ANNUAL REPORT A WORLD OF EXPERIENCE OVER 25 YEARS OFFICERS AND DIRECTORS* OFFICERS CROIL HUNTER President MALCOLM S. MACKAY Executive Vice President E. I. WHYATT Vice President and Comptroller FRANK C. JUDD Vice President--Operations LINUS C. GLOTZBACH Vice President and Assistant to the President AMOS CULBERT Vice President--Sales A. E. FLOAN Vice President and Secretary L. S. HOLSTAD Treasurer D. J. KING Regional Vice President--Orient Region WM. J. EIDEN Assistant Treasurer C. L. STEWART Assistant Secretary DIRECTORS MORTON H. FRY Partner, Riter and Company, New York City** WM. TUDOR GARDINER Chairman, Board of Directors, Incorporated Investors, Boston, Mass. ROBERT M. HARDY President, Sunshine Mining Co., Yakima, Wash. CROIL HUNTER President, Northwest Airlines, Inc. JOSEPH T. JOHNSON President, The Milwaukee Co., Milwaukee, Wis. MALCOLM S. MACKAY Executive Vice President, Northwest Airlines, Inc. DR. CHARLES W. MAYO Mayo Clinic, Rochester, Minn. ALONZO PETTEYS Vice President and Director, Farmers State Bank, Brush, Colorado C. FRANK REAVIS Partner, Hodges, Reavis, McGrath, Pantaleoni and Downey, New York City** ALBERT G. REDPATH Partner, Auchincloss, Parker & Redpath, New York City W ILLIAM STERN President, Dakota National Bank, Fargo, N. D. PRINCIPAL REGISTRAR PRINCIPAL TRANSFER AGENT CO-REGISTRAR GO-TRANSFER AGENT THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, N. Y. BANKERS TRUST COMPANY, NEW YORK, N. Y. HARRIS TRUST AND SAVINGS BANK, CHICAGO, I-LLINOIS THE FIRST NATIONAL BANK OF CHICAGO, CHICAGO, ILLINOIS GENERAL OFFICES: 1885 UNIVERSITY AVENUE, ST. PAUL 4, MINNESOIA *As of April 9, 1952 **Subject to approval of Civil Aeronautics Board NORTHWEST AIRLINES IN 1951 . . . * * Produced net earnings of $1,785,671 Increased operating revenues by $2,228,360 Increased passenger revenues by $2,044,370 Increased passenger load factor 13.1 per cent Reduced bank loan by $4,000,000 Paid dividends totaling $442,572 on 4.6 per cent cumulative preference stock Established new daily round trip Stratocruiser service between the Twin Cities and Washington, D. C. Took over flight and maintenance operations to help Japanese establish new intra-Japan airline Applied for Orient route extensions which would add 12,000 miles to our network * * WORLD OF EXPERIENCE . . . . OVER 25 YEARS TO THE SHAREHOLDERS OF NORTHWEST AIRLINES: FINANCIAL RESULTS For the year 1951 your company showed a profit of $1,785,671 after taxes. This amounts to $1.64 for each of the 820,858 shares of $10 par value common stock outstanding at the end of the year, after allowance for dividends on prefer ence shares. This is the largest profit ever reported by your company and rep resents 3.26% per dollar of total operat ing revenues. Total operating revenues were 4.25% or $2,228,360 over 1950, while total operating expenses were $28,704 under last year. Passenger revenues of $35,192,765 established an all-time high and showed a 6.17% increase over 1950. Mail pay ments from the U. S. Government to taled $7,788,915 compared with $9,937,- 999 for 1950. Freight and express reve nues amounted to $4,371,533 as against $4,122,222 for the previous year. The passenger load factor over our entire system was 63.91% compared with 56.51% for 1950. The Orient pas senger load factor dropped slightly, al though 35.52% more Orient passenger miles were performed, while the Do mestic load factor rose from 56.70% in 1950 to 65.88% in 1951. Despite a re duction of 27.00% in total revenue miles flown in scheduled service, your com pany flew 98.17% of the passenger miles flown in 1950. Operating expenses totaled $51,624,- 821 compared with $51,653,525 the year before. Your company has recently en tered into new wage agreements with certain labor unions which will increase the cost of doing business. Likewise oth er costs, such as materials, are rising; therefore, in 1952 additional revenue and continuing economy will be required to sustain a profitable operation. Im proved utilization of aircraft, increased sales effort, higher tariffs and rates and more efficient operations will all be sought in 1952 to maintain and improve our earnings. On December 31st your company's net working capital totaled $1,920,463. During the year $442,572 was paid out in dividends on preference shares; $4.- 000,000 was paid on our bank loan, and $4,582,188 was invested in additional aircraft and other capital equipment. The unpaid balance remaining on our bank loan was $13,140,363, compared with $17,140,363 as of December 31, 1950. At the time the financial report to shareholders was issued for 1950, the Civil Aeronautics Board had retroactive ly adjusted the company's temporary rates of mail pay for several years ended December 31, 1950, and tentatively awarded net additional mail pay aggre gating $1,572,348 for those periods. In November of 1951, however, the Board issued a show cause order reducing such tentative additional pay by $639,574. The net effect of this last reduction is $574,345, after income taxes. The com pany has adjusted its profit and loss statements for the years affected to re flect this latest order of the Board. The adjustment affects various years, three of which, 1949, 1950, and 