NORTI-IWEST ORIENT AIRLINES Description of Business Northwest 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 38 ,500 route miles and serves directly cities in 21 states of the 48 contiguous states. as well as Alaska. Hawaii. the District of Columbia. , Canada. countries in Asia . including Japan, Korea, Tuiwan, Hong Kong and the Philippines and countries in Europe including Sweden. Denmark. England, Netherlands. Ireland. Germany. Norway, and Scotland. Northwest Airlines Highlights 1980 1979 1978 Total Operating Revenues ... $1 ,639,330,000 $1,310,558,000 $790.162 ,000 Operating Income (Loss} . .. . (24,134 ,000} Net Earnings for the Year . ... 7,084 ,000 Per Common Share . . .33 Per Dollar of Revenues .4 Stockholders Equity ... . . . . 839,042 .000 Per Common Share . . .... 38.76 Dividends Paid . . . . . . . . 17,317 .000 Operating Expenses: Per Available Ton-Mile . 37.0C Per Revenue Ton-Mile . 80.6C Revenue Traffic: Passengers Carried . . 11.501 ,000 Passenger-Miles Flown ... . I 3 .8 I 0.889 .000 Ton-Miles. Mail & Freight . . . 667,260,000 Common Shares at Year End 21 ,647 ,000 Employees: Number at Year End .. . ... 12,748 Wages and Benefits Paid . . . $403 .4 52,000 55,352 ,000 72 .4 75 ,000 3.35 5.5 849,122 ,000 39.24 17,306.000 29.4C 63 .4C 11 ,636 ,000 67,285,000 61 ,841,000 2.86 7.8 793 ,691 ,000 36.70 16,210.000 27.9C 65 .7C 6,5 75.000 13,298. 161,000 7.018,305 ,000 626.401 ,000 377 ,851 .000 21 ,640,000 21 ,626,000 12,814 10,680 $3 5 I .403 ,000 $222 .188,000 *Operating results were affected by a major strike which extended from April 29 through August 15. 1978. 2 Trooping of the colors; London , England . 3 From the President- the 54th annual report to shareholders Northwest Airlines 1980 net earnings of $7,084 ,000. although down sharply from the previous year. compared favorably in the industry. Your company was one of only three U.S. trunk carriers to report a net profit. Our relatively good performance was achieved in the face of a world-wide airline recession marked by badly depressed traffic and escalating fuel costs which combined to bring the worst financial results ever to the airline industry at home and abroad. Progress in 1980 In many areas. Northwest Airlines made progress despite a down- profit year. We accepted delivery of three Boeing 747 's and four 727-200's which required final delivery payments of $154 .000,000 during the year. The NWA fleet reached a cost base of nearly $2 billion, and all aircraft are wholly-owned with no encumbrances of any kind. Cash flow continued to strengthen our financial condition and debt amounted to only 16% of equity at the end of 1980. Our new Atlantic routes made real progress in the second year and new services were begun-nonstop from Twin Cities to London and on to Hamburg, plus new flights to Shannon and to Oslo. During 1980 planning for the next up-turn in general traffic remained the key effort of Northwest Airlines. To this end we have restructured our headquarters sales group to strengthen a growing list of marketing programs and to enhance our identity as a major domestic- international carrier. Three new 4 sales divisions for marketing planning. field sales and commercial sales have been established; and a new emphasis on stronger advertising will emerge in 1981 . Employee Productivity Employee compensation is a major item of operating expense and Northwest Airlines-already holding the most favorable cost record- continued to strive for improved productivity and service excellence. Here the key has been implementation of advanced training for a wide range of employees and application of more modern equipment in the work place. In 1981 . new automatic call distributor systems and faster computers will speed reservations traffic and will add other features to better serve our customers. New Officers Elected Three corporate officer changes have been made in the past year. Brent Baskfield was elected Vice President-Public Relations; Ben H. Lightfoot was elected Vice President -Maintenance and Engineering; and John F. Horn was named Vice President-Orient Region in Tokyo. Mr. Horn's appointment was to replace Reginald C. Jenkjns who has served Northwest Airlines extremely well for 34 years in the Orient, and since 197 2 as Vice President in Japan. He will be takjng a new assignment in the U.S. during 1981. Outlook for 198 I Traffic trends across the industry in early 1981 have been poor-down from 1980. Notwithstanding. Northwest Airlines has maintained a favorable market participation as the only trunk carrier with year-to- year traffic gains in the fall and winter months just past. We will continue to develop our market opportunities in a five fold program for 1981 which will be designed to- Build on our dominant position at Minneapolis-St. Paul reaching new markets and enhancing traffic volume in old markets with multiple hub and spoke connections at the Twin Cities. Protect our strong domestic markets with more frequent and highly competitive schedules. Consolidate traffic gains in European markets. The coming year will see addition of only one new segment-Boston to London-and no new cities in Europe. Boston and New York will receive full connecting patterns for Europe from cities in our domestic network. Increase our Orient role with new service between Tokyo and Guam. Plan for the longer range future with a decision on the acquisition of new fuel-efficient aircraft for the mid 1980's. To Our Friends We thank our customers for their patronage and all our employees for their skill and expertise which is combined with real dedication and hard work. With the continued confidence and support of our shareholders I am certain that 1981 will be a good year for Northwest Airlines and will continue our position of leadership in the industry. "71irf"ir-7 M. Joseph Lapensky President and Chief Executive Officer March 27, 1981 Marketing Highlights Our marketing mission in 1980 was to strengthen our leadership position further by inaugurating new programs that maximize service to our passenger and cargo customers. With continued airline deregulation during 1980, special effort was directed toward maintaining our strong route structure. Fares Discount air fares, requiring advance purchase and a limited stay at the destination, continued to be the dominant mode of vacation travel, both domestically and internationally. At Northwest Airlines, for example, the new service to London featured the most competitive First and Economy Class air fares available from most U.S. cities. Strong Tour Sales Broad expansion in the transatlantic market triggered strong growth in leisure traffic for Northwest Airlines. The Group 100 Fare, announced early in 1980, brought such tremendous initial response from tour operators that the number of available seats was expanded by 15 ,000. Atlantic New service to Oslo was inaugurated successfully in 1980. And in response to the high demand, the 1981 Oslo schedule will be expanded from two weekly services from New York to include a non-stop from Minneapolis-St. Paul. London and Hamburg service showed consistent improvement despite early delays. Service was hampered initially by short notification as to the operating authority, and London fares were approved by the British government just weeks before service start-up. Traffic in 1981 is expected to increase significantly because of our ability to obtain advance bookings. Pacific In the Pacific, Northwest Airlines 6 R.Y NORTHWEST TO RORIDA WE'LL THROW IN LONDON Two London tickets for the price of one if you fly us to Florida. @ NORTHWEST ORIENT R.Y NORIHWESI" 10FLDRIDA WE'U. THROW IN IRELANDOR SC011AND Two tickets to Shannon, Ireland or Prestwick, Scotland for the price of one if you fly us to Florida. ~D.lt-'10.#~l)F"o-OIO"~- 3NONSTOPSOAILY _,~.o;-:;:::~-tB..:.,:.,~OI TOFt.ORIDAFROMBOSTON ~.:==::-=-== ~ -~ - I =:s;~~2~~ "-=-~:~;==~ SAVE 35-45% TO FLORIDA . . ,. ~~s..ce-s.-s....s ~==:::,:=~ ;;;:.=~.::..~~..;~- ~:;.":"'o""'~~~- ~-:::.~3.~~2~ .,, ~~ .. ..::-:-~.::::.