Northwest Airlines Annual Report 1985

NWA Inc. 1985 Annual Report
Contents
Financial Highlights
1
Letter to Shareholders
2
Operations Review
6
Management's Discussion
and Analysis
18
Financial Statements
22
Notes to Financial
Statements/Accountants'
Report
27
Stock Price and Dividend
Information
33
Ten Year Summary
34
Directors and Officers
36
^ Northwest Orient Airlines Route System
Singapore
^ Corporate Profile NWA Inc. is engaged primarily in the commercial transportation of passengers, freight
and mail through its wholly-owned subsidiary Northwest Airlines, Inc., a scheduled U.S. air carrier. Northwest's cur
rent route system spans 73 cities in 26 states and 17 countries in Western Europe and the Far East, where North
west is the dominant U.S. airline. Northwest was the seventh largest U.S. carrier in terms of revenue passenger-
miles in 1985, and its freight operations ranked number one in terms of freight ton-miles among all U.S. combination
carriers. NWA Inc. is also the parent company of Mainline Travel, Inc, a major wholesaler of vacation travel packages
that was acquired in 1985. In January 1986, NWA Inc. entered an agreement to acquire Republic Airlines. If this
acquisition receives all necessary approvals, Northwest will become the third largest carrier in the U.S. airline industry
based on 1985 total revenue passenger-miles. NWA Inc. is headquartered at Minneapolis/St. Paul International
Airport and its common stock is traded on the New York Stock Exchange.
Highlights
Operating Revenues
Year Ended December 31 1985 1984 1983
(Billions of Dollars) Total Operating Revenues $2,655,491,000 $2,444,974,000 $2,196,036,000
Operating Income 77,087,000 96,276,000 68,886,000
1983
Net Earnings for the Year 73,119,000 55,964,000* 50,073,000
Per Common Share 3.18 2.44* 2.19
Per Dollar of Revenue 2.8C 2.3<t 2.34
Stockholders' Equity $ 947,001,000 $ 892,923,000 $ 854,189,000
1.8 2.0 2.2 2.4 2.6 2.8 3.0
Per Common Share 43.49 41.05 39.33
Dividends Paid 19,586,000 17,933,000 17,367,000
Operating Expenses:
Net Earnings Per Available Ton-Mile 39.8C 40.2C 40.54
(Millions of Dollars)
Per Available Seat-Mile 6.8C 7.1 <t 7.14
Revenue Traffic (Scheduled):
1983
Passengers Carried 14,539,000 13,216,000 12,718,000
Passenger-Miles Flown 22,341,334,000 19,772,355,000 17,711,929,000
M 1984 Ton-Miles, Mail, Freight & Express 1,100,124,000 1,126,564,000 979,753,000
Common Shares at Year End 21,774,000 21,750,000 21,716,000
Employees:
50 55 60 65 70 75 80 Number at Year End 16,641 15,185 14,187
Total Wages & Benefits Paid $ 715,172,000 $ 639,606,000 $ 569,535,000
*After extraordinary charge of 530,903,000 or 51.30 per share resulting from the settlement of a lawsuit.
Revenue Passenger-Miles
and Available Seat-Miles
(Billions)
RPM's ASM's
1981
1982
1983
1984
1985
10 15 20 25 30 35 40
1
! X

I 1 ! ?
f
%jm

^ 1985 Annual Report To Shareholders One of the most significant developments in the 59-year history of
Northwest Airlines occurred in January 1986, when NWA Inc. entered into an agreement to acquire Republic Airlines.
Pending approval by Republic's shareholders and the federal government, which we hope to have later this spring,
the combined operations resulting from the $884 million transaction will rank Northwest third largest among all
U.S. carriers in terms of revenue passenger-miles.
In acquiring Republic we are bringing together two medium-sized airlines with complementary fleets and routes
into a single coherent system. By doing so, Northwest will create increased domestic mass that will improve our com
petitive position in a deregulated and intensely competitive environment.
The year 1985 was important for Northwest from the standpoint of implementing strategies designed to foster
growth and enhance our competitive capability. Toward these ends, we invested heavily in state-of-the-art aircraft,
strengthened our domestic system and took a step toward vertical integration at NWA Inc.
We achieved good operating and financial results in 1985 in the face of strong competition and general difficulties
affecting the U.S. airline industry. Operating revenues rose 8.6 percent in 1985 to an all-time high of $2.65 billion.
Operating income amounted to $77.1 million, compared to $96.3 million in 1984. Net earnings for the year totaled
$73.1 million or $3.18 per share, compared to the $56.0 million or $2.44 per share in 1984. Net earnings in 1984 were
reduced by an extraordinary charge of $30.9 million or $1.30 per share, resulting from the settlement of a 15-year-old
lawsuit at Northwest.
A 7.6 percent decline in freight revenues was a significant factor limiting higher revenue and earnings growth in 1985.
This drop was attributable largely to weak U.S. exports, reflecting the strength of the U.S. dollar as well as only mod
erate increases in consumer spending for air eligible items. Northwest's earnings growth was further restrained by
a 4.0 percent decrease in yield per revenue passenger-mile, a direct result of intense competition as well as the longer
haul makeup of our route system, where the average passenger traveled 1,537 miles in 1985, up from 1,496 miles in
1984. The largest decrease in yield was recorded in our domestic system due to the continuing industrywide avail
ability of discounted fares.The effect on operating income of revenues lost due to freight and yield declines was only
partially offset by an overall increase in passenger and mail traffic and lower operating unit costs.
3
Revenue passenger-miles rose 13 percent in 1985 as we increased our market share among major U.S. airlines for the
seventh consecutive year. Our 1985 RPM growth was spread uniformly throughout Northwest's route system.
Equally important, our systemwide passenger load factor of 60.1 percent remained practically unchanged in 1985
despite competitive pressures and an aggressive 13.7 percent increase in available seat-miles.
Our 1985 results were also favorably affected by the efficiencies of our growing fleet of Boeing 757 aircraft, which
was one of the major factors enabling us to reduce operating costs per available seat-mile by 4.6 percent to 6.78 cents.
Northwest was operating eleven 757s by year-end, and these aircraft have met or exceeded all of our expectations.
In 1985 we entered into the largest aircraft order in Northwest's 59-year history with commitments for 23 additional
aircraft valued at $2 billion. The aircraft to be delivered over the next five years are three long-range 747-200s, ten
more Boeing 757s, and ten new-generation 747-400s.
The new direction of the airline industry under deregulaton requires that we add substantial capacity in order to
remain competitive and capitalize fully on the opportunities available throughout our global system. For example,
the decision of the U.S. Department of Transportation to permit United Airlines to acquire the transpacific operations
of Pan American means that Northwest will defacing even stiffer competition in the Pacific, where we are the leading
U.S. carrier. To help meet this challenge, we became the launching customer for the new-technology Boeing 747-400
with our order for ten aircraft. The 747-400, developed to Northwest's specifications for our Pacific routes, will set the
standards for efficiency and passenger comfort in Pacific markets throughout the 1990s.
On the domestic side, the efficiency and flexibility of our 757s permitted us to make major strides toward
strengthening our domestic system in 1985. During the year, we improved domestic service with significant increases
in frequencies and nonstop scheduling in key markets. We also used our 757s to provide higher volumes of feeder
traffic into our eight international gateways. Nine previously ordered 757s will be added to our fleet in 1986.