1951, are shown in this report for comparative purposes. As of this date, the company is still operating under temporary mail rates, but it is expected that final rates for these years and for the future will be determined through proceedings now before the Board. FLYING EQUIPMENT AND SERVICE Your company's satisfactory 1951 per formance, achieved despite a reduction in the over-all volume of service offered, was due largely to improved utilization of all flight equipment, high average passenger loads, increased popularity of our luxury Boeing Stratocruisers and a sharp upturn in business on our Orient routes. Gratifying results from our fleet of 10 double-deck Boeing Stratocruisers were marked by increased daily utilization, high average passenger loads and en thusiastic acceptance by the traveling public. In addition to the established Strato- cruiser flights coast to coast, to Alaska and Hawaii, in 1951 we extended Strato- cruiser service into Washington, D. C. Daily round trip flights between the Twin Cities, Milwaukee, Detroit and Washington were inaugurated on Sep tember 30, the 25th anniversary of Northwest's founding. The response has been gratifying and the schedules have shown consistently high load factors. An important extension of high speed Stratocruiser service will be made in April of the current year when we in augurate flights over the Great Circle route to Tokyo. The favorable traffic outlook between the United States and the Orient reflected in our increased Orient business in 1951 prompted the decision to start this service. The new schedules will cut nearly eight hours from our present flying time between the United States and Japan, Formosa and the Philippines. For example, east- bound flights can be operated with only one stop between Tokyo and Seattle permitting a spectacular schedule of ap proximately seventeen hours. Initial operations will consist of two round trip Stratocruiser flights and one DC-4 flight per week. At the end of 1951 we were flying 24 DC-4s in passenger and freight serv ice in the United States, in first-class service to and in the Orient, in coach service between the United States and Alaska and in military contract opera tions. During the year three DC-3s were flying in domestic passenger and freight service, four more are now in operation and an eighth ship is being made ready for service. Our Martin fleet was removed from scheduled service in March of 1951 and although we put in service six DC-4s and tin ee DC-3s at various times during the year, the miles flown by these substi tuted aircraft were not sufficient to cov er all of the schedules previously flown by the Martins, thus total mileage was reduced. Since the removal from sched uled service, we have disposed of four teen Martin aircraft and have contract ed to sell four more to be delivered on or before May 15, 1952. The remain ing two Martins are in use in our intra- Japan airline contract operations as described later in this report. ROUTES In July we filed with the Civil Aero nautics Board an application for route extensions in Southeast Asia which would add 12,000 miles to our network and bring Northwest Airlines into some of the richest trade and travel points in the world. JAPANESE AIRLINES In October Northwest signed an agreement with the 1,500 mile intra- Japan airline, Nippon Koku Kabushiki Kaisha, by which we undertook this new line's operation. In helping to establish the Japanese carrier, Northwest flies and maintains the airplanes while the line's own personnel handles sales, estab lishment of fares and rates, ticketing and advertising. As Japanese participation expands, Northwest will train Japanese pilots and maintenance mechanics for operations duties. KOREAN AIRLIFT Northwest continued as a prime con tractor in the Korean military airlift. Military Air Transport Service figures show that from July 1, 1950, start of the lift, to January 1, 1952, we carried approximately 14,000 passengers and 1,500 tons of cargo and mail between the United States and Japan. North west pilots fly two NWA DC-4s and five DC-4s leased from other airlines, and up to January 1 had made 655 round trips between the United States, Tokyo and Korea. The airlift follows Northwest's Great Circle route and its flights arc integrated into our operations without conflicting with commercial schedules. The National Capitol, Washington, D.C. You were informed last year that we had instituted a suit against the Boeing Airplane Company on account of late delivery of aircraft and certain deficien cies and failures. Subsequently the Boe ing company filed a countersuit against us. In 1951 both suits were dropped by mutual agreement. OFFICIAL STAFF The year saw the election of Malcolm S. Mackay as Executive Vice President on May 1 and of Frank C. Judd as Vice President--Operations on May 28. Mr. Mackay has been a director of the com pany since 1948. Mr. Judd had been acting as Vice President -- Operations prior to his election, and before that had been Regional Vice President -- Western Region. He has been with Northwest since 1931. ' % One of the most important develop ments in the history of our company is now under way. An Agreement of Merg er was