=--=-----.. @ NORTHWEST ORIENT was selected by the U.S. Department of Commerce to operate a 747F all-cargo charter to Peking to transport exhibits and displays to the first U.S. industrial exhibition to be held in the Peoples Republic of China (PRC) . In addition, Northwest carried over 200 officials and technicians of the U.S. firms participating in the exhibition. Under Northwest Airlines' auspices, 500 travel agents visited the PRC in 1980, and our numerous tour programs were very positively received. Northwest Airlines' "Visit USA Pass" stimulated traffic across both the Pacific and Atlantic. The pass provided for extensive travel within the U.S. for a fixed fare. Record Agency Revenue Sales by retail travel agents continued to grow at a record rate, and once again travel agents represented the largest single source of revenue. Approximately 65 percent of Northwest Airlines' passenger revenue is generated by travel agent sales. Nearly I 0,000 agency employees attended Northwest Airlines' unique Travel Fairs. Held in dozens of major U.S. markets, these fairs enable wholesale tour operators and other suppliers of Northwest Airlines' travel services to meet directly with retail travel agents. New Market Development Throughout 1980, concerted effort was directed to developing off-route markets. Sales representation agreements have been implemented or are pending with major travel development firms in the Middle East, Australia, Southeast Asia, Argentina, Italy and Central Europe. Convention/Charter Sales The two divisions, convention and charter sales, were consolidated to maximize operating efficiencies and market impact. And at year-end, Northwest Airlines had retained its leadership position in the convention and incentive travel market. A total of 948 groups composed of 37,610 passengers traveled Northwest Airlines during 1980. Revenues came to $7,785 ,000, a 13.05 percent increase over 1979. Charter sales produced an additional $7,904 ,000, bringing the combined total to $15 ,087,000 for the year. Special Incentive Group fares were introduced in 1980 to support an ever-expanding international route system. These fares enabled client companies to obtain competitively priced group travel in Europe and the Orient for their corporate incentive contests. The excellent response in 1980 has resulted in further development of our incentive marketing plans for 1981. Florida Promotions A major campaign was staged in 1980 to increase traffic on routes from the Midwest and East Coast to Florida. Early results indicate substantial volume increases from the three-phase program . The first phase offered a 5 5 percent discount on tickets to Florida purchased during a specified time period in October, 1980, for travel to Florida after January I, 1981 . Phase two promoted two tickets to London for the price of one. Qualifications included purchase of tickets to Florida plus proof of travel to Florida during specified times. "Win a Jet" to Florida was kicked off in January as the third phase of the campaign. The contest winner, announced in May, receives free use of the full capacity of a 727 aircraft to Florida plus three days for the entire party at a luxury hotel and $10,000 cash . New Executive/VIP Programs Full-fare passengers flying Northwest Airlines on business trips continue to represent one of our most important sources of revenue. To serve these passengers. Northwest Airlines introduced two new services in 1980. Northwest Executive Class was established for full-fare Economy Class passengers on all 7 4 7 international flights. This elevated class provides for preferred seating, baggage allowance equal to that of First Class. a special check-in facility, complimentary cocktails. free movies and other amenities. The VIP Traveler is a program designed for the frequent passenger of Northwest Airlines. traveling anywhere on our system . Eligible travelers. indentified by our district sales office personnel. are provided a special identification card. baggage tags and boarding pass stickers. thus enabling flight attendants and station personnel to recognize them immediately. The VIP traveler receives personal copies of all Northwest Airlines schedules and is eligible for special discounts on hotel rooms and car rentals. Cargo Miles Increase Total freight revenue ton- miles increased 5. 3 percent in 1980 over the previous year. A 17.8 percent growth in international freight ton- miles reflected increased cargo traffic across both the Pacific and the Atlantic. Contributing most significantly to revenue increases was the transatlantic freighter service. which exhibited I 02 percent growth over 1979. The expanded fleet of 7 4 7 freighters allowed Northwest Airlines to step up frequency across the Pacific by 20 percent and the Atlantic by 50 percent. It also provided for more consistency in our domestic freighter schedule. By the end of the year. more than half of our freight ton- miles had moved on 747F aircraft. With our excellent equipment resource. strong growth is expected in cargo revenues during 1981 . Further expansion of domestic and international routes is being explored. The projection for 1981 is that cargo will account for I 5 percent of Northwest Airlines revenue, representing a 2 5 percent increase over cargo's current contribution . New Sales Support Restructuring of the headquarters sales department was designed to strengthen our sales capabilities and our identity as an international carrier. What was formerly a single division has become three divisions; Field sales, Market planning, and Commercial and International sales. 7 Valuable sales support is being provided by new sales offices in Phoenix, Denver and Toronto. In Tokyo an innovative sales program produced $1,500,000 in revenue from new accounts by year-end. The program involved temporary assignment of Northwest Airlines employees to direct sales solicitation of agency and commercial accounts in outlying areas not covered by regular sales personnel. These employees, who work at Tokyo's Narita Airport, assume their sales duties during periods of decreased activity at the airport. 8 People Plus Computers Numerous improvements in our automated systems have played a vital role in enabling employees to service passenger and cargo customers more efficiently. For example. new Automatic Call Distribution systems in Minneapolis and Chicago reservation offices resulted in significantly faster reservation service for customers throughout the Midwest. Automated reservation systems replaced slower teletype operations in Orient locations. Expansion of the central computer system caused a dramatic 7 5 percent increase in reservation handling capacity, from 20 to 3 5 transactions per second. And a cohost agreement. linking our computer directly with that of other major airlines. enables us to display our schedules in front of thousands of key travel agents who participate in the system. Statements of Earnings NORTHWEST AIRLINES, INC. Year Ended December 31 {In Thousands) 1980 1979 1978* Operating Revenues Passenger $1,347,830 $1,067,214 $557.401 Cargo 190,837 160,716 87,077 Mail 57,305 38,685 18,944 Charter and other transportation 16,303 I 5,093 10,997 Mutual Aid -0- -0- 104,864 Nontransport 27,055 28,850 10,879 1,639,330 1,310,558 790,162 Operating Expenses Flying operations 776,862 526,887 24 I .740 Maintenance 139,833 111,647 72,233 Passenger service 133,922 114,654 60,749 Aircraft and traffic servicing 226,153 198,509 117.410 Reservations, sales and advertising 229,148 169,341 100,615 Administrative and general 33,468 27,767 25.160 Depreciation and amortization 124,078 I 06.40 I 104,970 1,663,464 1.2 55,206 722,877 OPERATING I NCO ME (LOSS) (24,134) 55,352 67,285 Other Income (Expenses) Interest. net of capitalized interest of (1980-$3.393; 1979-$6.240; 1978-$4,679)-Note A (15,831) (1,635) (3,376) Gain on sale of flight equipment 143 15,544 34,290 Other 3,719 15,099 10,836 (11,969) 29,008 41.750 EARNINGS (LOSS) BEFORE INCOME TAXES (36, I 03) 84,360 109,035 Income taxes (credit)-Note D (43,187) I 1.885 47,194 NET EARNINGS $ 7,084 $ 72.475 $ 61,841 Average shares of Common Stock outstanding during the year 21,646 21,632 21,618 Earnings per share of Common Stock $.33 $3.35 $2.86 See notes to financial statements *Operating resutts were affected by a major strike which extended from April 29 through August 15, 1978. 