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Executives

Andrew Lacko – Director of Investor Relations

Douglas M. Steenland – President, Chief Executive Officer & Director

David M. Davis – Chief Financial Officer & Executive Vice President

Neal S. Cohen – Executive Vice President Strategy

J. Timothy Griffin – Executive Vice President Marketing & Distribution

Analysts

William Greene – Morgan Stanley

Ray Neidl – Calyon Securities

Michael Linenberg – Merrill Lynch

Gary Chase – Lehman Brothers

Jamie Baker – J.P. Morgan Securities

Frank Boroch – Bear Stearns

Daniel MacKenzie – Credit Suisse

Bill [Mastoria] – Broadpoint Capital

Media

Liz Fedor – Minneapolis Star Tribune

Josh [Fried] – Associated Press

Ted Reed – TheStreet.com

Northwest Airlines Corporation (NWA) Q1 2008 Earnings Call April 23, 2008 11:00 AM ET

Operator

Welcome to the Northwest Airlines first quarter 2008 financial results conference call. (Operator Instructions) It is now my pleasure to turn the conference over to Andrew Lacko, Director of Investor Relations.

Andrew Lacko

Good morning everyone. I’d like to thank you for joining us today for Northwest Airlines first quarter 2008 financial results conference call. Joining me today are Doug Steenland, President and Chief Executive Officer, Dave Davis, Executive Vice President and Chief Financial Officer, Neal Cohen, Executive Vice President of Strategy International and CEO of Regional Carriers and Tim Griffin, Executive Vice President Marketing Distribution. In today’s call Doug will provide open remarks followed by Dave who will review the quarter’s results and provide forward guidance. After our prepared remarks we will open up the call for questions from the analyst community followed by questions from the media.

During the course of our remarks today, we may make forward-looking statements and you should understand that actual results might differ materially from those projected in our forward-looking statements. Addition information concerning factors that could cause actual results to materially differ from those forward-looking statements is contained in today’s press release. I would like to remind everyone that today’s call is being recorded and is also being webcasted at ir.NWA.com. A replay of this call will be made available on the same site shortly after the call for one week.

I’d like now to turn the call over to Doug Steenland.

Douglas M. Steenland

Good morning everyone. For the first quarter of 2008 Northwest reported a net loss of $4.1 billion. These results include a $3.9 billion non-cash impairment charge to goodwill which we will describe in more detail later in the call. The net loss in the first quarter of 2007 was $292 million. Excluding the impact of the non-cash impairment charge and losses associated with marking-to-market out of period fuel hedges our results for the first quarter was a net loss of $191 million. This compares to a first quarter of 2007 when Northwest reported net income of $73 million before the impact of reorganization charges and out of period fuel hedge gains.

In a few moments Dave Davis will provide you with additional color on the first quarter financial performance which was obviously heavily impacted by a nearly 50% year-over-year increase in fuel price. But first, I’d like to comment on the recently announced merger between Northwest and Delta. On April 14th Northwest announced an agreement to merge with Delta to create America’s premier global airline. From the onset we said that we would consider a transaction only if it benefitted all of our key stakeholders and we’re confident that we have met this objective. Combining the end-to-end networks of two great airlines means that Northwest Delta will serve more US communities and connect to more worldwide destinations than any other airline. Our passengers will benefit from direct service from the United States to all of the world’s business centers in Asia, Latin America, Europe, Africa and North America. And, our stakeholders and our employees in particular will benefit from the improved financial resilience and better competitive positioning of the combined carrier.

The merger is expected to generate well in excess of a conservatively estimated $1 billion in annual net synergies through more effective aircraft utilization, a more comprehensive and diversified route system, reduce overhead and improved operational efficiency. The pros combination will also allow us to better utilize Northwest valuable pacific franchise, better develop both carriers’ domestic hubs and better match the right airplanes with the right routes. Northwest is already integrated many aspects of its technology with Delta through the Sky Team Alliance paving the way for a smooth integration process. We expect the regulatory review process to last from six to eight months and anticipate closing the transaction in late 2008.

