r NORTHWEST AIRLINES INC. Total Operating Re\'enues Operating Income . . . .:\.' et Earnings for the Year Per Common Share . Stockholders' Equity . Per Common Slwre . Di\'idends Paid . . . Operating Expenses- Per Available Ton-:U ile Per Ret:enuc Ton-")./ ilc Revenue Traffic- Passengers Carried Pa senger-Miles FlO\vn Ton-:\Jiles, :\fail, Freight and Express . . . . Employees at Year End . . Common Shares at Year End 1963 $168,788,040 $ 25,915,517 $ 10,452,957 $5.73 $ 68,435,947 $37.51 $ 1,822,656 21.7 46.8 2,911,914 2,179,208,000 73,082,000 6,090 L824A52 0 Based on equivalent shares to reflect Feb- ruary 1963 conversion of preferred stock. 1962 $150,453,420 $ 19,206,051 $ 7,230,392 $3.97 $ 59,711,883 $32.79 $ 1,701,743 23.9 50.2 2,437,342 1,904,112,000 68,814,000 5,788 1,820,781 1963 IN REVIEW Special Notice to Stockholders NEW DEVELOPMENTS SINCE DECEMBER 3t 1963 Flight Equipment Orders On February 24, 1964, your Company announced the purchase from The Boeing Company of 13 new fan-jet aircraft subject to completion of n~cessary financing ar- rangements. Included in the new orders are two Boeing 720B fan-jets and 11 Boeing 727 three engine fan-jet transports at a to- tal cost, with related spares of $68,800 000. Deliveries of the 720B's are scheduled for July and August 1964. The 727 deliveries will start in ovember 1964 and will con- tinue during 1965, with the last aircraft scheduled for January 1966. Upon com- pletion of this program Northwest will have a fleet of 35 Boeing fan-jet aircraft made up of: Service Range Intercontinental Medium to Long Range Short to Medium Range "Including 4 leased. Type 320B/ C 720B 727 No. 8 16 11 35 Our Electra II prop-jets and such remain- ing piston aircraft as may be required for service needs in special areas will round out a well-balanced fleet of aircraft designed to develop the maximum potential of our growing traffic. Financing Arrangements for financing of the new purchases include a broadening of the Company's equity base by a rights offering and replacement of our existing bank cre- dit arrangement with a new one, as well as the application of internally generated funds. Common Stock: You have already been advised by Prospectus dated March 18, 1964, of the Company's offering of new shares of Common Stock to stockholders of record on 1arch 18 at the rate of one new share for each four shares held. Your Di- March 20, 1964 rectors have decided to recommend to the stockholders of the Company that at their annual meeting in May 1964, they appro e a 2-for-l split of the Common Stock to be effective shortly thereafter. Bank Credit: Subject to satisfactory com- pletion of the equity financing referred to herein, re ision of orthwest Airlines' ex- isting bank credit agreement will provide for an increase of our revolving credit to a maximum of $36,000,000 remaining at that level through 1965, and thereafter sub- ject to reduction of $6 000,000 on each June 30 and December 31 in the years 1966, 196""' and 1968. _Tew interest rates have been negotiated at 4% for funds borrowed and ~i% for funds committed but not dra,,m down. These rates compare with interest at 5% and %, respecti ely, in the present agreement. Outstanding bank loans un- der the present agreement amounted to $11,000,000 at :March 17 1964. Under terms of the new bank credit agreement the 6%' Subordinated Note of ~7 500 000 payable to The Boeing Company and the 5% Condi- tional Sales Contracts of $5,771 025 for the Lockheed Electras will be repaid by early April 1964. Dividends Your Directors have declared a cash div- idend of 30c per share of Common Stock payable on March 31, 1964, to holders of record of shares outstanding on March 18, 1964. This is an increase over the dividend of 25c oer share paid each quarter during 1963. Dividends in years prior to 1963 were paid at 20c per share per quarter. NOTE: Your attention is directed to the Prospectus mailed to you on March 18. The offering by the Company of add-itio-nal Common Stock is made only by the Prns- pectus upon the terms and c011ditions de- scribed therein. Action must be taken to P-xercise or to dispose of your rights to sub- scribe for the new shares by 3:30 p.m. Neu York City time Ap-ril 1 1964. Such rights will be of no value after such time and date. (Included as a supplement to Northwest Airlines, Inc., 1963 Annual Report) NORTHWEST AIRLINES ORDERS 11 BOEING 727 FAN-JETS BOEING 727 FAN-JET AIRLINER, WITH ARTIST'S CONCEPTION OF NORTHWEST'S MARKINGS THE BOEING 727 AIRCRAFT General Specifications Powerplants Three aft-mounted Pratt & Whitney JT8D-l fan-jet engines Rated thrust, per engine Cruising speed Maximum gross takeoff weight Maximum landing weight Wingspan Over-all length Wing sweepback angle Passenger capacity 14,000 pounds in excess of 600 mph 160,000 pounds 135,000 pounds 108 feet 133 feet, 2 inches 32 degrees 92-99 Operating Characteristics: The 727 will be used by Northwest Airlines on route segments of sh01t-to-medium length. Through a combination of carefully designed wing high-lift devices, th e 727 requires only a 5,000 foot runway for normal operations. THE PRESIDENT'S LETTER TO OUR STOCKHOLDERS: , e are plea ed to report th compl tion of anoth r ucc s fol the first time in orthwest irlin s' history th y ar n t profit earned on record re\ enues of nearly $169,000 000. ar of operation. For xceeded $10 000 000, Your Company improved its er ice to th public in man ways during 1963- by offering increased sch dules on key rout s with our e, panding fl t by providing nev and enlarged terminal facilities to accommodate our cu tom r ; and by continued mphasis on a high standard of courteous personal service to pass ng rs and hipper alike. Th se efforts ha e been rewarded v ith increas d haffic and re enu s. Operating expen s required only 84.6 of ach r \ enu dollar in 1963 compar d v. ith 87.2 in 1962. nit cost of capacity offered d clined from 23.9 p r available ton-mile in 1962 to 21.7 in the y ar just ended. Our br ak- en pass ng r load factor to co er oper- ating costs and interest declined to a new low of 41.6 p r cent. Two important flight equipment changes took place in 1963. , e r ceived d livery of five Boeing int rcontinental 320B fan-jet aircraft and, at year- nd had on order for d livery in the first half of 1964 three long-range 320C aircraft and on additional 720B fan-jet. During 1963 we sold our remaining four DC-8 aircraft