entered into in March, 1952, be tween the directors of Northwest and the directors of Capital Airlines, Inc., for a merger of the two companies. To be effective, this merger agreement must be approved by the shareholders of both companies and by the Civil Aeronautics Board. The matter will be presented to Northwest shareholders at the Annual Meeting of May 19, 1952, and a separate Proxy Statement is being sent you, giving full details. The merger of these two systems should result in increased strength, ef ficiency and earning power, and should substantially benefit all shareholders of both companies. CONCLUSION At this time I wish to express to all of our shareholders and employees my appreciation for their loyal support and cooperation. Such support and coopera tion inspire confidence that we may suc cessfully deal with the opportunities and problems which lie ahead. By Authority of the Board of Direc tors, President and General Manager Saint Paul, Minnesota April 9, 1952 Daibutsu, The Great Buddha at Kamakura, Japan, Erected in 1252 and Important News in 1952 jUmneapolt Jilorning tribune MINNEAPOLIS, MINN., FRIDAY, FEBRUARY I, 1952 Pnce NWA Plans Immedial Steps Toward tderg er Vol. LXXXV--No. 253 By MIBIAM ALBURN' ^A^CaptAirl"te Pact For Merger^ w Riven lr n IWA and Capital Airlines to Merge _ . Northwest and Capital Airlines will be merging operations immediately, - taking steps toi Northwest executive Businessjdilestones A/Torctpr- Northwest, Capital A.Anes Plan M . A' 0 ^e te\ ^ olders of Bothjo GetShary^Shave Plan Awaits Action ot U.S., Stockholders Friday. Complete^oining of forces vii corporation merger by the civ.; , stockholders of i i mi " " . i * A i r IM^S^rWorihwest A (Lilli ('.|it"l,_'-u1'" to sharA ^ substantU ,,,, *3TMmen,t nc t ^ North- ptrsonncl in ho Vhs". w TSScSU 11 ' 10 BIG MMES E^iX'0 vfA tfREEOHmCEBr^dV^^ Contii icd From l' : 31 the Twin Cities i ]QQ Liai bet' apital'fs the outgro^vUi of locaj shington and Detroit. Unde i .nichaels preside re of the heavy New rod and New York-P.ttsburg ,, . disposed of mos ibined Domestic Routes porls overj^e Would Equal in Lengthy py of Nation's idents. and CJ barnstor looked up v.' Hera Merger of ISortlucest routes will I fnr-one exchange of ^"`".'because 1 said--such tn n n stoclt >n the o\ ^0 Chicago nFTM, which will "-""-^Car^'Shving thA Northwest the name North^ sloc u natiohal del ^ Chicago Nettiai Airlines. 'n'h P e rem 'ath 0Ut"lm Ste system' Capital but N<>rlh*Mt an Slisaon o! TM`Ulely 2 "He presufctanding as , nolh companies 11 think nfr-erccd cornua agreement. he t ^"Uandja^ r' a pO` both companie \ ^ \to i merge Cap-imaintain substantially i North-jperS onncl in both the T eon con*!and in Washing V nichacl.jth v ^n ;tal L!neS K J \*' --^tf2vresident*ami chief e> plan Mer^er 0 ,^-grffiTon the pa ny. which will be ii \ r,r- The ritferred slock na..t.nal 1 v g \ \iU ^ THE MINNEAPOLIS STAR i doing common shares compared with 52 02 Capital. | previous year, e officer. | Capital, which ,, filed immediately gross animal busi ironautics Board seeking ap- | 1910. when i ' j r-ann rrentlv. appl . ~r general currer Iholdci _ calls fo; tereste .ancc of com-,pedited mon stoex m me merged com- orcau-e panv. whicli will he meorpotated f..ilitic- undrr the nnme Northwest-Capl- >er -n '-"St e,ob!c . "'OAr ,, ;n rth ^"e a L 05 UcS'Y'^- ll/"'' ^l-Nori jsaGf ' Capital Airline vt \\on^ate yotV^oW^' Vould Be Third largest in L7. S. Capital and Northwest Airlines raw Up Plans for Merger ; and other W ith short- ill t ght. luci ss. has been plac iul troubles, la es which have MINNEAPOLIS, MINN. FRIDAY, FEBRUARY 1, 1952 operate approxi- four i then It By S. Oliver Goodma ' the largest ould join th with the Mid It also would Orient the Twin Cities, and th rngthened. But the irai ould add an .. officer. It 1 the maemtud company's opi ill cnab ilement prev Covert (idoVion Wou'd Ooit*0 ' . jni M'ie ^/t!,ecoun'r^ i for the merger of Capi- now President and general lines and Northwest Air ager of Northwest Airlines. Pr l into what is expected toiident will be James H- t third largest American nuchael. Capnafs president, ansport system were an The merger pgreement c \ed last nigh! for " one for-one exchange ictors of both companies common stock-^^- pproved details of Ihe eon VhrP"lc'1 application A^S 1N W Uorq^' immedu KortlHvesl aero^ beco^. L omeS"c roa _^ terTriS y compn'':i>ber se T'"' ."girlin'5' *rican v Cap>1 A Pa n A1 service. only vs in oyetseas .ld , *S5ST6S#5 S`^S.?Se= .nnoUI' w -- If ay closed l for the. sharesp Cal up 50 , ,;c anV' trad^dp big f 'Stock ET tal which first among th rs espoused the cause ot U oducing this low-cost se er scheduled domestic carne veral month- i had been fl> -c juple of vears. But Capital e pn aident of traffic ravel now may with first class ; X the most alert I probablv hav< ged company. Merger to Make N W A-Capital T op ' To Merge with p I Northwest ILl Speedy Government Approval Expected , M, of HfSRy U'ARD Pines . cip!i:rzn\raio^irhin, ... -- presenled to Ihe if both serrfnn pl.