Atlanta New Orleans 1 CITIES PRESENTLY SERVED BY NORTHWEST ORIENT OTHER CITIES AUTHORIZED FOR SERVICE BY NORTHWEST ORIENT DESCRIPTION OF BUSINESS North America Anchorage Atlanta Billings Bismarck/Mandan Boston Bozeman Butte Chicago Cleveland Detroit Edmonton Fargo/Moorhead Ft. Lauderdale/Hollywood Grand Forks The Orient Hong Kong Manila Okinawa Great Falls Helena Hilo Honolulu Jamestown Los Angeles/Long Beach/ Ontario Madison Miami Milwaukee Minneapolis/St. Paul Missoula ew Orleans ew York Osaka Seoul Newark Philadelphia Pittsburgh Portland Rochester San Francisco/Oakland/ San Jose Seattle/Tacoma Spokane Tampa/St. Petersburg/ Clearwater Washington, D. C./ Baltimore Winnipeg Taipei Tokyo Europe (Service to these European cities was authorized by the United States government on January 26, 1978. Service to some of these points will begin in 1978.) Bergen Copenhagen Glasgow Gciteborg Helsinki Oslo Reykjavik Stavanger Stockholm Mainland China (Service to Mainland China by orthwest Airlines was authorized by the United States government on July 20, 1946. The operation of these routes has been suspended for many years.) Dairen Harbin anking Peking Shenyang Shanghai orthwest Airlines , Inc. incorporated in the State of Minnesota, is a scheduled air carrier engaged in commercial transportation of passengers mail and property and operates under certificates of public convenience and necessity issued by the Civil Aeronautics Board. The present route system covers approximately 30,500 route miles and serves directly cities in 18 states of the 48 contiguous states, as well as Alaska, Hawaii, the District of Columbia, Canada, countries in Asia, including Japan, Korea, Taiwan, Hong Kong and the Philippines and countries in Europe including orway, Sweden, Denmark, Iceland, Finland and Scotland. The Euro- pean countries were recently awarded to Northwest Airlines and service will begin to some of these points this year. Authorizations to serve Shanghai, Peking and other points in continental China remain in effect although presently inoperative. NWA 'S FAMOUS RED TAIL ... is pictured here with the terminal building of Dulles International Airport framed in the background. The photograph was taken April 18, 1977 when a orthwest Orienl-char- ter flight, bearing 52 Minnesota businessmen bound for Cuba on a historic first trade mission and talks with Cuban president Fidel Castro, paused for a State Department brief- ing in Washington, D. C. 1977 Total Operating Revenues ............... $1,046,354,772 Operating Income ..................... . Net Earnings for the Year ............... . Per Common Share .................. . Per Dollar of Revenues ............... . Stockholders' Equity ............ . ...... . Per Common Share ....... . .......... . Dividends Paid ........................ . Operating Expenses: Per Available Ton-Mile Per Revenue Ton-Mile Revenue Traffic: 104,583,565 92 ,718,790 4.29 8.8 747,671 ,847 34.60 10,803,648 22.9 54.4 Passengers Carried.................... 10,354,808 Passenger-Miles Flown ................ 11,100,412,000 Ton-Miles, Mail, Freight and Express . . 566,428,000 Common Shares at Year End Employees: Number at Year End ......... .. ...... . Total Wages and Benefits Paid ........ . 21,606,686 11,445 $279,194,841 1976 $963,808,065 102,948,027 51,737,015 2.39 5.4 665,743 ,992 30.81 9,707,217 21.6 50.5 9,818,343 10,758,683,000 571,449,000 21,606,036 11,208 $249,521 ,454 FROM THE CHAIRMAN 51st Annual Report to the Shareholders 1977 was an excellent year for orthwest Orient Airlines. Operating revenues were $1 046,354,772 - exceeding one billion dollars for the first time in the Company's history. Total profit for 1977 was $92,718,790 - earn- ings per share reached $4.29 - an increase in earnings of 79% in 1977 over 1976. Financial Strength The financial strength of orthwest increased again in 1977. Debt was reduced $21 ,000,000 dur- ing the year that ended December 31, 1977 - from $125 000 000 to $104,000 000. At year-end 1977 orthwest stockholders' equity was $747,671 ,847. Retained earnings were $596,475 ,570 - highest in the U.S. airline indus- try. Debt as a per cent of equity was only 13.9%- which is the lowest in the U.S. airline industry. Dividend Increase for 1978 The Board of Directors on March 13, 1978 increased the dividend by 25 cents per share to an annual rate of 75 cents. This was the second increase in two years. The new quarterly dividend rate of 18 cents becomes effective with the payment to be made on March 31, 1978. Northwest has paid div- idends for 91 consecutive quarters. New Orleans Service orthwest began serving the Twin Cities- Chicago- ew Orleans market on June 8, 1977 - the first new route granted to the Company by the Civil Aeronautics Board in seven years. Development of this market was expected to take at least one year to be profitable, but response to orthwest's new service has been excellent and on December 15 1977 a fourth daily flight was added in each direction. ew Orleans' growing impor- tance as a national convention site and as an oil and gas exploration center makes this a key city on our route system. New Trans-Atlantic Routes President Carter approved new routes for orth- 4 west Airlines from the U.S. to six northern Euro- pean countries on January 26, 1978. In doing so, he confirmed the unanimous recommendation of the Civil Aeronautics Board that orthwest become 'the orth Country specialist' among U.S. airlines. The new trans-Atlantic authority permits orthwest to provide service between a combina- tion of nine U.S. points (Los Angeles, Seattle, Port- land, Minneapolis/St. Paul, Chicago, Detroit, Washington, D.C./Baltimore, Boston and New York/ ewark) and Scotland, Denmark, orway, Sweden, Finland and Iceland. The Company is now developing plans for its trans-Atlantic services which will begin in the summer of 1978. The opportunity to link Europe with the U.S. and Asia on Northwest's route struc- ture is a welcome one. It comes 3 0 years after orthwest successfully pioneered service to the Orient via Anchorage and the orth Pacific. Aircraft Fleet Modernization orthwest Airlines continued its program for ac- quiring cost-efficient, modern jet aircraft to im- prove its position in the industry. At year-end 1977, orthwest was operating a fleet of 110 fan-jet airplanes - 21 Boeing 747 airplanes, 22 McDonnell-Douglas DC-10-40's, 65 Boeing 727's and two Boeing 707's. With this fleet, orthwest provided 97% of its available seat-miles in interna- tional transportation with wide-bodied jet air- planes - Boeing 747's and DC-10-40's. On a sys- tem basis (international and domestic) 75% of the Company's available seat-miles were provided in "wide-cabin" airplanes. The percentage of wide- cabin seats will increase further in 1978 and 1979. During the year 1977, orthwest Airlines took delivery of one additional 747F all-cargo airplane and nine advanced-model Boeing 727-200's. These ten aircraft deliveries represent a capital investment of $127,500,000 and brought the cost of orthwest's flight equipment to more than $1 510,000,000. During the