NORTHWEST ORIENT AIRLINES General Offices : Minneapolis-St. Paul International Airport St. Paul, Minnesota 55111 Area Code 612/726-2111 DIRECTORS * JAMES H. BI GER Chairman of the Board, Honeywell, Inc. Minneapolis, Minnesota HADLEY CASE President, Case, Pomeroy & Company, Inc. ew York, ew York A. E. FLOA Secretary, orthwest Airlines, Inc. St. Paul, Minnesota DO ALD H. HARDESTY Vice President, orthwest Airlines, Inc. St. PauL Minnesota MALCOLM S. MACKAY President, Foothills Company Roscoe, Montana DO ALD G. Mc EELY President, Space Center, Inc. St. Paul, Minnesota DO ALD W. NYROP President, orthwest Airlines, Inc. St. Paul, Minnesota C. FRA K REA VIS Partner, Reavis and McGrath ew York, ew York ALBERT G. REDPATH Vice President, Thomson and McKinnon, Auchincloss, Inc. ew York, ew York LYMA E. WAKEFIELD, JR. Vice President, Piper, Jaffray & Hopwood Minneapolis, Minnesota REGISTRAR: The Chase Manhattan Bank, ew York, ew York TRANSFER AGENT: Bankers Trust Company, ew York, ew York STOCK LISTED: Common Stock listed on ew York Stock Exchange, Pacific Coast Stock Exchange and Midwest Stock Exchange * As of iarch 1, 1973 OFFICERS * DO ALD W. YROP President JAMES A. ABBOTT Vice President-Legal CLAYTON R. BRA DT Vice President-Purchasing and Stores ROBERT W. CAMPBELL Vice President-Budgets J. WILLIAM CAMPIO Vice President-Regulatory Proceedings ROLA D W. CHAMBERS Vice President-Properties ROBERT A. EBERT Vice President-Personnel ROY K. ERICKSON Vice President-Public Relations A. E. FLOA Secretary BE JAMI G. GRIGGS, JR. Vice President-Assistant to the President DO ALD H. HARDESTY Vice President-Finance and Treasurer WILLIAM E. HUSKI S, JR. Vice President-Communications and Computer Services REGI ALD C. JE KI S Vice President-Orient Region FRA KC. JUDD Vice President-Maintenance & Engineering M. JOSEPH LAPE SKY Vice President-Economic Planning RO ALD McVICKAR Vice President BRYA G. MOO Vice President-Advertising ROBERT J. PHILLIPS Vice President-Comptroller C. L. STEWART Vice President-Transportation Services ROBERT J. WRIGHT Vice President-Sales HIGHLIGHTS OF 1972 Total Operating Re,enue Opera tin a Income .. ~ et Earn.in a for the Year Per Common hare tock.holder ' Equity Per Common hare Di,idends Paid .... Operating Ex.-penses - Per }i.sailable Ton-:\Iile Per ReYenue Ton-~Iile ReYenue Traffic - Pas enaers Carried . Pas enaer-:\Iile F1o n1 Ton-:\1iles :\fail, Freiaht and E:\.-pre Common hare at Year End Employee at Year End 1972* 39:....500 605 15 09 630 1- ,6 :2 391 16.9c -19.6c 5150.636 -1565 61 ,000 :215 -1 -1 000 :...1 604136 10 000 1971 S -125 519,:...46 1 166.--120 21 361.:26:... 1.01 -1 -;,053.9:...2 22.56 9 51 530 14.5c -12.lc 6 0 9,:2 3 5 553 043,000 25 ,099.0 :...1,1-19. 56 10)13 *Operatina resul were affected by a major strike which e:x.-tended from June 30 through October 2 19 2. President' :\fe sage DC 10-40 Arri,es Financial Re,ie,, of 19 .... :2 _ ~YA. Jet Fleet Financial Reports Route Case Route :\fap TABLE OF CONTENTS Co er Photo: Xorthu;est Orient Airlines' neu;est Jet aircraft - the McDonnell Dougllls DC 10-40. A. total of 22 hace been ordered. Paae Page Paae Paae Paae p ae 4:-5 6--; -9 10 11-:...1 2:2-:23 1972 was not a good year for orthwest Airlines when measured in terms of net earnings. The net earnings after taxes were $17,682,391 which is a decline of $3,678,871 from the net earnings of 1971. The cause of the reduced earnings was the 95-day strike by the Airline Pilots Union which came during July, August and September, the peak traffic period for orthwest Airlines. Financial Strength However, lorthwest Airlines' financial strength continued to improve during 1972. A review of the indicators commonly used to measure corporate vitality bears this out: 1. Northwest Airlines leads the United States air carriers in retained earnings with $341,690,000. This is nearly 100 million dollars more in retained earnings than the second-place airline. 2. orthwest Airlines on December 31, 1972 had the lowest debt to equity ratio of all United States airlines. The debt at year end was $211,000,000 and the equity was $493,0000,000 - a ratio of 42.8% . 3. orthwest Airlines does not have any jet air- planes under lease arrangements - its entire fleet of 109 aircraft is owned by the Company. This is most unusual in the airline indusby today. 4. orthwest Airlines has one of the most con- servative accounting methods for depreciating its aircraft. All wide-bodied jets are depreciated over a 15-year period with a 10% residual, and all Boeing 727 and Boeing 320 airplanes are depreciated over a 10-year period with a 15% residual. This conservative practice provided a cash flow from depreciation and amortization of S81,054,000 in 1972 and represents 20.6% of operating revenues. 5. orthwest Airlines has paid quarterly dividends for eighteen consecutive years. The amount of dividend payments to shareholders in 1972 was $9,620,000. Equipment Advantage On ovember 10, 1972 orthwest Airlines accepted delivery of the first long-range DC 10-40. During the year 1972 orthwest Airlines exercised its option for eight additional DC 10-40's and the Company now has purchase conbacts for 22 such airplanes. The DC 10-40 is unique because it is powered with the same time-tested Pratt & Whitney JT9D engine that is used on orthwest Airlines' fleet of 15 Boeing 747's. By ordering this engine, Northwest avoided the problems that are commonly associated with the introduction of newly developed powerplants. This engine standardization results in increased operating efficiencies and reduced training and spare part costs. A decision to convert the early Pratt & Whitney JT9D-3 engines used on the Boeing 747's to the more powerful and reliable JT9D-7 engine was made in March 1972. This program is now two-thirds com- pleted and will be finished by August 1973. Sale of Airplanes As the Boeing 747's and the new DC 10-40's have been delivered into the fleet, some of the older and more fully depreciated aircraft have been sold. Twelve jet airplanes were sold in 1972 for $24,935,000. All were sold for cash. The Company now has firm con- tracts for the sale of 10 jet airplanes in 1973. The deliveries are spaced throughout the