Northwest Airlines Annual Report 1984

NWA Inc. 1984Annual Report
Northwest Airlines growth record of sustained profitability and
financial strength is unparalleled in an industry subject to dramatic cyclical swings.
We have been profitable every year since 7 950 and have consistently
maintained the strongest balance sheet among major U.S. airlines.
Contents
Financial Highlights
7
Letter to Shareholders
2
Operations Review
6
Management's Discussion and Analysis
76
Financial Statements
27
Notes to Financial Statements
26
Auditor's Report
33
Stock Price and Dividend Information
33
Ten Year Summary
34
Directors and Officers
36
Total Operating Re\ enue
Operating Income (Lo s)
Earning for the ear
Per Common hare
Per Dollar of Re\ enue
tockholder Equity
hare
Oi\idends Paid
Operating Expen e :
Per vailable Ton- lile
Per Revenue Ton-i\lile
Revenue Traffic:
Pa enger Carried
Pas enger- 1
!iles Flown
To ..
Emplo ee :
'umber at ear End
Total \ age and Benefits Paid
Highlights
3. - 4** 2. 19
3.6** .311
892 ,923.000 20,605 000
41.05
17 933 000 1-.367.000
40.- ~ 0.5c 40. cr
74.7 - 5_0~ 0.3c
13,216,000 L. 1 .000 11 .356.000
19,- 72.355 000 1- ,7 11.929 000 15_5-5, 19..J.,ooo
1 126.564,000 9 9.- 3.000 -39_955_000
_ 1,-50 000 :... 1,71 6,000 _] _67 .000
13.75-+
,953,000
*Operating re ults were affected by a major trike which extended from ~lay 22. 19 2 to June 11.
* " Before extraordinary loss of 30.903.000 or 1.30 per hare re ulting from the ettlemenl of a la,, uit.
Earnings Before Scheduled Revenue
Operating Revenues Extraordinary Item Passenger - Miles
(Billions of Dollars) (Millions of Dollars) (Billions)
52.5 590 27.0
78.0
575
- - -
$2.0
- - - -
75.0
S60
- - - -
S1 .5 - - - -
72.0
545
- - - -
- - -- 9.0
$1.0
BO - -
--
6.0
- - - -
5.5 - - -
S75 3.0
- - --
0 7982 7983 7984 0 7982 7983 7984 0 7982 7983 7984
Northwest Orient Airlines Route System
BeiJing
(Peking)
Shanghai
Seoul

Taipei

Tokyo

Osaka
Okinawa
Anchorage
Guangzhou

Honolulu
(Canton)
Hong Kong
Guam
Kuala Lumpur

Singapore

Manila
NWA Inc. is the parent company of Northwest Airlines, Inc., a scheduled
air carrier engaged in the commercial transportation of passengers, mail and freight.
Northwest's current route system extends to 7 4 cities in 2 7 states and 7 6 countries
in Western Europe and the Far East, where Northwest is the dominant U.S. carrier.
Headquartered in Minneapolis/St. Paul, Northwest was the seventh largest
US. carrier in terms of revenue passenger-miles in 1984, and its freight operations
ranked number one in terms of freight ton-miles among US. combination carriers.
Seattle
Tacoma
Portland

Edmonton
Winnipeg
Grand Forks
Sf)okane Great Falls Fargo Minneapol is .
e Billings St. Paul e Grand Rapids
Missoulf Bismarck Milwaukee
Helena B
~ zeman Rochester Detroit
Madison c1eveland
Omaha
Chicago
Denver

Boston


New York
Newark
Philadelphia
San Francisco

Kansas Cily

St. Louil
Washington. D.C.

Los Angeles
San Diego
Las Vegas

Phoenix
Dallas
Atlantf
Fort Worth
Houston New Orleans Tampa Orlando
Tucson
St. Petersburg West Palm Beach
M Ft. Lauderdale
Ft. yers Miami
En I of
Bo ing 727-100
Bo ing 727-200
Douglas DC-1
0-40
Boeing 747
Bo ing 747 Freighter
Bo ing 757
Total Fleet
1986*
9
56
19
29
6
20
139
*Ten Boeing 757s to b
r
NWA Fleet
1985*
9
56
19
29
6
10
129