year 1977, the Company sold thirteen older jet airplanes - six Boeing 707-320's and THE BOARD OF DIRECTORS ... of orthwest Airlines is pictured here. Seated, left to right: M. Joseph Lapensky; Donald G. Mc eely; Raymond H. Herzog; Donald . yrop; James H. Binger and Hadley Case. Standing, left to right: Lyman E. Wakefield, Jr.; Malcolm S. Mackay; Melvin R. Laird and James . Land, Jr. seven Boeing 727-l 00's. A pre-tax gain of $51 054,000 as realized from these transactions. Jorth est in March 1978 ordered six additional Boeing 747-200B wide-bodied jet airplanes. The cost of these additional airplanes is approximately 300,000.000 v\ hich includes the cost of addi- tional spare engines and other spare parts. First deliver of the new 747-200B s will be in May 1979.Fi eoftheaircraft illbedeli eredin1979 and the sixth in 1980. These ne,,\ Boeing 747's ha, e been purchased to provide for the further de elopment of our recently av arded trans- Atlantic routes to Scandinavia and Scotland. They will also be used on orthwest s trans-Pacific routes stem and in high-density cit -pa-ir markets , i thin the U.S. Together \\ i th our present 21 Boeing 7 47's (17 passenger aircraft and four all-cargo freighters) and 22 DC-10-40 s. the six ne, 747 s v ill gi e North" est Airlines a total of 49, ide-bodied air- craft - one of the largest fleets of the new genera- tion jumbo jets in the orld. T" o advanced model Boeing 727-200 s pre i- ou ly ordered. "ere deli, ered in Februar.> 1978 and t\\ o more will be deli ered in the last quarter of 1978. T o Officers Elected The Board of Director elected t\\o new corporate officer during 1 77. fr. Robert E. trite, age 44 as elected ice President-Comptroller, and Mr. Steven D. \ heeler, age 32, was elected Assistant Secretary of the corporation. Outlook for 1978 Passenger traffic, both domestic and international, has resumed its growth during the last quarter of 1977 and has continued into the first t o months of 1978. \ e expect that the growth will continue through 1978 and forecast that revenue passenger- miles ill increase 8% to 10% over last year. Cargo traffic, which showed little growth in 1977, increased during the last two months of 1977. The improvement has continued into 1978 and orthwest expects that cargo revenue will in- crease approximately 10% to 12% in 1978 over the previous year. orthwest Airlines continues to ha e good cost controls and, if the above sales forecasts are achieved. 1978 v ill be another successful year for orth, est ir lines. Sincerel , ~~r: ~ Chairman and Chief Exe cu ti ve Officer arch 15. 19 7 8 5 SALES AND MARKETING HIGHLIGHTS NWA Records First Billion Dollar Year as 10 Million Passenger Figure Surpassed Two new milestones were reached by Northwest Orient in 1977 as the Company exceeded one bil- lion dollars in operating revenues for the first time in history and carried more than 10 million pas- sengers for another first. A number of sales records were established in 1977: A new single month record of 998,279 revenue passengers was set in August. A new single month cargo revenue record of $12,043 ,781 was established in November. For the second consecutive year, more than 500 ,000 passengers were carried on Northwest Orients' trans Pacific services in 1977. The continued expansion and growth of North- west Orient's partnership with its travel agents was evident in 1977. Travel agency revenue totaled $432 million - an increase of more than $54 mil- lion compared to 1976. The 56 'Travel Fairs' held for nearly 8,000 travel agents in 1977 enabled them to meet with top tour operators, cruise lines and representatives of major tourist attractions in areas served by Northwest Orient. Tour Sales Show Gain Tour programs produced by Northwest Orient and selected tour wholesalers produced $90 million in revenues during 1977. This was a 26 per cent in- crease over 1976. WA's Orient tours remained a very popular attraction with more than 40,000 tourists par- ticipating in 1977 orthwest Orient programs. Cargo Gains Domestically Domestic cargo revenue increased by 6 per cent in 19 7 7 over 19 7 6. This offset a decline in eastbound trans Pacific cargo volume caused by a stagnant 6 import market resulting from the weakened U.S. dollar overseas. Also helping make up the deficit in eastbound trans Pacific traffic was a 26 per cent gain in westbound cargo traffic from the U.S. to the Orient. A special sales effort was launched to obtain ship- ments of fresh seafood products to Japan. Included were shipments of whole tuna from Boston to To- kyo, sea urchins from the West Coast and salmon roe from Alaska. Containerized traffic represented 46 per cent of NWA's domestic system freight traffic in 1977. Convention Sales Grow Over 43,000 delegates flew on Northwest Orient flights to their domestic and international conven- tions during 1977. Northwest Orient became the first airline to de- velop Travel Agent Seminars specializing in con- vention sales techniques. These seminars were at- tended by more than 200 travel agents in major on-line cities and the response has been excellent. New Orleans Service Begun On June 8, 1977, Northwest Orient began its first scheduled service in the New Orleans-Chicago market under new authority granted by the Civil Aeronautics Board. An aggressive sales and advertising program was launched in the key markets - New Orleans, Chicago and Minneapolis/ St. Paul - using news- paper advertising like that pictured at right. Spe- cial food service was also introduced. Originally estimated to take at least one year to be profitable because of the market dominance of the entrenched competitor, the Chicago-New Or- leans route has literally 'taken off' for Northwest Orient. On December 15, 1977, a fourth daily flight providing night coach service in each direction was added. Newway down yonder to New Orleans! S'l'-.,e,Nmnl ~,s.pro.,o10__,,.. r--..i--e,,a,,,se,wr,,e,~OC)Ol"-0-..-.. ~~"':',.,~~ioo---~l"TN EnrooM we'8a,eout.T1Qu5~~ ~ ,...,.o,~on h)~/'.e-0.... ---- ~r:,,,.,~F.e ., 0,-. --cal ~ ~ I O ' SALES AND MARKETING HIGHLIGHTS Chicago-Tokyo Non Stop Service Launched; 'Wide Cabin Airline' Emphasis Continues The first nonstop service to be offered in the Chicago-Tokyo market was introduced by orth- ,,vest Orient on June 8 , 1977. It gave WA the fastest service to the Orient from 3 5 states in the .S. This sen ice advantage was announced in news- papers and radio in all on-line cities, in 22 off-line cities , regional and national magazines and the travel trade press with messages like those shown below. A similar advertising program in the Orient promoted the Tokyo-Chicago service. In selected cities, newspaper advertising high- lighted the difference between orthwest Orient's full-size 747 and the shorter and more condensed seating of the smaller B747-SP. 'Wide Cabin' Theme Continuing emphasis was placed on 'The Wide Cabin Airline theme throughout 1977 and into 1978 in orthwest Orient advertising. With 75 per cent of its system seat miles and 97 per cent of its international available seat miles in modern, wide cabin jet aircraft, WA advertising reflected this marketing advantage. These 747 and DC 10 aircraft are clearly preferred by the public in all opinion surveys. 'The Wide Cabin Airline' theme also generated a musical jingle which was adapted for use in all radio and television commercials. New Uniforms Introduced A completely 'new look' was introduced for orthwest Orient's flight attendants on November 14 1977. Over one year in the design and de- velopment, the program to develop new uniforms involved the fitting and distribution of more than 32 ,000 pieces of clothing. With the navy blue and red uniforms keyed to orthwest Orient's corporate colors, the 'new look' has been welcomed by both the 2,200 WA flight attendants and the more than 10 million passen- gers they served in 1977. Northwest: Why fly shouldertoshoulder to Tokyo .. when Northwest gives you 60% more room! Northwest: fastest way to the Orient. 8 Wrth the first and only Chicago-Tokyo nonstop Sle()aooan:i/\ilol'lhWeSIA,gtlJOuaes &iroute.....,leatureRegallrnpenalSer'vce- ~MlJOf'l95am We"lffy)'OIJ OUfV@l)'tlc!St ~mCt-cagonSOICOl,.IS ~ Gongoeyond"Toq-o?NortnwestollSOseNeS 77--1.AcomlOrt-tl'lll!l'\nonslOPIOloi(yo'foully Osa,.a.$eou!C>-.JMWIITa.oeiMar-.ancl arie,atcne-ay-anc:111m,,,e.,i:,,:yoa1 Hor,gl(ongwttnocn,edlOl'\$to~cne0nent OO?"'me~d.ay h)'O~ ~:fly~fTOm Washlngton 1 ~~oqoo ~'-!.-::'s. ~::'~ NONSTOP !;~~ t~~ t.'~s..am ""'-- ~f~ F0t~&10\S SMyouttravelA99'1I01calNortnwest 337-0666 @ ~SWJi~is~n ORIENT m: m _ =--= u .. m m-m .... .. .. .;--- ] . 11 IJ 111 11 I 11 IJ ll II :.1:.E. _ :111 11.:11. ~= =II :1111.: . . :. II Northwest 747 Coach section with 150 passengers: Roornyrw,e-aoreas1sea1,ngpientyolooenseats1so-1001Coacflseaion am :m ea::a:a :::~~;;~~m:;; ~ J 11 .. n m.1 111:1::1:11. @ NORTHWEST ORIENT The wide-cabin airline For 11>ti...lligtl io - 0r--. 11t, ....,_ '9'W'i1 0t Nortr,,o,all'OoM )'Ol,I .... Fl,gN3-our -o.-uioln 7 7t'O'IIIOOIIOTI O'IQ(IOIO~ ~)'O'ol,.,..,. ~ sr1 1 afl'IOUS ~w~ or S::-~~t.aL~ or i~~~: l"NMtfrom lheN Cft .. - ~ :=:: ~ ~~ =-~c !.."':::. - ~~l':. ~ .... -- _,.r:: ~ ~(?i~ST ORIENT ~ NORTHWEST ORIENT lu.t AnM f-,it It! SIOl)S 01' V; Freq Serna LeM MM Flqll No Stops 01' Via Fl!Q Sena From: ANCHORAGE (ADT) fsr lt1emt1e11 ,tus, C at 243-1123 MILWAUKEE (CDT) 8 30a 8 10p 341717 Chago 8 30a 8 !Op i/717 Chic.go 6 llp 6 50a 26/409 Chiugo TuThSaSII Iii MoWeFr Iii~ ExSa M WINNIPEG. Mn .. C1111d1 (CO D 12 1~ 5 241) a/77'/71t ~ SI. I From: To: Mpls.-St Pai' Mo Wt Sa II ULANTA (EDT) 6~ 935a Z6 12 15a 5 23p 46177 If LUNGS (MDT) 9 00a 8 26p I Z/40 1215a 1156a .EVELA 8l>a 905p 8 l>a 90$p i))p 947a ;30p 11 ' 15a 3 3 p TROIT (E ~ 835p ~ 8 3Sp 6/416 30p 9 53a 26/16 30p II 35.1 26/406 ISa 3 Sbp 46 '0a 221p mmo IOHTOH. Alla .. Ca )a 6 30,1 421 ::0/ MOORHEAO ( J I l o 418/ 401 -UDERDA LE 1 I I Jp 16/ 10 I Mfl 6 1 11 T (All. (MUI) , .,. t 4r, 1 t, 4h 1, 4 WIDE-cABINS EVERY DAY TO A.ORIDA! ------ ::::;7.-=--::-=-:::- -----~--=--- Fly lhewide-cabin ..... s- I , Florida? FIY. Vlith the leader! (The choice is obvious.) SERVICE NORTHWEST OTHER AIRLINE Oally wk:te-ca.bm )et.a 6 0 toRorlda Dllllyw~-bln)ets 2 0 toMwnl . Ody nons1op to Miami 1 0 ~,\.~~:~~ 2 0 i:a-,.:=i~~~': 5 0 Ody wide-cabin nonstop 1 0 toTmpa l kP9ta -Doi\ Otoe -550~'"' NOT OFFERED and save up to 30% ! Service to 10 Florida cities. - - ~ 11 ;:_ ~ Flythewide-cabe,airine ~\ '~ 0 H -5T ORI T ::: Fly the wide-cabin air1ine @~ o I WES O 1n Financial Review and Management Analysis for 1977 Operating Revenues Operating revenues in 1977 surpassed the billion dollar mark for the first time and amounted to a record $1 ,046 ,354 ,772 . This compares with previ- ous highs of $963,808,065 in 1976 and $800 ,562 ,989 in 1975. Passenger revenues increased to $861 ,053 ,058 in 1977 and compare with $786,414,179 in 1976 and $659 ,849 ,499 in 1975. This reflects both an in- crease in traffic and an increase in fares granted by the Civil Aeronautics Board. The system scheduled passenger-mile yield increased to 7. 76ct in 1977 from 7.30ct in 1976 and 6.94ct in 1975. Cargo revenues amounted to $121 ,185 ,084 in 1977 and compare with $119 ,882 ,2 59 in 1976 and $88 ,307 ,610 in 1975. The system cargo revenue ton-mile yield increased to 26.45(1'; in 1977 from 25.65ft in 1976 and 22.86ct in 1975. Revenues from commercial charter and other in- come amounted to $13 ,619 ,005 , while military charter revenues were $12,251 ,605 in 1977. These compare with $13 ,249 ,974 and $12 ,7 04 ,567 in 1976 and $12 ,561 ,055 and $16 ,457 ,917 in 1975 , respectively. The higher military charter revenues in 197 5 reflected the increased activity from evacuation of personnel from Vietnam. The Mili- tary Airlift Contract expires on September 3 0, 197 8 and the Company will seek a renewal contract for the 1979 fiscal year. Fares and Rates The Civil Aeronautics Board approved a number of fare and rate increases in 1977 as a result of in- flationary pressures including higher fuel costs. Domestic 48 state fares were increased on Feb- ruary 15, 2%; April 1 , 8% first class only; August 18, 1% ; September 10, .5%; and November 4, 3 .0%. Mainland-Hawaii fares were increased on January 1, 2% on regular fares and 4 .5% on promo- tional fares and on July 15, 2 %. Canada trans border fares were increased 4% on June 15. North Pacific discount fares were increased 5% on August 1. Cargo bulk rate increases were granted for the domestic 48 states of approximately 12% and Mainland-Hawaii, 15%, effective August 21. Current inflationary trends have caused some U. S. carriers to apply to the Civil Aeronautics Board for a 3 % domestic 48 state fare increase for effectiveness on May 1, 1978. Operating Expenses Operating expenses in 1977 increased to $941 ,77 1 ,207 and compare with $860,860 ,03 8 in 1976 and $750,863,340 in 1975. Inflationary trends and development of the new Chicago-New Orleans and Chicago-Tokyo non- stop routes have contributed to expense increases in 1977. The Company continues to maintain strict cost control policies and procedures to minimize SOURCE AND DISTRIBUTION OF REVENUES Percent of Total (Dollars in Millions) Distribution: Employees Wages and Benefits 26.7% $279.2 Source: Fuel and 0 11 Passenger - Coach - ~ ,....._ ___ .....,.,. 