cash flows of the Company to arrive at an enterprise
value.
The estimated enterprise value and corresponding equity value are highly dependent upon achieving the future financial
results set forth in the five-year financial projections included in the Company's Plan of Reorganization, as well as the
realization of certain other assumptions. The equity value of the Company was calculated to be a range of approximately
$6.45 billion to $7.55 billion. Based on claims trading prior to the Company's Effective Date and the trading value of the
Company's common stock post emergence, the equity value of the Company was estimated to be $6.45 billion for purposes
of preparing the Company's financial statements. The estimates and assumptions made in this valuation are inherently
subject to significant uncertainties and the resolution of contingencies beyond the reasonable control of the Company.
Accordingly, there can be no assurance that the estimates, assumptions, and amounts reflected in the valuations will be
realized, and actual results could vary materially. Moreover, the market value of the Company's common stock may differ
materially from the equity valuation.
Frequent Flyer Program. Northwest operates a frequent flyer loyalty program known as "WorldPerks." Wor1dPerks is
designed to retain and increase traveler loyalty by offering incentives to travelers for their continued patronage. Under the
Wor1dPerks 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 and alliance partners. WorldPerks members accumulate mileage in their accounts and later redeem mileage for
free or upgraded travel on Northwest and alliance partners. WorldPerks members that achieve certain mileage thresholds
also receive enhanced service benefits from Northwest such as special service lines, advance flight boarding and upgrades.
The Company adopted a deferred revenue method to recognize frequent flyer liabilities on the Effective Date. Under
this method, we account for miles earned and sold as separate deliverables in a multiple element arrangement as prescribed
by EITF No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF No. 00-21 "). Therefore, mileage credits earned
on or after June 1, 2007 are now deferred based upon the price for which we sell mileage credits to other airlines ("deferred
mileage credits"), which we believe represents the best evidence of their fair value in accordance with EITF No. 00-21. The
revenue on deferred frequent flyer miles will be recognized when the miles are ultimately redeemed through flight, upgrades
or other means, or when it becomes remote that the miles will ever be used. Estimating deferred mileage credits that will not
be redeemed requires significant management judgment. Based on current program rules and historical redemption trends,
the Company records passenger revenue associated with deferred mileage credits if the mile is unredeemed seven years
after issuance.
We previously accounted for frequent flyer miles earned on Northwest flights on an incremental cost basis as an
accrued liability and as operating expense, while miles sold to airline and non-airline businesses were accounted for on a
deferredrevenue basis. Also in conjunction with the adoption of the new accounting policy, Northwest began recording a
component of the payments received from non-airline marketing partners in Other Revenue rather than in Passenger
Revenue. The component recognized as Other Revenue is the portion of the payment received that represents the amount
paid by the marketing partner in excess of the value of the deferred mileage credits.
As a result of the application of fresh-start reporting, the WorldPerks frequent flyer obligation was revalued at the
Effective Date to reflect the estimated fair value of miles to be redeemed in the future. Outstanding miles earned by flying
Northwest or its partner carriers were revalued using a weighted average per-mile equivalent ticket value, taking into account
such factors as class of service and domestic and international ticket itineraries, which can be reflected in awards flown by
WorldPerks members. At December 31, 2007, the Company had recorded deferred revenue for its frequent flyer program
totaling $2.0 billion. At December 31, 2006, the Company had recorded an incremental cost liability and deferred revenue for
its frequent flyer program totaling $412 million. A hypothetical 1 % increase or decrease in the number of outstanding miles
would result in a change of approximately $19 million to the deferred revenue liability.
Operating Revenues. The value of unused passenger tickets, miscellaneous change orders ("MCO's") and travel credit
vouchers ("TCV's") are included in current liabilities as air traffic liability. Passenger and cargo revenues are recognized
when the transportation is provided or when the ticket expires. Unused domestic passenger tickets generally expire one
year from scheduled travel. Unused international passenger tickets generally expire one year from ticket issuance. On the
Effective Date, the Company revised the accounting method used to recognize revenue for unused tickets, adopting the
delayed recognition approach. Under the delayed recognition approach, no revenue is recognized on an unused ticket until
the validity period has expired and the ticket can no longer be used; therefore, management estimates are no longer
required to recognize breakage revenue. Prior to the Effective Date, the Company recognized breakage associated with
unused passenger tickets based on estimates of future breakage based on historical breakage trends.
34
Fixed Asset and Definite-Lived Intangible Asset Impairments. The Company evaluates long-lived tangible assets and
definite-lived intangible assets for potential impairments in compliance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, ("SFAS No. 144"). For fixed assets, these impairment evaluations are primarily initiated by
fleet plan changes and therefore predominantly performed on fleet-related assets. For definite-lived intangible assets,
impairment evaluations are initiated based on quarterly reviews of key indicators of impairment. 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
valuations 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.
Goodwill and Indefinite-Lived Intangible Assets. The Company accounts for intangible assets in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 142 requires that companies test goodwill and
indefinite-lived intangible assets for impairment on an annual basis rather than amortize such assets. The Company tests
the balance for impairment annually as of October 1 and/or when an impairment indicator exists.
Impairment testing is performed in accordance with SFAS No. 142. The Company's impairment testing of goodwill is
based on the fair value of the enterprise considering both the market and income valuation approaches. The Company is
annually required to complete Step 1 (determining and comparing the fair value of the Company's reporting unit to its
carrying value) of the impairment test. Step 2 is required to be completed if Step 1 indicates that the carrying value of the
reporting unit exceeds the fair value and involves the calculation of the implied fair value of goodwill. The Company
completed Step 1 of the impairment assessment at its annual impairment testing date in 2007. Based upon the Company's
valuation procedures, the Company determined that the fair value of the enterprise exceeded its carrying value. As such,
the Company was not required to complete Step 2 of the impairment test and no impairment loss was recognized.
The Company tests its indefinite-lived intangible assets for impairment by remeasuring those assets at fair value using
the Company's forecasts and estimates, market information on comparable assets, when available, and discount rates
calculated from industry-wide information. Based upon the Company's valuation procedures, we determined that the fair
values of each category of indefinite-lived intangible assets exceeded its carrying value; as such, no impairment was
recorded on these assets.
The determination of fair value requires significant management judgment including the identification and computation of
multiples of comparable companies, computation of control premiums, future capacity, passenger yield, passenger traffic, jet
fuel and other operating costs, changes in working capital, capital investments, the selection for the appropriate discount
rates and other relevant factors.
The Company's forecasts and estimates were based on assumptions that are consistent with the plans and estimates
the Company is using to manage its business. Changes in these estimates could change the Company's conclusion
regarding an impairment of goodwill or other intangible assets and potentially result in a non-cash impairment in a future
period. Fuel costs and general economic conditions significantly impact our business and, thus, long-term assumptions
related to these items materially impact the computation of our fair value. If the expected future price of fuel does not
decrease from the record levels experienced during late 2007 or if the Company is unable to pass this commodity price
increase on to its passengers or if general economic conditions experience a material, negative change, the Company may
be required to book an impairment sometime during 2008.
Pension Liability and Expense. The Company has several defined benefit pension plans and defined contribution
401 (k)-type plans covering substantially all of its employees. The Company accounts for its defined benefit pension plans in
accordance with SFAS No. 87, Employers' Accounting for Pensions, ("SFAS No. 87"), which requires that amounts
recognized in financial statements be determined on an actuarial basis that includes estimates relating to expected return on
plan assets, discount rate, and employee compensation. Northwest froze future benefit accruals for its defined benefit
Pension Plans for Salaried Employees, Pilot Employees, and Contract Employees effective August 31, 2005, January 31,
2006, and September 30, 2006, respectively. Replacement pension coverage was 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 16 - Pension and Other Postretirement
Health Care Benefits" for additional discussion of actuarial assumptions used in determining pension liability and expense.
35
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 was retroactively
recorded as of January 1, 2005, and was 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. 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 2008 is based on target asset allocations of 35% 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 11.75%; 15% long-duration bonds with an expected rate of return of 6.0%; 5% high yield bonds
with an expected rate of return of 7.50%; and 10% real estate equities with an expected rate of return of 6.75%. These
assumptions result in a weighted geometric average rate of return of 8.75%. 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 was 9.0% for calendar year 2007 and 2006.
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 weighted-average
discount rate of 6.31% to be appropriate at December 31, 2007, versus the 5.93% discount rate used at December 31 , 2006.
For the year ended December 31, 2007, accounting for the changes related to the Company's pension plans resulted in
a loss of $199 million in accumulated other comprehensive income on a pre-tax basis. The impact on accumulated other
comprehensive income from May 31, 2007 was principally due to a 4.9% decrease in the fair value of the plan assets offset
by a 1.5% decrease in benefit obligations driven by a 0.14% increase in the discount rate from 6.17% to 6.31 %. The impact
of a 0.25% change in the weighted average discount rate is shown in the table below. 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.
36
For the year ended December 31, 2007, the Company recognized consolidated pension expense of $58 million,
including replacement defined contribution requirements, compared to $335 million in 2006. The impact of a 0.50% change
in the expected long-term rate of return on plan assets is shown in the table below.
Change in Assumption
0.25% decrease in discount rate
0.25% increase in discount rate
0.50% decrease in expected return on assets
0.50% increase in expected return on assets
Effect on 2008
Pension Expense
- 5 million
+5 million
+32 million
-32 million
Effect on Accrued
Pension Liability at
December 31, 2007
+278 million
-262 million
n/a
n/a
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, 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 December 2007, the FASS issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
This statement is effective for fiscal years beginning after December 15, 2008 and provides guidance for the classification
and disclosure of noncontrolling interests (formerly called minority interests), as well as deconsolidatien of subsidiaries. The
Company is currently evaluating the impact of this statement on its financial statements.
In December 2007, the FASS issued SFAS No. 141 (Revised 2007), Business Combinations ("SFAS No. 141R"). This
statement is effective for fiscal years beginning after December 15, 2008 and adjusts certain guidance related to recording
nearly all transactions where one company gains control of another. The statement revises the measurement principle to
require fair value measurements on the acquisition date for recording acquired assets and liabilities. It also changes the
requirements for recording acquisition-related costs and liabilities. Additionally, the statement revises the treatment of
valuation allowance adjustments related to income tax benefits in existence prior to a business combination. The current
standard, SFAS No. 141, requires that adjustments to these valuation allowances be recorded as adjustments to goodwill,
while the new standard will require companies to adjust current income tax expense. The Company is currently evaluating
the impact of this statement on its financial statements.
In February 2007, the FASS issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
("SFAS No. 159"). This statement permits all entities to elect to measure eligible financial instruments at fair value on a
recurring basis. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and may not be applied
retrospectively to prior fiscal years. The Successor Company did not elect to measure any eligible financial instruments at
fair value under this guidance.
In September 2006, the FASS 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 historically had and continues to utilize a fiscal year-end
measurement date. SFAS No. 158 was 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 Predecessor Company's equity deficit by $224 million as of December 31, 2006. SFAS No. 158 does not affect the
results of operations.
37
In September 2006, the FASS issued 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. The
Company adopted this statement on the Effective Date. See "Item 8. Consolidated Financial Statements and Supplementary
Data, Note 4 - Fair Value Measurements" for additional information.
In June 2006, the FASS issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), which
clarifies SFAS No. 109. 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 adopted FIN 48 as of January 1, 2007,
and no change was required to its reserve for uncertain income tax positions under FIN 48.
38
Item 7 A. 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 17 - Risk Management" 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. Excluding the impact of fuel hedges, a hypothetical 10% increase in the December 31, 2007
cost per gallon of fuel, assuming projected 2008 mainline and regional aircraft fuel usage, would result in an increase to
aircraft fuel expense of approximately $369 million in 2008, compared to an estimated $357 million for 2007 measured at
December 31, 2006. The Company, as of February 29, 2008, had hedged the price of approximately 45% and 18% of 2008
first quarter and full year fuel requirements, respectively. As of February 28, 2007, the Company had hedged approximately
40% of its estimated 2007 fuel requirements.
Foreign Currency. The Company is exposed to the effect offoreign 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, and from time to time, the Company uses financial instruments to hedge its exposure to the Japanese yen
and other foreign currencies. The result of a uniform 10% strengthening in the value of the U.S. dollar from December 31,
2007 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 $66 million for the year ending December 31, 2008, compared to an
estimated decrease of $131 million for 2007 measured at December 31, 2006. This sensitivity analysis was prepared based
upon projected foreign currency-denominated revenues and expenses as of December 31, 2007 and 2006, respectively.
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 liability position, as its foreign currency-denominated liabilities exceed 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 $9 million in 2008, caused by the remeasurement of net foreign currency-denominated liabilities as of December
31, 2007. In comparison, the Company was in a net asset position in 2006, as its foreign currency-denominated assets
exceeded its foreign currency-denominated liabilities. The result of a 10% strengthening in the value of the U.S. dollar would
have resulted 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. This sensitivity analysis was prepared based upon foreign
currency-denominated assets and liabilities as of December 31, 2007 and 2006, respectively.
The Company's operating income in 2007 was unfavorably impacted by a net $50 million due to the average yen being
weaker in 2007 compared to 2006 and unfavorably impacted in 2006 by $107 million due to the average yen being weaker in
2006 compared to 2005. In 2007, the Company's yen-denominated net cash inflow was approximately 86 billion yen
(approximately $726 million) and its yen-denominated liabilities exceeded its yen-denominated assets by an average of 10
billion yen (approximately $87 million). 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 three billion yen (approximately $24 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.
As a result of the Company not having any yen hedges in place during 2007, the average yen to U.S. dollar exchange
rate for the year ending December 31, 2007 was 118. Excluding the impact of hedging activities, the average yen to U.S.
dollar exchange rate for the years ending December 31, 2006 and 2005 was 117 and 110, respectively. Including the impact
of hedge activities, the average yen to U.S. dollar exchange rate for the years ending December 31, 2006 and 2005 was 115
and 108, 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. As of December 31, 2007, the Company had hedged
approximately 42.6% of its anticipated 2008 yen-denominated sales. The 2008 Japanese yen hedges consist of forward
contracts which hedge approximately 32. 7% of yen-denominated sales at an average rate of 109.3 yen per U.S. dollar and
collar options which hedge approximately 9.9% of yen-denominated sales with a rate range between 102.4 and 116.4 yen
per U.S. dollar. As of December 31, 2006, the Company had no hedges in place for its anticipated 2007 yen-denominated
sales.
39
The Company's operating income in 2007 was favorably impacted by a net $4 million due to the average Canadian
dollar being stronger in 2007 compared to 2006 and favorably impacted in 2006 by $15 million due to the average Canadian
dollar being stronger in 2006 compared to 2005. In 2007, the Company's Canadian dollar-denominated net cash inflow was
approximately C$484 million (approximately $453 million) and its Canadian dollar-denominated assets exceeded its
Canadian dollar-denominated liabilities by an average of C$10 million (approximately $10 million). In general, each time the
Canadian dollar strengthens, the Company's operating income is favorably impacted due to net Canadian dollar-
denominated revenues exceeding expenses. Additionally, a weakening Canadian dollar results in recognition of a non-
operating foreign currency loss due to the remeasurement of net Canadian dollar-denominated assets.
The average Canadian dollar to U.S. dollar exchange rate for the years ending December 31, 2007, 2006 and 2005 was
1.07, 1.13 and 1.21, respectively. The Company did not hedge any of its Canadian dollar-denominated sales in 2007, 2006
or 2005. As of December 31, 2007, the Company had hedged approximately 66.4% of its 2008 anticipated Canadian dollar
denominated sales with forward contracts at an average rate of 1.0008 Canadian dollars per U.S. dollar.
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, 2007 and December 31, 2006, the Company's interest income from cash equivalents and short-term
investments would increase by approximately $38 million and $24 million, respectively. These amounts are determined by
considering the impact of the hypothetical interest rate increase on the Company's cash equivalent and short-term
investment balances at December 31, 2007 and 2006.
The Company's floating rate indebtedness was approximately 70% of its total long-term debt and capital lease
obligations as of December 31, 2007. If short-term interest rates were to increase by 100 basis points throughout 2008 as
measured at December 31, 2007, the Company's interest expense would increase by approximately $49 million. This
amount is determined by considering the impact of the hypothetical interest rate increase on the Company's floating rate
indebtedness as of December 31, 2007. As of December 31, 2007 the Company had entered into individual interest rate
cap hedges related to three floating rate debt instruments, with a total cumulative notional amount of $429 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.
