Northwest Airlines Form 10-K 2008

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 1 S(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-15285
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: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ii No D
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 ii
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 ii 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 Fonn 10-K. ~
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ii Accelerated filer D Non-accelerated filer Smaller Reporting Company D
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes D No ii
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2008 was $1 .6 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 ii No
The registrant is a wholly owned subsidiary of Delta Air Lines, Inc., a Delaware corporation, and there is no market for the registrant's
common stock, par value $0.01 per share. As of January 31, 2009, there were 1,000 shares of the registrant's Common Stock outstanding.
The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this
Form with the reduced disclosure format permitted by General Instruction 1(2).
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'). On October 29, 2008 (the "Closing Date"), Nautilus Merger Corporation
("Merger Sub"), a wholly owned subsidiary of Delta Air Lines, Inc. ("Delta"), merged with and into NWA Corp. (the "Merger")
in accordance with the Agreement and Plan of Merger, dated as of April 14, 2008, among Delta, the Merger Sub and NWA
Corp. (the "Merger Agreement"). As a result of the Merger, NWA Corp. and its subsidiaries became wholly-owned
subsidiaries of Delta and the shares of NWA Corp., which traded under the symbol "NWA", ceased trading on, and were
delisted from, the New York Stock Exchange ("NYSE").
As a result of the application of purchase accounting in accordance with Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations ("SFAS No. 141 "), the financial statements prior to October 30, 2008 are not
comparable with the financial statements for periods on or after October 30, 2008. References to "Post-Merger'' refer to the
Company on or after October 30, 2008, after giving effect to the application of purchase accounting. References to "Pre-
Merger'' refer to the Company prior to October 30, 2008. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 2 - Business Combinations" for further details.
Unless otherwise indicated, the terms "we," "us," and "our" refer to NWA Corp. and all consolidated subsidiaries.
Northwest operates the world's sixth largest airline, as measured by 2008 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. Continental has
provided written notice to the Company and Delta of its decision to terminate the two-way alliance agreement
with the Company, and the three-way alliance agreement with the Company and Delta effective April 14, 2009
and July 31, 2009, respectively;
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, and all amendments to those reports are available free of charge through the Securities and Exchange
Commission ("SEC") Web site at http://idea.sec.gov as soon as reasonably practicable after those reports are electronically
filed with or furnished to the 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.1lwww.nwa-restructuring.com. See also "Item 8. Consolidated
Financial Statements and Supplementary Data, Note 6 - 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.
2
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 7 - 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 oommon stock authorized
under its amended and restated certificate of incorporation).
Northwest had reserved 6.4 million shares of oommon stock for future distributions to holders of allowed general,
unsecured claims when disputed claims are resolved. Pursuant to the terms of the Merger Agreement, each outstanding
share of Northwest common stock (including shares issuable pursuant to Northwest's Plan of Reorganization) was converted
into and became exchangeable for 1.25 shares of Delta common stock. Accordingly, shares issuable pursuant to
Northwest's Plan of Reorganization totaled 8.0 million after being adjusted for the exchange ratio.
In connection Yt'ith 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 9- Long-Term Debt and Short-Term
Borrowings" for additional information.
Item 1A. RISK FACTORS
Our business and results of operations are dependent on the price and availability of aircraft fuel. High fuel
costs or cost increases could have a materially adverse effect on our operating results. Likewise, significant
disruptions in the supply of aircraft fuel would materially adversely affect our operations and operating results.
Our operating results are significantly impacted by changes in the price and availability of aircraft fuel. Fuel prices have
increased substantially in the last five years and spiked at record high levels in 2008 before falling dramatically during the
latter part of the year. In 2008, our average fuel price per gallon rose 76.1% to $3.61, as compared to an average price of
$2.05 in 2007, which was 1.5% higher than our average price of $2.02 in 2006, and significantly higher than our fuel prices in
the earlier part of this decade. The fuel costs represented 32.2% and 32.5% of our operating expenses in 2008 and 2007,
respectively. These increasing oosts have had a significant negative effect on our results of operations and financial
condition.
Our ability to pass along the increased costs of fuel to our customers is limited by the oompetitive nature of the airline
industry. We often have not been able to increase our fares to offset the effect of increased fuel costs in the past and we
may not be able to do so in the future.
In addition, our aircraft fuel purchase oontracts do not provide material protection against price increases or assure the
availability of our fuel supplies. We purchase most of our aircraft fuel under contracts that establish the price based on
various market indices. We also purchase aircraft fuel on the spot market, from offshore sources and under contracts that
permit the refiners to set the price. To attempt to manage our exposure to changes in fuel prices, we use derivative
instruments, which are comprised of crude oil, heating oil and jet fuel swap and oollar contracts, though we may not be able
to successfully manage this exposure. Depending on the type of hedging instrument used, our ability to benefit from declines
in fuel prices may be limited.
We are currently able to obtain adequate supplies of aircraft fuel, but it is impossible to predict the future availability or
price of aircraft fuel. Weather-related events, natural disasters, political disruptions or wars involving oil-producing countries,
changes in governmental policy concerning aircraft fuel production, transportation or marketing, changes in aircraft fuel
production capacity, environmental concerns and other unpredictable events may result in additional fuel supply shortages
and fuel price increases in the future. Additional increases in fuel costs or disruptions in fuel supplies could have additional
negative effects on us.
3
The global economic recession has resulted in weaker demand for air travel and may create challenges for us
that could have a material adverse effect on our business and results of operations.
As the effects of the global economic recession have been felt in our domestic and international markets, we are
experiencing weaker demand for air travel. Our demand began to slow during the latter part of the year, and we believe the
worsening economic conditions .
could reduce U.S. airline industry revenues by 8-12% in 2009. As a result, Delta has
announced plans to further reduce consolidated capacity by 6-8% in 2009 compared to 2008 (which reflects planned
consolidated domestic capacity reductions of 8-10% and international capacity reductions of 3-5%), and has offered
voluntary workforce reduction programs for eligible employees, induding our employees. Demand for air travel could
continue to fall if the global economic recession continues, and overall demand may fall much lower than we are able
prudently to reduce capacity. The weakness in the United States and international economies could have a significant
negative impact on our future results of operations.
The global financial crisis may have an impact on our business and financial condition in ways that we
currenttycannotpredict.
The continued credit crisis and related turmoil in the global financial system has had and may continue to have an
impact on our business and our financial condition. For example, our ability to access the capital markets may be severely
restricted at a time when we would like, or need, to do so, which could have an impact on our flexibility to react to changing
economic and business conditions. In addition, the credit crisis could have an impact on our remaining fuel hedging
contracts or our interest hedging contracts if counterparties are forced to file for bankruptcy or are otherwise unable to
perform their obligations.
Our obligation to post collateral in connection with our fuel hedge contracts may have a substantial impact on
our short-term liquidity.
Under fuel hedge contracts that we may enter into from time to time, counterparties to those contracts may require us to
fund the margin associated with any loss position on the contracts. If fuel prices continue to fall, we may be required to post
a significant amount of additional collateral, which could have an impact on the level of our unrestricted cash and cash
equivalents and short-term investments until those contracts are settled.
Our substantial indebtedness may limit our financial and operating activities and may adversely affect our
ability to incur additional debt to fund future needs.
We have substantial indebtedness, which could:
require us to dedicate a substantial portion of cash flow from operations to the payment of principal, and interest on,
indebtedness, thereby reducing the funds available for other purposes;
make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;
limit our ability to withstand competitive pressures;
reduce our flexibility in planning for or responding to changing business and economic conditions; and/or
place us at a competitive disadvantage to competitors that have relatively less debt than we have.
In addition, a substantial level of indebtedness, particularly because substantially all of our assets are currently subject
to liens, could limit our ability to obtain additional financing on acceptable terms or at all for working capital, capital
expenditures and general corporate purposes. We have historically had substantial liquidity needs in the operation of our
business. These liquidity needs could vary significantly and may be affected by general economic conditions, industry trends,
performance and many other factors not within our control.
Certain of our credit facilities include financial and other covenants that impose restrictions on our financial
and business operations.
Our exit facility financing credit agreement and our liquidity facility credit agreement each contain financial covenants
that require us to maintain a minimum fixed charge coverage ratio, minimum unrestricted cash reserves and minimum
collateral coverage ratios. In addition, each of the credit facilities contains other negative covenants customary for such
financings. These covenants may have a material adverse impact on our operations. In addition, if we fail to comply with
the covenants in any credit facility and are unable to obtain a waiver or amendment, an event of default would result under
that facility.
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Each of the credit facilities also contains other events of default customary for such financings. If an event of default
were to occur, the lenders could, among other things, declare outstanding borrowings under the respective credit facilities
immediately due and payable. We cannot provide assurance that we would have sufficient liquidity to repay or refinance
borrowings under any of the credit facilities if such borrowings were accelerated upon an event of default. In addition, an
event of default or dedaration of acceleration under any of the credit facilities could also result in an event of default under
other financing agreements of Delta and us.
Employee strikes and other labor-related disruptions may adversely affect our operations.
Our business is labor intensive, utilizing large numbers of pilots, flight attendants and other personnel. Approximately
80% of our workforce is unionized. Strikes or labor disputes with our unionized employees may adversely affect our ability to
conduct business. Relations between air carriers and labor unions in the U.S. are governed by the Railway Labor Act, which
provides that a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes
amendable as of a stated date. The Railway Labor Act generally prohibits strikes or other types of self-help actions both
before and after a collective bargaining agreement becomes amendable, unless and until the collective bargaining
processes required by the Railway Labor Act have been exhausted.
In addition, if we or our affiliates are unable to reach agreement with any of our unionized work groups on future
negotiations regarding the terms of their collective bargaining agreements or if additional segments of our workforce become
unionized, they may be subject to work interruptions or stoppages, subject to the requirements of the Railway Labor Act.
Likewise, if third party regional carriers with whom we have contract carrier agreements are unable to reach agreement with
their unionized work groups on current or future negotiations regarding the terms of their collective bargaining agreements,
those carriers may be subject to work interruptions or stoppages, subject to the requirements of the Railway Labor Act,
which could have a negative impact on our operations.
The ability to realize fully the anticipated benefits of the Merger may depend on the successful integration of
the businesses of Delta and Northwest
The Merger involves the combination of two companies which operated as independent public companies prior to the
merger. The combined company will be required to devote significant management attention and resources to integrating its
business practices and operations. It is possible that the integration process could result in the loss of key employees,
diversion of each company's management's attention, the disruption or interruption of, or the loss of momentum in our
ongoing businesses or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect
our ability to maintain relationships with customers and employees or our ability to achieve the anticipated benefits of the
Merger, or could reduce our earnings or otherwise adversely affect our business and financial results.
The integration of the Delta and Northwest workforces will present significant challenges, including the
possibility of labor-related disagreements that may adversely affect the combined company's operations.
Our successful integration with Delta and achievement of the anticipated benefits of the combination depend
significantly on integrating our employee groups into Delta and on maintaining productive employee relations. The integration
of our workforces will be challenging in part because approximately 80% of the Northwest employees are represented by
labor unions while, among U.S. based employees, only the Pre-Merger Delta pilots and flight dispatchers (who combined
constitute approximately 17% of the total Pre-Merger Delta employees) are currently represented by labor unions. The
integration of the workforces of the two airlines will require the resolution of potentially difficult issues relating to
representation of various work groups and the relative seniority of the work groups at each carrier. Unexpected delay,
expense or other challenges to integrating the workforces could impact the expected synergies from the combination of Delta
and NWA Corp. and affect the financial performance of the combined company.
lntemiptions or disruptions in service at one of our hub airports could have a material adverse impact on our
operations.
Our business is heavily dependent on our operations at our hub airports in Detroit, Memphis, Minneapolis/St. Paul and
Tokyo-Narita. Each of these hub operations indudes flights that gather and distribute traffic from markets in the geographic
region surrounding the hub to other major cities and to other Delta hubs. A significant interruption or disruption in service at
one of our other hubs could have a serious impact on our business, financial condition and results of operations.
5
We are increasingly dependent on technology in our operations, and if our technology fails or we are unable to
continue to invest in new technology, our business may be adversely affected.
We have become increasingly dependent on technology initiatives to reduce costs and to enhance customer service in
order to compete in the current business environment. For example, we have made significant investments in our website,
check-in kiosks and related initiatives. The performance and reliability of the technology are critical to our ability to attract
and retain customers and our ability to compete effectively. These initiatives will continue to require significant capital
investments in our technology infrastructure to deliver these expected benefits. If we are unable to make these investments,
our business and operations could be negatively affected. In addition, we may face challenges associated with integrating
complex systems and technologies that support the separate operations of Delta and Northwest. If we are unable to
manage these challenges effectively, our business and results of operation could be negatively affected.
In addition, any internal technology error or failure or large scale external interruption in technology infrastructure we
depend on, such as power, telecommunications or the internet, may disrupt our technology network. Any individual,
sustained or repeated failure of technology could impact our customer service and result in increased costs. Like all
companies, our technology systems and related data may be vulnerable to a variety of sources of interruption due to events
beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and
other security issues. VVhile we have in place, and continue to invest in, technology security initiatives and disaster recovery
plans, these measures may not be adequate or implemented properly to prevent a business disruption and its adverse
financial consequences to our business.
ff we experience losses of senior management personnel and other key employees, our operating results could
be adversely affected.
We are dependent on the experience and industry knowledge of our officers and other key employees to execute our
business plans. If we experience a substantial turnover in our leadership and other key employees, our performance could
be materially adversely impacted. Furthermore, we may be unable to attract and retain additional qualified executives as
needed in the future.
We are at risk of losses and adverse publicity stemming from any accident involving our aircraft
An aircraft crash or other accident could expose us to significant tort liability. The insurance we carry to cover damages
arising from any future accidents may be inadequate. In the event that the insurance is not adequate, we may be forced to
bear substantial losses from an accident. In addition, any accident involving an aircraft that we operate or an aircraft that is
operated by an airline that is one of our codeshare partners could create a public perception that our aircraft are not safe or
reliable, which could harm our reputation, result in air travelers being reluctant to fly on our aircraft and harm our business.
Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax
purposes is subject to limitation and may be further limited as a result of the Merger and the employee equity
issuance, together with other equity transactions.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), a corporation that
undergoes an "ownership change" is subject to limitations on its ability to utilize its pre-change net operating losses ("NOLs"),
to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain
stockholders increases by more than 50 percentage points over such stockholders' lowest percentage ownership during the
testing period (generally three years).
As of December 31, 2008, Delta reported approximately $9.2 billion of federal and state NOL carryforwards. As of
December 31, 2008, we reported approximately $5.3 billion of federal and state NOL carryforwards. Both Delta and NWA
Corp. experienced an ownership change in 2007 as a result of their respective plans of reorganization under Chapter 11 of
the U.S. Bankruptcy Code. Pursuant to the Merger Agreement, Delta and NWA Corp. elected out of Section 382(1)(5) of the
Code, in which case Section 382(1)(6) of the Code will be applicable to the ownership changes that occurred pursuant to our
respective plans of reorganization. As a result of the Merger, NWA Corp. experienced a subsequent ownership change.
Delta also may experience a subsequent ownership change as a result of the Merger and the issuance of equity to
employees in connection with the Merger, together with other transactions involving the sale of our common stock within the
testing period. Even if the Merger and the employee equity issuance did not result in an ownership change, the Merger and
the employee equity issuance has significantly increased the likelihood there will be a subsequent ownership change for
Delta as a result of transactions involving sale of our common stock.
6
The NWA Corp. ownership change resulting from the Merger and the potential occurrence of a second ownership
change for Delta could limit the ability to utilize pre-change NOLs that are not currently subject to limitation, and could further
limit the ability to utilize NOLs that are currently subject to limitation. The amount of the annual limitation generally is equal to
the value of the stock of the corporation immediately prior to the ownership change multiplied by the adjusted federal tax-
exempt rate, set by the Internal Revenue Service. Limitations imposed on the ability to use NOLs to offset future taxable
income could cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in
effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar
rules and limitations may apply for state income tax purposes.
Risk Factors Relating to the Airline Industry
The airline industry is highly competitive and, if we cannot successfully compete in the marketplace, our
business, financial condition and operating results will be materially adversely affected.
We face significant competition with respect to routes, services and fares. Our domestic routes are subject to
competition from both new and established carriers, some of which have lower costs than we do and provide service at low
fares to destinations served by us. In particular, we face significant competition at several of our hub airports from other
carriers. In addition, our operations at our hub airports also compete with operations at the hubs of other airlines that are
located in close proximity to our hubs. We also face competition in smaller to medium-sized markets from regional jet
operators.
Low-cost carriers, including Southwest, AirTran and JetBlue, in the U.S. have placed significant competitive pressure on
network carriers in the domestic market. In addition, other netv.ork carriers have also significantly reduced their costs over
the last several years. Our ability to compete effectively depends, in part, on our ability to maintain a competitive cost
structure. If we cannot maintain our costs at a competitive level, then our business, financial condition and operating results
could be materially adversely affected. In light of increased jet fuel costs and other issues in recent years, we expect
consolidation to occur in the airline industry. As a result of consolidation, we may face significant competition from larger
carriers that may be able to generate higher amounts of revenue and compete more efficiently.
In addition, we compete with foreign carriers, both on interior U.S. routes, due to marketing and codesharing
arrangements, and in international markets. International marketing alliances formed by domestic and foreign carriers,
including the Star Alliance (among United Airlines, Lufthansa German Airlines and others and which Continental has
announced its intention to join in October 2009) and the oneworld Alliance (among American Airlines, British Airways and
others) have significantly increased competition in international markets. The adoption of liberalized Open Skies Aviation
Agreements with an increasing number of countries around the world, including in particular the Open Skies agreement with
the Member States of the European Union, has accelerated this trend. Through marketing and codesharing arrangements
with U.S. carriers, foreign carriers have obtained access to interior U.S. passenger traffic. Similarly, U.S. carriers have
increased their ability to sell international transportation, such as transatlantic services to and beyond European cities,
through alliances with international carriers.
Terrorist attacks or international hostilities may adversely affect our business, financial condition and
operating results.
The terrorist attacks of September 11, 2001 caused fundamental and permanent changes in the airline industry,
including substantial revenue declines and cost increases, which resulted in industry-wide liquidity issues. Additional terrorist
attacks or fear of such attacks, even if not made directly on the airline industry, would negatively affect us and the airline
industry. The potential negative effects include increased security, insurance and other costs and lost revenue from
increased ticket refunds and decreased ticket sales. Our financial resources might not be sufficient to absorb the adverse
effects of any further terrorist attacks or other international hostilities involving the U.S.
The airline industry is subject to extensive government regulation, and new regulations may increase our
operating costs.
Airlines are subject to extensive regulatory and legal compliance requirements that result in significant costs. For
instance, the FM from time to time issues directives and other regulations relating to the maintenance and operation of
aircraft that necessitate significant expenditures. We expect to continue incurring expenses to comply with the FAA's
regulations.
7
Other laws, regulations, ta>ces and airport rates and charges have also been imposed from time to time that significantly
increase the cost of airline operations or reduce revenues. For example, the Aviation and Transportation Security Act, which
became law in November 2001, mandates the federalization of certain airport security procedures and imposes additional
security requirements on airports and airlines, most of which are funded by a per ticket ta>c on passengers and a ta>c on
airlines. The federal government has on several occasions proposed a significant increase in the per ticket tax. The
proposed ticket ta>c increase, if implemented, could negatively impact our revenues.
Proposals to address congestion issues at certain airports or in certain airspace, particularly in the Northeast U.S., have
included concepts such as "congestion-based" landing fees, "slot auctions" or other alternatives that could impose a
significant cost on the airlines operating in those airports or airspace and impact the ability of those airlines to respond to
competitive actions by other airlines. Furthermore, events related to extreme weather delays in late 2006 and early 2007
have caused Congress and the Department of Transportation ("DOT") to consider proposals related to airlines' handling of
lengthy flight delays during extreme v.,eather conditions. The enactment of such proposals could have a significant negative
impact on our operations. In addition, some states have also enacted or considered enacting such regulations.
Future regulatory action concerning climate change and aircraft emissions could have a significant effect on the airline
industry. For example, the European Commission is seeking to impose an emissions trading scheme applicable to all flights
operating in the European Union, including flights to and from the U.S. Laws or regulations such as this emissions trading
scheme or other U.S. or foreign governmental actions may adversely affect our operations and financial results.
We and other U.S. carriers are subject to domestic and foreign laws regarding privacy of passenger and employee data
that are not consistent in all countries in which v.,e operate. In addition to the heightened level of concern regarding privacy of
passenger data in the U.S., certain European government agencies are initiating inquiries into airline privacy practices.
Compliance with these regulatory regimes is expected to result in additional operating costs and could impact our operations
and any future expansion.
Our insurance costs have increased substantially as a result of the September 11 terrorist attacks, and further
increases in insurance costs or reductions in coverage could have a material adverse impact on our business and
operating results.
