1973 ANNUAL REPORT NORTI-IWEST ORIENT AIRLINES ~ NORTHWEST ORIENT AIRLINES General Offices: Minneapolis-St. Paul International Airport St. Paul, Minnesota 55111 Area Code 612/726-2111 DIRECTORS* JAMES H. BINGER Chairman of the Board, Honeywell, Inc. Minneapolis, Minnesota HADLEY CASE President, Case, Pomeroy & Company, Inc. New York, New York A. E. FLOAN Secretary, Northwest Airlines, Inc. St. Paul, Minnesota DONALD H. HARDESTY Former Vice President-Finance, NWA St. Paul, Minnesota MALCOLM S. MACKAY President, Foothills Company Roscoe, Montana DONALD G. McNEELY President, Space Center, Inc. St. Paul, Minnesota DONALD W. NYROP President, Northwest Airlines, Inc. St. Paul, Minnesota C. FRANK REA VIS Partner, Reavis and McGrath New York, New York ALBERT G. REDPATH Vice President, Thomson and McKinnon, Auchincloss, Inc. New York, New York LYMAN E. WAKEFIELD, JR. Vice President, Piper, Jaffray & Hopwood Minneapolis, Minnesota REGISTRAR: The Chase Manhattan Bank, New York, New York TRANSFER AGENT: Bankers Trust Company, New York, New York STOCK LISTED: Common Stock listed on New York Stock Exchange, Pacific Coast Stock Exchange and Midwest Stock Exchange * As of March 1, 197 4 OFFICERS* DONALD W. NYROP President JAMES A. ABBOTT Vice President-Legal CLAYTON R. BRANDT Vice President-Purchasing and Stores ROBERT W. CAMPBELL Vice President-Budgets J. WILLIAM CAMPION Vice President-Regulatory Proceedings ROLAND W. CHAMBERS Vice President-Properties ROBERT A. EBERT Vice President-Personnel ROY K. ERICKSON Vice President-Public Relations A. E. FLOAN $ecretary BENJAMIN G. GRIGGS, JR. Vice President-Assistant to the President WILLIAM E. HUSKINS, JR. Vice President-Maintenance and Engineering REGINALD C. JENKINS Vice President-Orient Region FRANK C. JUDD Vice President-Assistant to the President M. JOSEPH LAPENSKY Vice President-Finance and Treasurer RONALD McVICKAR Vice President BRYAN G. MOON Vice President-Advertising ROBERT J. PHILLIPS Vice President-Comptroller C. L. STEWART Vice President-Transportation Services ROBERT J. WRIGHT Vice President-Sales Total Operating Revenues Operating Income ........ . . .. .. .. .... . Net Earnings for the Year ........ . ..... . Per Common Share . ... . .... . ....... . St o c kh older s' E quit . . . . . . . . . . . . . . . . . . . Per Common Share ........ . ........ . Dividends Paid ... .. .... . ....... . ..... . Operating Expenses - Per Available Ton-Mile Per Revenue Ton-Mile Revenue Traffic - Passengers Carried .......... . ...... . Passenger-Miles Flown . . ............ . Ton-Miles Mail, Freight and Express Common Shares at Year End ...... . Employees at Year End . . . . . ... ...... . 1973 $584,348,065 51 305 260 51 850,053 2.40 534 965,212 24.76 9 722,027 15.8 42.5 7,987 299 8 007 850,000 340 198,000 21.604,136 11 263 1972* $ 392,500,605 15 098 630 17 682 ,391 .83 492 ,837,186 22.81 9,619 967 16. 9q: 49.6 5,150,636 4 565,618,000 215 ,474,000 21 ,604,136 10 000 *Operating results ere affected b a major strike hich e tended from June 30 through October 2. 1972 . FROM THE PRESIDENT: 47TH ANNUAL REPORT TO THE SHAREHOLDERS Northwest Airlines achieved a strong performance in 1973. Earnings of $51,850,000 were recorded; this is an increase of 193 per cent over the $17,682,000 earnings of the prior year. Earnings per share in 1973 were $2.40, up sub- stantially from the 83 cents per share in 1972. Total operating revenues established an all-time high of $584,348,000, which is an increase of 49 per cent over 1972 revenue of $392,501,000. The 1972 revenues and profit were affected by the 95-day strike of the pilots' union from June 30 through October 2, 1972. The previous record for revenue was $467,938,000 in the year 1969. Dividend payments to Northwest shareholders in 1973 were $9,722,027. Quarterly dividends were paid for the 19th consecutive year. Book value per share at December 31 , 1973 was $24.76. Shareholders' equity increased to over one-half billion dollars ($534,965,000) in 1973 and total assets exceeded one billion dollars at year-end for the first time in the history of the Company. In 1973 Northwest Airlines took delivery of thirteen DC 10-40 aircraft. Seven additional DC 10's will be delivered in 1974. Northwest is now operating fifteen Boeing 747's and fifteen DC 10's - this results in approximately 66 per cent of the available seat miles being provided for our customers in the most modern wide-bodied jet airplanes. The Company did not ground any airplanes as the result of fuel allocations. The Boeing 747's and DC 4 10's as scheduled and routed produce more profit per airplane mile than that produced by conventional jet airplanes. As new wide-bodied jets were delivered in 1973, the Company sold and delivered eleven airplanes (four Boeing 720B's and seven Boeing 20's). All aircraft were sold for cash. In 1974, the Company will sell and deliver a minimum of ten used jets as the new DC 10's are delivered. The Company's original fleet of sixteen 720B's (placed in operation starting in 1961) has been sold and delivered. Importantly, none of your Company's aircraft is subject to expensive lease agreements as is true of many other carriers; all have been purchased by Northwest. By doing so, we have obtained the bene- fits of greater cash flow through depreciation and obtained substantial investment tax credits for the Company. The shortage of aviation fuel has created prob- lems for all U.S. airlines. The U.S. trunk airlines are presently operating on a fuel allocation of 95 per cent of the base year, 1972. Northwest has reduced its schedules by approximately eight per cent from the level of September 1973. All schedule reductions were made unilaterally - we have not entered into capacity reduction agreements in competitive mar- kets with other U.S. airlines or foreign airlines. Northwest continues to provide good airline service to every city on its authorized route structure - fuel crisis notwithstanding. In Montana and North Dakota, the Company is providing the same frequency of flights that we offered before fuel cuts were or- dered by the Government. Management of the reduced aviation fuel avail- ability requires close day-to-day attention, but we have experienced no major problems in obtaining sufficient jet fuel to date. The greater concern today is the rapidly escalating price of jet fuel. The cost of jet fuel per gallon on a systemwide basis has in- creased 115 per cent (February 1973 compared with February 1974). These increases will require a fuel surcharge or further modest increases in fares and rates during the remainder of 1974. Donald H. Hardesty, Vice President-Finance and Treasurer, retired on July 1 1973 after 30 years of service with the Company. His valuable counsel in the financial area will not be lost because he will continue as a member of the Board of Directors. amed to succeed Mr. Hardesty was M. J. Lapensky who had been serving as Vice President- Economic Planning. Mr. Lapensky, a 28-year veteran employee, also served as Vice President and Comp- troller in prior years. orthwest continues to register its strong interest in resuming scheduled airline service to the People's Republic of China. The Company holds operating authority to six major cities - Peking, Shanghai, 1 anking, Shenyang, Ha-erh-pin and Lu-Ta - which was granted by the Civil Aeronautics Board on July 20 1946. During June 1973, t o orthwest jet freighters landed in Peking with supplies for the U.S. ission - marking the first appearance of our aircraft in China since 1949. e were also honored b the visit of 14 computer experts from the People's Republic of China on October 25. 1973. orth est as the onl airline visited b this distinguished group. Industr projections for 1974 suggest that the ear ahead will see little gro th in passenger traffic and comparatively modest growth in the air freight area. Your Management is more optimistic for orth est. Traffic increases in Januar and Februar 1974 have been excellent and, assuming the fuel situation does not worsen, we foresee an excellent ear ahead. ith the continued support of the shareholders, we are confident that orth est can retain its leadership role among U.S. airlines. Sincerel , Donald . I rop March 1, 1974 5 SALES AND MARKETING HIGHLIGHTS 6 RECORD REVENUES PRODUCED IN 1973 An all-time high in total operating revenues of $584 million was registered in 1973, topping the previous record of $468 million set in 1969 by some 25 per cent. Playing a major role in this success was the strong partnership Northwest Orient enjoys with its travel agents in the U.S. and around the world. Collectively, they were responsible for more than $190 million of the passenger revenues generated in 1973. Orient Travel Up. Substantial gains were shown in the Orient Region, evidenced by the strong develop- ment of the Contract Bulk Inclusive Tour (CBIT) market in Japan. International traffic to and from the Orient and the mainland U.S. also showed good increases. Introduc- tion of DC 10-40 service on the Chicago-Anchorage- Tokyo route on June 1 resulted in very dramatic gains in these markets. Charter Sales. In a year of records, charter sales were no exception. A major - and most successful - effort was mounted to increase charter business. The result was $28 million in revenues - an increase of 42.5 per cent over 1972. Sports team charters for groups like the Minnesota Vikings, Baltimore Colts, Minnesota North Stars and Minnesota Twins assisted in obtaining this increase. Cargo Shows Growth. A strong cargo sales program was developed in 1973 and directed primarily at freight consolidators and wholesalers. Record cargo revenues of $55 million resulted. Weight of the average shipment was increased from 294 pounds to 390 pounds. This 33 per cent increase in average shipment weight was aided by the ability to sell containerized space on our fleet of wide bodied 747's and DC 10-40's. Various new commodity rates were also developed; one of the most successful being a shipper-loaded container rate for shipment of fresh pineapple from Hawaii to Chicago. Convention Central. The most unique sales program in the industry for convention sales was developed and implemented by Northwest Orient in 1973: it was given the name Convention Central. This new service utilizes a nationwide toll-free telephone number which can be dialed for convention reservations or assistance. It offers the convention planner a totally coordinated plan - tailored to his needs. Convention Central has quickly provided Northwest Orient a larger share of this growing market. Room Service. To capitalize on its fleet superiority in competitive markets, much of Northwest Orient's advertising in 1973 concentrated on a theme of 'Room Service.' A series of advertisements - several of them featuring members of the NFL Champion Minnesota Vikings - was run showing the wide-bodied comfort of WA's fleet of Boeing 747's and 15 DC 10-40's. Florida Dollars Sell. One of the most effective marketing campaigns of 1973 involved the Midwest to Florida market. Advertisements and broadcast commercials in the Twin Cities, Chicago and Milwaukee urged pros- pective travelers to 'get more for your Florida dollar' by flying Northwest Orient. From December 1 on, every Florida-bound traveler on Northwest Orient flights received a packet of 'Florida Dollars' representing discounts offered by various Florida attractions worth $55. These were good for credit at popular restaurants, fishing, golf, dog races, plus car and boat rental. The promotion has been so successful that it will be adopted for use in the Mainland-Hawaii markets during 197 4. Northwest gives the Minnesota Vikings Roooooom Service! =~~=----- ,~-~-- . ,-:. ___ : ::/ _'- - -- ---- , ~ NORTHWEST ORIENT Heres hoN Northwest gives~ \ , -- MORE ?:~ ~ ~~Fon YOUR ~ FWHIDA "~ r~ DOUAH .:. ~ \ @NORTHWEST ORIENT Who can Oy you lrom any of 39 US. obes tolokyo and the Onent? Only Northwest OnenL - ___ ........_ __ - - NORTHWEST ORIEt(f @ ORIENT EXPRESS 7 OPERATING HIGHLIGHTS NWA FIRST WITH NEW COMPUTER GENERATED TICKET Computer generated airline ticketing was pioneered by orthwest Orient in January, 1973. A program developed through the combined efforts of WA, Sperry Rand-Univac and Control Data Corporation has produced a ticket unique to the industry. It contains all the specific information relating to the passenger's travel (flight number, class of service, date, origin and destination, fare, etc.). This information is printed on the face of each flight coupon and encoded in a magnetic tripe on the reverse side. By reading the magnetic encoding, passenger services such as gate check-in, gate pass issuance and baggage tag issuance, among other services, can be automated. During the ear 1973, a total of 132,848 Insta-Res computer generated tickets were issued in the test location at Twin Cities International Airport. In 1974, the program will be e panded to 14 other airport locations. Insta-Res Expanded. By utilizing new techniques in which two data circuits are carried on one voice-grade channel, the Insta-Res system was extended to Anchorage - and through Honolulu on to Tokyo. orthwest Orient thus became the first U.S. airline to provide direct computer acce s from the Orient. Insta-Res service was also e panded in 1973 to include all Montana stations and Jamestown, North Dakota, completing the link-up of NWA's domestic reservations stem. 8 A In to Re y tern i now able to provide a computer eneroted ticket. printed in just econd . Two new expon ion of WA 's air freight focilitie ,vere completed in Detroit (top) and ilwoukee. Experimental Program. In an experimental program, three travel agency offices who do a large volume of business with NWA were equipped with the same Cathode Ray Tube sets as used by the airline's reserva- tions personnel. These CRT sets, literally miniature TV screens, provide direct access to the computerized reservations system and a visual display of all necessary reservations information. EMPHASIS ON AIR FREIGHT IN 1973 FACILITY DEVELOPMENT WA's rapidly growing air freight business was given priority in facility expansion in 1973. A new air freight building was constructed in Spokane and major expansions were completed for cargo facilities in Detroit and Milwaukee. Total cost for the three projects was in excess of $600,000. Four new city ticket offices were opened by Northwest Orient during the year - in Washington, D.C., New York, Chicago and Tampa. A major remodeling was also com- pleted in Seattle. Aggregate cost was $260,000. Other Major Projects. Delivery of additional DC 10's and their introduction into new markets by NWA resulted in the need for passenger jetways capable of handling the big, wide-bodied jets. ew jetways for DC 10's and 747's were installed in Detroit, Cleveland, Philadelphia, Seattle and San Fran- cisco during the year. Total expense was nearly $1,000,000. Relocation of NWA station facilities in Newark, Seattle and Billings was also accomplished after major airport expansion programs were completed. CUSTOMER SERVICES EXPANDED; NEW PROGRAMS ARE INTRODUCED A variety of new customer service features were intro- duced or expanded in 1973 by orthwest Orient. Twenty four hour reservation service was made available to all cities throughout the continental U.S. through new night-time telephone connections with the Minneapolis/ St. Paul central reservation office. Between 12,000-15,000 calls monthly are now being handled between the hours of 10 p.m. and 7 a.m. with this facility. In July of 1973, a new containerized mail program was introduced by NWA for the U.S. Postal Service. This eliminates the need for individual handling of mail sacks at planeside as the Postal Service loads the container at its facility, seals it for absolute security and unloads the container at its facility on completion of the flight. During the year. the Insta Res system was connected to the Orient Region - permitting instant access to the computers located in Minneapolis/ St. Paul. New X-ray equipment for inspection of passengers' carry-on luggage was installed by Northwest Orient in several major hub airports to minimize waiting time of our customers. A special LD-7 container, contoured for optimum cargo carrying capacity on NWA aircraft, was designed and 110 of them purchased and placed in use during 1973. Response from shippers has been excellent. TEN NEW LABOR AGREEMENTS SIGNED; AFFIRMATIVE ACTION PLAN BROADENED ew labor agreements were negotiated for ten classes or crafts of NWA employees in 1973 with la bar-management harmony preventing any interruption of schedules due to work stoppages. Collective bargaining is currently being conducted with six groups of employees, including cabin attendants, mechanics and related personnel. During 1973, as schedules were increased, nearly all personnel who had been idled by the strike of the previous year were restored to active status, with the exception of pilots. At year-end, NWA system employment totaled 11,263 persons, of which 879 were local nationals in countries within the Orient. This compared to 10,000 employees at year end 1972. Adoption of improved recruitment and placement techniques within the framework of the Company's Affirmative Action Program provided opportunities for 1,541 new personnel of which 258 or 16.7 per cent, were minorities. The Company's Affirmative Action Program included WA participation in a number of career guidance clinics. A 747 takes on its containerized cargo using automated loaders (top) . The line of carts shows the great cargo carrying capacity of the 747. 9 FLEET HIGHLIGHTS OF 1973 13 DC 10-40'5 DELIVERED; 11 OLDER JETS SOLD Thirteen of the long range model DC 10-40's joined Northwest Orient's pure jet fleet in 1973, making a total of 15 at year-end. Together with the Company's 15 Boeing 747's, they gave Northwest Orient a total of 30 new, wide- bodied jets as of December 31, 1973. This represented nearly one-third of the fleet total of 111 aircraft. Relative to its seventh place revenue ranking among the major U.S. airlines, Northwest Orient has the largest percentage of its fleet in wide bodied, new generation jets. Conversion Program Completed. The conversion pro- gram to upgrade performance and reliability of the Boeing 747 powerplant was started in February, 1972, and completed in December, 1973. Total cost was some $12 million. A total of 63 JT9D-3A engines were processed through the NWA overhaul shops where they were reconditioned and upgraded to the JT9D-7 model. This improved model corrected shortcomings in the earlier model and made additional engine thrust available. The vastly improved performance has resulted in Northwest Orient having one of the best engine reliability records in the industry. Engine Commonality. Recognizing that any new air- craft engine is likely to have initial problems, the management of Northwest Orient made a decision several years ago to order its DC 10 aircraft with the same Pratt & Whitney engine used in the 747. We were the only U.S. airline to do so. This commonality of engines has provided dramatic savings in the areas of spare engines and spare parts and pilot and mechanic training. It has also contributed great savings in terms of reliability. Northwest Orient's DC 10-40's, powered by the improved model JT9D Pratt & Whitney 10 engine, have achieved a far lower in-flight shutdown rate and off-schedule engine removal rate than any other wide-bodied jet flown by U.S. airlines. Older Aircraft Sold. As new DC 10-40's were delivered to Northwest Orient in 1973, older jets were sold. In all, four Boeing 720B's and seven Boeing 320's were delivered to their new owners. There are two noteworthy points in our used air- craft sales program: First, there is substantial 'repeat' business for our used jets. Olympic Airlines, Maersk Air of Denmark and Cathay Pacific Airlines, three of our five custom- ers in 1973, all had been previous purchasers. Obviously, they approved of the thorough overhaul and renovation program done by Northwest Orient before delivery of an aircraft. Second, all used Northwest Orient jets are sold for cash on delivery. This attests to the quality of the air- craft offered for sale since credit terms are available from most other sellers. The last two of Northwest Orient's original fleet of 16 Boeing 720B's were delivered to buyers in early 1974. 15 DC 10-40's Range of 5,100 miles with 236 passengers. 15 BOEING 747's Range of 5,850 miles with 362 passengers . ++++++++++++++++ ++++++++++++++++ 32 BOEING 727-lO0's Ra nge of 1,760 miles with 122 passengers. ++++++ ++++++ ++++++ ++++++ 24 BOEING 727-200's Ra nge of 2,380 miles with 93 passengers. ++++++ ++++++ ++++++ +++++ 23 BOEI G 707-320' Ra nge of 5,620 miles with 142 pas eng r . 11 FINANCIAL REVIEW FOR 1973 Revenues. Northwest Airlines' total operating revenues of $584,348,065 represents an all-time high with the previous record of $467,937,999 having been set in 1969. Comparisons of individual categories with 1972 are not meaningful as the prior year's revenues were severely curtailed due to a pilot strike. All-time revenue records were also established in Passenger - $476,793,651 and Cargo - $55,280,382. The system yield per passenger-mile decreased from 6.09