Our $2 billion aircraft orders will be financed through a combination of internally generated funds and the placement
of debt. Relying on some carefully managed debt is necessary to finance expensive new aircraft and other long-term
growth strategies. Traditionally, Northwest has purchased rather than leased its aircraft. However, recent changes in
tax laws have made it advantageous to lease aircraft under certain conditions, and we are now leasing five of our
757s with options to purchase them at low fixed prices at the expiration of their leases. This type of leasing arrange
ment was not previously available and use of it at this time is a proper and desirable form of financial management.
In other significant developments, we signed "Northwest Orient Airlink" agreements with America West Airlines in
4
Phoenix, Big Sky Airlines in Billings, Montana, and Fischer Bros. Aviation in Detroit. Like Mesaba Airlines, which entered
an Airlink agreement in late 1984, these three carriers are now coordinating their flight schedules with us and pro
viding Northwest higher volumes of feed traffic in our markets.
Another important move in 1985 was our acquisition of Mainline Travel, Inc. (MLT), which became a wholly-owned
subsidiary of NWA Inc. MLT is a tour wholesaler, marketing travel packages through more than 7,100 independent
retail travel agencies. With annual revenues in the area of $100 million, MLT gives us a sizeable presence in tour whole
saling and marks the first truly vertical integration for NWA Inc.
We continued to strengthen the management of Northwest Airlines in 1985 as John F. Horn was elected Executive
Vice President-Corporate Planning and International. Also elected as a corporate officer in 1985 was Roger D. Hauge,
Vice President-Atlantic Region.
Looking ahead, Northwest has positioned itself to continue growing and expanding. We believe that 1986 should be
a good year for Northwest, but the greatest uncertainty that we face.. .along with every other carrier.. .is severe price
competition. Given the ongoing potential for this competition in the current environment, we are continuing to
stress strategies and programs that will improve our operating efficiencies and sharpen our competitive edge. Further,
we expect approval of our purchase of Republic, a step which will double our domestic traffic.
As in the past, our nearly 17,000 employees desen/e a special word of thanks for their outstanding efforts in 1985. We
also appreciate the continuing support of our shareholders and hope to again reward your confidence in Northwest
in 1986.
Sincerely,
Steven G. Rothmeier
President and Chief Executive Officer
5
ORIENT.
MORTHWEST
Northwest signed $2
billion in orders in 1985
for 23 additional air
craft, including 10
new-technology Boe
ing 747-400 jetliners.
Developed specifically
for Northwest's Pacific
routes, the 450-passen
ger 747-400 will set the
standards for efficiency
and passenger comfort
in Far Eastern markets.
Keeping Northwest Competitive with a Modern, Growing Fleet To keep Northwest competitive in
both the domestic and international marketplaces, $2 billion in orders were signed in 1985 for 23 new aircraft. The
largest in Northwest's history, these orders include: ten new-technology Boeing 747-400s for transpacific service.
ten additional Boeing 757-200s for domestic service. three more 747-200s to be used on international routes.
To be delivered in 1986, the additional 747-200s will bring the number of Northwest 747s to 38, the largest fleet of
full-sized 747s in the U.S airline industry. The 747-400s will enter service beginning in 1988, with the deliveries com
pleted in 1990. Delivery of the newly ordered 757s will begin in 1987 and be completed by 1989, at which time
Northwest will be operating 30 of these advanced aircraft.
The new aircraft will complement one another, allowing expanded and efficient operations in domestic, Pacific and
Atlantic markets. In this way, Northwest is positioning itself to continue balanced geographic growth in the future.
The hallmark of this $2 billion transaction is the 747-400. Northwest is the launch customer for this new-generation
jetliner, which was developed to Northwest's own requirements for use specifically on transpacific routes.The 747-400
will also be among the first aircraft powered by Pratt & Whitney's new 4000 engines.
The 747-400 is ideally suited to Northwest's Pacific needs for several reasons: It will have a longer range than existing
models and will, without payload restrictions, easily operate over the airline's longest existing nonstop routes such as
New York to Tokyo or Chicago to Seoul. It also will permit expansion into new markets such as New York to Shanghai
or Seoul. The 747-400 will use 22 percent less fuel per seat mile than the 747s now in use. It will fly 450 passengers--
up from the current 400--and will have a cargo capacity of 60 tons. The sophistication of the systems developed for
the 747-400 permit it to be operated by two-pilot crews, as is the 757.
In all, the 747-400 offers an ideal combination of capabilities needed to serve Northwest's growing transpacific
network. Its design efficiencies, together with Northwest's historically low operating costs, will result in an operation
that will unequivocally set the economic standard for transpacific travel through the end of this century.
Fleet Schedule
Fleet as of March 1,1986: Owned Leased Total On order
Boeing 727-100 9 - 9 -
Boeing 727-200 56 - 56 -
Boeing 747 29 - 29 3
Boeing 747-400 0 - 0 10
Boeing 747F 6 - 6 --
Boeing 757 8 5 13 17
McDonnell Douglas DC-10 19 - 19 -
Total 127 5 132 30
7
!5>RTHWSTrgjjT
Establishing Northwest
Orient Airlink market
ing agreements with
regional carriers is an
important aspect of
Northwest's overall
domestic route system
strategy. In addition to
Mesaba Airlines, North
west has signed Airlink
agreements with Amer
ica West Airlines, Big
Sky Airlines and Fischer
Bros. Aviation.
VI f BTMMT
PT, NORTjHWEST ORIENT ESSuHS)
Jw U
Implementing New Domestic Strategies Throughout 1985, Northwest placed its greatest emphasis on
developing and enhancing the domestic route system. This undertaking was successful, as evidenced by 14 percent
increases in both domestic revenue passenger-miles and capacity
The Boeing 757 is becoming a major force in Northwest's domestic fleet. The 757 has the proper combination of
range, efficiency and comfort that is needed to implement domestic expansion.The eleven 757s that Northwest was
operating at year-end 1985 have met or exceeded all expectations, and Northwest will have a total of 20 757s in
service by the end of 1986.
aking full advantage of the 757s in 1985, Northwest was able to successfully execute several key strategies, including:
Dramatically increasing the level of domestic nonstop service. By year-end, the 757s were providing over 12 percent
of Northwest's domestic capacity. Re-entry into the New York-Seattle nonstop market. Providing greater volumes
of feeder traffic to Northwest's international gateways. Developing Northwest's Detroit hub, including the intro
duction of nonstop service to Los Angeles and Seattle/Tacoma. Increasing service and frequencies to sun belt des
tinations in Florida and the Southwest. Inaugurating Northwest's first southern tier nonstop transcontinental
service, between Los Angeles and Tampa/St. Petersburg.
Northwest Orient Airlink marketing agreements with regional and national carriers are also important elements of
Northwest's domestic strategy. Following the first Airlink agreement with Mesaba Airlines of Minneapolis/St. Paul in
late 1984, Northwest established three new relationships in 1985: America West Airlines, the largest carrier serving
Phoenix, with a route system of 23 cities in the Southwest and West and an all-jet fleet. Big Sky Airlines, which
serves 13 cities in Montana, Wyoming and North Dakota. Fischer Bros. Aviation, a regional airline headquartered in
Ohio that carries passengers between Detroit and seven other cities in Ohio and Michigan.
Through these Northwest Orient Airlink agreements, the route systems of the smaller carriers are tied directly into
Northwest's global structure. The result is better passenger service and higher volumes of feeder traffic into hubs
served by Northwest.
As part of every agreement, the flight designation of each Airlink partner carries Northwest's code in the computer
reservations systems used by travel agents. In addition, Airlink agreements provide for coordinated scheduling, joint
fares, participation in Northwest's Free Flight Plan, joint advertising and baggage handling arrangements.