Subsequent to its Chapter 11 filing, the Predecessor Company recorded or accrued post-petition interest expense on
pre-petition obligations only to the extent it believed the interest would be paid during the bankruptcy proceeding or that it
was probable that the interest would be an allowed claim. The Predecessor Company's floating rate indebtedness was
approximately 67% of its total long-term debt and capital lease obligations that were accruing interest as of December 31,
2006. If short-term interest rates would have increased by 100 basis points throughout 2007 as measured at December 31,
2006, the Company's interest expense would have increased by approximately $46 million. These amounts are determined
by considering the impact of the hypothetical interest rate increase on the Predecessor Company's floating rate
indebtedness, including debt obligations subject to compromise that continued to accrue interest as of December 31, 2006.
Market risk for fixed-rate indebtedness is estimated as the potential decrease in fair value resulting from a hypothetical
100 basis point increase in interest rates and amounts to approximately $96 million measured at December 31, 2007. This
compares to an estimated $35 million measured at December 31, 2006.
40
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Finn
The Board of Directors and Stockholders
Northwest Airlines Corporation
We have audited the accompanying consolidated balance sheets of Northwest Airlines Corporation (the Company) as of
December 31, 2007 (Successor) and as of December 31, 2006 (Predecessor), and the related consolidated statements of
operations, common stockholders' equity (deficit), and cash flows for the seven months ended December 31, 2007
(Successor), and for the five months ended May 31, 2007 (Predecessor), and for each of the two years in the period ended
December 31, 2006 (Predecessor). Our audit also included the financial statement schedules of the Successor Company
and the Predecessor Company for the periods as listed in the index at item 15. 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 as of December 31, 2007 (Successor) and 2006 (Predecessor), and the
consolidated results of its operations and its cash flows for the seven-month period ended December 31, 2007 (Successor),
five-month period ended May 31, 2007 (Predecessor), and each of the two years in the period ended December 31, 2006
(Predecessor), in conformity with U.S. generally accepted accounting principles. Also, in our opinion, such Successor
Company financial statement schedule and Predecessor Company financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set
forth therein.
As discussed in Note 1 to the consolidated financial statements, on May 18, 2007, the Bankruptcy Court entered an order
confirming the plan of reorganization which became effective on May 31, 2007. Accordingly, the accompanying consolidated
financial statements have been prepared in conformity with AICPA Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, for the Successor Company as a new entity with assets, liabilities,
and a capital structure having carrying values not comparable with prior periods as described in Note 1.
As discussed in Notes 3, 4, 11, 13, and 16 to the consolidated financial statements, the Company adopted the provisions of
the Financial Accounting Standards Board (FASS) Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment, and SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans- an amendment of FASB Statements No. 87, 88, 106, and 132(R), in 2006 and adopted the provisions
of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109,
and SFAS No. 157, Fair Value Measurements, in 2007.
As discussed in Note 5 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),
Northwest Airlines Corporation's internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 28, 2008, expressed an unqualified opinion thereon.
February 28, 2008
41
NORTHWEST AIRLINES CORPORATION
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 (2007-$4; 2006-$14)
Flight equipment spare parts, less allowance (2007-$10; 2006-$255)
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
Goodwill
International routes, less accumulated amortization (2007-$2; 2006-$334)
Other intangibles, less accumulated amortization (2007-$54; 2006-$11)
Investments in affiliated companies
Other, less accumulated depreciation and
amortization (2007-$8; 2006-$914)
Total other assets
Total Assets
Successor
December 31,
2007
$
$
2,939
95
725
776
135
180
187
5,037
7,717
197
7,520
594
36
558
8,078
9
1
8
6,035
2,976
2,136
24
223
11,394
24,517
Predecessor
December 31,
2006
$
$
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
8
634
21
42
752
1,457
13,215
The accompanying notes are an integral part of these consolidated financial statements.
42
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
Successor Predecessor
December 31, December 31,
2007 2006
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Air traffic liability/deferred frequent flyer liability $ 2,004 $ 1,557
Accrued compensation and benefits 459 301
Accounts payable 706 624
Collections as agent 140 138
Accrued aircraft rent 31 49
Other accrued liabilities 315 329
Current maturities of long-term debt 446 213
Current maturities of capital lease obligations 3
Total current liabilities 4,104 3,211
LONG-TERM DEBT 6,515 3,899
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 124
DEFERRED CREDITS AND OTHER LIABILITIES
Long-term pension and postretirement health care benefits 3,638 86
Deferred frequent flyer liability 1,490
Deferred income taxes 1,131
Other 138 161
Total deferred credits and other liabilities 6,397 247
LIABILITIES SUBJECT TO COMPROMISE 13,572
PREFERRED REDEEMABLE STOCK SUBJECT TO COMPROMISE 277
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Predecessor Company common stock, $.01 par value; shares
authorized-315,000,000; shares issued-111,374,977 at
December 31, 2006 1
Successor Company common stock, $.01 par value; shares
authorized-400,000,000; shares issued-233, 187,998 at
December 31 , 2007 2
Additional paid-in capital 7,235 1,505
Retained earnings (accumulated deficit) 342 (7,384)
Accumulated other comprehensive income (loss) (202) (1,100)
Predecessor Company treasury stock-24,024,317 at December 31, 2006 (1,013)
Successor Company treasury stock-1,684 at December 31, 2007
Total common stockholders' equity (deficit) 7,377 (7,991~
Total Liabilities and Stockholders' Equity (Deficit) $ 24,517 $ 13,215
The accompanying notes are an integral part of these consolidated financial statements.
43
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Successor Predecessor
Period From Period From
June 1 to January 1 to Year Ended Year Ended
December 31, May 31, December 31, December 31,
2007 2007 2006 2005
OPERA TING REVENUES
Passenger $ 5,660 $ 3,768 $ 9,230 $ 8,902
Regional carrier revenues 884 521 1,399 1,335
Cargo 522 318 946 947
Other 538 317 993 1,102
Total operating revenues 7,604 4,924 12,568 12,286
OPERA TING EXPENSES
Aircraft fuel and taxes 2,089 1,289 3,386 3,132
Salaries, wages and benefits 1,541 1,027 2,662 3,721
Aircraft maintenance materials and repairs 508 303 796 703
Selling and marketing 436 315 759 811
Other rentals and landing fees 304 235 562 627
Depreciation and amortization 289 206 519 552
Aircraft rentals 218 160 226 429
Regional carrier expenses 434 342 1,406 1,576
Other 1,044 684 1,512 1,654
Total operating expenses 6,863 4,561 11,828 13,205
OPERA TING INCOME (LOSS) 741 363 740 (919)
OTHER INCOME (EXPENSE)
l_nterest expense (282) (225) (565) (610)
Interest capitalized 9 6 10 10
Investment income 105 56 109 80
Earnings of affiliated companies 2 1 (14)
Reorganization items, net 1,551 (3,165) (1,081)
Other, net (91 (2) 6 77
Total other income (expense) (175) 1,386 {3,604~ p,538~
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 566 1,749 (2,864) (2,457)
Income tax expense (benefit) 224 (2) {29~ 7
NET INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 342 1,751 (2,835) (2,464)
Cumulative effect of accounting change ~69l
NET INCOME (LOSS) 342 1,751 (2,835) (2,533)
Preferred stock requirements {22}
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS s 342 s 1,751 $ (2,835) $ (2,555)
EARNINGS (LOSS) PER COMMON SHARE:
Basic
Income (loss) applicable to common
stockholders before cumulative
effect of accounting change $ 1.30 $ 20.03 $ (32.48) $ (28.57)
Cumulative effect of accounting change (0.79)
Net Income (loss) applicable to
common stockholders $ 1.30 $ 20.03 $ (32.48) $ (29.36)
Diluted
Income (loss) applicable to common
stockholders before cumulative
effect of accounting change $ 1.30 $ 14.28 $ (32.48) $ (28.57)
Cumulative effect of accounting change !0.79l
Net Income (loss) applicable to
common stockholders $ 1.30 $ 14.28 $ (32.48) $ (29.36)
The accompanying notes are an integral part of these consolidated financial statements.
44
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Successor Predecessor
Period From Period From
June 1 to January 1 to Year Ended Year Ended
December 31, May 31, December 31, December 31,
2007 2007 2006 2005
CASH FLOWS FROM OPERA TING ACTIVITIES
Net income (loss) $ 342 $ 1,751 $ (2,835) $ (2,533)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Reorganization items, net (1,551) 3,165 1,081
Depreciation and amortization 289 206 519 552
Income tax expense (benefit) 224 (2) (29) 7
Net receipts (payments) of income taxes (1) 2 (3)
Pension and other postretirement benefit
contributions (greater) less than expense (13) (2) 261 457
Stock-based compensation 76 2 13
Net loss (earnings) of affiliates (2) (1) 14
Net loss (gain) on disposition of property, equipment and other 10 4 16 (80)
Increase (decrease) in cash flows from operating assets and
liabilities, excluding the effects of the acquisition of
Mesaba Aviation, Inc.:
Post-emergence reorganization payments (164)
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable (176) 16 (3) (102)
Decrease (increase) in flight equipment spare parts (10) 3 23 (3)
Decrease (increase) in vendor deposits/holdbacks 162 163 (35) (290)
Decrease (increase) in supplies, prepaid expenses and other (74) 28 67 (34)
Increase (decrease) in air traffic liability/deferred
frequent flyer liability (317) 448 (33) 144
Increase (decrease) in accounts payable (21) 19 287 206
Increase (decrease) in other liabilities (1) (51) (164) 127
Other, net
1 14 !18} 7
Net cash provided by (used in) operating activities 325 1,046 1,224 (437)
NET CASH PROVIDED BY (USED IN) REORGANIZATION ACTIVITIES 5 21
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (739) (312) (527) (359)
Purchases of short-term investments (44) (21) (301)
Proceeds from sales of short-term investments 542 15 28 1,606
Proceeds from sale of investment in affiliates 130
Decrease (increase) in restricted cash, cash equivalents and
short-term investments (196) (74) 176 (444)
Cash and cash equivalents acquired in acquisition of
Mesaba Aviation, Inc. 16
Proceeds from sale of property, equipment and other assets 264 7 6
Proceeds from sale of Pinnacle note receivable 102
Investments in affiliated companies and other, net 1 1 9 ~1}
Net cash provided by (used in) investing activities 2 (398) (328) 609
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt (645) (609) (2,372) (606)
Proceeds from long-term debt 710 326 2,281 448
Payment of capital lease obligations (1) (1) (14) (16)
Payment of short-term borrowings (14)
Proceeds from equity rights offering 750
Payments related to equity rights offering (22)
Other, net !9! !11 ~35! ~81
Net cash provided by (used in) financing activities 805 (307) ~1401 ~196}
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,132 346 777 (23)
Cash and cash equivalents at beginning of period 1,807 1,461 684 707
Cash and cash equivalents at end of period
s UH s UD7 s 1.:m s ~84
Available to be borrowed under credit facilities $ 101 $ 127 $ $
Cash and cash equivalents and unrestricted
short-term Investments at end of period $ 3,034 $ 2,445 $ 2,058 $ 1,262
Supplemental Cash Flow Information:
Interest paid $ 304 $ 208 $ 569 $ 529
Investing and Financing Activities Not Affecting Cash:
Manufacturer financing of aircraft and other non-cash transactions $ 335 $ 167 $ 280 $ 344
The accompanying notes are an integral part of these consolidated financial statements.
45
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(In millions)
Retained Accumulated
Additional Earnings Other
Common Stock Paid-In (Accumulated Comprehensive Treasury
Shares Amount Capital Deficit) Income (Loss) Stock Total
Balance at January 1, 2005 111.1 $ $ 1,471 $ (1 ,999) $ (1 ,547) $ (1 ,013) $ (3,087)
(Predecessor Company)
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)
Pension, other postretirement, and long-term
disability benefits (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
Balance at December 31, 2005 111 .3 1,500 (4,548) (1,568) (1,013) (5,628)
(Predecessor Company)
Net income (loss) (2,835) (2,835)
Other comprehensive income (loss)
Deferred gain/(loss) from hedging activities (10) (10)
Unrealized gain/(loss) on investments 3 3
Pension, other postretirement, and long-term
disability benefits 699 699
Total (2,143)
Series C Preferred Stock converted to Common Stock 0.1 3 3
Stock options expensing 2 2
Other (1) (1)
Adjustment to Adopt SFAS No. 158 ~224! (224!
Balance at December 31, 2006 111 .4 1,505 (7,384) (1 ,100) (1,013) (7,991)
(Predecessor Company)
Series C Preferred Stock converted to Common Stock 2 2
Net income (loss) from January 1 to May 31, 2007 1,751 1,751
Other comprehensive income (loss)
Foreign currency (1) (1)
Unrealized gain/(loss) on investments 1
Total
Balance at May 31, 2007 111 .4 1
1]o7 (5,633) (1,100) (1,013) (6,238)
(Predecessor Company)
Fresh start adjustments:
Cancellation of the Predecessor Company's
preferred and common stock (111 .4) (1) (1 ,507) 1,013 (495)
Elimination of the Predecessor Company's accumulated
deficit and accumulated other comprehensive income 5,633 1,100 6,733
Reorganization value ascribed to the Successor Company 167.4 2 6,448 6,450
Issuance of new equity interests in connection
with emergence from Chapter 11 27.8 728 728
Balance at June 1, 2007 195.2 2 7;176 7,178
(Successor Company)
Net income from June 1 to December 31 , 2007 342 342
Other comprehensive income (loss)
Deferred gain/(loss) from hedging activities (3) (3)
Pension, other postretirement, and long-term
disability benefits (199) ~199!
Total (202)
Compensation expense associated with equity awards 59 59
Acquisition of Treasury Stock
Equity distributions - claims 38
Balance at December 31, 2007 233.2 $ 2 $ ---=;:m- $ 342 $ (202~ $ - $ 7,377
The accompanying notes are an integral part of these consolidated financial statements.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Voluntary Reorganization Under Chapter 11 Proceedings
Background and General Bankruptcy Matters. The following discussion provides general background information
regarding the Company's Chapter 11 cases, and is not intended to be an exhaustive summary. Detailed information
pertaining to the bankruptcy filings may be obtained at http://www.nwa-restructuring.com. Information contained on the
Company's Web site is not incorporated into these financial statements.
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 .
On May 18, 2007, the Bankruptcy Court entered an order approving and confirming the Debtors' First Amended Joint and
Consolidated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (as confirmed, the "Plan" or "Plan of
Reorganization"). The Plan became effective and the Debtors emerged from bankruptcy protection on May 31, 2007 (the
"Effective Date"). On the Effective Date, the Company implemented 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").
As a result of the application of fresh-start reporting in accordance with SOP 90-7 upon the Company's emergence from
bankruptcy on May 31, 2007, the financial statements prior to June 1, 2007 are not comparable with the financial statements
for periods on or after June 1, 2007. References to "Successor Company" refer to the Company on or after June 1 , 2007,
after giving effect to the application of fresh-start reporting. References to "Predecessor Company" refer to the Company
prior to June 1, 2007. See "Note 2 - Fresh-Start Reporting" for further details.
The Plan generally provided for the full payment or reinstatement of allowed administrative claims, priority claims, and
secured claims, and the distribution of new common stock of the Successor Company to the Debtors' creditors, employees
and others in satisfaction of allowed unsecured claims. The Plan contemplates the issuance of approximately 277 million
shares of new common stock by the Successor Company (out of the 400 million shares of new common stock authorized
under its amended and restated certificate of incorporation), as follows:
225.8 million shares of common stock are issuable to holders of certain general unsecured claims;
8.6 million shares of common stock are issuable to holders of guaranty claims;
27.8 million shares of common stock were issued pursuant to the Rights Offering and an Equity Commitment
Agreement; and
15.2 million shares of common stock are subject to awards under a management equity plan.
The new common stock is listed on the New York Stock Exchange (the "NYSE") and began trading under the symbol
"NWA" on May 31, 2007. Pursuant to the Plan of Reorganization, stockholders of NWA Corp. prior to the Effective Date
received no distributions and their stock was cancelled.
In connection with the consummation of the Plan of Reorganization, on the Effective Date, the Company's existing
$1 .225 billion Senior Corporate Credit Facility ("Bank Credit Facility") was converted into exit financing in accordance with its
terms. See "Note 8 - Long-Term Debt and Short-Term Borrowings" for additional information.
Stockholder Rights Plan. Pursuant to the Stockholder Rights Plan (the "Rights Plan"), each share of common stock has
attached to it a right and, until the rights expire or are redeemed, each new share of common stock issued by NWA Corp.,
will include one right. Once exercisable, each right entitles the holder (other than the acquiring person or group) to purchase
one one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $120, subject to
adjustment. The rights become exercisable upon the occurrence of certain events, including the acquisition by any air
carrier with passenger revenues in excess of approximately $1 billion per year (as such amount may be increased based on
increases in the Consumer Price Index from 2000) (a "Major Carrier"), a holding company of a Major Carrier or any of their
respective affiliates acquires beneficial ownership of 20% or more of NWA Corp.'s outstanding common stock or commences
a tender or exchange offer that would result in such person or group acquiring beneficial ownership of 20% or more of NWA
Corp.'s outstanding common stock. The rights expire on May 31, 2017, and may be redeemed by NWA Corp. at a price of
$.01 per right prior to the time they become exercisable.
