NORTHWEST ORIENT AIRLINES ANNUAL REPORT 1982 4 FROM THE PRESIDENT THE 56TH ANNUAL REPORT TO SHAREHOLDERS Northwest Airlines reported net earnings of $5,019,000 in 1982, making this carrier one of only three major U.S. airlines to record a profit for the year. Although net earnings were down from the $10,460,000 posted in 1981 , our 1982 earnings were realized in the face of an extremely difficult environment-the weak state of the U.S. and worldwide economy; extensive fare discounting on an industry-wide basis; and increased competition for the generally lower traffic available. More importantly to Northwest, a difficult 26-day strike by our machinists' union in May-J~ne adversely affected operating income during those months, and to some extent in July. These conditions notwithstanding, we succeeded in increasing Northwest's passenger-miles for the year by 1 O percent, improved our passenger load factor to nearly 60 percent; and we continued to hold the line on operating expenses. PROGRESS IN 1982 Northwest Airlines made progress in several important areas of our operation to strengthen the company: The last of Northwest 's $100,000,000 term loan was retired late in 1982, making NWA the only major U.S. airline to carry no long-term debt at year end. We continued our program to increase aircraft seating capacity and to improve passenger comfort at a cost far less than the purchase of new aircraft. When this program is completed in 1984 we will have added 2,840 new seats to our fleet-the equ ivalent of 14 new airplanes. In addition , weight reduction from the installation of lighter seats will result in fuel savings. We established a new airline planning department designed to coordinate Northwest's route development, scheduling and pricing policies. We settled the new machinists contract on reasonable pay terms and with several concessions from the union, including cross utilization of employees; redefin ition of jobs for greater productivity; job transfer restrictions; and extended contract duration. Altogether, we successfully negotiated long:term contracts with twelve union groups in 1982, covering more than 65 percent of our unionized work force. ROUTE DEVELOPMENT IN 1982 Northwest became the only airline offering full-size Boeing 747 nonstop flights between New York and Tokyo. We also increased to daily ou r nonstop service between Los Angeles and Tokyo, and increased the frequency of nonstop flights between Seattle and Seoul, Korea. All in all , we provided 50 transpacific passenger and cargo round trips per week in 747 aircraft from New York, Chicago, Los Angeles, Seattle, Anchorage and Honolulu to points in the Orient. We also strengthened our domestic system by adding eight new cities-for the most part feeding our growing hub and spoke operation at the Twin Cities. With the addition of Denver, Dallas/Ft. Worth , Omaha, Wichita, Kansas City, San Diego, West Palm Beach and Grand Rapids, we now serve 57 cities in 28 states, extending also to 14 foreign countries. Freighter services were added at San Francisco to strengthen our West Coast-Orient market, and at Atlanta providing that city with its only 747 all-cargo service. Finarly, Oslo was added as our new Scandinavian freighter destination. NEW OFFICERS-NEW DIRECTOR We accomplished strengthening of our top management team during the past year. Steven G. Rothmeier was named executive vice president-finance and administration and was elected as a member of Northwest's Board of Directors. Thomas J. Koors was elected executive vice president-marketing and sales early in 1983. William A. Kutzke was elected vice president of the newly created airline planning department and Terry M. Erskine was elected vice president of industrial relations to handle all union contract negotiations and related matters. Bjarnie R. Anderson was elected to the post of vice president-Washington. Robert A. Charpie president of Cabot Corporation of Boston was elected to Northwest Airline 's Board of Directors at its January 28, 1983 meeting. OUTLOOK Fare discounting and a weak economy will continue to bear adversely on our financial results until we see a meaningful upturn in U.S. and world business, perhaps at some point in 1983. However, Northwest Airlines is fully prepared to maintain its strong position in the industry during the coming year. Many airlines are in difficult straits with overwhelming debt loads and inadequate cash flow, but your company stands strong and ready for whatever may come-be it continued hard times or a surge of new prosperity. Northwest Airlines is staffed with highly trained, and dedicated employees whom we thank for their outstanding work in 1982. To our shareholders-we appreciate your continued confidence and we will do everything possible to make 1983 a successful year for Northwest Airlines. Sincerely, '7Ji,P.~ M.J. Lapensky President and Chief Executive Officer March 25, 1983 or ,es ir ines is e on air ine o o er rec i ing sleeper sea s in E ecu 1 'e c ass 6 MARKETING HIGHLIGHTS STRATEGIC PLANNING PAYS MARKETING DIVIDENDS Northwest's aggressive marketing program is a key to increasing traffic and revenues. Since the advent of deregulation, Northwest has made significant progress developing as a marketing-oriented company. Northwest will continue to generate those areas of traffic flow it lacked prior to deregulation and will capitalize on its current strengths in domestic and international markets. The key support tool for Northwest's marketing efforts was the airline's advertising plan. In the United States a proliferation of low fares escalated toward year end. Northwest's domestic advertising, already geared to segmented marketing, provided ongoing tactical support to each of the system's 57 on-line markets in a manner designed to protect those markets without further escalating fare wars. Coincident advertising introduced Northwest to eight new domestic markets and by year end the airline's service identity was established in these markets. Other successful campaigns included Free Flight Plan II and the winter-vacation Sunship promotion. Northwest introduced an expanded Free Flight program in 1982 designed to encourage the repeat traveler. The new program permits flyers to earn round-trip transportation to any of the 75 cities served by Northwest in 28 states and 14 foreign countries except Canada. Northwest's Free Flight Plan 11 is unique among free-travel programs in that it is based simply on the nurflb,er of segments traveled, not complicated mileage computations. In addition, it is the only free-travel program extended to th~ passenger's professional travel planner. As part of Northwest's winter-vacation Sunship promotion, special first-class Sunship fares to Florida, California and Arizona were offered in northern states between January and March 31 , 1983. A Northwest Sunship ticket entitled the holder to the added incentives of one free night of lodging at participating Holiday Inns when two additional nights were purchased, and one day free use of a rental car. INCENTIVE AND CHARTER SALES SHOW GROWTH Northwest's incentive travel sales increased dramatically in 1982 as travel continued to be the number one motivational tool used by large corporations and dealerships to increase sales. International guaranteed airfare agreements were signed with major incentive houses across the United States to spur incentive sales. In early 1982, Northwest transported more passengers to Las Vegas on a charter or sc;heduled basis than any other carrier. Eight weekly 7 4 7 charters to Las Vegas dominated the upper midwest market. In other markets, Northwest charters were involved with transporting professional football teams, corporation and leisure travel programs, cargo and live animals. The past year also marked the successful introduction of part charters. Under this program, limited seat inventory on regularly scheduled flights to Honolulu is contracted to tour operators. Due to the recession, convention , conference and meeting attendance became discretionary in 1982 as many businesses sought to reduce their expenses. In response, Northwest introduced new convention air-fare programs, designed to meet the heightened airline price competition and encourage delegate attendance. TRAVEL AGENTS AND COMMUTER AIRLINES IMPORTANT TO MARKETING PLAN Sales by retail travel agents account for about 80 percent of Northwest's total passenger sales, and the company is strongly emphasizing the development of automated reservation and ticketing programs for travel agents. Northwest is participating in the MARS/PLUS multi-access and American Airlines SABRE reservation systems, which permit nearly 7,000 U.S. travel agents to access Northwest's flight schedules in a more efficient manner. The company is also in the process of negotiating agreements to enhance its participation in the reservation systems of four other U.S. and Canadian airlines. In addition, Northwest is involved with or developing plans for automated reservation systems in England, Ireland, Scotland, Japan and Hong Kong . Airline deregulation has resulted in a tremendous increase in the number of commuter carriers and in the number of cities they serve. Northwest is working to establish closer working relationships with these carriers to provide additional interline feed potential from cities not served by Northwest. FIELD AND TOUR SALES REFLECT MARKETING STRENGTH OF NORTHWEST Northwest's field sales organization includes 59 sales offices handling nearly 58,000 accounts. This organization was expanded in 1982 by the addition of four sales districts in Kansas City, Omaha, Fort Lauderdale and Denver. The Sales Support Team Program that was developed in 1981 for North Dakota was expanded to all offices in Montana, plus Edmonton, Winnipeg and Orlando. Field Sales also continued its extensive sales and promotions training program for all reservation sales personnel in New York, Tampa, Minneapolis/St. Paul, Seattle and Los Angeles. Northwest's Tour Sales division reported substantially higher revenues and traffic in 1982. These gains were partially due to Northwest's expansion into new domestic markets such as Denver, where a strong base of business from tour operators and wholesalers was established during the year. The strength of the U.S. dollar and increased buying power overseas also made international travel extremely attractive for tour passengers in 1982. An example of transatlantic tour development was the consolidation of Northwest service to London, Glasgow and Shannon, Ireland, into a single tour itinerary in 1982. This generated over 5,000 passengers and an expanded program is planned for 1983. The Peoples' Republic of China was also a popular destination for Northwest tour travelers in 1982. Tours featuring China, but also including visits to other Northwest destinations in the Orient, recorded sizeable increases during the year. CARGO SALES Northwest is the third largest air-cargo carrier in the United States in terms of freight ton-miles and sixth largest in the world. Freighters generate the majority of Northwest's freight revenue ton-miles, with 60 percent of the total moving in the 747F. In addition, all of Northwest's passenger 747s and DC-1 Os are equipped to handle efficient cargo containers. Due to the prolonged impact of the weak global economy and the 26-day strike by Northwest's Machinist's Union, total freight ton-miles declined 2.6 percent in 1982. Total freight revenues were also down 7.5 percent in comparison to 1981. Northwest's cargo sales respond directly to the level of economic activity in the United States and abroad. This sensitivity to prevailing economic conditions explains the lower volume of cargo business in 1982 and is why this segment should be an early beneficiary of a strengthening economy. However, significant strides were made in increasing the average daily utilization of all-freighter aircraft. These improvements resulted from a thorough analysis of air- freighter scheduling which , in turn, led to a number of schedule changes. Moreover, to further penetrate its share of the air freight market, Northwest expanded its service into several key world markets. The inauguration of 747 freighter service to San Francisco positioned Northwest in the strategic West Coast-Orient market. With service already in place at Los Angeles and Seattle, Northwest is a major participant in the growing volume of trade with the nations of the Pacific basin. In addition, shipments of California produce continue to expand through the San Francisco gateway. In October, Northwest also inaugurated service to the two important freight hubs of Atlanta and Oslo. The new service to Atlanta, which bolsters Northwest's growing presence in the Sunbelt, provides the city with its only all-cargo 7 4 7 service. Distributors in the Southeast now have superior overnight export-import service with the Orient and Europe. Oslo replaced Stockholm as Northwest's Scandanavian freighter destination. This move is intended to help Northwest capitalize fully on the developing global market for Norwegian seafood. Northwest continued to bolster its position in the energy- related Houston market and took steps that should further strengthen its market share of the freighter service linking the Texas oil equipment supply industry with oil fields in the North Sea, Alaska's North Slope and Southeast Asia. Earlier in the year, an oil rig flex joint weighing 66,952 pounds was boarded in Houston and flown to the North Sea. This was the largest piece of cargo ever moved by Northwest's cargo system. Northwest also became a major competitor in the livestock and meat charter market in 1982. In June, 300 Holstein breeder heifers were shipped from Minneapolis to Seoul, South Korea, thus clearing the way for future air exports of livestock from the Upper Midwest. Later in the year, Northwest shipped 3,200 pounds of steaks and roasts from Minneapolis to London, becoming the first air carrier to ever transport meat to the United Kingdom. Ground was broken for a new $5 million Northwest cargo facility at Boston 's Logan Airport. The new Boston facility at Bird Island Flats will occupy seven acres adjacent to the airport, include 60,000 square feet under roof with plant maintenance facilities and parking capability for two 7 4 7 freighters. At New York's JFK Airport $7.7 million will be spent in 1983 to modernize the cargo-handling system. Other Northwest cargo terminal enhancements are being completed in Milwaukee, Honolulu, Ft. Myers, Orlando, New Orleans and Winnipeg, Canada. Robert J. Wright Robert J. Wright, vice president of sales retired early in 1983 after 37 years of service with Northwest Airlines. He began his career in Seattle in 1946 and soon was transferred to Anchorage. During the next 12 years Wright held sales positions of increased responsibility in Wash ington, D.C., Cleveland, Honolulu, Detroit and Minneapolis/St. Paul. He was elected vice president of sales in 1961 . Robert J. Wright 's ab1l1ty to get things done earned him the respect of his fellow employees and also of his marketing associates throughout the airline industry. 7 New York to Tokyo non-stop service was inaugurated in 1982. Northwest operates the only fu ll size 747 in the market and expanded frequencies to four times each week and in 1983 to 5 times each week. SERVICE HIGHLIGHTS NEW INTERNATIONAL AND DOMESTIC ROUTES In 1982 Northwest marked its 35th year of service to the Orient and became the only airline offering full-size, Boeing 747, non-stop service between New York and Tokyo. Inaugurated on the basis of two round-trips per week, the service was later increased to four per week. This new service also allows Northwest to offer one-stop, same airline service to seven other cities in the Orient: Hong Kong, Seoul, Manila, Taipei , Okinawa, Osaka and Guam. The daily non-stop New York-Tokyo service brings the number of non-stop and one- stop flights in the New York-Tokyo market to nine each week. In addition, daily non-stop service between Los Angeles and Tokyo, and additional Seattle-Seoul non-stop service , were added to the existing daily non-stop flights between Chicago, Seattle and Tokyo. Northwest remains the only U.S. airline operating non-stop service between Chicago and Japan. Further improvements in Northwest's service to the Far East are planned for 1983. Northwest began service to the Orient in 194 7 and by 1982 provided 50 transpacific passenger and cargo round trips each week from the gateways of New York, Chicago, Los Angeles, Seattle, Anchorage and Honolulu. In another expansion of its international routes, Northwest added new non-stop flights from Miami to Copenhagen , which continue to Stockholm. The added frequency and convenience of this new service on full-size 747s supplements Northwest's extensive transatlantic schedule, which included 29 flights per week in each direction during the peak season of 1982. Northwest now offers non-stop or direct service to eight European cities from the Twin Cities, Boston and other U.S. cities. Northwest strengthened several areas of its domestic service in 1982. Altogether, Northwest added eight new cities to its 37,000-mile route system. The airline now serves 75 cities in 28 states and 14 foreign countries. Daily round-trip service was inaugurated between Minneapolis/St. Paul and Denver, Dallas/Fort Worth , Omaha, Wichita and Kansas City. Northwest entered the San Diego market, inaugurating service to Los Angeles, Seattle and Minneapolis/St. Paul. In addition, service was introduced between Grand Rapids, Michigan and Detroit, Washington D.C. and Minneapolis/St. Paul, and daily, non-stop service was added between Seattle and Denver. Also in 1982, Northwest expanded service between Minneapolis/St. Paul and New York, Washington , D.C., San Francisco, Spokane, Seattle and several cities in North Dakota. Northwest became the only airline offering daily, non-stop, low-fare, roundtrip service between Chicago and Washington, D.C.'s Dulles Airport. Northwest also expanded its Florida service in 1982, introducing two direct flights daily from Minneapolis/St. Paul and Chicago to West Palm Beach, via Northwest's Tampa/ St. Petersburg hub. West Palm Beach became the seventh Florida city served by Northwest. To further expand its Florida service, Northwest signed an agreement with Dolphin Airways of Tampa providing air travelers with superior service to many key cities in Florida. Under this agreement, Dolphin is using Northwest's gate and ticket-counter facilities at Tampa, Orlando, Miami and New Orleans, thus facilitating connecting service between Northwest and Dolphin through these cities. This will benefit travelers by offering lower fares, greater convenience in booking reservations and easier connecting