As a result of the terrorist attacks on September 11, 2001, aviation insurers significantly reduced the maximum amount
of insurance coverage available to commercial air carriers for liability to persons (other than employees or passengers) for
claims resulting from acts of terrorism, war or similar events. At the same time, aviation insurers significantly increased the
premiums for such coverage and for aviation insurance in general. Since September 24, 2001, the U.S. government has
been providing U.S. airlines with war-risk insurance to cover losses, including those resulting from terrorism, to passengers,
third parties (ground damage) ~nd the aircraft hull. The coverage currently extends through March 31, 2009 and the
Secretary of Transportation has discretion to extend coverage through May 31, 2009. The withdrawal of government support
of airline war-risk insurance would require us to obtain war-risk insurance coverage commercially, if available. Such
commercial insurance could have substantially less desirable coverage than that currently provided by the U.S. government,
may not be adequate to protect our risk of loss from future acts of terrorism, may result in a material increase to our
operating expenses or may not be obtainable at all, resulting in an interruption to our operations.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
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Item 2. PROPERTIES
Flight Equipment
As shown in the following table, Northwest operated a mainline fleet of 312 aircraft at December 31, 2008, consisting of
254 narrow-body and 58 wide-body aircraft. Northwest's purchase commitments for aircraft as of December 31, 2008 are
also provided:
In Service
Average Aircraft
Seating Capital Operating Age on Finn
Aircraft Type Cae!Ci!l 0.Vned Lease Lease Total (Years) Order (1)
ea1angm: Air~!:lft
Airbus:
A319 124 55 2 57 6.8 5
A320 148 41 28 69 13.7 2
A330-200 243 11 11 3.7
A330-300 298 21 21 3.3
Boeing:
757-200 160-184 30 15 45 16.2
757-300 224 16 16 5.8
747-400 403 4 12 16 15.1
McDonnell Douglas:
DC9 100-125 67 67 35.2
245 57 302 7
Fcligbmr Air~r1fl
Boeing 747F 7 3 10 24.5
Total Northwest Operated Aircraft 252 60 312 (2) 7
Regional Aircraft
CRJ200 50 141 141 5.5
Saab 340 34 49 49 11 .1
CRJ900 76 35 35 0.9
Embraer 175 76 36 36 0.7
Total Airli'lk Operated Aircraft 71 190 261
Tota I Aircraft 323 250 573 7
(1) The Company has excluded from the table above its order for 18 787-8 aircraft. The Boeing Company ("Boeing") has
informed the Company that Boeing will be unable to meet the contractual delivery schedule for these aircraft. The
Company is in discussions with Boeing regarding this situation.
(2) Excluding DC9 aircraft, the average age of Northwest-operated aircraft is 8.9 years.
In total, the Company took delivery of 23 CRJ900 and 27 Embraer 175 aircraft during the twelve months ended
December 31, 2008. One CRJ900 aircraft had not been placed into service before December 31, 2008 and therefore is not
included in the table above. In connection with the acquisition of these 50 aircraft, the Company entered into long-term debt
arrangements. Under such arrangements, the aggregate amount of debt incurred totaled $886 million.
During 2008, the Company sold 31 aircraft induding three Boeing 727-200, three Boeing 747-200, two Boeing 747F,
four A320 and 19 DC9-30 aircraft. Proceeds from these sales totaled $23.9 million.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 15- Commitments" for further
information related to the Company's aircraft and commitments.
9
Airport Facilities
Northwest leases the majority of its airport facilities. The associated lease terms cover periods up to 30 years and
contain provisions for periodic adjustment of lease payments. At most airports that it serves, Northwest has entered into
agreements that provide for the non-exclusive use of runways, taxiways, terminals and other facilities. Landing fees under
these agreements normally are based on the number of landings and weight of the aircraft.
In certain cases, the Company has constructed facilities on leased land that revert to the lessor upon expiration of the
lease. These facilities include cargo buildings in Boston, Los Angeles, Seattle and Honolulu; support buildings at the
Minneapolis/St. Paul International Airport; a line maintenance hangar in Seattle; and several hangars in Detroit
Other Property and Equipment
Northwest's primary offices are located near the Minneapolis/St. Paul International Airport, induding its corporate offices
located on a 160-acre site east of the airport. Other owned facilities include reservations centers in Tampa, Florida, Minot,
North Dakota and Chisholm, Minnesota, a data processing center in Eagan, Minnesota and a property in Baltimore,
Maryland. The Company also owns property in Tokyo, induding a 1.3-acre site in downtown Tokyo, 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
Northwest Airlines, Inc. v. Filipas, et al (U.S. Dist. Ct. Minnesota, Case 07-CIV-4803 (JNEIJJG)). On December 12,
2007, Northwest Airtines, 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, induding under ERISA. The court has certified 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. On January 26, 2009, the District Court
granted summary judgment in favor of Northwest on its claim as well as the defendants' counterclaims.
Chapter 11 Proceedings. On September 14, 2005, NWA Corp. and 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.
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted under the reduced disclosure format permitted by General Instruction 1(2)(c) of Form 10-K.
10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
NWA Corp. is a wholly owned subsidiary of Delta, and there is no market for NWA Corp. 's common stock.
Item 6. SELECTED FINANCIAL DATA
Omitted under the reduced disclosure format permitted by General Instruction I(2)(a) of Form 10-K.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Reduced disclosure permitted by General Instruction I(2)(a) of Form 10-K.
Overview
Northwest Airlines Corporation ("NWA Corp." and, together with its subsidiaries, the "Company") is the direct parent
corporation of Northwest Airlines, Inc. ("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 2008 consolidated operating
revenues and expenses. The Company's results of operations also include other subsidiaries of which ML T Inc. ("ML r) is
the most significant. ML T develops and markets Worry-Free Vacations that include air transportation, hotel accommodations
and car rentals. In addition to its Worry-Free Vacations charter programs, ML T markets and supports Northwest's
WorldVacations travel packages to destinations throughout the U.S., Canada, Mexico, the Caribbean, Europe and Asia,
primarily on Northwest. These vacation programs, in addition to providing a competitive and quality tour product, increase
the sale of Northwest services and promote and support new and existing Northwest destinations. The following discussion
pertains primarily to Northwest and, where indicated, ML T.
On October 29, 2008 (the "Closing Date"), Nautilus Merger Corporation ("Merger Sub"), a wholly owned subsidiary of
Delta Air Lines, Inc. ("Delta"), merged with and into NWA Corp. (the "Merger") in accordance with the Agreement and Plan of
Merger, dated as of April 14, 2008, among Delta, Merger Sub and NWA Corp. (the "Merger Agreement"). As a result of the
Merger, NWA Corp. and its subsidiaries became wholly-owned subsidiaries of Delta and the shares of NWA Corp., which
traded under the symbol "NWA", ceased trading on, and were delisted from, the New York Stock Exchange ("NYSE").
As a result of the application of purchase accounting in accordance with Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations ("SFAS No. 141"), the financial statements prior to October 30, 2008 are not
comparable with the financial statements for periods on or after October 30, 2008. References to "Post-Merger'' refer to the
Company on or after October 30, 2008, after giving effect to the application of purchase accounting. References to "Pre-
Merger'' refer to the Company prior to October 30, 2008. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 2 - Business Combinations" for further details.
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 American Institute of Certified
Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code ("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 Pre-Merger 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 Pre-Merger periods are not comparable to the pre-emergence periods. 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.
11
For discussions on the results of operations, the Company has combined the results for the Pre-Merger Successor
Company period with the Post-Merger Successor Company period of 2008 and the five months ended May 31, 2007 with the
seven months ended December 31, 2007. 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 2008 Results
The Company reported net loss of $6.0 billion for the combined year ended December 31, 2008, compared to net
income of $2.1 billion for the combined year ended December 31, 2007. In 2008, the Company reported an operating loss of
$5.6 billion, compared with operating income of $1 .1 billion in 2007.
Operating revenues for the full year 2008 increased 8.3 percent versus 2007 to $13.6 billion. System consolidated
passenger revenue increased 6.9 percent to $11 .6 billion. Operating expenses increased 67.5 percent year-over-year to
$19.1 billion. Full year 2008 results induded $5.1 billion of net unusual operating and non-operating items, consisting of
purchase accounting, merger-related expenses, goodwill impairments, other impairments, and the year-over-year impact of
fresh-start accounting.
Full year 2007 results included $1.5 billion of net unusual and reorganization related gains. Unusual non-operating
items induded a $1 .6 billion of reorganization related gains. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 8 - Reorganization Related Items" for further information related to the Company's reorganization
items.
Results of Operations-2008 Compared to 2007
Operating Revenues. Operating revenues increased 8,3 percent ($1.0 billion), as a result of higher passenger revenue,
regional carrier revenue and other revenue, partially offset by a reduction in cargo 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 Department of Transportation ("DOT). The
following analysis by region outlines the Company's year-over-year performance as reported:
Mainline Total
As reported: Domestic Pacific Atlantic Mainline Consolidated
2008
Passenger revenues (in millions) $ 5,636 $ 2,340 $ 1,609 $ 9,585 $ 11 ,585
Increase (Decrease) from 2007:
Passenger revenues (in millions) $ (231) $ 154 $ 234 $ 157 $ 752
Percent (3.9) % 7.0 % 17.0 % 1.7 % 6.9 %
Scheduled service AS Ms ( capacity) (9.3) % (0.2) % 18.0 % (2.6) % 1.3 %
Scheduled service RPMs (traffic) (7.6) % (0.5) % 13.6 % (2.3) % 1.1 %
Passenger load factor 1.5 pts. (0.3) pts. (3.2) pts. 0.2 pts. (0.1) pts.
Yield 4.0 % 7.7 % 3.0 % 4.1 % 5.8 %
Passenger RASM 5.9 % 7.3 % (0.9) % 4.5 % 5.6 %
Regional Carrier Revenues. Regional carrier revenues increased 42.3 percent ($595 million) to $2.0 billion, primarily
due to a 47.9 percent increase in available seat miles associated with the delivery of new 76 seat regional aircraft, partially
offset by a reducti~>n in yield.
Cargo Revenues. Cargo revenues decreased 9.3 percent ($78 million) to $762 million due primarily to a 20.5 percent
decrease in volume, partially offset by 14.1 percent improvement in yield. Cargo revenues consisted of freight and mail
carried on passenger aircraft and the Company's dedicated fleet of Boeing 7 47-200 freighter aircraft.
Other Revenues. Other Revenues, the principal components of which are ML T, other transportation fees, partner
revenues, and charter revenues, increased 43.3 percent ($370 million) to $1 .2 billion. The year-over-year increase was due
to increased charter and partner revenues, and the portion of payments received from non-airline marketing partners for
frequent flyer miles that is now recorded in Other Revenues.
12
Operating Expenses. Operating expenses increased 67.5 percent ($7.7 billion) for 2008. 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. Also, in conjunction with the Merger, the Company recorded purchase accounting
adjustments as of October 29, 2008. Thus, the Company's Post-Merger financial statements are not comparable to its Pre-
Merger financial statements. At emergence the Company changed its policies pertaining to the accounting for frequent flyer
obligations and breakage of passenger tickets. During 2008, the Company recorded impairment charges associated with
goodwill, international routes, other intangibles and aircraft; the impacts are itemized in column (1). On April 24, 2007,
Mesaba Aviation, Inc. ("Mesaba") was acquired by the Company and became a wholly-owned consolidated subsidiary; year
over year impact of partial 2007 ownership is itemized in column (2). Excluding the items described above, the comparable
year-over-year operating performance variances, which include the impact of the Company's purchase accounting
adjustments and the effects of fresh-start reporting, are itemized in column (3). The following table and notes present
operating expenses for the years ended December 31, 2008 and 2007 and describe significant year-over-year variances:
Year Ended (1) (2) (3)
Combined Combined Mesaba Total
December 31, December 31, Impairment Net of lncr(Decr)
(In millions) 2008 2007 Charges Elim Operations from 2007
OPERATING EXPENSES
Aircraft fuel and taxes $ 5,670 $ 3,378 $ $ 1 $ 2,291 A $ 2,292
Salaries, wages and benefits 2,698 2,568 47 83 130
Aircraft maintenance materials
and repairs 772 811 13 (52) (39)
Selling and marketing 778 751 27 27
Other rentals and landing fees 592 539 6 47 53
Depreciation and amortization 1,145 495 642 3 5 650
Aircraft rentals 370 378 (8) (8)
Regional carrier expenses 880 776 (75) 179 B 104
Goodwill and other indefinite-
lived intangibles 3,841 3,841 3,841
Merger related 557 557 C 557
Other 1,833 1,728 13 92 105
Total operating expenses $ 19,136 $ 11,424 $ 4,483 $ 8 $ 3,221 $ 7,712
A. Aircraft fuel and taxes for the 2008 period includes $752.0 million in net fuel derivative contract losses, consisting of
$383.5 million in out-of-period mark-to-market losses and $368.5 million of losses for contracts settled in 2008. Fuel
expense for the 2007 period includes $112.9 million in net fuel derivative contract gains, consisting of $18.7 million in
out-of-period mark-to-market gains and $94.2 million of gains for contracts settled in 2007.
B. Regional carrier expenses increased primarily due to higher fuel costs.
C. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 3 - Merger Related Expenses" for
further details.
Other Income and Expense. The Company recorded non-operating expense of $649 million in 2008 as compared to
non-operating income of $1.2 billion in 2007. The difference of $1 .8 billion year-over-year was primarily due to a net
reorganization related gain of $1.5 billion associated with the Company's emergence from bankruptcy recorded in 2007. See
"Item 8. Consolidated Financial Statements and Supplementary Data, Note 8- Reorganization Related Items" for additional
information related to reorganization items. In 2008, the Company recorded $51 million in interest expense associated with
the amortization of debt discount recorded in conjunction with its purchase accounting. The Company also recorded a $213
million impairment of its minority ownership interest in Midwest Air Partners, LLC in conjunction with the goodwill impairment
test performed during the second quarter of 2008. See "Item 8. Consolidated Financial Statements and Supplementary Data,
Note 5 - Fair Value Measurements" for additional information related to the impairment.
Tax Expense (Benefit). The Company recorded a non-cash income tax benefit of $212 million for the year ended 2008,
primarily related to the impairment charges recorded in conjunction with the goodwill impairment test for certain indefinite-
lived intangible assets. The Company recorded a non-cash income tax expense for the year ended 2007 of $222 million.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 14- Income Taxes" for additional
discussion of the Company's tax accounts.
13
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 18 - 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 Mures contracts traded on regulated Mures exchanges,
swap agreements and options. Exduding the impact of fuel hedges, a hypothetical 10% increase in the full year December
31 , 2008 cost per gallon of fuel, assuming projected 2009 mainline and regional aircraft fuel usage, would result in an
increase to aircraft fuel expense of approximately $584 million in 2009, compared to an estimated $369 million for 2008
measured at December 31, 2007. The Company, as of January 31 , 2009, had hedged the price of approximately 64% and
22% of its estimated 2009 first quarter and full year 2009 fuel requirements, respectively. In comparison, as of February 29,
2008, the Company had hedged approximately 18% of its estimated 2008 fuel requirements.
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 ("yen"), and from time to time, the Company uses financial instruments to hedge its exposure to the yen and
other foreign currencies. Excluding the impact of foreign currency hedges, the result of a uniform 10% strengthening in the
value of the U.S. dollar from December 31, 2008 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 $103 million for the year
ending December 31, 2009, compared to an estimated decrease of $66 million for 2008 measured at December 31, 2007.
This sensitivity analysis was prepared based upon projected foreign currency-denominated revenues and expenses as of
December 31, 2008 and 2007, 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 $19 million in 2009, caused by the remeasurement of net foreign currency-denominated liabilities as of December
31, 2008. The Company was also in a net liability position in 2007, as its foreign currency-denominated liabilities exceeded
its foreign currency-denominated assets. The result of a 10% weakening in the value of the U.S. dollar would have resulted
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. This sensitivity analysis was prepared based upon foreign currency-
denominated assets and liabilities as of December 31, 2008 and 2007, respectively.
The Company's operating income in 2008 was favorably impacted by a net $104 million due to the average yen being
stronger in 2008 compared to 2007 and unfavorably impacted in 2007 by a net $50 million due to the average yen being
weaker in 2007 compared to 2006. In 2008, the Company's yen-denominated net cash inflow was approximately 79 billion
yen (approximately $732 million) and its yen-denominated liabilities exceeded its yen-denominated assets by an average of
12 billion yen (approximately $114 million). 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 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.
The average yen to U.S. dollar exchange rate for the years ending December 31, 2008, 2007 and 2006, excluding the
impact of any hedging activities, was 105, 118 and 117, respectively. The yen financial instruments utilized to hedge net yen-
denominated cash flows from sales resulted in a loss of $29.1 million in 2008. As a result of not having any yen hedges in
place in 2007, the Company did not realize a gain or loss. As of December 31 , 2008, the Company had hedged
approximately 32.1 % of its anticipated 2009 yen-denominated sales. The 2009 yen hedges consist of forward contracts
which hedge approximately 25.7% of yen-denominated sales at an average rate of 100.1 yen per U.S. dollar and collar
options which hedge approximately 6.4% of yen-denominated sales with a rate range between 99.5 and 103.5 yen per U.S.
dollar. As of December 31, 2007, the Company had hedged approximately 42.6% of its anticipated 2008 yen-denominated
sales. The 2008 yen hedges consisted 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.
14
The Company's operating income in 2008 was favorably impacted by a net $17 million due to the average Canadian
dollar being stronger in 2008 compared to 2007 and favorably impacted in 2007 by $4 million due to the average Canadian
dollar being stronger in 2007 compared to 2006. In 2008, the Company's Canadian dollar-denominated net cash inflow was
approximately C$525 million (approximately $518 million) and its Canadian dollar-denominated assets exceeded its
Canadian dollar-denominated liabilities by an average of C$10.4 million (approximately $9.8 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 , 2008, 2007 and 2006,
excluding the impact of any hedging activities was 1. 06, 1. 07 and 1.13, respectively. As of December 31, 2008, the
Company had not hedged any of its 2009 anticipated Canadian dollar denominated cash flows from sales. The Canadian
dollar financial instruments utilized to hedge Canadian dollar-denominated cash flows in 2008 resulted in a realized gain of
$22. 7 million. As of December 31, 2007, the Company had hedged approximately 66.4% of its 2008 anticipated Canadian
dollar denominated cash flows from 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, 2008 and 2007, the Company's interest income from cash equivalents and short-term investments would
increase by approximately $23 million and $38 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, 2008 and 2007.
The Company's floating rate indebtedness was approximately 42% of its total long-term debt and capital lease
obligations as of December 31 , 2008. Excluding the impact of interest rate hedges, if short-term interest rates were to
increase by 100 basis points throughout 2009 as measured at December 31, 2008, the Company's interest expense would
increase by approximately $31 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 , 2008. The Company had entered into individual
interest rate cap hedges related to three floating rate debt instruments, with a total cumulative notional amount of $371
million, as of December 31, 2008. During February 2008, the Company entered into individual interest rate swap hedges
related to two floating rate debt instruments. Additionally, during October 2008, the Company entered into ten interest rate
swap hedges related to ten floating debt instruments. The interest rate swap hedges had a total cumulative notional amount
as of December 31 , 2008 of $1.4 billion. The objective of the interest rate cap and swap hedges is to protect the anticipated
payments of interest (cash flows) on the designated debt instruments from adverse market interest rate changes.
The Company's floating rate indebtedness was approximately 70% of its total long-term debt and capital lease
obligations as of December 31, 2007. Excluding the impact of interest rate hedges, 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. 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, as of December 31, 2007. The objective of the interest rate cap hedges is to protect the anticipated payments of
interest (cash flows) on the designated debt instruments from adverse market interest rate changes.
Market risk for fixed-rate indebtedness is estimated as the potential decrease in fair value resulting from a hypothetical
100 basis point increase in interest rates and amounts to approximately $89 million measured at December 31, 2008. This
compares to an estimated $96 million measured at December 31 , 2007.
15
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Northwest Airlines Corporation
We have audited the accompanying consolidated balance sheets of Northwest Airlines Corporation (the Company) as of
December 31, 2008 (Post-merger Successor) and as of December 31, 2007 (Pre-merger Successor), and the related
consolidated statements of operations, oommon stockholders' equity (deficit), and cash flows for the period from October 30,
2008 to December 31, 2008 (Post-merger Successor), the period from January 1, 2008 to October 29, 2008 (Pre-merger
Successor), the seven months ended December 31, 2007 (Pre-merger Successor), the 5 months ended May 31, 2007 (Pre-
merger, Predecessor), and for the year ended December 31, 2006 (Pre-merger Predecessor). Our audit also inducted the
financial statement schedule 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 indudes examining, on a test basis, evidence supporting the
amounts and disdosures in the financial statements. An audit also indudes 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 oonsolidated financial
position of Northwest Airlines Corporation as of December 31, 2008 (Post-merger Successor) and as of December 31, 2007
(Pre-merger Successor), and the consolidated results of its operations and its cash flows for the period from October 30,
2008 to December 31, 2008 (Post-merger Successor), the period from January 1, 2008 to October 29, 2008 (Pre-merger
Successor), the seven months ended December 31, 2007 (Pre-merger Successor), the 5 months ended May 31, 2007 (Pre-
merger Predecessor), and for the year ended December 31, 2006 (Pre-merger 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 oonsolidated 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 Note 17 to the consolidated financial statements, the Company adopted the provisions of the Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined
Beneftt Pension and Other Postretirement Plans- an amendment of FASB Statements No. 87, BB, 106, and 132(R) in 2006.
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, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 2, 2009 expressed an unqualified opinion thereon.
Minneapolis, Minnesota
March 2, 2009
16
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
Post-Merser Pre-Merser
Successor Successor
December 31, December 31,
2008 2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,068 $ 2,939
Unrestricted short-term investments 49 95
Restricted cash, cash equivalents and short-term investments 196 725
.Accounts receivable, less allowance (2008--$6; 2007-$4) 659 776
Hedge margin receivable 526
Flight equipment spare parts, less allowance (2008-$3; 2007-$10) 130 135
Deferred income ta>ces 131 72
Maintenance and operating supplies 108 180
Prepaid expenses and other 146 187
Total current assets 4,013 5,109
PROPERTY AND EQUIPMENT
Flight equipment - owned, less accumulated
depreciation (2008-$63; 2007-$197) 7,990 7,520
Flight equipment - capital lease, less accumulated
amortization (2008-$0; 2007-$1) 8
Other property and equipment, less accumulated
depreciation (2008-$8; 2007-$36) 597 558
Total property and equipment 8,587 8,086
OTHER ASSETS
Goodwill 4,572 6,035
International routes, less accumulated amortization (2008-$0; 2007--$2) 2,140 2,976
Other intangibles, less accumulated amortization (2008-$8; 2007-$54) 554 2,136
Investments in affiliated companies 3 24
Other, less accumulated depreciation and
amortization (2008-$3; 2007-$8) 329 223
Total other assets 7,598 11,394
Total Assets $ 20,198 $ 24,589
The accompanying notes are an integral part of these consolidated financial statements.