9 Statements of Financial Position NORTHWEST AIRLINES, INC. (Dollars In Thousands) ASSETS Current Assets Cash and short-term investments Accounts receivable, less allowance of$ I .600 ( 1979-$1. 500) Recoverable income taxes Flight equipment spare parts. less allowance for depreciation of $19 .88 3 ( 1979-$17.600) 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 10 1980 $ 20,514 124,957 -0- 42,654 16,920 7,332 212,377 37,445 1,995,168 794,673 I ,200,495 9,166 I ,209,66 I 169,423 96,367 73,056 1,282,717 $1,532,539 December 31 1979 $ 74,583 111.432 21,726 32.461 9,238 3,724 253.164 26. l I 3 1,779,770 685,214 1.094,556 96,503 1.191.059 147,231 88.646 58,585 1,249,644 $1,528.921 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Commercial paper Accounts payable and accrued expenses Employee compensation Air traffic 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-Note C Common Stock $1.2 5 par value, authorized 40,000,000 shares; issued and outstanding 21,647,280 shares (1979-21.639. 589 shares) Capital surplus Retained earnings - Commitments and Contingencies-Notes E and F See notes to financial statements $ 1980 34,168 142,343 30,141 107,013 800 37,500 351,965 62,500 260,100 18,932 279,032 27,059 124,940 687,043 839,042 $1,532,539 December 3 I $ 1979 -0- I 63 ,400 29,347 59,544 -0- -0- 252 ,291 100,000 313 ,329 14,179 327,508 27,049 124,797 697 ,276 849,122 $1.528,921 II Statements of Changes in Financial Position NORTHWEST AIRLINES, INC. Year Ended December 31 {In Thousands) 1980 1979 1978 Funds Provided Net earnings $ 7,084 $ 72,475 $ 61,841 Items not affecting working capital: Depreciation and amortization 124,078 I 06,401 104,970 Increase {decrease) in deferred income taxes (53,228) 22,669 29,311 TOTAL FROM OPERATIONS 77,934 201,545 196,122 Proceeds from sale of flight equipment less gain included in earnings 433 2,818 6,795 Other -0- -0- 5,509 TOTAL PROVIDED 78,367 204,363 208,426 Funds Used Flight equipment and other property additions 145,709 193,634 52,299 Advance deposits on aircraft 9,166 96,503 98,106 Cash dividends 17,317 17,306 16,210 Reduction of long-term debt 37,500 -0- -0- Other 9,136 15,708 -0- TOTAL USED 218,828 323,151 166,615 INCREASE {DECREASE) IN WORKING CAPITAL $(140.461) $(118,788) $ 41,8 I I Changes in Working Capital Consist of Increase (decrease) in current assets: Cash and short-term investments $ (54,069) $( I 09.445) $ 54,311 Receivables 13,525 31,650 (3,631) Recoverable income taxes (21,726) 21,726 -0- Inventories 17,875 5,058 (805) Prepaid expenses 3,608 {2,334) 350 (40,787) (53,345) 50,225 Increase (decrease) in current liabilities: Commercial paper 34,168 -0- -0- Accounts payable and accrued expenses (21,057) 64,098 (2,019) Other accrued liabilities 1,594 (14,485) 13,501 Air traffic liability 47.469 15,830 932 Current maturitie of long-term debt 37,500 -0- (4,000) 99,674 65,443 8,414 INCREASE (DECREASE) IN WORKING CAPITAL $(140,461) $(118,788) $ 4 I ,811 See notes to financial statements 12 Statements of Stockholders' Equity NORTHWEST AIRLINES, INC. Common Stock Capital Retained (In Thousands) Shares Amount Surplus Earnings Balance January 1, 1978 21 ,607 $27,008 $124 ,188 $596.4 76 Exercise of stock options 19 25 363 Net earnings for 1978 6 I .841 Cash dividends-$. 7 5 a share (16 ,210) Balance December 31, 197 8 21 ,626 27 ,033 124,551 642 ,107 Exercise of stock options 14 16 246 Net earnings for 1979 72,475 Cash dividends-$.80 a share (17 ,306) Balance December 31, 197 9 21 ,640 27 ,049 124,797 697 ,276 Exercise of stock options 7 10 143 Net earnings for 1980 7,084 Cash dividends-$.80 a share (17 ,317) Balance December 31, 1980 21 ,647 $27,059 $124 ,940 $687 ,043 See notes to financial statements Application of Investment Tax Credit NORTHWEST AIRLINES, INC. Available* Appliedt and Reflected on (Period) in Earnings Tax Returns 1979 $27,396,000 $24,964,000 1980 24,554,000 (35,663 ,000) TOTAL $51 ,950,000 (10,699,000) Applied on Returns (I 0,699,000) f I To be Applied $62,649,000 *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. 13 Notes to Financial Statements NORTHWEST AIRLINES, INC. December 31, 1980 NOTE A-ACCOUNTING POLICIES A summary of significant accounting policies of the Company is set forth below: Basis of Presentation: The financial statements include the accounts of the Company and its wholly-owned subsidiaries aher elimination of inter-company accounts and transactions. Short-Term Investments: Short-term investments are stated at cost which approximates market and amounted to $1 ,943 ,000 and $65 ,146,000 at December 31, 1980 and 1979, respectively. Flight Equipment and Property: Provision for depreciation is computed by the straight line method over the estimated useful lives of the assets. Depreciation of flight equipment spare parts, rotables and assemblies is provided by the straight line method at rates which depreciate cost less residual value, over the estimated useful lives of the related aircrah. Pension Plans: The Company has several pension plans covering substantially all of its employees. The policy is to fund pension costs accrued inclL-s;ling 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. 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. Operating Revenues: Passenger and cargo revenues are recognized when the transportation is provided. Earnings Per Share: Earnings per share are based on the average number of shares of Common Stock outstanding. No material dilution would result upon exercise of outstanding stock options. NOTE B-LONG-TERM DEBT AND CREDIT ARRANGEMENTS Long-term debt consists of borrowings from banks payable $ I 2. 5 million quarterly beginning April I, I 98 I. Interest is paid based on a formula related to prime commercial loan rates, however. total interest shall not exceed 7% per annum over the term of the loan. The debt matures $50 million in 1982 and $12.5 million in 1983. The Company was in compliance with the covenants of the debt agreement at the end of both years. The restriction on retained earnings was deleted from the agreement in 1980. The Company has line of credit arrangements with banks for short-term borrowings up to $99,000,000 through April 15, 198 I. Borrowings under the credit lines bear interest at the prime rate. Commitment fees which are % per annum on outstanding balances of commercial paper amounted to $112,000 in 1980. At December 31. 1980, $34,168,000 of the lines were assigned to support outstanding commercial paper. 14 Notes to Financial Statements NORTHWEST AIRLINES, INC. NOTE C-STOCKHOLDERS' EQUITY Cumulative Preferred Stock, $2 5 par value: Authorized Issued 1980 1,000,000 None Shares 1979 1,000,000 None Common Stock options at prices which were not less than I 00 % of market at date of grant are as follows: Shares Price Per Share Outstanding at January I, 1979 104,910 $19. I 3/24.00 Exercised (13,305) I9.13/24 .00 Lapsed (1,210) 24.00 Outstanding at December 3 I, 1979 90,395 19.13/24.00 Exercised (7,691) 19.13/24.00 Lapsed (18,939) 19.13/24.00 Outstanding at December 31, 1980 63 ,765 22.75/24.00 Options exercisable: At December 31, 1979 55 ,295 $19.13/24.00 At December 31, 1980 63,765 22.75/24.00 Shares available for stock option and other plans were 303,227 and 284,288 at December 31, 1980 and 1979, respectively. NOTED-TAXES ON EARNINGS (In thousands) Reconciliation of the Company's effective income tax rate and the statutory federal income tax rate (46% in 1980 and 1979; 48% in 1978) follows: Statutory rate applied to pre-tax income Add (deduct): Investment tax credit earned Other Total income tax expense (credit) 1980 $(16,607) (24 ,554) (2,026) $(43,187) Federal, foreign and state income taxes (credit) consisted of the following: 1980 Current Deferred Current Federal provision $9,274 $(52,222) $(14,516) Foreign 620 695 State (825) (34) 825 $9,069 $(52,256) $(12,996) Year Ended December 3 I 1979 1978 - - - - $38,806 $52,337 (27,396) (6 ,320) 475 1,177 $11,885 $47,194 1979 1978 Deferred Current Deferred $23,175 $14,730 $28,503 690 1,706 2,075 1,196 $24,881 $17,495 $29,699 15 Notes to Financial Statements NORTHWEST AIRLINES, INC. NOTED-TAXES ON EARNINGS (continued) The deferred income tax expense (credit). which results from timing differences in recognizing items for financial reporting and income tax purposes, consists of the following: 1980 1979 1978 Accelerated depreciation $ 3,273 $19,176 $11,768 Investment tax credit (60,218) (2,431) 16,104 Prepaid expenses 1,958 Interest 6,217 6,101 3,407 Deferred employee benefits (1,893) 2,752 (2,422) Other (1,593) (717) 842 $(52 ,2 56) $24,881 $29,699 Investment tax credits not applier!- on tax returns but offset against deferred income taxes at December 31. I 980 will expire $4,379 in 1984; $6,320 in 1985; $27,396 in 1986; and $24,554 in 1987. NOTE E-COMMITMENTS The Company does not lease any aircraft or related flight equipment. At December 31. 1980 the Company had contracted to purchase two B 727-200 jet aircraft for delivery in 1981 for which deposits of $9.166,000 have been made with the manufacturers. Additional expenditures of $19. 786,000 will be required in 198 I. 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 years through 2029. Portions of these facilities are subleased under noncancelable operating leases expiring in various years through 1991. Future minimum rental commitments at December 31, 1980 for noncancelable operating leases with initial or remaining terms of one year or more. of which $240,942,000 is for air terminal and airport facilities, are as follows: 1981 1982 1983 1984 1985 Thereafter Sublease rental income Rental expense for all operating leases consisted of: Minimum Sublease rental income 16 1980 $24,352,000 (988,000) $23,364,000 1979 $22,029,000 (842,000) $21,187,000 $17,460,000 15,946,000 14,693,000 14,220,000 I 3,736,000 172,832,000 248,887,000 (5,657,000) $243,230,000 1978 $16,568,000 (724,000) $15,844,000 Notes to Financial Statements NORTHWEST AIRLINES, INC. 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 196 3 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 determination 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. 1978. The case was remanded to the trial court to decide the unresolved issues and to identify specific plaintiffs and the amounts to which they are entitled. On remand the trial court decided that a three year rather than a two year statute of limitations of the District of Columbia is applicable to the alleged Civil Rights Act violations thereby increasing the Company's potential liability for back pay by one additional year. On remand the trial court also determined that plaintiffs under the Equal Pay Act are entitled to liquidated damages equal in amount to the back pay which the court had already awarded. The trial court also ruled that longevity acquired by plaintiffs prior to the effective dates of the Equal Pay Act and the Civil Rights Act should not be considered in calculating back pay. The Company estimates that its ultimate liability may range from approximately $1 million to approximately $50 million. However. either party has the right to seek appellate review of the case again following a final decision by the trial court. 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. The Court of Appeals for the District of Columbia affirmed the lower court with respect to the Equal Pay Act claim and interjected an issue, which was raised by the defendants on appeal. of whether the Company's claim under the Civil Rights Act is barred because the claim was asserted too late. The Company petitioned the Supreme Court of the United States to review the Court of Appeals decision. The petition was granted and the matter was argued before the Supreme Court on December 3. 1980 after submission of written briefs. The Supreme Court's decision is pending. The outcome of this 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 $33 ,692,000 in 1980, $29.691.000 in 1979 and $27 .941.000 in 1978. The Company makes annual contributions to its pension plans equal to the amounts accrued for pension expense. including amortization of past service cost over 30 years. Accumulated plan benefit information, as estimated by consulting actuaries, and plan net assets for the Company's plans at December 31. 1980 are: 17 Notes to Financial Statements NORTHWEST AIRLINES, INC. NOTE G-PENSION PLANS (continued) Actuarial present value of accumulated plan benefits: Vested Non-vested Net assets available for benefits $273,038,000 4 l.988,000 $315,026,000 $343,765,000 The interest assumption used in determining the actuarial present value of accumulated plan benefits was 7% for 1980. FASB Statement No. 36 requires this interest assumption for the first time in the I 980 report. NOTE H-EXPORT SALES Northwest 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. Export sales were $375,000,000 in 1980, $255,000,000 in 1979 and $132,000,000 in 1978, principally associated with countries in Asia. Revenue from sales consummated in foreign countries is considered to be export sales. NOTE I-QUARTERLY RESULTS OF OPERATIONS (Unaudited) The following is a tabulation of the unaudited quarterly results of operations for the two years ended December 31, 1980: (In Thousands) Earnings Net {Loss) Per Operating Operating Earnings Share of Revenues Expenses {Loss) Common Stock 1980 First quarter $ 358, I 04 $ 389,923 $(10,903) $(.50) Second quarter 382,056 401,002 {5,203) {.24) Third quarter 481.718 456,455 17,475 .81 Fourth quarter 417,452 416,084 5,715 .26 $ I.639,330 $1,663.464 $ 7,084 $ .33 1979 First quarter $ 279,183 $ 263,700 $17,353 $ .80 Second quarter 343,795 296,628 34,138 l.58 Third quarter 354,122 338,815 18,956 .88 Fourth quarter 333.458 356,063 2,028 .09 $1.310,558 $1,255,206 $72,475 $3.35 The changing circumstances in the airline industry caused by the impact of deregulation and increased fares resulted in a significant increase in advance ticket purchases and a corresponding increase in advance payment of related travel agent commissions. Accordingly, in the fourth quarter of 1980, the Company deferred $4,256,000 in commissions paid applicable to revenue to be realized in future periods. The impact on net earnings amounted to $2 .149.000 {$.10 per share). 18 Notes to Financial Statements NORTHWEST AIRLINES, INC. NOTE )-SUPPLEMENTAL INFORMATION ON THE EFFECTS OF CHANGING PRICES (Unaudited) AS REQUIRED BY FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) STATEMENT NO. 33 , "FINANCIAL REPORTING AND CHANGING PRICES", THE COMPANY MUST PROVIDE SUPPLEMENTAL INFORMATION CONCERNING THE EFFECT OF CHANGING PRICES ON fTS FINANCIAL STATEMENTS. The disclosures are intended to address two different aspects of an inflationary environment: (I) the effect of a rise in the general price level on the exchange value or purchasing power of the dollar (called "general inflation") and (2) the specific price changes in the individual resources used by the Company. Because there is presently no consensus on which aspect of inflation (if any) should be reported, FASB has devised an experiment requiring certain large, publicly held companies to present supplemental information reflecting both types of inflation measurements. IT IS IMPORTANT THAT FINANCIAL STATEMENT USERS UNDERSTAND WHAT THE INFLATION ADJUSTED DATA IS INTENDED TO REPRESENT, AND ALSO RECOGNIZE ITS INHERENT LIMITATIONS. THE COMPANY HAS SERIOUS RESERVATIONS ABOUT THE USEFULNESS OF THIS DATA. The Company believes that the following information is essential for a proper understanding and assessment of the data presented: THE SUPPLEMENTAL INFORMATION ON CHANGING PRICES DOES NOT REFLECT A COMPREHENSIVE APPLICATION OF EITHER TYPE OF INFLATION ACCOUNTING. During the experimental period the FASB decided to focus on those items most affected by changing prices, that is: (I) the effect of botfz general inflation and specific price changes on properties and related depreciation expense, and (2) the effect of general inflation on monetary assets and liabilities. Statement of Earnings Adjusted for Changing Prices Year Ended December 31, 1980 (Dollars f n Thousands) Operating revenues