with th result that w now have a tandard fleet of fan-jets for greater operating effici ncy and conomy. We have continued our program for orderly disposal of piston aircraft. Significant accomplishments have been made in the area of labor relations. After ettlements concluded during 1963 and early this year we now ha e closed agreements with 17 of our 18 labor groups, and the only contract which remains op n is cunently in mediation. Major agre ments extend to dates ranging from S ptember 1965 to August 1966. Your Company is fortunate to have a well-hained staff of experienced people representing 57,000 years of service averaging more than nine years per employ e. The favorable results achieved by orthw st Airlines in 1963 are due in no small part to the fine spirit of interest and cooperation di played by our stockholders. I greatly appre- ciate your valuable support and assistance, so e sential to continued success. Sincerely, tfarch, 1964 37TH ANNUAL REPORT TO STOCKHOLDERS FINANCIAL RESULTS Continued growth of operating revenues and further improvement in net earnings marked 1963 as another year of sound financial progress for your Company. Northwest Airlines now has recorded net profits in each of 15 consecutive years. orthwest had revenues of $168,788,040 and operating expenses of $142,872,523, which re- sulted in net operating income of $25,915,517. This operating net income is equal to 15.4% of gross revenue. Nonoperating charges in 1963 included interest expense of $3,876,789 and a loss before taxes of $307,732 on disposals of property. In 1962 the nonoperating charge for interest expense was $5,040,266 and there was a profit before taxes of $346,352 from disposals of property. et earnings after taxes for 1963 were $10,- 452,957, an increase of $3,222,565 over the net earnings of $7,230,392 in 1962. The Company is amortizing over an eight-year period the net jncome tax credit allowable under the investment credit provisions of the Revenue Act o~ 1962. Such credits were included in net earnings and amounted to $106,400 in 1963 and $18,000 in 1962. Operations in 1963 generated a total cash Bow of $34,170,756 from net earnings plus deprecia- tion and deferred income taxes. An additional amount of $21,738,798 was realized from the value of Bight equipment sold. The major appli- cation of funds during the year consisted of ad- ditions to Beet and deposits on aircraft for deliv- ery in 1964, which together totaled $44,731,204. Other applications included debt reduction and payment of dividends. ( See next page.) Stockholder Earnings and Net Worth As a result of conversion of the Cumulative Pre- ferred Stock early in 1963, the entire stockholder equity in orthwest Airlines is reflected in the net worth of Common Stock. Net earnings of $5.73 per common share were realized in 1963. This compares with $3.97 per share earned in 1962 ( on the basis of shares adjusted to reflect the subsequent conversion of preferred). Quarterly cash dividends of 25 cents per share -or $1.00 per year-were paid on Common Stock during 1963. An unbroken record of consecutive quarterly cash dividends now has been main- tained for a period of nine years. Total net worth, or stockholders' equity, in- creased from $59,711,883 to $68,435,947 during the year ended December 31, 1963. This was a net gain of $8,724,064 resulting principally from profit for the year less dividends paid. Book val- ue of each share of Common Stock was $37.51 at December 31, 1963, marking an increase of $4.72 per share over the comparable book value of $32.79 one year earlier. Financial Position Long-term borrowing arrangements remained essentially unchanged during 1963 and outstand- ing debt at the close of 1963 amounted to $72,- 735,360 of which $7,739,845 is shown in current liabilities as maturing in 1964. Payments on debt in 1963 included interim repayment of $10,500,000 on bank loans under the revolving feature of that agreement and $2,786,013 paid on the Conditional Contracts of Sale for Lockheed Electras. More than 60 per cent of the latter debt now has been repaid. At year-end your Company had on order, for delivery in 1964, one Boeing 720B and three Boeing 320C fan-jet aircraft at a total cost of $28,185,000. Of this amount $8,700,000 was on deposit with manufacturers with the balance available from our existing credit line and from internal cash generation. NET EARNINGS 12.0 . . - - - - - - - - - - - - - - - - , 10.0 t----- - - - - - - - - - - - - - 1 (J) 0::: --- 2.0 - 0 ......_..--..___.. ........ _...__..___......._ ............... _.. 1959 1960 1961 1962 1963 1963 OPERATIONS Total transport revenues reached a new high of $169,642,000 in 1963, showing an increase of 12.7 per cent over the total of $150,484,000 for 1962. "Milestones" were passed in two traffic categories: Revenue ton-miles in all services ex- ceeded the 300 million mark; revenue passenger- miles on scheduled routes exceeded two billion. Passenger Traffic and Revenues In 1963 orthwest Airlines carried 2,912,000 passengers ( one-half million more than in 1962 ) for a total of 2,179,000,000 passenger-miles. The latter measure showed a 14.4 per cent increase over 1962. Gains generally were consistent throughout the system with domestic and inter- national passenger-miles up 12.8 and 19.5 per cent, respectively. Additional service with our expanding jet fleet brought improvement in the competitive standing of the Company in many areas. For example, there were substantial gains in the Florida markets, which have been de- veloped to a level which provides an important seasonal balancing effect in our year-round traf- fic. Total passenger revenues of $135,222,000 were 11 per cent more than in 1962, a smaller per- centage increase than the traffic gain. This relationship was the result of a reduction in the system average net fare per passenger-mile from 6.40 cents in 1962 to 6.21 cents in 1963. Lower yields were caused for the most part by a num- ber of new promotional fares introduced by several of the other airlines primarily for com- petitive reasons. Some of these new fares, in- cluding the military standby rates, appear to have had a favorable net effect on over-all reve- nues. Others appear to have done little more than create dilution of yield. The Civil Aeronau- tics Board presently is conducting an investiga- tion of some of these promotional fares. Cargo and Charter Traffic