^. Nor'fl"est.k-ort , Ic association H'ednestf may be mereon i ', sburh- soontr m the auation commiitcft *ystem. ni 0ne Sigamicrnc-' nneapolis Chamber J Plans for tho ft heir will consider thcl joinfly bv 71e.rger- ' - h-armicte,,. Domestic Airline Proposed merger of Northwest Airlines and Capital Airlines, as approved by directors of both ^ ^ companies, would give the consolidated cat net Northwest-Capital Airlines the largest domestic route mileage in the country. , indicated 5100 milhi Plans for the merger were announced in a joint state mem by Croil Hunter, president and general manager ot Northwest, and James H. Carmichael, president 1 Capua Homer said total demesne routes ' beserved bt me n rompanv in ihe Unlied States would be S.0S9 miles. TTus is mbinalion of Northwest s 3.S90 domestic mileage and Capi.al The CAB reports domestic lileage currently flown by L'nit- 1 Airlines is 7.800. and by Amer ican Airlines 6.515. They are present domestic leaders. ombined companies also meeting Wednesdaf ^f,'7n,('nael, presir ;_ , e committee .action/and Cro`l Huntrr r\-0t Capitabrhursc any `public President comes as a Thr 1 North ; before the \ ness in 1940. i about 51 m comes a su J been b^2 Jna'Jl'>,h C,rc,es ... . cen opera* ' ~*rJmesfic Pittsburgh . , n ^ w'csr. one 0 f the 1?27: North-Lr isent Networks I h-es. added P,rt ;h ^?.s oldest&/ I franscominenfui 'sf>,|,rSh to irai . l,chJ Between ,,T"_f.a! route in I9j8 f APProv; ihe East Coa Between vva'u- route I^K i -, Stnrra ^ 'be ro^'*TM n-t^h#W Un fed] y , flies * .ge'be1 on'O" i All"" ST PAUL, Minn.- Norlh,a4 Air Lu 1 Airlines, z of both i Merger and Capita uthonzed by director companies, would consolidated carrier. North Capital A 4/r Co, e(fera/ Fliett } addition ffshurgh Pitts-1 Orient service through/ Plans Paul-MinneapJ r'r'^rfh. Northwest ri:"Ui v^Zi'hr '"'sZZ rz: ,r^r ^ mpeg Can..-l| ha , Capita. I head. CarmkhacM Q^0 QX iOKyoL ' nrar1 nlheFarvvg Capiiii^--A huariers -T,\V;,nr 'r man-v 'ears AO\Xa'V',hen.,ral ^`ebnnslfeneral m am sw*Vft553&Sj id5 Rec Svf dn , Northwest, Capital Airlines To Merge >ncZyct Zr*o. I uuuuaien carrier. NorlhweslY fl"'^he^h/e,. nfofLlrf/J.lcompanies imp a mam new air- \UHE F^ARGO FORUM WASHINGTON. (UP) -- Capital and Northwest airlines last night announced plans to merge Ihe two companu yo' <*,, e -qua setter ^ .\nR Y .^."^edb'* ,old b'0: r'.nf' wUP * equip10*1 C T>oUr?r A\xali0t' (,-i p-for-onc exchange of /-om-1 Ixxjnded by New York New Or- stock in the merged com- lrans and Minncapohs-St. Paul, pany Northwest Airlines prefer- ^,nn Northwest flies a transcon- " " ' ` IQ. AND DAILY TRIBU Mor sre.nd ciw. MM. FARGO N D,, FRIDAY MORNING, FEBRUARY 1,1932 -- IPimi JND NW AIRLINES TO MERG Eighteen Pagea Price Five On SV, , \1 C xb Ian tr wo Ai Is Anm ^orlliw cs Combinn ub)eC' $ 6,444,634 CURRENT ASSETS Cash Accounts receivable: For transportation (including U. S. Government accounts of $3,098,885) Other current accounts $ 5,163,187 1,460,570 Less allowance for losses Inventories of repair materials and operating supplies --at average cost Other current assets: Prepaid insurance, rent, taxes, etc Recoverable federal income taxes and interest .... Property expenditures deemed reimbursable from Cash and other Collateral Accounts-security to long-term debt ($276,520 released January, 1952) TOTAL CURRENT ASSETS OTHER ASSETS Cash and other Collateral Accounts--security to long-term debt, less amounts ($652,370) deemed reimbursable to working capital during 1952 for prior property expenditures (as defined)--Note A Sundry related business investments (at cost -- no quoted market), deposits, advances, etc $ 6,623,757 50,000 6,573,757 1,239,009 $ 793,365 106,211 652,370 1,551,946 $15,809,346 $ 490,720 268,414 759,134 PROPERTY, PLANT, AND EQUIPMENT--on the basis of cost (including $10,530,708 amortized to residual amount of $230,263)---Notes A and B Land Cost $ 31,595 Depreciation and Amortization Allowances Balance $ 31,595 Aircraft and reserve ccjuipment... 39,079,139 $16,043,890 23,035,249 Conversion costs on leased aircraft 1,838,913 1,658,971 1 79,942 Buildings on land not owned .... 3,076,143 827,545 2,248,598 Other buildings and equipment.... 5,819,257 3,059,337 2,759,920 Improvements to leased property Work in progress 1.116,815 395,458 1,025,724 91,091 395,458 Non-operating property 6,619 3,023 3,596 $51,363,939 DEFERRED CHARGES Training and other costs in connection with the Boeing fleet, less accumulated amortization (over life of fleet) of $254,545 Long-term rental prepayments $22,618,490 $28,745,449 $ 542,579 146,598 28,745,449 Other deferred charges 13,558 702,735 $46.016,664 See accompanying Notes to Financial Statements. CURRENT LIABILITIES--Note C Accounts payable and accrued expenses: Trade accounts Refund of mail pay claimed by U. S. Government Salaries, wages, and vacation compensation Air travel contract deposits--gross Pay roll taxes and taxes withheld from employees' wages Retirement plan contributions, including amounts withheld from employees' wages--Note E Savings bond and other deductions from employees' wages Dividends on 4.6% Cumulative Preference Stock payable February 1, 1952 Accrued local taxes $ 4,177,424 639,574 2,347,362 578,425 415,770 80,417 104,336 110,643 338,317 $ 8,792,268 Unearned transportation revenue--estimated Federal and state taxes on income--estimated--Note F Current