9
Northwest has served
the Far East since 1947
carrier in
transpacific markets.
Through its major hub
at Narita Airport in
Tokyo, Northwest pro
vides scheduled air
service to 10 cities in 8
Far Eastern countries.
^ Expanding in Pacific and Atlantic Markets Northwest further solidified its position as the leading U.S.
carrier in the Pacific in 1985 by providing daily nonstop service to Tokyo from six U.S. gateway cities--New York,
Chicago, Seattle, San Francisco, Los Angeles and Honolulu. The airline operated 61 weekly roundtrip nonstop flights
between the U.S. and the Orient during summer 1985. This included introduction of air service to and from Kuala
Lumpur, the capital city of Malaysia. Northwest's competitive position in the Pacific, as measured by the most re
cently available statistics, remains strong at 26.5 percent of the U.S./Japan market and nearly 19 percent of the
total transpacific traffic.
Even with the full-scale entry of United Airlines into the Pacific in 1986, Northwest remains the largest U.S. carrier in
this growing market. Having served the Orient since 1947 and gained the confidence of customers and shippers in
the U.S. and throughout the Orient, Northwest intends to build upon its position of leadership by: Capitalizing on
an extensive intra-Asian system, currently composed of a strong Tokyo hub with spokes to nine cities throughout the
Far East, and an expanded connecting complex at Seoul. Developing steadily higher volumes of domestic feeder
traffic to the six cities that serve as Northwest's U.S. gateways to the Orient. This is now being accomplished through
Northwest's growing fleet of 757s and will be greatly expanded with the pending addition of Republic's domestic
system. Further increasing transpacific capacity and scheduling in 1986 with three new 747-200s. Utilizing the new-
technology, 450-passenger 747-400 aircraft beginning in 1988.
The year 1985 was also a successful period for Northwest's Atlantic operations. By late 1985, Northwest ranked sixth
out of the 50 transatlantic airlines in passengers carried across the Atlantic, up from seventh in 1984. In summer 1985,
the airline operated 35 transatlantic flights per week from the U.S. gateways of New York, Boston and Minneapolis/
St. Paul to eight European cities.
11
MAINLINE TRAVEL
MLT VACATIONS
CORPORATE HEADQUARTERS
Mainline Travel, Inc.
became a wholly-
owned subsidiary of
NWA Inc. in 1985. A
major wholesaler of
tour and vacation travel
packages, MLT gives
NWA Inc. a significant
presence in this grow
ing industry. This
acquisition also marks
the first step toward
vertical integration
for NWA Inc.
^ Vertical Integration into Tour Wholesaling NWA Inc. diversified into the tour wholesale market in 1985
with the acquisition of Mainline Travel, Inc. (MIT). MLT thus became the first acquisition of NWA Inc., which was
formed in 1984 as the parent company of Northwest Airlines. The holding company structure was adopted to
facilitate the corporation's entry into new business ventures, and the acquisition of MLT represents the first step
toward vertical integration in a related industry.
MLT is one of the nation's largest and fastest growing wholesalers of low-cost vacation travel packages and has
annual revenues of approximately S100 million. It makes bulk purchases of hotel rooms and land accommodations,
combines these with charter air services or low-cost seats on scheduled carriers, and sells these travel packages
through retail travel agencies and directly to the public. Northwest has been a supplier to MLT in the past, providing
seats on flights in selected markets.This acquisition is a good fit from the standpoint of seasonal revenue generation.
The first quarter of each year is normally MLT's strongest period but is typically soft for Northwest. Consequently, the
airline can readily make passenger seats available for MLT during this period. It is expected that MLT's successful tour
wholesaling business will have a further positive effect on the overall results of NWA Inc. through improved traffic
on Northwest.
13
Technical excellence in
maintenance pro
grams, weather fore
casting and noise
abatement are just a
few of the reasons why
Northwest is a pace
setter in the airline
^ Leadership and Excellence in Technical Management Excellence in technical aspects of airline operations
has always been a tradition of Northwest Airlines. The use of conservative maintenance schedules, adherence to
strict quality-control policies and development of programs that have led the air carrier industry have become
trademarks of Northwest. Air Transport World, a leading industry publication, selected Northwest for its Financial
Management Award for 1984 and has followed this with its 1985 Technical Management Award. In making that
award the publication stated, "Selection of Northwest Airlines as the recipient of AirTransport World's Technical
Management Award is a recognition of one of the most effective, efficient and productive operations in the busi
ness." In addition to the award, the airline continues to be nationally recognized by industry groups and government
agencies as the industry pacesetter in the following key areas: The airline does all of its airframe maintenance,
engine overhaul and virtually all accessory and component work at its own facilities with its own staff. Northwest
accomplishes major aircraft maintenance on a rigid program related to hours of flight time. Performing these tasks
in-house ensures a high level of quality assurance and provides for better control of maintenance costs. Northwest
has maintained its own meteorology department at a time when many airlines are reducing or eliminating weather
departments. Northwest's meteorology department developed turbulence plot and weather forecasting programs
that are reliable in identifying potentially dangerous weather situations and getting this information in a matter of
minutes to pilots while in flight. Northwest pioneered procedures for quieting jet noise over the communities it
serves. Its noise abatement procedures have been adopted throughout the airline industry, and Northwest's pilots
are frequently recognized for their strict adherence to this good neighbor policy.
Northwest has learned that, in addition to obvious safety advantages, superior technical management improves
bottom-line results. Its conservative maintenance schedules and strict adherence to noise abatement procedures are
reasons why its aircraft burn less fuel than similar types flown by other airlines. Northwest's operating expenses also
rank consistently among the lowest in the industry. These benefits transfer directly to the customer in terms of
reliable on-time performance, which is one of the best ways to ensure repeat customers.
8n 1985 Northwest completed a 54,000-square-foot addition to its Main Base facility, which houses equipment and
personnel necessary to overhaul Pratt & Whitney 2037 jet engines that power the new 757 aircraft. Further, the
Northwest engine test cell has been modified to accommodate checks and calibrations required for each 2037 after
overhaul and before installation on an aircraft.
15
^ The "New" Northwest Domestic Route System
16
^ The Decision to Acquire Republic Airlines The planned $884 million acquisition of Republic Airlines by
NWA Inc. represents a logical and positive development from practically any business standpoint. Through this pro
posed combination of two medium-sized carriers with complementary route systems and fleets, Northwest will
gain the economic mass neccessary to compete more effectively and efficiently in this intensely competitive indus
try. When this transaction is approved by Republic's shareholders and the federal government--as it is expected to
be--the new Northwest will be the nation's third largest carrier in terms of revenue passenger-miles. Northwest will
operate more than 300 aircraft, employ over 30,000 people and serve more than 130 cities worldwide.
The rapid expansion of carriers such as American and United since the beginning of airline deregulation has
resulted in these airlines becoming "mega-carriers." To compete effectively against these carriers over the long
term, Northwest needs a domestic system of a certain threshold size. Northwest was building toward this critical
mass by expanding internally, but it became apparent ihat a more rapid expansion was needed to achieve a
stronger market presence.
Northwest has historically had one major domestic hub, located at Minneapolis/St. Paul. Republic, in addition to
serving theTwin Cities, also has developed significant hub and spoke systems at Detroit and Memphis. By combining
the operations of the two airlines, Northwest will become the largest carrier at these three major airports and will
greatly increase domestic on-line traffic.
The strong domestic system resulting from a Republic/Northwest combination will allow Northwest to greatly
expand the feeder traffic to the airline's eight international gateways. This will enable Northwest to offer more
single-carrier service to the Orient and Europe. In short, acquiring Republic will permit Northwest to attain a key
objective in today's highly competitive environment: to keep passengers flying on a single airline --in this case
Northwest--for all or most of their trips.
Northwest's and Republic's fleets are excellent matches in terms of operational capabilities. Republic's smaller air
craft, which average 102 seats, are ideal for building and serving domestic hub and spoke systems. Northwest's larger
aircraft, averaging 228 seats, are well suited for longer hauls, including transcontinental and international service.
The combined fleet will facilitate further development of a strong domestic system linking most areas of the United
States with both the Orient and Europe.
17
^ Management's Discussion and Anaylsis
As part of an approved plan of reorganization, Northwest Air
lines, Inc. (Northwest) became a wholly-owned subsidiary of
NWA Inc. (NWA) in the latter part of 1984.The creation of NWA
as a holding company did not result in any changes in the
operation of Northwest and the shareholders of Northwest
automatically became shareholders of NWA.
In October, 1985 NWA purchased 100% of the capital
stock of Mainline Travel, Inc. (MIT). MIT is a major wholesaler
of low-cost vacation travel packages.
Northwest and MLT are the only operating subsidiaries
of NWA and together are responsible for all of its operating
revenues and substantially all of its operating expenses.
Earnings and Dividends NWA's 1985 consolidated net earn
ings totaled $73,119,000 ($3.18 per share) and
compare with net earnings of $55,964,000
($2.44 per share) in 1984 and $50,073,000
($2.19 per share) in 1983. The 1984 earnings
were after an extraordinary charge of
$30,903,000 resulting from the settlement
of a 15-year-old lawsuit.
Operating revenues increased 8.6% to
$2,655,491,000 during 1985 while operating
expenses grew 9.8% to $2,578,404,000 result
ing in operating income of $77,087,000 com
pared to $96,276,000 in 1984.1983 operating
income was $68,886,000.
Sources of 1985
Operating Revenues
(Millions of Dollars)
Passenger-
Coach
$2000.7
75.3%
Freight $328.4
12.4%
Passenger-
First Class
$153.7
5.8%
Mail $80.1
3.0%
Charter and
Other
$92.6
3.5%
Distribution of 1985
Operating Expenses
(Millions of Dollars)
Fuel and Oil
Employee
Wages
and Benefits
Landing Fees,
Rentals, Materials
and Services
Commissions
Depreciation
and
Amortization
I
$717.9
27.9%
$715.2
27.7%
Interest expense totaled $19,873,000 in 1985 compared
with $4,268,000 and $3,548,000 in 1984 and 1983, respec
tively. The additional interest expense in the current year is a
result of the higher level of debt outstanding for much of the
year and the capital lease obligations entered into during the
fourth quarter.
Investment income totaled $4,741,000 in 1985, $7,214,000
in 1984 and $7,960,000 in 1983. Gain from the disposal of
property amounted to $2,780,000 in 1985 and compares with
$19,864,000 in 1984 and $805,000 in 1983. The 1984 gain re
flected the sale of three McDonnell Douglas DC-10-40 aircraft.
Earnings before income taxes for 1985 were $64,743,000
compared to $117,388,000 in 1984 and $73,603,000 in 1983.
In 1985 NWA paid dividends to shareholders totaling
$19,586,000 (90< per share) continuing an unbroken string of
cash dividends extending back 123 consecutive quarters.
NWA common stock is principally traded on the New
York Stock Exchange. A table showing sales prices and divi
dends paid per share in 1985 and 1984 is included on page 33.
Operating Revenues Operating revenues increased 8.6% in
1985 to $2,655,491,000 compared with $2,444,974,000 in 1984
and $2,196,036,000 in 1983. Passenger revenues for 1985 rose
8.5% to $2,154,394,000, the result of a 13.0% increase in reve
nue passenger-miles and a 4.0% decrease in yield (revenue per
passenger-mile). 1984 passenger revenues of $1,984,999,000
were 9.5% greater than 1983 due to an 11.6% increase in traffic
and a 1.9% decline in yield.
The current year 13.0% increase in revenue passenger-
miles compares with an aggressive 13.7% increase in capacity
(available seat-miles), resulting in a slight drop in passenger
load factor to 60.1% from 60.5% in 1984. Load factor in 1983
18
Operating Costs per
Available Ton-Mile
1981
1982
1983
1984
1985
5.36 .37 .38 .39 .40 .41 .42
Operating Revenues
and Expenses
Revenues Expenses
(Billions of Dollars)
was 60.0%. The actual passenger load factors compare to
break-even passenger load factors of 58.0% in 1985, 57.6% in
1984 and 57.7% in 1983.
Freight revenues declined 7.6% to $328,400,000 in 1985
due to an 8.2% decrease in freight ton-miles and a .7% in
crease in yield per ton-mile. 1984 freight revenues totaled
$355,336,000 and were 22.9% greater than 1983. Mail reve
nues increased 37.3% to $80,126,000 in 1985 and compare
with $58,339,000 in 1984 and $55,585,000 in 1983.
Charter and other transportation revenues increased
45.1% to $55,959,000 in 1985, primarily due to a higher level
of military charter activity. Charter and other transportation
revenues totaled $38,559,000 in 1984 and $36,198,000 in 1983.
Other revenues totaled $36,612,000 in 1985,
$7,741,00 0 in 1984 and $2,856,000 in 1983.
Revenues of MIT subsequent to its purchase
by NWA are included in other revenues.
Operating Expenses Operating expenses
for 1985 totaled $2,578,404,000, a 9.8% in
crease over the prior year. 1984 operating
expenses were $2,348,698,000, up 10.4% over
1983 expenses of $2,127,150,000. For the
fourth year in a row, capacity of the airline
increased at a greater rate than airline oper
ating expenses. As a result, operating expen
ses per available ton-mile decreased to 39.84
in 1985 from 40.24 in 1984 and 40.54 in 1983.
Aircraft fuel expense increased a
modest 3.7% in 1985 to $717,870,000 despite
an 11.6% increase in plane-miles flown.This is
a reflection of the continuing decline in jet
fuel prices, which averaged 83.074 in 1985,
87.764 in 1984 and 92.584 in 1983. Additional
i98i fuel price declines are expected during 1986.
1982
1983
1984
1985
1.6 1.8 2.0 2.2 2.4 2.6 2.8
Salaries and related costs increased 11.8% to $715,172,000
over 1984, the result of a higher level of employment, wage
increases during the year and increased payroll taxes. Agency
commission expenses increased 7.2% to $327,708,000 in 1985,
reflecting the higher level of passenger revenues earned.
Rentals and landing fees increased 8.3% to $106,220,000 and
aircraft maintenance materials and repairs remained virtually
flat at $111,742,000.
Depreciation and amortization expense increased 9.2%
in 1985 to $182,563,000 compared with $167,203,000 in 1984
and $146,908,000 in 1983. The 1985 increase is primarily the
result of the addition of eleven new 757-200 passenger air
craft while the 1984 increase reflects the addition of five
additional 747s.
Other operating expenses increased $83,026,000 over
1984, primarily the result of higher marketing and passenger
service expenses plus the inclusion of MLT expenses for part
of the year.
Pension costs for 1985 were determined in accordance
with Accounting Principles Board Opinion No. 8. The Com
pany has not yet determined the impact on pension costs of
the recently issued FASB Statement No. 87, which must be
adopted by 1987. The impact and effect of inflation and
changing prices are discussed in footnote K to the financial
statements.