Shannon Glasgow
e e Dublin
1984
9
56
19
29
6
11 9

London
1983
9
56
22
24
6
11 7
Oslo


Stockholm
Copenhagen
Frankfurt
19 2
7
54
22
24
5
11 2
The Fifty-Eighth Annual Report to Shareholders
To Our Shareholders: orthwest Airlines had a most successful year in 1984 posting very
strong operating and financial results in spite of an intensely competitive industry environment.
Operating revenues totaled a record $2.4 billion, up 11.3 % from 1983, while operating income rose
39.8 % to $96.3 million. After a special one-time extraordinary charge in the fourth quarter, net earnings
amounted to $56.0 million for the year.
O ur net earnings for the year 1984 must be analyzed in two parts -
1) airline operations - et earnings from operation of Northwest Airlines in 1984 amounted to
$86,867,000, up 73.5 % from $50,073,000 in 1983. Per share 1984 earnings before the one-time special
item were $3.74 fully diluted compared to $2.19 per share in 1983.
2) one-time charge for an extraordinary item - In the fourth quarter of 1984, we recorded an extra-
ordina1y charge which reduced net income by $30,903,000 after taxes, or $1 .30 per share. This charge
resulted from the refusal by the U.S. Supreme Court to review a 15-year-old lawsuit involving claims
under the Civil Rights Act and Equal Pay Act on behalf of 3,354 female cabin attendants. The one-time
charge to net earnings from the lawsuit involved claims covering the years 1967 through 1978 and is not
related to the operation of orthwest Airlines in any year after 1978.
N WA Inc. In a major organizational development, Northwest Airlines began operating
late in 1984 as a wholly-owned subsidiary of NWA Inc. Approved by Northwest's shareholders, all of the
outstanding shares of orthwest Airlines, Inc. have been automatically converted into shares of the new
holding company, which will facilitate future expansion and business diversification.
Q uality of Earnings Special note should be made of the high quality of orthwest
Airlines' earnings based on our conservative accounting and sound fiscal policies.
- We have continued a longstanding policy of conservati 'e, rapid depreciation of our
aircraft. As a result, our cash flow from operations, before the extraordinary item and including
depreciation, amounted to $274,410,000 in 1984, up 30.8 % from 1983. Many airlines have "stretched"
depreciation lives again and again to improve reported earnings. We have not.
- We have continued to own our airplanes and to enjoy the benefit of strong residual
values at the end of service life. one of our airplanes is returnable to banks or other lending institutions
but can be sold profitably to aid in our fleet modernization.
- We have not sold our tax benefits at a discount when that routine was in vogue. Full
investment tax credit and full tax depreciation accrue to the benefit of Northwest Airlines' shareholders.
- We have not "washed out" pension plans as some carriers have done but have
continued sound funding of all of our plans. Plan assets at year-end of $591,881,000 exceeded
accumulated plan benefits by $118,536,000. We have no "catch up" or hidden liabilities to fund out of
future earnings.
2
- We have not sold our fixed a et to shore up cash position as some airlines have done.
In contrast, we have added new ground facilities at many locations to enhance our operating position.
- We have moderated wage increases and have obtained productivity gains from our
skilled and loyal employees. We have no expensively bought concessions to 'snap back" and damage
future earnings, and we have engaged in no dilution of equity as a price paid to obtain wage concession .
Thu orthwest irlines' earnings figures ring true. Our financial position at the end of
1984 is solid and strong with a net worth at $892,923,000 and a capital structure at 89.9 % equity and
only 10.1 % debt. Recognizing the superior strength of orthwest Airlines, Standard and Poors recently
raised the security rating on all debt issues of the company.
Fleet Expansion In February 1985, we took delivery of the fir t of 20 new-generation
Boeing 757 passenger aircraft equipped with the new Pratt & Whitne 2037 engine. A total of 10 will
be received in 1985 and the remaining 10 in 1986. Including engines and spare parts, this $800 million
fleet acqui ition will be financed primarily with internally-generated funds and some borrowing at the
peak of the acquisition period. The mo t fuel-efficient jetliner now in service the Boeing 757 will greatly
enhance our ability to compete cost-effectively and will permit ubstantial expan ion of our domestic
route system.
Late in December 1984 orthwest irlines purchased one used Boeing 7 4 7-2008 aircraft,
our 29th passenger 74 7. This airplane will serve to augment our capacity for long-range international
operations in the Atlantic and Pacific. In addition we are nearing the end of a three-year program to
refurbish all of our aircraft, and in the proce s, we have added near! 3,000 seats to existing aircraft, the
equivalent of 15 additional airplanes in the fleet.
Routes In 1984, our major development efforts were directed to our growing international
route system. Results of this focus were highly successful as orthwest Airlines became the dominant
U.S. carrier in the Pacific as well as a growing factor in transatlantic markets.
/n a significant move with long-term potential for Northwest in re-emerging China, we
returned to Shanghai with passenger service in the spring of 1984. We also instituted all-cargo flights to
Singapore in September our first venture beyond Hong Kong in Southeast Asia and we look to tart
passenger service to Kuala Lumpur in 1985. Atlantic operations were profitable for the second
con ecutive year, and we added the important cities of Frankfurt and Dublin to our European route
sy tern.
We focused our overall thrust in 1984 on strengthening orthwest Airlines' existing route
tructure, which ha grown ubstantially with the addition of 25 new cities in the U.S. since the
beginning of deregulation. We increa ed service in high-density markets and have met the challenges
posed by new low-fare carrier . In addition, we engaged in new working relationships with regional air-
lines carrying pas engers to and from important orthwest hub cities.
3
Left, M. Joseph Lapensky
Steven G. Rothmeier
M anagement Continuing an order! proces of management transition begun in 19 3.
l\I. Jo eph Lapensky relinquished the position of Chief Executi e Officer on January 1. 19 S remaining
as Chairman of the Board. Also on Janua 1. Ste en G. Rothmeier was named President and Chief
Executi e Officer ha ing been President and Chief Operating Officer ince October 19 3. In other man-
agement mo es James . bbott. former! enior ice President and General Counsel, \\as elected
Executi e ice President - Finance and dmini tration and General Counsel. In addition, Allen \ .
Johnson as named ice President - tlantic Region; Robert . lagnu on \,as elected ice President
- Treasurer and illiam C. ren \"las appointed ice President - Public Relation . In January 19 S.
John . Edv ardson \ as elected ice President - Finance and Chief Financial Officer. and !an K.
Pra as elected ice President - i tant to the President. f\orthwest A_jrlines has in place a sound
management team of seasoned eteran executi es \ ho ha e the kill and experti e to ad ance orth-
est as one of the orld's leading airlines.
Looking Ahead From our present antage point. 19 S hould be another good ear for
orth est Airlines. Our greatest challenge will remain the inten e competition from low-fare carriers as
ell as the major competiti e mo es of large \ ell-funded airlines. v e are making 19 S the " ear of the
domestic routes stem' - focusing added attention to our major hub cities of eattle the T\,rin Cities
and Boston and gaining increased presence at secondary hubs in Detroit Tampa and Phoenix. Our
ne Boeing 757 s ill be used to open up ne routes featuring the unique long-haul nature of this
fine aircraft. e rill continue to connect more of our on-line cities v\rith nonstop e ice to our
major international gate a sat Boston e York Chicago the Trin Cities Seattle LDs Angeles
and San Francisco.
/n all this e continue to de elop as a marketing compan \vith careful tailoring of product
lines to our unique route structure and\, ith greater emphasis on the quali of our service. In this
regard it is fitting that e salute our more than 15 000 skilled and dedicated emplo ees for making 19
an unqualified success.
W ith the continuing support of our shareholders v e look fon, ard to bringing nev s of
positi e de elopments throughout the coming ear.
Sincere! ,
. Joseph Lapensky
Chairman of the Board
5
Ste en G. Rothmeier
President and Chief Executive Officer
Northwest has developed a two-ocean network welded to a strong
domestic system. This is a balanced structure in which domestic operations
function as a separate system as well as provide strong feed traffic
to our eight international gateways.
Committed to Managed Route Growth
Throughout the post-deregulation era orthwest Airlines has folio ed a sound strategy in
expanding a far-flung route system that now extends from Stockholm to Singapore and from iami to
anila. We have mounted a spirited but careful! controlled growth program - avoiding the excesses
which have caused problems for many other airlines in a volatile industry en ironment.
N orthwest has built a unique two-ocean network welded to a trong domestic operation
(see map inside front co er). This i a balanced structure in hich domestic operations function as a
separate system and also provide strong feed traffic to our eight international gateways. Careful, steady
development of the international s stem has provided for earnings momentum in economic periods
when domestic revenues have experienced only moderate growth. Thus, our o erseas routes are a major
contributing factor to orthwest's consistent financial performance o er the long haul.
North est's experience in transpacific markets dates back 39 ears to 1946 and today we
are the leading .S. airline serving the Orient and second-largest o erall. Our system consists of six
major .S. gate ays feeding our Tokyo hub, hich in turn pro ides connecting service to nine ke Asian
capitals including Shanghai in the People's Republic of China. In 1984, e were operating 5 transpacific
-passenger round trip flights a week, near! double the number on! fi e years ago. In 1985 we ill
operate 61 - nearly nine round trips per da - featuring ne service be ond Tokyo to Kuala Lumpur
ala sia and new nonstop Boeing 747 service from 1.Ds Angeles to Seoul, Korea.
O ur service in transatlantic markets dates back to 1979 and became profitable ithin on!
four ears. In 1984, we ere operating 35 transatlantic flights per eek from three .S. gate a s to nine
European cities. And b the end of the year we ranked seventh in passengers across the Atlantic among
the 50 transatlantic carriers and added Frankfurt and Dublin as important ne European destinations
on our Atlantic route.
We have applied the same managed approach to our domestic stem. During the earl
deregulation years and despite the recession of 1980-1982, e added twelve ne domestic cities which
have provided a large number of ne connections to and through our main Twin Cities hub. These
include major traffic centers such as Dallas-Ft. orth, Denver, Kansas City and San Diego - and Sun
Belt markets in Phoenix and Tucson, Arizona and Orlando, West Palm Beach and Fort ers Florida.
By weaving a stronger and more effecti e domestic network, these ne cities al o enhance
our traffic flo son the Atlantic and Pacific routing . Thus the orthwest Airlines unique "two ocean-
domestic" route system is made a stronger and more competiti e factor on the U.S. airline scene.
7
The 184-seat Boeing 757 is one of the most advanced passenger
aircraft in production today Given its sophisticated design,
and powered by two Pratt & Whitney 2037 engines, the 757
is the most fuel-efficient jetliner currently in use.
Committed to a Modern, Efficient Fleet
Throughout our history, orthwest Airlines has always been committed to operating the
most modern and advanced aircraft available. This is why we currently fly one of the largest fleets of full-
size Boeing 747 aircraft in the world. And this commitment also was the rea on behind our decision to
purchase 20 new-generation Boeing 757 passenger aircraft.
Scheduled for delivery in 1985-1986, the 184-seat 757 is one of the mo t advanced aircraft
in production today. Given its sophi ticated de ign, and powered by two Pratt & Whitney 2037 engine ,
the 757's greatest economic feature is dramatically improved fuel economy. Stated imply, the 757 is the
most fuel-efficient jetliner current! in u e.
O n a typical domestic egment from the Twin Cities to ew York, the 757 will burn 31
percent fewer gallon of fuel than one of our 727-200's. nd because the 757 will carry more passengers
than a 727 - 184 vs. 146 - thi will tran late into a 46 percent saving in fuel gallon per seat on the
Twin Cities-New York flight.
W hen compared to the larger DC-10-40 the 757 will burn 61 percent le s fuel on the
same Twin Cities- ew York flight. ln pite of having fewer seats than the DC-10, the 757 will still yield
a savings of 40 percent in fuel gallons per eat on this run .
Thi kind of operating efficienc will greatly enhance orthwest's ability to compete cost-
effectively against the new breed of low-cost carriers. We will realize not only lower operating costs, but
also improved revenue per plane-mile and he!lce greater operating margin .
G iven its tate-of-the-art design technology, the Boeing 757 will offer other major advan-
tages as well. It will operate efficient! over long and short segments alike, and its 3,000-mile range will
make nonstop transcontinental flights a technical reality with great economic advantage.
N orthwest's growing fleet of Boeing 757's will be used to strengthen and expand our
domestic ystem over the next few years. This will permit renewed concentration on dome tic sched-
uling and increased frequencie in our key point-to-point markets. In addition, the new Boeing 757's
will provide more on-line cities with non top service to our eight international gateways, thus making
for still greater traffic flow between our domestic and international route systems.
9
The size and scope of our air freight business differentiates Northwest
from other U.S. airlines. Northwest has the largest cargo operation in terms of
freight ton-miles by a wide margin among all U.S. combination carriers.
We also have the fourth largest air-freight operation in the world.
Committed to a Dominant All-Cargo Operation
A ir freight and air mail are major and growing sources of Northwest's total revenue and at
$413,675,000 in 1984 provided a revenue component equal to 20.8 percent of pa enger revenue.
O ur cargo operation is unique in many respects. The size and scope alone of our air freight
business differentiates Northwest from other U.S. airlines. Among all U.S. combination carriers, Northwest -
which is the seventh-largest airline in terms of revenue passenger mile - has the largest cargo oper-
ation in terms of freight ton-miles by a wide margin. We also have the fourth large t air-freight operation
in the world. This dominance is due in large part to operation of six Boeing 7 4 7 all-cargo airplanes.
Northwest's freight ton-miles increased 15.6 percent in 1984 to 966 million, boosting our
market share to over 25 percent of all the freight traffic carried by the major U.S. airline . Only Flying
Tigers - dedicated solely to air freight - recorded more freight ton-miles than Northwest.
We made major cargo facility improvements at our important gateway cities in 1984. At
Boston Logan we occupied a new 60,000 square-foot $5.6 million freight facility, and in Los Angeles,
we moved into a new 70,000 square foot cargo facility. We al o completed in tallation of an automated
cargo handling system at John F Kennedy Airport in New York which will allow u to handle three
7 4 7 freighters simultaneously in less than three hours.
We have focused substantial resources on developing the rapidly growing all-cargo markets
in the Pacific Basin. Throughout 1984, all six 7 4 7 freighters were operating in the Pacific, carrying a
wide variety of commodities. From the Far East to the United States, major goods moved by Northwest
included textiles, electronics, auto parts, and foot wear. From the United States to the Far East, Northwest
carried computer parts, electrical supplies, office equipment and perishable goods. Other commodities
moved by Northwest to the Far East included salmon from Anchorage and Seattle, asparagus from
California, blue fin tuna from New York, Washington State cherries from Seattle, and live animals,
including several cattle charters from the Midwest.
Cargo ton-miles increased 16.2 percent over Pacific routes in 1984, marking an all-time
Northwest record for total freight and mail in this area. We will build upon this performance in 1984 with
new freighter service to Singapore begun last September.
A tlantic system freight is carried in the cargo bellies of 7 4 7 passenger aircraft. Over
domestic routes, Northwest also utilizes the substantial belly capacity in all of our passenger aircraft,
in particular the large DC-10-40 which handles unit loading containers compatible with 747 equipment
to facilitate our on-line transfer network.
Northwest's fully-automated cargo control system keeps track of our worldwide fleet of
cargo containers, and a growing number of U.S. terminal facilities are being equipped with mechanized
cargo-handling systems. Both systems are boosting the profitability of our air freight operations.
11
(,) '
,,,rr''[~[[[[[
I ._._._\..
Northwest Airlines has demonstrated its ability to compete effectively in an
intensely competitive industry environment. We succeeded in increasing
our passenger load factor to 60.5 percent in 1984, and revenue passenger-miles
rose nearly 12 percent, the third highest gain among the major carriers.
Committed to Meeting Competitive Challenges
The shape of the airline industry was drasticall changed in the late 1970's with passage of
the Airline Deregulation Act. As a result of this legislation, the doors of a once high! regulated industry
were thrown open to all newcomers, and existing carrier were freed to operate anywhere they wished
- and set ticket prices as they pleased.
Three new facets of service and price competition have emerged:
1) We have seen a proliferation of low-fare non-union carriers whose main competitive
weapons are cut-rate prices;
2) Wage and productivity concessions have made financially-troubled major airlines more
price competitive
3) Large financial! -strong carriers are committing tremendous resources to expansion programs.
Against this threefold threat, orthwest Airlines has demonstrated its ability to compete
effectively. We succeeded in increasing our passenger load factor to 60.5 percent in 1984, and revenue
passenger-miles rose nearly 12 percent the third highest gain among the major carriers. Finally we have