maturities of long-term debt, less $1,000,000 due January 1, 1952, paid in November, 1951 863,826 1,232,789 3,000,000 TOTAL CURRENT LIABILITIES $13,888,883 LONG-TERM DEBT--secured--Note A 4% Notes payable to banks under Credit Agreement--less current maturities of $3,000,000 10,140,363 DEFERRED CREDIT Unearned interest income 15,893 CAPITAL STOCK AND SURPLUS--Note G Capital stock: Cumulative Preference Stock, par value $25.00 per share; authorized 600,000 shares issuable in series: 4.6% Cumulative Preference Stock Series; authorized and issued 390,000 shares; entitled upon liquidation (voluntary) or redemption to $25.75 per share to May 1, 1953, thereafter to $25.25 per share, plus accumulated unpaid dividends; convertible to January 1, 1957, into one and one-half shares of Common Stock for each share of 4.6% Cumulative Pref erence Stock--Note C: Outstanding 384,845 shares after deducting 5,155 shares permanently retired through market fund purchases .... $ 9,621,125 Common Stock, par value $10.00 per share--Note FT: Authorized 3,000,000 shares; issued and outstanding 820,858 shares 8,208,580 Capital surplus (after deduction of $560,625 for part of dividends paid on 4.6% Cumulative Preference Stock)--see statement of surplus 2,821,033 $20,650,738 Earned surplus--see statement of surplus 1,320,787 21,971,525 CONTINGENT LIABILITIES^--Note I COMMITMENTS--Note J $46,016,664 See accompanying Notes to Financial Statements. NORTHWEST AIRLINES, INC. Year Ended December 31, OPERATING REVENUES Transportation: 1949 1950 1951 Passengers Mail, including amounts from foreign govern- $27,873,942 $33,148,395 $35,192,765 ments--Note D 8,508,884 10,469,715 8,408,679 Express, freight, and excess baggage 3,426,022 4,388,119 4,648,127 Charter and other 74,626 227,007 305,159 Pacific airlift for the U. S. Government--Note L .... 3,969,670 5,723,548 Repair and service income, rents, etc.--net 87,273 253,794 406,782 OPERATING EXPENSES--Note E $39,970,747 $52,456,700 $54,685,060 Flving operations $11,139,374 $15,654,788 $15,109,156 Ground operations 5,710,053 6,385,189 6,734,534 Maintenance and repairs 7,970,909 12,024,822 11,837,319 Passenger service 2,252,960 2,903,744 3,382,318 Traffic and sales 3,608,294 3,984,494 4,200,676 Advertising and publicity Administrative and general, pay roll taxes, property 1,353,129 1,442,156 1,281,198 taxes, etc 2,926,360 3,360,158 3,623,099 Provision for depreciation and amortization Provision for doubtful accounts, adjustments, 3,981,713 5,873,247 5,428,593 recoveries, etc 35,983 24,927 27,923 $38,978,775 $51,653,525 $51,624,821 OPERATING PROFIT OTHER INCOME $ 991,972 $ 803,175 $ 3,060,239 Interest on marketable securities 23,307 7,235 126 Discounts and interest earned 55,473 70,529 77,921 Profit from disposals of property--net 19,737 129,850 481,055 Profit from sale of surplus parts inventories 120,210 69,430 111,281 Sundry 34,909 51,714 10,126 OTHER DEDUCTIONS Interest and debt expense: $ 1,245,608 $ 1,131,933 $ 3,740,748 Interest on long-term debt $ 377,101 $ 772,026 $ 619,971 Other long-term debt expense 35,179 13,121 33,625 $ 412,280 $ 785,147 $ 653,596 Other interest expense 5,187 13,803 127 Route extension and development 5,369 5,905 2,314 Sundry 45,653 59,883 99,040 $ 468,489 $ 864,738 $ 755,077 PROFIT BEFORE TAXES ON INCOME TAXES ON INCOME--Note F Estimated federal and state taxes on income (no $ 777,119 $ 267,195 $ 2,985,671 excess profits taxes required) Reduction in taxes on income arising from carry- $ 310,000 $ 135,000 $ 1,425,000 forward of operating loss of prior year 310,000 135,000 225,000 $ $ $ 1,200,000 NET PROFIT--Notes K and L $ 777,1 19 $ 267,195 $ 1,785,671 See accompanying Notes to Financial Statements. CAPITAL SURPLUS Balance at beginning of year (1949 after deduction of $336,375 for part of prior dividends paid on 4.6% Cumulative Preference Stock) $ 3.007.242 $ 2,782.992 $ 2,821,033 Additions : Excess of par value over cost of 5,155 shares of 4.6% Cumulative Preference Stock permanently retired through market fund purchases 37,979 Excess of cash received over par value of 50 shares of Common Stock sold from treasury .... 62 Cash dividends on 4.6% Cumulative Preference Stock, 57.50 cents per share for the two quarters ended May 1. 1949, during which there was no $ 3,007,242 $ 2,821.033 earned surplus available for dividends 224.250 Balance at end of year (after deduction of $560,625 for part of dividends paid on 4.6% Cumulative Preference Stock) EARNED SURPLUS $ 2.782,992 $ 2.821.033 Balance at January 1, 1949, as previously reported.... Deduct retroactive adjustments of mail pay, pro visions for depreciation, war contract costs, rent. $ 108,778 and related taxes on income--Note K 396,458 Adjusted balance at beginning of year ($ 287,680) $ 265,189 Add net profit for the year 777,1 19 267,195 $ 489,439 $ 532,384 Cash dividends on 4.6% Cumulative Preference Stock: 57.50 cents per share for the two quarters ended November 1, 1949 $ $1.15 per share for the four quarters ended November 1, 1950, and 1951 28.75 cents per share for the quarter ending February 1, 1952. declared but not paid in 1951 : 224,250 $ 444,053 $ ; 224,250 $ 444,053 Balance at end of vear $ 265,189 $ 88,331 $ 2.821,033 $ 2,821,033 $ 88.331 1,785,671 $ 1,874,002 $ 442,572 110,643 $ 553,215 $ 1,320,787 ( ) Denotes red figure. See accompanying Notes to Financial Statements. December 31, 1951 NOTE A--BANK CREDIT AGREEMENT The Credit Agreement with banks (with which Reconstruction Finance Corporation has agreed upon request of the loaning banks to purchase a partici pation in the loan) requires annual fixed payments of $4,000,000 in equal installments on the first days of each calendar quarter. Additional payments, in determinate in amount and contingent upon happen ings specified in the Agreement, also may be required. The loan is secured (a) by chattel mortgages on NOTES (Continued) certain flight equipment which at December 31, 1951, was carried in the accounts at a depreciated cost of $19,333,571; (b) by mortgages on certain hangars and other improvements at airports at Minneapolis, Minnesota, and Seattle, Washington, carried in the accounts at December 31, 1951, at a depreciated cost of $1,228,738: and (c) by Cash and other Col lateral Accounts aggregating $1,143,090 which in clude the note and chattel mortgage referred to in Note B. Under certain conditions, among other things the replacement of the released or destroyed, or the repair of damaged, property and/or equipment, monies in the Cash Collateral Accounts may be released to the Company. Under the Credit Agreement, the Company also is required to maintain as additional security for the payment of principal of and interest on the loan, a Cash Collateral Account, which at all times, shall be equal to the excess of the unpaid balance of the loan over 80% of the depreciated cost of all flight equipment. At December 31, 1951, no amount was required as such collateral. The Company has covenanted that, among other things, it will not permit the excess of current assets over current liabilities (exclusive of current maturities of long-term debt) at any time to be less than $4,000,000. B--MARTIN 202 FLEET At December 31, 1951, the Company had retained eleven of its fleet of Martin 202 aircraft withdrawn from scheduled operations in March, 1951; and these were under lease to and operated by Transocean Air Lines, Inc. The remainder of the fleet had been sold or otherwise disposed of. Three of the aircraft were sold to Transocean Air Lines, Inc. for a con sideration including a note on which there was a balance of $476,799 owing at December 31, 1951. That note and chattel mortgage on the aircraft secur ity thereto had been deposited as part of the security to the Company's long-term debt. The Company's investment (net carrying amount) in the aircraft leased to Transocean Air Lines, Inc., and other related spare engines and parts, aggregated $3,169,205 at December 31, 1951. The Company is presently completing arrangements for the sale of nine of the retained aircraft and related spare engines and parts for approximately $3,175,000, which is in excess of the net carrying amount of all such flight equipment. In the opinion of the manage ment of the Company, the amount ultimately realiz able through sale, exchange, or other disposition of the remaining two aircraft and related spare engines and parts will be not less than the net carrying amount. C--MARKET FUND FOR 4.6% CUMULATIVE PREFERENCE STOCK So long as any of the 4.6% Cumulative Preference Stock is outstanding, the Company is required to set aside on or before March 31st in each year to and including 1957, an amount equal to 10% of its net earnings (as defined) for the preceding calendar year, but not more than 3% of the par value of such Stock theretofore issued. Such funds are to be used to purchase such Stock on the market at a price not exceeding $25 per share exclusive of brokerage charges and taxes. Any funds not so applied during the twelve months period following the date of having been set aside will revert to the Company. After 1957, other, and cumulative, sink ing fund provisions become applicable. Pursuant to the foregoing provisions, the Company is required to set aside $76.875 on or before March 31, 1952. During any period while the Company is in default with respect to payment of dividends on the Cumu lative Preference Stock, the Company shall not purchase any of such Stock except pursuant to an offer to all holders thereof and shall not redeem less than all of such Stock then outstanding. D--MAIL TRANSPORTATION COMPENSATION The Civil Aeronautics Board in orders issued in April and November, 1951, tentatively and retro actively adjusted the Company's mail transportation compensation for the period September 26, 1946, to December 31, 1950, as to international routes, and for the period December 8, 1947, to December 31, 1950, as to domestic routes. The order made in April was issued prior to the closing of the accounts for 1950; and $1,076,009 for additional compensation awarded in that order and the income tax effect thereof were reflected in income reported for that year. The remainder ($358,483 after related federal income taxes) of the April award, and the net decrease of $574,345 established by the order issued in November, have been reflected in the Statement of Profit and Loss insofar as they pertain to 1949 and 1950 (See Note K). The