NWA Northwest Airline

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

Commission File Number: 1-15285

NORTHWEST AIRLINES CORPORATION

(Exact name of registrant as specified in its charter)

(612) 726-2111

(Registrant’s telephone number, including area code)

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

Note: The registrant is no longer subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 and is now a voluntary filer.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o      No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 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  x      No o

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 April 20, 2009, there were 1,000 shares of the registrant’s Common Stock outstanding.

The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format permitted by General Instruction H(2).

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NORTHWEST AIRLINES CORPORATION

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PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements.

NORTHWEST AIRLINES CORPORATION

See accompanying notes.

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NORTHWEST AIRLINES CORPORATION

See accompanying notes.

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NORTHWEST AIRLINES CORPORATION

See accompanying notes.

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NORTHWEST AIRLINES CORPORATION

Note 1 – Basis of Presentation

The condensed consolidated financial statements of Northwest Airlines Corporation (“NWA Corp.”), the direct parent corporation of Northwest Airlines, Inc. (“Northwest”), include the accounts of NWA Corp. and all consolidated subsidiaries (collectively, the “Company”).  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 (the “Announcement Date”), 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.

Unless otherwise indicated, the terms “we,” “us,” and “our” refer to NWA Corp. and all consolidated subsidiaries.  The condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes included in the Company’s audited consolidated financial statements, which are provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”).

Northwest’s operations account for approximately 99% of the Company’s consolidated operating revenues and expenses.  Northwest is a major air carrier engaged principally in the commercial transportation of passengers and cargo.  Northwest’s global airline network includes domestic hubs at Detroit, Minneapolis/St. Paul and Memphis, an extensive Pacific route system with a hub in Tokyo, a transatlantic joint venture with KLM 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, Alitalia, Aeromexico, China Southern, CSA Czech Airlines and Korean Air, exclusive marketing agreements with three domestic regional carriers, Pinnacle Airlines, Inc. (“Pinnacle”), Mesaba Aviation, Inc. (“Mesaba”), a wholly-owned subsidiary, and Compass Airlines, Inc. (“Compass”), a wholly-owned subsidiary, which currently operate as Delta Connection carriers and a cargo business that includes a dedicated fleet of freighter aircraft that operate through hubs in Anchorage and Tokyo.

Continental has provided written notice to the Company and Delta of its decision to terminate the three-way alliance agreement with the Company and Delta effective July 30, 2009.  Codesharing and certain other aspects of the relationship will continue until October 24, 2009, which is also the date of Continental’s planned exit from SkyTeam.

The Company has decided to discontinue its dedicated freighter fleet and remove the remaining Boeing 747F aircraft from service by December 31, 2009.  The Company performed an impairment test in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), and determined that no material impairment currently exists related to these aircraft.

The Company maintains a Web site at http://www.nwa.com .  Information contained on the Company’s Web site is not incorporated into this quarterly report on Form 10-Q.  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 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.

In the opinion of management, the interim financial statements reflect adjustments, consisting of normal recurring accruals, unless otherwise noted, which are necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated.

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The Company’s results of operations for interim periods are not necessarily indicative of the results for an entire year due to seasonal factors as well as competitive and general economic conditions.  The Company’s second and third quarter operating results have historically been more favorable due to increased leisure travel on domestic and international routes during the spring and summer months.

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation.

Bankruptcy Claims Resolution Process .  On September 14, 2005 (the “Petition Date”), NWA Corp. and 12 of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).  Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed a voluntary petition for relief under Chapter 11.  On May 18, 2007, the Bankruptcy Court entered an order approving and confirming the Debtors’ First Amended Joint and Consolidated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (as confirmed, the “Plan” or “Plan of Reorganization”).  The Plan became effective and the Debtors emerged from bankruptcy protection on May 31, 2007 (the “Effective Date”).  On the Effective Date, the Company implemented fresh-start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”).

Pursuant to terms of the Plan of Reorganization, approximately 225.8 million shares of the Pre-Merger 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 Company’s common stock (or 285.1 million Post-Merger shares of Delta common stock) have been issued and distributed through March 31, 2009, in respect of valid unsecured and guaranty claims.  In total, there are approximately 6.4 million remaining shares of the Pre-Merger 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 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 Company, surrendering the collateral to the secured party, or by making full payment in cash.

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Note 2 – Goodwill and Intangibles

The Company determined that the announced Merger on April 14, 2008 (the “Announcement Date”) 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 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 Closing 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 of 2008 related to certain flight equipment, definite-lived and indefinite-lived intangible assets, investments in affiliated companies, and the related deferred tax effects.