19
Management's Discussion and Analysis-Continued
Taxes On Earnings Income taxes were a credit of $8,376,000
in 1985 compared to an expense of $2,427,000 in 1984 (after
the $28,094,000 income tax credit resulting from the extraor
dinary item) and $23,530,000 in 1983. Earned investment tax
credits totaled $37,749,000 in 1985, $23,576,000 in 1984 and
$9,745,000 in 1983. Investment tax credits are applied on tax
returns as allowed by income tax regulations. Credits not cur
rently applied are offset against deferred taxes for accounting
purposes, and as of December 31,1985, these credits totaled
$75,395,000.
Financial Condition Stockholders' equity at December 31,
1985, totaled $947,001,000 or $43.49 per share, up $54,078,000
or $2.44 per share from the balance at December 31,1984.
Long-term debt, excluding current maturi
ties, totaled $332,992,000 at December 31,
1985, and long-term obligations under capital
leases were $161,101,000. Thus, capitalization
consisted of 34% long-term debt (including
lease obligations) and 66% equity.
During the fourth quarter 1985, North
west leased five 757-200 passenger aircraft
under the commonly called "finance lease"
provisions of the tax code. Northwest was
the first airline to use this new type of lease,
which provides for the ability to have a low
fixed price purchase option at the end of the
lease term, for commercial jetliners.
For accounting purposes these leases are treated as capital
leases while for tax purposes they are treated as operating
leases. All other aircraft are owned outright by Northwest
and none have been pledged as security for debt or otherwise
encumbered.
In addition to providing the majority of NWA's $73
million profit during 1985, and thus continuing an unbroken
string of profitability going back to 1950, Northwest also
lowered its unit costs, achieved above average growth in reve
nue passenger-miles and, for the seventh consecutive year,
increased its market share.
Cash Flow, Liquidity and Capital Resources Cash provided
from operations during 1985 totaled $221,432,000 compared
with $215,413,000 in 1984 and $209,865,000 in 1983. Total cash
from all sources including borrowings was $850,343,000 in
1985, $281,100,000 in 1984 and $383,818,000 in 1983. During
1985 the Company issued $236,988,000 of new debt, inclu
ding $175,000,000 of 71/2% convertible subordinated deben
tures due in 2010, increased the amount of outstanding com
mercial paper by $134,357,000 and entered into $167,290,000
of capital lease obligations. No borrowings have been made
under the available bank revolving credit agreement. Total
cash used during 1985 was $854,065,000 compared with
$333,222,000 in 1984 and $314,632,000 in 1983.
The major uses of cash during the year were equip
ment purchases of $432,698,000 and aircraft deposits of
$260,418,000. Eleven new Boeing 757-200 passenger aircraft
were placed into service during 1985 with nineteen more
scheduled for delivery in 1986 through 1989. Other aircraft
purchase commitments consist of three Boeing 747-2 00 pas
senger aircraft to be delivered in 1986 and ten new-generation
Boeing 747-400 passenger aircraft which will be delivered in
1988, 1989 and 1990. Outstanding aircraft purchase commit
ments were approximately $1,923,163,000 at December 31,
1985, including approximately $524,868,000 for expenditures
in 1986. In addition, deposits totaling $239,292,000 have been
made with manufacturers in connection with the above air-
Scheduled Freight
Ton-Miles
(Millions)
1981
mmm 1982
mmmKm 1983
1984
1985
500 600 700 800 900 1000 1100
Scheduled Available
Seat-Mi les
(Billions)
1981
Mm 1982
IM 1983
1984
1985
21 24 27 30 33 36 39
20
Selected Financial Data (In Thousands Except Per Share Amounts)
Year Ended December 31 1985 1984 1983 1982* 1981
Operating Revenues $2,655,491 $2,444,974 $2,196,036 $1,877,568 $1,854,290
Net Earnings 73,119 55,964** 50,073 5,019 10,460
Total Assets 2,320,006 1,754,233 1,602,236 1,377,387 1,492,381
Long-Term Debt 332,992 100,000 100,000 - 12,500
Obligations Under Capital Leases 161,101 - - - -
Per Common Share:
Earnings 3.18 2.44** 2.19 .23 .48
Cash Dividends .90 .825 .80 .80 .80
`Operating results were affected by a major strike which extended from May 22,1982 to June 17,1982.
"After extraordinary charge of $30,903 or $1.30 per share resulting from the settlement of a lawsuit.
Fuel Efficiency Increases
(Available ton-miles per gallon)
1981
1982
1983
1984
1985
6.6 6.8 7.0 7.2 74 76 7.8
craft orders.The Company expects to finance
its aircraft purchase commitments with a
combination of leases, new debt and inter
nally generated funds.
On January 23, 1986, NWA entered
into an agreement to purchase Republic Air
lines, Inc. for approximately $884,000,000.
Republic is a major U.S. air carrier serving ap
proximately 100 cities in 34 states, Canada,
Mexico and the Cayman Islands. The pro
posed transaction is subject to government
and Republic shareholder approval. The Com
pany expects to incur additional debt to facil
itate its acquisition of Republic.
At December 31,1985, NWA and its subsidiaries had
cash and short-term investments of $45,842,000 compared to
$49,564,000 in 1984 and $101,686,000 in 1983. In addition, it
has a revolving credit agreement with a group of major banks
which provides for unsecured borrowings up to $500,000,000
through June 30,1988. The Company believes that internally
generated funds plus borrowings will provide sufficient capi
tal to meet all present commitments.
Stockholders' Equity
vs. Long-Term Debt
(Hundred Millions of Dollars)
Debt Equity
1981
1982
1983
1984
1985
0 2 4 6 8 10 12
21
Consolidated Statements of Financial Position NWA Inc.
(Dollars in Thousands)
December 31
ASSETS
Current Assets
Cash and short-term investments
Accounts receivable, less allowance of $2,300 (1984-$2,150)
Flight equipment spare parts, less allowance for depreciation of $40,230
(1984 --$35,490)
Maintenance and operating supplies
Prepaid expenses
Prepaid income taxes
TOTAL CURRENT ASSETS
Other Assets
Property and Equipment
Flight equipment
Less accumulated depreciation
Advance payments on new flight equipment
Other property and equipment
Less accumulated depreciation
Property and Equipment Under Capital Leases-Note F
Flight equipment
Less accumulated depreciation
1985 1984
$ 45,842
248,794
52,955
22,985
22,311
392,887
43,437
2,617,263
1,356,033
1,261,230
239,292
365,769
148,493
217,276
167,290
1,406
165,884
1,883,682
$2,320,006
$ 49,564
196,836
52,464
19,682
25,190
23,914
367,650
18,491
2,356,048
1,204,118
1,151,930
57,795
287,391
129,024
158,367
1,368,092
$1,754,233
22
December 31 1985 1984
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Commercial paper $ 152,191 $ 17,834
Accounts payable and other liabilities 262,805 230,944
Employee compensation 59,936 114,789
Air traffic liability 131,912 103,900
Income tax 110 -
Current maturities of long-term debt 3,996 -
Current obligations under capital leases 6,189 --
TOTAL CURRENT LIABILITIES 617,139 467,467
Long-Term Debt-Note C 332,992 100,000
Long-Term Obligations Under Capital Leases-Note F
Deferred Credits and Other Liabilities
161,101 --
Income taxes-Note E 246,213 280,463
Other 15,560 13,380
261,773 293,843
Stockholders' Equity-Note D
Common Stock $2.00 par value, authorized 60,000,000 shares; issued and
outstanding, 1985-21,774,251 shares; 1984-21,749,667 shares 43,549 43,499
Capital surplus 111,318 110,823
Retained earnings 792,134 738,601
947,001 892,923
Commitments and Contingencies-Notes F and G
$2,320,006 $ 1,754,233
See notes to consolidated financial statements.