23 0% $240.6 74 4% $778 0 Materials and Services 14.2% $148.2 Passenger - 1st Class 7 9% $ 83 1 Depreciation and Amortization 9.8% $103 2 Freight and Express 116% $1212 Commissions 6.8% $ 70 8 Charter and Other 3 3% $ 34 2 Landing Fees and Rentals 4 9% $ 51 .3 Mall Income Taxes 2 8% $ 29 9 58% $ 60 4 '------- Earnings 8.8% $ 92 7 10 the effect of inflation. Operating e pen e per a ail- able ton-mile increased to 22.92q; in 1977 from 21.61rt in 1976 and 20.61rt in 1975. This is the Im est operating cost le el in the U. . airline in- dustr . Depreciation and amortization e pense amounted to $103,152 530 in 1977 and compares ith 102,713,531 in 1976 and 98,879 815 in 197 5. Increases betv een the ears reflect the addi- tion of ne,, aircraft purchased to replace older less producti e aircraft. ajar inflationary increa es continued in the cost of labor, materials and supplies and aircraft fuel. The s stem fuel anal sis chart (on this page) sho s the dramatic climb in fuel costs since the base ear of 1973. The Com pan spent appro i- mately 23rt for fuel out of each re enue dollar in 1977 compared to onl 13 in 1973. Earnings and Dividends Record earnings were achieved in 1977, amount- ing to $92,718,790 or 4.29 per average share of common stock. Thi compares to 51 ,737,015 or $2 .3 9 per share in 1976. Included in the earnings before related income taxes were gains from sale of flight equipment amounting to $51 053 719, compared with 9,118,984 in 1976. Interest on long-term debt net of capitalized interest, was $6,517,695 this ear compared to $14,035,036 in 1976. This is a result of reduction of long-term debt. The Company continued its uninterrupted div- idend payment policy in 1977. Increased quarterly payments resulted in an annual rate of .50 per common share compared with .45 in 1976. This is the 2'.ird consecutive year in hich the Compan has paid dividends. The principal market on "hich orthwe t ir- lines common tock is traded i the ew York tock E change. The follm, in table how the sales price range for the ear 1977 and 1976 and the di, idend paid per hare for the am p riod. Quarter 1st 2nd 3rd 4th High Low High Low High Low High Low Sales Price of Common Shares 1976 1977 32 30% 23 22 1 / 2 34 283,\J 253/a 22 36 263/s 27 20 31 24 26 193/8 Taxes on Earnings Dividends Per Share 1976 1977 $. 1125 . 1250 .1125 .1250 .1125 .1250 .1125 .1250 Income ta es on earning in 197 7 amounted to $60,425 ,200 and compare v ith 46.527 .200 in 1976. The current ear consists of a normal ta.1 provision of $75,276,100 of v,hich 19,891,300 has been deferred for future pa ments as a result of the Compan s use of accelerated methods of com- putation of depreciation for income ta purpo e . In estment ta credits generated from the pur- chase of flight and ground equipment and applied against the income ta pro ision amount d to $14 850,900 in 1977 , up from $1,848 200 in 1976. The Ta Reform Act of 1976 allowed the airline industry to applj unutilized investment ta credit at the rate of 100% of the current ta liability in 1977. As a result, prior period in e tment ta , cr d- System Fuel Analysis Year Ended December % Change 1973 1974 1975 1976 1977 1977/ 1976 Price Per Gallon (Includes Sales Taxes) 12.66(]; 27 .20q; 31.67 33.29(]; 37.48q; + 12. 6% Gallons Used (000) . . . . . .. .. . ... . . . 616,930 587 ,302 593,821 618 ,325 633, 955 + 2.5% Fuel Cost (000) ....... . ... . . . $78 ,134 $159,753 $188,049 $205,853 $237 ,602 +15.4% Revenue Ton-Miles (000) 1,254 ,074 1,411 ,862 1,494,669 1,705,987 1 I 731 I 199 + 1.5% Revenue Ton-Miles Per Gallon .... . . 2.03 2.40 2.52 2.76 2.73 - 1.1 % Total Revenues (000) ... $584 ,348 $758,991 $800,563 $963 ,808 $1 ,046,355 8.6% Fuel Cos % of Revenues 13.37% 21.05% 23.49% 21.36% 22.71 % 6.310 11 Financial Review for 1977 ( continued) its which could not be applied to tax returns, but which were offset against deferred income taxes, were reduced from $53 527,600 in 1976 to $16 ,103,800 in 1977. Cash Flow Funds from all sources amounted to $273 ,364,266 in 1977 compared to $196,966,856 in 1976. Net earnings provided funds of $92,718 ,790 in 1977 compared to $51,737 ,015 in 1976. Additional benefits derived from owning equipment rather than procurement through leasing arrangements have provided funds through depreciation and amortization of $103 ,152,530 in 1977 compared with 102 ,713 531 in 1976. Funds from deferred taxes of $59 ,558 000 and other sources of $17 934 946 were generated in 1977. This com- pares with $36 765,400 and $5,750,910 respec- tively, in 1976. Funds used in 1977 amounted to 164 ,398 ,932 , down from $215 ,300,475 in 1976. Funds required for the purchase of flight equip- ment and other property and advance deposits on aircraft scheduled for delivery during 1978 amounted to 131 ,595 ,284. Payments for reduc- tion of long-term debt amounted to $22 ,000,000 and cash dividends amounted to $10,803,648. STOCKHOLDERS' EQUITY VS. LONG-TERM DEBT 1llions of Dollars EQUITY Ill 800 DEBT 1111 700 600 500 400 300 200 100 0 1973 1974 1975 1976 1977 12 Traffic and Services Scheduled operations in 1977 showed gains in both traffic and capacity over 1976. Revenue passenger-miles in scheduled service increased 3.2% and available seat-miles increased 3 .3 %. Revenue ton-miles increased 1.8% and a- vailable ton-miles flown increased 3 .4%. The in- crease in revenue ton-miles includes an increase in passenger ton-miles of 3.2% and a decrease in cargo ton-miles of 2.0%. The reduction in cargo ton-miles reflects the slowdown in the Japanese economy and the decline in the value of the U. S. dollar. On June 8 this year, the Company began serving its new route authority between Chicago and ew Orleans with three daily round trips and also began non-stop round trip services between Chicago and Tokyo four times a week. Passenger acceptance of these nev.r services has exceeded our expectations. On July 1, 1977 all trans-Pacific all-cargo service was converted to B-747F operations. This permits use of larger containers that produce efficiencies for both the airline and the shippers. Financial Condition The Company continued to improve its financial position in 1977 and enhanced its ranking as one of the strongest carriers in the airline industry. Effective December 3, 1977, the Company termi- nated the Revolving Credit Agreement with banks which provided for a maximum credit of $104 ,600,000 at termination. The Company's long-term debt arrangements are described in ate B to the Financial Statements. Internally generated cash provided the Com- pany with funds for all of its financial needs in 1977 including the reduction of long-term debt by $22,000.000 and the purchase of one 747F all- cargo airplane and nine 727-200 passenger airplanes and related spare parts. Existing finan- cial arrangements and internally generated cash will be used to cover the purchase of four addi- tional 72 7-200 passenger airplanes to be delivered in 1978 and si 747-200 passenger airplanes to be delivered - five in 1979 and one in 1980. Stockholder equity at December 31 , 1977 amounted to $747,671,847 , compared with 665 ,743,992 in 1976. Book value per common share at year end increased to $34.60 compared with $30.81 a year ago. Total outstanding debt at year end amounted to 104,000,000 compared with $125,000 ,000 in 1976. Outstanding debt was 13.9% of stockholder equity at year end, down from 18.8% in 1976. This advantageous debt to equity ratio continues to be the lowest of the U.S. trunkline carriers. Statements of Earnings NORTHWEST AIRLINES, INC. AND SUBSIDIARIES Operating Revenues Passenger ........ ... .. ...... . ..... . ......... . ......... . Cargo ...................... . ..... .... . . ..... ... . ..... . . Mail ...... ...... .. . . ..... . ........ . .. ...... ...... ..... . Charter and other transportation . .. ......... . . . . . .... ... . on transport ......... .... ..... .... . .... . ...... ... . .. .. . Operating Expenses Flying operations . ................ .. . .................. . Maintenance .. .. ......... . ...... . ... ... .. . .... ........ . Passenger service .... . .... . .... ... ........... .. .. .... .. . Aircraft and traffic servicing ................. .. . . ...... . . Reservations, sales and advertising .... ... . ....... .. .... . . Administrative and general ............................. . Depreciation and amortization ... . ....... .. ..... ........ . Other Income (Expenses) Interest on long-term debt, net of capitalized interest of $2,362 ,672 (1976 - $835 ,938) - ote A . .. . . Gain on sale of flight equipment .................. . ..... . Other ................................................. . Earnings Before Income Taxes .......... . .............. .. . . Income taxes - ote D . ......... ........ ................ . et Earnings ............................................ . Average shares of Common Stock outstanding during the year ........................................ . Earnings per share of Common Stock ...................... . e not to finan ial tat ments Year Ended December 31 1977 $ 861 053 058 121 ,185 ,084 29 ,893 ,962 25 ,870,610 8 ,352,058 1 046 354,772 351 ,480,978 105 ,146,793 86 ,526 853 148 871 ,186 122,031 ,763 24,561 ,104 103 152 ,530 941.771 207 104,583 ,565 6 ,51 7,695) 51 ,053, 719 4 ,024 ,401 48 ,560,425 153 ,143 ,990 60 ,4 25,200 92 ,718 ,7 90 21,606 ,544 -l .2 9 1976 $786,414,179 119,882259 25 137 ,346 25,954,541 6,419,740 963,808,065 309,198,914 87.175,964 77,085 717 138 ,94 0,753 123,568,082 22,177,077 102,713,531 860 ,860 ,038 102,948,027 14 ,035 036) 9,118,984 232,240 4.683,812) 98,264,215 46,527.200 $ 51.737,015 21.60 5 .-!93 $2.39 13 Statements of Financial Position NORTHWEST AIRLINES, INC. AND SUBSIDIARIES ASSETS Current Assets Cash and short-term investments .... . . ... . . ... . . . ...... . . Accounts receivable, less allowance of $1 ,300,000 (1976 - $1 ,2 00 ,000) ... .. . .. . ..... . ........ . .... . . .. . . Flight equipment spare parts, less allowance for depreciation of $15 ,728 ,241 (1976 - $13,24 7,969) . . . . . . . .. . .. . .... . . . .. . . .. .. .... . Maintenance and operating supplies ..... ..... .... ... . .. . Prepaid expenses ...... . . . ... . ...... .... ............... . Total Current Assets Other Assets ... . ...... . . .. . ..... .... .. . . .... . . . . .... . ... . Property and Equipment Flight equipment ... . .. . ........... . .. . ..... ..... . ... . . . Less allowance for depreciation ... . ...... . .............. . Advance payments on new flight equipment - Note E .. . . Other property and equipment ...... .... .. ... . . .. ....... . Less allowance for depreciation . . .. ... .. ................ . 14 December 31 $ 1977 129,717 ,280 83 ,413 ,519 29 ,731 ,581 7,714 ,326 5,707 ,249 256 ,283 ,955 16,064 ,461 1 ,510,447 ,264 547 ,490 ,198 962 ,957 ,066 13 ,145,496 976 ,102,562 127,595 ,835 76 ,595 ,835 51 ,000 ,000 1 ,027 ,102,562 $1 ,299 ,450 ,978 $ 1976 14,544,179 75 ,517,199 23,764,942 6 ,933 ,321 2 ,820,483 123,580,124 16,058 ,113 1,448,401 ,928 523 ,865 ,169 924 ,536,759 31 ,501,595 956 ,038 ,354 122,445,236 66 ,559,527 55,885 ,709 1 ,011 ,924 ,063 $1 ,151 ,562 ,300 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued expenses .. ............... . Employee compensation ......... . ......... . ............ . Unredeemed ticket liability ............. . . . . . ..... . ... . . . Income taxes ... . . . ... . .. . ..... .. ... ... ................ . Current maturities of long-term debt .................... . Total Current Liabilities Long-Term Debt - Note B . .. ..... .. . .. .... . .. ... .. . ... . . . Deferred Credits and Other Liabilities Income taxes - Note D ............. . . . ................ . Other ............... . ... . ...... ... . ... ................ . Stockholders' Equity - ote C Common Stock $1.25 par value, authorized 40,000,000 shares; issued and outstanding 21,606 686 shares (1976 - 21,606 03 6 shares) ..................... ...... . Capital surplus ......... . ..................... ... ...... . Retained earnings ................ . ..................... . Commitments and Contingencies - T otes E and F See notes to financial statements $ December 31 1977 122 060 666 27 ,029 ,098 22,041,670 3 302,315 4 000 ,000 178,433 ,749 100,000 000 261 349,600 11 995 782 273 345 ,382 27,008.357 124,187 ,920 596 475,570 747 ,671 ,847 1,299 ,450.978 $ 1976 100 485,107 21,934 ,578 17 ,887 ,086 11 ,3 88481 3,000,000 154,695.252 122 000,000 201 791,600 7,331,456 209 123 ,056 27,007,545 124,176 019 514,560,428 665,743 ,992 $1.151,562,300 15 Statements of Changes in Financial Position NORTHWEST AIRLINES, INC. AND SUBSIDIARIES Year Ended December 31 Funds Provided et earnings . . . .. . . . . .. ... . .. . . ......... . . . . . . .. ...... . Items not affecting working capital: Depreciation and amortization . . ...... . .......... . .. . . . Increase in deferred income taxes . . ... . . ... ... . . ... .. . . Amortization of deferred investment credit . .. . ........ . Total From Operations Proceeds from sale of flight equipment less gain included in earnings .. ... . .... .. . . . .... ..... . Other .... .. . . . ...... . . ..... . . ..... . . ... .. . .. . ... . . . .. . . Total Provided Funds Used Flight equipment and other property additions . . . . ... . . .. . Advance deposits on aircraft . . . . . .... . . ...... . . ......... . Cash dividends ...... . . .. ............ . ...... . .. . .... .. . . Reduction of long-term debt ... . . . . ... . .. . . . .... ........ . Total Used Increase (Decrease) in Working Capital . . . . . .. . .. ... . ..... . Changes in working capital consist of: Increase ( decrease) in current assets: Cash and short-term investments .. . .......... . . . . . .. . . . Receivables . . . ..... . .. . .. .. ..... . ...... . ... . .... . ... . Recoverable income taxes . . . . . ............... . ....... . Inventories ... . ....... . .. . . ... ..... .. . . . . ... ... . . . .. . . Prepaid expenses .. .... . .... .. ... .. .......... . ..... . . . Increase ( decrease) in current liabilities: Accounts payable and accrued expenses ...... . ... . .... . Other accrued liabilities .... . .. .. . . ... . .. . . . .... .. ... . . Unredeemed ticket liability ............ .. ... . .. .. . . ... . Current maturities of long-term debt .... . . . .... . .. . .. . . Increase ( decrease) in working capital . .. . . ...... .... .. .. . . See notes to financial statements 16 $ 1977 92,718 ,790 103 ,152 ,530 59,558 ,000 -0- 255,429,320 15 ,780 ,836 2,154,110 273,364,266 118 ,449 ,788 13 ,145 ,496 10,803 ,648 22,000,000 164,398 ,932 $108 ,965 ,334 $115 ,173 ,101 7,896,320 -0- 6 ,747 ,644 2,886 ,766 132 ,703,831 21 ,575 ,559 2,991,646) 4 ,154 584 1,000,000 23 ,738 ,497 $108 ,965 ,334 1976 $ 51,737 ,015 102 ,713 ,531 36,765 ,400 522,200) 190,693 ,746 5 ,976,395 296 ,715 196,966,856 50,091,663 31,501 ,595 9 ,707,217 124,000 ,000 215,3 00,475 ($ 18,333,619) ($ 34,617 ,989) 3,025 ,071 6 ,040 ,800) 73 ,758) 194,224 37 ,513 ,252) 359,316) 4,417 ,292 337,609) 22,900 ,000) ( 19,179,633) ( $18 ,333 ,619) Statements of Stockholders' Equity NORTHWEST AIRLINES, INC. AND SUBSIDIARIES Common Stock Shares Amount Balance December 31 , 1975 ............ 