Depreciation and amortization Other operating expenses Other expenses, net Loss before income taxes Income tax credit Net earnings (loss) Other Information Purchasing power gain from holding net monetary liabilities during the year Increase in specific prices (current costs) of property and equipment held during the year* Less effect of increase in general price level Excess of increase in specific prices over increases in the general price level As Reported in the Primary Statements $1 ,637.330 124,078 1,536,598 11 ,969 I ,672 ,645 (35 ,315) (42 ,797) $ 7,482 Adjusted for Adjusted Changes in for General Specific Prices Inflation (Current Costs) $1.637,330 $1,637,330 193.459 220,249 1,536,598 1,536,598 11.969 11 ,969 1,742 ,026 I ,768,816 (104,696) (131,486) (42 ,797) (42 ,797) $ (61 ,899) $ (88 ,689) $ 52 ,739 $ 52 ,739 $ 401,447 265 ,290 $ 136,157 19 Notes to Financial Statements NORTHWEST AIRLINES, INC. NOTE I-SUPPLEMENTAL INFORMATION ON THE EFFECTS OF CHANGING PRJCES (Unaudited) (continued) * At December 3 I, I 980, current cost of property and equipment, net of accumulated depreciation, was $2,439,412,000 (historical amount-$1.282,7I7,000). Five Year Comparison of Selected Supplementary Financial Data Adjusted for Effects of Changing Prices In Average 1980 Dollars {In thousands of dollars, Year Ended December 3 I except per share data) 1980 1979 1978 1977 1976 Operating revenues $ I.637,330 $1,487,791 $998,014 $1,422,812 $1,395,119 Historical Cost Information Adjusted for General Inflation Net earnings (loss) (61,899) 14,800 Per share data (2.86) .68 Net assets at year end I .473,746 I ,503,287 Current Cost Information Net earnings {loss) (88,689) {22,663) Per share data (4.09) (1.04) Excess of increase in specific prices of property and equipment over increase in the general price level I 36.157 38,686 Net assets at year-end 2,018.404 1,977.2 I 2 Other Information Purchasing power gain from holding net monetary liabilities during the year 52,739 53,741 Cash dividends declared per common share .80 .91 .95 .68 .65 Market price per common share at year-end 23.75 31.37 36.00 32. I 3 43.06 Average consumer price index 246.8 217.4 195.4 181.5 I 70.5 Statement of Earnings The accompanying supplemental statement of earnings presents income data under three measurement methods. These are: a. As Reported in the Primary Statements-This amount is net earnings as reported in the primary financial statements on the historical cost basis of accounting. Under generally accepted accounting principles the effects of changing prices generally are not recognized for assets and liabilities. 20 Notes to Financial Statements NORTHWEST AIRLINES, INC. NOTE }-SUPPLEMENTAL INFORMATION ON THE EFFECTS OF CHANGING PRICES (Unaudited) (continued) b. Adjusted for General Inflation-This represents the historical amounts of revenues and expenses stated in dollars of the same (constant) general purchasing power, as measured by the average level of the Consumer Price Index (CPI) for 1980. Under this measurement method, historical amounts of depreciation expense and the gain on the sale of properties are adjusted to reflect the change in the level of the CPI that has occurred since the date the related properties were acquired. The amounts of revenues and other costs and expenses already approximate average 1980 constant dollars and remain unchanged from those amounts presented in the primary financial statements. c. Adjusted for Changes in Specific Prices (Current Costs)-lncome under current cost accounting attempts to deal with a different issue than income adjusted for general inflation. The specific prices of the Company's property have risen at a different rate than the general inflation rate as measured by the CPI. Current cost accounting measures properties at their current cost (rather than their historical cost) at the balance sheet date; depreciation is computed on average current cost for the year. Purchasing Power Gain From Holding Net Monetary Liabilities During the Year When prices are increasing, the holding of monetary assets (e.g. , cash and receivables) results in a loss of general purchasing power. Similarly, liabilities are associated with a gain of general purchasing power because the amount of money required to settle the liabilities represents dollars of diminished purchasing power. The net gain in purchasing power is shown separately in the accompanying supplemental data. The amount has been calculated based on the Company's average net monetary liabilities for the year multiplied by the change in the CPI for the year. Such amount does not represent funds available for distribution to stockholders. Increases in Current Cost of Properties Under current cost accounting, increases in specific prices [current cost) of properties held during the year (including realized--gains and losses on those sold) are not included in income from continuing operations but are presented separately. The current cost increase is reduced by the effect of general inflation measured by applying the annual rate of change in the CPI to the average current cost balances of properties. Current Cost Measurements The current cost of property and equipment has been estimated by management using pricing data furnished to the airline industry by the Air Transport Association. Flight equipment represents approximately 95 % of the property and equipment. Current cost depreciation is based on the average current cost of properties during the year. The depreciation methods (straight-line), salvage values and useful lives are the same as those used in preparing the primary financial statements. Current cost calculations involve a substantial number of judgments as well as use of various estimating techniques that have been employed to limit the cost of accumulating the data. The data reported should not be thought of as precise measurements of the assets and expenses involved, but instead represent reasonable approximations of the price changes that have occurred in the business environment in which the Company operates. Current cost does not purport to represent the amount at which the assets could be sold. 21 IO Year Summary* NORTHWEST AIRLINES, INC. Years Ended December 31 (Dollars in thousands except per share figures) 1980 1979 1978t 1977 1976 1975 1974 1973 l972t 1971t Operating Revenues Passenger $ 1,347,830 $ 1,067,214 $ 5 57,40 I $ 86 I ,053 $ 786,414 $ 659,849 $ 628,488 $ 476,794 $ 277,891 $ 331,966 Cargo 190,837 160,716 87,077 121,185 119,882 88,308 76,157 55,280 34,694 39,641 Mail 57,305 38,685 18,944 29,894 25,137 23,280 22,911 18,415 13,309 19,443 Charter and other transportation 16,303 15,093 10,997 25,871 25,955 29,019 27,322 28,517 20,009 31,588 Non transport 27,055 28,850 115,743 8,352 6,420 107 4.113 5,342 46,598 2,881 TOTAL OPERATING REVENUES $ 1,639,330 $ 1,310,558 $ 790,162 $ 1,046,355 $ 963,808 $ 800,563 $ 758,991 $ 584,348 $ 392,501 $ 425,519 Operating Expenses Depreciation and amortization $ 124,078 $ I 06,40 I $ 104,970 $ 103,152 $ 102,713 $ 98,880 $ 96,213 $ 87,642 $ 81,054 $ 77,245 Other 1,539,386 I, 148,805 617 ,907 838,619 758,147 651,983 584,993 445,40 I 296,348 330,108 TOTAL OPERATING EXPENSES $ 1,663,464 $ 1,255,206 $ 722,877 $ 941,771 $ 860,860 $ 750,863 $ 681,206 $ 533,043 $ 377,402 $ 407,353 Operating income (loss) $ {24,134) $ 55,352 $ 67,285 $ I 04,584 $ 102,948 $ 49,700 $ 77,785 $ 51,305 $ 15,099 $ 18,166 1 nterest expense (15,831) (1,635) (3 ,376) (6,518) (14,035) (16,120) (19,554) (14,758) (8,356) (13,051) Other income and (deductions)-net 3,862 30,643 45, I 26 55,078 9,351 13,509 40.148 19,133 10,510 6,685 Earnings (loss) before taxes $ (36,103) $ 84,360 $ I 09,035 $ 153,144 $ 98,264 $ 47,089 $ 98,379 $ 55,680 $ 17,253 $ 11,800 Income taxes (credit) (43,187) 11,885 47,194 60,425 46,527 3,693 33 ,631 3,830 (429) (9,561) Net Earnings1 $ 7,084 $ 72,475 $ 61,841 $ 92,719 $ 51. 73 7 $ 43,396 $ 64,748 $ 51,850 $ 17,682 $ 21,36 I Earnings per average share1 $ .33 $ 3.35 $ 2.86 $ 4.29 $ 2.39 $ 2.01 $ 3.00 $ 2.40 $ .83 s 1.01 Cash dividends 17,317 17.306 16,210 10,804 9,707 9,710 9,722 9,722 9,620 9,518 Dividends per share .80 .80 .75 .50 .45 .45 .45 .45 .45 .45 Stockholders' equity 839,042 849,122 793,691 747,672 665,744 623,677 589,991 534,965 492,837 477,054 Number of shares outstanding at end of year 21,647,280 21.639,589 21,626,284 21,606,686 21 ,606,036 21,604,136 21,604,136 21,604,136 21,604,136 21,149,756 Book value per share at end of year2 $ 38.76 $ 39.24 $ 36.70 $ 34.60 $ 30.81 $ 28.87 $ 27.31 $ 24.76 $ 22.81 $ 22.56 Assets and Long-Term Debt Flight property at cost $ 1,995,168 $ 1,779,770 $ 1,525,442 $ 1,510,447 $ 1,448,402 $ 1,420,670 $ 1,282,556 $ 1,216,632 $ 1,008,041 $ 1,012,568 Flight property at net book value 1,200,495 1,094,556 922,615 962,957 924,537 977 ,062 907,935 861.231 682,020 709,433 Total assets 1,532,539 I, 528,921 1.392,865 1,299.451 1,151.562 1.215,146 1,121.153 1,085 ,632 920,4 I 8 944,302 Long-term debt 62,500 100,000 100,000 100,000 122,000 246,000 2 I 3.900 284,000 208,000 252.500 Unit Expenses Per available ton-mile 37.0 29.4 27.9 22.9 21.6 20.6 19.9 15.8 16.9 14.5 Per revenue ton-mile 80.6 63 .4 65.7 54.4 50.5 50.2 48.2 42.5 49.6 42. 1 Per cent of operating revenues 101.5% 95 .8% 91.5% 90.0% 89.3% 93.8% 89.8% 91.2% 96.2% 95.7% Statistics-Scheduled Services Revenue plane-miles (000) 120,709 116.105 66.420 111.271 I 08.474 104,104 105,295 I 08,853 79,025 100,992 Available seat-miles (000) 24,904,355 24,028,928 14,302,037 22,968,489 22,228,259 20,910,966 20,016,107 19,593 ,379 12,963 ,054 15,614,614 Revenue passenger-miles (000) 13,810,889 13,298,161 7,018,305 i I, 100.412 I 0,758,683 9,471.282 9,173,875 8,007,850 4,565,618 5,553,043 Passenger load factor 55.5% 55.3% 49. 1% 48 .3% 48.4% 45.3% 45.8% 40.9% 35.2% 35.6% Revenue passengers carried 11,501,148 11,636,170 6,57 4,90 I 10,354,808 9,8 I 8,343 8,865,263 8,948,373 7,987 ,299 5, I 50,636 6,089 ,273 Freight and express ton-miles (000) 529,434 504,753 302,153 458, I 43 467,399 386,309 317,437 251.865 150,973 161,345 Total revenue ton-miles (000) 2,048,349 1,956,217 1,079,68 I 1,676,470 1.647,317 I ,428,381 1,330,803 1,140,983 672 ,035 813,403 Statistics-Total Operations Revenue plane-miles (000) 121,243 117,027 67,471 114,643 112,279 107,721 110,519 115,726 84 ,098 I 10,045 Available ton-miles (000) 4,495,666 4,265,640 2,594,632 4,109,110 3,982,743 3,642,650 3,431,038 3,370,694 2,236,069 2,806,407 'ot covered by Accountants' Report tStrikes adversely affected 1972 and 1978 and the strike recovery period in 1971 following a strike in 1970. 1 See Financial Review pages 2 5 through 2 7 for Managements Discussion and Analysis of the Summary of Operations. ' Per share figures reflect the increase in outstanding shares resulting from a stock issue in 1972. 22 23 Report of Ernst & Whinney, Independent Auditors To the Stockholders and Board of Directors Northwest Airlines, Inc. Saint Paul, Minnesota We have examined the statements of financial position of Northwest Airlines, Inc. and subsidiaries as of December 31 , 1980 and 1979, and the related statements of earnings, stockholders' equity and changes in financial position for each of the three years in the period ended December 31 , 1980. 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 financial statements referred to above present fairly the consolidated financial position of Northwest Airlines, Inc. and subsidiaries at December 31 , 1980 and 1979, and the consolidated results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1980, in conformity with generally accepted accounting principles applied on a consistent basis. t~:?:- February 19, 1981 Notice to Stockholders Any person who either owns, as of December 3 I of the year preceding issuance of this annual report, or subsequently acquires, beneficially or as trustee, 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 24 5 .12 of the CA B's Economic Regulations on or before April I, 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 than 5 per centum of any class of the capital stock or capital of an air carrier to the extent that it holds such 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 24 5 .14 of the CA B'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 the air carrier shall, within 30 days after granting such security interest, file with the CAB a report containing the information required in Section 24 5 .15 of the CA B'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. Co-Registrars and Transfer Agents: Northwestern National Bank, Minneapolis, MN, Northwestern Trust Co. , New York, NY Stock Listed: Common Stock listed on New York Exchange, Pacific Coast Stock Exchange and Midwest Stock Exchange. Number of stockholders as of March 17, 1981 is 10,256. 24 Financial Review and Management Discussion for 1980 Revenue Total operating revenues in 1980 were at a new record level of $1 ,639 ,330,000 compared with $1.310,558,000 in 1979 and $790,162 ,000 in 1978. New records were established in 1980 for both passenger and cargo revenue. These record revenues reflected increases in traffic and substantial fare and rate increases granted by the Civil Aeronautics Board. System scheduled revenue passenger-mile yield increased to 9.76C compared to 8.03C and 7.94Cin 1979 and 1978. Northwest's cargo revenue ton-mile yield in 1980 increased to 36 .49C from 3 l.23C in 1979 and 27 .55C in 1978. During 1980 the Civil Aeronautics Board granted fare increases for travel in the 48 states totaling 44 %. At the same time Mainland-Alaska and Mainland-Hawaii fares increased 36 % and 32 % respectively. Northwest's international operations also benefited from fare increases of 20% in the Pacific and 24 % in the Atlantic. These fare increases were a function of the pass through of higher operating expenses granted by the Civil Aeronautics Board and management's discretion in implementing allowable fare increases after weighing relative price elasticities in the recessionary economy that plagued the travel industry in 1980. The Civil Aeronautics Board also allowed freight rate increases totaling 9% for domestic rates. 3 3 % for Pacific rates, and I 0% for Atlantic rates. Expenses Total operating expenses for I 980 amounted to $1.663,464 ,000 compared with $1.255 ,206 ,000 in 1979 and 197 8 expenses of $722 ,877,000. The marked increases in expenses were attributable to continued increases in fuel and labor costs, in addition to inflationary pressures in all other operating cost centers. The impact and effect of inflation and changing prices is discussed in detail in Footnote J to the financial statements. Northwest's 1980 jet fuel bill amounted to $631.273 ,000 compared to $395 ,260,000 in 1979. The average cost per gallon of jet fuel rose to 97.3C in December, 1980 from 78 .2C in December. 1979. or a 24 .5% increase. Overall operating expenses per available ton-mile increased to 3 7.00C in 1980 from 29.43C in 1979 and 27.86C in 1978. Historically, Northwest is the most efficient trunk carrier in the industry. By constantly surveying its cost control efforts. Northwest achieved this position again in 1980. Depreciation and amortization expenses totaled $124 ,078 ,000 in 1980 compared with $106,401,000 in 1979 and $104 ,970,000 in 1978. This increase in depreciation and amortization expense reflected the addition of seven new fuel efficient aircraft in 1980 following the purchase of seven aircraft in 1979. Earnings and Dividends Net earnings in 1980 were $7,084 ,000, down substantially from 1979 net of $72,475 ,000 which was the second highest in the Company's history. Earnings per common share of stock outstanding were $.3 3 compared to $3 .3 5 per share in Sources of 1980 Operating Revenues (Dollars in Millions) Passenger-Coach -------4 $1.220.5 74.5% Passenger-First Class - - ---t--- $12 7.3 7.8% Cargo -----------+-- $190.8 11 .6% 1979 and $2 .86 per share in 197 8. Gain from disposal of property was $143 ,000, down from $15,544 ,000 in 1979 and $34 ,290,000 in 1978 due to no aircraft sales in 1980. The reduction in net earnings, and the operating loss in 1980, are typical of the problems faced by the entire airline industry during the year, specifically, higher operating costs and a major U.S. recession resulting in