Board has issued orders directing the Company to show cause why the tentative findings should not be made final. The Company's rate of mail transportation com pensation for the year 1951 is temporary. The final rates for that year will be determined through pro ceedings now being conducted before the Board. The Company believes that any changes which may result would not be material. The Company received $371,352 in 1951 and $361,526 (part of the retroactive mail transportation compensation awarded by the Board in its order of April, 1951) as partial reimbursements for loss of profits and additional costs occasioned by the temporary withdrawals from operations in 1949 and 1950 of the fleet of Martin aircraft. The remainder ($1,022,963) of such loss of profits and additional costs is involved in proceedings being conducted by the Board in which it is proposed that commencing January 1, 1952, the Company should not receive mail transportation compensation in excess of a service rate for the domestic routes. A determination to that effect would affect the Company's right to be reimbursed in the future for the aforementioned amount of $1,022,963, which has not been included in the financial statements. E--EMPLOYEES' RETIREMENT PLAN In 1946, the Company instituted an uninsured contributory trusteed employees' retirement plan. During the period covered by the Statement of Profit and Loss, contributions by the Company charged against income for its share of the cost of the plan were as follows : Past Service Future Service Benefits Benefits 1949 $18,600 $238,700 1950 18,030 271,440 1951 14,960 300,340 As of September 30, 1951, the Company's actuary reported that the indicated maximum liability of the Company for unfunded past service benefits was esti mated to be $557,789. This sum, at the discretion of the Company, may be paid to the Trustee in variable amounts each year. It is presently being funded over a period estimated not to exceed twenty-five years from October 1, 1946, the effective date of the plan. This liability for past service contributions will be re duced each time a participant dies or leaves the Company's employ prior to reaching normal retire ment age. NOTES (Continued) F--TAXES OX INCOME The Company's federal and State of Minnesota in come tax returns have been examined and settled through December 31, 1948: however, recoverable federal taxes on income arising from a retroactive mail pay reduction in 1951, together with interest thereon as well as interest on tax refunds of years set tled. have not yet been collected from the U. S. Gov ernment. G--RESTRICTIONS ON DIVIDENDS Under provisions of the Credit Agreement (Note A) the Company may not, without the prior written con sent of the representative of the lending banks and the Reconstruction Finance Corporation, pav divi dends (other than stock dividends) on, or purchase, retire, or redeem anv of its capital stock except that (a) 4.60 Cumulative Preference Stock may be re tired (Note C): and (b) dividends on such class of Stock may be declared and paid to the extent that the net improvement at the date of the declaration thereof in the earned surplus since March 31, 1949, exceeds $224,250. At December 31, 1951, such improvement in earned surplus amounted to $2,470,- 729. However, under the covenant to maintain not less than $4,000,000 net current assets (See Note A) the amount free for dividends on 4.6% Cumulative Preference Stock at December 31. 1951. was $920.463, the excess of net current assets at that date over the amount required to be maintained. The terms of the Cumulative Preference Stock also contain restrictions relative to dividends on and re purchase of Common Stock which are less limiting than those contained in the Credit Agreement. H--COMMON STOCK RESERVATIONS AND OPTIONS Of the 2,179,142 shares of unissued Common Stock: (a) 577,267J/a shares were reserved for conver sion of the 4.6% Cumulative Preference Stock : (b) 14,800 shares were reserved for options which may be granted in the future to offi cers and employees; and (c) 15,147 shares were subject to outstanding op tions (at prices approximately market at the time the options were granted) as follows: (i) 5,147 shares at $10 per share to Jan uary 10, 1954; (ii) 10,000 shares at $11.25 to October 23, 1955. I--CONTINGENT LIABILITIES The Company is involved in a number of lawsuits as follows: (a) those in which any claims paid by the Company will be fully reimbursed by the LE S. Gov ernment under terms of various war contracts; (b) those in which any claims paid by the Company will be fully reimbursed under insurance contracts; and (c) other miscellaneous claims of approximately $710,- 000 in excess of insurance coverages and approximate ly $76,000 which are not covered by insurance or other indemnification which the Company believes will be settled without material effect on its financial position. J--COMMITMENTS The Company's commitments for capital expendi tures at December 31, 1951, amounted to approxi- mately $1.180,000 of which approximatelv $1,090,000 were for spare parts and assemblies for flight equip ment. The Company had no material long-term lease commitments. K--RESTATEMENT OF