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