traffic depression. Northwest's profitability was further eroded by several factors. In the Pacific. an historically profitable region , there was intense pricing competition and increased competition from foreign flag carriers. In the highly competitive Atlantic market there were additional start up costs as a result of the inauguration of TWin Cities- London-Hamburg nonstop service. A return to Northwest's previous profit levels can be accomplished in 1981 with improved fare and traffic results in the Transpacific market. maintenance of high operating efficiency, and further development Mail - - - - - - - - --_........, __ .,._ $57.3 3.5% Charter and Other - - - - - - - - - - $43 .4 2.6 % Distribution of 1980 Operating Expenses (Dollars in Millions) Fuel and Oil ---------#------- $63 1.3 38.0% Employee Wages and Benefits $403 .5 24 .2% Landing Fees, Rentals, Materials and Services ____ """"""" __ _ $369.6 22 .2% Commissions - - - - - - - - - -------- I35 .0 8.1% Depreciation and Amortization - - - - - - - - - - - - - $124 .1 7.5% TOTAL $1 ,639.3 100.0% TOTAL $1,663.5 100.0% 25 Operating Revenues and Expenses (Millions of_ Dollars) REVENUES - 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 1976 1977 1978 Stockholders' Equity vs. Long-Term Debt 1979 EXPENSES 1980 (Millions of Dollars) EQUITY - DEBT 900 800 700 600 500 400 300 200 100 0 1976 1977 1978 1979 1980 Sales Price of Dividends Common Shares Per Share Quarter 1980 1979 1980 1979 I st High 31 29 $.20 $.20 Low 20 23 2nd High 25 28 .20 .20 Low 20 26 3rd High 3 1 34 .20 .20 Low 24 30 4th High 27 28 .20 .20 Low 22 26 26 of North Atla ntic operations. The domestic region can also provide attractive growth and profit opportunities in 1981 if domestic fuel costs can be compensated for through increased revenues. Northwest Airlines continued its dividend payment policy in 1980 with quarterly payments for the 26th consecutive year. A cash dividend of 80C per share was paid in 1980 totaling $17,317 ,000. Northwest common stock is principally traded on the New York Stock Exchange. A table showing the sales prices and the dividends paid per share in 1980 and 1979 is included in the accompanying graphs and charts. Taxes on Earnings Income tax credits were $43 ,187,000 in 1980 compared to income tax expense of $11 ,885 ,000 in 1979 and $47,194 .000 in 1978. Investment tax credits earned were $24 . 5 54.000 compared with $27.396.000 in 1979 and $6.320,000 in 1978. Investment tax credits in 1981 will be significantly lower than in 1980 since only two new aircraft will be delivered in 1981 compared to seven in 1980. The Company continues to use accelerated depreciation methods for income tax purposes. Cash Flow, Liquidity, and Capital Resources Funds generated from all sources were $78.367,000 in 1980. Benefits from the Company's policy of Beijing (Peking) ,. Ta)pei J, . Hong Kohg f_ ~ .. ,,. owning its equipment rather than leasing provided funds through depreciation , which with amortization totaled $124,078.000. Application of funds in 1980 totaled $218,828.000 and primarily consisted of flight equipment and ground property additions and cash dividends. Three 7 4 7 aircraft and four 727-200 aircraft were added to the Northwest fleet in 1980. With only two aircraft ordered and delivered in 1981 , and no further aircraft commitments. Northwest will be accumulating cash in the course of normal business operations. The Company foresees no problem in its ability to generate adequate cash to meet corporate needs. At present the company has available $64 ,832 ,000 in unused lines of credit. Northwest's debt to equity ratio on December 31 . 1980 was 16.0%-the lowest in the U.S. air-line industry. Long term debt totaled $62 .5 million. Repayment of the term loan begins in April, 1981 and terminates in January. 1983. Stockholders equity at December 31 . 1980 was $839,042 ,000 compared with $849 ,122 .000 in 1979. The book value per average common share was $38 .76 compared to $39.24 a year ago. Traffic and Services Traffic gains from scheduled operations for 1980 reflected growth in both passenger and cargo resulting from additional international flying. particularly in the Atlantic, and improved service on the domestic system . In a year when the industry showed significant traffic declines in a recessionary environment. Northwest was one of the few carriers to experience traffic growth. Prospects for 1981 remain favorable. Northwest expects traffic growth exceeding the industry average. In 1980 Northwest carried II , 501 .148 passengers. Financial Condition Despite a dismal year for the U.S. economy and travel market. Northwest was able to produce a net profit for the 32nd consecutive year. Northwest remains one of the strongest carriers in the airline industry. The Company is not immune to the fuel cost problems or the general economic conditions that inflicted disastrous financial results on the entire industry in 1980. However. in the second half of the year. Northwest was able to produce better results. With a continued effort the Company believes this trend can be carried forward into 1981 . Because of its strong balance sheet. excellent liquidity and efficiency of operation. the Company is better prepared than most of its competitors to maintain a strong presence in the U.S. and international air transporation market. Assuming there is a reasonable recovery of the domestic economy in 1981 and no crisis in international fuel supply and pricing. Northwest's management is optimistic of returning to adequate profit levels. Selected Financial Data (In Thousands) Y ear Ended December 3 1 1 980 1 979 1 978 1977 1 976 Operating Revenues $1 ,639.3 30 $1.310.558 $ 790. 162 $ 1.046.355 $ 963 ,808 Net Earnings 7,084 72.475 6 1,84 1 92 ,719 5 1,737 Total Assets 1.53 2,5 39 1,528.92 1 1,392,865 I ,299.4 5 I I , 15 1,562 Long-Term Debt 62 . 500 100.000 100,000 100,000 122 .000 Per Common Share: Earn ings .33 3.3 5 2.86 4.29 2.39 Cash Dividends .80 .80 .75 .50 .45 Operating results were affected by a major strike which extended from April 29 through August 15. 197 8 27 Service Highlights The favorable results achieved at Northwest Airlines during 1980 required extraordinary effort in every operational and technical area. Throughout the system, Northwest people exhibited dedication to the mission of optimizing service to passenger and cargo customers. Emphasis on Training The focus continues on customer service, and during 1980, training on this subject was held for airport customer service supervisors. A program of refresher training on customer service was initiated for all Northwest Airlines ramp services supervisors and transportation agents. Flight attendants received intensive in-flight servjce training in the classroom and on aircraft. With the emphasis on international routes, this training provided a program of service that applies to all international flights. 28 There also was training provided on international fares and ticketing, directed to employees from gateway airports. And factory technicians conducted classes for Northwest Airlines mechanics on maintenance of sophisticated passenger loading bridges, cargo loading equipment and new high capacity deicers. Contracts During 1980 negotiations were conducted and successfully concluded with unions representing four groups of employees. As of March I. 1980 all union employees were under contract. Agreements were signed with Transport Workers Union for radio and teletype operators, with the Brotherhood of Railway and Airline Clerks for Canadian agents, with Air Line Employees Association for flight duplicator instructors and with Air Line Pilots Association for pilots. Aircraft Seven new aircraft were added to the fleet during the year. Six were passenger aircraft, including two Boeing 747s and four 727s, the remaining was a Boeing 7 4 7 freighter. A major interior refurbishment program has been completed for 15 of the 747s, and two additional 747s will be refurbished in 1981 to bring these aircraft up to the standard of the newly delivered aircraft. This project involves thorough renovation . including installation