maintained or increased our market share in near! all of our ke dome tic and international cities.
W ith our financial strength and operating efficienc we ha e maintained our firm resolve
to meet the new low-fare competition while continuing to offer all of the service and customer amenities
expected of a full-service major airline. Our aried fleet gi es us the flexibility to increase frequencies
and improve scheduling where needed. And we have taken steps to strengthen working relationships
with regional carriers erving important orthwest cities. In 19 4 we reached a comprehensive "Airlink"
marketing agreement with Mesaba Airlines providing for enhanced feed traffic from regional markets in
four midwestern states to our inneapolis/St. Paul traffic hub.
Continued impro ements in ground facilities are also contributing to orthwest's
competitive edge. At our important Boston hub, we began work on a 4 million relocation to the Volpe
terminal, which will give us more gates and the convenience of a joint domestic-international operation
in one terminal. We relocated to Terminal 2 at LDs Angeles, where our nonstop service to Tokyo and
Seoul will also benefit from combined domestic-international service on one site. At Minneapolis/St.
Paul, we entered a 30- ear lease extension and began construction of a 22 million expansion of the
Gold Concourse. This will add se en idebody gates with moving sidewalks and u e of the new cros -
connect corridor will make for easy access to orthwest gates on the Red Concourse. We ha e also
de eloped a hub capability at Phoenix with our relocation to modern Terminal 3 and full use of four
permanent gates.
To improve airport customer ervice, we ha e equipped near! half of orthwest's domestic
cities with automated one-stop seat check-in; and the remainder will be completed b summer 1985.
13
The underlying earnings power of Northwest has been particularly
evident since the advent of airline deregulation. Northwest is
one of only two major carriers that has been profitable each year since
deregulation, thus demonstrating our ability to operate effectively
in a wide range of economic conditions.
Structured for Long-Term Profitability
N orthwest Airlines' record of sustained profitability and financial strength is unparall l d in
an industry subject to dramatic cyclical swings. We have b en profitable every y ar ince 1950 and hav
paid cash dividends to our shareholders for 30 con ecutive years.
The underlying earnings power of orthwe t has b n particularly important since th
advent of airline deregulation when a tremendou up urge in comp titive pr sure, a v re r cession
and soaring fuel prices combined to de tabilize the airline indu try. Th re ult for mo t airlin was
heavy losses during the early 1980' .
N orthwest is one of only two major carriers that have remain d profitable each year ince
deregulation. Although our earnings in some years have fluctuated with volatile industry conditions, we
have consistently demonstrated the ability to operate effectiv ly in a wide rang of economic conditions.
W hat is the basis for this unique record?
In foregoing sections, we have discussed the important aspects of our route policy, fleet
plan, cargo emphasis, and competitive posture as they bear on our long-term strength. These are all
essential elements of orthwe t's basic philosophy to manage for long-term r ults, not imply short-
term gains. Our commitment to the long-term continues to entail a trong mphasis on managed route
growth, fleet expansion and expen e control, and we believe thi approach serves the best interests of
shareholders, customers and employees alike.
For example, orthwest Airline has not been forced to dilute hareholders' equity in order
to extract wage concessions from its employees to stay in busine s. To compete eff ctively with carrier
that must operate in this fashion, we will continue to monitor and control our expen es, improve our
operating efficiencies and, in negotiation with our employee groups, seek moderation in wage agree-
ments that will keep us competitive in our industry.
M aintaining a strong financial condition continues to be a key el m nt in orthwest
Airlines' long-term success. In an industry addled with heavy debt, your company has con istently
maintained the strongest balance sheet among major U.S. airlines and the industry's lowest debt/equity
ratio. This is a significant accomplishment in light of ongoing investments to modernize our fleet and to
upgrade ground facilities.
O ur firm commitment to preserve a strong capital po ition will enable orthwest Airlines
to grow in future years without having our operating earnings eroded by high interest expense. This
will also give us ample flexibility to provide the resources that might be required to pursue any future
opportunities that may arise.
15
Management's Discussion and Analysis
As part of a plan of reorganization previously
approved by our hareholders, orthwest Airlines,
Inc. ( orthwest) became a wholly-owned subsidiary
of WA Inc. ( WA) in the latter part of 1984. The
creation of WA as a holding company did not result
in any change in the operation of orthwest and the
shareholders of orthwest automatically became
shareholders of WA.
orthwest is the only operating subsidiary of
WA and was responsible for all of its operating rev-
enues and ubstantially all of its expenses in 1984.
Operating Revenues Operating revenues
for 19 4 rose 11.3 % to $2 ,444,974 ,000 compared
with 2,196,036,000 in 1983 and $1 ,877,568,000 in
19 2. The largest component of operating revenues
is pa senger revenues, which increased 9.5 % to
$1 ,9 4,999,000 due to an 11 .6 % increase in revenue
pa senger-miles and a 1.9 % decrease in yield (reve-
nue per pa enger-mile). 1983 passenger revenues
Sources of 1984 Operating Revenues
(Millions of Dollars)
Passenger- $7,829.2
Coach 74.8%
Freight $355.3
74.5%
Passenger- $755.8
First Class 6.4%
Mail $58.3
2.4%
Charter and $46.4
Other 7.9%
16
totaled $1 ,812,227,000, a 15.6 % increase over 1982.
Revenues for 1982 were adversely impacted by a
major strike which extended from May 22, 1982 to
June 17, 1982.
During 1984, the increase in actual revenue
passenger-miles was greater than the increase in
capacity (available seat-miles) and, as a result, the
passenger load factor rose .5 percentage points to
60.5 % . The 1984 break-even passenger load factor
was 57.6%, or 2.9 percentage points below the actual
1984 load factor. Break-even passenger load factors
for 1983 and 1982 were 57.7 % and 60.0 %, respec-
tively, and compare to actual load factors of 60.0 % in
1983 and 59.7 % in 1982. 1984 marks the seventh
consecutive year in which year over year passenger
load factor improvements have been achieved.
Freight revenues increased 22.9 % in 1984 to a
record $355,336,000 on a 15.6 % increase in freight
ton-miles and a 6.3 % increase in yield per ton-mile.
1983 freight revenues totaled $289,170,000 and were
41 % greater than 1982 when freight operations
were negatively affected by a strike. Mail revenues
increased 5 % to $58,339,000 in 1984 and compare
Distribution of 1984 Operating Expenses
(Millions of Dollars)
Fuel and Oil $692.2
29.5%
Employee $639.6
Wages 27.2%
and Benefits
Landing Fees, $544.0
Rentals, 23.2%
Materials and
Services
Commissions $305.7
73.0%
Depreciation $767.2
and 7.7%
Amortization
to 55,585,000 in 1983 and $60,451 ,000 in 1982.
Charter and other transportation revenues were
38,559,000 in 1984, 36,198,000 in 1983 and
34,758,000 in 1982. ontransport revenues totaled
7 741,000, 2,856,000 and 9,355,000 in 1984,
1983, and 1982, respective!
Operating Expenses Operating expenses
for 1984 totaled $2 ,348,698,000, a 10.4 % increase
over the prior year. 1983 operating expenses were
$2,127,150,000 up 12.8% over 1982. Because capa-
city of the airline increased at a greater rate than
expenses, operating expenses per available ton-mile
decreased to 40.2 in 1984 from 40.5 (1: in 1983 and
40.7 in 1982. 1984 marks the third ear in a row in
which unit costs have declined.
Aircraft fuel expense increased a modest 3.0 %
o er 1983 even though revenue plane-miles flown
ere up 7.2 % ear to year. This is a result of the
continued decline in the cost of jet fuel hich, at an
average price of 87.76 per gallon in 1984, was 4.82
lower than the 1983 a erage per gallon price.
Operating Revenues and Expenses
(Billions of Dollars)
Revenues Expenses
524
S2 2
- - - - - - - - - - - - -
S20
- - - - - - - - - - - - -
S18
SJ 6
s1 .4 7980 7981 798r 1983 1984
~operating results Vvl:'re affected fy a major stri e
which extended from May 22, 1982 to Jur.e 1 7, 1982.
17
Agency commission expenses increased
21.3 % during 1984 reflecting higher levels of sales by
commission agents and increased commission rates.
Salaries and related costs were up 12.3 % in
1984 while other cash expenses increased 11.8 %
over the prior period. These increases result partially
from additional numbers of personnel and higher
levels of purchases which are related to increased
capacity and traffic, and partially from moderate
increases in wage rates and supplier price levels.
Depreciation and amortization expense rose
13.8% in 1984 to $167,203 ,000 compared with
$146,908,000 in 1983 and $136,651 ,000 in 1982. The
1984 increase was primarily the result of the addition
of four ne 747 passenger aircraft early in the year.
The impact and effect of inflation and changing
prices are discussed in Footnote J to the financial
statements.
Operating Costs Per Available Ton-Mile
S40
S38
S36
S34
S32
S30
S 28
526 1980 1981 1982 1983 7984
Management's Discussion and Analysis-Continued
Earnings and Dividends Net earnings for
1984 totaled $55,964,000 ($2.44 per share) compared
with $50,073,000 ($2.19 per share) in 1983 and
$5,019,000 ($.23 per share) in 1982. The current year
earnings are after an extraordinary after tax charge
of $30,903,000 ($1 .30 per share) resulting from a law-
suit. Earnings before the extraordinary charge were
$86,867,000 ($3.74 per share), a 73 % improvement
over 1983 earnings. The $30,903,000 extraordinary
charge was recorded in the fourth quarter of 1984
after the Supreme Court of the United States refused
to review a 15-year-old lawsuit involving claims
under the Civil Rights Act and the Equal Pay Act on
behalf of 3,354 cabin attendants. The extraordinary
charge to earnings involves claims covering the years
1967 through 1978 and is not related to the opera-
tions of the airline after 1978.
Scheduled Freight Ton - Miles
(Millions)
1050
900
- - -
750
- - - - -
600
- - - - - -
450
- - - - - -
300
- - - - - -
150
0 7980 7987 7982 7983 7984
18
As previously stated, operating revenues
increased 11.3 % in 1984 while operating expenses
were up 10.4 %. As a result, operating income
increased 39.8 % to $96,276,000 from the
$68,886,000 recorded in 1983. An operating loss
in 1982 totaled $8,375,000.
Interest expense amounted to $4,268,000 in
1984, $3,548,000 in 1983, and $7,216,000 in 1982.
Investment income totaled $7,214,000 in 1984
compared with $7,960,000 and $2,550,000 in 1983
and 1982, respectively.
Gain from the disposal of property during
1984 totaled $19,864,000, primarily the result of the
sale of three McDonnell Douglas DC-10-40 aircraft.
1983 gains totaled $805,000 and 1982 gains were
$12,425,000. The 1982 gains reflected the sale of five
Boeing 727-lO0C aircraft.
Earnings before income taxes were
$117,388,000, up $43,785,000 over 1983 pre-tax
earnings of $73,603,000. 1982 earnings before taxes
totaled $688,000.
Cash dividends of 82.5 per share totaling
$17,933,000 were paid during 1984, continuing an
unbroken string of quarterly dividend payments
begun 30 years ago. NWA Inc. common stock is
Available Seat Miles
(Billions)
35
30
- - - -
25
- - - - - -
20
75 7980 7987 7982 7983 7984
principally traded on the ew York Stock Exchange.
A table listing the sales prices and dividends paid per
share in 1984 and 1983 is included on page 33.
Taxes on Earnings Income tax expense
without taking into consideration the extraordinary
item amounted to $30,521,000 in 1984 compared to
$23,530,000 in 1983 and a tax credit of $4,331,000 in
1982. After consideration of the $28,094,000 income
tax credit resulting from the extraordinary item, total
1984 income tax expense was $2,427,000. Earned
investment tax credits totaled $23,576,000 in 1984,
$9,745,000 in 1983, and $3,128,000 in 1982.
Investment tax credits are applied on tax returns as
allowed by income tax regulations. Credits not
currently applied are offset against deferred taxes for
accounting purposes, and as of December 31, 1984
these credits totaled $20,504,000. The Company
continues to use the shortest depreciation (ACRS)
write-off periods for income tax purposes allowed
by law.
Financial Condition Stockholders' equity at
December 31 , 1984 totaled $892,923,000 while long-
term debt was $100,000,000. WA has consistently
maintained a strong balance sheet as emphasized
Fuel Efficiency Increases
(Revenue ton miles per gallon)
4.25
*28.9%
4.00
*24./%
3.75
16.2%
"8.9%
3 50
*
325 -
3.00
2 75
2.50
2.25
2.00 7980 7987 7982 7983 7984
*Percent of increase over 7980
19
by the low debt/equity ratio at the end of 1984. All
aircraft are owned and paid for, and it is expected
that the purchase of 20 Boeing 757 aircraft during
1985 and 1986 will be financed primarily with
internally-generated funds supplemented by some
borrowing at the peak of the acquisition period.
Despite a $30,903,000 net of tax extraordinary
charge, the Company produced its largest net earn-
ings since 1979, and continued its unbroken string
of profitability dating back to 1950. Book value per
share of common stock of WA was $41 .05 at Decem-
ber 31 , 1984 compared to $39.33 and $37 .85 at the
end of 1983 and 1982, respectively.
WA is committed to a philosophy which
entails a strong emphasis on managed route growth,
operation of the most modern and advanced aircraft
available, and efficiency of operations. This philos-
ophy, coupled with our strong financial position,
should allow the Company to continue to grow
and prosper in the future.
Stockholders' Equity vs Long Term Debt
(Millions of Dollars)
Equity Debt
$1000
5800
5600
5400
5200
O 7980 7981 7982 1983 984
Management's Discussion and Analysis-Continued
Selected Financial Data (I n Thousands except per share amounts)
Year Ended December 31 1984 1983 1982* 198 1 1980
Operating Revenues 2,444,974 $2, 196,036 $1,877,568 $1,854,290 $1,639,330
Earnings 86,867** 50,073 5,019 10,460 7,084
Total As ets 1,754,233 1,602,236 1,377,387 1,492,381 1,532,539
Long-Term Debt 100,000 100,000 12,500 62,500
Per Common Share:
Earnings 3.74** 2. 19 .23 .48 .33
Cash Dividends .82 5 .80 .80 .80 .80
*Operati ng results were affected by a major trike which extended from May 22, 1982 to June 17, 1982.
** Before extraordinary los of $30,903,000 or 1.30 per hare resu lting from the settlement of a lawsuit.
Cash Flow, Liquidity, and Capital
Resources Total cash provided from 1984
operations was $274,410,000 before the extra-
ordinary item, and $2 15,413,000 after the
$58,997,000 pre-tax extraordinary loss. This
compares with $209,865,000 in 1983 and
$132 ,895,000 in 1982. Included in the cash from
operations are the benefits from WA's long-standing
policy of owning its equipment rather than leasing,
which in 1984 provided cash through depreciation
and amortization totaling $167,203,000. Cash and
short-term investments declined by $52,122,000 to
$49,564,000 at the end of 1984 as total cash used
during the year of 419,347,000 exceeded the total
cash provided of $367,225,000. The major use of
cash during 1984 was for $345,844,000 of equip-
ment additions which included the purchase of
four new Boeing 747 passenger aircraft early in
the year and one used Boeing 747 passenger air-
craft in December.
20
The Company will take delivery of ten new
Boeing 757 passenger aircraft in 1985 with ten more
scheduled for delivery in 1986. These aircraft plus
related equipment will cost $851 ,037,000, of which
$57,795,000 was on deposit with the manufacturer
at the end of 1984. These aircraft additions will be
financed primarily with funds currently on hand
plus cash from 1985 and 1986 operations supple-
mented by some borrowing at the peak of the
acquisition period. During 1984, the Company
entered into a revolving credit agreement
which provides for unsecured borrowings up to
$500,000,000 through June of 1988. There were no
borrowings under this agreement in 1984. During
1984, Standard and Poors raised the security rating
on all debt issues of the Company.
With its available lines of credit, the lowest
debt/equity ratio in the airline industry, and stock-
holders' equity of $893,000,000, NWA believes it will
have no difficulty in obtaining adequate cash to meet
all future expansion and other corporate needs.
Consolidated Statements of Earnings NWA Inc.
(Dollars in Thousands, except per share amounts)
Year Ended December 31 1984
Operating Revenues
Passenger $1,984,999
Freight 355,336
Mail 58,339
Charter and other transportation 38,559
ontransport 7,741
2,444,974
Operating Expenses
Flying operations 912,501
aintenance 212,828
Passenger service 215,012
Aircraft and traffic servicing 342,726
Reservations, sales and advertising 454,517
Administrative and general 43,911
Depreciation and amortization 167,203
2,348,698
OPERATI G I COME (LOSS) 96,276
Other Income (Expenses)
Investment income 7,214
Interest, net of capitalized interest
(1984-$5,446; 1983- 4,872; 1982- 1,681) (4,268)
Gain on sale of equipment 19,864
Other (1,698)
21,112
Earnings Before Income Taxes
and Extraordinary Item 117,388
Income tax expense (credit)- ote D 30,521
EAR I GS BEFORE EXTRAORDI ARY ITEM 86,867
Extraordinary loss from settlement of litigation
(less applicable income tax credit of 28,094)- ote F (30,903)
$ 55,964
Earnings per share-primary and fully diluted:
Earnings before extraordinary item $ 3.74
Extraordinary loss (1.30)
2.44
19 3
$1 ,812,227
289,170
55,585
36,198
2,856
2,196,036
868,145
192,383
186,802
308,782
383,551
40,579
146,908
2,127,150
68,886
7,960
(3,548)
805
(500)
4,717
73,603
23,530
50,073
$ 50,073
2.19
2. 19
* Operating results were affected by a major strike wh ich extended from May 22, 19 2 to June 17, 19 2.
See note to consolidated financial tatements.
21
19 2*
$1 ,567,986
205,018
60,451
34,758
9,355
1,877,568
838,693
149,749
158,816
265,764
298,611
37,659
136,651
1,885,943
(8,375)
2,550
(7,216)
12,425
1,304
9,063
688
(4,331)
5,019
5,019
.23
$ .23
Consolidated Statements of Financial Position NWA Inc.
(Dollars In Thousands)
December 31 1984
ASSETS
Current Assets
Cash and short-term investments $ 49,564
Accounts receivable, less allowance of
$2,150 (1983-$1,800) 196,836
Flight equipment spare parts, less allowance
for depreciation of $35,490 (1983-$31 ,406) 52,464
Maintenance and operating supplies 19,682
Prepaid expenses 25,190
Prepaid income taxes 23,914
TOTAL CURRENT ASSETS 367,650
Other Assets 18,491
Property and Equipment
Flight equipment 2,356,048
Less allowance for depreciation 1,204,118
1,151,930
Advance payments on new flight equipment 57,795
Other property and equipment 287,391
Less allowance for depreciation 129,024
158,367
1,368,092
1983
$ 101 ,686
189,665
58,502
17,599
18,372
385,824
12,409
2,080,299
1,103,798
976,501
99,572
242,233
114,303
127,930
1,204,003
$1,754,233 $1,602,236
22
December 31
LIABILITIE AND TO KHOLD R ' EQUITY
Current Liabiliti s
omm rcial pap r
Accounts payabl and oth r liabiliti s
Employ comp nsation
Air traffic liability
Income tax s
Long-Term Debt- ot B
D ferred Cr dits and 0th r Liabiliti s
Incom tax - ot D
Other
tockholders' Equity- ot
Common Stock $2.00 par valu , authoriz d
60,000,000 shar s; is u d and ou tstanding
2],749,667 hares (1983-$ 1.25 par valu ,
authorized 40,000,000 shar s; issued and
outstanding 21,71 5,995 shar s)
Capital urplus
Commitments and Contingenci s- ot s E and F
S e notes to consolidated financial stat m nts.
23
1984
$ J 7,834 $
230)44 2H ,G62
1 H ,789 50,863
]03,. 00 104 /)33
5,0.:)7
- - - -
467,467 375,555
100,000 100,000
280,'163 260, 123
n ,380 12,369
293,843 272,492
43,499 27,145
J 10,823 126,474
738,601 700,570
892,923 854,189
$1,754 ,233 $1,602,236
Consolidated Statements of Changes in Financial Position NWA Inc.
Year Ended December 31 1984 1983 1982
Cash Provided
Earnings before extraordinary item $ 86,867 $ 50,073 $ 5,019
Add (deduct) non-cash items:
Depreciation and amortization 167,203 146,908 136,65 1
Increase (decrease) in deferred income taxes 20,340 12,884 (8,775)
TOTAL FROM OPERATIO S BEFORE
EXTRAORDI ARYITEM 274,410 209,865 132,895
Extraordinary loss before tax benefit of $28,094 (58,997)
TOTAL FROM OPERATIONS 215,413 209,865 132,895
Issuance of 7 % convertible debt 100,000
Is uance of commercial paper and other borrowings 39,000 76,042 40,516
Decrea e in interest receivable 43,528
Increase in accounts payable and other liabilities 16,282 41 ,305 21,174
Increase in accrued employee compensation 63,926 10,847 3,986
et book value of property dispositions 20,672 2,667 4,73 1
Other 11,932 7,2 11 1,464
TOTAL CASH PROVIDED 367,225 447,937 248,294
Cash Used
Additions to flight equipment, other property and deposits 345,844 234,256 55,070
Payments of commercial paper and other borrowings 21 ,166 81,000 81,109
Increase (decrease) in air traffic liability 1,033 (27,728) 11,028
Reduction of long-term debt including current maturities 62,500
Increase in accounts receivable 7,171 46,018 5,535
Dividends 17,933 17,367 17,332
Other 26,200 27,838 17,790
TOTAL CASH USED 419,347 378,751 250,364
I CREASE (DECREASE) I CASH
A D SHORT-TERM I VESTME TS (52 ,122) 69, 186 (2,070)
Cash and short-term investments at the beginning of the year 101,686 32,500 34,570
Cash and short-term investments at the end of the year $ 49,564 $101 ,686 $ 32,500
See notes to consolidated financial tatements.
24
Consolidated Statements of Stockholders' Equity NWA Inc.
Common Stock Capital Retained
Shares Amount Surplus Earnings
Balance January 1, 1982 21 ,661 $27,077 $125,256 $680,177
Exercise of stock options 17 21 387
et earnings for 1982 5,019
Cash dividends-$.80 per share (17,332)
Balance December 31, 1982 21,678 27,098 125,643 667,864
Exercise of stock options 38 47 831
et earnings for 1983 50,073
Cash dividends-$.80 per share (17,367)
Balance December 31, 1983 21,716 27,145 126,474 700,570
Exercise of stock options 38 55 840
Increase in par value from 1.25 to $2.00 per
share 16,308 (16,308)
et earnings for 1984 55,964
Cash dividends-$.825 per share (17,933)
Other ( 4) (9) (183)
Balance December 31, 1984 21,750 $43,499 110,823 $738,601
See notes to consolidated financial statements.
25
Notes to Consolidated Financial Statements NWA Inc.
December 3 7, 7 984
Note A-Accounting Policies A summary of
significan t accoun ting policies of the Company is set
forth below:
Corporate Reorganization and Basis of
Presentation: Effective ovember 20, 1984, orthwest
Airlines, Inc. ( orthwest) became a wholly-owned sub-
idiary of WA Inc. ( WA) pursuant to a plan of rear-
Flight Equipment and Property: Provision for
depreciation is computed by the straight line method
over the estimated useful lives of the assets. U eful
lives are estimated at fifteen years with 10 % residual
values for 747 and DC-1 0 aircraft and ten years with
15 % residual value for 727 aircraft. Useful lives of
buildings vary from 5-30 years and other equipment
ganization approved by the shareholders of orthwest from 4-1 0 years. Depreciation of fli ght equipment
on May 21, 19 4. The shareholders of orthwest auto- pare part , rotables and assemblies is provided by
matically became shareholders of NWA with the
same equ ity interest in NWA as they previously had
in orthwest. WA became jointly liable for orth-
west's Convertible Subordinated Debentures which
are now convertible into shares of WA Common
Stock, and a urned orthwest's tock option plans.
the traight line method at rates which depreciate
cost, less residual value, over the estimated useful
lives of the related aircraft.
Pension Plans: The Company has several
noncontributory pension plans covering substantially
all of its employees. The Company's policy is to annu-
The consolidated financial statements include ally fund pension costs accru ed, which includes
the accoun ts of WA, orthwest, and all other sub- amortization of prior service cost over periods of ten
sidiaries after eli mination of intercompany accounts to thirty year .
and transaction .
Short-Term Investments: Short-term invest-
ments are stated at cost which approximates market
and amounted to 30,173,000 and 78,54 7,000 at
December 31, 1984 and 1983, respectively.
Income Taxes: Income taxes are provided at
statutory rates applied to earnings before income taxes
regardless of when such taxes are paid. Deferred in-
come taxes arise principally from timing differenc s
between fin ancial and tax methods of accounting for
depreciation and capitalized interest.
The Company uses the flow-through method of
accounting for investment tax credits. lnve tment tax
credits not applied on tax returns are offset against
deferred income taxes to the extent they are applica-
ble to deferred taxes becoming payable in the invest-
ment tax credit carryover periods.
Operating Revenues: Passenger and freight
revenues are recognized when the transportation
is provided.
Earnings Per Share: et arnings per share
are calculated by dividing net earnings, adjusted for
interest expense (net of income taxes) related to the
convertible debentures, by the weighted average
number of shares of Common Stock and Common
tock equivalents. Common Stock equivalents con-
sist of convertible debentures and sto k options.
26
Note 8-Long-Term Debt and Credit Common Stock options at prices which were
Arrangements During 1984 the Company entered not less than 100 % of market at date of grant are as
into a revolving credit agreement with a group of follows:
major banks which provides for unsecured borrow-
rngs up to $500 million through June 30, 1988. This
amount decreases periodically thereafter to the ter-
mination date of July 1, 1994. Interest on borrowings
is, at the Company's election , the lower of various
formula rates or the prime rate as defined until June
30, 1991 and the formula rate or prime rate plus
% thereafter. Commitment fees ranged from
6
%
to % per annum on the unused credit and
amounted to $253,000 in 1984. During 1984 there
were no borrowings under the revolving credit
agreement.
The Company was in compliance with the
covenants of the revolving credit agreement at the
end of the year. At December 31, 1984, approxi-
mately 179,000,000 of retained earnings was avail-
able for the payment of dividends under the terms
of the revolving credit agreement.
In February 1983 the Company issued $100
million of 7 % convertible subordinated deben-
tures due in 2007. The debentures are convertible
into common stock at a rate of 50. 75 per share. The
Company may redeem the debentures at any time
after December 15, 1984 at prices ranging from 107 %
in 1984 to 100% in 2001 of the principal amount.
Annual sinking fund payments are required begin-
ning in 1992 of 5 million, less the amount of
debentures converted or redeemed.
Note C-Stockho!ders' Equity
Cumulative Preferred
Stock:
Authorized
Issued
Shares
1984
5,000,000
one
19 3
1,000,000
one
As part of the reorganization , as described in
ote A, the authorized cumulative preferred stock
was increased to 5,000,000 shares at$ l par value
from 1,000,000 shares at S25 par value.
The Company has 1,970,443 shares of
Common Stock reserved for conversion of the 7 %
convertible subordinated debentures as of December
31, 1984.
Shares Price Per Share
Outstanding at
January 1, 1983 154,327 22. 75/23.31 /24.00
Exercised (37,537) 22.75/23.31 /24.00
Lapsed (22 ,348) 22 . 75/23.31/24.00
Outstanding at
December 31, 1983 94,442 23.31
Granted 126,650 44.06
Exercised (38,395) 23.31
Lapsed (2,750) 23.31/44.06
Outstanding at
December 31, 1984 179,947 23.31/44.06
Options exercisable:
At December 31, 1983 34,142 23.31
At December 31, 1984 54,797 23.31
Shares available for stock option and other
plans were 350,000 and 203,835 at December 31,
1984 and 1983, respectively.
Note O-Taxes on Earnings (Dollars in
thousands) Reconciliation of the Company's effective
income tax rate is as follows:
Year Ended December 31 1984 1983 1982
Statutory rate applied
to earnings before
tax and
extraordinary item $53,998 $33,857 $ 316
Add (deduct):
Investment tax
credit earned (23,576) (9,745) (3,128)
Rate change on
timing differences (1,467) (1 ,284) (1 , 1.52)
Other 1,566 702 (367)
Income tax expense
(credit) before
extraordinary item 30,521 23 ,530 (4 ,33 1)
Tax benefit on
extraordinary loss (28,094)
Total income tax
expense (credit) 2,427 23 ,530 $(4 ,33 1)
27
Notes to Consolidated Financial Statements NWA Inc. -Continued
Federal , foreign and state income taxes (credit) consists of the following:
1984 1983 1982
Current Deferred Current Deferred Current Deferred
Federal $ 6,687 $(7, 107) $6,396 $14,138 $1,619 $(6,821)
Foreign 1,118 827 855
State 2,889 (1,160) 2,068 101 1,009 (993)
$10,694 $(8,267) $9,291 $14,239 $3,483 $(7,814)
The deferred income tax expense (credit) consists of
the following:
19 4 1983 19 2
Extraordinary loss $(28,094) $
Accelerated
depreciation (3,566) (10,961) (3,947)
lnve tment tax and
other credits 15,958 24 ,123 13,127
Disposition of
property 8,749
Interest 2,505 2,241 (18,724)
Deferred employee
benefits (834) (685) 3,437
Rate change
on timing
differences (1,467) (1,2 4) (1,152)
Other (1,518) 805 (555)
(8,267) $ 14,239 (7,814)
Investment tax credits of 20,504,000 not applied on
tax returns but offset against deferred income taxes
at December 31, 1984 will expire in 1999.
Note E- Commitments At December 31,
1984 the Company had contracted to purchase
twenty Boeing 757 aircraft for delivery in 1985 and
1986. Deposits of $57,795,000 have been made with
the manufacturers, and additional expenditures of
406,283,000 in 1985 and $386,959,000 in 1986 will
be required for these aircraft and related equipment.
The Company does not lease any aircraft or
related flight equipment.
Leased property consists of space in air
terminals, land and building at airports, and ticket,
sales and re ervation offices under noncancelable
operating leases which expire in variou years
through 2018. Portions of these facilities are sub-
leased under noncancelable operating leases
expiring in various years through 199 1.
Future minimum rental commitments at
December 31, 1984 for noncancelable operating
lea es with initial or remaining terms of one year or
more, of which $367 million are for air terminal and
airport facilities, are as follows:
1985
1986
1987
1988
1989
Thereafter
Sublease rental income
28,11 6,000
27,277.000
26,047,000
23,5 10,000
19,086,000
258,839,000
3 2,875,000
6,489,000
$376,3 6,000
Rental expen e for all operating leases consi ted of:
1984 19 3 1982
Gross $39,884,000 $35,633,000 29,57 1,000
Sublea e
rental
income (1 ,079,000) (1,099,000) (1,075,000)
$38,805,000 $34 ,534,000 $28,496,000
28
Note F
- Litigation and Contingencies As
previously reported, in 1973 a federal trial court in
Washington, D.C. held in a class action by certain
female flight attendants that the Company violated
certain provisions of the Equal Pay Act of 1963 and
the Civil Rights Act of 1964. After several appeals the
trial court judgment has been affirmed. On January
14, 1985 the Supreme Court of the United States
declined to review the case.
The Company's liability is estimated at
$58,997,000 including plaintiffs' attorney's fees. This
amount is reflected as an extraordinary loss in 1984
of $30,903,000 net of a $28,094,000 tax benefit.
The Company is also involved in other legal
actions relating to environmental issues (primarily
noise and air pollution), alleged employee discrimi-
nation, and other matters relating to the Company's
business. While the Company is unable to predict
the ultimate outcome of these actions, it is the opin-
ion of management that their disposition will not
have a material adverse effect on the Company's
financial position.
Note G- Pension Plans The Company's
pension expense was $26,409,000 in 1984,
$27,817,000 in 1983 and $23,468,000 in 1982.
Certain estimates relating to actuarial assump-
tions were changed in 1982. The changes resulted
in reduced 1982 pension expense of approximately
$10.2 million. The changes in estimates had no effect
on pension benefits to employees.
Accumulated plan benefit information, as
estimated by consulting actuaries, and plan net
assets for the Company's plans are:
Year Ended December 31
Actuarial present value
of accumulated
plan benefits:
Vested
on-vested
et assets available
for benefits
1984
$421,624,000
51,721,000
$473,345,000
$591,881,000
1983
$373,198,000
37,132,000
$410,330,000
$551 ,968,000
The interest rate used in computing the
present value of accumulated plan benefits was 7%
except for certain retired plan participants where a
14 % rate was used. The rate for retirees is based
upon the actual earnings of a dedicated securities
portfolio established for the payment of their
benefits.
In addition to providing pension benefits,
the Company provides certain health care and life
insurance benefits for certain retired employees.
Those benefits are provided through an insurance
company whose premiums are based on the benefits
paid during the year. The cost of providing those
benefits, which is not material, is recognized by
expensing the annual insurance premiums.
Note H- Export Sales The operations of
WA Inc. consist primarily of holding stock in
orthwest Airlines, Inc. orthwest Airlines, Inc. is a
scheduled air carrier engaged in commercial trans-
portation of passengers, freight and mail. Export
sales were $649,000,000 in 1984, $612,000,000 in
1983 and $536,000,000 in 1982, principally
associated with countries in Asia and Europe.
Revenues from sales consummated in foreign
countries is considered to be export sales.
29
Notes to Consolidated Financial Statements NWA Inc - Continued
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, 1984:
(Dollars in Thousands)
Earnings et
Earnings (Loss) Earnings
(Loss) Per Share (Loss)
Before of Common Per
Extraor- et Stock Before Share of
Operating Operating di nary Earnings Extraordi- Common
Revenues Expenses Item (Loss) nary Item Stock
1984
First quarter $ 542,529 $ 556,123 $ 1,040 $ 1,040 $ .05 $ .05
Second quarter 622 ,766 578,511 39,625 39,625 1.70 1.70
Third quarter 705,251 629,450 45,898 45,898 1.97 1.97
Fourth quarter 574,428 584,614 304 (30,599) .02 (1.28)
$2,444,974 $2,348,698 $ 86,867 $ 55,964 $3.74 $2.44
1983
First quarter $ 451 ,882 $ 495,077 $(20,905) $(20,905) $(.96) $(.96)
Second quarter 537,537 51 3,482 14,356 14,356 .66 .66
Third quarter 646,670 569,597 45,050 45,050 1.91 1.91
Fourth quarter 559,947 548,994 11 ,572 11 ,572 .49 .49
$2,196,036 $2,127,150 $ 50,073 $ 50,073 $2.19 $2. 19
See also ote F for extraordinary loss recorded in fourth quarter 1984.
Note )- Supplemental Information on
the Effects of Changing Prices (Unaudited)
AS REQUIRED BY FINANCIAL ACCOUNT! G
STANDARDS BOARD (FASS) STATEMENT NO. 33,
"FINA CIAL REPORTING A D CHA GI G PRICES,"
THE COMPA Y MUST PROVIDE SUPPLEME TAL
I FORMATIO CO CER I G THE EFFECT OF
CHA GI G PRICES O ITS FI A CIAL
STATEME TS.
While there is presently no consensus on
how the impact of inflation should be reported,
FASS has devised an experiment requiring certain
large, publicly held companies to present supple-
mental information reflecting the effect of specific
price changes in the individual resources used by
the Company and the effect of general inflation on
monetary assets and liabilities. THE COMPA Y HAS
SERIOUS RESERVATIO S ABOUT THE USEFUL-
ESS OF THIS DATA.
30
Statement of Earnings Adjusted for Changing Prices
Year Ended December 31 , 1984
(Dollars In Thousands)
Operating revenues
Depreciation and amortization
Other operating expenses
Gain on sale of equipment
Other income, net
Earnings before income taxes and extraordinary item
Income taxes
et earnings (loss) before extraordinary item
Extraordinary item, net of tax
et earnings (loss)
Other Information
Purchasing power gain from holding net monetary liabilities during the year
As Reported
in the Primary
Statements
$2,444,974
167,203
2, 1 1,495
(19, 64)
(1,248)
2,327,586
117,388
30,52 1
6,867
(30,903)
$ 55,964
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
Adju ted for
Changes in
Specific Price
(Current Costs)
2,444,974
238,364
2,1 1,495
(1 ,248)
2,41 ,611
26 363
30,52 1
(4, 15 )
(30,903)
(35,06 1)
Adju ted for
Changes in
pecific Prices
(Current Costs)
$ 17,864
$ 11 2,257
32,901
79,356
* At December 31, 1984, current cost of property and equipment, net of accumulated depreciation, was $2, 150,351 ,000 (historical
amount-$1,368,092,000).
Five Year Comparison of Selected Supplementary Financial Data Adjusted for
Effects of Changing Prices
Year Ended December 31 (Dollars in thousand , except per
share and price index data) 1984 1983 1980
Operating revenues $2,444,974 $2,289,500 $2,020,448 $2, 11 7,730 $2,066,433
Current Cost Information
Earnings (loss) before extraordinary item
Per share data
Excess of increase in specific prices of property
and equipment over increase in the general
price level
et as ets at year-end
Other Information
Purchasing power gain from holding net
monetary liabilities during the year
Cash dividends declared per common share
Market price per common share at year-end
Average consumer price index
(4,158)
(.19)
79,356
1,682,894
17,864
.825
40.75
311.1
31
(159,309)
(6.79)
448,504
2,781,844
14,381
.83
46.65
298.4
(179,781)
(8.30)
250,622
2,491,956
14,676
.86
50.58
289. 1
(154,295)
(7. 11 )
11 7, 176
2,488,639
44,398
.91
30.84
272.4
(11 2,789)
(5.20)
171 ,630
2,539,277
66,479
1.08
29.94
246.8
Notes to Consolidated Financial Statements NWA Inc. -Continued
Statement of Earnings The accompanying
supplemental statement of earnings presents income
data under two measurement methods. These are:
a. As Reported in the Pnmary 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.
b. Adjusted for Change in Specific Prices (Current
Costs) - Income under current cost accounting
attempts to reflect the effects of changes in specific
prices of the resources actually used in operations
so that measures of these resources and their con-