Turning back to the first quarter the airline’s performance was significantly impacted by the unprecedented rise in fuel prices. Northwest average price of fuel increased nearly $1 per gallon or 50% versus the first quarter of 2007. In response to this increase Northwest has undertaken a series of actions to help mitigate the dramatic rise in fuel costs which are described in more detail in our press release. On the passenger revenue side Northwest has participated in numerous fuel surcharge and fair increases to reflect rising fuel costs and we’ve attempted to implement and expand minimum stay requirements to better segment passenger demand. Northwest will reduce its domestic capacity in the fall by an additional 5% versus the 2008 business plan and Northwest Cargo has reoptimized the freight network which will result in the suspension of service to several cities in Asia.

On the cost and liquidity side Northwest intends to annualize profit improvements in excess of $100 million through costs reduction, productivity and revenue enhancements and we will also reduce the airline’s non-aircraft capital expenditures by $100 million for a total in 2008 of $150 million. We continue to monitor fuel prices and are preparing to take additional action in response to the continued increases. This likely will include further capacity reductions.

Let me now update you on several key initiatives that we have underway. First, we are running a reliable airline. During the quarter Northwest continued to operate well. We’re number one among domestic carriers in completion factor, our luggage performance remains strong and was in the top two of network carriers through February and we expect to maintain that position through the end of the first quarter in to the second quarter. With respect to customer satisfaction Northwest is ranked number one among network carriers in the recently released 18th Annual National Airline Quality Ratings Study. The AQR Study is viewed as an industry standard and provides consumers and industry watchers a means to compare quality among airlines using objective performance data on 15 elements important to consumers when judging the quality of airline service.

We continued our profitability enhancing re-fleeting. NWA’s 76 seat regional jet fleet grew in the first quarter with the delivery of six Lombardi ACRJ-900s and eight EMB-175s bringing the airlines total to 19 CRJ-900s and 17 EMB-175s. By the end of 2008 Northwest’s 76 seat regional jet fleet will include 36 EMB-175s and 36 Lombardi ACRJ-900s. As the North American launch customer for the Boeing 787 we remain confident that the 787 will be a game changer and will allow us to increase the profitability of and grow our international network. The recent announcements related to the delay of the 787 production we now expect to receive our first delivery in the fourth quarter of 2009.

Importantly, recently Northwest received tentative approval from the US Department of Transportation on its application for six way antitrust immunity with our Sky Team Alliance Partners Delta, Air France, KLM, Alitalia and CSA Czech. Final approval is expected to follow after DOT reviews the final round of comments to its show cause order and after that finalization we will look to implement the immunity powers that the order grants to us.

With that, I’d now like to turn the call over to Dave Davis.

David M. Davis

Excluding non-cash impairment charges and losses associated with marking-to-market out of period fuel hedges, Northwest reported a first quarter net loss of $191 million versus the first quarter of 2007 when the airline reported net income of $73 million before the impact of reorganization items and out of period fuel hedge gains. The goodwill impairment charge taken in the current quarter is the result of complying with GAAP which requires us to test for goodwill impairment annually or when significant events occur which could be an indicator of Northwest’s value.

Upon emergency from bankruptcy in May of 2007 Northwest adopted fresh start reporting as required by GAAP which required the company to mark-to-market all of its assets and liabilities. The excess of enterprise value over fair value of net assets was assigned to goodwill. Northwest enterprise value at the time of the emergence was based on an analysis by the company’s financial advisors and incorporated then current economic conditions and fuel prices. In a more recent evaluation of goodwill the company considered the value of our equity implied by the announced merger with Delta, current fuel prices and economic conditions and other factors. The implied value of goodwill resulting from this analysis required a $3.9 billion right down from the value calculated at the time of emergence.

I want to reiterate that this accounting of impairment charges is a non-cash expense, there’s no impact on our liquidity or financial flexibility, no impact on any of our financial covenants and no affect on our operations. While the adjustment does reflect the decline on our stock price it does not reflect management’s view of [inaudible] value of the company or the potential strategic operating and financial benefits of our announced merger.

Our quarterly earnings were impacted by the implementation of fresh start accounting which is detailed in the financial statements. Also, the acquisition of Mesaba in April of 2007 affects the comparison of year-over-year results for certain P&L line items. These changes were also detailed in the footnotes to the financial statements of our press release. We ended the quarter well within compliance of the covenants in our loan agreements.

Let me turn to our revenue and RASM. Operating revenues for the quarter were $3.1 billion up 8.8% from last year. Consolidated ASMs increased 2% year-over-year. Northwest consolidated RASM growth of 5% excluding the impact of fresh start reporting reflects continued strong demand in yield. Normalizing for a 3.3% growth in stage length consolidated RASM would have been increased by an additional 1.3 points to 6.3%.

Moving to our revenue performance by region, our year-over-year RASM changes excluding fresh start accounting impacts were as follows: our domestic main line RASM was up 2.3% on 3.6% fewer ASMs and our domestic consolidated RASM with regionals was up 4.6% on 0.9% more ASMs. Our year-over-year regional RASM improved by 3.1% on 34.9% ASMs which demonstrates the effectiveness of 76 seat regional jets in our domestic network. Our pacific RASM increased a strong 11% on 2.4% fewer ASMs primarily driven by reduced capacity in our beach markets with the introduction of A330 aircraft replacing 747-200s. Atlantic revenue decreased 1.5% on a 16.4% increase on ASMs. Increased capacity in the Atlantic was driven by the annualization of new 757 trans Atlantic service in conjunction with our joint venture partner KLM.

Turning to cargo, cargo revenues were $198 million. Of $198 million were $9 million or 4.8% favorable for the quarter on a 0.2% increase in cargo ton miles. Cargo revenue per ton mile increased 4.1% year-over-year. Additionally, we continued to rationalize freighter capacity which led to a significant increase in year-over-year freighter unit revenues.

Moving to costs, first quarter operating expenses of $3.2 billion excluding impairment charges were up $574 million or 21.5% year-over-year as a result of a $445 million increase in year-over-year fuel expense. Excluding fuel costs and impairment charges operating expenses were up by $129 million year-over-year. Our main line unit costs excluding fuel and non-recurring items were up 4.5% versus last year which is consistent with previous guidance. The year-over-year unit cost growth was a result of reduced main line capacity as well as the continued impact of non-cash emergence related items and year-over-year timing of maintenance checks. Excluding these two items our year-over-year chasm growth was approximately 1%.

Fuel continues to be Northwest’s single largest costs representing 38% of the company’s first quarter operating expenses excluding impairment charges. During the quarter excluding taxes and losses associated with marking-to-market out of period fuel hedges, we paid an average of $2.77 per gallon which was a 49.7% increase versus last year. Northwest had previously hedged approximately 45% of its fuel exposure for the quarter and realized $19 million in value from settled fuel hedged contracts during Q1.

Moving now to the balance sheet; we ended the first quarter with $3.2 billion in unrestricted cash, an increase or approximately $200 million from year end and $484 million in restricted cash. At the end of the quarter our unrestricted cash as a percentage of trailing 12 months revenue was 25.2% which continues to be the strongest among network carriers. Our total debt at the end of the first quarter was $9.5 billion including the present value of off balance sheet aircraft leases. Our net debt at the end of the quarter was $6.3 billion.

Let me update your briefly on the status of share distributions. Following the distribution of over 8 million shares during the first week in April, we have approximately 244 million shares issued including 208 million shares to unsecured creditors with a total of $7.9 billion in allowed claims and 28 million shares that were issued pursuant to the rights offering we completed upon exiting bankruptcy. Currently the company has 700 million of remaining disputed unsecured claims to be resolved. Based on the current status of the claims resolution process, our estimate of ultimate allowed unsecured claims remains between $8 and $8.4 billion. The next periodic distribution is scheduled for July 1 of 2008.

Moving now to guidance; in the second quarter of 2008 we expect system main line capacity to be flat to down 1% with domestic main line capacity down 7 to 8% and international capacity up 9 to 10%. Regional capacity will be up 45 to 50% as the 76 seaters continue to be delivered. Domestic consolidated capacity will be down approximately 0.5% and system consolidated capacity will be up 3 to 4%. For the full year our system main line capacity will be down 1 to 2% with domestic main line capacity down 7.5 to 8.5% and international up 8 to 9%. Regional capacity will be up 50 to 55% due to the continued growth and annualization of 76 regional jet flying resulting in domestic consolidated ASMs down approximately .5% and system consolidated ASMs up 2 to 3%. In light of the current fuel environment we are continuing to review our capacity to determine if future reductions are warranted.

Regarding cap ex; we expect 2008 aircraft capital spending to be approximately $1.2 billion and non-aircraft spending to be $150 million or less which is consistent with the previous guidance we provided. Regarding costs guidance for 2008; we expect our full year main line chasm excluding fuel will be up 2 to 3% on a 1 to 2% reduction in main line ASMs. For those that model Northwest on a consolidated basis we expect full year 2008 consolidated chasm ex fuel to be up 1 to 2% versus 2007. We expect our second quarter main line chasm ex fuel will be up 5 to 6% on flat to 1% fewer ASMs largely as a result of the continued impact of non-cash emergence related items in the first half of 2008.

High fuel prices continue to be a challenge for Northwest and the industry. Based on the forward curve as of April 21st our second quarter 2008 fuel price would be $3.48 per gallon excluding taxes and our fuel year 2008 fuel price would be $3.22 per gallon also excluding taxes. It remain difficult to forecast future period fuel prices given the current volatility in the futures markets. For the remainder of the year we’ve hedged approximately 24% of our second quarter fuel requirements, 21% of our third quarter requirements and 46% of our fourth quarter requirements. As of April 21st the value of our open hedge positions for the remainder of 2008 was approximately $115 million.

With that, let me open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of William Greene from Morgan Stanley.

William Greene – Morgan Stanley

Doug, I’m wondering if you could talk a little bit about the ATI opportunity with the joint venture because you guys have always had some pretty good success with the KLM and I think it’s even been measured in at least the high hundreds of millions if not even higher than that. When you get together as a four way, what’s the incremental opportunity there? And, I assume that’s not in the synergy number for the merger but I was just double checking.

Douglas M. Steenland

I think there’s a very, very conservative estimate in the revenue synergy numbers as to the benefit coming from ATI cooperation over the Trans Atlantic. I think Bill the real opportunity there is to in essence take what we now have which is an extremely successful Northwest tail end joint venture that has industry leading results over the Trans Atlantic and a emerging Delta, Air France joint venture and really have we’ll probably at the end of the day post the closing of our transaction would be a two way JV between the merged carrier on this side of the Atlantic and the Air France tail end entity on the other side. I think there is substantial upside potential from that and I know that the team will aggressively look to develop that. In the interim, assuming that there is a finalization of the ATI decision at the DOT in the next 30 days, while we will both proceed with the negotiation of that expanded joint venture we’ll have the immunity powers available to us and I think we will look to use them to develop a more competitive network to do some potential rationalization and to make some decisions in this fuel environment that will be better for all that might be more difficult if the ATI was not available.

William Greene – Morgan Stanley

So, is it safe to say that the kind of scale that you will get with this ATI, you’d have a similar kind of scale benefit from it? Or, would it not sort of be one plus one is more than two?

Douglas M. Steenland

I think there will clearly be some scale benefits that comes from it and if the final – it will be the result of the negotiation to see what that final joint venture looks like and obviously I think a goal will be to try and realize the kind of margins and the kind of returns that Northwest tail end realized over the Trans Atlantic today.

William Greene – Morgan Stanley

Okay. Then Dave, on costs, it seemed to me but maybe my expectations were not set correctly but it seemed to me that the first quarter cost performance wasn’t quite as good as I had expected at least and so I’m curious – it’s not clear to me how as you’re cutting capacity you’ll be able to get these kind of cost guidance numbers that you put out there. You talked about the $100 million savings but what are some of the things you’re going to be able to cut?

David M. Davis

Well first of all in referring to the first quarter the 4.5% chasm increase was in line with our previous guidance and as I said one piece of that, the biggest piece, was some emergence related non-cash expenses that are going to continue to hit us in the first and second quarter. Then, there was simply timing of some maintenance checks. Ex those two items our first quarter chasm was only up 1% year-over-year. Once we lap by the third quarter of 2008 these non-cash emergence related items the year-over-year comps will look better.

Douglas M. Steenland

I also think you can expect particularly in this fuel related environment that we will be very aggressive and very focused with respect to making sure that we do get costs down related to the capacity reductions that we anticipate and to make sure that we operate as absolutely efficiently as we can and we take full advantage and benefit of the restructuring opportunities that came about during the Chapter 11 process.

Operator

Our next question comes from the line of Ray Neidl, Calyon Securities. Please proceed.

Ray Neidl – Calyon Securities

With the potential merger with Delta coming, I was just wondering if you’ve heard anything from the Japanese government with your extensive [inaudible] out of Narita Airport. Are there concerns about losing some of that ability? Or, is that grandfathered in?