21,604,136 $27 ,005 ,170 Exercise of stock options ....... . . . . . . 1,900 2,375 et ~arnings for 19 7 6 ..... . . .. ..... . . Cash dividends - $.45 a share ...... . Balance December 31 , 1976 ............ 21,606,036 27 ,007,545 Exercise of stock options ............. 650 812 et earnings for 1977 . . ....... . ...... Cash dividends - $.50 a share ... . ... Balance December 31, 1977 ........... . 21 ,606,686 $27,008,357 See notes to financial statements Capital Retained Surplus Earnings $124,140,834 $4 72 ,53 0,63 0 35,185 51,737,015 9,707,217) 124,176,019 514,560,428 11 ,901 92,718,790 10,803 ,648) $124,187,920 $596,475,570 APPLICATION OF INVESTMENT TAX CREDIT NORTHWEST AIRLINES FLEET Available* Appliedt and Reflected on Period in Earnings Tax Returns 1962-1976 ......... $124,757,700 $ 71,230,100 1977. . ............ 14,850,900 52,274,700 Total .... . ........ $139,608,600 $123,504,800 Applied on I Returns . . . . . . . . . . 123,504,800 .,____J To be Applied ..... $ 16,103,800 *The Company uses the flow-through method of accounting for investment credits and records the credits as a reduction of income tax expense in the year earned. tlnvestment credits are applied on tax returns as allowed by income tax regulations. Credits not applied currently are offset against deferred taxes. Year End On Order Aircraft Type 1976 1977 B727 & B727C-100 .... 32 25 B727-200 ............ 31 40 4 B707-320B & 320C .... 8 2 DCl0-40 ............. 22 22 B747 ..... ........... 17 17 6 B747F .... . .. ..... . .. 3 4 Total ................ 113 110 10 See ate E to financial statem nts 17 18 Notes to Financial Statements NORTHWEST AIRLINES, INC. AND SUBSIDIARIES December 31 , 1977 ote A - Accounting Policies A summary of significant accounting policies of the Company which have been consistently followed in preparing the accompanying financial staterLents is set forth below: Consolidation The consolidated financial statements include the accounts of the Company and its wholly- owned subsidiaries after elimination of intercompany accounts and transactions. Short-Term Investments Short-term investments are stated at cost which approximates market. Flight Equipment and Property Provision for depreciation is computed by the straight line method over the estimated useful lives of the assets. Useful lives are estimated at fifteen years with 10% residual values for 7 4 7 and DC-10 aircraft and ten years with 15% residual values for all other aircraft. Useful lives of buildings vary from 5-30 years and other equipment from 4-10 years. Depreciation of flight equipment spare parts, rotables and assemblies is provided by the straight line method at rates which depreciate the cost of these ass.ets, less residual value, over the estimated useful lives of the related aircraft. The Company charges all expenditures for maintenance and repairs and minor renewals and betterments to operating expense. Expenditures which materially increase values or extend useful lives are capitalized. Book value of assets sold or otherwise disposed of is eliminated from the accounts in the year of disposal and the resulting gain or loss is included in operations. Interest on the Company's long-term debt relating to deposits advanced to manufacturers prior to the delivery of new aircraft is capitalized and amortized over the useful life of the aircraft. If the Company did not follow a policy of capitalizing interest, net earnings would have been increased by 15 ,000 in 1977 and by $731,000 ($.03 a share) in 1976. 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 thirty years. Income Taxes Income taxes are provided at statutory rates to earnings before income taxes regardless of when such taxes are paid. Deferred income taxes arise principally from timing differences between financial and tax methods of accounting for depreciation and capitalized interest. Notes to Financial Statements ote A - Accounting Policies (Continued) The Company uses the flow-through method of accounting for investment credits. 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 investment credit carryover periods. Earned Revenue Passenger and cargo sales are recognized as earned revenue when the transportation is provided. Earnings Per Share Earnings per share are based on the average number of shares of Common Stock outstanding during each year. o material dilution would result upon exercise of outstanding stock options. Note B - Long-Term Debt Term Credit with banks is payable $12.5 million quarterly be- ginning April 1, 1981. Interest is paid based on a formula related to prime commercial loan rates; however, total in- terest paid shall not exceed 73/a% per annum on borrowings over the term of the loan .. . , ... . ...... . .. . . . . ..... . .... . Revolving Credit Agreement with banks was terminated by the Company effective December 3, 1977. Interest on funds bor- rowed was at % above the prime commercial loan rate prior to July 1, 1976 and % above thereafter .. .. .. .. ... . . . . . . ote purchase agreements with twelve insurance companies are payable $3 ,000 ,000 annually to October 1, 1978 when the balance is due. Interest is at 6% per annum .. ... . .. . . ... . Less current maturities . . .. .. . ..... . ... . . . . ......... . .... . . December 31 1977 1976 $100 ,000 ,000 -0- 4,000 ,000 104,000,000 4,000 ,000 $100 ,000 ,000 18,000 ,000 7,000,000 125,000 ,000 3,000 ,000 $100 ,000 ,000 $122 ,000 ,000 The Company was in compliance with the covenants of the debt agreements at the end of both years. At Dec; mber 31 , 197 7 approximately $178 ,000,000 of retained earnings was unrestricted under the terms of the agreements. The required long-term debt payments are $37 ,500,000 in 1981 , $50 ,000 ,000 in 1982 and $12 500,000 in 1983 . 1. 20 Notes to Financial Statements ote C - Stockholders' Equity Cumulative Preferred Stock, $25 par value: Authorized ............................................ . Issued December 31 .... .... .. ........... ....... ........ . Common Stock options at prices which were not less than 100% of market at date of grant are as follows: Outstanding December 31, 1975 .................. .... . Exercised ............... . ... . .. ............... .... . Outstanding December 31, 1976 ...................... . Exercised ................. . .. ............... ...... . Lapsed ............................................ . Outstanding December 31, 1977 ...................... . Options exercisable: At December 31 , 1976 .............................. . At December 31 , 1977 .. . .................. .. . . .. . .. . 1977 1,000 ,000 None Shares 81,000 ( 1,900) 79 ,100 ( 650) ( 1,150) 77 ,300 56 ,450 77 ,300 Shares 1976 1,000 ,000 None Price Per Share $19.13/ 20.06 19.13/ 20.06 19.13/20.06 19.13/ 20.06 19.13/ 20.06 19.13/ 20.06 $19.13/ 20.06 19.13/ 20.06 Shares available for future stock options and other plans were 330,286 and 329,136 at December 31, 1977 and 1976, respectively, of which 70,150 and 69 ,000 , respectively, were available for additional grants under the 1973 Stock Option Plan. Note D - Taxes on Earnings The provision for taxes on earnings consists of the following: Year Ended December 31 1977 1976 Current: Provision for the year .. . ............................... . $55,384,800 $20,494,300 Investment credit applied .............................. . ( 52,274,700) ( 9,956 ,700) 3,110,100 10,537,600 Deferred: Provision for the year .............. ......... .. . ........ . 19,891,300 27,881 ,100 Investment credit: Earned during the year ............................... . 14,850,900) 1,3 26 ,000) Transferred to current ( earned in prior years, applied on tax return in current year) ...... .... .. . . . . 52 ,274 ,700 9,956 ,700 Deferred amortized over eight years ........ ..... ...... . -0- 522,200) 57 ,315 ,100 35 ,989,600 Total income tax expense .... .. ...... ....... .. .......... . . $60,425,200 $46,527,200 The deferred expense consists of: et current items . ............... ......... ............. . ($ 2,242 ,900) ($ 775 ,800) et noncurrent items ..... . .......... ...... ... . ..... ... . 59,558,000 36 ,765 ,400 $57,315,100 $35 ,989 ,600 Notes to Financial Statements Note D - Taxes on Earnings (Continued) TheCompan 'seffectivetaxrate\ as39.5 % for1977and47.3 % for1976.Therate arelm erthan the statutor federal rate of 48% primarily because of in e tment tax credits earn d. In estment credits not applied on tax return but offset again t deferred income ta 'es at De- cember 31. 1977 will e pire $1,227 100 in 1983 and $14.876.700 in 1984. Note E - Commitments The Company does not lease an aircraft or related flight equipment. At December 31 1977 the Company has contracted to purcha e four B727-200 jet aircraft for delivery in 1978 which will require expenditures of $42,536.000, of\ hich $13,145,000 ha b n deposited and the remainder is pa able in 1978. On February 25. 1978 the Company contracted to purchas ix B7--l: 7-200 jet aircraft for deli\ ery in 1979 and 1980 which \Nill require expenditures of $89.041 ,000 in 197 8, $153,961.000 in 1979 and $30,453 ,000 in 1980. Leased property consists of space in air terminals, land and buildings at airports, and ticket, sales and reservation offices under noncancelable operating leases which expire in various year through 2008. Portions of these facilities are subleased under noncancelable op rating leases expiring in various years through 1988. Future minimum rental commitments at December 31, 1977 for noncanc lable operating 1 a es with initial or remaining terms of one year or more, of which $163 ,73 6.000 is for air terminal and airport facilities are as follows: 1978 ............ . .................... . 1979 ................................. . 1980 ................................. . 1981 ................................. . 1982 ........... ...... . ...... ......... . Thereafter .............. ... ... ........ . $ 12,451,000 11.671000 10,908,000 10 614 ,000 10,470,000 120,305 000 176,419,000 Sublease rental income . ..... ... .. ... . . ( 7,068,000) R ntal e pen for all op rating 1 ases con ist d of: Minimum ....... ... ................................. . ubl a r ntal incom ............................... . $169 351,000 1977 14,984 ,000 610,000) H,374.000 1976 21 22 Notes to Financial Statements Note F - Contingencies The Company is a defendant in a class action brought in 1970 in federal court in Washington, D.C. by certain of its female cabin attendants alleging violations of certain provisions of the Equal Pay Act of 1963 and the Civil Rights Act of 1964. The trial judge held that provisions of both statutes had been violated by the Company. The Company appealed that decision. The Court of Appeals for the District of Columbia affirmed the trial judge on all substantive issues and remanded the case for further consideration including (1) a redetermination as to whether plaintiffs seeking recovery under the Equal Pay Act may be entitled to liquidated damages which could effectively double the Company's liability to certain of the plaintiffs and (2) a determina- tion of the appropriate statute of limitations applicable to the alleged Civil Rights Act violations which could also increase the Company's liability. After a denial of a motion for rehearing by the Court of Appeals, the Company petitioned the Supreme Court of the United States to review the decision of the Court of Appeals. That petition was denied on February 21 , 197 8 . The case will now be remanded to the trial court to decide the unresolved issues and to identify specific plaintiffs and the amounts to which they are entitled. Last year, while the Company's motion for rehearing was pending , it estimated that its ultimate liability might range from approximately $1 million to an amount in excess of $26 million. If all the issues that are to be decided by the trial court upon remand are resolved against the Company, liability could ultimately reach $50 million. However, either party has the right to seek appellate review of the case again following the trial court's further decision, so that no specific amount of ultimate liability may be estimated as probable. The Company has brought action against the unions that represented the plaintiffs in the class action described above. The Company seeks indemnification and contribution from the unions for any liability for which the Company may ultimately be held responsible. The District Court held that the unions may be liable for contribution under the Civil Rights Act but not under the Equal Pay Act. Both parties have appealed the decision to the Court of Appeals. The outcome of the lawsuit cannot be predicted. The Company is a defendant, along with other airlines, in a number of legal actions alleging noise and air pollution resulting from aircraft operations around certain airports. Company management does not believe that these actions will result in material liability to the Company. Note G - Pension Plans The Company's pension expense was $26 ,359,000 in 1977 and $23 ,636,000 in 1976 . Unfunded prior service costs at January 1 , 1977 were estimated by consulting actuaries to be $24,161 ,800. At December 31 , 1977 the market value of the assets in all pension funds was $180,444,966. The value of vested benefits was estimated by consulting actuaries to be $191,347 ,781 or $10,902 ,815 in excess of the fund assets. Notes to Financial Statements Note H - Export Sales orthvlest Airlines, Inc. is a scheduled air carrier engaged in commercial transportation of passengers , mail and cargo, and operates under certificates of public convenience and necessity issued by the Civil Aeronautics Board. Operating revenues include export sales of $183 .349.000 , principally associated with countries in Asia. Revenue from sales consummated in foreign countries is considered to be export sales. Note I - Replacement Cost of Property and Equipment (Unaudited) As required by the Securities and Exchange Commission, the Company's annual report on Form 10-K contains specific information with respect to replacement cost of property and equipment at December 31, 1977 and the approximate effect which replacement cost would have had on the computation of depreciation expense for the year then ended. The Company's fleet modernization program substantially mitigates the impact of replacement cost assumptions on its historical cost financial statements. Moreover, since the Company is regulated and entitled to a fair rate of return on its investment, any increased cost would justify higher fares and rates to its customers. ote J - Quarterly Results of Operations (Unaudited) The following is a tabulation of the unaudited quarterly results of operations for the two years ended December 31, 1977: Earnings Operating Operating Net Per Share of Revenues Expenses Earnings Common Stock 1977 First quarter $ 238 ,555 ,071 $227 ,892 ,025 $12 ,160,183 $ .56 Second quarter . . . . . 251 ,588 ,606 224 ,975,908 27 ,238,413 1.26 Th:rd quarter ..... . 281 319 ,813 243,295 ,659 29 ,401 ,907 1.36 Fourth quarter 274 ,891 ,282 245 ,607 ,615 23 ,918.287 1.11 $1 046 ,354,772 $941 ,771 ,207 $92 ,718 ,790 $4 .29 1976 First quarter $214 ,714 ,469 $210,026 ,554 $ 5.298,109 $ .25 Second quarter ..... 238 ,381 ,535 209 ,921 ,881 12 ,816 ,786 .59 Third quarter .. . . .. 267,069 ,988 222 ,513 ,430 21 ,371 ,128 .99 Fourth quarter 243 .642 ,073 218,398 ,173 12 ,250 ,992 .56 $ 963 .808 ,065 $860 ,860 ,038 $51 ,7 37 ,015 $ 2.3 9 Income taxes for interim periods are calculated at statutory rates less a pro rata portion of investment tax credits. 23 10 Year Summary*. NORTHWEST AIRLINES, INC. AND SUBSIDIARIES (Dollars in thousands except per share figures) Operating Revenues Passenger ........................................ . Cargo ............................................ . Mail ............................................. . Charter and other transportation ................... . Non transport ............................. , ....... . Total Operating Revenues Operating Expenses Depreciation and amortization ..................... . Other ............................................ . Total Operating Expenses Operating income ................................... . Interest expense on long-term debt ................... . Other income and (deductions) - net ................ . Earnings before taxes ................................ . Income taxes ....................................... . Net Earnings l~l ...................................... . Earnings per average share as reported each year l. 11 ..... . Cash dividends ..................................... . Dividends per share as paid each year ................ . Stockholders' equity ................................ . Number of shares outstanding at end of year .......... . Book value per share at end of year l2 _l Recomputed per share figures after stock splits l3 l Earnings per average share l3 _l Dividends per share \3! ............................. . Book value per share at end of year l3 _ l Assets and Long-Term Debt Flight property at cost ............................... . Flight property at net book value ..................... . Total assets ......................................... . Long-term debt ..................................... . Unit Expenses Per available ton-mile ............................. . Per revenue ton-mile .............................. . Per cent of operating revenues ..................... . Statistics - Scheduled Services Revenue plane-miles (000) ......................... . Available seat-miles (000) ......................... . Revenue passenger-miles (000) ..................... . Passenger load factor .............................. . Revenue passengers carried ........................ . Freight and express ton-miles (000) ................ . Total revenue ton-miles (000) ...................... . Statistics - Total Operations Revenue plane-miles (000) ......................... . Available ton-miles (000) .......................... . * ot covered by Accountants' Report. $ $ $ $ $ $ $ $ $ $ 1977 861 ,053 121 ,185 29 ,894 25 ,871 8 ,352 1,046,355 103 ,152 838,619 941 ,771 104,584 (6 ,518) 55 ,078 153 ,144 60,425 92 ,719 4.29 10,804 .50 747 ,672 21 ,606 ,686 34.60 4 .29 .50 34.60 1,510,447 962 ,957 1,299 ,451 100,000 22.9(/: 54.4 90.0% 111 ,271 22 ,968 ,489 11 ,100 ,412 48.3 % 10 ,354 ,808 458 ,143 1,676 ,470 114 ,643 4 ,109,110 tStrikes adversely affected 1970 and 1972 and the strike recovery period of 1971. 1976 $ 786,414 119,882 25,137 25,955 6,420 $ 963,808 $ 102,713 758,147 $ 860,860 $ 102,948 (14,035) 9,351 $ 98,264 46,527 $ 51,737 $ 2.39 9,707 .45 665,744 21,606,036 $ 30.81 2.39 .45 30.81 $ 1,448,402 924,537 1,151,562 122,000 21.6 50.5 89.3% 108,474 22,228,259 10,758,683 48.4% 9,818,343 467,399 1,647,317 112,279 3,982,743 (1) See Financial Review pages 10 through 12 for Management's Discussion and Analysis of the Summary of Operations. (2) Per share figures reflect the increase in outstanding shares resulting from stock issues in 1969, 1970 and 1972. (3) The stock was split "two-for-one" in 1969. The recomputations in this section are shown to provide 24 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. 1975 $ 659,849 88,308 23,280 29,019 107 $ 800,563 $ 98,880 651,983 $ 750,863 $ 49,700 (16,120) 13,509 $ 47,089 3,693 $ 43,396 $ 2.01 9,710 .45 623,677 21,604,136 $ 28.87 2.01 .45 28.87 $ 1,420,670 977,062 1,215,146 246,000 20.6 50.2 93.8% 104,104 20,910,966 9,471,282 45.3% 8,865,263 386,309 1,428,381 107,721 3,642,650 1974 1973 1972t 1971t 1970t 1969 1968 $ 628 ,488 $ 4 76 ,794 $ 277 ,891 $ 331 ,966 $ 260 ,335 $ 350,504 $ 301 277 76 ,157 55 ,280 34 ,694 39 ,641 30,053 51 ,006 43 ,902 22 ,911 18 ,415 13 ,309 19,443 18,958 29 ,386 28,605 27 ,322 28 ,517 20 ,009 31 588 20 ,800 35 ,090 4 1,060 4 ,113 5,342 46 ,598 2 881 48 ,894 1,952 1,446 $ 758 ,991 $ 584,348 $ 392 ,501 $ 425 ,519 $ 379,040 $ 467 ,938 $ 416 ,290 $ 96 ,213 $ 87 ,642 $ 81 ,054 $ 77 ,245 .$ 69 ,173 $ 60 ,833 $ 49 ,817 584 ,993 445 ,401 296 ,348 330,108 258 ,784 324 ,979 268 ,529 $ 681,206 $ 533 ,043 $ 377 ,402 $ 407 ,353 $ 327 ,957 $ 385 ,81 2 $ 318,346 $ 77 ,785 $ 51 ,305 $ 15,099 $ 18,166 $ 51 ,083 $ 82 ,126 $ 97 ,944 (19 ,554) (14 ,758) (8 ,356) (13 ,051) (6,296) (2 ,334) (3 ,894) 40 ,148 19,133 10,510 6 ,685 (227) 1,181 674 $ 98,379 $ 55 ,680 $ 17,253 $ 11 ,800 $ 44 560 $ 80,973 $ 94 ,724 33 631 3,830 (429) (9 ,561) 121 29 ,507 44 ,673 $ 64 ,748 $ 51 ,850 $ 17,682 $ 21 ,361 $ 44 ,439 $ 51 ,466 $ 50,051 $ 3.00 $ 2.40 $ .83 $ 1.01 $ 2.11 $ 2.55 $ 5.47 9,722 9,722 9,620 9,518 9,465 9,117 7,320 .45 .45 .45 .45 .45 .45 .80 589 ,991 534,965 492 ,837 477,054 465 ,210 426 ,797 306,717 21 ,604 ,136 21,604,136 21 ,604 ,136 21 ,149,756 21 ,149,756 20,914 ,272 9,149,628 $ 27 .31 $ 24.76 $ 22.81 $ 22 .56 $ 22.00 $ 20.41 $ 33.52 3.00 2.40 .83 1.01 2.11 2.55 2.74 .45 .45 .45 .45 .45 .45 .40 27.31 24.76 22.81 22.56 22.00 20.41 16.76 $ 1,282 ,556 $ 1,216 ,632 $ 1,008 ,041 $ 1,012 ,568 $ 929 ,181 $ 697,938 $ 582 ,646 907 ,935 861 ,231 682,020 709 ,433 668,129 492 ,241 424 ,522 1,121 ,153 1,085,632 920,418 944,302 923 ,126 742 ,732 627 ,538 213 ,900 284 ,000 208,000 252 ,500 260 ,915 112,000 160,000 19.9 15 .8 16.9 14.5 18.0 15.2 14.6 48.2