17
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
Post-Merger Pre-Merger
Successor Successor
December 31, December 31,
2008 2007
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Air traffic liability/deferred frequent flyer liability $ 2,002 $ 2,004
Accrued compensation and benefits 393 459
Accounts payable 723 706
Hedge derivatives liability 560 3
Due to parent company 200
Other accrued liabilities 524 483
Current maturities of long-term debt and capital lease obligations 384 449
Total current liabilities 4,786 4,104
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 5,382 6,639
DEFERRED CREDITS AND OTHER LIABILITIES
Long-term pension, other postretirement, and disability benefits 5,476 3,638
Deferred frequent flyer liability 1,500 1,490
Deferred income taxes 1,094 1,203
Other 533 138
Total deferred credits and other liabilities 8,603 6,469
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY
Pre-Merger Successor Company common stock, $0.01 par value;
shares authorized-400,000,000; shares issued-233, 187,998
at December 31, 2007 2
Post-Merger Successor Company common stock, $0.01 par value;
shares issued-1, 000 at December 31, 2008
Additional paid-in capital 3,605 7,235
Retained earnings (accumulated deficit) (539) 342
Accumulated other comprehensive income (loss) (1,639) (202)
Pre-Merger Successor Company treasury stock-1,684 at
December 31, 2007
Total common stockholders' equity 1,427 7,377
Total Liabilities and Stockholders' Equity $ 20,198 $ 24,589
The accompanying notes are an integral part of these consolidated financial statements.
18
NORTHVVEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In nillions, except per share amounts)
Post-Me!B!r
!uccessor !uccessor
Pre-Me!]ler
Piedecessor
Period From Period From Penod From Penod From
October 30 to January1 to June1 to January1 to Year Ended
December 31, October 29, December 31, May 31, December 31,
2008 2008 2007 2007 2006
OPERATING REVENUES
Passenger $ 1,348 $ 8,237 $ 5,660 $ 3,768 $ 9,230
Regional carrier revenues 338 1,662 884 521 1,399
Cargo 95 667 522 318 946
Other 241 984 538 317 993
Total operating revenues 2,022 11,550 7,604 4,924 12,568
OPERATING EXPENSES
Aircraft fuel and taxes 718 4,952 2,089 1,289 3,386
Salaries, wages and benefits 468 2,230 1,541 1,027 2,662
Aircraft maintenance materials and repairs 121 651 508 303 796
Selling and marketing 126 652 436 315 759
Other rentals and landing fees 107 485 304 235 562
Depreciation and amortization 91 1,054 289 206 519
Aircraft rentals 61 309 218 160 226
Regional carrier expenses 114 766 434 342 1,406
Goodwill and other indefinite-lived
intangibles impainnent 3,841
Merger related 333 224
Other 288 1,545 1,044 684 1,512
Total operating expenses 2,4~7 16,709 6,863 4,561 11,828
OPERATING INCOME (LOSS) (405) (5,159) 741 363 740
OTHER INCOME (~E)
Interest expense (131) (373) (273) (219) (555)
Investment income 7 83 105 56 109
Reorganization items, net 1,551 (3,165)
Other, net (11) (224) F) (2) 7
Total other income (expense) (135) (514) (175) 1,386 (3,604)
INCOME (LOSS) BEFORE INCOME TAXES (540) (5,673) 566 1,749 (2,864)
Income tax expense (benefit) (1) (211) 224 (2) (29)
NET INCOME (LOSS) s (539) $ (5,462) $ 342 $ 1,751 $ (2,835)
EARNNGS (LOSS) PER COMMON SHARE:
Basic NIA s (20.72) $ 1.30 $ 20.03 $ (32.48)
Diluted NIA $ (20.72) $ 1.30 $ 14.28 $ (32.48)
The accompanying notes are an integral part of these consolidated financial statements.
19
NOR1lflEST AIRUIES CORPORATION
C08X.JMTEO STATEMENTS OF CASH FLONS
(In millions)
~= Pre-MetJI!!
SI ICC8SS0I' Pl 8da08Ssor
Period From Period From Period From Period From
October 30 to January1 to June1 to January 1 to YearEnded
December 31, Oc1Dber29, December 31, May31, December 31,
2008 2008 2007 2007 2006
CASH FLONS FROM OPERATING ACTIVITIES
Net income (loss) $ (539) $ (5,462) $ 342 $ 1,751 $ (2,835)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Reorganization items, net (1 ,551) 3,165
Non-cash merger related expense 309 187
Amortization of debt discount (premium) 52 13 (7) 6 12
Depreciation and amortization 91 1,054 289 206 519
Income tax expense (benefit) (1) (211) 224 (2) (29)
Net receipts (payments) of income taxes (1) (2) (1) 2
Pension and other postretirement benefit
contributions (greater) less than expense 30 (12) (13) (2) 261
Stock-based compensation 3 89 76 2
Goodwill and other indefinite-lived intangibles impairment 3,841
Investment impainnent 213
Net loss (gain) on disposition of property, equipment and other 2 10 4 16
lriaease (decrease) in cash flows from operating assets and
liabilities, excluding the effects of the acquisition of
Mesaba Aviation, Inc.:
Post-emergence reorganization payments (1) (8) (164)
Changes in certain assets and liabilities:
Decrease (inaease) in accounts receivable (72) (353) (176) 16 (3)
Decrease (increase) in operating restrided cash 35 (36)
Decrease (inaease) in vendor depositslholdbacks 162 163 (35)
Decrease (inaease) in supplies, prepaid expenses and other n 5 (74) 28 67
lnaease (decrease) in air traffic liability/deferred
frequent flyer liability (326) 233 (317) 448 (33)
Increase (deaease) in aa;ounts payable 99 (22) (21) 19 287
lnaease (decrease) in other liabilities (539) 621 (1) (51) (164)
Other, net 183 29 ti 11 ll
Net cash provided by (used in) operating activities (599) 181 3 5 1,046 1, 4
tET CASH PRCMDED BY (USED IN)
RECRGANZAT10N ACTIVITIES 5 21
CASH FLONS FROM INVESTING ACTMTIES
Gapital expenditures (136) (1,118) (739) (312) (527)
Purchases of short-term investments (44) (21)
Proceeds from sales of short-tenn investments 55 542 15 28
Transfers (to) from short-term investments (from) to cash and
cash equivalents 70 (120)
Proceeds from sale of investment in affiliates 20 130
Decrease (inaease) in restricted cash, cash equivalents and
short-term investments 607 (84) (196) (74) 176
Cash and cash equivalents acquired in acquisition of
Mesaba Aviation, Inc. 16
Proceeds from sale of property, equipment and other assets 23 17 264 7
Investments in affiliated companies (213)
Other, net 1 1 9
Net cash provided by (used in) investing activities 564 (1,443) 2 (398) (328)
CASH FLONS FROM FINANCING AC11VITIES
Payment of long-term debt (323) (697) (645) (609) (2,372)
Proceeds from long-term debt 86 1,183 710 326 2,281
Payment of capital lease obligations (8) (1) (1) (14)
Payment of short-term borrowings (300) (18)
Proceeds from short-term borrowings 300
Proceeds from equity rights offering 750
Proceeds from intercompany loan 200
Other, net i1!
..
l9l F3l ~35}
Net cash provided by (used in) financing activities {338! 764 805 l30:!l l140l
INCREASE (DECREASE) IN CASH At> CASH EQUVALNTS (373) (498) 1,132 346 7TT
Cash and cash equivalents at beginning of period 2,441 2,939 1,807 1,461 684
Cash and cash equivalents at end of period $ 2,068 $ 2,441 $ 2,939 $ 1,807 $ 1,461
Available to be borrowed under credit facilities $ 600 $ 5 $ 101 $ 127 $
Cash and cash equivalents and Ulll'Ntl1c18d
short-1Brm invastments at end of pertod $ 2,117 $ 2,601 $ 3,034 $ 2,445 $ 2,058
Supplemental Cash Flow Information:
Interest paid $ 87 $ 352 $ 304 $ 208 $ 569
Investing and Financing Activities Not Affecting Cash:
Manufacturer financing of aircraft and other non-cash transactions $ $ $ 335 $ 167 $ 280
The accompanying notes are an integral part of these consolidated financial statements.
20
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUllY (DEFICIT)
(In millions)
Retained Accumulated
Additional Earnings Other
Common Stock Paid-In (Accumulated Comprehensive Treasury
Shares Amount Caeltal Deficit! Income lloss! Stock Total
Balance at January 1, 2006 111.3 $ $ 1,500 $ (4,548) $ (1 ,568) $ (1,013) $ (5,628)
(Pre-Merger 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 benefrts 699 699
Total comprehensive income (loss) 692
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)
(Pre-Merger 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
Total comprehensive income (loss)
Balance at May 31, 2007 111.4
--1- 1]ci7 (5,633) (1 ,100) (1,013) (6,238)
(Pre-Merger 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- ~ 7,178
(Pre-Merger Successor Company)
Net income (loss) 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 comprehensive income (loss) (202)
Compensation expense associated with equity awards 59 59
Equity distributions - claims 38
Balance at December 31, 2007 233.2 2 7,235 342 (202) 1,3n
(Pre-Merger Successor Company)
21
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(In millions)
Balance at December 31, 2007
(Pre-Merger Successor Company)
Net income (loss) from January 1 to October 29, 2008
Other comprehensive income (loss)
Deferred gain/(loss) from hedging activities
Pension, other postretirement, and long-term
disability benefits
Total comprehensive income (loss)
Compensation expense associated with equity awards
Equity distributions - claims
Balance at October 29, 2008
(Pre-Merger Successor Company)
Purchase accounting adjustments:
Cancellation of the Successor Company's
common stock (1)
Elimination of the Successor Company's accumulated
deficit and accumulated other comprehensive income
Issuance of new stock in connection with the Merger
with Delta (1)
Balance at October 30, 2008
(Post-Merger Successor Company)
Net income (loss) from October 30 to December 31 , 2008
Other comprehensive income (loss)
Deferred gain/(loss) from hedging activities
Unrealized gain/(loss) on investments
Pension, other postretirement, and long-term
disability benefits
Total comprehensive income (loss)
Compensation expense associated with equity awards
Balance at December 31, 2008
(Post-Merger Successor Company)
Common Stock
Shares Amount
233.2 2
24.6
257.8
---2-
(257.8) (2)
- -$--
Retained Accumulated
Addition al Earnings Other
Paid-In (Accumulated Comprehensive
Caf!ltal Deficit! Income lloss!
7,235 342 (202)
(5,462)
(11)
71
237
7,472 (5,120) (142)
(7,472)
5,120 142
3,353
3,353
(539)
(199)
(7)
(1,433)
252
$ 3,605 $ (539) $ (1,639)
Treasury
Stock
$
( 1) On the Closing Date, NWA Corp. and its subsidiaries became wholly-owned subsidiaries of Delta and the shares of NWA Corp., which traded
under the symbol "NWA", ceased trading on, and were delisted from, the New York Stock Exchange rNYSE"). In connection with the Merger,
1,000 shares of NWA Corp. common stock, par value $0.01 , were issued and held by Delta.
The accompanying notes are an integral part of these consolidated financial statements.
22
Total
7,377
(5,462)
(1 1)
71
60
237
2,212
(7,474)
5,262
3,353
3,353
(539)
(199)
(7)
(1,433)
(1 ,639)
252
$ 1,427
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Business. Northwest Airlines Corporation ("NWA Corp." and, together with its subsidiaries, the "Company") is the direct
parent corporation of Northwest Airlines, Inc. ("Northwest"). Northwest's operations account for approximately 99% of the
Company's cxmsolidated 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 252 cities in 25 countries in North America,
Asia and Europe. Northwest's global airline network indudes 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, 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, Pinnade Airlines, Inc. ("Pinnade"), Mesaba Aviation, Inc. ("Mesaba") and Compass Airlines,
Inc. ("Compass"), which operate as Northwest Airlink carriers, and a cargo business that indudes a dedicated fleet of
freighter aircraft that operate through hubs in Anchorage and Tokyo.
Financial Statement Presentation. On October 29, 2008 (the "Closing Date"), Nautilus Merger Corporation ("Merger
Sub"), a wholly owned subsidiary of Delta Air Lines, Inc. ("Delta"), merged with and into N\NA Corp. (the "Merger") in
accordance with the Agreement and Plan of Merger, dated as of April 14, 2008, among Delta, Merger Sub and NWA Corp.
(the "Merger Agreement'). As a result of the Merger, NWA Corp. and its subsidiaries became wholly-owned subsidiaries of
Delta and the shares of NWA Corp., which traded under the symbol "NWA", ceased trading on, and were delisted from, the
New York Stock Exchange ("NYSE").
As a result of the application of purchase accounting in accordance with Financial Accounting Standards Board
("FASB.) Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations ("SFAS No. 141"), the
financial statements prior to October 30, 2008 are not comparable with the financial statements for periods on or after
October 30, 2008. References to "Post-Merger'' refer to the Company on or after October 30, 2008, after giving effect to the
application of purchase accounting. References to "Pre-Merger'' refer to the Company prior to October 30, 2008. For
additional information regarding purchase accounting, see "Note 2- Business Combinations.
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 N\NA 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-r), which resulted in the Company becoming a new entity for financial reporting purposes.
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 7 - Fresh-Start Reporting" for further details.
In preparing our Consolidated Financial Statements for the Pre-Merger Predecessor Company, we applied SOP 90-7,
which requires that the financial statements for periods subsequent to the Chapter 11 filing distinguish transactions and
events that were directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain
revenues, expenses, realized gains and losses and provisions for losses that were realized or incurred in the bankruptcy
proceedings were recorded in reorganization items, net on the accompanying Consolidated Statements of Operations.
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). The Company has eliminated all intercompany balances in its
Consolidated Financial Statements.
Use of Estimates. We are required to make estimates and assumptions when preparing our Consolidated Financial
Statements in accordance with GAAP. These estimates and assumptions affect the amounts reported in our Consolidated
Financial Statements and the accompanying notes. Actual results could differ materially from those estimates.
23
New Accounting Standards. In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations ("SFAS No. 141(R)"). SFAS No. 141(R) provides guidance for recognizing.and measuring goodwill acquired in
a business combination and requires disclosure of information to enable users of the financial statements to evaluate the
nature and financial effects of a business combination. It also revises the treatment of valuation allowance adjustments
related to income tax benefits in existence prior to a business combination. Under SFAS No. 141, any reduction in the
valuation allowance, as a result of the recognition of deferred tax assets, are adjusted through goodwill, followed by other
indefinite-lived intangible assets until the net carrying costs of these assets is zero. By contrast, SFAS No. 141 (R) requires
that any reduction in this valuation allowance be reflected through the income tax provision. SFAS No. 141(R) is effective for
fiscal years beginning on January 1, 2009.
Effective January 1, 2007, we adopted FASS Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 ("FIN 48"), which darifies the accounting and disclosure for uncertainty in tax
positions, as defined. FIN 48 is intended to reduce the diversity in practice associated with certain aspects of the recognition
and measurement related to accounting for income taxes. The adoption of FIN 48 did not have a material impact on the
Company's financial statements.
In September 2006, the FASS issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). This statement,
among other things, defines fair value, establishes a framework for measuring fair value and expands disdosure about fair
value measurements. SFAS No. 157 is intended to eliminate the diversity in practice associated with measuring fair value
under existing accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We were required to adopt SFAS No. 157 on May 31 , 2007 in connection with
the adoption of fresh start reporting. For additional information regarding recurring and nonrecurring fair value measurements,
see "Note 5- Fair Value Measurements".
In June 2006, the FASB ratified the Emerging Issues Task Force ("EITF) consensus on Issue No. 06-03, How Taxes
COiiected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement ("EITF
06-03"). The scope of EITF 06-03 indudes any tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer, and provides that a company may adopt a policy of
presenting taxes either gross within revenue or on a net basis. For any such taxes that are reported on a gross basis, a
company should disclose the amounts of those taxes for each period for which an income statement is presented if those
amounts are significant. This statement is effective for interim and annual reporting periods beginning after December 15,
2006. We adopted EITF 06-03 on January 1, 2007. Various taxes and fees on the sale of tickets to customers are collected
by us 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.
Cash and Cash Equivalents. We classify short-term, highly liquid investments with maturities of three months or less
when purchased as cash and cash equivalents. These investments are recorded at cost, which approximates fair value.
Unrestricted short-term investments. At December 31, 2008, our short-term investment was completely comprised of
our investment in The Reserve Primary Fund ("the Primary Fund"). In accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities C-SFAS No. 115"), we record these investments as available for sale securities at
fair value on our Consolidated Balance Sheets.
At December 31, 2008, the fair value of our investment in the Primary Fund was $49 million. The cost of this investment
was $53 million. In mid-September, the net asset value of the Primary Fund decreased below $1 per share as a result of the
Primary Fund's valuing at zero its holdings of debt securities issued by Lehman Brothers Holdings, Inc. ("Lehman Brothers"),
which filed for bankruptcy on September 15, 2008. Accordingly, we recognized an other than temporary impairment of $3. 75
million to recognize our pro rata share of the Primary Fund's overall investment attributable to the Lehman Brothers
securities. For additional information about our measurement of this investment, see "Note 5 - Fair Value Measurements".
Restricted Cash. Restricted cash, cash equivalents and short-term investments induded in current assets on our
Consolidated Balance Sheets totaled $196 million and $725 million at December 31 , 2008 and 2007, respectively.
Restricted cash, cash equivalents and short-term investments are recorded at fair value.
At December 31, 2008, our restricted cash, cash equivalents and short-term investments balance primarily related to (1)
cash held to meet certain projected self-insurance obligations, (2) a Voluntary Employee Beneficiary Association ("VEBA")
trust, (3) short-term investments pledged as collateral for certain obligations of the Company and (4) an irrevocable trust that
contains funds collected 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.
24
The Company held $22 million and $321 million in the irrevocable tax trust, as outlined above, as of December 31 , 2008
and December 31, 2007, respectively. Cash equivalents and short-term investments of $147 million and $160 million as of
December 31 , 2008 and December 31, 2007, respectively, were pledged as collateral for certain obligations of the Company.
On December 31 , 2007, a $213 million deposit in an escrow account was dassified as restricted cash 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 ("Midwest"). The deposit was
subsequently withdrawn upon the closing of the transaction in January 2008.
Auction Rate Securities. Northwest redassified its auction rate securities from short-term investments and current
restricted investments to other noncurrent assets on our Consolidated Balance Sheets in December 2008. Auction rate
securities categorized as noncurrent investments were $34 million as of December 31 , 2008. Auction rate securities
categorized as noncurrent restricted investments were $4 million as of December 31 , 2008. There were no similar
investments or restricted investments dassified as noncurrent assets as of December 31, 2007. Auction rate securities are
recorded at fair value in accordance with SFAS No. 115. See "Note 5 - Fair Value Measurements" for further information
about the Company's auction rate securities.
Margin Receivables. The cash margin we provide to counterparties is recorded in Hedge margin receivable or
Restricted cash. All cash flows associated with purchasing and selling fuel hedge contracts are classified as operating cash
flows on our Consolidated Statements of Cash Flows.
Presentation of Regional Carrier Related Revenue and Expense Items. Compass has been a wholly-owned
consolidated subsidiary of the Company since its inception in 2006. Mesaba was acquired by the Company on April 24,
2007 and became a wholly-owned consolidated subsidiary. Northwest and Pinnade, an unconsolidated regional carrier,
have entered into an airline services agreement (" ASA"), under which Northwest determines Pinnade's commuter aircraft
scheduling. This agreement is structured as a capacity purchase agreement whereby Northwest pays Pinnade 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 Pinnade 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 Pinnade and other Pinnacle-related expenses. In conjunction with the effectiveness of an amended and
restated Airline Services Agreement ("Amended Pinnade 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.
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 \NOuld have
increased by $3 million, Aircraft rentals expense would have increased $188 million, Regional carrier expenses would have
decreased $400 million, and 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 induded in current liabilities as air traffic liability. Passenger and Cargo revenues are recognized
when the transportation is provided or when the ticket expires, unused, reducing air traffic liability. 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 Pre-Merger Predecessor Company recognized breakage associated with unused passenger tickets
based on estimates of future breakage developed using historical breakage trends.
Taxes and Fees. We are required to charge certain taxes and fees on our passenger tickets. These taxes and. fees
indude U.S. federal transportation taxes, federal security charges, airport passenger facility charges and foreign arrival and
departure taxes. These taxes and fees are legal assessments on the customer, for which we have an obligation to act as a
collection agent Because we are not entitled to retain these taxes and fees, we do not indude such amounts in passenger
revenue. We record a liability when the amounts are collected and reduce the liability when payments are made to the
applicable government agency or operating carrier.
Frequent Flyer Program. Northwest operates a frequent flyer loyalty program known as "WortdPerks." WorldPerks is
designed to retain and increase traveler loyalty by offering incentives to travelers for their continued patronage. Under the
WortdPerks 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. WortdPerks members accumulate mileage in their accounts and later redeem mileage for
free or upgraded travel on Northwest and alliance partners. WortdPerks members that achieve certain mileage thresholds
also receive enhanced service benefits from Northwest such as special service lines, advance flight boarding and upgrades.
25
The Company adopted a deferred revenue method to recognize frequent flyer revenues on the Effective Date. The
Company uses the residual method for recognition of mileage credits. 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 Affangements
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 estimated to be redeemed through flight, upgrades or other means, or when it
becomes remote that the miles will ever be used. Also in conjunction with the adoption of the new accounting policy on the
Effective Date, Northwest began recording a component of the payments received from non-airline marketing partners in
Other operating revenue rather than in Passenger revenue. This component, which is recognized immediately as Other
operating 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. 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 on the Consolidated Balance Sheets.
As a result of applying SFAS No. 141 on the Closing Date, the WorldPerks frequent flyer obligation was revalued 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.
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.
The Company recorded deferred revenue for its frequent flyer program of $2.0 billion as of both December 31, 2008 and
December 31, 2007.
Property, Equipment and Depreciation. We record owned property and equipment at cost and depreciate or amortize
these assets on a straight-line basis to their estimated salvage values over their respective estimated useful lives. Property
and equipment under capital lease, and related obligations for Mure lease payments, are recorded at amounts equal to the
initial present value of those lease payments. 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.
In connection with the closing of the Merger, Northwest adjusted the salvage values on airframes and engines to comply
with Delta's accounting policy. Additionally, we adjusted the net book values of property and equipment to their estimated
fair values and adjusted the estimated useful lives of flight equipment to correspond to those of Delta. Future purchases of
aircraft will be depreciated to estimated salvage values, over lives of 25 to 30 years; buildings and leasehold improvements
will be depreciated up to 40 years; and other property and equipment will be depreciated over lives of three to 25 years.
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, whidl requires the financing
related to certain guaranteed airport construction projects committed to after September 23, 1999, be recorded on the
balance sheet. Airport improvements at Memphis, Knoxville and Seattle totaling $83.4 million were recorded in other
property and equipment, with the corresponding obligations included in long-term obligations under capital leases as of
December 31, 2008. 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 $51 .8 million at
December 31, 2008.
Goodwill and Intangibles. Post-Merger Successor Company goodwill represents the excess of the purchase price over
the fair value of net tangible assets and identifiable intangible assets acquired and liabilities assumed resulting from the
application of SFAS No. 141 on the Closing Date. Pre-Merger Successor Company goodwill represents the excess of the
reorganization value of the Pre-Merger Successor Company over the fair value of tangible assets and liabilities and
identifiable intangible assets assumed resulting from the application of SOP 90-7 on the Effective Date.
26
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 certain SkyT earn alliance relationships 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 one to 18 years, as of December 31 , 2008. Refer to "Note 4 - Goodwill and
Intangibles" for further information about changes to Northwest's intangible asset lives and policies as a result of applying
purchase accounting on the Closing Date.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), we apply a fair value-based
impairment test to the net book value of goodwill and indefinite-lived intangible assets on an annual basis and, if certain
events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. Northwest
performed an interim impairment test in conjunction with the announcement of the Merger between Northwest and Delta on
April 14, 2008 ("the Announcement Date") and recorded impairments on goodwill and certain intangible assets in conjunction
with that interim test. The annual impairment test date for our goodwill and indefinite-lived intangible assets is October 1.
The Company passed Step 1 of the goodwill impairment test. See "Note 4 - Goodwill and Intangibles" for further information
about Northwest's intangibles, goodwill, and impairment testing process.
Changes in assumptions or circumstances could result in an additional impairment in the period in which the change
occurs and in future years. Factors which could cause impairment indude, but are not limited to, (1) high fuel prices, (2)
declining passenger mile yields, (3) lower demand as a result of the weakening U.S. economy, (4) interruption to our
operations due to an employee strike, terrorist attack, or other reasons and (5) consolidation of competitors within the
industry.
Impairment of Long-Uved Assets. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Uved Assets ("SFAS No. 144"), we record impairment losses on long-lived assets used in operations when events and
circumstances indicate the assets may be impaired and the estimated future cash flows generated by those assets are less
than their carrying amounts.
To determine impairments for aircraft used in operations, we group assets at the fleet-type level (the lowest level for
which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity, passenger
yield, fuel costs, labor costs and other relevant factors. If impairment occurs, the impairment loss recognized is the amount
by which the aircraft's carrying amount exceeds its estimated fair value. We estimate aircraft fair values using published
sources, appraisals, and bids received from third parties, as available. 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.
The Company's aircraft were subject to recoverability tests to determine if a loss in fair value measured in the goodwill
Step 2 test would result in an impairment charge. As a result, the Company recorded, as additional Depreciation and
amortization expense, impairment charges of $35.9 million related to the Boeing 747F fleet and related spare engines during
the second quarter of 2008. See "Note 5 - Fair Value Measurements" for further information on these impairment charges.
In March 2008, as part of a revised fleet plan, the Company determined that it would remove three Boeing 7 47F aircraft
and two DC9-30 aircraft from scheduled service during the remainder of 2008 and the first quarter of 2009. As a result, the
Company recorded, as additional Depreciation expense, impairment charges of $17.2 million associated with these aircraft
and related inventory.
In the first quarter of 2007, the Company recorded $13.3 million related to the impairment of three owned aircraft which
were permanently removed from service. These charges reflect the Company's decision to park three DC9-30 aircraft
permanently, consistent with the Company's ongoing review of its aircraft fleet plan in conjunction with its overall route
structure and capacity requirements. The first quarter 2007 impairment charges were recorded as Reorganization expenses.
Flight Equipment Spare Parts. On the Closing Date and 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. We record maintenance costs in aircraft maintenance materials and repairs in our
Consolidated Statements of Operations as they are 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.
27
Advertising. Advertising costs, induded in Selling and marketing expenses, are expensed as incurred and were $12
million for the period from October 30 to December 31 , 2008, $47 million for the period from January 1 to October 29, 2008,
$51 million for the seven months ended December 31 , 2007, $20 million for the five months ended May 31 , 2007 and $63
million for the year ended December 31, 2006.
Stock-Based Compensation. On the Effective Date, the Management Equity Plan ("the 2007 Plan") of the Pre-Merger
Successor Company provided for in the Plan of Reorganization became effective. On the Closing Date, vesting on all
outstanding stock-based awards was accelerated and each share was converted into 1.25 shares of Delta stock and each
option was converted into 1.25 options in Delta stock. In connection with the closing of the Merger, an equity-based program
sponsored by Delta was adopted under the Delta Air Lines, Inc. 2007 Performance Compensation Plan. This Merger Award
Program included grants to employees of Northwest in the form of unrestricted common stock, restricted shares of common
stock, and/or non-qualified stock options that will settle in Delta common shares with an expense allocation to Northwest.
See "Note 12 - Stock-Based Compensation" for additional information.
Effective January 1, 2006, we adopted the fair value provisions of SFAS No. 123 (revised 2004), Share Based
Payments ("SFAS No. 123(R)"). This standard requires companies to measure the cost of employee services in exchange
for an award of equity instruments based on the grant-date fair value of the award. The fair value is estimated using option-
pricing models. The resulting cost is recognized over the period during which an employee is required to provide service in
exchange for the awards (usually the vesting period of the awards). The Company uses straight-line recognition for awards
subject to graded vesting. SFAS No. 123(R) 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.
Income Taxes. In accordance with SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"), we account for
deferred income taxes under the liability method. Under this method, we recognize deferred tax assets and liabilities based
on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as
measured by current enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets when necessary.
Deferred tax assets and liabilities are recorded net as current and noncurrent deferred income taxes on our Consolidated
Balance Sheets. The Company has reclassified its December 31, 2007 beginning balance sheet to adjust its allocation of
net current and noncurrent deferred income taxes. This reclassification conforms the allocation to the methodology used by
Delta.
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 Closing Date and on the Effective Date, the Company accounted for deferred taxes based on the
remeasured values of the Post-Merger Successor Company and the Pre-Merger Successor Company, respectively, and in
accordance with SFAS No. 109. Use of deferred tax assets from the Pre-Merger Successor Company and the Pre-Merger
Predecessor Company that require valuation allowances under SFAS No. 109 are recognized as adjustments to goodwill
followed by other indefinite-lived intangible assets until the net carrying value of these assets is zero. Beginning January 1,
2009, any adjustments to Pre-Merger Successor and Pre-Merger Predecessor tax positions will be made through the income
tax provision pursuant to SFAS No. 141(R).
28
Note 2 - Business Combinations
Under the terms of the Merger Agreement, each outstanding share of Northwest's common stock was converted into
1.25 shares of Delta common stock. Stock options and other equity awards granted under the 2007 Plan converted into
stock options and equity awards with respect to Delta common stock, after giving effect to the exchange ratio. The purchase
price is calculated in accordance with EITF 99-12, Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in Purchase Business Combination ("EITF 99-12"), which outlines that the purchase price be determined
based on the price of the acquirer's common stock for a reasonable period before and after the Announcement Date. Based
on the 5-day average closing price of Delta's common stock around the Announcement Date, the right to receive 1.25 shares
of Delta stock for each share of the Company's common stock, and the number of shares converted into Delta common
stock on the Closing Date, the purchase price was $3.35 billion.
Under purchase accounting, the excess of the purchase price over the fair value of net tangible and identifiable
intangible assets acquired and liabilities assumed was recorded as Goodwill in the accompanying Consolidated Balance
Sheet. Deferred taxes are determined in conformity with SF AS No. 109.
In accordance with SFAS No. 141, the allocation of purchase price is subject to adjustment for up to one year after the
Closing Date when additional information on asset and liability valuations becomes available. Any changes to the initial
estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and
residual amounts will be allocated to Goodwill.
29
The effects of the Merger on the Company's Condensed Consolidated Balance Sheet are as follows:
Pre-Merser Post-Merser
Successor Purchase Successor
October 29, Accounting October 29,
(Unaudited, in millions) 2008 Adjustments 2008 Reference
Assets
Current Assets
Cash and cash equivalents . $ 2,441 $ $ 2,441
Unrestricted short-tenn investments 159 159
Restricted cash, cash equivalents and short-tenn
investments 844 844
Accounts receivable, net 1,146 1,146
Flight equipment spare parts, net 131 131
Maintenance and operating supplies 172 172
Current deferred tax assets 150 150 (a)
Prepaid expenses and other 171 !17! 154
Total current assets 5,064 133 5,197
Property and Equipment
Property and equipment, net 8,667 (115) 8,552 (b)
Other Assets
Goodwill 2,873 1,699 4,572
International routes and other intangibles 3,882 (1 ,180) 2,702 (c)
Investments in affiliated companies 3 3
Other 450 !161! 289 (d)
Total Assets $ 20,939 $ 376 $ 21 ,315
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Air traffic liability/deferred frequent flyer liability $ 2,303 $ $ 2,304
Accounts payable and other liabilities 2,263 104 2,367 (e)
Current maturities of long-term debt and capital
lease obligations 934 ~277l 657 (f)
Total current liabilities 5,500 (172) 5,328
Long-Term Debt and Obligations Under Capital Leases 7,067 (1 ,485) 5,582 (f)
Deferred Credits and Other Liabilities
Long-tenn pension and postretirement benefits 3,640 370 4,010 (g)
Deferred frequent flyer liability 1,422 101 1,523 (h)
Deferred income taxes 913 200 1,113 (i)
Other 185 221 406 (j)
Total deferred credits and other liabilities 6,160 892 7,052
Common Stockholders' Equity (Deficit)
Pre-Merger Successor Company common stock
and additional paid-in capital 7,474 (7,474) (k)
Retained earnings (Accumulated deficit) (5,120) 5,120 (k)
Accumulated other comprehensive income (loss) (142) 142 (k)
Post-Merger Successor Company common stock
and additional paid-in capital 3,353 3,353 (k)
Total common stockholders' equity (deficit) 2,212 1,141 3,353
Total Liabilities and Stockholders' Equity (Deficit) $ 20,939 $ 376 $ 21 ,315
30
Purchase Accounting Adjustments. Purchase accounting adjustments were recorded on the Closing Date to reflect
asset values at their estimated fair values and liabilities at their estimated fair values or the present value of amounts to be
paid, including the following:
(a) $0.2 billion was reclassified as a current deferred tax asset in association with adopting Delta's accounting policy for
presentation of deferred tax assets and liabilities;
(b) The balance of the Company's flight equipment was decreased by $0.1 billion to its estimated fair value;
(c) A reduction of $1.2 billion was recorded to intangible assets in conjunction with the estimated fair value of the
Company's international route authorities, slots and other intangible assets;
( d) The balance of the Company's other assets was reduced by $0.2 billion, primarily related to writing off deferred debt
issuance costs that have no value to the Post-Merger Successor Company;
(e) An increase of $0.1 billion in accounts payable and other liabilities, primarily related to recording severance
expected to be paid to Northwest employees, officers and directors and to an increase in property tax accruals to
conform to Delta's accounting policy;
(f) A reduction of $1 .8 billion was recorded to adjust debt and capital lease obligations to fair value primarily due to a
widening of interest rate spreads in the market;
(g) The pension and other postretirement benefits liability balances were increased by $0.4 billion due to the required
remeasurement on the Closing Date;
(h) The Company's deferred frequent flyer liability balance was increased by $0.1 billion to its estimated fair value;
(i) The Company's deferred tax liability balance was increased by $0.2 billion in conjunction with recording the
estimated fair value of certain indefinite-lived intangible assets;
0) The Company recorded $0.2 billion in additional other deferred credits and other liabilities primarily to record the fair
value of certain above-market aircraft operating leases; and
(k) Entries were recorded to eliminate the Pre-Merger Successor Company's equity balances and establish the
opening equity balances of the Post-Merger Successor Company based on the purchase price associated with the
Merger.
Additionally, goodwill of $4.6 billion was recorded to reflect the excess of the purchase price over the value of net
tangible and identifiable intangible assets acquired and liabilities assumed. 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. Refer to "Note 5 - Fair Value
Measurements" for further information about the valuation methodologies used in estimating the fair values.
Included in the liabilities valued on the Closing Date were severance and related costs of $62 million, all of which will be
paid in cash, and restructuring of facility leases and other charges of $32 million. The following table shows the balances for
these liabilities as of December 31 , 2008, and the activity for the year then ended:
(In millions)
Severance and related costs
Facilities and other
Total
Note 3 - Merger Related Expenses
Balance at
December 31,
2007
$
$
Purchase
Accounting
Adjustments
$ 62
32
$ 94
Payments
$ (15)
$ (15)
Balance at
December 31,
2008
$
$
47
32
79
In connection with the Merger, the Company recorded the following largely non-cash merger related expenses:
Post-Merser Pre-Me!]ler
Successor Successor
Period From Period From
October 30 to January 1 to
December 31, October 29,
(In millions) 2008 2008
Stock compensation (1) s 307
s 165
Other payroll related charges 18 16
Professional fees 2 39
Other 6 4
Merger related expenses $ 333
s 224
(1) Refer to "Note 12 - Stock-Based Compensation" for additional information.
31
Note 4 - Goodwill and Intangibles
Post-Merger Successor Company goodwill represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired and liabilities assumed resulting from the application of SFAS No. 141 on
the Closing Date. Pre-Merger Successor Company goodwill represents the excess of the reorganization value of the Pre-
Merger Successor Company over the fair value of net tangible and identifiable intangible assets acquired and liabilities
assumed resulting from the application of SOP 90-7 and SFAS No. 142. Northwest's goodwill mainly consists of two
components:
A valuation allowance is recorded against our net deferred tax assets, as required by SFAS No. 109. Use of
deferred tax assets from the Pre-Merger Successor Company that require valuation allowances under SFAS No.
109 are recognized as an adjustment to goodwill followed by other indefinite-lived intangible assets until the net
carrying value of these assets is zero, when used by the Pre-Merger Successor Company and Post-Merger
Successor Company. Beginning January 1, 2009, any adjustments to Pre-Merger Successor Company deferred
tax assets will be made through the income tax provision pursuant to SFAS No. 141(R); and
Significant annual revenue and cost synergies from more effective aircraft utilization, a more comprehensive and
diversified route system and cost synergies from reduced overhead and improved operational efficiency.
Identifiable intangible assets consist primarily of international route authorities, trade names, airport slots/airport
operating rights, certain partner contracts and other items. International route authorities and certain airport slots/airport
operating rights are indefinite-lived and, as such, are not amortized. On the Closing Date, our alliances with certain
SkyTeam partners were revalued and recorded as an indefinite-lived intangible asset, consistent with Delta's policy for
similar assets. Prior to the Closing Date, the SkyTeam alliance relationship intangible asset was a definite-lived asset.
Additionally, on the Closing Date, Northwest's trade name was recorded at fair value as a definite-lived intangible asset due
to Delta's intent to convert the Northwest trade name to the Delta trade name over a relatively short timeframe. Prior to the
Closing Date, the trade name was an indefinite-lived intangible asset. Also on the Closing Date, the Company's WorldPerks
affinity card contract was significantly reduced in value, since customers will be converted to the new Delta SkyMiles
program and to the new affinity card for the combined Company. The Company's definite-lived intangible assets are
amortized on a straight-line basis over the remaining estimated lives of the related assets, which span periods of one to 18
years.
On the Closing Date, Northwest's assets and liabilities were adjusted to fair value under the guidance of SFAS No. 141.
These adjustments resulted in recording a new goodwill amount. No adjustments have been recorded to increase or reduce
goodwill since the Closing Date.
The Company determined that the announced Merger on April 14, 2008, was a triggering event under SFAS No. 142,
requiring the Company to further evaluate the carrying value of its goodwill. As a result of this evaluation, the Company
recorded a net goodwill impairment charge of $3.2 billion during the first and second quarters of 2008 to reduce the book
value of Northwest's equity to its implied fair value as of the Announcement Date. Based on the 5-day average closing price
of Delta's common stock around the Announcement Date, the right to receive 1.25 shares of Delta common stock for each
share of NWA Corp. common stock, and the projected number of NWA Corp. 's common shares to be converted into Delta
common stock on the transaction dose date, the implied fair value of NWA Corp. 's equity on the Announcement Date was
$3.35 billion. Additionally, Northwest recorded a net $1 .1 billion of impairment charges in the second quarter in conjunction
with Step 2 of the goodwill impairment analysis related to certain flight equipment, definite-lived and indefinite-lived intangible
assets, investments in affiliated companies, and related deferred taxes. These impairment charges induded $480. 9 million
to write-off the customer relationship intangible asset and $106.7 million to write-down the SkyTeam Alliance intangible asset.
These impairment charges also induded $584. 7 million to write-down the pacific route intangible asset. Refer to "Note 5 -
Fair Value Measurements" for further details about the fair value measurements used in recognizing these impairments and
the details of charges recorded to reduce the balances of these assets.
32
The following table presents information about our intangible assets, including goodwill, at December 31, 2008 and
December 31 , 2007:
Post-Merser Pre-Merger
Successor Successor
December 31, 2008 December 31, 2007
Weighted- Gross Weighted- Gross
Average Carrying Accumulated Average Carrying Accumulated
(In millions) Life in Years Amount Amortization Life in Years Amount Amortization
NWA trade name 1 $ 40 $ (6) Indefinite $ 662 $
WorldPerks marketing
partner relationships 18 20 21 43 (1)
WorldPerks affinity card
contract 1 5 (1) 14 196 (8)
Slots/airport operating rights 1 4 (1) N/A
Visa contract 1 2 3 12 (2)
England airport operating rights N/A 4 16 (2)
NWA customer relationships N/A 8 530 (34)
Pacific routes and Narita slots/
airport operating rights Indefinite 2,140 Indefinite 2,962
Certain SkyTeam alliance
relationships Indefinite 380 29 462 (9)
Slots/airport operating rights Indefinite 110 Indefinite 283
Other intangibles Indefinite 1 Indefinite 2
Goodwill Indefinite 4,572 Indefinite 6,035
$ 7,274 $ (81 $ 11 ,203 $ (56)
Total amortization expense rerognized was approximately $8 million for the period from October 30 to December 31,
2008, $631 million for the period from January 1 to October 29, 2008, $56 million for the period from June 1 to December 31,
2007, $1 million for the period from January 1 to May 31 , 2007, and $2 million for the year ended December 31, 2006. Of
the amortization expense recognized in the period ended October 29, 2008, approximately $588 million was related to SFAS
No. 144 impairment expense for the certain SkyTeam alliance relationships intangible asset and the NWA customer
relationships intangible asset. Accumulated amortization as of December 31 , 2008 in the table above reflects amortization
for the period between the Closing Date and December 31, 2008, as the Pre-Merger Successor Company accumulated
amortization was written off through purchase accounting. Accumulated amortization as of December 31, 2007 in the table
above reflects amortization for the seven months between the Effective Date and December 31, 2007, as the Pre-Merger
Predecessor Company accumulated amortization was written off through fresh-start accounting. We expect to record
amortization expense of approximately $35 million in 2009, $9 million in 2010, and $1 million from 2011 through 2013.
The following table reflects adjustments to the Pre-Merger Successor Company goodwill from the Effective Date to the
Closing Date:
Pre-Meraer Pre-Me!Jler
Successor Successor
Period from Period from
January 1 to June 1 to
October 29, December 31,
(In millions) 2008 2007
Balance as of beginning of period $ 6,035 $ 6,257
Impairment losses (3,243)
Adjustments related to deferred tax assets 74 (224)
Other 7 2
Balance as of end of period $ 2,873 $ 6,035
33
Note 5 - Fair Value Measurements
As described in "Note 1 - Summary of Significant Accounting Policies," we adopted SFAS No. 157 upon emerging from
bankruptcy. SFAS No. 157, among other things, defines fair value, establishes a consistent framework for measuring fair
value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or
nonrecurring basis. SF AS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that market participants would use in pricing
an asset or liability. As a basis for considering such assumptions, SFAS No. 157 establishes a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value as follows: (1) Quoted prices in active markets for identical assets -
Level 1, (2) Significant other observable inputs - Level 2, and (3) Significant unobservable inputs - Level 3. This standard
was applied prospectively to the valuation of assets and liabilities on and after the Effective Date.
The valuation techniques that may be used to measure fair value are described below:
(A) Market approach - Uses prices and other relevant information generated by market transactions involving identical or
comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other
sources;
(B) 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 Mure amounts to a single present amount based on current
market expectations about the future amounts (includes present value techniques, option-pricing models, and 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. Excess earnings method is a variation of the income approach where the value of a
specific asset is isolated from its contributory assets.
Measured on a Recurring Basis. 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.