The Company recorded a goodwill impairment charge of $3.9 billion for the quarter ended March 31, 2008.  Northwest finalized the impairment tests of goodwill and long-lived assets during the second quarter of 2008, resulting in an additional net charge of $547 million, which includes an adjustment of estimated goodwill from $2.2 billion to the implied fair value of goodwill of $2.9 billion. The adjustment to goodwill resulted in the reversal of $674 million of impairment expense recorded in the first quarter of 2008 which is classified as Goodwill and other indefinite-lived intangibles impairment expense.  Additionally, Northwest recorded $624 million in depreciation and amortization related to impairment of certain flight equipment and definite-lived intangibles, $598 million of impairment expense in goodwill and other indefinite-lived intangibles impairment expense related to indefinite-lived intangibles, $213 million in other non-operating expense related to other than temporary impairment on investments in affiliated companies and $214 million in income tax benefit related to the reversal of deferred tax liabilities related to certain of the indefinite-lived intangible assets.

Adjustments to goodwill during the three months ended March 31, 2009 are shown in the table below:

Note 3 – Fair Value Measurements

SFAS No. 157, Fair Value Measurements (“SFAS No. 157”) defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis.  SFAS 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.

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 future 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.

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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.

Assets and liabilities itemized below were measured at fair value during the period using the market and income approaches:

Valuation techniques for assets and liabilities within the level 3 hierarchy are based on the income approach using (1) a discounted cash flow model for the Reserve Primary Fund and auction rate securities, (2) an option pricing model for fuel hedge option contracts and (3) a market approach for interest rate cash flow hedges.

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:

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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.   During the first quarter of 2009, the Company did not remeasure assets or liabilities at fair value on a non-recurring basis.

In March 2008, as part of a revised fleet plan, the Company determined that it would remove three Boeing 747F 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 during the first quarter of 2008.

The Company also recorded a goodwill impairment charge in other operating expense to reduce the book value of Northwest’s equity to its implied fair value as of the Announcement Date.  The goodwill measurement described below was an estimate and was adjusted based on the completion of Step 2 of the goodwill impairment test during the second quarter of 2008, as described more fully in “Note 2 — Goodwill and Intangibles.”  The assets itemized below were measured at fair value on a non-recurring basis during the first quarter of 2008 using a market approach:

Note 4 — Derivative Financial Instruments

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment to FASB Statement No. 133 (“SFAS No. 161”).  SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008.  The Company adopted SFAS No. 161 on January 1, 2009 .

Our results of operations are materially impacted by changes in aircraft fuel prices, interest rates and foreign currency exchange rates.  In an effort to manage our exposure to these risks, we periodically enter into various derivative instruments, including fuel, interest rate and foreign currency hedges.  In accordance with SFAS No. 133, we are required to recognize all derivative instruments as either assets or liabilities at fair value on our Condensed Consolidated Balance Sheets and to recognize certain changes in the fair value of derivative instruments on our Condensed Consolidated Statements of Operations.

We believe our hedge contracts will be highly effective during their term in offsetting changes in cash flow or fair value attributable to the hedged risk.  We perform, at least quarterly, both a prospective and retrospective assessment of the effectiveness of our hedge contracts, including assessing the possibility of counterparty default.  If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge to earnings.  As a result of our effectiveness assessment at March 31, 2009, we believe our derivative contracts that are designated and qualify for hedge accounting under SFAS No. 133 will continue to be highly effective in offsetting changes in cash flow or fair value attributable to the hedged risk.

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Cash flow hedges.  For derivative instruments that are designated and qualify as cash flow hedges under SFAS No. 133, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated other comprehensive (loss) income (“OCI”) and reclassified into earnings in the same period during which the hedged transaction affects earnings.  The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item.  To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in Other income (expense) on our Condensed Consolidated Statements of Operations.  The following table summarizes the accounting treatment and classification of our cash flow hedges on our Condensed Consolidated Financial Statements:

(1)      Ineffectiveness on fuel hedge option contracts is calculated using a “perfectly effective” hypothetical derivative, which acts as a proxy for the fair value of the change in expected cash flows from the purchase of aircraft fuel.

The following tables reflect the estimated fair value gain (loss) position of our hedge derivatives at March 31, 2009:

(1)   Represents the margin postings associated with the open position of our fuel hedge derivative contracts and fuel hedge contract settlements payable.

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Hedge Margin.  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 fuel hedge contracts.  The margin requirements are intended to mitigate a party’s exposure to market volatility and the associated contracting party risk.  We do not offset margin funded to counterparties against fair value amounts recorded for our hedge contracts.

The fuel hedge margin we provide to counterparties is recorded in Hedge margin receivable on our Condensed Consolidated Balance Sheets.  All cash flows associated with purchasing and settling fuel hedge contracts are classified as operating cash flows on our Condensed Consolidated Statements of Cash Flows.

Foreign Currency.  The Company is exposed to the effect of foreign currency exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expenses.  The Company’s largest exposure comes from the Japanese Yen and Canadian Dollar.  From time to time, the Company uses financial instruments such as forward contracts, collars, or put options to hedge its anticipated foreign currency sales.  The changes in market value of such instruments have historically been highly effective at offsetting exchange rate fluctuations.  Hedging gains or losses are recorded in Accumulated other comprehensive (loss) income until the associated transportation is provided, at which time they are recognized as an increase or decrease in revenue.

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 36 months.

As of March 31, 2009, our open foreign currency hedge positions for the years ending December 31, 2009 through 2011 were as follows: