Northwest Takes $547 Million Impairment Charge

The charge follows up on a first-quarter $3.9 billion goodwill charge aimed at cutting the book value of the airline's equity to its fair value as ...
Stephen TaubJuly 24, 2008

Northwest Airlines has taken an additional $547 million non-cash impairment charge. The embattled airline, which is expected to complete its merger with Delta Air Lines before the end of the year, had previously taken a $3.9 billion non-cash goodwill impairment charge in the first quarter.

In reporting its second-quarter results Wednesday, Northwest stated that the $3.9 billion impairment charge, based on a preliminary estimate, was aimed at reducing the book value of the airline’s equity to its fair value as of the merger announcement date of April 14. During the second quarter, the company finished its goodwill impairment test by measuring the fair value of its assets and liabilities in order to compute the implied fair value of its goodwill. It was that analysis that resulted in the $547 million charge.

When it reported its first-quarter goodwill impairment charge, Northwest said it considered the effects of high fuel prices, its recent share price, other industry trends, and the equity value of Northwest implied by the merger announcement.

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“To make this determination, the company compared the carrying value of its equity to its fair value,” it explained at the time. “For purposes of this evaluation, fair value has been determined based on the implied market value of Northwest’s equity in the announced transaction.”

On April 14, Northwest and Delta announced their agreement to merge the two companies. Northwest reported first-quarter results on April 23.