Douglas M. Steenland

There are no concerns Ray and we are highly confident that the transfers that the transaction will require are ministerial in nature and will occur and will occur in the time frame that will permit the transaction to close by year end.

Ray Neidl – Calyon Securities

Okay. And, your freight operation, your pure freight operation across the Pacific, I know you were looking at its possible future, is that endangered now with the Delta merger?

Douglas M. Steenland

Well, I think one of the issues that Northwest will face and that the merged entity will face is a strategic decision going forward with respect to the size and structure of the freighter business. No decisions have been made on that and that’s a decision to be made subsequently. I think in this fuel environment though we’ve made some changes to the freighter side of the house to make sure that it’s being operated in this environment as efficiently and as cost effectively as possible and that’s caused us to basically park three airplanes and to discontinue service to a number of Asian cities.

Ray Neidl – Calyon Securities

And your aircraft orders and your fleet plan going forward, is that kind of on hold now pending the merger?

Douglas M. Steenland

No, I mean the aircraft orders that we have we’ll continue to take delivery of the remaining 76 seat regional jets. We would like to take delivery – we were scheduled to take delivery of our 787s starting August of this year. Obviously, we’re very disappointed by the deferrals in that delivery schedule but the 18 firm and 50 option airplanes that Northwest ordered in 2005 remain a key piece of the long term strategic future of Northwest and the merged entity and there’s every intent to take everyone of those 18 airplanes because they will in fact be game changers and they will contribute to a material improvement to the profitability of the airline.

Operator

Our next question comes from the line of Mike Linenberg with Merrill Lynch. Please proceed.

Michael Linenberg – Merrill Lynch

Just a question on your RASM, if I look at your consolidated domestic RASM it looked like even after the stage length adjustment it looked like you lag the industry a little bit even with the decent capacity coming out. What’s behind that? Is that more short haul in nature? Are you seeing weakness coming from the Detroit market given what’s happened there with businesses? Any color would be great.

J. Timothy Griffin

Mike, fairly broad and consistent across our network, a little bit of weakness in Memphis relative to the other two hubs primarily from some competitive [encurgents], a key one which has already exited so we’ll see some restoration of those numbers moving forward which we’re already seeing in Q2.

Michael Linenberg – Merrill Lynch

Okay. Then actually a second question for Tim. Tim, when you look at how capacity is coming down and the loads are still running pretty high are you seeing any changes in the booking curve or sort of the time in which people book? Are the curves getting longer? And also, comments on just some of the fences that seem to be going back in to the fare structure which I think is a good thing, any commentary on that would be great.

J. Timothy Griffin

Yes, as fuel continues to skyrocket everybody is searching for revenue. Segmentation in any business when you can separate two groups that have different demand elasticity and charge different prices produces more revenue and there’s nothing different about the airline business than any other business. So, we have long been a proponent of segmentation. Just in the last few days we filed in a significant number of markets restoration of the Saturday night stay and that’s drawing some competitive support. I’d like to see that in place for Northwest revenue.

Booking profiles not changing radically. Customers are for the summer buying out a little bit earlier, we have really been carefully managing our yields. Yields are very strong for the summer that we booked so far and we kind of have the breaks on a little bit on taking bookings because demand is so strong. With all the other news about the economy and all we have all antenna up and are looking for any signs of downturn and quite frankly haven’t seen it.

Some few isolated pockets on the corporate side where people might be under pressure themselves and taking a reduction in their travel budgets but that seems to be being offset largely by others particularly venturing out internationally with the very weak dollar doing more global selling and pushing. So, overall demand really quite strong for all the tidbits of bad news that are out in the economic world.

Douglas M. Steenland

Mike, let me just add to hedge our bets on the other side of the summer which, as Tim pointed out, we expect to be strong. Our domestic mainline capacity in Q4 is expected to be 12.6% less than what it was in Q4 of 07. And I think that will have a very positive impact on domestic RASM.

Operator

And our next question comes from the line of Gary Chase with Lehman Brothers. Please proceed.

Gary Chase – Lehman Brothers

I wondered if you could just refresh us, I know the delivery schedule on the 76 seaters is predominantly a 2008 event if not entirely, but could you just give us a flavor for what the run rate growth is on that regional line as we move into 2009?