Equity Commitment Agreement. On March 27, 2007, the Bankruptcy Court approved the Equity Commitment
Agreement dated February 12, 2007 among NWA Corp., together with Northwest, as guarantor, and JP Morgan Securities
Inc. ("JP Morgan"), pursuant to which, among other things, JP Morgan agreed to backstop the rights offering (the "Rights
Offering") to creditors of NWA Corp., Northwest and the Debtors. The Company raised net proceeds of $728 million in new
capital through the sale of 27,777,778 shares of new common stock pursuant to the Rights Offering and JP Morgan's
commitments under the Equity Commitment Agreement.
47
Restrictions on the Transfer of Common Stock. To reduce the risk of a limitation under Section 382 of the Internal
Revenue Code on the Company's ability to use its net operating loss carryforwards ("NOLs"), the Amended and Restated
Certificate of Incorporation restricts certain transfers of common stock for two years after the Company's emergence from
bankruptcy. Such restrictions can be extended thereafter for three consecutive one year periods (to June 2012) upon, each
time, the affirmative vote of the Company's stockholders. During the two year period, these restrictions generally provide
that any attempted transfer of common stock prior to the expiration of the term of the transfer restrictions will be prohibited
and void if such transfer would cause the transferee's ownership interest in the Company to increase to 4.95% or above,
including an increase in a transferee's ownership interest from 4.95% or above to a greater ownership interest, unless
approved by the Board of Directors on the basis that the transfer does not increase the risk of an ownership change. In the
event that these restrictions are extended beyond the two year period, the Board of Directors will approve proposed transfers
that, taking into account all prior transfers, do not result in an aggregate owner shift under Section 382 of more than 30%. If
the aggregate owner shift as of any date after the two year period exceeds 30%, the Board of Directors has the discretion to
approve any subsequent transfers subject to the standards applicable during the two year period until the earlier of the date
on which the aggregate owner shift no longer exceeds 30%, or the restriction is no longer in effect.
The Predecessor Company's common stock ceased trading on the NASDAQ stock market on September 26, 2005 and
began trading in the "over-the-counter" market under the symbol NWACQ.PK. Upon the Effective Date of the Plan, the
outstanding common and preferred stock of the Predecessor Company was cancelled for no consideration and the
Predecessor Company's stockholders no longer have any interest as stockholders in the Successor Company by virtue of
their ownership of the Predecessor Company's common or preferred stock prior to emergence from bankruptcy.
Claims Resolution Process. Pursuant to terms of the Plan of Reorganization, approximately 225.8 million shares of the
Successor Company's common stock will be issued to holders of allowed general unsecured claims and 8.6 million shares
will be issued to holders who also held a guaranty claim from the Debtors. Once a claim is allowed consistent with the
claims resolution process as provided in the Plan, the claimant is entitled to a distribution of new common
stock. Approximately 199.6 million shares of new common stock were issued and distributed on or about May 31, 2007, July
16, 2007, October 1, 2007 and January 2, 2008 as part of the initial distributions in respect of valid unsecured claims totaling
$7.8 billion. Additionally, approximately 7.9 million shares of new common stock were distributed in respect of valid
unsecured guaranty claims. In total, there are approximately 27.0 million remaining shares of new common stock held in
reserve under the terms of the Plan of Reorganization. Of these shares, approximately 26.3 million are being held in reserve
relating to disputed unsecured claims totaling $1.0 billion, and 0. 7 million are being held in reserve relating to unsecured
guaranty claims totaling $295 million.
The Company estimates that the probable range of unsecured claims to be allowed will be between $8.0 and $8.4 billion.
Differences between claim amounts filed and the Company's estimates are being investigated and will be resolved in
connection with the claims resolution process. However, there will be no further financial impact to the Company associated
with the settlement of such unsecured claims, as the holders of all allowed unsecured claims against the Predecessor
Company will receive under the Plan of Reorganization only their pro rata share of the distribution of the newly issued
Common Stock of the Successor Company. Secured claims were deemed unimpaired under the Plan and were satisfied
upon either reinstatement of the obligations in the Successor Company, surrendering the collateral to the secured party, or
by making full payment in cash.
Note 2 - Fresh-Start Reporting
Upon emergence from its Chapter 11 proceedings on May 31, 2007, the Company adopted fresh-start reporting in
accordance with SOP 90-7. The Company's emergence from Chapter 11 resulted in a new reporting entity with no retained
earnings or accumulated deficit. Accordingly, the Company's consolidated financial statements for periods prior to June 1,
2007 are not comparable to consolidated financial statements presented on or after June 1, 2007.
Fresh-start reporting reflects the value of the Company as determined in the confirmed Plan of Reorganization. Under
fresh-start reporting, the Company's asset values were remeasured and allocated in conformity with Statement of Financial
Accounting Standards ("SFAS") No. 141, Business Combinations ("SFAS No. 141"). The excess of reorganization value over
the fair value of net tangible and identifiable intangible assets was recorded as goodwill in the accompanying Consolidated
Balance Sheet. In addition, fresh-start reporting also required that all liabilities, other than deferred taxes and pension and
other postretirement benefit obligations, be stated at fair value or at the present values of the amounts to be paid using
appropriate market interest rates. Deferred taxes are determined in conformity with SFAS No. 109, Accounting for Income
Taxes ("SFAS No. 109").
Estimates of fair value represent the Company's best estimates based on its valuation models, which incorporated
industry data and trends and relevant market rates and transactions. The estimates and assumptions are inherently subject
to significant uncertainties and contingencies beyond the control of the Company. Accordingly, we cannot provide
assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could
vary materially.
48
To facilitate the calculation of the enterprise value of the Successor Company, Northwest's financial advisors assisted
management in the preparation of a valuation analysis for the Successor Company's common stock to be distributed as of
the Effective Date to the unsecured creditors. The enterprise valuation included (i) a 40% weighting towards a comparable
company analysis based on financial ratios and multiples of comparable companies, which were then applied to the financial
projections developed by the Company to arrive at an enterprise value; and (ii) a 60% weighting towards a discounted cash
flow analysis which measures the projected multi-year, un-levered free cash flows of the Company to arrive at an enterprise
value.
The estimated enterprise value and corresponding equity value are highly dependent upon achieving the future financial
results set forth in the five-year financial projections included in the Company's Plan of Reorganization, as well as the
realization of certain other assumptions. The equity value of the Company was calculated to be a range of approximately
$6.45 billion to $7.55 billion. Based on claims trading prior to the Company's Effective Date and the trading value of the
Company's common stock post emergence, the equity value of the Company was estimated to be $6.45 billion for purposes
of preparing the Company's financial statements. The estimates and assumptions made in this valuation are inherently
subject to significant uncertainties and the resolution of contingencies beyond the reasonable control of the Company.
Accordingly, there can be no assurance that the estimates, assumptions, and amounts reflected in the valuations will be
realized, and actual results could vary materially. Moreover, the market value of the Company's common stock may differ
materially from the equity valuation.
As part of the provisions of SOP 90-7, on June 1, 2007 we were required to adopt all accounting guidance that would be
effective within the subsequent twelve-month period. See "Note 4 - Fair Value Measurements" for additional information.
The following Fresh-Start Condensed Consolidated Balance Sheet illustrates the financial effects on the Company
resulting from the implementation of the Plan of Reorganization and the adoption of fresh-start reporting. This Fresh-Start
Condensed Consolidated Balance Sheet reflects the effect of consummating the transactions contemplated in the Plan of
Reorganization, including settlement of various liabilities, issuance of certain securities, incurrence of new indebtedness,
repayment of old indebtedness, and other cash payments.
49
The effects of the Plan of Reorganization and fresh-start reporting on the Company's Condensed Consolidated Balance
Sheet are as follows:
(a) (b) (c) (d)
New Credit
Facility New (Successor)
(Predecessor) Debt Discharge & Financing Equity Fresh-Start Reorganized
(In millions) Mal 31, 2007 Reclassification Transactions Issued Adjustments June 1, 2007
~
CURRENT ASSETS
Cash, cash equivalents and unrestricted
short-term investments $ 2,465 $ (20) $ . $ 750 $ . $ 3,195
Restricted cash, cash equivalents and
short-term investments 974 170 1,144
Accounts receivable, less allowance 587 (9) 578
Flight equipment spare parts and
maintenance and operating supplies 217 31 248
Prepaid expenses and other 254 (22) (51~ 181
Total current assets 4,497 (20) 728 141 5,346
PROPERTY AND EQUIPMENT
Net flight equipment and net flight
equipment under capital lease 7,767 (1,068) 6,699
Other property and equipment, net 477 69 546
Total property and equipment, net 8,244 (999) 7,245
OTHER ASSETS
Goodwill 18 6,239 6,257
International routes and other intangible assets 653 4,513 5,166
Investments in affiliated companies 22 143 165
Other 739 ~267~ 472
Total other assets 1,432 10,628 12,060
Total Assets $ 14,173 $ (20) $ . $ 728 $ 9,770 $ 24,651
LIABILITlES AND TOCKHOLDERS' EQUITY
CURRENT LIABILITlES
Air traffic liability/deferred frequent flyer liability $ 2,006 $ . $ . $ . $ 274 $ 2,280
Accrued compensation and benefits 445 4 (20) 429
Accounts payable 1,538 179 5 1,722
Current maturities of long-term debt and
capital lease obligations 218 305 (10) 513
Current maturities of long-term debt exit
financing 10 10
Other 87 ~49) 38
Total current liabilities 4,294 488 210 4,992
LONG-TERM OBLIGATIONS
Long-term debt and obligations under capital
leases 4,149 1,993 (1,215) 22 4,949
Exit financing 1,215 1,215
Total long-term obligations 4,149 1,993 22 6,164
DEFERRED CREDITS AND OTHER LIABILITIES
Long-term pension and postretirement
health care benefits 86 3,786 (426) 3,446
Deferred frequent flyer liability 1,549 1,549
Deferred income taxes 4 1,127 1,131
Other 275 125 ~209~ 191
Total deferred credits and other liabilities 365 3,911 2,041 6,317
LIABILITlES SUBJECT TO COMPROMISE 14,350 (14,350)
PREFERRED REDEEMABLE STOCK SUBJECT
TO COMPROMISE 275 (275)
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Predecessor Company common stock,
additional paid-in capital and treasury stock 495 (495)
Retained earnings (accumulated deficit) (8,655) 1,763 6,892
Accumulated other comprehensive
income (loss) (1 ,100) 1,100
Successor Company common stock and
additional paid-in capital 6,450 728 7,178
Total common stockholders' equity (deficit) (9,260) 8,213 728 7,497 7,178
Total Liabilities and Stockholders'
Equity (Deficit) $ 14,173 $ (20) $ . $ 728 $ 9,770 $ 24,651
50
(a) Debt Discharge and Reclassification. This column reflects the discharge of $8.2 billion of liabilities subject to
compromise pursuant to the terms of the Plan of Reorganization. Pursuant to the Plan, the holders of general
unsecured claims and guaranty claims together will receive approximately 234 million common shares of the Successor
Company in satisfaction of such claims.
This column also reflects the Successor Company's reinstatement of $6.4 billion of secured liabilities which had been
classified as liabilities subject to compromise on the Predecessor Company's balance sheet, consisting of the following:
$3.8 billion represents the reinstatement of pension and .other post-retirement benefit plan liabilities;
$2.3 billion reflects the reinstatement of secured debt, including accrued interest; and
$0.3 billion is associated with accruals for priority payments and other payments required under the Plan.
Additionally, this column reflects the payment of $20 million for cash cures and convenience class payments to certain
unsecured creditors pursuant to the Plan, and the reclassification of $125 million of pre-petition deferred liabilities and
credits that were reclassified out of liabilities subject to compromise, and subsequently written off as part of the fresh-
start adjustments.
(b) New Credit Facility Financing Transactions. In connection with the consummation of the Plan of Reorganization, on the
Effective Date, the Company's existing $1.225 billion Bank Credit Facility was converted into the exit financing in
accordance with its terms. See "Note 8 - Long-Term Debt and Short-Term Borrowings" for further details.
(c) New Equity Issued. This column reflects $728 million in net proceeds received on the Effective Date from the
Company's Rights Offering.
(d) Fresh-Start Adjustments. Fresh-start adjustments were recorded on the Effective Date to reflect asset values at their
estimated fair values and liabilities at their estimated fair value or the present value of amounts to be paid, including the
following:
$4.5 billion of incremental intangible assets were recorded in conjunction with the estimated fair value of the
Company's international route authorities, slots and other intangible assets;
$1.5 billion was recorded to recognize the additional estimated fair value of the Company's frequent flyer liability;
The balance of the Company's flight equipment was decreased by $1.1 billion to its estimated fair value;
The Company's deferred tax liability balance was increased by $1.1 billion in conjunction with recording the
estimated fair value of certain indefinite-lived intangible assets;
The pension and other postretirement benefits liability balances were reduced by $0.4 billion due to the required
remeasurement at emergence. The weighted-average discount rate used in our remeasurement was 6.17% at
May 31, 2007, compared with a weighted-average discount rate of 5.93% as of our December 31, 2006
remeasurement date.
The Company's air traffic liability balance was increased by $0.3 billion to its estimated fair value; and
Entries were recorded to eliminate the Predecessor Company's equity balances and establish the opening equity
balances of the Successor Company.
Additionally, goodwill of $6.2 billion was recorded to reflect the excess of the Successor Company's reorganization value
over the value of tangible and identifiable intangible assets. Additional changes in the fair values of these assets and
liabilities from the current estimated values, as well as changes in other assumptions, could significantly impact the
reported value of goodwill. Accordingly, there can be no assurance that the estimates, assumptions, and values
reflected in the valuations will be realized, and actual results could vary materially. Moreover, the market value of the
Company's common stock may differ materially from the equity valuation.
Note 3 - Summary of Significant Accounting Policies
Business. Northwest's operations account for approximately 99% 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 as many as 239 cities in 21 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 airline alliance with KLM, Continental, Delta, Air
France, Aeroflot, Aeromexico, Alitalia, China Southern, CSA Czech Airlines, and Korean Air, exclusive marketing
agreements with three domestic regional carriers, Pinnacle, Mesaba and Compass, which operate as Northwest Airlink
carriers, and a cargo business that includes a dedicated fleet of freighter aircraft that operate through hubs in Anchorage and
Tokyo.
51
Financial Statement Presentation. The Company's financial statements after the Effective Date are not comparable to
those prior to the Effective Date. The Company's consolidated financial statements have been prepared in accordance with
Generally Accepted Accounting Principles ("GAAPn), which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Upon emergence from bankruptcy, we adopted fresh-start reporting in
accordance with the SOP 90-7, which resulted in our becoming a new entity for financial reporting purposes. The adoption
of fresh-start reporting had a material impact on the consolidated financial statements of the new financial reporting entity.
See "Note 2- Fresh-Start Reportingff for additional information.
Basis of Consolidation. NWA Corp. is a holding company whose 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.
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. 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 has also established an irrevocable tax trust and a VEBA trust; cash held in these trusts
is included in restricted cash.
Various taxes and fees assessed on the sale of tickets to end customers are collected by the Company as an agent and
remitted to the respective taxing authority. These taxes and fees have been presented on a net basis in the accompanying
consolidated statements of operations, and recorded as a liability until remitted to the respective taxing authority.
During 2007 the restricted cash balance increased $301 million to $725 million as of December 31, 2007 from $424
million as of December 31, 2006. The increase was primarily due to a $213 million deposit in an escrow account related to
Northwest's pending investment in Midwest Air Group, LLC, a company formed by Northwest, TPG Midwest US V, LLC, and
TPG Midwest International V, LLC for purposes of acquiring Midwest Air Group, Inc. The deposit was classified as restricted
cash as of December 31, 2007 and was subsequently withdrawn upon the closing of the transaction in January 2008. In
addition, the Company's irrevocable trust fund balance increased $45 million and other restricted cash items increased $43
million.
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.
Under fresh-start reporting, the Company's asset values were remeasured using fair value, which was allocated in
conformity with SFAS No. 141. In addition, fresh-start reporting also requires that all liabilities, other than deferred taxes and
pension and other postretirement benefit obligations, be reported at fair value or the present values of the amounts to be
paid using appropriate market interest rates. Deferred taxes are reported in conformity with SFAS No. 109.
Estimates of fair value represent the Company's best estimates based on its valuation models, which incorporated
industry data and trends and relevant market rates and transactions. The estimates and assumptions are inherently subject
to significant uncertainties and contingencies beyond the control of the Company. Accordingly, we cannot provide
assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could
vary materially.
Presentation of Regional Carrier Related Revenue and Expense Items. Compass Airlines, Inc. ("Compassff) has been a
wholly-owned consolidated subsidiary of the Company since its inception in 2006. Mesaba Aviation, Inc. ("Mesabaff) was
acquired by the Company on April 24, 2007 and became a wholly-owned consolidated subsidiary. Northwest and Pinnacle
Airlines, Inc. ("Pinnacle"), an unconsolidated regional carrier, have entered into an airline services agreement ("ASAn), under
which Northwest determines Pinnacle's commuter aircraft scheduling. This agreement is structured as a capacity purchase
agreement whereby Northwest pays Pinnacle to operate the flights on Northwest's behalf and Northwest is entitled to all
revenues associated with those flights. Ticket revenues generated on flights operated by Compass, Mesaba and Pinnacle
are recorded in Regional Carrier Revenue. Since the inception of Compass and the acquisition of Mesaba, operating
expenses of these subsidiaries have been presented on the applicable lines of the Consolidated Statements of Operations.
Amounts presented in Regional Carrier Expenses represent ASA payments to Pinnacle and other Pinnacle-related expenses.
In conjunction with the effectiveness of the Amended Pinnacle ASA and the Stock Purchase and Reorganization Agreement
with Mesaba, the Company changed its presentation of certain regional carrier related revenue and expense items effective
January 1, 2007. This change in presentation had no impact on the Company's 2007 operating income.
52
If this change in presentation was retroactively applied to prior year financial statements for the year ended December
31, 2006, Other Operating Revenues would have decreased $209 million, Depreciation and Amortization Expense would
have increased by $3 million, Aircraft Rentals Expense would have increased $188 million, Regional Carrier Expenses would
have decreased $400 million, and the Operating Income would have been unchanged.
Operating Revenues. The value of unused passenger tickets, miscellaneous change orders ("MCO's") and travel credit
vouchers ("TCV's") are included in current liabilities as air traffic liability. Passenger and cargo revenues are recognized
when the transportation is provided or when the ticket expires. Unused domestic passenger tickets generally expire one
year from scheduled travel. Unused international passenger tickets generally expire one year from ticket issuance. On the
Effective Date, the Company revised the accounting method used to recognize revenue for unused tickets, adopting the
delayed recognition approach. Under the delayed recognition approach, no revenue is recognized on an unused ticket until
the validity period has expired and the ticket can no longer be used. Prior to the Effective Date, the Company recognized
breakage associated with unused passenger tickets based on estimates of future breakage developed using historical
breakage trends.
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 to travelers 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 and alliance partners. WorldPerks members accumulate mileage in their accounts and later redeem mileage for
free or upgraded travel on Northwest and alliance partners. WorldPerks members that achieve certain mileage thresholds
also receive enhanced service benefits from Northwest such as special service lines, advance flight boarding and upgrades.
The Company adopted a deferred revenue method to recognize frequent flyer revenues on the Effective Date. Under
this method, we account for miles earned and sold as separate deliverables in a multiple element arrangement as prescribed
by EITF No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF No. 00-21"). Therefore, mileage credits earned
on or after June 1, 2007 are now deferred based upon the price for which we sell mileage credits to other airlines ("deferred
mileage credits"), which we believe represents the best evidence of their fair value in accordance with EITF No. 00-21. The
revenue on deferred frequent flyer miles will be recognized when the miles are ultimately redeemed through flight, upgrades
or other means, or when it becomes remote that the miles will ever be used. Estimating deferred mileage credits that will not
be redeemed requires significant management judgment. Based on current program rules and historical redemption trends,
the Company records passenger revenue associated with deferred mileage credits if the mile is unredeemed seven years
after issuance. The amounts expected to be recognized in the next year based on historical redemption patterns are
recorded as a component of current liabilities, while the remaining amount expected to be redeemed in years two through
seven are recorded in Deferred Credits and Other Liabilities.
We previously accounted for frequent flyer miles earned on Northwest flights on an incremental cost basis as an
accrued liability and as operating expense, while miles sold to airline and non-airline businesses were accounted for on a
deferred revenue basis. Also in conjunction with the adoption of the new accounting policy, Northwest began recording a
component of the payments received from non-airline marketing partners in Other Revenue rather than in Passenger
Revenue. The component recognized as Other Revenue is the portion of the payment received that represents the amount
paid by the marketing partner in excess of the value of the deferred mileage credits.
As a result of the application of fresh-start reporting, the WorldPerks frequent flyer obligation was revalued at the
Effective Date to reflect the estimated fair value of miles to be redeemed in the future. Outstanding miles earned by flying
Northwest or its partner carriers were revalued using a weighted-average per-mile equivalent ticket value, taking into account
such factors as class of service and domestic and international ticket itineraries, which can be reflected in awards flown by
WorldPerks members. The Company recorded deferred revenue for its frequent flyer program of $2.0 billion as of December
31, 2007. At December 31 , 2006, the Company had recorded an incremental cost liability and deferred revenue for its
frequent flyer program totaling $412 million.
Property, Equipment and Depreciation. Owned operating property and equipment and equipment under capital leases
used in operations were remeasured at fair values in accordance with SFAS No. 141, as of the Effective Date. The Company
records additions to property and equipment at cost when acquired. Property and equipment under capital lease, and
related obligations for future lease payments, are recorded at amounts equal to the initial present value of those lease
payments.
Depreciation is based on the straight-line method over assets' estimated useful lives. Leasehold improvements are
amortized over the remaining term of the lease, including estimated renewal options when renewal is reasonably assured, or
the estimated useful life of the related asset, whichever is less. On the Effective Date, the Successor Company increased
the depreciable lives of certain wide-body aircraft to better reflect the period over which those assets will be used. Future
purchases of aircraft will be depreciated to estimated salvage values, over lives of 20 to 30 years; buildings and leasehold
improvements will be depreciated up to 31 .5 years; and other property and equipment will be depreciated over lives of three
to 20 years.
53
The Company accounts for certain airport leases under 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
Government Unit or Authority to Entities that Enter into Leases with Government 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 $89.4 million at December 31, 2007 which relate to airport improvements at
Memphis, Knoxville and Seattle were recorded in other property and equipment, with the corresponding obligations included
in long-term obligations under capital leases. Capital expenditures associated with a construction project at the Detroit
airport were also reflected in other property and equipment with a corresponding liability on the balance sheet. This amount
totaled $18.2 million at December 31, 2007. Upon completion of the project, the corresponding asset and obligation will be
removed from the balance sheet and will be accounted for as an operating lease.
Impairment of Long-Lived Assets. The Company evaluates long-lived tangible assets and definite-lived intangible
assets for potential impairments in compliance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, ("SFAS No. 144"). 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 valuations 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. 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 of 2006, the Company recorded $33.5 million as additional reorganization expense for the
impairment of certain Boeing 7 4 7-200 passenger and freighter aircraft and DC9-30 aircraft. See "Note 7 - Reorganization
Related Items." Also in the fourth quarter of 2006, the Company 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 7 - 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 10 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.
Flight Equipment Spare Parts. On the Effective Date, flight equipment spare parts were remeasured at current
replacement cost in accordance with SFAS No. 141. Inventories are expensed when consumed in operations or scrapped.
An allowance for obsolescence is provided based on calculations defined by the type of spare part. This obsolescence
reserve is recorded over the useful life of the associated aircraft.
Airframe and Engine Maintenance. Routine maintenance, airframe and engine overhauls are charged to expense as
incurred or accrued when a contractual obligation exists, 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.
Goodwill and Intangibles. Goodwill represents the excess of the reorganization value of the Successor Company over
the fair value of tangible assets and identifiable intangible assets resulting from the application of SOP 90-7. Northwest's
goodwill mainly consists of three components:
A valuation allowance recorded against our net deferred tax assets, as required by SFAS No. 109; this valuation
allowance will be reversed against goodwill when the Company reports income in future periods.
Revenue-generating intangibles that do not meet the contractual or separable criteria of SFAS No. 141, including
our flight network and international routes to open skies countries.
The value inherent in future customer relationships due to Northwest's ability to attract new customers.
54
Identifiable intangible assets consist primarily of international route authorities, trade names, the WorldPerks customer
database, airport slots/airport operating rights, certain partner contracts and other items. International route authorities,
certain airport slots/airport operating rights and trade-names are indefinite-lived and, as such, are not amortized. The
Company's definite-lived intangible assets are amortized on a straight-line basis over the estimated lives of the related
assets, which span periods of four to 30 years.
The following table presents information about our intangible assets, including goodwill, at December 31, 2007 and
2006:
Successor December 31, 2007 Predecessor December 31, 2006
Asset Gross Carrying Accumulated Gross Carrying Accumulated
(In thousands) Life Amount Amortization Amount Amortization
SkyTeam alliance & other
code share partners 30 $ 461,900 $ (8,981) $ $
England routes 5 16,000 (1,867)
NWA customer relationships 9 530,000 (34,352)
WorldPerks affinity card contract 15 195,700 (8,843)
WorldPerks marketing
partner relationships 22 43,000 (652)
Visa contract 4 11,900 (992)
Gates 90,675 (78,326)
Pacific routes and Narita slots/airport
operating rights Indefinite 2,961,700 967,639 (333,679)
NWA trade name and other Indefinite 663,625 1,690 (190)
Slots/airport operating rights Indefinite 283,300 30,457 (11,248)
Goodwill Indefinite 6,034,609 7,740
$ 11,201,734 $ (55,687) $ 1,098,201 $ (423,443)
Total amortization expense recognized was approximately $0.6 million for the five month period ended May 31, 2007,
$55.7 million for the seven month period ended December 31, 2007, and $1.5 million and $4.1 million for the years ended
December 31, 2006 and 2005, respectively. We expect to record amortization expense of $95.5 million per year from 2008
through 2010, $93.7 million in 2011 and $90.6 million in 2012.
In accordance with SOP 90-7, a reduction in the valuation allowance associated with the realization of pre-emergence
deferred tax assets will sequentially reduce the value of recorded goodwill followed by other indefinite-lived assets until the
net carrying cost of these assets is zero. In the seven months ended December 31, 2007, goodwill decreased $224 million
due to the use of tax net operating losses and increased $20 million due to receipt of additional information to finalize certain
valuations performed at emergence.
The Company tests the carrying amount of goodwill and other indefinite-lived intangible assets annually as of October 1
or whenever events or circumstances indicate that an impairment may have occurred. Impairment testing is performed in
accordance with SFAS No. 142 Goodwill and Other Intangible Assets ("SFAS No. 142"). The Company's impairment testing
of goodwill is based on the fair value of the enterprise considering both the market and income valuation approaches. The
Company is annually required to complete Step 1 (determining and comparing the fair value of the Company's reporting unit
to its carrying value) of the impairment test. Step 2 is required to be completed if Step 1 indicates that the carrying value of
the reporting unit exceeds the fair value and involves the calculation of the implied fair value of goodwill. The Company
completed Step 1 of the impairment assessment at its annual impairment testing date in 2007. Based upon the Company's
valuation procedures, the Company determined that the fair value of the enterprise exceeded its carrying value. As such,
the Company was not required to complete Step 2 of the impairment test and no impairment loss was recognized.
The Company tests its indefinite-lived intangible assets for impairment by remeasuring those assets at fair value using
the Company's forecasts and estimates, market information on comparable assets, when available, and discount rates
calculated from industry-wide information. Based upon the Company's valuation procedures, we determined that the fair
values of each category of indefinite-lived intangible assets exceeded its carrying value; as such, no impairment was
recorded on these assets.
The determination of fair value requires significant management judgment including the identification and computation of
multiples of comparable companies, computation of control premiums, future capacity, passenger yield, passenger traffic, jet
fuel and other operating costs, changes in working capital, capital investments, the selection for the appropriate discount
rates and other relevant factors.
55
The Company's forecasts and estimates were based on assumptions that are consistent with the plans and estimates
the Company is using to manage its business. Changes in these estimates could change the Company's conclusion
regarding an impairment of goodwill or other intangible assets and potentially result in a non-cash impairment in a future
period. Fuel costs and general economic conditions significantly impact our business and, thus, long-term assumptions
related to these items materially impact the computation of our fair value. If the expected future price of fuel does not
decrease from the record levels experienced during late 2007 or if the Company is unable to pass this commodity price
increase on to its passengers or if general economic conditions experience a material, negative change, the Company may
be required to book an impairment sometime during 2008.
Advertising. Advertising costs, included in selling and marketing expenses, are expensed as incurred and were $70
million, $62 million, and $63 million in 2007, 2006 and 2005, respectively.
Stock-Based Compensation. Prior to the Effective Date, the Company maintained stock incentive plans for officers and
key employees of the Company (the "Prior Management Plans") and a stock option plan for pilot employees (the "Pilot Plan").
On the Effective Date, outstanding awards under the Prior Management Plans and Pilot Plan were cancelled in accordance
with the terms of the Plan of Reorganization. On the Effective Date, the Management Equity Plan of the Successor
Company provided for in the Plan of Reorganization became effective. See "Note 11 - Stock-Based Compensation" for
additional information. The Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment ("SFAS No. 123R"),
using the modified-prospective transition method, effective January 1, 2006. Under SFAS No. 123R, non-cash
compensation expense for equity awards is recognized over the vesting period, generally the required service period. The
Company uses straight-line recognition for awards subject to graded vesting. SFAS No. 123R also requires the Company to
estimate forfeitures of stock compensation awards as of the grant date of the award.
Foreign Currency. Assets and liabilities denominated in foreign currency are remeasured at current exchange rates with
resulting gains and losses 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, 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. On the Effective Date, the Company restated deferred taxes based on the remeasured
values of the Successor Company and in accordance with SFAS No. 109. Use of net operating losses from the Predecessor
Company that require valuation allowances under SFAS No. 109 are recognized as an adjustment to goodwill when used by
the Successor Company.
56
Note 4 - Fair Value Measurements
SOP 90-7 requires that the Company adopt new accounting standards that have been issued and will become effective
within twelve months of emergence from bankruptcy. In accordance with this guidance, the Company adopted SFAS No.
157, Fair Value Measurements ("SFAS No. 157"), on the Effective Date. SFAS No. 157 defines fair value, establishes a
consistent framework for measuring fair value and expands disclosure requirements about fair value measurements.
SFAS No. 157 requires, among other things, the Company's valuation techniques used to measure fair value to maximize
the use of observable inputs and minimize the use of unobservable inputs. This standard was applied prospectively to the
valuation of assets and liabilities on and after the Effective Date.
There are three general valuation techniques that may be used to measure fair value, as described below:
(A) Market approach - Uses prices and other relevant information generated by market transactions involving identical or
comparable assets or liabilities;
(8) Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset
(replacement cost); and
(C) Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current
market expectations about the future amounts (includes present value techniques, option-pricing models, and the
excess earnings method). Net present value is an income approach where a stream of expected cash flows is
discounted at an appropriate market interest rate. The excess earnings method is a variation of the income approach
where the value of a specific asset is isolated from its contributory assets.
For assets and liabilities measured at fair value on a recurring basis during the period, SFAS No. 157 requires
quantitative disclosures about the fair value measurements separately for each major category of assets and liabilities.
These assets are all measured using a market approach and there were no changes in the valuation techniques used to
measure the fair values of assets measured on a recurring basis during the period. SFAS No. 107, Disclosures about Fair
Values of Financial Instruments ("SFAS No. 107"), requires disclosure of the fair values of financial instruments. For assets
and liabilities measured at fair value on a recurring basis, the SFAS No. 107 and SFAS No. 157 disclosures are combined in
the table below. Assets measured at fair value on a recurring basis during the period included:
Successor Predecessor
Quoted Prices in Quoted Prices in
As of Active Markets for As of Active Markets for
(In millions) December 31, Identical Assets December 31, Identical Assets Valuation
ASSETS 2007 (Level1) 2006 (Level 1) Technique
Cash and cash equivalents $ 2,939 $ 2,939 $ 1,461 $ 1,461 (A)
Unrestricted short-term investments 95 95 597 597 (A)
Restricted cash, cash equivalents,
and short-term investments 725 725 424 424 (A)
Derivatives 57 57 8 8 (A),(B)
Total $ 3,816 $ 3,816 $ 2,490 $ 2,490
The financial statement carrying values equal the fair values of the Company's cash, cash equivalents, short-term
investments and derivatives. Cash equivalents are carried at cost and consisted primarily of unrestricted money market
funds as of December 31, 2007. 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
$ 6,961
2007
Fair
Value
$ 6,836
Carrying
Value
$ 4,112
2006
Fair
Value
$ 4,150 (1)
(1) In 2006, the Company only estimated the fair value of long-term debt classified as not subject to compromise.
The fair value of the Company's debt was estimated using quoted market prices, where available. For long-term debt
not actively traded, fair values were estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of securities.
57
Fair value information for each major category of assets and liabilities measured on a nonrecurring basis during the
period is listed in the following table. The Company remeasured its assets and liabilities at fair value on the Effective Date
as required by SOP 90-7 using the guidance for measurement found in SFAS No. 141. The gains and losses related to
these fair value adjustments were recorded on the Predecessor Company. Where two valuation techniques are noted below,
either individual assets were valued using one technique, while other assets in the same category were valued using a
different technique, or a combination of the two techniques was used to measure individual assets within the category. No
material adjustments were recorded based on fair value measurements since the Effective Date. Assets and liabilities
measured at fair value on a nonrecurring basis during the period included:
Successor
Significant
Quoted Prices in Other Significant
Active Markets for Observable Unobservable
As of June 1, Identical Assets Inputs Inputs Total Gains Valuation
(In millions) 2007 {Level 11 {Level 21 {Level 31 flossesl Technigue
ASSETS
Flight equipment $ 6,699 $ $ 6,699 $ - $ (1 ,068) (A),(B)
Goodwill (1) 6,257 6,257 (C)
International routes and other
intangible assets (2) 5,166 947 4,220 4,513 (B),(C)
Other property and equipment 546 546 69 (A),(B)
Non-operating flight equipment and
property leased to others 282 282 (47) (A),(B)
Flight equipment spare parts and
maintenance and operating supplies 248 248 31 (A),(B)
Equity investments 124 124 111 {A),(C)
Computer software 120 120 46 (B)
Other 147 147 21 (A)
Prepaid rents and deferred costs 37 37 !56} (A)
I 3,620
Successor
Significant
Quoted Prices In Other Significant
Active Markets for Observable Unobservable
As of June 1, Identical Liabilities Inputs Inputs Total Gains Valuation
(In millions) 2007 {Level 11 {Level 21 {Level 3! flosses! Technigue
LIABILITIES
Debt and obligations under capital
leases $ 6,687 $ - $ 6,687 $ - $ (22) (C)
Deferred frequent flyer liability (3) 1,972 1,972 (1 ,559) (C)
Air traffic liability 1,857 1,857 (259) (A)
Deferred credits and other liabilities 125 125 158 (A)
I (1 682}
(1) Goodwill represents the excess of the fair value of the Company's assets over the allocated values of the identifiable
assets as determined under the guidance of SFAS No. 141. Northwest's financial advisors assisted management in the
preparation of a valuation analysis for the Successor Company's common stock to be distributed to Unsecured Creditors
under the Plan. In its valuation analysis, Northwest's financial advisors estimated the fair value of the Successor
Company's Common Stock as of the Effective Date.
(2) Other Intangible Assets are identified by type in "Note 3 - Summary of Significant Accounting Policies." With the
exception of the value of Northwest's trademarks and trade names, these valuations included significant unobservable
inputs (Level 3), which generally included the Company's five-year Business Plan, 12-months of historical revenues and
expenses by city pair, and Company projections of available seat miles, revenue passenger miles, load factors, and
operating costs per available seat mile. The valuations also included market verifiable sources, such as licensing
information, royalty rates and macroeconomic factors.
(3) The frequent flyer liability was measured at fair value based on an analysis of how a hypothetical transaction to transfer
this liability might be negotiated in the market. Assumptions used in this measurement include the price of a frequent
flyer mile based on actual ticket prices for similarly restricted tickets, estimates about the number of miles that will never
be used by customers, and projections of the timing when the miles will be used.
58
Note 5 - 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 ("PBGC"), 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.
Note 6- Earnings (Loss) Per Share Data
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
{In millions, except per share data)
Numerator:
Net income (loss) before cumulative effect of accounting changes
Cumulative effect of accounting changes
Preferred stock requirements
Adjusted net income (loss) applicable to common stockholders
Effect of dilutive securities:
Gain on discharge of convertible debt
Gain on discharge of Series C Preferred Stock
Adjusted net income for diluted earnings (loss) per share
Denominator:
Weighted-average shares outstanding for basic and
diluted earnings (loss) per share
Effect of dilutive securities:
Contingently convertible debt
Restricted stock units and stock options
Series C Preferred Stock
Adjusted weighted-average shares outstanding and assumed
conversions for diluted earnings (loss) per share
Basic earnings (loss) per common share:
Net income (loss) before cumulative effect of accounting change
Cumulative effect of accounting change
Preferred stock requirements
Net income (loss) applicable to common stockholders
Diluted earnings (loss) per common share:
Successor
Period From
June 1 to
December 31,
2007
$ 342
$ 342
$ 342
262.2
0.2
262.4
$ 1.30
$ 1.30
Predecessor
Period From Twelve Months
January 1 to Ended
May 31, December 31,
2007 2006
$ 1,751 $ (2,835)
$ 1,751 $ (2,835)
(82)
(60)
$ 1,609 $ (2,835)
87.4 87.3
19.1
6.2
112.7 87.3
$ 20.03 $ (32.48)
$ 20.03 $ (32.48)
Twelve Months
Ended
December 31,
2005
$ (2,464)
(69)
(22)
$ (2,555)
$ (2,555)
87.0
87.0
$ (28.32)
(0.79)
(0.25)
$ (29.36)
Net income (loss) applicable to common stockholders $ 1.30 $ 14.28 $ (32.48) $ (29.36)
Successor EPS. The Plan contemplates the issuance of approximately 277 million shares of new common stock by the
Successor Company (out of the 400 million shares of new common stock authorized under its amended and restated
certificate of incorporation), as follows:
225.8 million shares of common stock are issuable to holders of certain general unsecured claims;
8.6 million shares of common stock are issuable to holders of guaranty claims;
27.8 million shares of common stock were issued pursuant to the Rights Offering and an Equity Commitment
Agreement; and
15.2 million shares of common stock are subject to awards under a management equity plan.
The new common stock is listed on the New York Stock Exchange (the "NYSE") and began trading under the symbol
"NWA" on Ma~ 31, 2007.
59
In accordance with SFAS No. 128, Earnings per Share ("SFAS No. 128"), basic and diluted earnings per share were
computed by dividing net income by the weighted-average number of shares of common stock outstanding for the seven
months ended December 31, 2007. SFAS No. 128 requires that the entire 234 million shares to be issued to holders of
unsecured and guaranty claims be considered outstanding for purposes of calculating earnings per share as these shares
will ultimately be issued to unsecured creditors once the allocation of disputed unsecured claims is completed.
At December 31, 2007, approximately 16 million restricted stock units and stock options to purchase shares of the
Successor Company's common stock were outstanding but excluded from the computation of diluted earnings per share
because the effect of including the shares would have been anti-dilutive.
Predecessor EPS. Predecessor basic earnings per share was computed based on the Predecessor's final weighted-
average shares outstanding.
At May 31, 2007, stock options to purchase approximately 7 million shares of common stock were outstanding but
excluded from the computation of diluted earnings per share because the effect of including the shares would have been
anti-dilutive.
For the years ended December 31, 2006 and 2005, approximately 19 million incremental shares related to dilutive
securities were not included in the diluted earnings per share calculation because the Company reported a net loss for these
periods.
Additionally, approximately 6 million shares of Series C Preferred Stock were excluded from the effect of dilutive
securities for the years ended December 31, 2006 and 2005 because the Company reported a net loss for these periods.
Total employee stock options outstanding of approximately 7 million and 8 million as of December 31, 2006 and 2005,
respectively, were not included in diluted securities because the Company reported a net loss for the years ended December
31, 2006 and 2005.
Note 7 - Reorganization Related Items
In accordance with SOP 90-7, the financial statements for the Predecessor periods distinguish transactions and events
that are directly associated with the reorganization from the ongoing operations of the Company. In connection with our
bankruptcy proceedings, implementation of our Plan of Reorganization and adoption of fresh-start reporting, the Company
recorded the following largely non-cash reorganization income/(expense) items:
Net reorganization items, as shown on the Consolidated Statements of Operations, consist of the following:
Predecessor
Period From
January 1 to Year Ended Year Ended
May 31, December 31 , December 31 ,
(In millions) 2007 2006 2005
Discharge of unsecured claims and liabilities (a) $ 1,763 $ $
Revaluation of frequent flyer obligations (b) (1,559)
Revaluation of other assets and liabilities (c) 2,816
Employee-related charges (d) (312) (1,362) (136)
Abandonment of aircraft and buildings (d) (323) (129) (133)
Restructured aircraft lease/debt charges (d) (74) (1,598) (641)
Professional fees (60) (63) (23)
Other (d) (700) ~13) (148)
Reorganization items, net $ 1,551 $ (3,165) $ (1,081)
(a) The gain on discharge of unsecured claims and liabilities relates to the Company's unsecured claims as of the
Petition Date and the discharge of unsecured claims established as part of the bankruptcy process. In accordance
with the Plan of Reorganization, the Company discharged its estimated $8.2 billion in unsecured creditor obligations
in exchange for the distribution of approximately 234 million common shares of the Successor Company valued at
emergence at $6.45 billion. Accordingly, the Company recognized a non-cash reorganization gain of approximately
$1.8 billion.
(b) The Company revalued its frequent flyer miles to estimated fair value as a result of fresh-start reporting, which
resulted in a $1.6 billion non-cash reorganization charge.
60
(c) In accordance with fresh-start reporting, the Company revalued its assets at their estimated fair value and revalued
its liabilities at estimated fair value or the present value of amounts to be paid. This resulted in a non-cash
reorganization gain of $2.8 billion, primarily as a result of newly recognized intangible assets, offset partially by
reductions in the fair value of tangible property and equipment.
(d) Prior to emergence, the Company recorded its final provisions for allowed or projected unsecured claims including
employee-related Association of Flight Attendants - Communication Workers of America ("AFA-CWA") contract
related claims, other employee related claims, claims associated with restructured aircraft lease/debt, and municipal
bond obligation related settlements.
Reorganization items recorded during the twelve months ended December 31, 2006, largely consisted of aircraft
restructurings, employee claims, pension plan curtailment charges and aircraft rejection charges. Reorganization
items recorded from the commencement of the Chapter 11 case through December 31 , 2005, largely consisted of
aircraft restructuring, aircraft rejection charges and pension plan curtailment charges.
Note 8- Long-Term Debt and Short-Term Borrowings
Long-term debt as of December 31, 2007 consisted of the following (with interest rates as of December 31, 2007):
Successor Predecessor
{In millions) 2007 2006
Aircraft enhanced equipment trust certificates due through 2022, 6.6% weighted-average rate (1) $ 1,421 $ 168
Aircraft secured loans due through 2025, 7.1 % weighted-average rate (2) 3,743 2,215
Bank Credit Facility due through 2013, 7.0% weighted-average rate (3) 1,214 1,225
Other secured debt & equipment financing due through 2020, 7.2% weighted-average rate (4) 451 376
Real estate and land notes due through 2031, 3.1 % weighted-average rate 134 128
Total secured debt 6,963 4,112
Add net unamortized valuation premium (discount) (2)
Total debt 6,961 4,112
Less current maturities 446 213
Total Long-term debt $ 6,515 $ 3,899
(1) At December 31, 2007, direct obligations of Northwest included the $1.4 billion of equipment notes underlying the
pass-through trust certificates issued for 62 aircraft. Interest on the pass-through trust certificates is payable
quarterly or semi-annually.
The above table does not include principal obligations related to $454 million of aircraft enhanced equipment trust
certificates ("2007-1 EETC") issued on October 10, 2007. The 2007-1 EETC proceeds were placed in escrow to
pre-fund the financing of 27 new Embraer 175 aircraft expected to be delivered in 2008. Interest on the Certificates
will be payable semiannually on May 1 and November 1 of each year, beginning on May 1, 2008.
(2) The Company took delivery of and financed eight Airbus A330-300, 13 CRJ900 and nine Embraer 175 aircraft
during the twelve months ended December 31, 2007, resulting in an increase of $1.1 billion in aircraft secured loans.
At December 31 , 2007, 125 aircraft collateralized $3.7 billion of secured loans.
On May 14, 2007, the Company closed on a refinancing of three A330-300 aircraft through the issuance of $221
million of debt. The aircraft were delivered to the Company in 2007 with original debt proceeds reflected in the
above mentioned $1 .1 billion increase in aircraft secured loans.
On July 11, 2007, the Company executed a $176.7 million refinancing of loans through a private placement of
senior secured loans. Proceeds of the financing were used to refinance 15 A320 aircraft.
61
(3) On August 21, 2006, the Predecessor Company entered into a $1.225 billion Senior Corporate Credit Facility
("Bank Credit Facilityn), formerly called the DIP/Exit Facility, consisting of a $1.05 billion term loan facility and a
$175 million revolving credit facility which has been fully drawn. The final maturity date of the Bank Credit Facility is
August 21, 2013. Principal on the term loan portion of the Bank Credit Facility will be repaid at 1.0% per year with
the balance (94%) due at maturity. The first such principal repayment was made on August 21, 2007. Loans drawn
under the $175 million 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. As amended in
March 2007, both loan facilities under the Bank Credit Facility bear interest at LIBOR plus 2.00%. 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 Bank Credit Facility received a credit rating of BB from Standard & Poor's Rating Services
("S&P") and a Ba3 from Moody's Investors Service, Inc. ("Moody's") and is secured by a first lien on the Company's
Pacific Route authorities. The March 2007 amendment also allowed the Company to grant a pari-passu lien in the
Pacific Route authorities to secure up to $150 million of exposure arising from hedging trades entered into with
Bank Credit Facility lenders. The interest rate as of December 31, 2007 was 6.97% on both the term loan facility
and the revolving credit facility.
The Bank Credit Facility requires ongoing compliance with financial covenants requiring the Company to maintain
unrestricted cash of at least $750 million, a collateral coverage ratio of at least 1.50 to 1.0 and a minimum ratio of
EBITDAR to consolidated fixed charges of 1.50 to 1.00. For purposes of calculating this ratio, EBITDAR is defined
as operating income adjusted to exclude the effects of depreciation, amortization and aircraft rents and to include
the effects of interest income and governmental reimbursements for losses resulting from developments affecting
the aviation industry. Earnings also exclude non-recurring non-cash charges (subject to the inclusion of any cash
payments then or thereafter made with respect thereto) and are determined without giving effect to any acceleration
of rental expense. Fixed charges are defined as interest expense and aircraft rents (without giving effect to any
acceleration of rental expense).
As of December 31, 2007 the Company was in compliance with all required financial covenants.
(4) On November 29, 2007, the Company closed on an accounts receivable financing facility. The facility size is $150
million and as of December 31, 2007 the facility was undrawn. While any portion of the facility remains undrawn,
the Company pays a commitment fee on the undrawn amount.
Debt Maturity Table:
Maturities of long-term debt for the five years subsequent to December 31, 2007 are as follows:
(In millions) 2008 2009 2010 2011 2012 Thereafter Total
Aircraft enhanced equipment
trust certificates
Aircraft secured loans
Bank Credit Facility
Other secured debt & equipment financing
Real estate and land notes
Total secured debt
Add net unamortized valuation
premium (discount)
Total long-term debt
$
$
141
264
11
35
451
(5)
446
$ 151
250
10
177
588
(4)
$ 584
$ 103
266
11
16
36
432
(1)
$ 431
$ 269
268
10
60
607
$ 607
$ 120
297
11
12
440
$ 440
$ 637
2,398
1,161
151
98
4,445
8
$ 4,453
$ 1,421
3,743
1,214
451
134
6,963
(2)
$ 6,961
Under some of the debt instruments included above, agreements with the lenders require that the Company meet
certain financial covenants, such as unrestricted cash balances and fixed charges coverage ratios. Assets having an
aggregate book value of $10.5 billion at December 31, 2007, principally aircraft and route authorities, were pledged under
various loan agreements. The Company was in compliance with the covenants and collateral requirements related to all of
its debt agreements as of December 31, 2007. While the Company anticipates that it will remain in compliance with such
covenants and collateral requirements, these measures will depend upon the many factors affecting operating performance
and the market values of assets.
As of December 31, 2007, 2006 and 2005 there were no short-term borrowings.
62
Note 9 - 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.
At December 31, 2007, future minimum lease payments for capital leases and non-cancelable operating leases with
initial or remaining terms of more than one year are as follows:
Capital
(In millions) Leases
2008 $ 10
2009 14
2010 9
2011 9
2012 8
Thereafter 203
253
Less sublease rental income
Total minimum operating lease payments
Less amounts representing interest 144
Present value of future minimum capital
lease payments 109
Add unamortized valuation premium 18
Total capital leases 127
Less current obligations under capital leases 3
Long-term obligations under capital leases $ 124
(1) Projected sublease rental income is to be received from Pinnacle.