sumption reflect the current cost of replacing these
resources, rather than the historical cost.
Income Taxes Current tax laws do not
recognize deductions for current cost depreciation
expense; therefore, no adjustments have been made
to the provisions for income tax.
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 for aircraft still in
production furnished to the airline industry by the
Air Transport Association and current market values
for non-production aircraft. Flight equipment repre-
sents approximately 90 % 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 judgements 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 approximations of the price
changes that have occurred in the business environ-
ment in which the Company operates.
Current cost does not purport to represent the
amount at which the assets could be sold.
32
Accountants' Report
To the Stockholders and Board of Directors
NWA Inc.
Saint Paul, Minnesota
We have examined the consolidated statements
of financial postion of NWA Inc. (formerly Northwest
Airlines, Inc.) and subsidiaries as of December 31,
1984 and 1983, and the related consolidated
statements of earnings, stockholders' equity and
changes in financial position for each of the three
years in the period ended December 31, 1984. Our
examinations were made in accordance with gen-
erally 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 NWA Inc. and subsidiaries at
December 31, 1984 and 1983, 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, 1984, in conformity
with generally accepted accounting principles applied
on a consistent basis.
~~,F1t)~
Saint Paul, Minnesota
February 19, 1985
Stockholders' Information
Stock Prices and Dividends
ales Price of Dividends
Common Shares Per Share
Quarter 1984 1983 1984 1983
1st High $49 $5 1 $.20 $.20
Low 34 41
2nd High 41 55 .20 .20
Low 343/s 42
3rd High 42 51% .20 .20
Low 33 36
4th High 42 49 .225 .20
Low 35 36
Stock Listed
Common Stock listed on New York Exchang ,
Pacific Stock Exchange and Midwest Stock
Exchange. There w re 6,846 stockhold rs of r cord
as of March 11 , 1
985.
Co-Registrars and Transfer Agents
Norwest Bank Minneapolis, N.A. , Minneapolis, MN;
Norwest Trust Company, New York, NY.
Notice of Annual Meeting
The 1985 annual shareholders' meeting will be held
at Northwest Airlines General Offices, Minneapolis/
St. Paul International Airport, St. Paul, Minnesota, on
Monday, May 20, 1985 at 9:30 AM .
33
70 Year Summary* NWA Inc.
(Dollar in Thou and Except Per Share Figures)
Year Ended December 31 1984 1983 1982t 1981 I 80 1979 197 t 1977 1976 1975
Operating Revenues
Pa senger $ 1,984,999 $ 1,812,227 $ 1,567,9 6 $ 1,521 ,856 $ 1,34 7, 30 $ 1,067,2 14 $ 557,401 $ 861,053 $ 786,414 $ 659,849
Freight 355,336 289,170 205,018 22 1,691 190,837 160,716 87,077 121,185 11 9,882 88,308
Mail 58,339 55,5 5 60,451 59,786 57,305 38,685 18,944 29,894 25,137 23,2 0
Charter and oth r transportation 38,559 36, 198 34,758 21,766 16,303 15,093 10,997 25,87 1 25,955 29,019
on transport 7,741 2,856 9,355 29, 191 27,055 28,850 11 5,743 8,352 6,420 107
$ 2,444,974 $ 2, 196,036 $ 1,877,568 $ 1,854,290 $ 1,639,330 $ 1,3 10,558 $ 790, 1 2 $ 1,046,355 $ 963, 08 $ 800,563
Operating Expenses
Depreciation and amortization $ 167,203 $ 146,908 $ 136,651 $ 133,489 $ 124,07 $ 106,401 $ 104,970 $ 103, 152 $ 102,713 $ 9 ,8 0
Other 2,181,495 1,980,242 I , 749,292 1,719,054 1,539,386 1,148,805 6 I 7,907 38,619 758,147 65 1,9 3
TOTAL OPERATI SES $ 2,348,698 $ 2, 127,150 $ 1,885,943 $ 1,852,543 $ 1,663,464 $ 1,255,206 $ 722,877 $ 94 1,771 $ 860,8 0 $ 750,863
Operating incom $ 96,276 $ 6 ,8 6 $ ( ,375) $ 1,747 $ (24, 134) $ 55,352 $ 7,2 5 $ 104,5 4 $ 102,948 $ 49,700
Interest expense (4,268) (3,548) (7,2 16) (14, 135) (15, 31) (1,635) (3,376) (6,5 1 ) (14,035) (I , 120)
Other income and (deductions)-net 25,380 8,265 16,279 20,2 7 3, 62 30,643 45,126 55,078 9,351 13,509
Earnings (loss) before taxes and extraordinary item $ 117,388 $ 73,603 $ 6 8 $ 7, 09 $ (36, 103) $ 4,360 $ 109,035 $ 153,144 $ 98,264 $ 47,0 9
Income taxes (credit) 30,52 1 23,530 (4,331) (2,55 1) (43,187) 11 ,885 47,194 60,425 46,527 3,693
Earnings1 $ 86,867 tt $ 50,073 $ 5,019 $ l 0,460 $ 7,084 $ 72,475 $ 61,841 $ 92,7 19 $ 51,737 $ 43,396
Earning p r averag shar 1 3. 74 tt 2. 19 .23 .48 .33 3.35 2.86 4.29 2.39 2.01
Ca h dividends 17,933 17,367 17,332 17,326 17,317 17,30 16,2 10 10,804 ,707 9,710
Dividends per share .825 . 0 . 0 . 0 .80 .80 .75 .50 .45 .45
Stockholder equity 892,923 854 , 1 9 820,605 832,510 839,042 849, 122 793,69 1 747,672 665,744 23,677
umber of shar outstanding at end of year 21,749,667 21,715,995 21,678,458 21,661,367 21,647,280 21,639,589 21,626,284 21,606,686 21,606,036 21,604,136
Book value per share at end of year $ 41.05 $ 39.33 $ 37. 5 $ 3 .43 $ 3 .76 $ 39.24 $ 3 .70 $ 34. 0 $ 30. 1 $ 28. 7
Assets and Long-Term Debt
Flight prop rty at co t $ 2,356,048 $ 2,080,299 $ 1,996,925 $ l , 92,0 15 $ I , 95, 16 $ 1,779,770 $ 1,525,442 $ 1,5 10,447 $ 1,448,402 $ 1,420,670
Flight prop rty at net book valu 1,151,930 97 ,501 1,019,071 1, 11 0,9 5 1,200,495 1,094 ,55 922, 15 962,957 924,537 . 77,062
Total as ts 1,754,233 1,602,236 1,377,387 1,492,381 1,532,539 1,528,921 1,392,8 5 1,299,45 1 1,151 ,562 1,2 15, 14.
Long-term debt 100,000 100,000 12,500 62,500 100,000 100,000 100,000 122,000 246,000
Unit Expenses
Per availabl ton-mile 40.2 40.5 40.7 41.0 37.0 29.4 27 .. 22.9 21.6 20.6
Perr venue ton-mile 74.7 76.0 80.3 83.9 80.6 63.4 65.74' 54.4 4 50.5 50.2
Percent of operating revenu s 96. 1% 96.9% 100.4% 99.9% 101.5% 95. % 91.5% 90.0% 9.3% 93.8%
tatistics- ch duled ervices
Revenue plane-miles (000) 143,410 133,699 11 9, 1 9 120,139 120,709 116,105 66,420 111 ,271 108,474 104,104
ailable at-mil (000) 32,663,660 29,511,2 7 26,257,466 24,813,9 1 24,904,355 24,028,92 14,302,037 22,96 ,4 9 22,228,259 20,9 10,966
Revenue pa enger-mile (000) 19,772,355 17,71 1,929 15,675, 194 14,251,932 13,810,889 13,298, 161 7,01 ,305 11 ,100,4 12 10,75 ,6 3 9,471,2 2
Pas ng r load factor 60.5% 0.0% 59.7% 57.4% 55.5% 55.3% 49. 1 % 48.3% 48.4% 45.3%
Revenue pass ngers carried 13,2 15,907 12,7 18,468 11 ,356, 165 11, 144,785 11 ,50 1,148 11 ,636,170 ,57/J,901 10,354,808 9,818,343 8,8GS,263
Freight ton-mil s (000) 965,868 35, 197 600, 198 616,285 529,434 504 ,753 302, 153 458,143 467,399 386,309
Total revenu ton-mil s (000) 3, 103,799 2,750,946 2,307,475 2, 186,815 2,048,349 1,956,2 17 1,079, l 1,676,470 1,647,3 17 1,428,3 1
tatistic -Total Operations
R venu plane-mil s (000) 144,568 134,870 120,378 120,761 121 ,243 117,027 67,47 1 11 4,643 11 2,279 107,721
Available ton-miles (000) 5,837,972 5,255,086 4,635,4 15 4,519,768 4,495,666 4,2 5,640 2,594,632 4, 109,1 10 3,. 82,743 3,642,650
o covrr d by Artounlants Report.
tStnkts advtrstly affec-lC'd 1978 and 1982.
ttBe fore extraord111arv loss of 530/J0'.3 or S 1.:30 per share resulting from the s ttlem nt of a law uit.
1Se pag ,s IG through 20 for Management s D1scl1';sion and An alysis.
34 35
Directors and Officers
Directors
M. Joseph Lapensky
Chairman of the Board
orthwest Airlines, Inc.
St. Paul, Minnesota
James A. Abbott
Executive Vice President-Finance and Administration
and General Counsel
orthwest Airlines, Inc.
St. Paul, Minnesota
James H. Binger*
Former Chairman of the Executive Committee
Honeywell, Inc.
Minneapolis, Minnesota
Manufacturer of automation systems
E. W. Blanch, Jr.*
Chairman of the Board and Chief Executive Officer
E.W. Blanch Company
Minneapolis, Minnesota
Re-insurance brokerage
Robert A. Charpie*
President
Cabot Corporation
Boston, Massachusetts
Production of oil and gos products
Raymond H. Herzog*
Former Chairman of the Board
3M Company
St. Paul, Minnesota
Multinational manufacturing
Melvin R. Laird*
Senior Counselor
Reader's Digest Association
Washington , D.C.
Magazine publishing
James . Land, Jr.*
Financial Consultant
ew York , New York
Donald G. Mc eely*
Chairman of the Board
Space Center, Inc.
St. Paul , Minnesota
wgistics
Steven G. Rothmeier
President and Chief Executive Officer
orthwest Airlines, Inc.
St. Paul, Minnesota
* Member, Audit Committee
Officers of Northwest Airlines, Inc.
M. Joseph Lapensky*
Chairman of the Board
Steven G. Rothmeier*
President and Chief Executive Officer
James A. Abbott*
Executive Vice President-Finance and Administration
and General Counsel
Benjamin G. Griggs, Jr.
Executive Vice President-Operations
Thomas J. Koors
Executive Vice President-Marketing and Sales
Bjarnie R. Anderson
Vice President-Washington
Brent J. Baskfield
Vice President-In-Flight Services
John W. Campion
Vice President-Regulatory Proceedings
John A. Edwardson*
Vice President-Finance and Chief Financial Officer
Terry M. Erskine
Vice President-Industrial Relations
Bruce H. Fillips*
Vice President-Comptroller
Phillip R. Gossard
Vice President-Ground Services
Jonn F. Horn
Vice President-Orient Region
Allan W. Johnson
Vice President-Atlantic Region
William A. Kutzke
Vice President-Airline Planning
Benjamin H. Lightfoot
Vice President-Maintenance and Engineering
Robert A. Magnuson*
Vice President-Treasurer
Thomas E. McGinnity
Vice President-Purchasing and Stores
Bryan G. Moon
Vice President-Advertising
Walter H. Pemberton
Vice President-Communications and Computer Services
Allan K. Pray
Vice President-Assistant to the President
James F Redeske
Vice President-Personnel Administration
R. James Thorne
Vice President-Properties
Steven D. Wheeler*
Corporate Secretary
William C. Wren
Vice President-Public Relations
*also officers of WA Inc.
36
@
NORTI-IWEST ORIENT
NWA Inc.
Minneapolis-St. Paul International Airport
St. Paul, Minnesota 55 7 7 7