At the end of the fourth quarter of 2008, Northwest reduced the liability for its interest rate derivative instruments based
on the guidance of SFAS No. 157, which states that the fair value of liabilities should consider the Company's own credit risk
in its determination of fair value. Northwest transferred these liabilities from Level 2 to Level 3 and reduced the liability by
$10.5 million based on credit spreads of Northwest's related debt. This $10.5 million unrealized reduction was recorded in
Accumulated other comprehensive income. These credit spreads were not observable in the market Northwest did not
record a credit related adjustment to other types of derivative contracts, as Northwest posts margin balances with its
counterparty to offset the effects of credit risk or the agreements settle within the next twelve months and a credit risk
adjustment would not be material. Changes in market conditions could result in further adjustments to the fair value of these
investments.
Northwest's fuel hedge option and certain fuel hedge swap derivative contracts are valued under the income approach
using option-pricing models. As of the Closing Date, the Company reevaluated the valuation inputs for these contracts. As a
result, the Company reclassified these contracts from Level 2 to Level 3 within the SFAS No. 157 three-tier fair value
hierarchy.
Based on market conditions in the third quarter, the Company changed the valuation technique for our investment in the
Primary Fund from a market approach to an income approach using a discounted cash flow model. The Primary Fund is a
money market fund that has been frozen and is in the process of being liquidated. In mid-September, the net asset value of
the Primary Fund decreased below $1 per share as a result of the trustees of the Primary Fund valuing at zero the debt
securities issued by Lehman Brothers held by the Primary Fund. Accordingly, Northwest reclassified its balance from cash
equivalents to unrestricted short-term investments and recognized an other than temporary impairment of $3. 75 million as an
unrealized loss reflected in investment income, which was Northwest's pro rata share of the Primary Fund's overall
investment attributable to Lehman Brothers securities. As each investment matures or additional liquidity becomes available
within the fund, the money market fund manager will repay those amounts to each investor on a pro rata basis. As a result of
these events, Northwest adjusted its fair value measurement of the Primary Fund from Level 1 to Level 3 in the third
quarter. During the fourth quarter, Northwest received payments of $197 million related to maturities of the short-term
instruments underlying the investment. The Company's net investment in the Primary Fund was $49.2 million as of
December 31, 2008. Changes in market conditions could result in further adjustments to the fair value of these investments.
34
In the third quarter of 2008, because auction rate securities were not actively traded, Northwest began measuring the
fair value of auction rate securities by discounting the cash flows expected to be received over the remaining maturities of
the underlying securities. The valuations are based on the Company's assessment of observable yields on instruments
bearing comparable risks. This valuation technique considers the credit worthiness of the underlying debt issuer and
insurance protection of the principal and interest.- The par value and fair value of Northwest's auction rate securities
measured using this technique were $40 million in unrestricted short-term investments and $5 million in restricted short-term
investments as of the Closing Date. During the fourth quarter of 2008, Northwest changed its fair value of auction rate
securities from Level 2 to Level 3, due to an increase in the spreads between long-term and short-term interest rates, and
certain other pertinent factors considered in the fair value measurement, which resulted in Northwest recording a $7.4 million
decrease to the value of its auction rate securities. Northwest's auction rate securities are dassified as available for sale
securities under the guidance of SFAS No. 115, and this decrease was recorded through Accumulated other comprehensive
income because the Northwest has the intent and ability to hold these securities until they recover their par value.
Additionally, Northwest redassified the investments from short-term to long-term, as the auction rate securities market is not
presently showing signs of resuming trading activity. The valuation was based on observable yields on instruments bearing
comparable risks. Changes in market conditions could result in Mure adjustments to the fair value of these securities or in a
determination that the decline in value has become other than temporary.
Assets and liabilities itemized below were measured at fair value during the period using the market and income
approaches:
Post-Mergel Pre-Merger
Successor Assets Successor Assets
Quoted Quoted
Prices Prices
in Active Significant in Active Significant
Marttetsfor Other Significant Markets for Other Significant
Asof Identical Observable Unobservable Asof Identical Observable Unobservable
December Assets Inputs Inputs December Assets Inputs Inputs Valuation
(In millions) 31, 2008 (Level 1) (Level 2) (Level 3) 31, 2007 (Level 1) (Level 2) (Level 3) Technique
Cash and cash
equivalents $ 2,068 $ 2,068 NIA NIA $ 2,939 $ 2,939 NIA NIA (A)
Unrestricted short-
lemt investments 49 NIA NIA 49 95 95 NIA NIA (C)
Restricted cash,
cash equivalents,
and short-term
investments 196 196 NIA NIA 725 725 NIA NIA (A),(C)
Long-temt investments 38 NIA NIA 38 NIA NIA NIA NIA (C)
Hedge derivatives asset NIA NIA 60 NIA 60 NIA (A),(C)
Total $ 2,351 $ 2,264 NIA $ 87 $ 3,819 $ 3,759 $ 60 NIA
Post-Merger Pre-Merger
Successor Liabilities Successor Liabilities
Quoted Quoted
Prices Prices
in Active Significant in Active Significant
Mar1<etsfor Other Significant Mancets for Other Significant
Asof Identical Observable Unobservable Asof Identical Observable Unobservable
December Assets Inputs Inputs December Assets Inputs Inputs Valuation
(In milions) 31, 2008 (Level 1) (Level 2) (Level 3) 31, 2007 (Level 1) (Level 2) (Level 3) Technique
Hedge derivatives
liability - current $ 560 NIA $ 74 $ 486 $ 3 NIA $ 3 NIA (A),(C)
Hedge derivatives
liability - long-temt 63 NIA 63 NIA NIA (A),(C)
Total $ 623 NIA $ 74 $ 549 $ 3 NIA $ 3 NIA
35
A reconciliation of the beginning and ending balances of assets and liabilities measured at fair value on a recurring basis
using Level 3 inputs is presented in the table below:
(In millions)
Balance as of October 30. 2008
Realized gains (losses) during the period:
Investment income
Unrealized gain (loss) recorded in AOCI
Purchases, sales, and settlements (net)
Transfers in or (out) of level 3
Balance as of December 31 , 2008
(In millions)
Balance as of October 30, 2008
Credit-related liability reduction
recorded in AOCI
Unrealized loss (gain) recorded in AOCI
Purchases, sales, and settlements (net)
Transfers in or (out) of level 3
Balance as of December 31 , 2008
Post-Merger
Successor
Assets
Levell
Unrestricted
Short-Term
Investments
$ 246
(197)
$ 49
Post-MerS!r
Successor
Liabilities
Level3
Hedge
Derivatives
Liabil!!l
$
(11)
165
(173)
568
$ 549
Level3
Long-Term
Investments
$
(7)
45
$ 38
(In millions )
Balance as of January 1, 2008
Realized gains (losses) during the period:
Investment income
Unrealized gain (loss) recorded in AOCI
Purchases, sales, and settlements (net)
Transfers in or (out) of level 3
Balance as of October 29, 2008
Pre-Merger
Successor
Assets
Levell
Unrestricted
Short-Term
Investments
$
(4)
250
$ 246
The financial statement carrying values and estimated fair values of the Company's financial instruments, including
current maturities, as of December 31 were:
Post-Merger Pre-Merger
Successor Successor
2008 2007
Carrying Fair Carrying Fair
(In millions) Value Value Value Value
Long-term debt $ 5,675 $ 5,195 $ 6,961 $ 6,836
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 market
borrowing rates for similar types of instruments.
The following table provides information as to the amount of gross gains and losses realized through the sale or other
than temporary impairment of available-for-sale investment securities:
Post-Me~r Pre-Merser
Successor Successor Successor Predecessor
Period From Period From Period From Period From
October 30 to January 1 to June 1 to January 1 to Year Ended
December 31, October 29, December 31 , May 31 , December 31 ,
(In millions) 2008 2008 2007 2007 2006
Realized gains (1) $ $ $ 19 $ 5 $
Realized losses ( 1) (4) (35) (6) (1)
Net realized gains (losses) $ $ (4) $ (16) $ (1) $ (1)
(1) Realized gains and losses are identified using the specific identification method.
36
The contractual maturities of available-for-sale securities at December 31, 2008 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 available-for-sale securities
Post-Merger
Successor
Amortized
Cost Fair Value
$ 53 $ 49
45 38
$ 98 $ 87
====
As of December 31, 2008, the Company's available-for-sale securities investments consisted primarily of the Company's
investment in the Primary Fund, classified as short-term investments, and student loan backed auction rate securities, whose
rate reset dates occur monthly and which are classified as other noncurrent assets.
Measured on a Non-Recurring Basis. For assets and liabilities measured on a non-recurring basis during the period,
SFAS No. 157 requires quantitative disclosures about the fair value measurements separately for each major category. The
Company remeasured various assets and liabilities during 2008 as a result of two significant events. First, the Company
remeasured certain assets including flight equipment, goodwill, international routes and other intangible assets at fair value
as a result of impairments that were identified and measured as of March 31, 2008. These impairments were identified in a
Step 2 goodwill impairment test required by SFAS No. 14iwhich included consideration that indicated the carrying value of
the Company's assets exceeded their fair value. These adjustments were recorded as charges to earnings in the Pre-
Merger Successor Company during the second quarter of 2008. Second, the Company also revalued all of its assets and
liabilities as of the Closing Date in accordance with the guidance of SFAS No. 141. These changes in value did not result in
adjustments that were recorded in the Consolidated Statement of Operations, as these revaluations were recorded as
adjustments to Goodwill through the application of purchase accounting. The latter revaluations were recorded as of the
Closing Date.
Impairment Test Measurements. Northwest completed Step 2 of the goodwill impairment test during the second quarter
of 2008. During this process, the Company was required to measure the fair value of its assets and liabilities. VVhere fair
values of assets were below book value, Northwest recorded impairments under the criteria of SFAS No. 142 for certain
indefinite-lived intangible assets and investments in affiliates that failed their respective recoverability tests required by SFAS
No. 144 or APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, as appropriate. The
losses related to impairments of indefinite-lived intangibles were recorded in Other operating expense, impairments of
definite-lived intangibles were recorded in Depreciation and amortization, and impairments on investments in affiliates were
recorded in Other non-operating income (expense) on the Condensed Consolidated Statement of Operations based on the
fair values of the impaired assets.
The Company also recorded a $3.2 billion goodwill impairment charge in 2008 in conjunction with Step 2 of Northwest's
goodwill impairment test. The recorded value of goodwill was impacted by the impairments described above and by
changes in fair values that were not recorded on the balance sheet in accordance with GAAP. The implied value of goodwill
determined during this process was measured using an implied purchase price for the Merger as of the Announcement Date.
This implied purchase price was measured using the guidance in EITF 99-12 and was based on the 5--day average closing
price of Delta's common stock around the Announcement Date, the right to receive 1.25 shares of Delta common stock for
each share of the Company's common stock, and the estimated number of shares that would be converted into Delta
common stock upon the closing of the Merger.
37
The assets itemized below were measured at fair value on a non-recurring basis using information as of March 31,
2008. See "Note 4 - Goodwill and Intangibles" for further information about the impairment testing process. These fair
values were recorded as of March 31, 2008:
(In millions)
International routes and other
intangible assets (1)
Goodwill (1)
Flight equipment, net
Investment in affiliate (2)
Fair Value
Measurement
$ 3,026
2,873
74
Quoted Prices
in Active
Mari<ets for
Identical
Aaaeta
(Level 1)
NIA
NIA
NIA
NIA
Pre-Merger
Successor
Significant
Other
Observable
Inputs
(Level 2)
NIA
NIA
74
NIA
Significant
Unobservable
Inputs
(Level 3)
$ 3,026 $
2,873
N/A
I
Total
Gains
(losses)
(1,185)
(3,243)
(36)
(213)
(41
sn1
Valuation
Technique
(A),(C)
(A},(B),(C)
(A)
(C)
( 1) Pre-Merger Successor Company goodwill represents the excess of the reorganization value over the fair value of the
net tangible and identifiable intangible assets acquired and liabilities assumed resulting from the application of SOP 90-7
on the Effective Date. International routes and other intangible assets are identified by type in "Note 4 - Goodwill and
Intangibles." Northwest's fair value measurements for goodwill, international routes and other intangible assets induded
significant unobservable inputs (Level 3), which generally indude the Company's five-year business plan, 12-months of
historical revenues and expenses by city pair, Company projections of available seat miles, revenue passenger miles,
load factors, and operating costs per available seat mile, and a discount rate.
One of the significant unobservable inputs underlying the intangible fair value measurements performed as of March 31,
2008 was the discount rate. North-west determined the discount rate using the Weighted Average Cost of Capital
("WACC") of the airline industry, which we measured using a Capital Asset Pricing Model ("CAPM"). The CAPM in our
valuation of goodwill and indefinite-lived intangibles utilized a 50% debt and 50% equity structure. The historical
average debt-to-equity structure of the major airlines since 1990 is also approximately 50% debt and 50% equity, which
was similar to Northwest's debt-to-equity structure at emergence. The return on debt was measured using a bid-to-yield
analysis of major airline corporate bonds and the expected market rate of return for equity was measured based on the
risk free rate, the airline industry beta, and risk premiums based on the Federal Reserve Statistical Release H. 15 or
Ibbotson Stocks, Bonds, Bills, and Inflation Valuation Yearbook, Edition 2008. These factors resulted in an 11%
discount rate. This compares to an 11 % discount rate used at emergence and a 10.5% discount rate on our impairment
testing date of October 1, 2007, which were each based on consistent application of the methodology described above.
(2) The valuation of investments in affiliates consisted of Northwest's investment in Midwest. This investment was
measured at fair value based on an income approach, which included significant unobservable inputs (Level 3). The
unobservable inputs generally include cash flow projections and a discount rate developed using a CAPM, which utilized
a similar approach to the discussion of the CAPM above. However, the industry peer set for Midwest considered other
mid-sized airlines similar to Midwest and resulted in a 17.5% discount rate. Due to Northwest's position as a minority
investor, current cash flow projections would result in the majority investor receiving all of the expected excess cash
flows of the entity.
38
Purchase Accounting Measurements. On the Closing Date, Northwest revalued its assets and liabilities in accordance
with the guidance of SFAS No. 141 . As such, many of these assets and liabilities were recorded at fair value on a non-
recurring basis as described in SFAS No. 157. These changes in value did not result in gains or losses, but were instead an
input to the calculation of goodwill. The revaluations were recorded as of the Closing Date:
Post-Mer9er
Successor
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Fair Value Assets Inputs Inputs Valuation
(In millions) Measurement llevel 11 llevel2l llevel 31 Technique
Flight equipment, net $ 7,954 NIA $ 7,954 NIA (A)
Goodwill (1) 4,572 NIA NIA 4,572 (A),(8),(C)
International routes and other
intangible assets (1) 2,702 N/A NIA 2,702 (A),(C)
Property and equipment, net 598 N/A 598 NIA (A),(8)
Operating leases 88 NIA 88 NIA (A)
Computer software (2) 80 NIA NIA 80 (8)
Non-operating equipment 80 NIA 80 NIA (A)
Property leased to others 13 N/A 13 N/A (A)
Deferred debt issue costs (3) NIA NIA (A)
Post-MerS!r
Successor
Debt and capital lease
obligations $ 6,239 NIA $ 6,239 NIA (A),(C)
Frequent flyer liability (4) 2,034 NIA NIA 2,034 (A)
Operating leases 224 NIA 224 NIA (A)
(1) Post-Merger Successor Company goodwill represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired and liabilities assumed resulting from the application of SFAS No.
141 on the Closing Date. International routes and other intangible assets are identified by type in "Note 4-Goodwill
and Intangibles." Northwest's fair value measurements for goodwill, international routes and other intangible assets
included significant unobservable inputs (Level 3), which generally include the Company's five-year business plan, 12-
months of historical revenues and expenses by city pair, Company projections of available seat miles, revenue
passenger miles, load factors, and operating costs per available seat mile, and a discount rate. These factors resulted
in a 13% discount rate on the Closing Date, measured consistent with the CAPM approach described in Note (1) under
the table in the Impairment Test Measurements section above.
(2) Computer software was revalued using the cost approach and adjusted for obsolescence.
(3) Deferred debt issue costs have no market value as they have no ongoing benefit. Therefore, deferred debt issue costs
were written down to zero as part of purchase accounting.
(4) 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 over which the miles will be used.
39
2007 Fresh-Start Reporting Measurements. The Company revalued 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 Pre-Merger Predecessor Company. The following revaluations
were recorded as of the Effective Date:
(In millions)
ASSETS
Flight equipment
Goodwill (1)
International routes and other
intangible assets (1)
Other property and equipment
Non-operating flight equipment and
property leased to others
Flight equipment spare parts and
maintenance and operating supplies
Equity investments
Computer software
Other
Prepaid rents and deferred costs
(In millions)
LIABILITIES
Debt and obligations under capital
leases
Deferred frequent flyer liability (2)
Air traffic liability
Deferred credits and other liabilities
As of June 1,
2007
$ 6,699
6,257
5,166
546
282
248
124
120
147
37
As of June 1,
2007
$ 6,687
1,972
1,857
125
Pre-Me!Jler Successor
Significant
Quoted Prices in Other
Active Markets for Observable
Identical Assets Inputs
(Level 11 (Level 21
$ $ 6,699
946
546
282
248
124
120
147
37
Pre-Me!Jler Successor
Quoted Prices in
Active Markets for
Identical Liabilities
(Level 11
$
Significant
Other
Observable
Inputs
(Level 21
$ 6,687
1,857
125
Significant
Unobservable
Inputs
(Level 3}
$ -
6,257
4,220
Significant
Unobservable
Inputs
(Level 3}
$ -
1,972
Total Gains Valuation
!Losses} Technigue
$ (1,068) (A),(B)
(A),(B),(C)
4,513 (A),(C)
69 (A),(B)
(47) (A),(B)
31 (A),(B)
111 (A),(C)
46 (8)
21 (A)
~56~ (A)
i 3620
Total Gains Valuation
(Losses} Technlgue
$ (22) (A),(C)
(1,559) (C)
(259) (A)
158 (A)
! {1682}
( 1) Pre-Merger Successor Company goodwill represents the excess of the reorganization value over the fair value of the
net tangible and intangible assets acquired and the liabilities assumed. International routes and other intangible assets
are identified by type in "Note 4 - Goodwill and Intangibles." With the exception of the value of Northwest's trade name,
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, 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.
(2) 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.
40
Note 6 - 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 httpJlwww.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 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 7 - Fresh-Start Reporting" for further details.
Claims Resolution Process. Pursuant to terms of the Plan of Reorganization, approximately 225.8 million shares of the
Pre-Merger 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. Pursuant to the terms of the Merger Agreement, each outstanding share of Northwest common stock (including
shares issuable pursuant to Northwest's Plan of Reorganization) was converted into and became exchangeable for 1.25
shares of Delta common stock. Approximately 228.0 million shares of the Pre-Merger Successor Company's common stock
(or 285.1 million Post-Merger shares of Delta common stock) have been issued and distributed through January 2, 2009, in
respect of valid unsecured and guaranty claims. In total, there are approximately 6.4 million remaining shares of the Pre-
Merger Successor Company's new common stock (or 8.0 million Post-Merger shares of Delta common stock) held in reserve
under the terms of the Plan of Reorganization.
The Company estimates that its unsecured claims to be allowed will not exceed $8.2 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 Pre-Merger Predecessor Company will receive,
under the Plan of Reorganization, Delta common stock based on the pro-rata amount of Northwest shares held in reserve.
Secured claims were deemed unimpaired under the Plan and were satisfied upon either reinstatement of the obligations in
the Pre-Merger Successor Company, surrendering the collateral to the secured party, or by making full payment in cash.
41
Note 7 - 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 acquired and liabilities
assumed 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.
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.
To facilitate the calculation of the enterprise value of the Pre-Merger Successor Company, Northwest's financial
advisors assisted management in the preparation of a valuation analysis for the Pre-Merger 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 were 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 vvell as
the realization of certain other assumptions. The equity value of the Pre-Merger Successor 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 Pre-Merger Successor Company was
estimated to be $6.45 billion for purposes of preparing its financial statements. The estimates and assumptions made in this
valuation were inherently subject to significant uncertainties and the resolution of contingencies beyond the reasonable
control of the Company.
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.
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.
42
The effects of the Plan of Reorganization and fresh-start reporting on the Company's Consolidated Balance Sheet are
as follows:
(a) (b) (c) (d)
New Credit Pre-Merger
Pre-Merger Facility New Successor
Predecessor Debt Discharge & Financing Equity Fresh-Start Reorganized
(In millions) May 31, 2007 Reclassification Transactions Issued Adjustments June 1, 2007
ASSETS
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 4n 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,no $ 24,651
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Airtraffic 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
LIABILITIES 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,no $ 24,651
43
(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 Pre-Merger
Successor Company in satisfaction of such claims.
This column also reflects the Pre-Merger Successor Company's reinstatement of $6.4 billion of secured liabilities which
had been classified as liabilities subject to compromise on the Pre-Merger 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 9- 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 Pre-Merger Predecessor Company's equity balances and establish the
opening equity balances of the Pre-Merger Successor Company.
Additionally, goodwill of $6.2 billion was recorded to reflect the excess of the Pre-Merger Successor Company's
reorganization value over the value of net tangible and identifiable intangible assets acquired and liabilities assumed.
44
Note 8 - Reorganization Related Items
In accordance with SOP 90-7, the financial statements for the Pre-Merger Predecessor Company 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:
(In millions)
Discharge of unsecured claims and liabilities (a)
Revaluation of frequent flyer obligations (b)
Revaluation of other assets and liabilities (c)
Employee-related charges ( d)
Abandonment of aircraft and buildings ( d)
Restructured aircraft lease/debt charges (d)
Professional fees
Other (d)
Reorganization items, net
Pre-Merger
Predecessor
Period From
January 1 to Year Ended
May 31 , December 31,
2007 2006
$ 1,763 $
(1 ,559)
2,816
(312) (1,362)
(323) (129)
(74) (1 ,598)
(60) (63)
~1ool ~13l
$ 1,551 $ ~3. 165)
(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 Pre-Merger 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.