David M. Davis

The delivery schedule is everything will be in by the end of the year so we’ll have 36 aircraft in place. In terms of the run rate 2009 ASM number, Gary, I think we’re going to have to get back to you on it. I don’t have that at my fingertips. But we probably have an average of 36 to 40 aircraft in 2008 and an average of 76 in 2009. Andrew can get back to you on the year-over-year ASM number.

Gary Chase – Lehman Brothers

The reason I asked that question, Dave, is if you just take a 10% mainline reduction and offset with 55 regional growth, you get to a pretty flattish capacity outcome, at least in the third and fourth quarters of this year for consolidated domestic and I understanding that you’re flying less than what your plan was because of where you were last year, but I’m just trying to think through what’s really happening from a standpoint of actual Northwest capacity in the domestic system. My sense is that as we move into 2009 those mainline cuts, assuming those are run rate, are going to start overwhelming the regional growth and I just want to – I think it’s important to understand how that will shake out.

David M. Davis

Yeah, Gary, I think your read is accurate. As Doug just mentioned in the fourth quarter our domestic mainline capacity is down 12.6% and even with all the 76 seaters in towards the end of the year, we’ll still be down on a total domestic basis in the fourth quarter and I think your read is correct that once we get into 09, the mainline cuts, the run rate there sort of overwhelms the regional increase.

Gary Chase – Lehman Brothers

And that is the intent to leave those in?

David M. Davis

Right.

Gary Chase – Lehman Brothers

In other words, they’re not – Okay.

Douglas M. Steenland

We’ve indicated that particularly given the recent increases over the last couple weeks we’re going to be revisiting capacity again to see whether additional reductions are warranted given where fuel is. So those are not static numbers.

Operator

And our next question comes from the line of Jamie Baker with J.P. Morgan. Please proceed.

Jamie Baker – J.P. Morgan Securities

Quickly, Tim, just back at something you said before actually suggests a difference between the airline business and other commodities is that your best customers have to pay the most but your least loyal customers pay far less. That certainly isn’t the case when I’m out shopping for other products, but that’s actually not my question.

The question is, I think generally speaking most industry executives – and I don’t want to put words in anybody’s mouth here – but everybody seems to be writing off the domestic market, citing the losses there, withdrawing capacity and so forth and meanwhile moving aggressively into whatever international markets they can find, but when you look at the data for recent recessions – and there are different ways to cut this – but it looks to me like the international market is what typically takes the biggest hit. Can you offer some thoughts as to why this recession might be different?

J. Timothy Griffin

I think the dollar weakness is an important driver of US origin international business. I think that’s quite different in this recession. I think in this recession since the last one I think the world has globalized even more. Just a comment on your non-question comment that you started with, you’re buying a different product than some of our leisure customers. We provide convenience for you and safe seats through our yield management system for you so that they will be there at the last minute when you decide to go somewhere.

Jamie Baker – J.P. Morgan Securities

I would agree with that, Tim. I wasn’t trying to call you out on that, I just heard your response I think to Michael’s question and to the difference between your models and others and I appreciate the extra leg room in not having to pay for a window seat, for example. Anything other than dollar weakness that would contribute to your apparent international optimism?

Douglas M. Steenland

One other point I would, Jamie, is as a result of our joint venture, we clearly benefit from the KLM distribution system in Europe and European travel to the United States given the Euro dollar exchange is very reasonable these days. So we’re able to toggle that back and forth to make sure that we capture what the optimal mix is from the different points of sale.

Operator

And our next question comes from the line of Frank Boroch with Bear Stearns. Please proceed.

Frank Boroch – Bear Stearns

Tim, maybe you could shed some light on what you’re seeing in the Pacific region. I know in the first quarter the unit revenue remained robust. Some of your Asian competitors have recently noted a weakening of demand on the trans backer. Are you guys seeing anything like that?

Neal S. Cohen

What you saw in the first quarter in the Pacific we saw an 11% RASM improvement year-over-year which as Dave and Doug covered very strong, totally in line with Tim’s comments earlier. The business travel to Asia, we’re seeing just tremendous strength there. So the business class marketplace US, origin traffic to Asia as US companies look to export more. That traffic we see a lot of strength.

On the leisure side we definitely don’t see quite as much strength but we have a very, very modest capacity plan. We were down 2.5% in the first quarter in Asia so we have a plan of keeping our capacity in Asia well in line with supply and demand, take advantage of the opportunity to improve our RASM in that market and market our product our core heartland customer which frankly is where we see a lot of strength in the market today.