23
Consolidated Statements of Earnings NWA Inc.
(Dollars in Thousands, except per share amounts)
Year Ended December 31
Operating Revenues
Passenger
Freight
Mail
Charter and other transportation
Other
Operating Expenses
Fuel, oil and taxes
Salaries and related
Commissions
Rentals and landing fees
Aircraft maintenance materials and repairs
Other operating
Depreciation and amortization
OPERATING INCOME (LOSS)
Other income (Expenses)
Investment income
Interest, net of capitalized interest
(1985--$7,799; 1984-55,446; 1983-$4,872)
Gain on sale of equipment
Other
Earnings Before Income Taxes
and Extraordinary Item
Income tax expense (credit)-Note D
EARNINGS BEFORE EXTRAORDINARY ITEM
Extraordinary loss from settlement of litigation
(less applicable income tax credit of $28,094)-Note F
NET EARNINGS
Earnings Per Share-Primary and Fully Diluted
Earnings before extraordinary item
Extraordinary loss
NET EARNINGS PER SHARE
See notes to consolidated financial statements.
1985 1984 1983
$2,154,394 $1,984,999 $1,812,227
328,400 355,336 289,170
80,126 58,339 55,585
55,959 38,559 36,198
36,612 7,741 2,856
2,655,491 2,444,974 2,196,036
717,870 692,160 672,169
715,172 639,606 569,535
327,708 305,679 251,943
106,220 98,044 89,651
111,742 111,903 100,483
417,129 334,103 296,461
182,563 167,203 146,908
2,578,404 2,348,698 2,127,150
77,087 96,276 68,886
4,741 7,214 7,960
(19,873) (4,268) (3,548)
2,780 19,864 805
8 (1,698) (500)
(12,344) 21,112 4,717
64,743 117,388 73,603
(8,376) 30,521 23,530
73,119 86,867 50,073
_ (30,903) _
$ 73,119 $ 55,964 $ 50,073
$ 3.18 $ 3.74 $ 2.19
- (1.30) --
$ 3.18 $ 2.44 $ 2.19
24
Consolidated Statements of Changes in Financial Position NWA Inc.
(Dollars in Thousands)
Year Ended December 31 1985 1984
Cash Provided
Earnings before extraordinary item $ 73,119 $ 86,867
Add (deduct) non-cash items:
Depreciation and amortization 182,563 167,203
Increase (decrease) in deferred income taxes (34,250) 20,340
TOTAL FROM OPERATIONS BEFORE EXTRAORDINARY ITEM 221,432 274,410
Extraordinary loss before tax benefit of $28,094 - (58,997)
TOTAL FROM OPERATIONS 221,432 215,413
Issuance of debt 236,988 -
Increase in capital lease obligations 167,290 -
Increase (decrease) in commercial paper 134,357 17,834
Increase in accounts payable and other liabilities 31,861 16,282
Increase (decrease) in air traffic liability 28,012 (1,033)
Net book value of property dispositions 775 20,672
Other 29,628 11,932
TOTAL CASH PROVIDED 850,343 281,100
Cash Used
Additions to flight equipment, other property and deposits 693,116 345,844
Decrease (increase) in accrued employee compensation 54,853 (63,926)
Increase in accounts receivable 51,958 7,171
Dividends 19,586 17,933
Other 34,552 26,200
TOTAL CASH USED 854,065 333,222
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (3,722) (52,122)
Cash and short-term investments at the beginning of the year 49,564 101,686
Cash and short-term investments at the end of the year $ 45,842 $ 49,564
See notes to consolidated financial statements.
1983
$ 50,073
146,908
12,884
209,865
209,865
100,000
(4,958)
41,305
27,728
2,667
7,211
383,818
234,256
(10,847)
46,018
17,367
27,838
314,632
69,186
32,500
$101,686
25
@ Consolidated Statements of Stockholders' Equity NWA Inc.
(In Thousands Except Per Share Amounts)
Common Stock
Shares Amount
Capital
Surplus
Retained
Earnings
Balance January 1,1983 21,678 $27,098 $125,643 $667,864
Exercise of stock options 38 47 831 -
Net earnings for 1983 - - - 50,073
Cash dividends-$.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 $2.00 per share - 16,308 (16,308) -
Net earnings for 1984 - - - 55,964
Cash dividends --$.825 per share - - - (17,933)
Other (4) (9) (183) -
Balance December 31,1984 21,750 43,499 110,823 738,601
Exercise of stock options 30 60 753 -
Net earnings for 1985 - - - 73,119
Cash dividends--$.90 per share - - - (19,586)
Other (6) (10) (258) -
Balance December 31,1985 21,774 $43,549 $111,318 $792,134
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements NWA Inc.
December 31,1985
Note A-Accounting Policies A summary of significant ac
counting policies of the Company is set forth below:
Basis of Presentation: The consolidated financial statements
include the accounts of NWA Inc., Northwest Airlines, Inc., and
all other subsidiaries after elimination of intercompany ac
counts and transactions.
Short-Term Investments: Short-term investments are stated
at cost which approximates market and amounted to
516,528,000 and $30,173,000 at December 31,1985 and 1984,
respectively.
Flight Equipment and Property: Provision for depreciation is
computed by the straight line method over the estimated use
ful lives of the assets. Useful lives are estimated at fifteen years
with 10% residual values for 747, DC-10, and 757 aircraft and
ten years with 15% residual value for 727 aircraft. Useful lives
of buildings van/ from 5-30 years and other equipment from
4-10 years. Depreciation of flight equipment spare parts, reta
bles and assemblies is provided by the straight line method at
rates which depreciate cost, less residual value, over the esti
mated useful lives of the related aircraft.
Pension Plans:The Company has several noncontributory
pension plans covering substantially all of its employees.The
pension costs accrued include amortization of prior service
costs over periods of ten to thirty years. It is the Company's
policy to annually fund at least the minimum pension contri
bution as required by the Employees Retirement Income
Security Act.
Income Taxes: Income taxes are provided at statutory rates
applied to earnings before income taxes regardless of when
such taxes are paid. Deferred income taxes arise principally
from timing differences between financial and tax methods
of accounting for depreciation and capitalized interest.
The Company uses the flow-through method of ac
counting for investment tax credits. Investment tax credits
not applied on tax returns are offset against deferred income
taxes to the extent they are applicable to deferred taxes be
coming payable in the investment tax credit carryover periods.
Operating Revenues: Passenger and freight revenues are
recognized when the transportation is provided.
Earnings Per Share: Net earnings per share are calculated by
dividing net earnings, adjusted for interest expense (net of in
come taxes) on the convertible debentures, by the weighted
average number of shares of Common Stock and Common
Stock equivalents. Common Stock equivalents consist of con
vertible debentures and stock options.
Reclassifications: Certain amounts in the 1984 and 1983 finan
cial statements have been reclassified to conform with the
1985 presentation.
Note B-Business Acquisition Effective October 1,1985, the
Company acquired 100% of the capital stock of Mainline Travel,
Inc., a wholesaler of vacation travel packages. The transaction,
which is not material to the Company's financial results, was
accounted for as a purchase.
On January 23, 1986, the Company entered into an
agreement to purchase Republic Airlines, Inc. for 5884 million.