Rental expense for all operating leases consisted of the following:
Successor
Period From Period From
June 1 to January 1 to
December 31, May 31,
(In millions) 2007 2007
Gross rental expense $ 379 $ 291
Sublease rental income (86) (1) (72) (1)
Net rental expense $ 293 $ 219
Oeeratin9 Leases
Aircraft Non-aircraft
$ 385 $ 184
382 176
393 154
339 128
303 115
1,902 902
3,704 1,659
1,133 (1) 21
$ 2,571 $ 1,638
Predecessor
Year Ended Year Ended
December 31, December 31,
2006 2005
$ 727 $ 991
(338) (371)
$ 389 $ 620
(1) Mesaba was acquired by Northwest Airlines on April 24, 2007 and became a wholly-owned consolidated subsidiary,
which reduced sublease rental income upon consolidating Mesaba for reporting purposes.
At December 31 , 2007 the Company leased 115 of the 431 aircraft it operates; of these 115 leases, one was a capital
lease and 114 were operating leases. The above table also includes operating leases for 137 aircraft operated by and
subleased to Pinnacle. The base term lease expiration date is 2009 for aircraft under capital leases, and from 2009 to 2025
for aircraft under operating leases.
The Company's aircraft leases can generally be renewed for terms ranging from one to eight years at rates based on
the aircraft's fair market value at the end of the lease term. All 252 aircraft lease agreements provide the Company with
purchase options during the lease, at the end of the lease, or both.
63
Note 10 - Liabilities Subject to Compromise
At December 31, 2006, the Predecessor Company had liabilities subject to compromise of $13.6 billion, 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
Capital lease obligations, including accrued interest (2)
Accounts payable and other liabilities
Total liabilities subject to compromise
$ 4,556
48
3,902
2,962
238
1,866
$ 13,572
(1) Long-term debt subject to compromise included pre-petition and post-petition accrued interest and unpaid principal.
Refer to "Note 8 - Long-Term Debt and Short-Term Borrowings" for information related to the Predecessor
Company's debt not classified as subject to compromise as of December 31, 2006.
At December 31, 2006, the Predecessor Company's long-term debt subject to compromise was as follows:
(In millions)
Aircraft enhanced equipment trust certificates
Aircraft secured loans
Other secured notes
Other secured debt
Unsecured notes
Convertible unsecured notes
Unsecured debt
Pre-petition claims
Total debt liabilities subject to compromise
$ 1,554
784
220
1
1,313
375
2
307
$ 4,556
(2) Capital lease obligations subject to compromise included accrued interest and unpaid principal.
Subsequent to its Chapter 11 filing, the Predecessor Company recorded post-petition interest expense on pre-petition
obligations only to the extent it believed the interest would be paid during the bankruptcy proceeding or that it was probable
that the interest would be an allowed claim. Had the Predecessor Company recorded interest expense based on its pre-
petition contractual obligations, interest expense would have increased by $178. 7 million during the year ended December
31 , 2006.
In addition to the $13.6 billion of liabilities subject to compromise itemized above, the Predecessor Company's $277
million of Preferred Redeemable Stock was also subject to compromise as of December 31, 2006. This preferred security
was not presented as a liability on the Predecessor Company's December 31 , 2006 Consolidated Balance Sheet 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.
64
Note 11 - Stock-Based Compensation
Prior to the Effective Date, the Company maintained stock incentive plans for officers and key employees of the
Company (the "Prior Management Plans") and a stock option plan for pilot employees (the "Pilot Plan"). On the Effective
Date, outstanding awards under the Prior Management Plans and Pilot Plan were cancelled in accordance with the terms of
the Plan. On the Effective Date, the Management Equity Plan ("the 2007 Plan") of the Successor Company provided for in
the Plan of Reorganization became effective. The 2007 Plan is a stock-based incentive compensation plan, under which
the Compensation Committee of the Board of Directors has the authority to grant equity-based awards including stock
options, stock appreciation rights, restricted stock, restricted stock units, and/or other stock-based awards, including
performance-based awards. Each of these awards may be granted alone, in conjunction with, or in tandem with other
awards under the 2007 Plan. Awards may be to any employee of the Company or its subsidiaries. The number of
participants participating in the 2007 Plan will vary from year to year. At its inception, the 2007 Plan provided that 21.33
million sha
res of common stock of the Successor Company were available for issuance under the plan. As of December 31,
2007, approximately 5.99 million shares remained available for new awards to be granted under the 2007 Plan. The
Company adopted SFAS No. 123R using the modified-prospective transition method, effective January 1, 2006. Under
SFAS No. 123R, non-cash compensation expense for equity awards is recognized over the vesting period of the awards,
generally the required service period. Under the terms of awards granted in connection with the Company's emergence from
bankruptcy, a portion of the shares subject to such awards vested immediately with the remaining shares vesting in one year
or over four years; in addition, the shares subject to emergence related awards that vest on or before May 2008 are also
subject to a disgorgement provision if the participant voluntarily terminates his or her employment prior to the one year
anniversary of the Effective Date. Under SFAS No. 123R, the corresponding expense is recognized over this implied service
period. For awards containing the disgorgement provision, the tables below exclude the portion of such awards that vest
prior to May 31, 2008. The Company uses straight-line recognition for awards with installment vesting. SFAS No. 123R also
requires the Company to estimate forfeitures of stock awards as of the grant date of the award.
The compensation expense related to stock options and restricted stock units granted to management employees in
connection with the Company's emergence from bankruptcy, which is quantified below, does not represent payments
actually made to these employees. Rather, the amounts represent the non-cash compensation expense recognized by the
Company in connection with these awards for financial reporting purposes. The actual value of these awards to the
recipients will depend on the trading price of the Company's stock when the awards vest.
Stock Options. Stock option awards are granted with an exercise price equal to the closing sales price of the
Company's common stock on the date of grant. Generally, outstanding employee stock option awards vest over four years
and have a 10-year term.
The fair value of option awards are estimated on the date of grant using the Black-Scholes option pricing model based
on several assumptions. The risk-free interest rate for periods within the term of the option is based on the U.S. Treasury
yield curve in effect at the time of grant. The dividend yield on our common stock is assumed to be zero since in the past the
Company has not paid dividends and has no current plans to do so. The expected market price volatility assumption was
developed considering both historical and implied volatilities of the trading prices of other airlines' stocks. Volatility data was
not considered for the Company due to its bankruptcy. The expected life of the options was developed using Staff
Accounting Bulletin ("SAB") No. 107, Topic 14, Share-Based Payments.
The weighted-average fair value of options granted in connection with the Company's emergence from bankruptcy was
determined based on the following assumptions:
Risk-free interest rate
Dividend yield
Expected market price volatility
Expected life of options (years)
65
Seven Months Ended
December 31, 2007
3.45% -5.11%
0.0%
53%-56%
6
A summary of the stock option activity under the 2007 Plan as of December 31, 2007 and changes during the seven
months then ended are as follows:
(Shares in thousands)
Outstanding at beginning of period
Granted
Exercised
Forfeited or expired
Outstanding at end of period
Vested or expected to vest at end of period
Exercisable at end of period (1)
Shares
-
5,878
(72)
5,806
5,381
28
Weighted-
Weighted- Average
Average Remaining
Exercise Contractual
Price Term
$
21.64
22.00
21.63 9.52
21.65 9.42
22.00 0.17
(1) Excludes 1.2 million shares subject to vested options due to the SFAS No. 123R disgorgement provision discussed
above.
The weighted-average grant date fair value of options granted in connection with the Company's emergence from
bankruptcy was approximately $12.19 per share. There were no options exercised during the seven months ended
December 31, 2007. The aggregate intrinsic value of the outstanding options at December 31, 2007 was zero. As of
December 31, 2007, the Company had approximately $54.3 million of unrecognized non-cash compensation expense
related to non-vested options. The Company expects to recognize this expense over a weighted-average period of
approximately 1.6 years.
Restricted Stock Units. The fair value of restricted stock units ("RSUs") is determined based on the closing sales price
of the Company's common stock on the date of grant. Generally, outstanding RSUs vest in one year or over four years.
A summary of the status of the Company's RS Us as of December 31, 2007, and changes during the seven months then
ended, are presented below:
(Shares in thousands)
Unvested at beginning of period
Granted
Vested (1)
Forfeited
Unvested at end of period
Weighted-
Weighted- Average
Average Remaining
Grant Date Contractual
Shares Fair Value
- $
10,298
(56)
(105)
10,137
24.59
25.15
25.15
24.58
Tenn
9.5
(1) Excludes 1.8 million shares subject to vested RSUs due to the SFAS No. 123R disgorgement provision discussed
above.
As of December 31, 2007, there was $176.8 million of unrecognized non-cash compensation cost related to RSUs
granted under the Plan. The compensation cost is expected to be recognized over a weighted-average period of
approximately 1. 7 years.
Other Awards. The Company also issued certain awards that are accounted for as a liability because such awards
provide for settlement in cash. During 2007, the Company granted approximately 0. 7 million RSUs to be settled in cash and
approximately 0.4 million stock appreciation rights ("SARs"). Each cash-settled RSU represents the right to receive a cash
payment equal to the closing sales price of the Company's common stock multiplied by the number of shares subject to the
award on the applicable vesting date. During the seven months ended December 31, 2007, the Company paid $2.2 million
in settlement of stock awards to be settled in cash. SARs provide participants the right to receive the excess (if any) of the
fair market value of the number of shares of common stock subject to the award at the time of exercise over the exercise
price of the SAR. The cash-settled RSUs vest in one year or over four years and the SARs vest over a four year period.
66
For the seven months ended December 31, 2007, the total stock-based non-cash compensation expense related to
stock awards and liability awards was approximately $73.2 million and $2.8 million, respectively. There was no
corresponding tax benefit in 2007 related to the stock-based compensation, as the Company record~ a full valuation
allowance against its deferred tax assets due to the uncertainty regarding the ultimate realization of those assets. See
"Note 13- Income Taxes" for additional information.
Note 12 -Accumulated Other Comprehensive Income (Loss)
The following table sets forth information with respect to accumulated other comprehensive income (loss) ("OCI"):
Foreign Deferred Pension, Other Adjustment Unrealized Accumulated
(In millions)
Predecessor
Balance at January 1, 2005
Before tax amount
Tax effect
Net-of-tax amount
Balance at December 31, 2005
Before tax amount
Tax effect
Net-of-tax amount
Balance at December 31, 2006
Before tax amount
Tax Effect
Net-of-tax amount
Balance at May 31, 2007
Successor
Balance at June 1, 2007
Before tax amount
Tax Effect
Net-of-tax amount
Currency Gain (Loss) Postretirement to Adopt Gain (Loss) Other
Translation on Hedging and Long-Tenn SFAS on Comprehensive
_A_d..:.j_us_tm_e_n_t. __
A_ct_iv_it_ie_s
__
D_is_a_b_ili-=ty;...B_e_n_e_fi_,ts
___
N_o_. _15_8
___
ln_v_e_s_tm_en_ts_ ,_ln_c_o_m_e....:(:...L_o_ss...:.)_
$ (4) $
(7)
(7)
(11)
(11)
11
11
(5) $
11
11
6
(10)
(10)
(4)
4
4
(3)
(3)
(1,541) $
(16)
(16)
(1,557)
699
699
(858)
858
858
(199)
- $
(224)
(224)
(224)
224
224
3 $
(9)
(9)
(6)
3
3
(3)
3
3
(1,547)
(21)
(21)
(1,568)
468
468
(1,100)
1,100
1,100
(202)
Balance at December 31, 2007 _$ __ _ _
$ _ _ (
__
3) $
(199)
(199) $
---- $ $
(202}
(202)
67
Note 13 - Income Taxes
Income tax expense (benefit) consisted of the following:
Successor Predecessor
Period From Period From
June 1 to January 1 to Year Ended Year Ended
December 31, May 31, December 31, December 31,
(In millions) 2007 2007 2006 2005
Current:
Federal $ $ $ $ 6
Foreign 2 1 8
State 1
2 1 8 7
Deferred:
Federal 208 (3) (37)
Foreign (1)
State 15
222 (3) (37)
Total income tax expense (benefit) $ 224 $ (2) $ (29) $ 7
Reconciliations of the statutory rate to the Company's income tax expense (benefit) are as follows:
Successor Predecessor
Period From Period From
June 1 to January 1 to Year Ended Year Ended
December 31, May 31, December 31, December 31,
(In millions) 2007 2007 2006 2005
Statutory rate applied to income (loss)
before income taxes $ 198 $ 612 $ (1,003) $ (860)
Add (deduct):
State income tax expense (benefit)
net of federal benefit 10 28 (45) (39)
Non-deductible expenses 15 25 23 13
Adjustment to valuation allowance and
other income tax accruals (665) 1,023 883
Other 1 (2) (27) 10
Total income tax expense (benefit) $ 224 $ (2) $ (29) $ 7
The Company accounts for income taxes in accordance with SFAS No. 109 which requires that deferred tax assets and
liabilities be recognized, using enacted tax rates, for the tax effect of temporary differences between the financial reporting
and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. Based on the
consideration of all available evidence, the Company has provided a valuation allowance on its net deferred tax assets
recorded beginning in the first quarter 2003. The Company continues to maintain a valuation allowance against its net
deferred tax assets due to the uncertainty regarding the ultimate realization of those assets.
68
Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
Successor Predecessor
(In millions) 2007 2006
Deferred tax liabilities:
Accounting basis of assets in excess of tax basis $ 1,710 $ 2,002
Accounting basis of indefinite-lived intangible assets in excess of tax basis 1,424 217
Accounting basis of definite-lived intangible assets in excess of tax basis 437
Other 17 71
Total deferred tax liabilities 3,588 2,290
Deferred tax assets:
Expenses not yet deducted for tax purposes 185 253
Reorganization charges not yet deducted for tax purposes 869 1,526
Pension and postretirement benefits 1,395 1,476
Deferred revenue 718
Gains from the sale-leaseback of aircraft 18
Rent expense (35)
Travel award programs 104
Net operating loss carryforward 1,316 1,216
Alternative minimum tax credit carryforward 137 134
Other 53 34
Total deferred tax assets 4,673 4,726
Valuation allowance for deferred tax assets {2,216) (2,436)
Net deferred tax assets 2,457 2,290
Net deferred tax liability $ 1,131 $
At December 31, 2007, the Company has certain federal deferred tax assets available for use in the regular tax system
and the alternative minimum tax ("AMr) system. The deferred tax assets available in the regular tax system include: NOL
carryforwards of $3.6 billion, AMT credits of $137 million, general business tax credits of $6 million and foreign tax credits of
$19 million. The deferred tax assets available in the AMT system are: NOL carryforwards of $3.7 billion and foreign tax
credits of $16 million. AMT credits available in the regular tax system have an unlimited carryforward period and all other
deferred tax assets in both systems are available for years beyond 2007, expiring in 2008 through 2027.
. The Company also has the following deferred tax assets available at December 31, 2007, for use in certain states: NOL
carryforwards with a tax benefit value of approximately $87 million are available for years beyond 2007, expiring in 2008
through 2027, and state job tax credits of $7 million are available for years beyond 2007, expiring in 2008 through 2011.
With the adoption of fresh-start reporting, a valuation allowance of $2.4 billion was recorded which, if reversed when the
Company reports income in future periods, will reduce goodwill and then other intangible assets and will generate income tax
expense. Because of its NOL carryforwards, however, the Company expects to pay minimal cash income taxes for the
foreseeable future.
An ownership change under Internal Revenue Code Section 382 occurred in connection with the Company's bankruptcy
Plan of Reorganization. However, the Company does not believe that such change has any material impact on the
Company's ability to use its NOL carryforwards and other tax attributes.
69
In June 2006, the FASB issued FIN 48, which clarifies SFAS No. 109. 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. The Company adopted FIN 48 on January 1, 2007. As of December 31, 2007, the
Company had unrecognized tax benefits of approximately $3 million, which, if recognized, would impact the effective tax rate
in future periods. During the quarter ended December 31, 2007, the Company increased its reserve for unrecognized tax
benefits by approximately $2 million as a result of a resolution of a federal tax controversy. A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows:
(In millions)
Balance at January 1, 2007
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Lapse of statute of limitations
Balance at December 31, 2007
$
$
5
2
(2)
(2)
3
Subject to the impact of the Company's bankruptcy filing, open tax years for federal income tax purposes are 1992
through 2006 and for state income tax purposes generally are 2005 and 2006.
The Company's continuing practice is to recognize interest and penalties related to income tax matters in income tax
expense. The Company had $10 million accrued for interest and nothing accrued for penalties at December 31, 2007.
Note 14 - Commitments
The Company's firm orders for 25 new aircraft to be operated by Northwest consist of scheduled deliveries for 18
Boeing 787-8 aircraft from 2009 through 2010, two Airbus A320 aircraft in 2012 and five Airbus A319 aircraft from 2010
through 2011. As of December 31, 2007, the Company also had firm orders to take delivery of 23 Bombardier CRJ900
aircraft and 27 Embraer 175 aircraft in 2008 related to its regional aircraft operations.
Committed expenditures for these aircraft and related equipment, including estimated amounts for contractual price
escalations and predelivery deposits, will be approximately $1.2 billion in 2008, $1.2 billion in 2009, $770 million in 2010, $79
million in 2011, and $97 million in 2012. 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. Financing commitments or
cancellation rights are available to the Company for all aircraft on firm order.
Note 15 - Contingencies
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 obligor, 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, 2007, the total outstanding amount of these LOCs was $92.4 million
(excluding an additional $133.4 million of LOCs that were fully secured by the Company's pledge of cash collateral). The
obligations of the Company with respect to this $92.4 million of LOCs, together with certain other obligations of the Company,
are secured by the Company's routes, certain aircraft and cash collateral.
Note 16 - Pension and Other Postretirement Health Care Benefits
The Company has several defined benefit pension 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 coverage was 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 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. New contributions that came due under the 2006 Pension Act funding rules were paid while Northwest was in
bankruptcy and must continue to be paid going forward. 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 is not continuing to fund the plans due to bankruptcy prohibitions. The independent
fiduciary subsequently withdrew all of the claims that the independent fiduciary filed in our Chapter 11 Case following our
election of the special funding rules under the 2006 Pension Act.
Congress enacted, and the president signed into law on December 13, 2007, a change in the retirement age for pilots
from age 60 to 65. Due to this legislative change, the Company has updated its retirement assumptions for pilots and
assumes that certain pilots will continue to work past age 60. This change had an immaterial impact on
Northwest's overall pension benefit and other postretirement obligations.
71
In September 2006, the FASS 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 historically had and continues to utilize a fiscal year-end
measurement date. SFAS No. 158 was 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 Predecessor Company's equity deficit by $224 million as of December 31, 2006. SFAS No. 158 does not affect the
results of operations.
Northwest's 2007 calendar year contributions to its frozen defined benefit plans under the provisions of the 2006
Pension Act and the replacement plans were approximately $130 million. Northwest's 2008 calendar year contributions to its
frozen defined benefit plans under the provisions of the 2006 Pension Act and the replacement plans will approximate $140
million.
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:
Pension Benefits Other Benefits
Successor Predecessor Successor Predecessor
(In millions) 2007 2006 2007 2006
Change in benefit obligations:
Benefit obligations at beginning of year $ 9,373 $ 9,472 $ 898 $ 1,051
Service cost 45 116 23 30
Interest cost 553 533 49 59
Plan amendments (3) (119) (270)
Actuarial loss and other (299) (265) (27) 91
Transfer of liability out of plan (1) (8)
Benefits paid (502) (472) (64) (63)
Benefit obligations at end of period 9,170 9,373 760 898
Change in plan assets:
Fair value of plan assets at beginning of year 6,278 5,794 5 5
Actual return on plan assets 449 870
Employer contributions 79 86 63 63
Benefits paid 1502) (472) (64) (63)
Fair value of plan assets at end of period 6,304 6,278 4 5
Funded status at end of period - net underfunded $ (2,866) $ (3,095) $ (756) $ (893)
(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 $9.1 billion and $9.4 billion at December
31, 2007 and 2006, 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
Successor
2007
$ 9,143
9,123
6,273
Predecessor
2006
$ 9,352
9,338
6,251
Amounts recognized in the statement of financial position as of December 31 consist of:
Pension Benefits Other Benefits
Successor Predecessor Successor Predecessor
(In millions) 2007 2006 2007 2006
Assets
Noncurrent assets $ 3 $ 6 $ $
Total assets $ 3 $ 6 $ $
Liabilities
Current liability $ (27) $ (28) $ (43) $ (64)
Noncurrent liability {2,842! ~3,073~ {713! ~829~
Total liabilities $ (2,869) $ (3,101) $ (756) $ (893)
Accumulated other comprehensive
loss (income), pre-tax
Net loss (gain) $ 199 $ 1,621 $ 8 $ 619
Prior service cost (credit) (1) (333)
Total other comprehensive income $ 199 $ 1,620 $ 8 $ 286
Weighted-average assumptions used to determine benefit obligations for pension and other benefits at
December 31:
(In millions)
Discount rate
Rate of future compensation increase (1)
(1) Not applicable to frozen plans.
Pension Benefits
Successor Predecessor
2007 2006
6.31% 5.93%
3.50% 3.50%
73
Other Benefits
Successor Predecessor
2007 2006
6.24% 5.93%
n/a n/a
Components of net periodic benefit cost of defined benefit plans and defined contribution plan costs:
Pension Benefits
Successor Predecessor
Period From Period From
June 1 to January 1 to Year Ended Year Ended
December 31, May 31, December 31, December 31 ,
(In millions) 2007 2007 2006 2005
Defined benefit plan costs
Service cost $ 26 $ 19 $ 116 $ 278
Interest cost 328 225 533 553
Expected return on plan assets (337) (207) (484) (518)
Amortization of prior service cost 30 73
Recognized net actuarial loss
and other events 18 87 170
Net periodic benefit cost 17 55 282 556
Defined contribution plan costs 41 23 53 11
Total benefit cost $ 58 $ 78 $ 335 $ 567
Other Benefits
Successor Predecessor
Period From Period From
June 1 to January 1 to Year Ended Year Ended
December 31, May 31, December 31, December 31,
(In millions) 2007 2007 2006 2005
Defined benefit plan costs
Service cost $ 13 $ 10 $ 30 $ 34
Interest cost 27 22 59 56
Expected return on plan assets
Amortization of prior service cost (15) (21) (10)
Recognized net actuarial loss
and other events 16 38 31
Net periodic benefit cost 40 33 106 111
Defined contribution plan costs
Total benefit cost $ 40 $ 33 $ 106 $ 111
Related to the freezing of Northwest's defined benefit plans covering domestic employees in 2006, Northwest recorded
pension curtailment charges and gains. Curtailment charges and gains have been recorded as a component of net
reorganization expense. Northwest has recorded the following pension curtailment amounts:
Successor Predecessor
Period From Period From
June 1 to January 1 to Year Ended Year Ended
(In millions) December31,2007 May 31, 2007 December 31 , 2006 December 31, 2005
Curtailment charge (gain)
Pilot Plan $ $ $ (49) $ 127
Salaried Plan 28
Contract Plan 332 54
Total $ $ $ 283 $ 209
74
Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic
benefit cost in 2008:
(In millions)
Net loss (gain)
Prior service cost (credit)
Pension
Benefits
$ 1
$ 1
Other
Benefits
$
$
Weighted-average assumptions used to determine net periodic pension and other benefit costs for the periods
ended December 31:
Pension Benefits
Successor Predecessor
2007 2006
Discount rate (1) 6.17% 5.71%
Expected long-term return on plan assets 9.00% 9.00%
Rate of future compensation increase (2) 3.50% 3.50%
(1) The discount rate used for the period from January 2007 through May 2007 was 5.93%.
(2) Not applicable to frozen plans.
Other Benefits
Successor Predecessor
2007 2006
6.17% 5.71%
5.00% 5.00%
n/a 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, 2007 and 2006:
Plan Assets
Asset Cate90!} Tarset 2007 2006
Domestic stocks 35.0% 42.7% 47.2%
International stocks 25.0% 27.1% 28.1%
Private markets 10.0% 9.0% 5.1%
Long-duration bonds 15.0% 15.7% 14.5%
High yield bonds 5.0% 5.1% 5.1%
Real estate 10.0% 0.4% n/a
Total 100.0% 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 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.
75
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 35% 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
11.75%; 15% long-duration bonds with an expected rate of return of 6.0%; 5% high yield bonds with an expected rate of
return of 7 .50%; and 10% real estate equities with an expected rate of return of 6. 75%. These assumptions result in a
weighted geometric average rate of return of 8. 75% on an annual basis.
For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered health care benefits was
assumed for 2008. The rate was assumed to decrease 0.5% per year reaching 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 (1)
Effect on accumulated postretirement benefit obligations
One Percentage- One Percentage-
Point Increase Point Decrease
$ 4.4 $ (3.8)
65.1 (57.3)
(1) Effect on total of service and interest cost components for the period June
through December 2007.
The future benefit payments expected to be made by the pension and other postretirement benefit plans are
shown below:
Note 17 - Risk Management
(In millions)
2008
2009
2010
2011
2012
Years 2013-2017
Pension
Benefits
$ 481
497
520
541
568
3,218
Employer
Provided Other
Postretirement
Benefits
$ 47
48
50
52
53
308
The Company recognizes all derivatives on the balance sheet at fair value. The Company uses derivatives as cash flow
hedges to manage the price risk of fuel, its exposure to foreign currency fluctuations, and its exposure to interest rates. For
cash flow hedges that qualify for special hedge accounting treatment under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), the effective portion of the derivative's gain or loss is 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. For all other derivatives, gains and losses are recorded in earnings each period.
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.
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 2007, the Company's yen-denominated net cash inflow was approximately 86 billion yen ($726 million).
76
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. As of December 31 , 2007, the Company had hedged approximately 42.6% of its
anticipated 2008 yen-denominated sales. The 2008 Japanese yen hedges consist of forward contracts which hedge
approximately 32.7% of yen-denominated sales at an average rate of 109.3 yen per U.S. dollar and collar options which
hedge approximately 9.9% of yen-denominated sales with a rate range between 102.4 and 116.4 yen per U.S. dollar. As of
December 31, 2007, a $0.1 million unrealized loss was outstanding in accumulated other comprehensive income associated
with the Japanese yen hedge contracts. 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.
As of December 31, 2007, Company had also hedged approximately 66.4% of its 2008 anticipated Canadian dollar
denominated sales with forward contracts at an average rate of 1.0008 Canadian dollars per U.S. dollar. A $2.9 million
unrealized loss was outstanding in accumulated other comprehensive income associated with the Canadian dollar hedge
contracts, as of December 31, 2007.
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, 2007, the Company had economically hedged the price of approximately 10% of its projected fuel
requirements for 2008, through collar options. Including an additional collar option entered into during January and February
2008, the Company has hedged the price of approximately 18% of its projected fuel requirements for 2008. All of the
Company's existing fuel derivative contracts will expire on or before December 31 , 2008. The collar options consist of crude
oil put options with a price range of $63.50 to $85.00 per barrel (average of $78.42), and related call options with a price
range of $84.00 to $104.65 per barrel (average $97.38).
The Company currently has no fuel derivative contracts outstanding that are designated for special hedge accounting
treatment, and therefore had no related unrealized gains (losses) in Accumulated Other Comprehensive Income (Loss) as of
December 31, 2007. The Company records any changes in the contracts' values as mark-to-market adjustments through the
Consolidated Statement of Operations on a monthly basis. During 2007, the Company recognized $112.9 million of fuel
derivative net gains as reductions in fuel expense, including $18.7 million of unrealized gains related to fuel derivative
contracts that will settle in 2008. Effective June 2007, the Company began allocating mark-to-market adjustments to
regional carrier expense for fuel consumed by our non-consolidated Airlink partners. For the seven months ended
December 31, 2007, the Company recognized $10.6 million of fuel derivative net gains as reductions in regional carrier
expense, including $1 . 7 million of unrealized gains related to fuel derivative contracts that will settle in 2008. 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 settled in 2007. During 2005, the Company recognized $20.9
million of fuel derivative net gains as a reduction to fuel expense.
Interest Rates. The Company's earnings are also affected by changes in interest rates due to the impact those changes
have on 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 $429
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, 2007, the
Company has recorded $0.3 million of unrealized losses in accumulated other comprehensive income (loss) associated with
these hedges.
77
Note 18 - Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of short-tenn investment securities classified as
available-for-sale as of December 31 were as follows:
Successor Predecessor
2007 2006
Gross Gross Gross Gross
(In millions) Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Available-for-sale Securities l1! Cost Gains Losses Fair Value Cost Gains Losses Fair Value
Mutual Funds $ $ - $ $ $ 146 $ $ (2) $ 144
U.S. Treasury securities 17 17
Corporate securities 50 51
Mortgage-backed securities 173 (2) 172
Asset-backed securities 95 95 212 (1) 211
Other securities and investments 2
Total available-for-sale securities $ 95 $ $ $ 95 $ 600 $ 2 $
(1) Available-for-sale securities are carried at fair value, with unrealized net gains or losses reported within other
comprehensive income in stockholders' equity.
(5) $
As of December 31, 2007, the Company did not hold any available-for-sate securities investments which had been in an
unrealized loss position for greater than 12 months.
The following table provides information as to the amount of gross gains and tosses realized through the sate of
available-for-sale investment securities for the years ending December 31:
Successor Predecessor
Period From Period From
June 1 to January 1 to Year Ended Year Ended
December 31, May 31, December 31, December 31,
(In millions) 2007 2007 2006 2005
Realized gains (1) $ 19 $ 5 $ $ 24
Realized losses ( 1 ) (35) !6) (1) (27)
Net realized gains (losses) $ (16) $ (1) $ (1) $ (3)
(1) Realized gains and losses are identified using the specific identification method.
The contractual maturities of debt securities available-for-sale at December 31, 2007 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.
(In millions)
Within one year
Between one and five years
Between five and ten years
After ten years
Total short-term investments
Amortized
Cost
$ 95
$ 95
Fair Value
$ 95
$ 95
As of December 31, 2007, all of the Company's available-for-sate securities investments consisted of student loan
backed auction rate securities whose rate reset dates occur monthly.
Note 19 - Related Party Transactions
Pinnacle. On November 29, 2007, the Company entered into a stock redemption agreement with Pinnacle Airlines
Corp., pursuant to which Pinnacle repurchased the Company's 11.4% equity interest in Pinnacle common stock for $32.9
million. The Company recorded a toss on the sate of common stock of $14.2 million in the fourth quarter 2007. In January
2008, the Company sold the Preferred Series A share it held in Pinnacle for proceeds of $20 million. The Company no tonger
holds any equity interests in Pinnacle as a result of the common and preferred stock sales.
78
2
597
Northwest and Pinnacle have entered into an airline services agreement, under which Northwest determines Pinnacle's
commuter aircraft scheduling. The agreement is structured as
a capacity purchase agreement whereby Northwest pays
Pinnacle to operate the flights on Northwest's behalf and Northwest is entitled to all revenues associated with those flights.
Under this agreement, Northwest paid $533 million, $596 million and $572 million for the years ended December 31, 2007,
2006 and 2005, respectively. The Company had payables of $22 million and $131 million to Pinnacle as of December 31,
2007 and 2006, respectively. As of December 31, 2007, the Company has leased 137 CRJ200 aircraft, which are in turn
subleased to Pinnacle. 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 on January 11, 2007.
Aeronautical Radio, Inc. On October 25, 2007 the Company, together with certain other major airlines sold Aeronautical
Radio, Inc. ("ARING") to Radio Acquisition Corp., an affiliate ofThe Carlyle Group. For its 15.75% equity interest in ARING,
the Company received cash proceeds of $97 million.
Note 20 - 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:
Successor Predecessor
Period From Period From
June 1 to January 1 to Year Ended Year Ended
December 31, May 31, December 31, December 31,
(In rrillions) 2007 2007 2006 2005
Domestic $ 4,925 $ 3,347 $ 8,561 $ 8,274
Pacific, principally Japan 1,683 1,063 2,711 2,639
Atlantic 996 514 1,296 1,373
Total operating revenues $ 71604 $ 41924 $ 121568 $ 121286
The Company's tangible assets consist primarily of flight equipment, which are utilized across geographic markets and
therefore have not been allocated.