of new carpet. interior wall panels and galley equipment. To support 747 and DC-10 engine overhaul functions, a large vacuum heat treating and brazing furnace was installed in July of 1980. The furnace represents an investment of over $250,000 that will be recovered in just two years through a reduction in outside vendor charges. Fuel Conservation At a time when fuel cost is a major determinant of an airline's profitability, it is essential to implement every possible measure of fuel efficiency. At Northwest Airlines, a comprehensive fuel conservation program resulted in impressive savings without compromising flight safety, adding to crew workload or creating passenger discomfort. Savings were achieved through optimized climb speeds and cruise altitudes. lowe1 cruise and descent speeds, reduced operating weights and fuel loads, increased accuracy of computer flight planning, 7 4 7 engine upgrading and many other measures. Also very important. was the increased awareness and effort by pilots to conserve fuel. From an analysis based on gallons of fuel purchased per month, Northwest Airlines would have spent an additional $22 ,000,000 on fuel the first eight months of 1980 if the fleet had been operated using 1973 flight procedures. New Routes/Services Northwest Airlines utilized the developments in deregulation activity to expand markets internationally. Flights were initiated in April of 1980 to Shannon from Boston and from New York City. That was followed in June with inauguration of the route from Minneapolis-St. Paul to London and on to Hamburg. A new single-class service, utilizing 72 7 aircraft, was introduced during 1980. Ten aircraft fitted for this type of service offer passengers maximum convenience and economy when flying to Chicago's Midway Airport and to key cities in our domestic route network. Expansion of Preclearance Northwest Airlines continues to work for the expansion of U.S. preclearance. Under this procedure, the international traveler completes U.S. Customs and Immigration formalities before boarding the flight. As soon as the aircraft arrives in the U.S. . the passenger is free to leave the airport or make a connecting flight. The advantages have been proven in settings, such as Edmonton, where preclearance has reduced the online connecting time from 90 to 2 5 minutes at Minneapolis-St. Paul. The Irish Airports Authority at Shannon is currently seeking U.S. preclearance. Expansion of this procedure to Shannon could encourage the initiation of preclearance in other European locations as well as the Orient. Facilities In line with the emphasis on customer service, facilities throughout the Northwest Airlines system underwent major improvements during 1980. A new airport was opened in Taipei and new passenger terminals were opened in Atlanta and Seoul. A Top Flight Lounge was added at Boston's airport. and our lounge at J. F. Kennedy Airport in New York City was refurbished. Facilities were added or improved at LaGuardia Airport in ew York City, at Chicago's O'Hare Airport and in Minneapolis, Oslo. Phoenix, Seattle, Tampa and Tokyo. Improvements in baggage claim facilities were made at several airports. including Boston, J. F. Kennedy, Minneapolis-St. Paul and O'Hare. Automated Systems Expanded computer capabilities had a positive effect on virtually every phase of Northwest Airlines operations in 1980. Effective utilization of people resources plus computerized efficiency had the two-pronged impact of increasing employee productivity as well as improving customer service. New hardware in the headquarters computer center was coupled with computerized reservations/ communications equipment throughout the system-in the Orient. the United Kingdom and all major cities in the U.S. Design of a new fourth generation reservation system moved rapidly forward in 1980. When this system goes online in 1981 . Northwest Airlines will be thrust into the forefront with the most modern passenger service reservations system in the U.S. Some of the features of this new system include more comprehensive airline schedule displays with the ability to update schedules quickly; complete employee training programs using the computer terminal (CRT); a fare quotation data base that will encompass all orth American published fares as well as international fares for all online city pairs for which we store schedules; and special features to promote travel agent sales. Future options include automated airport check-in ; hotel availability information for many domestic and international hotels; a comprehensive flight operations system plus more comprehensive revenue accounting programs. The computerized automatic call distribution system , newly installed in Minneapolis and Chicago, not only improved customer service but also increased employee productivity by at least I 5 percent. The system provides information on individual agent productivity and on overall telephone line usage. Analysis of this information allows management to recognize problem areas and take corrective action with, for example, additional training, the addition or deletion of telephone lines or adjustment of the number of agents. Information generated by the computer also helped us tackle the issue of baggage handling. Causes of baggage mishandling were clearly identified by the computer so that we could take corrective action and assure future efficiencies in baggage delivery and transfer times. The new year will bring implementaion of Cargo Central. This is a computerized system of control for capacity and loading equipment as well as a source of current information on rates and cargo handling status. 29 The Directors of Northwest Orient Airlines (As of March 2 7, 1981) James H. Bingert Former Chairman of the Executive Committee, Honeywell. Inc. Minneapolis, Minnesota Manufacturer of automation systems E.W. Blanch, Jr. t President & Chief Executive Officer E.W. Blanch Company Minneapolis, Minnesota Re-insurance brokerage Raymond H. Herzogt Former Chairman of the Board . 3M Company St. Paul. Minnesota Multi-national manufacturing Melvin R. Lairdt Senior Counsellor, Reader's Digest Association Washington , D.C. Magazine publishing 30 James N. Land, Jr.t Financial Consultant New York, New York M. Joseph Lapensky President & Chief Executive Officer Northwest Airlines, Inc. St. Paul. Minnesota Donald G. McNeelyt Chairman of the Board, Space Center, Inc. St. Paul. Minnesota Logistics Donald W. Nyropt President & Chief Executive Officer. 1954-1976; Chairman & Chief Executive Officer, 1976-1978 Northwest Airlines, Inc. St. Paul. Minnesota Lyman E. Wakefield, Jr.t Vice Chairman of the Board, Resource Trust Co. Minneapolis, Minnesota t Member. Audit Committee The Officers of Northwest Orient Airlines (As of March 2 7, 1981) M . Joseph Lapensky President & Chief Executive Officer James A. Abbott Vice President-Law Brent J. Baskfield Vice President-Public Relations Robert W. Campbell Vice President-Budgets J. William Campion Vice President-Regulatory Proceedings Robert J. Glischinski Vice President-Communciations and Computer Services Benjamin G. Griggs, Jr. Vice President-Assistant to the President John F. Horn Vice President-Orient Region Thomas J. Koors Vice President-Transportation Services William A. Kutzke Vice President-Washington Ben H. Lightfoot Vice President-Maintenance and Engineering Thomas E. McGinnity Vice President-Purchasing and Stores Bryan G. Moon Vice President-Advertising James F. Redeske Vice President-Personnel Steven G. Rothmeier Vice President-Finance and Treasurer Steven D. Wheeler Secretary Robert J. Wright Vice President-Sales Scenic canal area near Hamburg. Germany. 2 2 McDonnell Douglas DCI0-40's Range of 5.400 miles with 236 passengers 5 Boeing 7 4 7 F Freighters All cargo aircraft capable of carrying a structural payload of 261,600 pounds. Northwest Orient's Fleet Total 117 as of March 27. 1981 24 Boeing 747's With ranges up to 6,660 miles with 363 passengers. 5 2 Boeing 727-200's Range of 1.760 miles with 128 passengers J 4 Boeing 727-IO0's Range of 2,350 miles with 93 passengers. or 2. 150 miles with 111 passengers. 31