Republic is a major U.S. air carrier serving approximately 100
cities in 34 states, Canada, Mexico and the Cayman Islands.The
proposed transaction is subject to government and Republic
shareholder approval.
27
Notes to Consolidated Financial Statements NWA Inc.-Continued
Note C-Long-Term Debt and Credit Arrangements Long
term debt less current maturities consists of (in thousands):
1985 1984
9% senior notes due 1992 S 50,000 $
10'/8% notes due 1988
Convertible subordinated debentures:
7,992 --
7'/2% due 2007 100,000 100,000
7V2% due 2010 175,000
$332,992 $100,000
The Company has a revolving credit agreement with a
group of major banks which provides for unsecured borrow
ings up to $500 million through June 30,1988. This amount
decreases periodically thereafter to the termination date of
July 1,1994. Interest on borrowings is, at the Company's elec
tion, the lower of various formula rates or the prime rate as
defined until June 30,1991, and the formula rate or prime rate
plus 1/4% thereafter. Commitment fees ranged from 1/16% to
1/8% per annum on the unused credit and amounted to
$469,000 in 1985. During 1985 there were no borrowings
under the revolving credit agreement.
In February 1983 the Company issued $100 million of
7V2% convertible subordinated debentures due in 2007. The
debentures are convertible into Common Stock at a rate of
$50.75 per share. The debentures are redeemable at prices
ranging from 106% in 1986 to 100% in 2002 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.
In June 1985 the Company issued $175 million of 71/2%
convertible debentures due in 2010. The debentures are
convertible into Common Stock at a rate of $57.00 per share.
Subject to certain restrictions, the Company may redeem the
debentures at prices ranging from 107% in 1986 to 100% in
2005 of the principal amount. Annual sinking fund payments
are required beginning in 1995 of $7.5 million, less the amount
of debentures converted or redeemed.
The Company was in compliance with the covenants of
all debt agreements at the end of the year. At December 31,
1985, approximately $214,000,000 of retained earnings was
available for the payment of dividends under the terms of the
agreements.
Note D--Stockholders' Equity
Shares
1985 1984
Cumulative Preferred Stock:
Authorized 5,000,000 5,000,000
Issued None None
The Company has 5,040,618 shares of Common Stock reserved
for conversion of the 71/2% convertible subordinated deben
tures as of December 31,1985.
Common Stock options at prices which were not less
than 100% of market at date of grant are as follows:
Shares Price Per Share
Outstanding at January 1,1984 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
Granted 158,000 42.19
Exercised (29,710) 23.31/44.06
Lapsed (10,500) 44.06/42.19
Outstanding at December 31,1985 297,737 23.31/44.06/42.19
Options exercisable:
At December 31,1984 54,797 23.31
At December 31,1985 86,663 23.31/44.06
Shares available for stock option plans were 197,000 and
350,000 at December 31,1985 and 1984, respectively.
Note E-Taxes on Earnings (Dollars in thousands) Reconcili
ation of the Company's effective income tax rate is as follows:
Year ended December 31
Statutory rate applied
to earnings before tax and
1985 1984 1983
extraordinary item
Add (deduct):
$29,782 $53,998 $33,857
Investment tax credit earned
Rate change on timing
(37,749) (23,576) (9,745)
differences (1,444) (1,467) (1,284)
Other 1,035 1,566 702
Income tax expense (credit)
before extraordinary item (8,376) 30,521 23,530
Tax benefit on extraordinary loss - (28,094) -
Total income tax expense (credit) $(8,376) $ 2,427 $23,530
28
Note E-Taxes on Earnings (Dollars in thousands)-Continued
Federal, foreign and state income taxes (credit) consist of the following:
1985
Current Deferred
Federal $(6,039) $(6,061)
Foreign 1,855 -
State (868) 2,737
$(5,052) $(3,324)
The deferred income tax expense (credit) consists of the
following:
1985 1984 1983
Extraordinary loss 528,094 $(28,094) $
Accelerated depreciation 13,739 (3,566) (10,961)
Investment tax and
other credits (54,891) 15,958 24,123
Disposition of property (565) 8,749 -
Interest 3,588 2,505 2,241
Deferred employee
benefits (923) (834) (685)
Deferred 757 training costs 4,346 - -
Deferred revenue 2,220 - -
Rate change on timing
differences (1,444) (1,467) (1,284)
Other 2,512 (1,518) 805
$(3,324) $(8,267) $14,239
Investment tax credits of $75,395,000 not applied on tax re
turns but offset against deferred income taxes at December
31, 1985, will expire $1,107,000 in 1996; $3,198,000 in 1997;
$9,752,000 in 1998; $23,589,000 in 1999 and $37,749,000 in 2000.
Note F-Commitments At December 31,1985, the Company
has contracted to purchase nineteen 757-200 aircraft for de
livery in 1986 through 1989, three Boeing 747-200 aircraft for
delivery in 1986 and ten Boeing 747-400 aircraft for delivery
in 1988 through 1990. Deposits of $239,292,000 have been
made with the manufacturers, and additional expenditures
for these aircraft and related equipment will be approxi
mately: 1986 --$524,868,000; 1987-$271,840,000; 1988-
$413,756,000; 1989-$430,806,000; and 1990-$281,893,000.
The Company leases space in air terminals, land and
buildings at airports and ticket, sales and reservation offices
under noncancelable operating leases which expire in various
years through 2018. Portions of these facilities are subleased
under noncancelable operating leases expiring in various
years through 1995. The Company also leases certain aircraft
under capital leases which expire in 2003.
1984 1983
Current Deferred Current Deferred
$ 6,687 $(7,107) $6,396 $14,138
1,118 - 827 -
2,889 (1,160) 2,068 101
$10,694 $(8,267) $9,291 $14,239
Rental expense for all operating leases consisted of:
1985 1984 1983
Gross 544,330,000 539,884,000 535,633,000
Sublease rental
income (1,818,000) (1,079,000) (1,099,000)
542,512,000 538,805,000 $34,534,000
Future minimum rental commitments at December 31,
1985, for noncancelable operating leases with initial or remain
ing terms of one year or more, of which $470 million are for
air terminal and airport facilities and future minimum rental
commitments for capital leases are as follows:
Capital Leases Operating Leases
1986 $ 16,501,000 $ 31,107,000
1987 16,981,000 29,983,000
1988 16,981,000 27,453,000
1989 17,619,000 23,182,000
1990 15,894,000 21,706,000
Thereafter 214,886,000 345,189,000
298,862,000 478,620,000
Less sublease rental income 8,610,000
Less amounts representing
interest 131,572,000
Present value of obligations
under capital leases and mini
mum rental commitments $167,290,000 $470,010,000
29
Notes to Consolidated Financial Statements NWA Inc.-Continued
Note G--Litigation and Contingencies As previously re
ported, 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 was affirmed. On January 14, 1985,
the Supreme Court of the United States declined to review
the case.
The Company's liability was estimated at $58,997,000
including plaintiffs' attorneys' fees. This amount was reflected
as an extraordinary loss in the fourth quarter of 1984 in the
amount 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 pollu
tion), alleged employee discrimination, and other matters re
lating to the Company's business. While the Company is unable
to predict the ultimate outcome of these actions, it is the
opinion of management that their disposition will not have a
material adverse effect on the Company's financial position.
Note H-Pension Plans The Company's pension expense
was $23,242,000 in 1985, $26,409,000 in 1984 and $27,817,000
in 1983.