79
Note 21 - Quarterly Financial Data (Unaudited)
Unaudited quarterly results of operations are summarized below:
Predecessor Successor
Period From Period From
April 1 to June 1 to
(In millions, except per share amounts) 1st Quarter May31 June 30 3rd Quarter 4th Quarter
2007:
Operating revenues $ 2,873 $ 2,051 $ 1,130 $ 3,378 $ 3,096
Operating income (loss) 201 162 195 459 87
Net income (loss) applicable to common stockholders $ (292) $ 2,043 $ 106 $ 244 $ (8)
Basic earnings (loss) per common share $ (3.34) $ 23.37 $ 0.41 $ 0.93 $ (0.03)
Diluted earnings (loss) per common share $ (3.34) $ 16.87 $ 0.41 $ 0.93 $ (0.03)
Predecessor
2006: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
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)
80
Unaudited quarterly net income (loss) applicable to common stockholders in the table above includes the following
unusual items:
Predecessor Successor
Period From Period From
April 1 to June 1 to
(In millions) 1st Quarter Ma~31 June 30 3rd Quarter 4th Quarter
2007:
Gain (loss) on sale of assets $ $ $ $ $ (14)
Reorganization items (393) 1,944
Impact on net income (loss) from unusual items $ (393) $ 1,944 $ $ $ (14)
Predecessor
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 accounting change (69)
Impact on net income (loss) from unusual items $ (87) $ 54 $ (241) $ (922)
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 22 - Subsequent Events (Unaudited)
Sale of Pinnacle Airlines Preferred Share. In January 2008, Northwest sold its Class A Preferred share to Pinnacle for a
purchase price of $20 million. The Class A Preferred share was marked-to-market upon Northwest's adoption of fresh-start
reporting; therefore, no gain or loss was recognized upon the sale.
Midwest Air Partners, LLC. Northwest, TPG Midwest US V, LLC, and TPG Midwest International V, LLC formed
Midwest Air Partners, LLC for purposes of acquiring Midwest Air Group, Inc. The acquisition closed on January 31, 2008
and Northwest contributed $213 million for a minority ownership interest in Midwest Air Partners, LLC. Northwest is a
passive investor in Midwest Air Partners, LLC and will not take an active role in its management. Northwest will report its
portion of the profits and losses associated with its investment in the Midwest Air Partners, LLC on the Other Income line in
its Consolidated Statements of Operations.
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, 2007, 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, 2007. 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, 2007 was effective. The Company's independent registered public accounting firm has issued
an attestation report on 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 Finn
The Board of Directors and Stockholders
Northwest Airlines Corporation
We have audited Northwest Airlines Corporation's internal control over financial reporting as of December 31, 2007, based
on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Northwest Airlines Corporation'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 included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on Northwest Airlines Corporation'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, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, Northwest Airlines Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, 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 as of December 31, 2007 (Successor) and 2006
(Predecessor), and the related consolidated statements of operations, common stockholders' equity (deficit), and cash flows
for the seven months ended December 31, 2007 (Successor), the five-month period ended May 31, 2007 (Predecessor), and
for each of the two years in the period ended December 31, 2006 (Predecessor). Our report dated February 28, 2008,
expressed an unqualified opinion.
Minneapolis, Minnesota
February 28, 2008
83
Item 98. OTHER INFORMATION
None.
PART Ill
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item is set forth under the headings "General Information - Section 16(a) Beneficial
Ownership Reporting Compliance", "Information about our Board of Directors", and "Item 1-Election of Directors--
Information Concerning Director--Nominees" in our Proxy Statement to be filed with the Commission in connection with our
2008 Annual Meeting of Stockholders ("Proxy Statement"), and is incorporated by reference. Pursuant to instruction 3 to
paragraph (b) of Item 401 of Registration S-K, certain information about our executive officers is contained in Part I of this
report under the caption "Executive Officers of the Registrant".
Item 11. EXECUTIVE COMPENSATION
Information required by this item is set forth under the headings "Information about our Board of Directors--
Compensation of Directors," "Information about our Board of Directors-Compensation Committee Interlocks and Insider
Participation" and "Executive Compensation" in our Proxy Statement and is incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information required by this item is set forth under the headings "Beneficial Ownership of Securities" and "Equity
Compensation Plan Information" in our Proxy Statement and is incorporated by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this item is set forth under the headings "Information about our Board of Directors-
Compensation Committee Interlocks and Insider Participation" and "Information about our Board of Directors--Related Party
Transactions" in our Proxy Statement and is incorporated by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item is set forth under the headings "Audit and Non-Audit Fees" and "Audit Committee Pre-
Approval Policy" in our Proxy Statement and is incorporated by reference.
84
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.
Consolidated Balance Sheets-December 31, 2007 and December 31, 2006 42-43
Consolidated Statements of Operations--For the seven months ended December 31, 2007,
the period from January 1 to May 31, 2007, and for the years ended December 31, 2006
and 2005 44
Consolidated Statements of Cash Flows-For the seven months ended December 31, 2007,
the period from January 1 to May 31, 2007, and for the years ended December 31 , 2006
and2005 45
Consolidated Statements of Common Stockholders' Equity (Deficit)--For the seven months
ended December 31, 2007, the period from January 1 to May 31, 2007, and for the years
ended December 31 , 2006 and 2005 46
Notes to Consolidated Financial Statements 47
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 seven months
ended December 31 , 2007, the period from January 1 to May 31, 2007, and for the years
ended December 31, 2006 and 2005 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 Amended and Restated Certificate of Incorporation of Northwest Airlines Corporation (filed as Exhibit 3.1 to
NWA Corp.'s Registration Statement on Form 8-A filed on May 18, 2007 and incorporated herein by reference).
3.2 Amended and Restated Bylaws of Northwest Airlines Corporation (filed as Exhibit 3.2 to NWA Corp.'s
Registration Statement on Form 8-A filed on May 18, 2007 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 Amended and Restated 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 Rights Agreement dated as of May 25, 2007 by and between NWA Corp. and Computershare Trust Company,
N.A., as Rights Agent (filed as Exhibit 1 to NWA Corp.'s Registration Statement on Form 8-A filed on May 30,
2007 and incorporated herein by reference).
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.
85
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 Amendment to Airline Operating Agreement and Terminal Building Lease Minneapolis-St. Paul International
Airport dated as of March 29, 2002 between the Metropolitan Airports Commission and Northwest Airlines, Inc.
10.6 Second Amendment to Airline Operating Agreement and Terminal Building Lease Minneapolis-St. Paul
International Airport dated as of November 15, 2004 between the Metropolitan Airports Commission and
Northwest Airlines, Inc.
10.7 Third Amendment to Airline Operating Agreement and Terminal Building Lease Minneapolis-St. Paul
International Airport dated as of May 9, 2007 by and between the Metropolitan Airports Commission and
Northwest Airlines, Inc.
10.8 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).
10.9 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).
10.1 0 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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; the Commission has granted confidential treatment for certain
portions of this document).
86
10.15 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; the Commission has granted confidential treatment for
certain portions of this document).
10.16 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).
10.17 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).
10.18 First Amendment dated as of March 9, 2007 to the Super Priority Debtor in Possession and Exit Credit and
Guarantee Agreement dated as of August 21, 2006 among Northwest Airlines Corporation, Northwest Airlines
Holdings Corporation, NWA Inc., Northwest Airlines, Inc. and various lenders and agents (filed as Exhibit 10.1
to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and incorporated
herein by reference).
10.19 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).
10.20 Equity Commitment Agreement dated as of February 12, 2007 among Northwest Airlines Corporation,
Northwest Airlines, Inc. and J.P. Morgan Securities Inc. (filed as Exhibit 10.2 to NWA Corp.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference).
*10.21 Description of Compensation for Non-Employee Directors of Northwest Airlines Corporation (filed as Exhibit
10.1 to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated
herein by reference).
*10.22 Form of Indemnity Agreement entered into by NWA Corp. with each member of the Board of Directors of NWA
Corp.
*10.23 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).
*10.24 Management Compensation Agreement dated as of January 14, 2002 between Northwest Airlines, Inc. and J.
Timothy Griffin (filed as Exhibit 10.23 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2006 and incorporated herein by reference).
*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) (filed as Exhibit
10.28 to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated
herein by reference).
*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).
87
*10.30 Northwest Airlines, Inc. Supplemental Executive Retirement Plan (2001 Restatement) (filed as Exhibit 10.30 to
NWA Corp.'s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by
reference).
*10.31 First Amendment of Northwest Airlines Supplemental Executive Retirement Plan (2001 Restatement) (filed as
Exhibit 10.31 to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31, 2006 and
incorporated herein by reference).
*10.32 Second Amendment of Northwest Airlines Supplemental Executive Retirement Plan (2001 Restatement) (filed
as Exhibit 10.32 to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31, 2006 and
incorporated herein by reference).
*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 Excess 401(k) Cash Payments Program (filed as Exhibit 10.1 to Amendment No. 2 to NWA
Corp. 's Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by
reference).
*10.35 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).
*10.36 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).
*10.37 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).
*10.38 2007 Stock Incentive Plan (filed as Exhibit 99.2 to NWA Corp.'s Current Report on Form 8-K filed on May 29,
2007 and incorporated herein by reference).
*10.39 Form of Award Agreement for Restricted Stock Units (Settled in Stock) Granted to Employees under the
Northwest Airlines Corporation 2007 Stock Incentive Plan (filed as Exhibit 99.3 to NWA Corp.'s Current Report
on Form 8-K filed on May 29, 2007 and incorporated herein by reference).
*10.40 Form of Award Agreement for Restricted Stock Units (Settled in Cash) Granted to Employees under the
Northwest Airlines Corporation 2007 Stock Incentive Plan (filed as Exhibit 99.4 to NWA Corp.'s Current Report
on Form 8-K filed on May 29, 2007 and incorporated herein by reference).
*10.41 Form of Award Agreement for Non-Qualified Stock Options Granted to Employees under the Northwest Airlines
Corporation 2007 Stock Incentive Plan (filed as Exhibit 99.5 to NWA Corp.'s Current Report on Form 8-K filed
on May 29, 2007 and incorporated herein by reference).
*10.42 Form of Award Agreement for Stock Appreciation Rights Granted to Employees under the Northwest Airlines
Corporation 2007 Stock Incentive Plan (filed as Exhibit 99.6 to NWA Corp.'s Current Report on Form 8-K filed
on May 29, 2007 and incorporated herein by reference).
*10.43 Amendment No. 1 to the Northwest Airlines Corporation 2007 Stock Incentive Plan (filed as Exhibit 10.2 to
NWA Corp. 's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by
reference).
*10.44 Form of Award Agreement for Restricted Stock Units Granted to Directors under the Northwest Airlines
Corporation 2007 Stock Incentive Plan (filed as Exhibit 10.3 to NWA Corp.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007 and incorporated herein by reference).
*10.45 Form of Award Agreement for Non-Qualified Stock Options Granted to Directors under the Northwest Airlines
Corporation 2007 Stock Incentive Plan (filed as Exhibit 10.4 to NWA Corp.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007 and incorporated herein by reference).
88
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 directors or executive officers of NWA Corp. or Northwest participate.
89
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: February 29, 2008
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, David M. Davis 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 29th day
of February 2008 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 DAVID M. DAVIS
David M. Davis
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 ROY J. BOSTOCK
Roy J. Bostock
Chairman of the Board
Isl DAVID BRANDON
David Brandon
Director
Isl MIKE DURHAM
Mike Durham
. Director
Isl JOHN M. ENGLER
John M. Engler
Director
Isl MICKEY FORET
Mickey Foret
Director
Isl ROBERT L. FRIEDMAN
Robert L. Friedman
Director
Isl DORIS KEARNS GOODWIN
Doris Kearns Goodwin
Director
Isl JEFFREY G. KATZ
Jeffrey G. Katz
Director
Isl JAMES POSTL
James Postl
Director
Isl RODNEY SLATER
Rodney Slater
Director
Isl WILLIAM S. ZOLLER
William S. Zoller
Director
90

NORTHWEST AIRLINES CORPORATION
SCHEDULE II -- VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
(In millions)
Col. A Col. B Col.C
Additions
Balance at Charged to
Beginning Costs and
Description of Period Expenses
Period from June 1, 2007 to December 31, 2007 - Successor Company
Allowances deducted from asset accounts:
Allowance for doubtful accounts $ 6 $
Accumulated allowance for depreciation
of flight equipment spare parts
Period from January 1, 2007 to May 31, 2007 - Predecessor Company
Allowances deducted from asset accounts:
Allowance for doubtful accounts $
Accumulated allowance for depreciation
of flight equipment spare parts
Year Ended December 31, 2006 - Predecessor Company
Allowances deducted from asset accounts:
Allowance for doubtful accounts $
Accumulated allowance for depreciation
of flight equipment spare parts
Year Ended December 31, 2005 - Predecessor Company
Allowances deducted from asset accounts:
Allowance for doubtful accounts
Accumulated allowance for depreciation
of flight equipment spare parts
(1) Uncollectible accounts written off, net of recoveries
(2) lnteraccount transfers
$
14 $
255
12 $
243
12 $
240
5
10
3
2
6
11
10
9
Charged to
Other
Accounts
- Describe
$
$
3
$
4
$
4
Col.D
Deductions
- Describe
$ 7 (1)
(2) 1 (3)
$ 11 (1)
(2) 260 (3)
$ 4 (1)
(2) 3 (3)
$ 10 (1)
(2) 10 (3)
(3) Adjustments as required for the adoption of fresh-start reporting on June 1, 2007, dispositions and write-offs
S-1
Col.E
Balance at
End
of Period
$ 4
10
$ 6
$ 14
255
$ 12
243
Exhibit 12.1
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Successor Predecessor
Period from Period from
June 1 to January 1 to
December 31, May 31, Year ended December 31
2007 2007 2006 2005 2004 2003
Earnings:
Income (loss) before income taxes and
cumulative effect of accounting change $ 566 $ 1,749 $ (2,864) $ (2,457) $ (861) $ 218
Less:
Income (loss) from less than 50%
owned investees 2 1 (14) 8 18
Capitalized interest 9 6 10 10 8 10
Add:
Fixed charges, from below 408 322 745 865 791 753
Amortization of interest capitalized 3 8 8 8 10
Adjusted earnings $ 963 $ 2,068 $ ~2,122) $ {1 ,580) $ i78) $ 953
Fixed charges:
Rent expense representative of interest (1) $ 126 $ 97 $ 180 $ 255 $ 248 $ 253
Interest expensed and capitalized, issuance
costs, amortization of debt discounts
and premiums and interest of preferred
security holder (2) 282 225 565 610 543 500
Fixed charges $ 408 $ 322 $ 745 $ 865 $ 791 $ 753
Ratio of earnings to fixed charges 2.36 6.42 - (3) - (3) - (3) 1.27
(1) Calculated as one-third of rentals, which is considered representative of the interest factor.
(2) Subsequent to its Chapter 11 filing and prior to its emergence, the Company recorded post-petition interest expense on pre-petition
obligations only to the extent it believed the interest would be paid during the bankruptcy proceeding or that it was probable
that the interest would be an allowed claim.
(3) Earnings were inadequate to cover fixed charges by $2.87 billion, $2.45 billion, and $869 million for the years ended
December 31, 2006, 2005, and 2004.
Exhibit 12.2
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RA TIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK REQUIREMENTS
(Dollars in millions)
Successor Predecessor
Period from Period from
June 1 to January 1 to
December 31, May 31, Year ended December 31
2007 2007 2006 2005 2004 2003
Earnings:
Income (loss) before income taxes and
cumulative effect of accounting change $ 566 $ 1,749 $ (2,864) $ (2,457) $ (861) $ 218
Less:
Income (loss) from less than 50%
owned investees 2 (14) 8 18
Capitalized interest 9 6 10 10 8 10
Add:
Fixed charges, from below 408 322 745 887 820 765
Amortization of interest capitalized 3 8 8 8 10
Adjusted earnings $ 963 $ 2,068 $ (2,122) $ (1,558) $ (49) $ 965
F.ixed charges:
Rent expense representative of interest ( 1) $ 126 $ 97 $ 180 $ 255 $ - 248 $ 253
Interest expensed and capitalized, issuance
costs, amortization of debt discounts
and premiums and interest
of preferred security holder (2) 282 225 565 610 543 500
Preferred stock requirements 22 29 12
Fixed charges and preferred
stock requirements $ 408 $ 322 $ 745 $ 887 $ 820 $ 765
Ratio of earnings to fixed charges
and preferred stock requirements 2.36 6.42 - (3) - (3) - (3) 1.25
( 1) Calculated as one-third of rentals, which is considered representative of the interest factor.
(2) Subsequent to its Chapter 11 filing and prior to its emergence, the Company recorded post-petition interest expense on pre-petition
obligations only to the extent it believed the interest would be paid during the bankruptcy proceeding or that it was probable
that the interest would be an allowed claim.
(3) Earnings were inadequate to cover fixed charges by $2.87 billion, $2.45 billion, and $869 million for the years
ended December 31, 2006, 2005, and 2004.
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: February 29, 2008
/s/ DOUGLAS M. STEENLAND
Douglas M. Steenland
President and Chief Executive Officer
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David M. Davis, certify that:
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: February 29, 2008
Isl DAVID M. DAVIS
David M. Davis
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, 2007 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: February 29, 2008
/s/ 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.
r 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, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David M. Davis,
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: February 29, 2008
Isl DAVID M. DAVIS
David M. Davis
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.