Increased cargo capacity made available dur- ing the last half of the year in your Company's new 320 series fan-jet fleet contributed to large increases in cargo traffic during 1963. System freight and express ton-miles were up 12.0 per cent, including a major gain of 22.1 per cent on the international portion of our routes. Mail tonnage held relatively steady in 1963. Over- all revenues from nonpassenger traffic totaled $27,978,000 or 7.4 per cent above 1962 revenues. In July, 1963, Northwest Airlines commenced greatly increased charter operations for the mili- tary establishment, utilizing jet aircraft in serv- ices to Alaska and the Orient and DC-7C/F piston aircraft in a mid-Pacific island schedule. Approximately $9,300,000 in charter revenue will be obtained from this operation in the fiscal year ending June 30; 1964. Efforts will be made to secure renewal of these contracts for fiscal 1965. Operating Costs Total operating expenses were $142,873,000 in 1963, or $11,625,000 more than in 1962. Em- ployees' wage rates and the cost of services and supplies increased during the year. Expanded service to the public, reflected in a 16.4 per cent increase in available seat-miles, also require - - - - - - - --------1 0::: <( _j _J 125 1 - - - - -- - - --------1 - 1- z w 0 50 0::: 45 w n.. 40 0 0 1959 1960 1961 1962 1963 LL 0 100 t - - - -- i (J) z EXPENSE PER AVAILABLE TON MILE 0 75 f - - _j 30 1----------------------1 _j ~ 50 ,___ (J) 1- 26 z W 24 25 _ 0 22 O L..-----------------' 1958 1959 1960 1961 1962 1963 1959 1960 1961 Source and Application of Funds for 1963 Working Capital at January 1, 1963 ......................................................................... . Source of Funds: T et Earnings ................................................. ......................................................... $10,452,957 Depreciation and Amortization .......................................................................... 19,158,899 Deferred Taxes . . . ...... . . .. . . .. . ............... .... .. .... .. . . .. . . .. . . ........ ... . ...... .... . ... .. .. . . .. . ... . . . . .. ... 4,558,900 Total from Operations ...... .................................................................... ........ $34,170,756 Disposals of Operating Property .......................................................................... 21,738,798 Other Sources ......................................................... .............. ................................. 310,932 Total Funds Available ................................................................................. . Application of Funds: Addition to Operating Property .......................................................................... $36,031,451 Advance Depo its on Aircraft .............................................................................. 8,699,753 Reduction of Long-Term Debt .......................................................................... 9,972,013 Cash Dividends ...................................................................................................... 1,822,656 Other Applications ............................... ................ ................................................. 1,517,136 Working Capital at December 31, 1963 .................................................................. .. 1962 1963 $ 8,049,066 56,220,486 $64,269,552 58,043,009 $ 6,226,543 FLEET i orthw t Airlin s during 1963 took delivery of fiv intercontin ntal-range Boeing fan-jet 707-320B airliners. Th e aircraft, put into serv- ic on rout to Alaska and the Orient, enabled your Company to provide an all-jet patt rn of r ic in the Pacific. nother important development in orth- west's fleet which took place in 1963 was the al of th airlines remaining four DC-8 turbojet aircraft to another carrier. Three were delivered during th year, with the fourth-retained for use in tran -Pacific conhact operations for the Mili- tary Air Transport Service-to be delivered next June 30. Sale of the DC- fl et was important in two ways: ( 1) It enabled orthwest to standardize on Bo ing equipment with resulting economies in pare parts inventories and maintenance facili- ti s. ( 2 ) The DC-8 sale made it possible for ~orth, e t to provide fan-jet aircraft on all of it comm rcial jet s 1-vices, using Boeing 320B and 720B aircraft. During 1963 and early 1964, ::--Jorthwest al o old and delivered three piston- engined DC-6B transports. Proceeds from sale of these aircraft have been utilized in our equip- m nt program. ltoaether, with the 720B's obtained in prior years th five 320B's delivered in 1963 and an additional 720B delivered early in 1964, 1 orth- w t at present operates a total of 19 fan-jet aircraft in addition to the one DC-8 turbojet on military flights. Your Company also operates a fleet of 16 fast jet-prop Electra II aircraft, 6 DC-7C' and 8 DC-6B s, two of which have been sold and will be delivered to the purchaser in Ma and Jun 1964. In April, May and June, 1964, Northwest will take deliv ry of three additional intercontinen- tal Boeing fan-jets. These aircraft, 320C con- vertible cargo-passenger aircraft, will be used to increase both passenger and cargo lift across the Pacific. Looking even farther into the future, orth- west during 1963 deposited $400,000 with the Federal Government to rese1-ve delivery positions on four supersonic transports for the early 1970's. FACILITIES The year 1963 saw a continuation, on the part of Northwest Airlines and the managements of the airports it serves, of the years-long program of improving ground facilities in the interests of customer convenience and more efficient operations. We occupied new terminal structures at Win- nipeg and Tokyo in 1963. In early 1964, new terminals were opened at Taipei and Grand Forks. Spokane began construction of a new terminal during 1963 and Bismarck is scheduled to undertake similar work in spring, 1964. Complete restaurant facilities were opened in orthwest's new unit terminal at John F. Ken- nedy International Airport, ew York. Top Flight Loaders-enabling jet passengers to walk directly from terminal concourse levels into airliner cabins without exposure to the weather or climbing stairs-proved to be so popular at Seattle-Tacoma, Minneapolis-St. Paul, Chicago 1 ew York and Miami in 1963 that their installation at Detroit and Portland has been programmed for 1964. A new city