(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.
45
Note 9- Long-Term Debt and Short-Tenn Borrowings
Long-term debt as of December 31, 2008 and 2007 consisted of the following (with interest rates as of December 31,
2008):
(In millions)
Airaaft enhanced equipment trust rertificates due through 2022, 6.0% weighted-average rate (1)
Airaaft serured loans due through 2025, 5. 7% weighted-average rate (2)
Bank Credit Facilities due through 2010, 3.3% weighted-average rate (3)
Other secured debt & equipment financing due through 2020, 5. 8% weighted-average rate (4)
Real estate and land notes due through 2031, 3.0% weighted-average rate
Total serured debt
Add net unamortized valuation premium (discount)
Total debt
Less current mab.Jrities
Total Long-term debt
Post-Mer~r
Successor
2008
$ 1,735
4,003
904
551
160
7,353
(1,678)
5,675
382
$ 5,293
Pre-Me!Der
Successor
2007
$ 1,421
3,743
1.214
451
134
6,963
(2)
6,961
446
$ 6,515
(1) At December 31, 2008, direct obligations of Northwest included the $1.7 billion of equipment notes underlying the
pass-through trust certificates issued for 89 aircraft. Interest on the pass-through trust certificates is payable
quarterly or semi-annually.
(2) The Company took delivery of and financed 23 CRJ900 and 27 Embraer 175 aircraft during the twelve months
ended December 31, 2008, resulting in an increase of $886 million in aircraft secured loans. At December 31, 2008,
155 aircraft collateralized $4 billion of secured loans.
On July 15, 2008, the Company closed on a financing of ten 8757-200 aircraft through the issuance of $106 million
of debt. Four of the ten 8757-200 aircraft were delivered to the Company in 1986 and the related debt has a five
year term. The other six aircraft were delivered in 1996 and the related debt has a seven year term.
(3) Bank Credit Facility. On August 21, 2006, Northwest entered into a $1 .225 billion Senior Corporate Credit Facility
("Bank Credit Facility) consisting of a $1 .05 billion term loan facility and a $175 million revolving credit facility which
was fully drawn. Pursuant to the Third Amendment, dated as of September 15, 2008, to the Bank Credit Facility,
the final maturity date of the Bank Credit Facility is the earlier of (i) the date on which Northwest is merged with and
into Delta and (ii) December 31, 2010. The Company made two scheduled $10.5 million principal repayments on
August 21, 2007 and August 21, 2008 as well as a $300 million repayment on the Closing Date required by the
Third Amendment. These repayments have reduced the size of the Bank Credit Facility to a $773 million term loan
facility and a $131 million revolving credit facility. Loans drawn under the revolving credit facility may be borrowed
and repaid at the Company's discretion. Up to $75 million of the revolving credit facility may be utilized by the
Company as a letter of credit facility. Both loan facilities under the Bank Credit Facility bear interest, at North-west's
option, at LIBOR plus 2.00% or an index rate plus 1.0%. Letter of credit fees will be charged at the same LIBOR
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 has a credit rating of BB- from Standard & Poor's Rating Services ("S&P") and 81 from Moody's
Investors Service, Inc. ("Moody's"), is secured by a first lien on the Company's Pacific route authorities and is
guaranteed by NWA Corp. The Bank Credit Facility also allows 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 Company currently secures $114 million of such exposure with these pari-passu liens.
The interest rate as of December 31, 2008 was 3.44% on the term loan facility and 2.59% on the revolving credit
facility based on the different LIBOR interest periods applicable to the term loan facility and the revolving credit
facility. The Bank Credit Facility remained outstanding after the Closing Date.
46
The Bank Credit Facility contains financial covenants that require the Company to maintain (1) unrestricted cash,
cash equivalents and short-term investments of not less than $750 million, (2) a minimum total collateral coverage
ratio (defined as the ratio of (x) the appraised value of the collateral to (y) the sum of the aggregate outstanding
exposure under the Bank Credit Facility, the aggregate termination value of certain hedging agreements and certain
pari-passu obligations) of 150% and (3) a minimum ratio of consolidated EBITDAR to consolidated fixed charges.
Compliance by the Company with this financial covenant has been waived through March 31, 2009 followed by a
phase-in period as set forth below:
Number of
Months Covered
Three
Six
Nine
Twelve
Twelve
Twelve
Period Ending
June 30, 2009 ............. ........................ ...... ... ..... .. .......... ..... . .
September 30, 2009 ..................... ....... .. ....... .. .. ..... .. .......... .. .
December 31, 2009 ..................... ........................ ................ .
March 31 , 2010 ...... ............. ........ ... ..... ...................... ........ .. .
June 30, 2010 .... ........ ....... ................. ............... ...... .......... . .
September 30, 2010 and each quarter ending thereafter .... ........ . .
Required
Coverage Ratio
1.00 to 1.0
1.10 to 1.0
1.20to 1.0
1.30 to 1.0
1.40 to 1.0
1.50to 1.0
For purposes of calculating this ratio, EBITDAR is defined as earnings before interest, taxes, depreciation,
amortization, aircraft rents, and other adjustments to operating income. Fixed charges are defined as interest
expense and aircraft rent expense (without giving effect to any acceleration of rental expense and certain other
items). Additionally, certain aircraft sublease rental income is exduded from EBITDAR and reduces aircraft rental
expense in fixed charges.
$500 Million Revolving Credit Fadlity. In October 2008, Northwest entered into a $500 million revolving credit
facility with three banks C-$500 Million Credit Facility") consisting of a $300 million tranche that matures in October
2009 ("Tranche 1") and a $200 million tranche that matures in October 2011 ("Tranche 2"). Both tranches terminate
on any earlier date that Northwest is no longer a separate legal entity and an operating airline, including a merger
with and into Delta. Borrowings under Tranche 1 bear interest, at Northwest's option, at LIBOR plus 3.5% or an
index rate plus 2.0%. Borrowings under Tranche 2 bear interest, at Northwest's option, at LIBOR plus 4.5% or an
index rate plus 3.0%. Borrowings under both Tranche 1 and Tranche 2 can be prepaid without penalty and
amounts prepaid can be re-borrowed. The $500 Million Credit Facility remained outstanding after the Closing Date.
As of December 31, 2008, there were no outstanding borrowings under the facility.
Northwest's obligations under the $500 Million Credit Facility are guaranteed by NWA Corp. and certain of
Northwest's subsidiaries. The $500 Million Credit Facility and related guarantees are secured by substantially all of
Northwest's and the guarantors' unencumbered assets as of October 29, 2008.
The $500 Million Credit Facility requires ongoing compliance with financial covenants requiring the Company to
maintain (1) unrestricted cash, cash equivalents and short-term investments, together with the undrawn amount of
the $500 Million Credit Facility ("Cash Liquidity"), of not less than $1.25 billion, (2) a minimum collateral coverage
threshold (defined as the appraised value of certain eligible collateral) of not less than $625 million and (3) a
minimum ratio of EBITDAR to consolidated fixed charges that is currently the same as the Bank Credit Facility.
The Bank Credit Facility and the $500 Million Credit Facility each contain events of default customary for financings
of their type, including cross-defaults to other material indebtedness. The credit facilities also indude events of
default specific to the airline business, induding the maintenance of pledged slots and routes. Upon the occurrence
of an event of default, the outstanding obligations under either the Bank Credit Facility or the $500 Million Credit
Facility may be accelerated and become due and payable immediately. Additionally, if at any time Cash Liquidity is
less than $2. 75 billion, the commitment of each lender under the $500 Million Credit Facility is reduced by 50%. On
December 9, 2008, the agreement was amended to reduce the Cash Liquidity requirement to $2.5 billion. This
amendment expired at the close of business on February 9, 2009 and the Cash Liquidity requirement was adjusted
back to $2. 75 billion for the remainder of the agreement.
(4) On July 15, 2008, the Company closed on a financing of 17 spare engines through the issuance of $77 million of
debt. The debt has a seven year term.
On December 16, 2008, the Company renewed its accounts receivable financing facility, dated November 29, 2007.
This facility, originally scheduled to mature on November 28, 2008, was renewed to March 2009 and the facility size
was reduced from $150 million to $125 million. As of December 31 , 2008, the entire $100 million available under
this facility was drawn. V\/hile any portion of the facility remains undrawn, the Company pays a commitment fee on
the undrawn amount.
47
Debt Maturity Table
Maturities of long-term debt for the five years subsequent to December 31 , 2008 are as follows:
(In rrillions) 2009 2010 2011 2012 2013 Thereafter Total
Airaaft enhanced equipment
trust rertificates $ 170 $ 135 $ 293 $ 143 $ 223 $ 771 $ 1,735
A iraaft se rured loans 284 302 306 337 452 2,322 4,003
Bank Credit Facility 10 894 904
Other secured debt and equipment financing 221 55 70 23 25 157 551
Real estate and land notes 36 124 160
Total serured debt 685 1,422 669 503 700 3,374 7,353
Add net unamortized valuation discount (303) (310) (194) (174) (157) (540) (1 ,678)
Total long-term debt $ 382 $ 1,112 $ 475 $ 329 $ 543 $ 2,834 $ 5,675
Under some of the debt instruments induded above, agreements with the lenders require that the Company meet
certain financial covenants, such as unrestricted cash balances and fixed charges coverage ratios. The Company's secured
debt is collateralized by liens on substantially all of the Company's assets, induding, but not limited to, accounts receivable,
certain owned aircraft, certain owned spare engines, spare parts, flight simulators, ground equipment, landing slots,
international routes, equity interests in certain of the Company's domestic subsidiaries, intellectual property and real
property. As of the Closing Date, the Company, as a wholly owned subsidiary of Delta, became a party to the guarantee of
Delta's senior secured debt. The Company was in compliance with the covenants and collateral requirements related to all
of its debt agreements as of December 31, 2008. VVhile 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, 2008 and 2007 there were no short-term borrowings.
Note 10 - 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 , 2008, 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 Ol!!ratin9 Leases
(In millions) Leases Aircraft Non-aircraft
2009 $ 9 $ 378 $ 193
2010 9 390 184
2011 9 337 159
2012 9 300 142
2013 9 261 122
Thereafter 194 1,671 1,318
239 3,337 2,118
Less sublease rental income 29
Total minimum operating lease payments $ 3,337 $ 2,089
Less amounts representing interest 148
Present value offuture minimum capital
lease payments $ 91
Total capital leases $ 91
Less current obligations under capital leases 2
Long-term obligations under capital leases $ 89
48
Rental expense for all operating leases consisted of the following:
Post-Merger Pre-Merger
Successor Successor Predecessor
Period From Period From Period From Period From
October 30 to January 1 to June 1 to January 1 to Year Ended
December 31, October 29, Derember 31 , May 31 , Derember 31,
(In millions) 2008 2008 2007 2007 2006
Gross rental expense $ 122 $ 575 $ 379 $ 291 $ 727
Sublease rental income (23) (1) (117) (1) (86) (1) (72) (1) (338)
Net rental expense $ 99 $ 458 $ 293 $ 219 $ 389
(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 , 2008 the Company leased 126 of the 449 aircraft it operates; all 126 were operating leases. The
above table also includes operating leases for 124 aircraft operated by and subleased to Pinnacle. The base term lease
expiration dates are 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 250 aircraft lease agreements provide the Company with
purchase options during the lease, at the end of the lease, or both.
49
Note 11 - Earnings (Loss) Per Share Data
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
Pre-Mer9er
Successor Predecessor
Period From Period From Period From Twelve Months
January 1 to June 1 to January 1 to Ended
October 29, Decemt;>er 31 , May 31, December 31 ,
(In millions, except per share data) 2008 2007 2007 2006
Numerator:
Net income (loss) applicable to
common stockholders $ (5,462) $ 342 $ 1,751 $ (2,835)
Effed of dilutive securities:
Gain on discharge of convertible debt (82)
Gain on discharge of Series C Preferred Stock (60)
Mjusted net income (loss) for diluted
earnings (loss) per share $ {5,4621 $ 342 $ 1,609 $ (2,835)
Denominator:
Weighted-average shares outstanding for
basic and diluted earnings (loss) per share 263.6 2622 87.4 87.3
Effect of dilutive securities:
Contingently convertible debt 19.1
Restricted stock units and stock options 02
Series C Preferred Stock 6.2
M justed weighted-average shares
outstanding and assumed conversions
for dihled earnings (loss) per share 263.6 262.4 112.7 87.3
Basic earnings (loss) per common share: $ (20.72) $ 1.30 $ 20.03 $ (32.48)
Diluted earnings (loss) per common share: $ i20.721 $ 1.30 $ 14.28 $ (32.48)
On the Closing Date, the Company became a wholly owned subsidiary of Delta and the shares of NWA Corp., which
traded under the symbol "NWA", ceased trading on, and were delisted from, the NYSE. As a result the Company is not
presenting Post-Merger Successor Company earnings (loss) per share data for the period from October 30 to December 31 ,
2008.
Pre-Merger Successor Company EPS. 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 period from January 1 to October 29, 2008 and the period from June 1 to December 31,
2007, respectively. 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 October 29, 2008, approximately 6 million stock options to purchase shares of the Pre-Merger Successor Company's
common stock were outstanding but excluded from the computation of diluted earnings per share because the Company
reported a net loss for the period from January 1 to October 29, 2008.
At December 31, 2007, approximately 16 million restricted stock units and stock options to purchase shares of the Pre-
Merger Successor Company's common stock were outstanding but exduded from the computation of diluted earnings per
share because the effect of including the shares would have been anti-dilutive.
Pre-Merger Predecessor Company EPS. Pre-Merger Predecessor Company 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.
50
For the year ended December 31 , 2006, 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 the period.
Additionally, approximately 6 million shares of Series C Preferred Stock were excluded from the effect of dilutive
securities for the year ended December 31, 2006 because the Company reported a net loss for the period.
Total employee stock options outstanding of approximately 7 million as of December 31 , 2006 were not included in
diluted securities because the Company reported a net loss for the year ended December 31 , 2006.
Note 12- Stock-Based Compensation
On the Effective Date, the 2007 Plan of the Pre-Merger Successor Company provided for in the Plan of Reorganization
became effective. The 2007 Plan was a stock-based incentive compensation plan, under which the Compensation
Committee of the Board of Directors had 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 varied from year to year. At its inception, the 2007 Plan provided that 21 .3 million shares of common stock of the
Pre-Merger Successor Company were available for issuance under the plan. On the Closing Date, the Company became a
wholly-owned subsidiary of Delta. All vesting awards were fully accelerated and converted into 1.25 shares of Delta
common stock or stock options. Vested options of employees terminated within two years of change in control remain
outstanding for three years post termination.
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 vested on or before
May 2008 were 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 was recognized over
this implied service period. For awards containing the disgorgement provision, the tables below exclude the portion of such
awards that vested 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.
Pre-Merger Successor Company. The compensation expense related to stock options and restricted stock units
granted to employees, 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 1 ~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 for awards granted
in 2007 and 2008. Volatility data was not considered for the Company due to its bankruptcy. The expected life of the
options was developed using the simplified method under Staff Accounting Bulletin ("SAB") No. 107, Topic 14, Share-Based
Payments because the Company does not have sufficient historical exercise data.
51
The weighted-average fair value of options granted during the period from January 1 to October 29, 2008 and the period
from June 1 to December 31, 2007 was determined based on the following assumptions:
Risk-free interest rate
Dividend yield
Expected market price volatility
Expected life of options (years)
Pre-Merger
Successor
October 29, 2008 December 31, 2007
3.07% - 3.69%
0.0%
57%-64%
5-6
3.45% - 5.11%
0.0%
53%-56%
6
A summary of the stock option activity for the period from January 1 to October 29, 2008 and the period from June 1 to
December 31, 2007 is as follows:
Pre-Merger
Successor
October 29, 2008 December 31, 2007
Weighted- Weighted-
Weighted- Average Weighted- Average
Average Remaining Average Remaining
Exercise Contractual Exercise Contractual
(Shares in thousands) Shares Price Term Shares Price Term
Outstanding at beginning of period 5,806 $ 21.63 - $
Granted 132 16.92 5,878 21 .64
Exercised
Forfeited or expired !121! 21.86 <nl 22.00
Outstanding at end of period 5,817 21.52 8.68 5,806 21 .63 9.52
Vested or expected to vest at end of period 5,817 21.52 8.68 5,381 21 .65 9.42
Exercisable at end of period ( 1) 5,817 21.52 8.68 28 22.00 0.17
(1) 2007 excludes 1.2 million shares subject to vested options due to the disgorgement provision discussed above and the
requirements of SFAS No. 123R.
The weighted-average grant date fair value of options granted in the period from January 1 to October 29, 2008 and the
period from June 1 to December 31, 2007 was approximately $4.66 and $12.19 per share, respectively. There were no
options exercised during the period from January 1 to October 29, 2008 and the period from June 1 to December 31, 2007.
The aggregate intrinsic value of the outstanding options at October 29, 2008 and December 31, 2007 was $0.1 million and
zero, respectively.
The compensation expense related to stock options continued to be recognized over the service period until the closing
of the Merger, at which time vesting was accelerated and each option was converted to 1.25 Delta option. The Company
recorded in Merger expense a non-cash charge for stock compensation expense of approximately $39.2 million as a result of
the accelerated vesting of outstanding options.
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.
52
A summary of the status of the Company's RSUs for the period from January 1 to October 29, 2008 and the period from
June 1 to December 31 , 2007 is as follows:
(Shares in thoosands)
Unvested ct beginning of pericx:t
G-arted
Vested (1)
Forfeite:J
Unvested ct end of period
Pre~erger
Successor
October 29, 2008 December 31, 2007
Weighted- Weigtted-
Average Average
Grant Date Gra,t Date
Shares Fair Value Sha-es Fair Value
10,137 $ 24.58 - $
231 9.40 10,2~ 24.f.9
(10,2A3) 24.23 (ffi) 25.15
(125) 24.87 (1a5) 25.15
10,137 24.58
(1) 2007 excludes 1.8 million shares subject to vested RSUs due to the disgorgement provision discussed above and the
requirements of SFAS No. 123R.
The compensation expense related to these RSUs continued to be recognized over the remaining employee service
period until the closing of the Merger, at which time vesting was accelerated and each share was converted to 1.25 Delta
share. The Company recorded in Merger expense a non-cash charge for stock compensation of approximately $117. 7
million as a result of the accelerated vesting of outstanding RSUs.
Other Awards. The Company also issued certain awards that are accounted for as a liability because such awards
provide for settlement in cash. During the period from January 1 to October 29, 2008 and the period from June 1 to
December 31, 2007, the Company granted approximately 0.4 million and 0.7 million RSUs to be settled in cash, respectively.
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. The Company also
granted approximately nine thousand and 0.4 million in stock appreciation rights ("SARs") during the period from January 1
to October 29, 2008 and the period from June 1 to December 31, 2007, respectively. 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. The Company paid $8. 7 million and $2.2 million to settle share-based liabilities for the period
from January 1 to October 29, 2008 and the period from June 1 to December 31 , 2007, respectively.
The compensation expense related to these RSUs and SARs continued to be recognized over the remaining employee
service period until the closing of the Merger, at which time vesting was accelerated and each share was converted to 1.25
Delta share. The Company recorded in Merger expense approximately $7.1 million for RSUs and approximately $0.7 million
for SARs as a result of the accelerated vesting of outstanding shares.
The total stock-based non-cash compensation expense related to stock awards was approximately $87. 0 million and
$73.2 million for the periods ended October 29, 2008 and December 31 , 2007, respectively. The total stock-based non-cash
compensation expense related to liability awards was approximately $2.5 million and $2.8 million for the periods ended
October 29, 2008 and December 31, 2007, respectively.
Post-Merger Successor Company. In connection with the closing of the Merger, an equity-based program sponsored by
Delta was adopted under the Delta Air Lines, Inc. 2007 Performance Compensation Plan. This Merger Award Program
included grants to employees of Northwest in the form of unrestricted common stock, restricted shares of common stock,
and/or non-qualified stock options that will settle in Delta common shares with an expense allocation to Northwest. The
Company recorded $307 million related to the unrestricted common stock as those awards vested immediately. The
restricted shares of common stock and the non-qualified stock options vest over three years. The Company recorded $1.8
million and $0.5 million in stock compensation expense for restricted stock and stock options, respectively.
Other. There was no corresponding tax benefit in 2008 or 2007 related to the stock-based compensation, as the
Company records a full valuation allowance against its deferred tax assets due to the uncertainty regarding the ultimate
realization of those assets. See "Note 14 - Income Taxes" for additional information.
53
Note 13 -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
Currency Gain (Loss) Postretirement to Adopt Gain (Loss) Other
Translation on Hedging and Long-Term SFAS on Comprehensive
(In millions) Adjustment Activities Disability Benefits No. 158 Investments Income (Loss)
Prt~~IHQr; Pr1;:~rg1r
Balance at January 1, 2005 $ (11) $ 6 $ (1,557) $ - $ (6) $ (1,568)
Before tax amount (10) 699 (224) 3 468
Tax e~ct
Net-of.tax amount (10) 699 (224) 3 468
Balance at December 31, 2006 (11) (4) (858) (224) (3) (1,100)
Before tax amount 11 4 858 224 3 1,100
Tax Effect
Net-of.tax amount 11 4 858 224 3 1,100
Balance at May 31, 2007
SM~1112r Pm:Mm:mr
Balance at June 1, 2007
Before tax amount (3) (199) (202)
Tax Effect
Net-of.tax amount (3) (199) (202)
Balance at December 31, 2007 (3) (199) (202)
Before tax amount 3 199 202
Tax Effect
Net-of.tax amount 3 199 202
Balance at October 29, 2008
Successorj Post-Merger
Balance at October 30, 2008
Before tax amount (199) (1,433) (7) (1,639)
Tax Effect
Net-of.tax amount (199) (1,433) (7) (1,639)
Balance at December 31, 2008 $ - $ (199) $ (1,433) $ - $ (7) $ (1,639)
54
Note 14 - Income Taxes
Income tax expense (benefit) consisted of the following:
Post-Mer51er Pre-Mer51er
Successor Successor Predecessor
Period From Period From Period From Period From
October 30 to January 1 to June 1 to January 1 to Year Ended
December 31, October 29, December 31, May 31, December 31,
(In millions) 2008 2008 2007 2007 2006
Current:
Federal s (1) s 1 $ $ $
Foreign 4 2 1 8
State 1
(1) 6 2 1 8
Deferred:
Federal (202) 208 (3) (37)
Foreign (1)
State i151 15
i2171 222 {3l {37}
Total income tax expense (benefit) s i1)
s (2111 $ 224 $ {2} $ ~29}
Reconciliations of the statutory rate to the Company's income tax expense (benefit) were as follows:
Post-Mer9er Pre-Mer9er
Successor Successor Predecessor
Period From Period From Period From Period From
October 30 to January 1 to June 1 to January 1 to Year Ended
December 31, October 29, December 31, May 31, December 31,
(In millions) 2008 2008 2007 2007 2006
Statutory rate applied to income (loss)
before income taxes s (189) s (1,985) $ 198 $ 612 $
Add (deduct):
State income tax expense (benefit)
net of federal benefit (9) (35) 10 28
Non-deductible expenses 3 1,224 15 25
Adjustment to valuation allowance and
other income tax accruals 195 582 (665)
Other ~11 3 1 {2l
Total income tax expense (benefit) s (11
s ~211) $ 224 $ {2} $
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, exdusive of indefinite-lived deferred tax liabilities, due to the uncertainty regarding the ultimate
realization of those assets.
55
(1,003)
(45)
23
1,023
{27}
{29}
Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows:
Post-Merser Pre-Merser
Successor Successor
(In millions) 2008 2007
Deferred tax liabilities:
Accounting basis of property and equipment in excess of tax basis $ 1,796 $ 1,710
Accounting basis of indefinite-lived intangible assets in excess of tax basis 963 1,424
Accounting basis of definite-lived intangible assets in excess of tax basis 1 437
Accounting basis of long-term debt in excess of tax basis 627
Other 27 17
Total deferred tax liabilities 3,414 3,588
Deferred tax assets:
Expenses not yet deducted for tax purposes 378 185
Reorganization charges not yet deducted for tax purposes 516 869
Pension and postretirement benefits 2,027 1,395
Deferred revenue 750 718
Net operating loss carryforward 1,946 1,316
Alternative minimum tax credit carryforward 137 137
Other 270 53
Total deferred tax assets 6,024 4,673
Valuation allowance for deferred tax assets (3,573) (2,216)
Net deferred tax assets 2,451 2,457
Net deferred tax liability $ 963 $ 1,131
The following table shows the current and noncurrent deferred tax assets (liabilities), recorded on our Consolidated
Balance Sheets at December 31:
Post-Me!Jler Pre-Me!Jler
Successor Successor
2008 2007
Current deferred tax asset, net $ 131 $ 72
Noncurrent deferred tax liabilities, net {1,094} !1,203}
Total deferred tax liabilities, net $ {963} $ !1,131}
The current and noncurrent components of our deferred tax balances are generally based on the balance sheet
classification of the asset or liability creating the temporary difference. If the deferred tax asset or liability is not based on a
component of our balance sheet, such as our net operating loss ("NOL") carryforwards, the classification is presented based
on the expected reversal date of the temporary difference. Our valuation allowance has been classified as current or
noncurrent based on the percentages of current and noncurrent deferred tax assets to total deferred tax assets.
At December 31 , 2008, 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 $5.3 billion, AMT credits of $137 million, general business tax credits of $5 million and foreign tax a-edits of
$23 million. The deferred tax assets available in the AMT system are: NOL carryforwards of $5.8 billion and foreign tax
credits of $20 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 2008, expiring in 2009 through 2027.
The Company also has the following deferred tax assets available at December 31 , 2008, for use in certain states: NOL
carryforwards with a tax benefit value of approximately $149 million are available for years beyond 2008, expiring in 2009
through 2027, and state job tax credits of $7 million are available for years beyond 2008, expiring in 2009 through 2011 .
Wrth the adoption of fresh-start reporting, a valuation allowance of $2.4 billion was recorded. As a result of purchase
accounting based on the Merger, the valuation allowance was adjusted to $2. 7 billion. Beginning January 1, 2009, pursuant
to SFAS No. 141(R), any reduction in this valuation allowance will be reflected through the income tax provision.
56
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. A second ownership change under Internal
Revenue Code Section 382 occurred in connection with the Merger. The Company does not believe that such change has
any material impact on the Company's a~ility to use its NOL carryforwards and other tax attributes.
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 nor the tax
position will be ultimately sustained. The Company adopted FIN 48 on January 1, 2007. As of December 31 , 2008, the
Company had no unrecognized tax benefits. During the quarter ended December 31, 2008, the Company decreased its
reserve for unrecognized tax benefits by approximately $3 million as a result of a resolution of a state tax controversy. A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(In millions)
Balance at beginning of period
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 end of period
Post-Merger
Successor
Period From
October 30 to
December 31,
2008
$ 3
(3)
$
Pre-Merger
Successor
Period From Period From
January 1 to June 1 to
October 29, December 31,
2008 2007
$ 3 $
$ 3 $
5
2
(2)
(2)
3
Open tax years for federal and state income tax purposes are 2002 and 2004 through 2008.
Predecessor
Period From
January 1 to
$
$
May 31,
2007
5
5
The Company had no accrued interest or penalties at December 31, 2008. If the Company did record accrued interest
or penalties they would be recorded in interest expense and operating expense, respectively. Prior to the Closing Date the
Company recorded interest and penalties in income tax expense. As of the Closing Date the Company has conformed to
Delta's policy of recording interest and penalties in interest expense and operating expense.
Note 15 - Commitments
The Company's firm orders for seven new aircraft to be operated by Northwest consist of scheduled deliveries for two
Airbus A320 aircraft in 2012 and five Airbus A319 aircraft from 2013 through 2014.
Committed expenditures for these aircraft and related equipment. including estimated amounts for contractual price
escalations and predelivery deposits, will be approximately $63.3 million in 2009, $27.1 million in 2010, $20.8 million in 2011,
$112.8 million in 2012, $90.2 million in 2013 and $128.4 million in 2014. 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. Under these
financing commitments, third parties have agreed to finance, on a long-term serured basis, a substantial portion of the
purchase price of the covered aircraft. The Company has excluded from the committed expenditures above its order for 18
787-8 aircraft. The Boeing Company ("Boeing") has informed the Company that Boeing will be unable to meet the
contractual delivery schedule for these aircraft. The Company is in discussions with Boeing regarding this situation.
57
Note 16 - 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. VVhile 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.
War Risk Insurance. Following the events of September 11, 2001, commercial aviation insurers materially curtailed war
risk coverage and increased insurance premiums. Subsequently, the FAA was mandated to offer U.S. airlines war risk
insurance. The coverage was recently extended to March 31, 2009, from its previous expiration of December 31, 2008 and
the Secretary of Transportation has the discretion to extend coverage through May 31, 2009. While the government may
again extend the period that it provides 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. Commercial war
risk insurance in amounts and scope adequate for our operations is not currently available at reasonable prices. 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 higher than the premium
currently charged by the government and the coverage materially more restrictive. Commercial aviation insurers could
further increase insurance premiums and reduce or cancel coverage in the event of a new terrorist attack or other events
adversely affecting the airline industry. Significant increases in insurance premiums could negatively impact our financial
condition and results of operations. If we are unable to obtain adequate war risk insurance, our business could be materially
and adversely affected.
If we were to be involved in an accident, we could be exposed to significant tort liability. Although we carry insurance to
cover damages arising from such accidents, resulting tort liability could be higher than our policy limits which could
negatively impact our financial condition.
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 exdudes 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.
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, 2008, the total outstanding amount of these LOCs was $93.0 million
(excluding an additional $128.8 million of LOCs that were fully secured by the Company's pledge of cash collateral). The
obligations of the Company with respect to this $93.0 million of LOCs, together with certain other obligations of the Company,
are secured by the Company's routes, certain aircraft and cash collateral.
58
Note 17 - 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 medical and dental 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 subsidized medical and non-subsidized 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 Pension Protection Act of 2006 ("2006 Pension Actn) 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 ("ERISAn
). 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
ele~ion 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.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, ("SFAS No. 158"), which amends SFAS No. 87, Employers' Accounting for Pensions ("SFAS No. 87")
and SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS No. 106") to require
recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet.
Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS
No. 87 and SFAS No. 106 that have not yet been recognized through net periodic benefit cost will be recognized in
accumulated other comprehensive income, net of tax effects. The measurement date, the date at which the benefit obligation
and plan assets are measured, is required to be the oompany'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 oompanies 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 2008 calendar year contributions to its frozen defined benefit plans under the provisions of the 2006
Pension Act and the replacement plans were approximately $139 million. Northwest's 2009 calendar year contributions to its
frozen defined benefit plans under the provisions of the 2006 Pension Act and the replacement plans will approximate $134
million.
59
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
(In millions) 2008 2007 2008 2007
Change in benefit oblgations:
Benefit obligations at beginning of year $ 9,170 $ 9,373 $ 760 $ 898
Service cost 19 45 23 23
Interest cost 566 553 46 49
Plan amencments (52) (119)
Actuarial loss and other (427) (299) (161) (27)
Benefits paid {520} (502) {41} (64)
Benefit obligations at end of period 8,807 9,170 575 700
Change in plan assets:
Fair value of plan assets at beginning of year 6,304 6,278 4 5
Actual return on plan assets and other (1,959) 449
Employer contributions 64 79 41 63
Benefits paid (520) (502) (42) (64)
Fair value of plan assets at end of period 3,889 6,304 3 4
Funded status at end of period - net underfunded
s (4,918) $ (2,866) $ (572) $ (756)
The accumulated benefit obligations for all defined benefit pension plans were $8.8 billion and $9.1 billion at December
31, 2008 and 2007, respectively. The Company's pension plans with accumulated benefit obligations in excess of plan
assets as of December 31 were as follows:
(In millions)
Projeced benefit obligations
.Accumulated benefit obligations
Fair value of plan assets
Post-Merger
Successor
2008
$ 8,796
8,769
3,879
Pre-Merger
Successor
2007
$ 9,143
9,123
6,273
Amounts recognized in the statement of financial position as of December 31 consist of:
Pension Benefits Other Benefits
Post-M!!:9 er Pre-Meraer Post-Merger Pre-Me!Jl!r
Successor Successor Successor Successor
(In millions) 2008 2007 2008 2007
hisets
Noncurrent assets $ $ 3 $ $
Total assets $ $ 3 $ $
Liabilities
Current liability $ (28) $ (27) $ (40) $ (43)
Noncurrent liability (4,890) (2,842) (532) (713)
Total liabilities $ (4,918) $ (2,869) $ (572) $ (756)
Accumulaed other comprehensive
loss (income), pre-tax
Net loss (gain) $ 1,356 (1) $ 199 $ 73 $ 8
Prior service cost (credit)
Total other comprehensive income $ 1,356 $ 199 $ 73 $ 8
(1) The Company remeasured the benefit obligation at October 29, 2008 for purchase accounting at a weighted average
discount rate of 7.82%. The December 31, 2008 year-end valuation was measured at a weighted average discount
rate of 6.44% thus driving the majority of the $1 .4 billion in accumulated other compressive loss.
60
Weighte~average assumptions used to determine benefit obligations for pension and other benertts at
December 31:
(In millions)
Discount rate
Rate of futlre compensation increase (1)
(1) Not applicable to frozen plans.
Pension Benefits
Post-Merser Pre-Merser
Successor Successor
2008 2007
6.44% 6.31%
3.50% 3.50%
Other Benefits
Post-MerS!: Pre-Merger
Successor Successor
2000 2007
6.50% 624%
n/a nla
Components of net periodic benertt cost of defined benertt plans and defined contribution plan costs:
Pension Benefits Pension Benefits
Post-Mer&!r Pre-Mer&!r
Successor Successor Predecessor
Period From Period From Period From Period From
October 30 to January 1 to June 1 to January 1 to Year Ended
December 31, October 29, December 31 , May 31, December 31,
(In millions) 2008 2008 2007 2007 2006
Defined benefit plan costs
Service cost $ 1 $ 18 $ 26 $ 19 $ 116
Interest cost 95 470 328 225 533
Expected return on plan assets (57) (467) (337) (207) (484)
Amortization of prior service cost 30
Recognized net actuarial loss
and other events 2 1 18 87
Net periodic benefit cost 41 22 17 55 282
Defined contribution plan costs 19 90 41 23 53
Total benefit cost $ 60 $ 112 $ 58 $ 78 $ 335
Other Benefits Other Benefits
Post-Me!B!r Pre-Mer&!r
Successor Successor Predecessor
Period From Period From Period From Period From
October 30 to January 1 to June 1 to January 1 to YearEnded
December 31, October 29, December 31, May 31, December 31,
(In millions) 2008 2008 2007 2007 2006
Defined benefit plan costs
Service cost $ 2 $ 21 $ 13 $ 10 $ 30
Interest cost 6 40 27 22 59
Expected return on plan assets
Amortization of prior service cost (15) (21)
Recognized net actuarial loss
and other events 16 38
Net periodic benefit cost 8 61 40 33 106
Defined contribution plan costs
Total benefit cost $ 8 $ 61 $ 40 $ 33 $ 106
Related to the freezing of Northwest's defined benefit plans covering domestic employees in 2006, Northwest recorded
net pension curtailment charges of $283 million as a component of reorganization expense.
Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic
benefit cost in 2009:
(In millions)
Net loss (gain)
61
Pension
Benefits
$ 18
Other
Benefits
$ 1
Weighted-average assumptions used to determine net periodic pension and other benertt costs for the periods
ended December 31:
Pension Benefits Other Benefits
Discount rate (1)
Expected long-term return on plan assets
Rate of future compensation increase (2)
Post-Merger Pre-Merger
Successor Successor
2008 2007
7.82%
8.75%
3.50%
6.1 7%
9.00%
3.50%
Post-Merger
Successor
2008
8.00%
5.00%
n/a
(1) The discount rates used for the period from January 2008 through October 2008 for Pension Benefits and Other
Benefits were 6.31% and 6.24%, respectively.
(2) Not applicable to frozen plans.
Pre-Merger
Successor
2007
6.17%
5.00%
n/a
The Company has adopted and implemented an investment policy for the defined benefit pension plans that
incorporates a strategic asset allocation mix designed to best meet the Company's long-term pension obligations. This asset
allocation policy mix is reviewed every 2-3 years and, on a regular basis, actual allocations are rebalanced toward the
prevailing targets. The following table summarizes actual allocations as of December 31 , 2008 and 2007:
Plan Assets
Post-Merser Pre-Merser
Successor Successor
Asset Cat!SO!I Tarset 2008 2007
Domestic stocks 35.0% 36.5% 42.7%
International stocks 25.0% 23.3% 27.1%
Private markets 10.0% 17.0% 9.0%
Long-duration bonds 15.0% 17.6% 15.7%
High yield bonds 5.0% 5.2% 5.1%
Cash 0.0% 0.4% 0.0%
Real estate 10.0% 0.0% 0.4%
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, clear1y 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.
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 9. 75%; 25%
international equities with an expected rate of return of 9.95%; 10% private markets with an expected rate of return of
12.80%; 15% long-duration bonds with an expected rate of return of 6.25%; 5% high yield bonds with an expected rate of
return of 9. 75%; and 10% real estate equities with an expected rate of return of 8.75%.
For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered health care benefits was
assumed for 2009. The rate was assumed to decrease 0.5% per year reaching 5.0% in 2015 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.
62
A one percent change in assumed health care cost trend rates would have the following effects:
(In millions)
Effect on total of service and inerest cost componen1s ( 1)
Effect on accumulated postretirement benefit obligations
One Percentage- One Percentage-
Point Increase Point Decrease
$ ~8 $ (O.n
44.1 (39.0)
(1) Efect on total of service and interest cost components for 1he period November
through December 2008.
The future benefit payments expected to be made by the pension and other postretirement benefit plans are
shown below:
Note 18 - Risk Management
(In millions)
2009
2010
2011
2012
2013
Years 2014-2018
Pension
Benefits
514
512
523
540
560
3,133
Employer
Provided Other
Postretirement
Benefits
$ 44
45
45
44
43
236
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 ("yen"). In 2008, the Company's yen-denominated net cash inflow was approximately 79.3 billion yen ($732
million).
The Company uses forward contracts, collars or put options to hedge a portion of its anticipated yen-denominated sales.
The changes in market value of such instruments have historically been highly effective at offsetting exchange rate
fluctuations in yen-denominated sales. As of December 31, 2008, the Company had hedged approximately 32.1 % of its
anticipated 2009 yen-denominated sales. The 2009 yen hedges consist of forward contracts which hedge approximately
25. 7% of yen-denominated sales at an average rate of 100.1 yen per U.S. dollar and collar options which hedge
approximately 6.4% of yen-denominated sales with a rate range between 99.5 and 103.5 yen per U.S. dollar. As of
December 31, 2008, a pre-tax unrealized loss of approximatelt $22 million was outstanding in Accumulated other
comprehensive income associated with the yen hedge contracts. Hedging gains or losses are recorded in revenue when
transportation is provided. The yen financial instruments utilized to hedge yen-denominated cash flows resulted in a realized
loss of $29.1 million in 2008. As a result of not having any yen hedges in place in 2007, the Company did not realize a gain
or loss.
As of December 31, 2008, the Company had no outstanding hedges for any of its 2009 anticipated Canadian dollar
denominated sales. The Canadian dollar financial instruments utilized to hedge Canadian dollar-denominated cash flows in
2008 resulted in a realized gain of $22. 7 million.
63
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, 2008, the Company had economically hedged the price of approximately 22% of its projected fuel
requirements for 2009, through a combination of oollars, three-way collars and swap agreements. All of the Company's
existing fuel derivative contracts will expire on or before December 31 , 2009.
The crude oil collars, which hedge the price of approximately 9% of the Company's projected fuel requirements for 2009,
provide upside protection beginning, on average, with a crude oil equivalent price of $110.25 per barrel, and payment
obligations beginning, on average, with a crude oil equivalent price of $88.28 per barrel. The three-way crude oil collars,
which hedge the price of approximately 8% of the Company's projected fuel requirements for 2009, provide upside protection
beginning, on average, with a crude oil equivalent price of $132.02 per barrel and capped, on average, at $157.99 per barrel,
and payment obligations beginning, on average, with a crude oil equivalent price of $114.01 per barrel. The three-way
heating oil oollars, which hedge the price of approximately 1 % of the Company's projected fuel requirements for 2009,
provide upside protection beginning, on average, with a heating oil equivalent price of $174.30 per barrel and are capped, on
average, at $205.13 per barrel, and payment obligations beginning, on average, with a heating oil equivalent price of
$143.47 per barrel. The crude oil swaps hedge approximately 1% of the Company's projected 2009 fuel requirements and
provide upside protection at an average crude oil equivalent price of $100.35 per barrel. The 2009 jet fuel swap agreements
hedge approximately 3% of the Company's projected 2009 fuel requirements and provide upside protection at a jet fuel
equivalent price of $160.94 per barrel and are capped, on average, at $199.50 per barrel.
In December 2008, the Company entered into three-way crude oil collar oontracts which oompletely offset existing third
and fourth quarter 2009 three-way crude oil collar contracts. The Company paid $67.4 million for these offsetting oontracts,
effectively settling the existing third and fourth quarter oontracts which had previously hedged approximately 3% of the
Company's projected 2009 fuel requirements.
In accordance with SFAS No. 133, we record the fair value of our fuel hedge contracts on our Consolidated Balance
Sheets. Prior to the Merger, the Company had no fuel derivative oontracts outstanding that were designated for special
hedge accounting treatment under SFAS No. 133, and therefore had no related unrealized gains (losses) in Accumulated
other oomprehensive income. On the Closing Date, certajn existing fuel derivative contracts were designated as cash flow
hedges which qualify for special hedge acoounting treatment. As a result, pre-tax unrealized losses on the designated fuel
hedge contracts totaling approximately $70 million were deferred in Accumulated other comprehensive inoome between the
Closing date and December 31, 2008. Any losses related to these balances will be realized in aircraft fuel expense when
the anticipated aircraft fuel purchases being hedged and the related contracts are settled.
We believe these designated fuel hedge contracts will be highly effective during the remainder of their term in offsetting
changes in cash flow attributable to the hedged risk. We perform both a prospective and retrospective assessment to this
effect at least quarterly, including assessing the possibility of a oounterparty default. If we determine that a derivative is no
longer expected to be highly effective, we discontinue hedge acoounting prospectively and recognize subsequent changes in
fair value of the hedge to other inoome (expense) on our Consolidated Statements of Operations rather than deferring such
amounts in Accumulated other comprehensive income on our Consolidated Balance Sheets.
64
Prior to the Merger and for those fuel derivative contracts that did not qualify or were not designated for special hedge
accounting treatment after the Merger, 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 2008, the Company recognized
$752.0 million of fuel derivative net losses as increases in fuel expense, including $383.5 million of unrealized losses related
to fuel derivative contracts that will settle in 2009. Effective on the Closing Date, the Company discontinued allocating mark-
to-market adjustments to regional carrier expense for fuel consumed by our non-consolidated Airlink partners to conform with
Delta's accounting policies. Prior to the Merger, the Company recognized $48.3 million of fuel derivative net losses as
increases in Regional carrier expenses, including $26.2 million of unrealized losses related to fuel derivative contracts that
will settle in 2009. 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 settled in 2008. Effective June
2007, the Company began allocating mark-to-market adjustments to Regional carrier expenses 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 expenses, induding $1 .7 million of unrealized gains related to
fuel derivative contracts that settled 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.