service to many Florida destinations. AUTOMATED SYSTEMS EXPANDED Northwest continued making strides in 1982 as an industry leader in the area of automated systems employing state-of- the-art computer technology. Resulting from strategic planning, much of this activity focused on major enhancements to the $15 million POLARIS computerized reservations system that was activated in 1981 . Other advancements to upgrade the airline's communications capabilities as well as refining and expanding the extensive on-line computerized data base are under way. One such commun ications improvement underway is Northwest's computerized flight planning system in which all of the complex factors governing every Northwest flight will be pre-programmed into the computer system. Computerized flight plans are already used for Northwest's international flights and will now be extended to shorter domestic routes. As an automated system, this program has the potential for significant fuel savings , since all manual calculations and estimates on such factors as required fuel loads will be eliminated. In addition to enhancing its computerized flight planning system, Northwest is developing its own high-speed private- line weather distribution network. Weather data will be programmed into Northwest's systemwide computer system and distributed via computer terminals to every point served by Northwest aircraft. This will result in significantly faster weather communications and will be totally owned and operated by Northwest. Automated Ticket Printers and Call Distribution System By mid-1983, new state-of-the-art, fully automated ticket printers will be installed at all Northwest airport ticket counters and city ticket offices. An enhancement to the POLARIS system, these high-volume printers produce a more legible ticket at faster speeds. About 115 of these printers will replace the 30 existing machines. The greater number of machines, combined with their improved capabilties, will permit this automated system to handle nearly 95 percent of Northwest's ticket printing needs. Northwest's Automatic Call Distribution System (ACD) was completed in 1982 with the installation of sophisticated, electronic telephone systems at the New York and Los Angeles reservations centers. The rerouting of customer calls from a busy reservation center to one where a ticket agent is available can now be accomplished between the six centers from coast to coast. Each costing more than $1 million, the ACD system will greatly reduce reservation response time, permit call load balancing , increase reservation sales productivity and insure reliability and its uninterruptible back-up power supply. An additional improvement implemented by Northwest in 1982 to benefit its customers was the introduction of a new, single 800 (800-225-2525) number in 1982 for making reservations anywhere in the continental United States, Puerto Rico and the Virgin Islands. Cargo Container Control System Every Northwest DC-10 and Boeing 7 4 7 is equipped to handle cargo containers, which represent the most efficient way to handle large volumes of freight. A new, fully automated control system is being implemented which will track Northwest's container fleet and monitor where containers are positioned at any given moment around the 9 NORTHWEST ORIENT AIRLINES ROUTE SYSTEM - Route system prior to deregulation - Routes added after deregulation Beijing (Peking) Edmonton burg 12 SERVICE HIGHLIGHTS (continued) world . The result of this computerized system will be higher utilization of the container fleet as well as the ability to provide containers when and where they are needed. NEW SERVICES FOR BUSINESS PASSENGERS Northwest Airlines introduced Executive Suite service, a new concept in business travel between the United States and Scandinavia, Ireland and Scotland. It offers all the amenities of first class travel at a business class fare. Northwest Airlines executive class is the only business class service in the airline industry to offer reclining sleeper seats without additional charge. Northwest executive class service is offered on all international flights and occupies Zone Band the upper deck section of the airline's 747 aircraft. Other features include advance seat selection, special check-in, upg rading to first class on the domestic segments of the flight-space permitting -Regal Imperial cocktail and dining service. Executive suite and executive class have gained wide customer acceptance. INCREASED SEATING CAPACITY AND COMFORT Northwest continued its program of increasing aircraft seating capacity and improving passenger comfort at a total cost far less than that for purchasing additional airplanes. Reconfiguration