ticket office was designed and oc- cupied at Cleveland. In the past five years we have occupied our new Main Base at Minneapolis-St. Paul and new or substantially improved terminal facilities at most of our major stations. PERSONNEL Northwest Air lines' highly experienced and efficient work force has utilized an excellent Beet of aircraft and ground facilities of match- ing caliber to continue the airline's high stand- ards of efficient and convenient service to the public. The airline's system-wide force of 6 090 em- ployees-a net increase of 302 persons-represents in the aggregate more than 57,000 years of ex- perience with the Company, providing the foun- dation for the service and airmanship that contributed to the success of your Company in 1963. The average length of service for our employees is more than nine years. Further contributing to the stability of your Company's work force, collective bargaining agreements were reached during the year with 11 classes or crafts of employees providing for reasonable rules, working conditions and rates of pay. Major agreements were signed for three- year terms. Early in 1964, agreement was also reached with the pilot group on a new, 43-month conh act which will run until September 1, 1965. orthwest during 1963 took a major step toward insuring for future years a ready pool of qualified and experienced personnel for man- agement positions by the introduction of a for- mal management selection and development pro- gram. Included as one of its features is the recruitment of promising college graduates from campuses across the nation. Young men who have completed their initial training under this program have been assigned to positions in the Sales, 1aintenance & Engineering and Finance Departments where they will continue to de- velop their management capabilities. This new plan for personnel development is in addition to our long-established training pro- gram under which all employees are instructed in the latest techniques to insure continued safe and efficient operation of the airline. EMPLOYEES BY LENGTH OF SERVICE 25 years or more...................................... 92 20 to 25 years................................. ........... 556 15 to 20 years............................................ 883 10 to 15 years ............................................ 1,121 5 to 10 years............... ............................. 867 1 to 5 years ............................................ 1,880 Less than 1 year...................................... 691 Total .. .. ..... 6,090 Ten Years of Revenue and Traffic Growth Traffic-Scheduled Services Total Ton-Miles Operating Passenger Freight and Year Revenues Miles Express Mail 1963 $168,788,040 2,179,208,000 39,417,000 33,665,000 1962 150,453,420 1,904,112,000 35,179,000 33,635,000 1961 111,052,512 1,361,790,000 23,035,000 26,955,000 1960 123,361,479 1,653,966,000 32,480,000 24,424,000 1959 126,029,501 1,738,138,000 31,377,000 24,436,000 1958 101,957,172 1,408,743,000 22,285,000 21,892,000 1957 83,432,404 1,205,765,000 19,714,000 17,803,000 1956 76,479,526 1,094,121,000 18,825,000 16,780,000 1955 71,088,043 1,017,400,000 16,341,000 15,407,000 1954 62,138,312 909,675,000 12,970,000 6,990,000 CUSTOM ER SERVICES Expansion of Northwest Airlines' jet capabili- ties in 1963 provided a number of significant schedule improvements better to serve the in- creasing volume of passengers and shippers re- sponding to the advantages of air transportation. In response to the growing service needs of our domestic routes, we added jet and jet-prop frequencies in a number of markets. In the Detroit->;ew York market, for example, we in- creased daily flights by 60 per cent and capacity from 687 seats a day in January, 1963, to 1,306 seats daily in January, 1964, schedules. In order to increase service in our Florida markets, we provided a total of 16 one-way flights a day b e- tween Chicago and Florida points during the l1eight of the current winter season. In :\fay, 1963, by scheduling an eighth trans- Pacific jet frequency each week and assigning 720B fan-jets to interport flights beyond Tokyo, we achieved an all-jet pattern of Orient services. Delivery of longer-range 707-320B aircraft en- abled the Company to inaugurate in 1 ovember the first regular nonstop service in both direc- tions bet\veen the West Coast of the nited States and Tokyo. The new 707-320C fan-jets which Northwest will acquire during the spring of 1964 will permit an increase in trans-Pacific schedules to 12 round trips weekly bet\veen the United States and the Orient to fulfill the need for passenger and cargo lift across the Pacific. At least seven of these round trips each week will be on the nonstop routing benveen Seattle-Tacoma and Tokyo, with the remainder operating nonstop benveen Tokyo and Anchorage. The new 320C's-with a large-door forward cargo area-will be operated in a basic con- figuration providing more than 30,000 pounds of cargo capacity and 96 passenger seats in an all-economy configuration. Main deck cargo will be carried on preloaded pallets. This arrange- ment may be varied by relocating the bulkhead separating passengers from cargo, to provide for capacity ranging from 165 passengers to an all- cargo load of 90,000 pounds. ~orthwest also increased its fan-jet service to H awaii, and in the present winter vacation season is operating eight round trips a week in the market-seven of which are through-plane flights between ;\ew York and H onolulu, via Chicago and the Pacific Northwest cities of Seat- tle-Tacoma and Portland. orthwest's in-flight operation, as well as ground handling of both passengers and cargo, were praised repeatedly through the year by customers appreciative of the continued high standards of your Company's public service. MAINTENANCE 0;orthwest Airlines' highly skilled maintenance personnel, working with dependable jet equip- m nt, have compiled an enviable record of per- formance. For example, in the three months bracketing the end of 1963, N'orthwest's turbine- engine reliability was among the best in the in- d us try. The ~ orthwest Airlines continuous overhaul maint nance program, which in prior years proved to be so uccessful on pure jet aircraft, was extended to the Ekctra fleet in 1963. This program provides for more efficient maintenance of aircraft by combining with routine check maintenance, performed every 260 flight