In accordance with our fuel hedge agreements, counterparties may require us to fund the margin associated with our
loss position on these contracts. The amount of the margin, if any, is periodically adjusted based on the fair value of the
underlying fuel hedge contracts. We do not offset margin amounts funded to counterparties against the fair value of the
obligations recorded for our fuel hedge contracts.
The cash margin we provide to counterparties is recorded in Hedge margin receivable or Restricted cash, as
appropriate, on our Consolidated Balance Sheets. All cash flows associated with purchasing and selling fuel hedge
contracts are classified as operating cash flows on our Consolidated Statements of Cash Flows. As of December 31 , 2008,
payments classified as Hedge margin receivable on the Consolidated Balance Sheet totaled $526 million.
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; these interest rate cap hedges had a total cumulative
notional amount of $371 million as of December 31, 2008. During February 2008, the Company entered into individual
interest rate swap hedges related to two floating rate debt instruments. Additionally, during October 2008, the Company
entered into ten interest rate swap hedges related to ten floating debt instruments. The interest rate swap hedges had a
total cumulative notional amount as of December 31, 2008 of $1 .4 billion. The objective of the interest rate cap and swap
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 and swap hedges corresponds exactly with
the maturity dates of the designated debt instruments. As of December 31 , 2008, the Company has recorded approximately
$95 million of unrealized pre-tax losses in Accumulated other comprehensive income associated with these hedges.
Note 19 - Related Party Transactions
Delta Air Unes, Inc. On October 29, 2008, the Company completed its Merger. Subsequent to the Merger, the
Company entered into a $300 million intercompany credit facility with Delta ("Delta Credit Facility"). The Delta Credit Facility
currently matures on December 21 , 2009 and bears interest at the rate of 1. 78% per annum. Interest on unpaid principal is
paid quarterly. As of December 31 , 2008, the Company had receivables of $42.5 million from Delta and payables of $227.3
million to Delta for a net payable position of $184.8 million. Included in the $227.3 million of payables to Delta was $200
million which was drawn on the Delta Credit Facility and dassified in Due to parent company on the Consolidated Balance
Sheets as of December 31, 2008. The Company drew the remaining $100 million available under the Delta Credit Facility on
February 3, 2009. On February 4, 2009, the Company amended the size of the Delta Credit Facility from $300 million to
$750 million and drew an additional $200 million made available by the amendment. The following is a summary of the
changes in the net payable position with Delta for the period from October 30 to December 31, 2008:
(In millions)
Balance at beginning of period
Net cash remitted to (received from) parent
Net intercompany (purchases) sales
Balance at end of period
Post-Merger
Successor
Period From
October 30 to
December 31,
$
$
65
2008
(227.3)
42.5
(184.8)
Pinnacle. On November 29, 2007, the Company entered into a stock redemption agreement with Pinnade, 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 c:ommon 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 longer holds
any equity interests in Pinnacle as a result of the c:ommon and preferred stock sales.
Northwest and Pinnacle have entered into an airline services agreement, under which Northwest determines Pinnade's
commuter aircraft scheduling. The agreement is structured as a capacity purchase agreement whereby Northwest pays
Pinnade to operate the flights on Northwest's behalf and Northwest is entitled to all revenues associated with those flights.
Under this agreement, Northwest paid $490 million, $533 million, and $596 million for the years ended December 31 , 2008,
2007 and 2006, respectively. The Company had payables of $20 million and $22 million to Pinnacle as of December 31 ,
2008 and 2007, respectively. As of December 31, 2008, the Company has leased 124 CRJ200 aircraft, which are in tum
subleased to Pinnade. 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 the Amended Pinnade ASA between the Company and Pinnade on January 11, 2007.
Aeronautical Radio, Inc. On October 25, 2007 the Company, together with certain other major airlines sold Aeronautical
Radio, Inc. ("ARINC") to Radio Acquisition Corp., an affiliate of The Carlyle Group. For its 15.75% equity interest in ARINC,
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 dassified
into the Pacific or Atlantic regions, as appropriate. The following table shows the operating revenues for each region:
Post-Me!]ler Pre-Me!ller
Successor Successor Predecessor
Period From Period From Period From Period From
October 30 to January 1 to June 1 to January 1 to Year Ended
December 31, October 29, December 31 , May 31, December 31 ,
(In millions) 2008 2008 2007 2007 2006
Domestic $ 1,326 $ 7,466 $ 4,925 $ 3,347 $ 8,561
Pacific, principally Japan 449 2,420 1,683 1,063 2,711
Atlantic 247 1
1
664 996 514 1,296
Total operating revenues I 2.022 I 11
1
sso $ 7.604 $ 4.924 $ 12.568
The Company's tangible assets c:onsist primarily of flight equipment, which are utilized across geographic markets and
therefore have not been allocated.
66
Note 21 - Quarterly Financial Data (Unaudited)
Unaudited quarterly results of operations are summarized below:
(In millions, except per share amounts)
2008:
Operating revenues
Operating income (loss)
Net income (loss)
Basic and diluted earnings (loss)
per common share
2007:
Operating revenues
Operating income (loss)
Net income (loss)
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
2006:
Operating revenues
Operating income (loss)
Net income (loss)
Basic and diluted earnings (loss)
per common share
Pre-Merger Post-Merger
Successor Successor
Period From Period From
October 1 to October 30 to
1st Quarter 2nd Quarter 3rd Quarter October 29 December 31
$
$
$
3,127 $
(4,053)
(4,139) $
(15.78) $
3,576 $
(300)
(3n)
s
(1.43) $
3,798 $
(216)
(317) $
1,049 $ 2,022
(586) (405)
(629) =$==(=5=39=)
(1.20) =$====(=2.=37=)
Pre-Merger
Predecessor Successor
Period From Period From
April 1 to June 1 to
1st Quarter Mal31 June 30 3rd Quarter 4th Quarter
$ 2,873 $ 2,051 $ 1,130 $ 3,378 $ 3,096
201 162 195 459 87
$ (292) $ 2,043 $ 106 $ 244 $ (8)
$ (3.34) $ 23.37 $ 0.41 $ 0.93 $ (0.03)
$ (3.34) $ 16.87 $ 0.41 $ 0.93 $ (0.03)
Pre-Merger
Predecessor
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
$ 2,890 $ 3,291 $ 3,407 $ 2,980
(15) 295 366 94
$ (1,104) $ (285) $ (1 ,179) $ (267)
$ (12.65) $ (3.27) $ (13.50) $ (3.06)
67
Unaudited quarterly net income (loss) in the table above includes the following unusual items:
(In millions)
2008:
Goodwill and other indefinite-lived
intangibles impairment
Merger related expenses
1st Quarter
$ (3,917)
$ (3,917)
Impact on net income (loss) from unusual items ===========
Pre-Merser
Successor
Period From
October 1 to
2nd Quarter 3rd Quarter October 29
$ 76 $ $
!224!
$ 76 $ $ (224)
Pre-Merger
Predecessor Successor
Period From Period From
April 1 to June 1 to
1st Quarter May31 June 30 3rd Quarter
2007:
Gain (loss) on sale of assets $ $ $ $
Reorganization items (393) 1,944
Impact on net income (loss) from unusual items $ (393) $ 1,944 $ $
Pre-Merger
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)
=======
Note 22 - Subsequent Events (Unaudited)
Post-Merser
Successor
Period From
October 30 to
December 31
$
p33!
$ (333)
4th Quarter
$ (14)
$ (14)
In December 2008, we announced two additional voluntary workforce reduction programs for U.S. non-pilot employees
to align staffing with planned capacity reductions. Approximately 18,000 employees were eligible for these programs by
notifying us of their decision to participate in the period which began in January 2009 and ended in February 2009 (the
"Election Period"). We did not record any charge for these programs at December 31, 2008, because we could not
reasonably estimate on that date who would elect to participate in the programs. During the Election Period, approximately
1,500 employees decided to participate. Accordingly, we expect to record $30 million to $40 million in restructuring charges
during the March 2009 quarter for these programs.
68
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 , 2008, management performed an
evaluation under the supervision and with the participation of the Company's President and Chief Executive Officer and 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 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 Vice President and Chief Financial Officer of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2008. 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 , 2008 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 70.
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.
69
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Northwest Airlines Corporation
We have audited Northwest Airlines Corporation's internal control over financial reporting as of December 31, 2008, 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 the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, 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 indudes 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, 2008, 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, 2008 (Post-merger Successor) and
as of December 31, 2007 (Pre-merger Successor}, and the related consolidated statements of operations, common
stockholders' equity (deficit), and cash flows for the period from October 30, 2008 to December 31, 2008 (Post-merger
Successor), the period from January 1, 2008 to October 29, 2008 (Pre-merger Successor), the seven months ended
December 31, 2007 (Pre-merger Successor), the 5 months ended May 31, 2007 (Pre-merger Predecessor), and for the year
ended December 31, 2006 (Pre-merger Predecessor). Our report dated March 2, 2009 expressed an unqualified opinion.
Minneapolis, Minnesota
March 2, 2009
70
Item 98. OTHER INFORMATION
None.
PART Ill
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORA TE GOVERNANCE
Omitted under the reduced disclosure format permitted by General Instruction I(2)(c) of Form 10-K.
Item 11. EXECUTIVE COMPENSATION
Omitted under the reduced disclosure format permitted by General Instruction I(2)(c) of Form 10-K.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Omitted under the reduced disclosure format permitted by General Instruction I(2)(c) of Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Omitted under the reduced disclosure format permitted by General Instruction I(2)(c) of Form 10-K.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit fees
The aggregate fees billed to the Company by Ernst & Young for services rendered during 2008 and 2007 were as
follows:
Audit Fees. Fees for audit services totaled approximately $3,954,000 in 2008 and approximately $4,704,000 in 2007,
including fees associated with the annual audit of the financial statements, audit of internal controls over financial reporting,
the reviews of the Company's quarterly reports on Form 10-Q, services in connection with regulatory filings, accounting
consultations, and other audits required by regulation or contract.
Audit-Related Fees. Fees for audit-related services totaled approximately $338,000 in 2008 and approximately
$243,000 in 2007. Audit-related services principally include audits of the Company's employee benefit plans and due
diligence procedures on potential mergers.
Tax Fees. Fees for tax services, including tax compliance, tax advice and tax planning including expatriate tax services,
totaled approximately $367,000 in 2008 and approximately $236,000 in 2007.
All Other Fees. Fees for all other services totaled $2,000 in 2008 and $1,500 in 2007 for a subscription to online
technical resources.
71
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, 2008 and December 31, 2007
Consolidated Statements of Operations-For the period from October 30 to December
31, 2008, the period from January 1 to October 29, 2008, the period from June 1 to
December 31, 2007, the period from January 1 to May 31 , 2007, and for the year
ended December 31, 2006
Consolidated Statements of Cash Flows-For the period from October 30 to December
31, 2008, the period from January 1 to October 29, 2008, the period from June 1 to
December 31, 2007, the period from January 1 to May 31 , 2007, and for the year
ended December 31, 2006
Consolidated Statements of Common Stockholders' Equity (Deficit)-For the period
from October 30 to December 31, 2008, the period from January 1 to October 29,
2008, the period from June 1 to December 31, 2007, the period from January 1 to
May 31, 2007, and for the year ended December 31, 2006
Notes to Consolidated Financial Statements
17-18
19
20
21-22
23
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 period from
October 30 to December 31, 2008, the period from January 1 to October 29, 2008,
the period from June 1 to December 31, 2007, the period from January 1 to May 31 ,
2007, and for the year ended December 31, 2006 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 Air1ines Corporation (filed as Exhibit 3.2 to NWA Corp. 's Current
Report on Form 8-K filed on October 31, 2008 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 Airtines, 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 The registrant hereby agrees to furnish to the Commission, upon request, copies of certain instruments
defining the rights of holders of long-term debt of the kind described in Item 601 (b) (4) of Regulation S-K.
10.1 Airport Use and Lease Agreement dated as of June 1, 2005 between Wayne County Airport Authority and
Northwest Airtines, 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).
72 -
10.2 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).
10.3 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.
(filed as Exhibit 10.5 to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31 , 2007 and
incorporated herein by reference).
10.4 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. (filed as Exhibit 10.6 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31 , 2007 and incorporated herein by reference).
10.5 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. (filed as Exhibit 10. 7 to tiNilA Corp. 's Annual Report on Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference).
10.6 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. 7 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 tiNiJA 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).
10.8 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).
10.9 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 tiNilA 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).
10.10 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).
10.11 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).
10.12 A330 Financing Letter Agreement dated as of January 24, 2006 between Northwest Airlines, Inc. and AVSA
S.AR.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).
10.13 Form of Credit Agreement to be entered into pursuant to Exhibit 10.16 by Northwest Air1ines, Inc. and Airbus
Financial Services (filed as Exhibit 10.4 to NWA Corp.'s Quarter1y 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).
10.14 Purchase Agreement No. 2924 dated May 5, 2005 between The Boeing Company and Northwest Air1ines, Inc.
(filed as Exhibit 10.1 to tiNilA 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).
73
10.15 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).
10.16 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 Airtines Corporation, Northwest Airlines
Holdings Corporation, t-NvA 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).
10.17 Second Amendment dated as of April 30, 2008 to the Super Priority Debtor in Possession and Exit Credit and
Guarantee Agreement dated as of August 21 , 2006 among Northwest Airtines Corporation, 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 June 30, 2008 and incorporated herein by reference).
10.18 Third Amendment dated as of September 15, 2008 to the Super Priority Debtor in Possession and Exit Credit
and Guarantee Agreement dated as of August 21, 2006 among Northwest Airlines Corporation, Northwest
Airtines, Inc. and various lenders and agents (filed as Exhibit 99.1 to NWA Corp. 's Current Report on Form 8-K
filed on September 17, 2008 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 Credit Agreement dated as of October 29, 2008 among Northwest Airlines, Inc., Northwest Airlines Corporation,
certain subsidiaries of Northwest Airlines, Inc., various lenders and U.S. Bank National Association, as
Administrative Agent.
10.22 First Amendment dated as of December 9, 2008 to the Credit Agreement dated as of October 29, 2008 among
Northwest Airlines, Inc., Northwest Airlines Corporation, certain subsidiaries of Northwest Airlines, Inc., various
lenders and U.S. Bank National Association, as Administrative Agent.
*10.23 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).
*10.24 First Amendment of Northwest Airlines Excess Pension Plan for Salaried Employees (2001 Restatement) (filed
as Exhibit 10.3 to NWA Corp. 's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and
incorporated herein by reference).
*10.25 Third Amendment of Northwest Airlines Excess Pension Plan for Salaried Employees (2001 Restatement)
(filed as Exhibit 10. 1 to NWA Corp. 's Quarterly Report on Form 10-Q for the quarter ended March 31 , 2008 and
incorporated herein by reference).
*10.26 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).
*10.27 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).
*10.28 Amendment No. 2 to the Northwest Airlines Corporation 2007 Stock Incentive Plan (filed as Exhibit 10.5 to
NWA Corp. 's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and incorporated herein by
reference).
74
*10.29 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).
*10.30 Amendment No. 1 to Form of Award Agreement for Non-Qualified Stock Options Granted to Employees under
the Northwest Airlines Corporation 2007 Stock Incentive Plan (filed as Exhibit 10. 7 to NWA Corp. 's Quarterly
Report on Form 10-Q for the quarter ended Marcil 31 , 2008 and incorporated herein by reference).
12. 1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Requirements.
24.1 Powers of Attorney (induded 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.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 2, 2009
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 Edward H. Bastian, Terry W. Mackenthun 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 2nd day
of March 2009 by the following persons on behalf of the registrant and in the capacities indicated.
Isl EDWARD H. BA.STIAN
Edward H. Bastian
President and Chief Operating
Officer (principal executive officer)
and Director
Isl TERRYW. MACKENTHUN
Terry W. Mackenthun
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 RICHARD B. HIRST
Richard B. Hirst
Director
/s/ PAUL A. JACOBSON
Paul A. Jacobson
Director
76
NORTHWEST AIRLINES CORPORATION
SCHEDULE II -VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
(In millions)
Col.A Col.B Col.C Col.D
Additions
Charged to
Balance at Charged to Other
Beginning Costs and Accounts Deductions
Description of Period Expenses - Describe
Period from October 30, 2008 to December 31, 2008 - Post-Merger Successor Company
Allowances deducted from asset accounts:
Allowance for doubtful accounts $ 6 $ 1 $
Accumulated allowance for depreciation
of flight equipment spare parts 3
Period from January 1, 2008 to October 29, 2008 - Pre-Merger Successor Company
Allowances deducted from asset accounts:
Allowance for doubtful accounts $ 4 $ 6
Accumulated allowance for depreciation
of flight equipment spare parts 10 16
Period from June 1, 2007 to December 31, 2007 - Pre-Merger Successor Company
Allowances deducted from asset accounts:
Allowance for doubtful accounts $ 6 $ 5
Accumulated allowance for depreciation
of flight equipment spare parts 10
Period from January 1, 2007 to May 31, 2007 - Pre-Merger Predecessor Company
Allowances deducted from asset accounts:
Allowance for doubtful accounts $ 14
Accumulated allowance for depreciation
of flight equipment spare parts 255
Year Ended December 31, 2006 - Pre-Merger 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
$ 12
243
$ 3
2
$ 6
11
$
$
$
$
3
4
- Describe
$ 1
$ 4
26
$ 7
(2)
$ 11
(2) 260
$ 4
(2) 3
(3) Adjustments as required for the adoption of fresh-start reporting on June 1, 2007, dispositions and write-offs
(1)
(1)
(4)
(1)
(3)
(1)
(3)
(1)
(3)
(4) Adjustments as required for the application of purchase accounting on October 29, 2008, dispositions and write-offs
S-1
Col.E
Balance at
End
of Period
$ 6
3
$ 6
$ 4
10
$ 6
$ 14
255
Exhibit 12.1
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Post-Me!]ler Pre-Me!]ler
Successor Successor Predecessor
Period from Period from Period from Period from
October 30 to January 1 to June 1 to January 1 to
December 31, October 29, December 31, May 31, Year ended December 31
2008 2008 2007 2007 2006
Earnings:
Income (loss) before income taxes and
cumulative effect of accounting change $ (540) $ (5,673) $ 566 $ 1,749 $ (2,864)
Less:
Income (loss) from less than 50%
owned investees 2
Capitalized interest 9 9 6 10
Add:
Fixed charges, from below 173 574 408 322 745
Amortization of interest capitalized 3 8
Adjusted earnings $ (368) $ (5,108) $ 963 $ 2,068 $ (2,122)
Fixed charges:
Rent expense representative of interest (1) $ 41 $ 191 $ 126 $ 97 $ 180
Interest expensed and capitalized, issuance
costs, amortization of debt discounts
and premiums and interest of preferred
security holder (2) 132 383 282 225 565
Fixed charges $ 173 $ 574 $ 408 $ 322 $ 745
Ratio of earnings to fixed charges (3) (3) 2.36 6.42 . (3)
(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 $541 million for the period from October 30, 2008 through December 31, 2008,
$5.68 billion for the period from January 1, 2008 through October 29, 2008, and $2.87 billion, $2.45 billion, and $869 million for the
years ended December 31, 2006, 2005, and 2004.
2005 2004
$ (2,457) $ (861)
{14) 8
10 8
865 791
8 8
$ (1 ,580) $ (78)
$ 255 $ 248
610 543
$ 865 $ 791
. (3) . (3)
Exhibit 12.2
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK REQUIREMENTS
(Dollars in millions)
Post-Me!Jler Pre-Me!Jler
Successor Successor Predecessor
Period from Period from Period from Period from
October 30 to January 1 to June 1 to January 1 to
December 31 , October 29, December 31 . May 31 , Year ended December 31
2008 2008 2007 2007 2006
Earnings:
Income (loss) before income taxes and
cumulative effect of accounting change $ (540) $ (5,673) $ 566 $ 1,749 $ (2,864)
Less:
Income (loss) from less than 50%
owned investees 2
Capitalized interest 9 9 6 10
Add:
Fixed charges, from below 173 574 408 322 745
Amortization of interest capitalized 3 8
Adjusted earnings $ (368) $ (5,108) $ 963 $ 2,068 $ {2,122)
Fixed charges:
Rent expense representative of interest (1) $ 41 $ 191 $ 126 $ 97 $
Interest expensed and capitalized, issuance
costs, amortization of debt discounts
and premiums and interest
of preferred security holder (2) 132 383 282 225
Preferred stock requirements
Fixed charges and preferred
stock requirements $ 173 $ 574 $ 408 $ 322 $
Ratio of earnings to fixed charges
and preferred stock requirements - (3) - (3) 2.36 6.42
. (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 $541 million for the period from October 30, 2008 through December 31, 2008,
$5.68 billion for the period from January 1, 2008 through October 29, 2008, and $2.87 billion, $2.45 billion, and $869 million for the
years ended December 31, 2006, 2005, and 2004.
180
565
745
- (3)
2005 2004
$ (2,457) $ (861)
(14) 8
10 8
887 820
8 8
$ ~1 ,558) $ ~49)
$ 255 $ 248
610 543
22 29
$ 887 $ 820
- (3) - (3)
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Edward H. Bastian, 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 officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 2, 2009
Isl EDWARD H. BASTIAN
Edward H. Bastian
President and Chief Operating Officer
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Terry W. Mackenthun, 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 induded 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 disdosure 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 disdosure controls and procedures, or caused such disdosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, induding 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 officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 2, 2009
/s/ TERRY W. MACKENTHUN
Terry W. Mackenthun
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, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I,
Edward H. Bastian, President and Chief Operating 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 fair1y presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 2, 2009
Isl EDWARD H. BASTIAN
Edward H. Bastian
President and Chief Operating Officer
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to
the extent that the Company specifically incorporates it by reference.
EXHIBIT 32.2
Certification by the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Northwest Airlines Corporation (the "Company") on Form 10-K for the period ending
December 31 , 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Terry W.
Mackenthun, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted
pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 2, 2009
/s/ TERRY W. MACKENTHUN
Terry W. Mackenthun
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.