Frank Boroch – Bear Stearns

And then maybe this is for Dave, I think the last couple years you had talked about the expected P&L improvement from the 76 RGAs relative to the DC-9s and in this current fuel environment I think before it was about a 16 percentage OP margin improvement. Is that tracking a lot higher than that? Are you happy with that performance? I would think with fuel the improvement would be quite a bit better now.

David M. Davis

The comment I would make on that is this, from a revenue and cost perspective the 76 seaters have been performing exactly as planned and we’re very, very pleased with how they’re working in our network. Obviously with fuel costs substantially higher than they were when we did the analysis to decide to purchase the 76 seaters, the benefit coming from these aircraft is even greater than we had initially anticipated.

Frank Boroch – Bear Stearns

Then lastly could you remind us, have you guys filed the HSR paperwork yet? I saw some comment in the media.

Douglas M. Steenland

Yes we have. Yes we have.

Operator

And our next question comes from the line of Dan MacKenzie with Credit Suisse. Please proceed.

Daniel MacKenzie – Credit Suisse

It looks like there’s going to be a lot of spare RJs looking ahead this year, presumably pretty cheap. I guess I’m wondering, does that create an opportunity to park more DC-9s or back fill even with more regional jets than you already plan to schedule?

Douglas M. Steenland

Certainly as our domestic capacity comes down, a lot of it is coming down in the form of retirement of DC-9s and so at the moment we have no plans for bringing on additional 50 seat CRJs.

Daniel MacKenzie – Credit Suisse

And then, Tim, I appreciate the comments earlier about revenues and capacity, I would just like to come at it from a slightly different angle and I guess when you think about demand destruction from fare increases versus demand destruction from general economic weakness, which is generally a more dominant phenomenon or a bigger worry from your perspective?

J. Timothy Griffin

I think I would probably worry more about the general conditions, the resistance to price is something we can monitor with our customers and adapt to it and see changes in behavior and we modify prices. Sometimes in certain short haul markets that get a standard across the board flat dollar increase time and time again, you look at them and the price can be too high in a market like that and you see customer resistance where revenue is actually lower. All higher prices don’t produce higher revenue and you can adjust to that. More macro exogenous factors I guess I worry about more because there’s not a lot I can do about recession other than react to it.

Operator

And ladies and gentlemen the following question will conclude the analyst portion of the question-and-answer session. We’ll proceed with the media for the next question. The final analyst question comes from the line of Bill Mastoria with Broadpoint Capital.

Bill Mastoria – Broadpoint Capital

Dave, I’m going to ask you the same question that I asked at Delta, are there any change of control provisions in any one of your aircraft notes? And that would include obviously both the untouched AATCs as well as some of the restructured ATCs.

David M. Davis

The answer to that is no.

Bill Mastoria – Broadpoint Capital

And I assume that you’re fully funded for all 08 aircraft deliveries. Would that be correct?

David M. Davis

When you say fully funded do you mean fully financed?

Bill Mastoria – Broadpoint Capital

Yeah, fully financed. I’m sorry.

David M. Davis

Yeah, we have financing in place for all of our upcoming aircraft deliveries. That’s correct.

Bill Mastoria – Broadpoint Capital

And finally, have you thought about when you actually close the transaction with Delta, what’s going to happen to the bank debt agreement? Are you going to refinance it from your end or is that going to go away altogether? What are the plans? I know it’s a little bit early, but I’m just wondering. Any color that you could provide there would be very helpful.

David M. Davis

I think it’s premature to discuss that. We’re looking at that now.

Bill Mastoria – Broadpoint Capital

And then finally, or I should say one more question, and that is any status with the Northwest Airlines pilots just on where you are with them? That would of course be greatly appreciated.

Douglas M. Steenland

I hope you noted yesterday there was a joint communication between the Northwest pilots and the Delta pilots. It talked about a process to reach a single combined collective bargaining agreement to be followed in by a seniority integration and we have committed and the combined entity has committed to look to use our best efforts to resolve those issues prior to closing, which would be a first in the industry. That was a positive communication and there will be follow up associated with it.

Operator

And our next question comes from the line of Liz Fedor with Minneapolis Star Tribune. Please proceed.