year as addi- tional DC 10-.J0's are delivered. Merger Agreement Cancelled On ovember 28, 1972, the Board of Directors of ational Airlines advised orthwest Airlines that it had taken unilateral action to terminate the orthwest- lational Merger Agreement. orthwest Airlines does not have under consideration any merger proposals at this time. Strike by The Pilots' Union The Airline Pilots Union rejected a Company offer of a 26.7% average increase in wages and benefits over a three-year period and the Company was struck on June 30th. During negotiations after the strike commenced, the Company increased its offer to 29.5% on July 5th. This latest offer was finally accepted on October 2nd and the strike ended after 95 days. The Federal Pay Board has now ruled that the 12.3% increase which was to be granted for the "control year" commencing on July, 1972, pursuant to the terms of the labor agreement, must be reduced to an increase of not more than 6.2%. Agreement has been reached with the pilots union in accordance with the ruling of the Pay Board. Service to China orthwest Airlines' operating authority to serve the cities of Shanghai, Peking, 1 anking, Shenyang, Ha-erh-pin and Lu-ta, granted by the Civil Aeronautics Board on July 20, 1946, has been validated b_ legal opinon. It does not appear likely that orth,, est can resume in 1973 the service to China that the Compan_ provided from 1947 to 1949. However, Iorthwest's Management remains enthusiastic about the prospect of renewing trade and commerce with the People's Republic of China and the commencement of air services in the future. Continuing Corporate Concern The seniority recall of most employees who , ere idled by the strike is nearly complete and therefore the Company is able to resume the recruitment program for new employees. Additional progress is being made in the employment and promotion of minorities. 1 orthwest's continuing efforts in the en ironmental areas have produced good results. For example, the jet engine retro-fit program on the JT8 engine is more than 80% complete at this time. This program virtuall eliminates the exhaust smoke from the Boeing 727 airplanes. A recent report by the Presidential Aviation Advisory Commission commends orthwest Airlines' flight procedures that effectively reduce aircraft noise in the vicinity of airports and the report recommends the adoption of these procedures b other nited States airlines. Forecast for 1973 New labor agreements ha, e been signed with nearly all labor organizations represented on the airline. The Compan, anticipates stabilit) in this area in the ) ear ahead. Inflationary pressures will continue in 1973 on all such items as jet fuel, landing fees, contract labor settlements, and materiel purchases. It is expected that passenger traffic and freight baffic on an industry basis will increase ten to t,-veh-e percent in 1973 over 197:2. This growtl1 in traffic togetl1er with tl1e recovery of re enues lost dming the sbike, will make 1973 a successful ear for l orthwest Airlines. Sincerel ', Donald \, 1 ~ yrop :.larch 15, 1973 6 The most sophisticated flight simulator yet developed is the DC 10-40 simulator shown here, housed at Northwest Orient's flight services building in the Twin Cities. Heart of the closed circuit TV visual system is the terrain diorama, 60 feet long and 22 feet high. Behind Scenes Support for DC 10-40 Requires New Equipment & Skills Arrival of a new type aircraft like the DC 10-40 must be preceded by careful planning if the airplane is to be introduced smoothly into scheduled service. There is a requirement for both supporting 'hardware' and for training of personnel. Personnel Training Training is needed for a host of individuals - the pilots, the cabin attendants, the ramp service and cargo personnel, the mechanics and technicians. A new DC 10-40 flight simulator, a $3.2 million investment, is the key to flight crew training. The most sophisticated system ever developed for airline use, the Mark V simulator uses a closed circuit color television camera tracking over a huge terrain diorama. Use of the new simulator greatly reduced the time required for pilot transition training and reduces the need to fiy actual aircraft for training. A view of the simulator cockpit, which is identical in every respect to that of the actual DC 10-40 cockpit. Proving Flight Before the DC 10-40 was introduced into scheduled service, the Federal Aviation Administration requirements called for completion of a successful 'proving flight'. This was conducted December 9-11 and saw the aircraft visit Tampa, Miami, Milwaukee, ew York, Philadelphia, Detroit, Chicago, Seattle, Portland, Spokane and the Twin Cities. This proving flight, termed by FAA officials involved as the most successful ever staged by WA, provided necessary orien- tation and training for other personnel. Standardization Important One of the strong management beliefs of orthwest Airlines is to standardize whenever possible. Thus, the same cargo containers and the same loading equipment are used for the DC 10-40 and the 747. This has saved time for shippers and expense for the airline. Another area where standardization has proved important is in the commonality of the Pratt & Whitney JT9D engines to both the DC 10-40 and the 747. With spare engines costing over $1,000,000 each, the great saving is immediately evident. Additional savings flow from less time required for training of pilots, mechanics and technicians. Computer Break-Through An industry 'first' was recorded by orthwest Orient in the field of computer technology in 1972. The airline's Insta-Res, a computerized reser- vation system featuring a passenger name record, became the first in the industry to produce computer generated, magnetically encoded flight coupons. This completely eliminates the need for any handwriting by ticket agents and forms the basis for future automation of many other passenger services. Bright Future The DC 10-40 was introduced into scheduled service on December 13 with daily round trip service between the Twin Cities and Tampa/St. Petersburg via Milwaukee. With the delivery of the fourth aircraft on February 16, additional daily service was announced for March 1 between the Twin Cities, via Chicago, to Tampa/ St. Petersburg and to Fort Lauderdale, via Chicago. Daily non-stop service began March 1.5 between the Twin Cities and San Francisco. Based on the enthusiastic response it has already received, the DC 10-40 h3.s a bright future with orthwest Orient irlines. Automation is used increasingly in the airline industry. Here, LD-3 cargo containers are being loaded into the DC 10-40 by an NW A employee using a Clyde hydraulic loader. Use of sealed containers minimizes damage, provides greater security and increases ease of handling. The same engine - the Pratt & Whitney JT9D _, powers both WA's 747's and DC l0's. This standardization gives the airline many savings in both time and expense. Jn these photos, two mechanics are completing overhaul of a JT9D engine while another performs a routine check on the engine on a 7 47. orthwest Orient's compute,ized passenger name record reservations system, called Insta-Res, is the most advanced in the industry today. Here, reser ation sales agents at the Twin Cities general office are aided by miniature TV monitors which display complete information on the screen when called for by the operator. 7 FINANCIAL REVIEW OF 1972 Revenues The total operating revenues for 1972 amounted to $392,500,605 compared with $425,519,246 in 1971. This r duction in revenue resulted from the major curtail- ment of operations during the pilot tri\e, June 30 through October 2, 1972. Therefore, comparisons of the individual revenue categories with the prior year are not meaningful. The operating revenues for 1972 included mutual aid - net of payments to others - $43 629,192. The Civil Aeronautics Board (CAB), on ovember 23 1970, issued an order remanding for review, only the amended portion of the Mutual Aid Agreement which provided for an increased level of supplemental payments. After further hearing, the CAB on February 27, 1973, again approved the Amendments to the Mutual Aid Agreement retroactive to the effective date of such amendments and for a future period of five years. This had the effect of reapproving all payments made under the new provisions. In April 1972, the Civil Aeronautics Board approved IATA agreements which provided for fare increases for trans-Pacific travel and for travel between foreign ports, approximating 8% . The CAB, in the Domestic Passenger- Fare Investigation, approved a 2.7% increase in domestic fares effective in September 1972. The system passenger- mile yield increased to 6.09 or 1.8% over the yield of 5.98 in 1971, however passenger-mile yields continue to be diluted by increased use of tourist and pro- motional fares. Other phases of the domestic fare in- vestigation are still pending and final decisions are not expected until late in 1973. As a result of court action brought against the CAB, the Board has under review the domestic passenger fare levels which were charged between October 1, 1969 and October 14, 1970. The hearing examiner has concluded that the fares were lawful however, the CAB will review this deci ion and it is e;qJected that a final ruling will be released during 1973. A Domestic Air Freight Rate Investigation which began in 1971 is still in preliminary procedural steps with a formal hearing now scheduled for October 1973. Domestic mail and express rates are also open and procedural steps are progressing with a hearing cheduled for September 1973. o final decision is xpected in either case until 1974. It is anticipated that rate improvements will result from both of these inv tigations. Revenues from charter and other transportation , ere 20 008 467 in 1972. This revenu included 5 19 140 from commercial charters and other income and $14189 327 from military charters. The Military Airlift Contract expires on June 30, 1973 and we will eek a renev.ral contract for the Government's 1974 fi cal year. Ex enses Operatina expen e in 1972 were reduced as a r ult of the trik and amounted to $377,401,975 compar d ,vith 407 352 826 in 1971. Depreciation and amortization expenses amounted to $81,054,263 in 1972 compared with $77,245,465 in 1971. This increase is primarily the result of fifteen 747 aircraft being depreciated in 1972 for the full year, whereas five of these aircraft were delivered during the year in 1971. Inflationary trends continue to increase costs in the airline industry, including wages, rentals, services and costs of material and supplies. Operating expenses per available ton-mile in- creased in 1972 to 16.9 compared with 14.5 in 1971. Productivity improvements anticipated with the 747 equipment do not show in the 1972 unit costs as they were offset by the effect of the strike. Pre-strike unit costs for the first six months of 1972 were 14.3 per available ton-mile. Earnings and Dividends et earnings for 1972 amounted to $17,682,391, or $.83 per average share of common stock outstanding compared with $21,361,262 or $1.01 per share in 1971. Interest on long-term debt in 1972 declined to $8,355,485 from $13,050,806 in 1971. Gain on disposals of property before tax application, increased to $9,923,380 from $6,198,195 a year ago. The Company has continued its dividend policy even though many airlines have discontinued such payments. Dividends in 1972 amounted to $.45 per common share and represented the 18th consecutive year in which Northwest Airlines has paid dividends. Taxes on Earnings Taxes on earnings in 1972 resulted in a net credit of $429,300 compared with a net credit of $9,561,000 in 1971. The income tax credit is made up of the normal tax provision including current and deferred taxes amounting to $8,856,300, less additional benefits for carryback to federal surcharge years amounting to $1,602,800, resulting in a net provision of $7,253,500. Investment tax credits recorded in 1972 of $7,682,800 were deducted from the normal income tax provision, resulting in a net tax credit of $429,300. The Company continues to use accelerated method of depreciation for computation of income tax payments. Investment tax credits which could not be applied to income tax returns, but which were offset against deferred income taxes, total $20,909,900 for 1972 and prior years. ( See Note E to Financial Statements ). Cash Flow Funds generated from operations in 1972 totaled $102100,154 which included net earnings, depreciation and amortization, deferred income taxes and deferred investment tax credit. Other funds generated totaled $155,594,836 coming principally from the Employ e Stock Purchase Plan, disposals of operating property, and from a new long-term debt arrangement with banks. Application of funds in 1972 totaled $286,943,387 and is made up primarily of re-payment of the prior long-term debt arrangement with banks, additions of flight equipment and other property, advance deposits on aircraft and dividend payments. ( See Statement of Chang in Financial Position, Page 14). Traffic and Services Traffic results in 1972 show reductions in all areas in comparison with 1971, reflecting the effect of the strike. Traffic data for the two calendar years are shown on page 20; but, as noted, specific item com- parisons would not be meaningful. Passenger traffic recovered rapidly after the end of the strike and in December 1972, scheduled passenger- miles flown exceeded those of 1971 by .9% . By February 1973, passenger-miles were up 4.3% over 1972 despite one less day in the 1973 month. ew services have been inaugurated to increase traffic. Late in 1972, I orthwest Airlines received the first two McDonnell Douglas DC 10-40 jet aircraft. This new wide-bodied airplane was put into service between the Twin Cities/Milwaukee and Tampa and between the Twin Cities/ Chicago and Florida for the winter vacation season. The DC 10-40 was put into service between the Twin Cities and San Francisco during March 1973, and additional flights will be added in east-west transcontinental markets to impro e our competitive position in key city pairs. Early traffic response has been most satisfactory. In June the DC 10-40 will be assigned to fly the Orient Express, replacing narrow-bodied flights in the Washington-Chicago-Anchorage-Tokyo-Korea markets. "\ ith inauguration of this service, I orthwest irlines vrill be the first carrier to offer its entire trans-Pacific passenger schedule in modern wide-bodied equipment. Financial Condition The financial condition of orthwest Airlines con- tinues to be one of the strongest in the airline industry. In December 1972, the Company rearranged the Credit Agreement with its banks. The new agree- ment provides for a $100 million long-term credit with repayment beginning in April 1981 and terminating in January 1983. It also provides for a revolving credit of $250 million, reducing $20 million quarterly beginning July 1976 and terminating April 1979. Other previously arranged financial commitments remained in effect and totaled $79 million at year end. ( See 1 ote B to Financia] Statements ). Outstanding debt at year end amounted to $211 million or 42.8% of stockholders' equity. This preferential debt equity ratio is one of the lowest, if not the lowest, of the U.S. trunkline carriers. Stockholders' equity at December 31, 1972 was $492,837,186 compared with $477,053,922 at the end of 1971. The book value per average common share increased to $22.81 from $22.56 a year ago. At year end the Company had on order an additional 20 DC 10-40 wide-bodied aircraft from the McDonnell Douglas Corporation. This will require an expenditure of $422,120,000 of which $74,117,000 has been deposited with manufacturers at December 31, 1972. Internally generated funds and the existing financial arrangements will cover the purchase of all aircraft on order. These new aircraft are scheduled for delivery in 1973 through 1975. SOURCE AND DISTRIBUTION OF REVENUES .8% OTHER PASSENGER AND MU UAL AID 81 .9% SOURCE DISTRIBUTION STOCKHOLDERS' EQUITY VS.LONG TERM DEBT MILLIONS OF DOLLARS 600 500 400 300 200 100 0 c::=::J EQUITY - DEBT 1968 1969 1970 1971 1972 9 Northwest 0r!ent's allJet~ fleet totals 109 aircraft 15 BOEING 747'S Statistic : Length, 231 ft.; range, 5,850 miles with 362 pa sen- g er ; crui ing peed, 585 mph cruising altitude, 45,000 feet max. ++ ++ ++ ++ ++ ++ ++ + 2 DOUGLAS DC 10-40'5* Stati tic : Length, 182 ft.; range, 5,100 miles with 242 passen- gers; cruising peed, 555 mph; cruising altitude, 42,000 feet max. *20 additional aircraft on order. 30 BOEING 320B/C'S Statistics: Length, 1.53 ft.; range, 5,620 miles with 142 passen- gers; cruising speed, 550 mph; cruising altitude, 42,000 feet max. 6 BOEING 720B'S Statistic : Length, 137 ft.; range, 3,600 miles with 109 passen- gers; cruising speed, 565 mph; cruising altitude, 42,000 feet max. 24 BOEING 727-200'5 Statistics: Length, 153 ft.; range, 1,760 miles with 122 passen- gers; cruising speed, 570 mph; cruising altitude, 42,000 feet max. +++ +++ +++ +++ +++ +++ +++ +++ 32 BOEING 727-l00'S Statistics: Length, 133 ft.; range, 2,380 miles with 93 passengers; cruising speed 570 mph; cruising alti- tude 42,000 feet max. +++ +++ +++ +++ +++ +++ +++ +++ +++ +++ ++ NORTHWEST AIRLINES, INC. AND SUBSIDIARIES Operating Revenues Passenger Cargo . . ............. . Mail .. . .... . ..... . .......... . Charter and other transportation Mutual Aid Agreement- Note H Non transport Operating Expenses Flying operations Maintenance .. Passenger service . . . . . . . . . . . . . . . . . . . . . . . . . .... Aircraft and traffic servicing Reservations, sales and advertising Administrative and general Depreciation and amortization - Note G ..... . Other Income and (Deductions) Interest on long-term debt ....... . Disposals of property . . . . . . . . . ........ . Other . . . . . . . . . . .. ____ .. _ Earnings Before Taxes Taxes on Earnings, including deferred taxes and investment credit- Note E ....... . Net Earnings for the Year ........... . Average shares of Common Stock outstanding during the year Earnings per share of Common Stock * Operating results in 1972 were affected by a strike which extended from June 30, 1972 through October 2, 1972- see Note H See notes to financial statements. Year Ended December 31 1972 * 1971 $277,890,978 $331,966,391 34,694,315 39,641,301 13,309,095 19,442,669 20,008,467 31,588,334 43,629,192 461,889 ) 2,968,558 3,342,440 392,500,605 425,519,246 100,642,511 122,181,445 47,503,176 47,936,083 33,462,312 39,009,954 62,170,832 65,332,134 38,410,180 41,373,888 14,158,701 14,273,857 81,054,263 77;245,465 377,401,975 407,352,826 15,098,630 18,166,420 8,355,485 ) 13,050,806 ) 9,923,380 6,198,195 586,566 486,453 2,154,461 6,366,158 ) 17,253,091 11,800,262 429,300 ) 9,561,000 ) $ 17,682,391 $ 21,361,262 21,361,255 21,149,756 $ .83 $1.01 11 L NORTHWEST AIRLINES, INC. AND SUBSIDIARIES ASSETS Current Assets Cash and short-term invesbnents Accounts receivable .... Recoverable federal income tax Flight equipment spare parts, at average cost, less allowances for depreciation of $7,141,035 ( 1971- $6 662,645) Maintenance and operating suppli s at average cost Prepaid expenses Property and Equipment Flight equipment at cost ... Less allowances for depreciation Total Current Assets Advance payments on new flight equipment - Note D Other property and equipment at cost ... Less allowances for depreciation ... Deferred Charges and Other Assets Training and development costs Rentals Other ..... . December 31 1972 1971 $ 23,340,648 $ 42,468,318 41,012,970 43,303,034 7,901,803 15,394,400 18,785,638 15,985,804 4,457,932 4,441,808 1,924,095 3,608,902 97,423,086 125,202,266 1,008,040,777 1,012,567,920 326,020,308 303,134,687 682,020,469 709,433,233 74,117,238 41,130,050 756137,707 750,563,283 94,805,390 90,327,722 37 254,176 31,394,624 57,551,214 58,933,098 813,688,921 809,496,381 3,139,391 3,337,857 4,062,435 4,003,320 2,103,681 2,261,709 9,305 507 9,602,886 $920,417,514 $944,301,533 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable Employe compensation Air travel card deposits Unredeemed ticket liability Income taxes ....... . Current maturities of long-term debt . .. . ......... . Total Current Liabiliti s Long-Term Debt - Note B Deferred Credits - Note E Income taxes - arising principally from accelerated depreciation method Investment credit . . .... . . Stockholders' Equity - Note C Common Stock $1.25 par valu ; authorized 40,000 000 shares; issued and outstanding 21,604,136 shares ( 1971 - 21,149,756 shares) Capital surplus Retained earnings . . ..... . Commitments - Note D See notes to financial statements. Dec mb r 31 1972 53 330 067 l ,4 6 35 l 009 00 7 556 0...,9 1123 974 3 000 000 84 506 22 20 000 000 127 875 900 719 ,200 135 074,100 27 005,170 L4,l--O 34 341 6911 ..., 49_,,837186 9...,0 417,514 1971 $ 56,299152 15,535 334 l 056,125 6,419,0 .... 3 727 377 3 000 000 83 037 0ll 252,500 000 120 727,300 10 983 300 - - - -- 131,710 600 26,437,195 ll6 987 969 333,628,758 477 053,922 $944,301 533 l ' 14 NORTHWEST AIRLINES, INC. AND SUBSIDIARIES Source of Funds Net earnings .... Items not requiring current funds: Depreciation and amortization Deferred income taxes .......................... . Deferred investment credit . Total from Operations Sale of Common Stock, less expenses Issuance of long-term debt .. Disposals of operating property - book value Refund of SST development cost Total of Sources Application of Funds Flight equipment and other property additions ....... . Advance deposits on aircraft . .. Deferred DC 10-40 ( Boeing 747 in 1971) training costs Cash dividends ........... . Payment of long-term debt ... . Other ............... . .. . .......... . Total of Applications Increase (Decrease) in Working Capital Changes in Working Capital Consist of: Increase ( decrease) in current assets: Cash and short-term investments ..................... . Receivables ....... . Inventories . . . . ............. . Prepaid expenses .............. . Increase (decrease) in current liabilities: Current maturities of long-term debt ..... . Accounts payable ... Other accrued liabilities Unredeemed ticket liability ................... . Increase (Decrease) in Working Capital notes to financial statements. Year Ended December 31 1972 $ 17,682,391 81,054,263 7,148,600 3,785,100) 102,100,154 7,720,840 133,500,000 14,373,996 257,694,990 58,156,479 39,530,611 665,534 9,619,967 178,000,000 970,796 286,943,387 ( $ 29,248,397) ( $ 19,127,670) ( 9,782,661) 2,815,958 1,684,807) 27,779,180) 2,969,085) 3,301,296 1,137,006 1,469,217 ( $ 29,248,397) 1971 $ 21,361,262 77,245,465 11,589,200 4,390,000) 105,805,927 34,585,365 12,364,883 5,500,000 158,256,175 87,330,076 23,166,916 1,287,427 9,517,530 43,000,000 1,345,993 165,647,942 ($ 7,391,767) ( $ 9,057,077) 9,264,655 1,488,616 1,459,419 3,155,613 15,000,000) 17,922,737 3,339,289 4,285,354 10,547,380 ( $ 7,391,767) NORTHWEST AffiLINES INC. AND SUBSIDIARIES Balance January 1 1971 . . . . . .................. . t amings for th year .......... . Cash dividends - $.45 a har . . . . . . . . . . . . . . . . Balance December 31 1971 .......... . Shares issued pursuant to: Employe Stock Purchas Plan ............. . Emplo. Stock Option Plan ............... . et arnings for th ar . . . . . ....... . Cash divid nds - $.45 a shar Balance December 31, 1972 ... S e not s to financial tat m nt . Period 1962-1971 1972 ...... . . .. .. . Total ..... . . . . To Net Earnings To Be Amortized .... Availabl * $70,699,600 3 897,700 Reflect din Net Earning t $59,716,300 7 682,800 $67,399,100 $74,597,300 67,399,100 - - - $ 7,198,200 ===------=- * Investm nt credit not appli d on tax r turns but offset against deferr d taxes through 1972 amount to $20 909,900. Se Note E to financial statern nts. t Income benefits of investm nt er dit g n rated in 1962-68 ar amortiz d ov r an ight y ar p riod. Th flow-through method of accounting was adopt d for investment credit gen rat d after 1968 and the incom benefits have b n r fl cted in the year generated. Common to k apital R tain d Sh,u Amow1t urplu~ :..,1,149,756 26.437 195 $116 9 7,969 21361 .;.,62 9 517,530) - - - - - - :..,1,149 756 26 437 195 116 987 969 333 62 ,758 45:.-,59 56574 7 0 9 26 1 78::.. ::..~7 63 039 17 68::.. 391 i 9,619 967 -'-'1,604136 .;.,7 005170 $124,140 '4 341 691,l 2 Dec mb r 31 Aircraft Typ 1971 1972 On Ord r JET: 707-320B & 320C 33 30 720B .... 13 6 727 & 727C-100 ........ 3"" 32 727-200 .. ' ..... . . . . 24 24 747 . . .. ' .. 15 15 DC 10-40 2 '....0 Total J t . ... . . . . . . . . . . . 117 109 20 16 NORTHWEST AIRLINES, INC. AND SUBSIDIARIES Years Ended December 31, 1972 Lmd 1971 Note A - Accom1ting Policies A summary of certain accounting policies of the Company which have been consistently followed in preparing the accompanying financial statements is set forth below: Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned domestic sub- sidiaries after elimination of intercompany accounts and hansactions. Flight Equipment and Property Provision for depreciation is computed by the straight line method over the estimated useful lives of the assets. For aircraft the calculation assumes ten year lives and 15% residual values, except as to 747 and DC 10 jet aircraft as to which the lives are fifteen years and 10% residual values. Useful lives of buildings vary from 5-30 years and other equipment 4-10 years. Allowances for depreciation of flight equipment spare parts, rotables and assemblies are provided by the straight line method at rates which allocate the cost of these assets, less residual value, over the estimated useful lives of the related aircraft. The Company charges to operating expense when incurred, all expenditures for maintenance and repairs and minor renewals and betterments. Expenditures which materially increase values or extend useful lives are generally capitalized. Carrying amounts of assets sold or otherwise disposed of are eliminated from the accounts in the year of disposal and the resulting gain or loss reflected in operations. The Company capitalizes interest on borrowings related to the acquisition of aircraft until such time as the aircraft is delivered. The capitalized interest is amortized over the useful life of the aircraft. For income tax purposes, accelerated depreciation methods are used and interest is not capitalized. Training and Development Costs The Company defers preoperating expenses of new aircraft fleets ( principally training) and amortizes such costs over future periods to be benefited, generally five years. Pension Plans The Company has several pension plans covering substantially all of its employees. The policy is to fund pension costs accrued which. includes the amortization of prior service costs over a period of forty years. Taxes on Earnings Taxes are provided for all items included in the statement of earnings regardless of the years when such items are reported for tax purposes. Deferred income taxes result primarily from accelerated depreciation methods and non-capitalization of interest costs related to aircraft acquisitions for tax purposes. Since 1969, the Company has used the flow-through method of accounting for the investment credit. Investment credits not applied on tax returns are offset against deferred income taxes to the extent they are applicable to deferred taxes becoming payable in the carryover periods. o change has been made in accounting for investment credits arising prior to 1969 which are amortized over eight years from the dates the credits arose. Earnings Per Share Earnings per share are ba ed on the average number of shares of Common Stock outstanding during each year. Share issuable upon exercise of stock options and under the Employee Stock Purchase Plan are excluded from th computation since their effect is not significant. December 31 Note B - Long-Term Debt 1972 1971 1972 Revolving Credit Agreement with banks provides for revolving credit of $250 million reducing $20 million quarterly beginning July 1, 1976 and terminates April 1, 1979. Interest on funds borrowed is at J~% above prime commercial loan rate prior to July 1, 1976 and % above thereafter (interest rate currently 67i% ) $ 32,000,000 1972 Term Credit with banks is payable $12.5 million quarterly beginning April 1, 1981 and terminates January 1, 1983. Interest is based on a formula related to prime commercial loan rates and is currently 7.15% ; however, total interest paid shall not exceed TJ~% per annum on borrowings over the term of the loan 100,000,000 1968 Revolving Credit Agreement with banks paid during 1972; interest at ;i% above prime commercial loan rate _ ......... . Note purchase agreements with twelve insurance companies are payable $3,000,000 annually and terminate on October 1, 1978. Interest is at 6% per annum. Certain optional prepayments at par are permitted. The agreements contain certain other provisions with respect to redemption as a whole, but not from borrowed funds, at premiums not to exceed 2% . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,000,000 Credit agreements with aircraft and aircraft engine manufacturers provide for financing of purchases from those manufacturers through the issuance of five- year notes to aggregate not more than $60,000,000 . . . . ...... . Less amounts due within one year included in current liabilities 60,000,000 211,000,000 3,000,000 $208,000,000 $ 175,000,000 22,000,000 58,500,000 255,500,000 3,000,000 $252,500,000 The Company had complied with the covenants of tl1e debt agreements at the end of botl1 years. The payment of dividends is limited to $50,000,000 plus 75% of net earnings ( as defined ) from January 1, 1973. The aggregate repayment of the outstanding long-term debt over the years 1974 tl1rough 1977 is $3,000,000, $26,915,000, $37,585,000 and $4,500,000, respectively. Note C - Stockholders' Equity Cumulative Preferred Stock, $25 par value: Authorized .... Issued December 31 Common Stock options for officers and employees at prices ranging from $32.375/ 36.625 a share which were not less than 100% of market at date of grant: Outstanding . . . . . . . . . . . . . . ....... . Became exercisable during year . . . . . . . . . . .. . ....... . Exercised . ...... . Exercisable at end of year ( options for 55,752 shares lapsed January 29, 1973) Common shares reserved for additional stock options and/ or the Employee Stock Purchase Plan at December 31 . . . ..... 1972 1,000,000 None 69,986 4,300 1,782 69,986 340,150 Shares 1971 1,000,000 one 71,768 24,167 None 67,468 792,748 17 1 ' I Note C - Stockholders' Equity (Cont'd) The Northwest Airlines' 1968 Employee Stock Purchase Plan provides for the sale of Common Stock to eligible employees through payroll deductions of up to 10% of their salary not to exceed $3,000 a year. The sale price is 90% of the highest price of the stock on the New York Stock Exchange on specified annual dates. The plan terminates May 19, 1973. Note D - Commitments At December 31, 1972 the Company has contracted to purchase jet aircraft for delivery in 1973 through 1975 which, with spare engines, will require expenditures of $422,120,000 ($290,060,000 at December 31, 1971). Of this amount, $74,117,000 has been deposited with manufacturers at December 31, 1972 and approximately $221,000,000, $94,000,000 and $33,003,000 become payable during the next three years, respectively. As of December 31, 1972 annual rental payments of approximately $8,100,000 were required under various lease agreements for periods up to thirty-seven years covering airport facilities; ticket offices, etc. Note E - Taxes on Earnings The provision for taxes on earnings consists of the following: Year Ended December 31 Current: 1972 1971 Operating loss carryback for tax purposes ($11,643,500) ($18,192,100) Reduction of refund for limitation of investment credits utilized in prior years . 5,469,900 2,797,700 Deferred: 6,173,600) 15,394,400) Provision 18,897,000 21,765,700 Unapplied investment credit: Flow-through 3,897,700) 8,744,600) Arising from operating loss carryback . 5,469,900) 2,797,700) 9,529,400 10,223,400 Deferred investment credit being amortized over eight years 3,785,100) 4,390,000) ($ 429,300) ( $ 9,561,000) Investment credits not applied on tax returns but offset against deferred income taxes at December 31, 1972 will expire $8,939,200 - 1978, $6,225,800 - 1979 and $5,744,900 - 1980. Note F - Pension Plans Total pension expense was $8,397,778 ( 1971- $8,557,205). As of the latest valuation date, the total amount of fund assets was sufficient to cover vested benefits. Note G - Depreciation and Amortization Provision for depreciation of aircraft and related flight equipment approximated $72,874,000 (1971- $73,424,000). Upon abandonment of the SST aircraft development project by the United States Government during 1971, the Company's prior year costs of $3,300,000 were refunded and were credited to reduce amortization expense for 1971 in accordance with Civil Aeronautics Board accounting requirements. Note H - Mutual Aid Agreement On February 27, 1973 the Civil Aeronautics Board reaffirmed the Mutual Aid Agreement among the airlines. To the Stockholders and Board of Directors Northwest Airlines, Inc. Saint Paul, Minnesota We have examined the financial statements of Northwest Airlines, Inc. and subsidiaries for the years ended December 31, 1972 and 1971. 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. In our opinion, the accompanying statements of financial position, earnings, stockholders' equity and changes in financial position present fairly the consolidated financial position of Northwest Airlines, Inc. and subsidiaries at December 31, 1972 and 1971 and the consolidated results of their operations, the changes in stockholders' equity and changes in financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. Saint Paul, Minnesota February 27, 1973 Any person who either owns, as of December 31 of the year preceding issuance of this annual report, or subsequently acquires, beneficially or as hustee, more than 5 per centum, in the aggregate, of any class of the capital stock or capital of the air carrier, shall file with the Civil Aeronautics Board (CAB) a report containing the information required by Section 245.12 of the CAB's Economic Regulations on or before April 1, as to capital stock or capital owned as of December 31 of the preceding year, and, in the case of stock subsequently acquired, a report under Section 245.13 of such Economic Regulations, within 10 days after such acquisition, unless such person has otherwise filed with the CAB a report covering such acquisition or ownership. A bank or broker which holds, as trustee, more tl1an 5 per centum of any class of the capital stock or capital of an air carrier to the extent that it holds shares on the last day of any quarter of a calendar year, shall file with the CAB, within 30 days after the end of the quarter, a report in accordance with the provisions of Section 245.14 of the CAB's Economic Regulations. Any person required to report under the CAB's regulations who grants a security interest in more than 5 per centum of any class of the capital stock or capital of tl1e air carrier shall, within 30 days after granting such security interest, file with the CAB a report containing tl1e information required in Section 245.15 of the CAB's Economic Regulations. Any stockholder who believes that he may be required to file such a report may obtain further information by writing to the Director, Bureau of Operating Rights, Civil Aeronautic Board, Washington, D. C. 20428. l9 NORTHWE;ST AIRLINES, INC. AND SUBSIDIARIES ( Dollars in thou ands except per share figures) Operating Revenues 1972t 1971 t 1970t 1969 1968 1967 1966 1965 1964 1963 Passenger $ 277,891 $ 331,966 $ 260,335 $ 350,504 $ 301,277 $ 275,873 $ 216,239 $ 198,457 $ 163,807 $ 135,222 Cargo . . . . . . . 34,694 39,641 30,053 51,006 43,902 38,118 29,515 24,779 18,402 13,745 fail 13,309 19,443 18,958 29,386 28,605 26,898 22,557 17,421 15,313 14,233 Charter and Other Transportation . .... . . . 20,009 31,588 20,800 35,090 41,060 41,799 39,205 21,851 12,965 6,442 1utual Aid Agreement . 4. 3,629 (462) 46,325 (509) 2,491 (717) (21) (12) Non transport . ...... . . ... . 2,969 3,343 2,569 2,461 1,446 1,291 1,312 1,207 1,144 (842) Total Operating Revenues $ 392,501 $ 425,519 $ 379,040 $ 467,938 $ 416,290 $ 383,979 $ 311,319 $ 262,998 $ 211,610 $ 168,788 Operating Expenses Depreciation ::md Amortization . ..... .. ... . $ 81,054 $ 77,245 $ 69,173 $ 60,833 $ 49,817 $ 41,252 $ 33,195 $ 24,011 $ 22,852 $ 19,159 Other 296,348 330,108 258,784 324,979 268,529 229,969 177,469 153,140 135,627 123,713 - - -- - - - Total Operating Expenses $ 377,402 $ 407,353 $ 327,957 $ 385,812 $ 318,346 $ 271,221 $ 210,664 $ 177,151 $ 158,479 $ 142,872 Operating Income . . . . . . . . . $ 15,099 $ 18,166 $ 51,083 $ 82,126 $ 97,944 $ 112,758 $ 100,655 $ 85,847 $ 53,131 $ 25,916 Other Income and (Deductions) - Net . . . . . . . . . . . . . . . . 2,154 (6,366) (6,523) (1,153) (3,220) (2,391) (1,243) 224 (1,125) (4,166) - - - - - - Earnings Before Taxes . . . ..... $ 17,253 $ 11,800 $ 44,560 $ 80,973 $ 94,724 $ 110,367 $ 99,412 $ 86,071 $ 52,006 $ 21,750 Income Taxes (429 ) (9,561) 121 29,507 $ 44,673 51,651 46,276 40,377 25,220 11,297 - - - Net Earnings Io o $ 17,682 $ 21,361 $ 44,439 $ 51,466 $ 50,051 $ 58,716 $ 53,136 $ 45,694 $ 26,786 $ 10,453 Earnings per Average Share As Reported Each Year c 1 J $ .83 $ 1.01 $ 2.11 $ 2.55 $ 5.47 $ 6.42 $ 5.81 $ 9.99 $ 5.86 $ 5.73 Cash Dividends . . . . . . . . 9,620 9,518 9,465 9,117 7,320 6,405 5,490 3,657 2,602 1,823 Dividends per Share As Paid Each Year ... . .45 .45 .45 .45 .80 .70 .60 .80 .60 1.00 Stockholders' Equity 492,837 477,054 465,210 426,797 306,717 263,986 212,727 165,081 122,960 68,436 1 umber of Shares Outstanding at End of Year 21,604,136 21,149,756 21,149,756 20,914,272 9,149,628 9,149,626 9,149,626 4,574,813 4,568,634 1,824,452 Book Value per Share at End of Year , 1 J ... $ 22.81 $ 22.56 $ 22.00 $ 20.41 $ 33.52 $ 28.85 $ 23.25 $ 36.08 $ 26.91 $ 37.51 Recomputed per Share Figures After Stock Splits: <2 J Earnings per Average Share czi . . . . . . . . . . .83 1.01 2.11 2.55 2.74 3.21 2.90 2.50 1.47 .72 Dividends per Share (2) .45 .45 .45 .45 .40 .35 .30 .20 .15 .12 Book Value per Share at End of Year c2 J ... . . . . . . . . 22.81 22.56 22.00 20.41 16.76 14.43 11.62 9.02 6.73 4.69 Assets and Long-Term Debt Flight Property at Cost $ 1,008,041 $ 1,012,568 $ 929,181 $ 697,938 $ 582,646 $ 467,859 $ 401,476 $ 304,072 $ 219,523 $ 176,655 Flight Property at et Book Value 682,020 709,433 668,129 492,241 424,522 346,029 311,803 233,858 160,925 127,074 Total Assets 920,418 944,302 923,126 742,7.32 627,538 481,206 422,040 333,311 237,226 196,765 Long-Term Debt .. ...... 208,000 252,500 260,915 112,000 160,000 85,000 96,000 72,000 45,000 64,996 Unit Expenses Per Available Ton-Mile .. 16.9 14.5 18.0 15.2 14.6 14.5 15.6 16.4 18.5 21.7 Per Revenue Ton-Mile .. . . . . . 49.6 42.1 43.5 34.5 30.8 ,30.3 30.1 33.0 39.7 46.8 Per Cent of Operating Revenues 96.2% 95.7% 86.5% 82.4% 76.5% 70.6% 67.7% 67.4% 74.9% 84.6% Statistics - Scheduled Services Revenue Plane-Miles ( 000) 79,025 100,992 83,177 123,966 107,646 93,395 67,780 61,653 52,157 45,356 vaila ble Seat-Miles ( 000) . . . . .... 12,963,054 15,614,614 10,234,060 13,504,111 10,840,758 9,198,150 6,773,257 6,140,717 5,129,944 4,305,147 Revenue Passenger- files ( 000 ) 4,565,618 5,553,043 4,506,256 6,208,725 5,458,128 4,901,520 3,699,851 3,303,809 2,668,812 2,179,208 Passenger Load Factor 35.2% 35.6% 44.0% 46.0% 50.3% 53.3% 54.6% 53.8% 52.0% 50.6% Revenue Passengers Carried .. 5,150,636 6,089,273 4,682,812 7,517,780 7,173,805 6,489,295 4,963,275 4,593,462 3,663,077 2,911,914 Freight and Express Ton-Miles ( 000) 150,973 161,345 110,215 198,494 169,416 141,175 108,914 82,715 55,100 39,417 Total Revenue Ton-Miles ( 000) 672,035 813,403 655,339 ~ 942,050 836,085 709,165 533,556 452,553 351,886 284,732 Statistics - Total Operations Revenue Plane-. liles ( 000) ... . . . . . . 84,098 110,045 89,938 135,563 121,077 106,197 77,715 67,125 55,477 47,207 Available Ton-Miles (000) 2,236,069 2,806,407 1,819,439 2,535,137 2,186,234 1,864,128 1,348,983 1,079,832 856,612 657,761 t Sbikcs adversely affected 1970 and 1972 and the strike recovery period of 1971. ' 11 Per share figures reflect the increase in outstanding shares resulting from stock issues in 1964, 1969, 1970 and 1972. (Z)The stock was split "two-for-one" in 1964, 1966 and 1969. The recomputations in this section are shown to provide comparability on an adjusted basis and follow the form recommended by the Accounting Principles Board. These figures, of course, do not reflect the way the corporation was operated. 20 21 3a.m. 22 NON-STOP TO THE ORIENT SOUTH CHINA SEA PACIFIC BONIN ISLANDS VOLCANO ISLANDS OCEAN - - ROUTES OPERATED MARIANA ISLANDS MARCUS ISLAND - - - CHINESE MAINlANO,ROUTES SUSPENDED CAROLINE ISLANDS n ROUTE MAP OF NORTI-IWEST ORIENT NATIONAL PARK SYSTEM NORTHWEST ORIENT AIRLINES ROUTES 0. CITIES SERVED BY NORTHWEST ORIENT AIRLINES * STATE CAPITALS, CITIES D NATIONAL MONUMENTS PACIFIC OCEAN saskatche-kt--an ffi ~ Reg ina Med icine Hat 5 am C '. PARK t) m1dn1ghl ---- - .... .. Gu aQa Puen . ... Vall . a M an n pe Cod CONNECT ING SERVICE Lakelan St. Petersburg: Tampa i Clearwat~r Bradentop Saraso'r-t Fort rii4\ er Gulf Of Mexico EVERG~ AoEs : N p KeyWer ~ ban ---...,,,,,, -.; '---' ffi V 1a.m. elphia ton ver .C. ort News fo lk h urg ATLANTIC OCEAN (:) (9 2a.m 3 om BEAUFORT SEA ....... ~T.. . , ..... _ ..... ______ __._ __________ ,_ _______ _ NWA INVOLVED IN FOUR ROUTE CASES IN '72 During 1972, the Civil Aeronautics Board continued to view new route case investigations cautiously. Four proceedings in which orthwest Airlines has a substantial interest did move forward late in the year, however. They are: Service to Saipan and Guam from Tokyo is involved in one important route case. WA proposes unique group excursion fares and the regular use of wide- bodied jet equipment among the applicants. Award of this authority to Northwest Airlines could help compensate the Company for the loss of local traffic rights between Tokyo and Okinawa which occurred when Okinawa reverted to the Japanese early in 1972. An investigation to add a second carrier in the Miami- Los Angeles non-stop market began in late December. In this case, we have stressed WA's ability to com- pete well in the Miami-California market and to link Miami to the Orient. Atlanta-Detroit/ Cleveland/ Cincinnati ervice is being considered currently, with competitive non-stop service to be authorized in each of the markets which are currently served on a monopoly basis. orthwest Airline has concentrated its presentation on the Atlanta-Detroit and Atlanta-Clevelan l market noting our prior presence in these cities and citing the advantages which would follow from closing the gap b tween the three cities. orthwest is also an applicant in a reopened route proceeding centered mainly on Omaha-Chicago and Omaha-California authority. We are seeking the opportunity to serve both Omaha and Des foines on east-west routings. 23