hours, a portion of the major overhaul program formerly accomplished by removal of the aircraft from ser ic for an extended period. The additional flying time made available by this method serves to increase re enue utilization of aircraft. The JT3D-l fan engines which power our 720B airliners have undergone modification in our Main Base shops to JT3D-3 configuration to in- crease their thrust to 18,000 pounds from the original 17,000 pounds at which they were rated when this type of aircraft was delivered to orth- west. In addition, thi modification has enabled us to use these engines interchangeably on 707- 320-type aircraft as well as on the 720B, thus taking further advantage of our standardization on Boeing equipment. CHINA Hong Kong PHILIPPINES KOREA Okinawa SYSTEM MAP UNITED STATES Honolulu HAWAII Newark Washington St. Petersburg Clearwater SALES ACTIVITIES Aggressive and imaginative sales work and advertising contributed materially to the finan- cial success of Northwest Airlines during 1963. Gross revenues for the year exceeded the com- pany forecast. Several new techniques of selling were added during the year. One of these was the travel agent seminar program. Teams of experts rep- resenting orthwest and prime vacation desti- nations visited major cities across the nation. Travel agents in the cities attended seminars at which the exp rts pre ented information in depth on the area being covered, as well as on orth- west' s schedules to and from the area. Travel to Alaska was the subject of the spring seminar program and the Orient was covered in the fall. The program will be continued. Special promotional programs were held in major Midwest and Florida cities, in advance of the winter vacation season, to advise travel agents and other customers of our attractive schedule of flights in the Florida market. Advertising during the year was related closely to the over-all sales effort. The Florida cam- paign-featured by an upside-down map of the United States so as to show a jet literally heading "northwest" to the Sunshine State-par- ticularly attracted widespread attention. Two major events on Northwest's routes in 1964-the ew York World's Fair and the Olympic Games in Tokyo-will receive special attention in our sales efforts this year. Promo- tional work for both attractions got under way in mid-1963. Objective of sales, advertising and public relations activities is to build an identity for orthwest in connection with both events. orthwest was granted official status as a World's Fair ticket and information center and the airline contracted to sponsor an exhibit in the Transportation & Travel Pavilion at the fair. 1 orthwest already has a large number of tour groups booked to the Olympic Games. Heavy emphasis continued on the sale of group tours, to Hawaii, Alaska, the Orient and various domestic destinations. This program-including the sale of tours through radio stations and other public media-conhibuted materially to the growth of Northwest's passenger revenues. In its freight program, T orthwest emphasized the sale of volume cargo to and from the Orient through the ew York and Chicago gateways, utilizing the additional lift provided by the big- door, 707-320B fan-jets. Throughout the system, sales effort has been pointed toward informing shippers of the advantages of consistent use of air fre'ght as a regular rather than occasional method of dishibution. J;::j. RYING SOUlll TO FLORIDA? GO NORTHWEST r NOW ITS A FAN-JET WORLD! FLY NORTHWEST- THE FAN >-JET A/RUNE ,~ ' , - ~-------- NORTHWEST ORIENT Al RU N CS (Any U, }'Oil loolc ai tt. Northwest Is yoor best way to Florida) You're up to 2,000 miles e closer to 1 , the Orient - on Northwest . ' . YOUR NORTHWEST JET IS ALWAYS A FAN~ETI E IN HISTORY KYO/SEATTLE llll'fSn U f A!f J1SUYICl 1-00.l"O~HU ~- \.. NORTHWEST ORIENT - TH FAN > JU A/RUNE \... NORTHWEST ~,~:~N~~ THE FAN >-JU A/RUNE ROUTES There were no significant changes in or addi- tions to the routes of Northwest Airlines in 1963. On ovember 8, 1963, the Civil Aeronautics Board, with the approval of the President of the United States, ordered the Transpacific Case terminated. No additional authority was award- ed to any applicant in areas affecting orthwest in either the so-called "international" or "domes- tic" (California-Hawaii) phases of the case. One of the carrier applicants and certain civic bodies have petitioned for judicial review, limited, how- ever, to the denial of new California-Hawaii au- thority. This matter still is pending before the Court. In May, 1963, an Examiner of the Civil Aero- nautics Board issued his initial decision in the United Air Lines Competitive Service Investiga- tion, in which he found that orthwest should be granted authority to serve the Cleveland-Chi- cago, Cleveland-Philadelphia and Dehoit-Phila- delphia markets, but that another carrier should be authorized to serve the ew York-Cleveland market in which orthwest also had sought authority. Thereafter, the Board ordered review of the Examiner's initial decision on all issues. In the review proceeding, 1 orthwest vigorously pursued its application for the ew York-Cleve- land authority as well as rights in the other mar- kets. Oral argument was heard in ovember, 1963, and the matter now is awaiting the Board's decision. Directors, officers and employees of Northwest Airlines were shocked and sad- dened by the death, on January 1, 1964, of Mr. Willwm Stern, director of Northwest since August 29, 1938. "Bill," as he was known to his many friends in all walks of life, was President of the Dakota National Bank of Fargo, North Dakota, and had an important part in many state and national affairs during his lifetime. His long time interest in the Company's affairs and his outstanding abil- ities were major contributors to the growth of the Company. As previously reported, the CAB instituted a proceeding for study of possible revision of the route structure between the Pacific orthwest and Alaska. Hearings were held before a CAB Examiner during the year in which Northwest vigorously opposed any restriction on its exist- ing authority as being without valid basis. In addition, orthwest maintained that such re- striction would not be necessary to solve the difficulties other carriers serving the area might be encountering. The matter is awaiting the Examiner's initial decision. During the year the CAB disapproved a pro- posed merger between American Airlines and Eastern Air Lines which would have created a giant carrier controlling nearly 35 per cent of domestic trunkline business. This merger was opposed by orthwest as well as by most of the other hunkline carriers. In addition, Pan Amer- ican World Airways and Trans World Airlines withdrew their application for approval of a pro- posed merger in light of developments subse- quent to its submission. In an initial decision in the Service to Spokane Case, served in September, 1963, an Examiner of the CAB proposed additional route authorities for two air carriers which compete with North- west at that important city. The Examiner pro- posed that West Coast Airlines, a local service carrier, be granted nonstop rights in the Spokane-Seattle/ Tacoma and Spokane-Portland markets, and that United Air Lines be given non- stop authority from Spokane to California and from Spokane to Salt Lake City and Denver-the latter permitting United to fly one-stop from Spokane to Chicago. Northwest Airlines and other parties petitioned the CAB for a discre- tionary review of the Examiner's decision; such a review was ordered and argument was presented before the Board in February, 1964. There are several other proceedings pending before the Board in which orthwest is a par- ticipant, either as an applicant or in opposition to competitive authorizations. one of these has an importance comparable to the proceed- ings mentioned above. In addition to the applications being heard in the United Competitive Service Investigation, Northwest has on file with the CAB a number of applications for new route authority which would strengthen its route structure, particularly its dome tic system. STATEMENT OF EARNINGS NORTHWEST AIRLINES, INC. and SUBSIDIARY Year Ended December 3 I, OPERATING REVENUES Transport: Pas ng r . . nit d Stat s mail For ign mail . . Exe baaaag Fr iaht and x--pr ss . ChaTt r and oth r transportation Non transport: Mutual Aid Agre m nt-n t- ot F Fed ral mail subsidy- ot E Other . . . . . . . . OPERATING EXPENSES Flying op rations . t,.faint nanc Passenger rvice . Aircraft and traffic r icing Res rvations sales and ad ertising Administrath and g n ral D epreciation and amortization OTHER INCOME AND (DEDUCTIONS) Interest on long-t rm debt Disposals of property Other income . . . . EARNINGS BEFORE TAXES TAXES ON EARNINGS (including d erred tax s $4,336,900 -1963; $5,812,900-1962 arising principally from ace I r- ated d pr ciation methods and in estm nt er dit) 1963 $135,..,..,.., 11 L.917,441 1316 118 1146,730 12 597 52 6 441.700 $169.641,635 ( ( $16 $ 4...,,906,...,11 26 203 309 11,412 619 19 690 557 16,9 5 125 6,515 803 19 15 899 $14..., 87 ...,,523 $ 25 915,517 ($ 3, 76,7 9) ( 307 732) 19 261 ($ 4,165,-"60) $ 21,750 257 - ote G . . . . . . . . . . . . . . . . . 11 297 300 NET EARNINGS FOR THE YEAR $ 10,452 957 See notes to financial statements. 1962 $Ll,7 l 068 L ,90-1,069 l 3.A,347 1,0 3,96 10 744 241 2.646,207 $150 4 3.900 AO $ 3 , 47,73..., 23 243,505 9 5 6 053 17 658 4 7 15 6 7 673 7,678 7...,9 18,445,190 $131,....47 369 $ 19,...,06,051 ($ 5 040,...,66 ) 346 352 116 555 ($ 4 77, 59 ) $ 14 628 692 7 398 300 $ 7,230 392 ST A TEMENT OF FINANCIAL POSITION ASSETS CURRENT ASSETS Cash . ote rec iva ble from sale of aircraft Trade r ceivables, less allowance of 105,000 Flight equipment parts at average cost, less allowance for depreciation ( 1963- 2,765,206 1962-$2,529 171 ) Maintenance and operating supplies at average cost . . . Prepaid expenses . . . . . . . . . . . . . . . TOTAL CURRENT ASSETS INVESTMENTS AND OTHER ASSETS at cost Related indu try investments and other advances PROPERTY AND EQUI PMENT at cost Flight quipment . . . . . . . . . . . . Less allowances for depreciation and obsolescence . Advance on purchase contracts- ote D . . . . Other property and equipment Le s allowances for depreciation DEFERRED CHARGES namortized training and other costs in connection with aircraft Beets Rentals Other See notes to financial statements. December 31, 1963 $ 12,866,565 6,911,619 15,248 025 6,100,076 2,176,335 2,706,816 $ 46,009,436 $ 638,615 $176,654,741 49,580,630 $127,074,111 8,699,753 $135,773,864 $ 21,523,556 12,031,320 $ 9,492,236 $145,266,100 $ 3,885,157 965,385 $ 4,850,542 $196,764,693 1962 $ 16,371,029 14,037,703 6,475,526 2,181,111 2,414,788 $ 41,480,157 $ 320,332 $169,413,299 46,433,719 $122,979,580 6,327,901 $129,307,481 $ 21,103,687 10,751,430 $ 10,352,257 $139,659,738 $ 4,461,405 890,756 74,214 $ 5,426,375 $186,886,602 NORTHWEST AIRLINES, INC. and SUBSIDIARY LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable . . . . . . . . . . Collections as agent ( taxes, payroll deductions, etc. ) Accrued taxes ( other than income taxes ) Salaries, wages and vacations Air travel card deposits . . . . . Unredeemed ticket liability . . . . Income taxes-estimated . . . . . Current maturities of long-term debt TOT AL CURRENT LIABILITIES LONG-TERM DEBT, less current maturities- ote A 1otes payable to insurance companies otes payable to banks . . Subordinated note payable . Conditional sales contracts DEFERRED CREDITS- ote G Income taxes-arising principally from accelerated deprecia- tion methods Other STOCKHOLDERS' EQUITY- ote B Cumulative Preferred Stock, $25 par value, authorized 1,000,000 shares, outstanding none: Shares outstanding were called; 70 shares were re- deemed and 449,545 shares were converted into 432,254 Common Shares . . . . . . . . . . . Common Stock, $10 par value; authorized 4,500,000 shares; issued and outstanding 1963-1,824,452 shares; 1962- 1,388,459 shares- ote C Capital surplus . Retained earnings . . . COMMITMENTS AND CONTINGENT LIABILITIES- ote D See notes to financial statements. December 31, 1963 1962 $ 10,662,050 $ 8,428,916 2,488,578 2 624,246 1,316,345 2,048 746 7,764,811 5,584,258 1,195,100 1,187 875 1,865,862 1,038 843 6,750,302 1,464,362 7,739,845 11,053,845 $ 39,782,893 $ 33,431,091 $ 40 000,000 $ 40,000,000 19,000,000 21000,000 2,314 000 7,500 000 3,681,515 6,467,528 $ 64 995,515 $ 74 967,528 $ 20,707,800 $ 17,450,100 2,842,538 1326,000 $ 23,550,338 $ 18,776100 $ $ 11,240 375 18,244 520 13,884,590 13 587113 6,612 905 36,604,314 27,974,013 $ 68,435 947 $ 59,711,883 $196 764,693 $186,886 602 ST A TEMENTS OF CAPITAL SURPLUS AND RETAINED EARNINGS NORTHWEST AIRLINES, INC. and SUBSIDIARY Year Ended December 31, CAPITAL SURPLUS 1963 1962 Balance at beginning of year Additions arising from: $ 6,612,905 $ 6,586,281 Sale of shares of Common Stock under option agreements, in excess of par . Redemption of shares of Preferred Stock and conversion into shares of Common Stock . 58,213 6,915,995 1,710 24,914 Balance at end of year . $ 13,587,113 $ 6,612,905 RETAIN ED EARNINGS Balance at beginning of year Add net earnings for the year $ 27,974,013 $ 22,445,364 10,452,957 7,230,392 $ 38,426,970 $ 29,675,756 Deduct cash dividends on: $ $ 592,187 5J~% Preferred Stock-annual rate of $1.3rn a share Common Stock-$1.00 a share ( $.80 for 1962) 1,822,656 1,109,556 Balance at end of year . See notes to financial statements. ACCOUNTANTS' RE.PORT To the Stockholders and Board of Directors Northwest Airlines, Inc. Saint Paul, Minnesota $ 1,822,656 $ 1,701,743 $ 36,604,314 $ 27,974,013 We have examined the statement of consolidated financial position of Northwest Airlines, Inc., and subsidiary as of December 31, 1963 and the related statements of consolidated earnings, capital sur- plus and retained earnings for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting rec- ords and such other auditing procedures as we considered necessary in the circumstances. W e have made similar examinations for prior years. In our opinion, the accompanying statements of financial position, earnings, capital surplus and re- tained earnings present fairly the consolidated financial position of Northwest Airlines, Inc., and subsidiary at December 31, 1963 and the consolidated results of their operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Further, it is our opinion that the five year summary of earnings presents fairly the information stated therein. Saint Paul, Minnesota February 12, 1964 Certified Public Accountants NOTES TO FINANCIAL STATEMENTS NORTHWEST AIRLINES, INC. and SUBSIDIARY December 31, 1963 Note A- Long-Term Debt Under ote Purchase Agreements with twelve in- surance companies the Company has borrowed $40,- 000,000 at 6% payable $3,000,000 annually beginning October 1, 1966 and $4,000,000 on October 1, 1978. Certain optional prepayments at par are permitted. The Agreements contain other provisions with re pect to redemption as a whole, but not from borrowed funds, at premiums ranging from 5% to 1% . Under the Amendatory Credit Agreement with fifteen banks the Company has outstanding $19,000,000. This Agreement provides for revolving credit of $34,000,000 at December 31, 1963, reducing to $31,875,000 on June 30, 1964, to $27,625,000 on September 30, 1964 and to $25,500,000 on December 31, 1964. On the latter date the loan, to the extent then out tanding, become a term loan at 5%, payable $8,500,000 in each year 1965 through 1967. Optional prepayments are permitted at par, except that prepayments with fund borrowed from other banks are subject to a premium of %. Subordinated note payable of $7,500,000 was is ued in connection with the purchase of six Boeing 720B turbojet aircraft and is subordinate to notes payable to insurance companies and to banks. This note bears interest at 6% and is payable $1,500,000 annually 1968 through 1972. In addition, the note provides for pre- payments ( based on net earnings) to be applied to the reverse order of maturities. Payments totaling $5,186,- 000, ba ed on net earnings of 1963, will be required in 1964 if at the dates for payment they are permitted by pro i ion of agreements of superior indebtedness. Conditional sales contracts for the purchase of seven Lockheed Electra prop-jet aircraft bear interest at 5% and are payable in monthly installments to June 10, 1966. The aggregate repayment of long-term debt over the years 1964 through 1969 i $7,740,000 in 1964, $13,- 600,000 in 1965, $12,400,000 in 1966, $5,000,000 in 1967 and $3,000,000 in 1968. The foregoing assumes that $2,314,000 of the ubordinated note payabl will become payable in 1965. Under provisions of long-term debt agreements the Company has agreed, among other things, that it will not permit its working capital at any time to be les than certain specified amount and its funded debt to exceed certain percentages of net tangible a et , of net worth and of depreciated value of flight equipment, as tho e term are defined in the agreement . At D e- cember 31, 1963 the Company had complied with the covenants then in effect. The ote Purcha e Agreem nts and the Amenda- tory Credit Agreement e tabli h an aggregate dollar maximum for the declaration and payment of ca h dividends on Common Stock, and for the distribution on, redemption, purcha e or other acquisition of hares of any cla s of Capital Stock. The amount of retained earnings available for such purposes at December 31, 1963 was $7,152,949. ote ommon tock Option and At December 31, 1963, 6,762 unissued hares of Common Stock were subject to outstanding option , exercisable by Company officers and employee at $27.45 a share which price was not less than 95% of the market when the options were granted during 1962. Options for 2,050 shares expire in 1965 and for 4,712 shares in 1966. Options for 500 shares at $13.42 and for 3,238 shares at $27.45 were exercised during the year. An additional 150,000 shares are reserved for irnilar options which may be granted to officers and employees in th future. ote - Conumtments and Contingent abili( e~ The Company has purcha ed one Boeing 720B turbo- jet aircraft for delivery in the first quarter of 1964 for $5,607,000 and three 320C turbo-jet aircraft for de- livery in the second quarter of 1964 for $22,578,000. Deposits on these purchases aggregated $8,699,753 at December 31, 1963. Annual payments of approxirnat ly $3,100,000 are required und r variou rental agreements for lease from five to thirty-five years for airport facilities, ticket of- fices, etc. The Company was contingently liable at December 31, 1963 in the amount of $409,038 resulting from di - counting notes receivable arising from the sale of assets. Other contingent liabilities include those inherent in the Company's operation. While the amount of these con- tingent liabiliti s is not now determinable, the manage- ment of the Company is of the opinion that it is not material with re pect to the Company's financial posi- tion. C oe!lsa ion o final determination of total mail compensation ha been made by the Civil Aeronautics Board on inter- national and domestic routes for 1951. The ultimate effect of any redetermination i not known at this time. Pursuant to an order issued by the Civil Aeronautics Board, the Company has made provision in 1963 for the reduction of $1,833,123 of mail subsidy for 1954 which amounts to a reduction in net earnings of $843,000 after applicable income taxes. e The Company is party to a Mutual Aid Agreement with certain airline under which any party to the agreement uffering a trike a defined therein is to receive from the other airlines amounts as determined under the agreement. The Civil Aeronautic Board is investigating the agreement and in the event of it dis- approval, Mutual Aid payments are to be refunded to the paying airlines to the extent affected by such dis- approval. At December 31, 1963 the Company is a net beneficiary under the 0-f utual Aid Agreement to the extent of $2,615,123. The Company's investment credit was $2,929,600 for 1963 and $300,000 for 1962 and has been added to deferred taxes and other deferred credits, the latter to b r ported a earned income ov r eight year period from the respective year in which the credit ari es. $106,400 of other deferred credits have been reported as earned in 1963 and $18,000 in 1962. Taxe on earn- ings charged to the Statem nt of Earnings include d - erred taxes of $2,823,200 for 1963 and $282,000 for 1962 ari ing from the in e tment er dit. FIVE YEAR SUMMARY OF EARNINGS (Amounts Shown in Thousands) NORTHWEST AIRLINES, INC. and SUBSIDIARY 1963 1962 1961 1960 1959 OPERATING REVENUES Transport: Passenger $135,222 $121,781 $ 85,971 $ 97,680 $100,641 United States mail 12,917 12,904 10,474 9,680 10,174 Foreign mail . 1,316 1,324 1,227 1,031 1,045 Excess baggage . 1,147 1,084 914 1,183 1,349 Freight and express 12,598 10,744 7,529 10,185 10,532 Charter and other transportation . 6,442 2,646 1,482 823 526 $169,642 $150,483 $107,597 $120,582 $124,267 Non transport . ( 854 )( 30) 3,456 2,780 1,763 $168,788 $150,453 $lll,053 $123,362 $126,030 OPERA Tl NG EXPENSES Flying operations $ 42,906 $ 38,948 $ 29,269 $ 37,606 $ 37,610 Maintenance . 26,203 23,243 17,253 22,872 21,771 Passenger service ll,413 9 586 7,178 8,840 8,465 Aircraft and traffic servicing 19,690 17,658 12,446 15,422 15,5ll Reservations, sales and advertising 16,985 15,688 ll,973 13,789 14,0ll Administrative and general 6,516 7,679 6,094 5,926 6,443 Depreciation and amortization 19,159 18,445 17,118 14,413 ll,310 $142,872 $131,247 $101,331 $ll8,868 $ll5,121 $ 25,916 $ 19,206 $ 9,722 $ 4,494 $ 10,909 OTHER INCOME AND (DEDUCTIONS)-NET ( 4,166) ( 4,578 ) ( 2,828) ( 1,882 ) 335 EARNINGS BEFORE TAXES $ 21,750 $ 14,628 $ 6,894 $ 2,612 $ ll,244 INCOME TAXES 11,297 7,398 3,233 986 5,530 NET EARNINGS FOR THE YEAR $ 10,453 $ 7,230 $ 3,661 $ 1,626 $ 5,714 OTHER FINANCIAL STATISTICS Cash dividends paid ( 000 ) . $ 1,823 $ 1,702 $ 1,701 $ 1,700 $ 1,714 Earnings per share O O 5.73 3.97 2.01 .89 3.14 Stockholders' equity ( 000 ) . 68,436 59,712 54,177 52,193 52,267 Book value per share00 . 37.51 32.79 29.76 28.70 28.74 Cash ( 000 ) . 12,867 16,371 15,991 18,360 10,206 et working capital ( 000 ) 6,227 8,049 7,034 23,008 12,093 Flight property at cost ( 000 ) 176,655 169 413 170,772 121,441 104,389 Flight property at net book value ( 000 ) . 127 074 122,980 133,485 86,957 76,647 Total assets ( 000 ) 196,765 186 887 189,103 148,698 130,097 Long-term debt ( 000 ) 64,996 74,968 90,286 68,500 50,000 Operating expenses: Per available ton-mile 21.7 23.9 27.6 27.8 26.5 Per revenue ton-mile . 46.8 50.2 54.2 54.2 51.0 Break-even pa senger load factor 41.6% 45.5% 48.9% 53.7% 51.1% ( to cover operating expen es and interest) Actual passenger load factor 50.6% 51.5% 52.1% 53.8% 55.2% Available seat miles ( 000 ) 4,305,147 3,697,796 2,6ll,840 3,073,400 3,149,000 0 Operations were curtailed in the first quarter of 1961 as a result of a flight engineer strike. 00 1959-1962 based on total number of shares outstanding at end of year plus shares arising from subsequent con- ersion of preferred stock issued in December, 1958, and called in January, 1963. Northwest Airlines, Inc. DIRECTORS* CROIL HU?\TER Chairman of the Board, ~orthwest Airlines, Inc:. St. Paul, 0-linnesota JA\IES H . BI T GER President, \Iinneapoli -Honeywell Regulator Co. \1inneapolis, 0-1innesota HADLEY CASE President, Case, Pomeroy & Company, Inc. , 'e\\ York, :\'ew York \!ORTO?\ H . FRY Senior Partner, Riter & Company "\ew York, 0Jew York JOSEPH T. JOH1 SO1 Chairman of the Board, The Milwaukee Company \Iilwaukee, 'Wisconsin :\IALCOD.f S. :MACKAY President, Foothills Company Roscoe, \1ontana CLYDE B. MORGAN Chairman of the Board, Rayonier Incorporated . 'ew York, :\'ev .. York OFFICERS* DO. 'ALD W . NYROP President PAULL. BENSCOTER Vice President-Transportation Services ROBERT A EBERT Vice President-Personnel A .. E. FLOA0J Vice President and Secretary DONALD H . HARDESTY Vice President- Finance and Treasurer \DI. E . HUSKII\'S, JR. \'ice President- Orient Region DO:\'ALD W . :\'YROP President, ;\' orthwest Airlines, Inc. St. Paul, \1innesota ALO. zo PETTEYS Pre idcnt, Farmers State Bank Brnsh, Colorado C. FRA:\'K REA VIS Partner, Reavi. and \1cGrath :\'e,, York :\'e\\' York ALBERT G. REDPATH Partner, Auchincloss, Parker & Redpath :\'ew York, ?\cw York LY\IA:\' E. WAKEFIELD, JR. \'ice President, First 0Jational Bank of Minneapolis \1inneapolis, \Iinnesota A.LBERT J. WEATHERHEAD, JR. President, The Weatherhead Company Cleveland, Ohio FRA:'--JK C. JUDD Vice President-,\1aintenance and Engineering \1. JOSEPH LAPENSKY Comptroller RO?\ALD :\fcVICKAR Assistant Vice President DALE \!ERRICK Vice Pre iclent- Properties j\1ORY T. :\'U:\':\'ELEY, JR. Yice President and General Counsel C. L. STEW ART Vice Pre ident-Economic Planning ROBERT J. WRIGHT Yice Pre ident- Sales 0 As of March 1, 1964 REGISTRAR: The Chase Manhattan Bank, New York, N. Y. TRANSFER AGENT: Bankers Trust Company, New York, N. Y. STOCK LISTED: Common Stock listed on New York Stock Exchange and Midwest Stock Exchange. General Offices Minneapolis-St. Paul International Airport, St. Paul, Minn. 55111 ANCHORAGE FT. LAUDERDALE MILWAUKEE ST. PETERSBURG ATLANTA GRAND FORKS MINNEAPOLIS SEATTLE BILLINGS GREAT FALLS MISSOULA SEOUL BISMARCK HELENA MOORHEAD SPOKANE BOZEMAN HOLLYWOOD NEW YORK TACOMA BUTTE HONOLULU NEWARK TAIPEI CHICAGO JAMESTOWN OKINAWA TAMPA CLEARWATER MADISON PITTSBURGH TOKYO CLEVELAND MANDAN PORTLAND WASHINGTON, D. C. DETROIT MANILA ROCHESTER WINNIPEG FARGO MIAMI ST. PAUL YAKIMA