work on the fleet of 24 Boeing 747s will be completed in 1983, with work on the 22 McDonnell-Douglas DC-1 Os beginning this spring and scheduled for completion in early 1984. Together with the increased seating capacity attained on the 727-200 aircraft in 1982, these new seating reconfiguration programs will result in total seat additions equal to 14 new aircraft: seven new 727-200s, five new DC-10s and two new 747s. The 7 4 7 reconfiguration increased capacity from 367 to 394 seats on each plane. In additon, the executive-class compartment was made more spacious, has specially designed seats and provides the business traveler with seating in either the upper lounge or main deck of the aircraft. The DC-10 conversion in 1983 and 1984 will involve complete refurbishment of the aircraft's interior and an inc rease in seating capacity from 236 to 293 seats. This will be achieved by reducing the first-class cabin to 22 seats and installing 271 new slim-line, lightweight seats in the tourist section. Weight reductions from the new, nine-abreast tourist seating will recover conversion costs in a short period of time due to savings in fuel costs. The program of increasing seating capacity will result in a gain of 2,840 seats for the entire fleet at a cost of nearly $33 million. This will require a low capital outlay of $12,000 per seat, compared with the new aircraft cost of $150,000 to $200,000 pe r seat. All of the seating reconfiguration and refurbishment will be performed by Northwest maintenance personnel at the airline's main overhaul base in Minneapolis/St. Pau l. FACILITIES Underscoring Northwest's commitment to superior customer service, Northwest implemented its own passenger and boarding ramp operations during the year at Grand Rapids, Dallas/Fort Worth, San Diego, Wichita, Kansas City and Omaha. At Minneapolis/St. Paul, a $54,000 modification to an existing hangar made it capable of handling a 747, thus permiting a delay in constructing an eighth hangar at a cost of $18 million. The development of an alternative glycol-filling system that halves the amount of time required for refilling spray trucks that de-ice aircraft was implemented at Minneapolis/St. Paul. This new system enables Northwest maintenance personnel to do a better job of keeping up with de-icing requirements and minimizing flight delays. Reginald C. Jenkins Reginald C. Jenkins, formerly vice president-Orient region , retired after 35 years of service with Northwest Airlines. Jenkins was a true pioneer of early NWA days in the Orient beginning his career in 1947 as flight superintendent in Shanghai. In 1970 he was elected vice president-Orient region, a position he held until a brief assignment at the General Office. During his long career in the Far East, Reginald Jenkins was a leader in the aviation community in Japan, and under his leadership Northwest Airlines grew to its dominant position in the Orient . orthwest 's state-of-the-art high temperature vacuum furnace is used to temper metals. 14 FINANCIAL HIGHLIGHTS AND MANAGEMENT DISCUSSION FOR 1982 OPERATING REVENUES Total operating revenues for 1982 increased $23,278,000 to a record $1,877,568,000. 1981 revenues totaled $1,854,290,000, a 13 % increase over 1980. Passenger revenues from scheduled operations for 1982 totaled $1 ,567,986,000, a 3% increase over the prior year. Revenue passenger-miles increased 10% over 1981 while the yield (revenue per passenger mile) decreased 6.4% to 10. The 10% gain in revenue passenger miles was achieved with a 5.8% increase in available seat miles, resulting in a 2.3 percentage point increase in load factor to 59.7% . While passenger fare increases of up to 10 % were implemented in many markets during 1982, the yield actually declined 6.4 %, reflecting a greater availability and use of special discount and promotional fares. Price wars continued to plague the industry in 1982. Freight revenues decreased $16,673,000 to $205,018,000 as revenue ton-miles declined 2.6 % and the yield per ton-mile slipped 5% . 747F freighter operations were limited during the strike and price competition in freight was as severe as price competition for passenger service. Mail revenues increased by $665,000 over 1981 to $60,451 ,000 and charter and other transportation revenues increased $12,992,000 to $34,758,000. OPERATING EXPENSES Total operating expenses were $1 ,885,943,000 in 1982 compared with $1 ,852,543,000 in 1981 and $1 ,663,464,000 in 1980. The moderate 1.8% increase in 1982 reflects the results of Northwest's continued emphasis on cost control, a reduction in fuel expense, and the 26 day machinists strike. Operating expenses per available ton-mile decreased to 40.7 from 41 .0