Liz Fedor – Minneapolis Star Tribune

As you’re aware, Delta also released its results this morning and both Northwest and Delta have very large goodwill write downs. In response to that I received a question from a reader who said, “are both Northwest and Delta taking those impairment charges earlier than required in order to build a political case for their merger?” That’s maybe a question for Doug and/or Dave.

David M. Davis

The answer is no. We’re governed by GAAP accounting principles. We deal with our external auditors on issues like this. There are clearly laid out standards for how one looks at whether an impairment is necessary and when one looks at that. When there’s a significant external event such as the announcement of the merger under the accounting guidance that triggers the necessity to look at whether an impairment is necessary or not.

So that really drove the timing. There’s no discretion with respect to that and when our Northwest team and our external auditors looked at it, particularly given the impact that oil price run ups have had it drove the answer that an impairment was in fact required and we used our best efforts to estimate what that was and that’s the $3.9 billion that we announced. There really was no discretion here, there was no effort to do this in advance and we basically followed the accounting book. This is the result that that produced.

Liz Fedor – Minneapolis Star Tribune

One brief follow up and that is in the Delta call, Richard Anderson indicated that as Northwest and Delta will work on the transition plan that some of the cost efficiencies, some of the synergies may actually increase beyond the original estimates. I was just interested in your thinking on that, Doug.

Douglas M. Steenland

We would clearly concur in that. I think we were, as I said earlier, I think we were conservative in the estimates of synergies and I think as the process goes forward and gets more detailed and granular, I’m highly confident that that number will increase.

Operator

And our next question comes from the line of Josh Fried with the Associated Press. Please proceed.

Josh Fried – Associated Press

You said that you’re in compliance now with your lending covenants. Do any of those covenants include any kind share price trigger?

David M. Davis

No, they don’t.

Josh Fried – Associated Press

And on the fuel hedging, could you say a little more about, I don’t know, maybe an average price that you’ve locked in at this point or what the benefits or the down sides of the hedges depending on fuel price behavior over the rest of the year?

Douglas M. Steenland

We’ve said that our existing fuel hedges are based on the current forward curve are worth about $115 million and our fuel hedges are largely in the form of collars where we have put in place ceilings so that if the price of fuel is in excess of the ceiling we only pay the ceiling price and so that $115 million reflects the dollar amounts to which today the forward curve would drive prices over the ceilings that we’ve put in place on the collars that we have arranged for.

Operator

And our next question comes from the line of Ted Reed with Street.com. Please proceed.

Ted Reed – TheStreet.com

Two things, Dave, is it possible to give a net income per share number after the impairment?

David M. Davis

It is possible. I don’t have it at my fingertips. We can calculate here as we sit here. Excluding our impairment charges, it’s $191 million divided by our share count of 262 million. So you can do that math.

Ted Reed – TheStreet.com

All right. Let me ask something else while you’re doing that. I want to ask about Nerita. Access to Nerita is limited so in the merger you would have to take out some of your existing flights in order to fly to Atlanta and Kennedy. Is that correct?

J. Timothy Griffin

Northwest has the second largest slot portfolio in Nerita. Those slots are used for flights from the US to Japan. They’re used from flights from Japan to other Asian cities and they’re used by our cargo operation and they’re also used by flights from Japan to the resort markets of Hawaii, Guam, Saipan. So the answer is there would have to be some reallocation of those slots to the extent that new Nerita flights were proposed and that would be done on a traditional ranking basis where, to the extent that the new flights were going to be better performers, one would look at that what’s then at the bottom of the list, then decide what changes would need to be made. No decisions have been made, needless to say, because that will not occur until post-closing and things can and will change inevitably between now and then.

Ted Reed – TheStreet.com

But that is one of the principal benefits of this merger, to use those powerful Delta hubs to access Narita, correct?

Douglas M. Steenland

Yeah. I think we’ve acknowledged that given our smaller domestic base here in the United States we’re 7% domestic player that the Pacific assets would be better utilized by having a larger domestic base that can be the basis for US origin flights to Japan.

David M. Davis

Excluding the non-cash impairment charges we would have had a $0.78 per share loss.

Operator

There appear to be no further questions at this time.

Douglas M. Steenland

Thank you very much.

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Source: Northwest Airlines Corporation Q1 2008 Earnings Call Transcript

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