PRIOR YEARS' PROFIT AND LOSS AND SURPLUS The results of operations for the years 1949 and 1950 dift'er from the amounts originally reported for those years by reason of retroactive application to the years affected of adjustments recorded through profit and loss and/or earned surplus accounts in 1949, 1950, and 1951. A reconcilement follows: 1949 1950 Net proft or loss originally reported $1,357,679 ($493,961) Additional income or deductions : Retroactive mail pay adjust ment and related income taxes recorded in 1950 (See Note D) 312,996 Retroactive mail pay adjust ment and related income taxes recorded in 1951 (See Note D) ( Adjustment of provisions for depreciation in re spect of station commu nication equipment, ve hicles, and Martin 202 radio equipment ( Adjustment of war con tract costs and related income taxes ( Overaccrual of rent ( Income taxes 682,059) 794,627 162,293) 28,850) ( 33,471) 52,647) 32,293 Net profit adjusted $ 777,119 $267,195 ( ) Denotes loss or deductions. In addition, earned surplus at January 1, 1949, as originally reported, was reduced by $396,458 for por tions of the items described above that affected prior periods. L--RENEGOTIATION OF PROFITS Operations of the Company for 1950 and 1951 in cluded transactions under fixed price contracts with the LE S. Government which provide for price rede termination and renegotiation of profits. Price re determinations have been settled through June 30, 1951, and no material changes are anticipated for the six months ended December 31, 1951. The effect of renegotiation of profits is indeterminable at this time. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors Northwest Airlines, Inc., Saint Paul. Minnesota We have examined the balance sheet of NORTHWEST AIRLINES, INC., as of December 31, 1951, and the related statements of profit and loss and surplus for the period of three years then ended. Our examinations were made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. It was not possible to confirm by communication accounts receivable from certain U. S. Government departments and agencies, as to which accounts we satisfied ourselves by other auditing procedures. In our opinion, the accompanying balance sheet and related statements of profit and loss and surplus present fairly the financial position of NORTHWEST AIRLINES, INC., at December 31, 1951, and the results of its operations for the period of three years ended at that date, in conformity with generally accepted accounting principles applied on a consistent basis. Saint Paul, Minnesota March 14, 1952 ERNST & ERNST Certified Public Accountants SHANGHAI DAI R N HARBIN MUKDEN KOREA TOK1IO HE HILIPPINES OKINAWA iNIL A HONG KONG P U I Ai A O NO ROUND U n I ri H W " *0I'ID NANKING *** PEIPING coNNtcnoNs m m : : LEGEND Note: HAWAII HONOLULU Ivii-r* I HE President's Letter refers to a proposed merger between Northwest Airlines, Inc., and Capital Airlines, Inc. This map shows the routes presently certificated to Northwest Air lines and to Capital Airlines and indicates the complementary route structures of the two systems. Northwest Airlines Routes Presently Operated Capital Airlines Routes Presently Operated Northwest Airlines Routes Certificated but not Presently Operated Connecting Airlines Seoul, Korea, is presently being served through Pusan. CALENDAR YEAR ` J?Sc CJemJ $4,371,533 4,122,222 602,220,853 613,446,244 495,114,870 386,509,809 9,142,552,000 9,975,120,154 9,445,597,392 8,052,148,614 5,473,873,894 4,099,317,238 19,531,632 $35,192,765 $8,408,679 26,868,177 33,148,395 27,873,942 9,409,526 25,908,552 3,163,278 9,039,154 24,074,778 2,072,362 22,288,002 20,824,912 19,304,234 8,444,106 1,019,497 553,875 409,613 382,544,382 385,858,473 218,469,773 20,520,631 18,062,492 10,060,619 6,073,967 4,018,340 1,254,257 5,396,757,098 12,870,714 ,649,575 246,030 297,941 240,800 118,885 79,531 120,834,296 4,900,802,947 4,005,180,807 2,528,042,954 1,871,311,191 1,370,076,043 7,523,146 1,500,874 3,139,713 63,787,683 52,061,159 59,659,145 51,175,254 4,584,766 1,353,822 2,410,512 2,526,721 4,931,815 ,850,601 6,353,659 1,955,826 2,151,311 6,079,669 1,769,735 61,186 1,324,728 34,749,246 1,166,518,244 5,399,024 1,763,288 829,554 41,625 21,153,258 1,116,975,430 5,310,015 1,286,549 761,839 33,768 16,685,852 841,274,933 1,076,293 4,462,439 759,981 27,318 16,528,401 671,011,789 1,050,639 3,699,818 481,528 12,388 10,342,834 315,817,803 629,724 2,841,198 1,643,127 199,074 4,319 4,301,145 251,133 44,034,248 82,613,032 188,966 4,108,313 4,127,800 762,208 1,823,850 200,984 77,867,566 884,719 1,639,015 205,164 3,934,093 917,635 89,706,330 1,434,555 119,349 648,799 2,129,600 Not Avail 1,032,340 121,075 Not Avail. 495,708 1,956,400 736,664 24,890 195,315 402,400 126.000 314,496 ,663 76,029 211,667 47,397 3 Months, 1926 MAIL REVENUE PASSENGER REVENUE MAIL POUND MILES TOTAL PLANE MILES FLOWN REVENUE PASSENGER MILES m&mt EXPRESS AND FREIGHT REVENUE "o'1)' Solv, Newsweek V/h**0 V' m>-M,k ,Abm sun never s<-rs on NORTHWEST AIRLINES HORTHV/EST A'UNES A RTHVitSt `.HOtrt 10 AlttfA AHO TH OVltHt UNtsi COASI w 0AS1 ovirmur ro HAWAII. H/tf, A*>" tW| K [}j'WjA ^ NORTHWEST AIRLINES . OM/, if'i ojj Ifxi'li <% NORTHWEST AIRLINES H*nh AIRLINES INC.