Certain actuarial assumptions for all plans and the
actuarial cost method for one plan were changed in 1985
which reduced pension expense for the year by approximately
$10,200,000.The change in actuarial method, which comprised
approximately $3,800,000 of the expense reduction, was
from the aggregate cost method to the projected unit credit
method. The new actuarial method is believed to be prefer
able because it more closely matches pension expense with
the pension benefits actually earned during the period and
because it more accurately reflects the current funded status
of the plan. The changes had no effect on pension benefits to
employees.
Accumulated plan benefit information, as estimated by
consulting actuaries, and plan
plans are:
net assets for the Company's
Year Ended December 31 1985 1984
Actuarial present value of
accumulated plan benefits:
Vested $455,014,000 $421,624,000
Non-vested 58,363,000 51,721,000
$513,377,000 $473,345,000
Net assets available for benefits $735,610,000 $591,881,000
The interest rate used in computing the present value
of accumulated plan benefits was 8% except for certain re
tired plan participants where a 13.75% rate was used. The
rate for retirees is based upon the actual earnings of a dedi
cated 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 cer
tain 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 I--Sales to Customers in Foreign Countries The opera
tions of NWA Inc. consist primarily of holding stock in North
west Airlines, Inc. Northwest Airlines, Inc. is a scheduled air
carrier engaged in commercial transportation of passengers,
freight and mail. Sales to customers in foreign countries were
$658,000,000 in 1985, $649,000,000 in 1984 and $612,000,000
in 1983, principally associated with countries in Asia and Europe.
30
Note J-Quarterly Results of Operations (Unaudited) The following is a tabulation of the unaudited quarterly results of opera
tions for the two years ended December 31,1985:
Operating
Revenues
(Dollars in Thousands)
Earnings
(Loss)
Before
Extraor-
Operating dinary
Expenses Item
Net
Earnings
(Loss)
Earnings
(Loss)
Per Share
of Common
Stock Before
Extraordi
nary Item
Net
Earnings
(Loss)
Per
Share of
Common
Stock
1985
First quarter $ 577,191 $ 590,793 $ 798 $ 798 $ .04 $ .04
Second quarter 692,530 638,229 35,318 35,318 1.52 1.52
Third quarter 754,535 692,561 39,012 39,012 1.55 1.55
Fourth quarter 631,235 656,821 (2,009) (2,009) (.09) (.09)
$2,655,491 $2,578,404 $73,119 $73,119 $3.18 $3.18
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
See also Note G for extraordinary loss recorded in fourth quarter 1984.
Note K--Supplemental Information on the Effects of Chang
ing Prices (Unaudited) AS REQUIRED BY FINANCIAL
ACCOUNTING STANDARDS BOARD (FASB) STATEMENT NO. 33,
"FINANCIAL REPORTING AND CHANGING PRICES," THE
COMPANY MUST PROVIDE SUPPLEMENTAL INFORMATION
CONCERNING THE EFFECT OF CHANGING PRICES ON ITS FI
NANCIAL STATEMENTS. While there is presently no consensus
on how the impact of inflation should be reported, FASB has
devised an experiment requiring certain large, publicly held
companies to present supplemental 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 COMPANY HAS SERIOUS
RESERVATIONS ABOUT THE USEFULNESS OF THIS DATA.
Statement of Earnings Adjusted for Changing Prices
Year Ended December 31,1985
(Dollars in Thousands)
As Reported
in the Primary
Statements
Adjusted for
Changes in
Specific Prices
(Current Costs)
Operating revenues 52,655,491 52,655,491
Depreciation and amortization 182,563 247,347
Other operating expenses 2,395,841 2,395,841
Gain on sale of equipment 2,780 -
Other income, net (15,124) (15,124)
Earnings (loss) before
income taxes 64,743 (2,821)
Income tax benefit 8,376 8,376
Net earnings S 73,119 5 5,555
Other Information
Adjusted for
Changes in
Specific Prices
(Dollars in Thousands) (Current Costs)
Purchasing power gain from holding net monetary
liabilities during the year $ 27,772
Increase in specific prices (current costs) of property
and equipment held during the year* 461,897
Less effect of increase in general price level 367,706
Excess of increase in specific prices over increases in
the general price level $ 94,191
*At December 31,1985, current cost of property and equipment net of accumulated
depreciation, was $3,055,264,000 (historical amount--$1,883,682,000).
31
Notes to Consolidated Financial Statements NWA Inc.-Continued
Note K--Supplemental Information on the Effects of Changing Prices (Unaudited)-Continued
Five Year Comparison of Selected Supplementary Financial Data Adjusted for Effects of Changing Prices
In average 1985 dollars.
Year Ended December 31
(Dollars in thousands, except per share and price index data) 1985 1984 1983 1982 1981
Operating revenues $2,655,491 $2,532,210 $2,371,189 $2,092,537 $2,193,290
Current Cost Information
Earnings (loss) before extraordinary loss 5,555 (4,306) (164,993) (185,707) (159,800)
Per share data .27 (.20) (7.03) (8.60) (7.36)
Excess of increase in specific prices of property
and equipment over increase in the general
price level 94,191 82,187 464,507 259,564 121,357
Net assets at year-end 2,134,641 1,742,939 2,881,100 2,580,869 2,577,433
Other Information
Purchasing power gain from holding net
monetary liabilities during the year 27,772
Cash dividends declared per common share .90
Market price per common share at year-end 46.00
Average consumer price index 322.2
Statement of Earnings The accompanying supplemental
statement of earnings presents income data under two meas
urement methods. These are:
a. As Reported in the Primary Statements-This amount is net
earnings as reported in the primary financial statements on
the historical cost basis of accounting. Under generally ac
cepted 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 consumption reflect the current cost of replacing these
resources, rather than the historical cost.
IncomeTaxes Current tax laws do not recognize deductions
for current cost depreciation expense; therefore, no adjust
ments have been made to the provisions for income tax.
18,501 14,894 15,200 45,982
.85 .86 .89 .95
42.20 48.32 52.38 31.94
311.1 298.4 289.1 272.4
Purchasing Power Gain from Holding Net Monetary Liabili
ties 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 repre
sent funds available for distribution to stockholders.
Increases in Current Cost of Properties Under current cost
accounting, increases in specific prices (current cost) of proper
ties 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 in
crease is reduced by the effect of general inflation measured
by applying the annual rate of change in the CPI to the aver
age current cost balances of properties.
32
Note K-Supplemental Information on the Effects of
Changing Prices (Unaudited)--Continued
Current Cost Measurements
The current cost of property and equipment has been esti
mated by management using pricing data for aircraft still in
production furnished to the airline industry by the Air Trans
port Association and current market values for nonproduc
tion aircraft. Flight equipment represents 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 judgments as well as use of various estimating techniques
that have been employed to limit the cost of accumulating
the data. The data reported should not be thought of as pre
cise measurements of the assets and expenses involved, but
instead represent approximations of the price changes that
have occurred in the business environment in which the
Company operates.
Current cost does not purport to represent the amount
at which the assets could be sold.
Stockholders' Information
Stock Prices and Dividends
Quarter
Sales Price of
Common Shares
Dividends
Per Share
1985 1984 1985 1984
1st High $461A $49 $.225 $.20
Low 40V4 3 4 Vi
2nd High 55% 41% .225 .20
Low 37 V4 34%
3rd High 59V2 42 .225 .20
Low 47% 33 V2
4th High 58V4 42 Vi .225 .225
Low 46 35%
Stock listed Common Stock listed on New York Exchange, Pacific
Stock Exchange and Midwest Stock Exchange. There were
6,384 stockholders of record as of February 28,1986.
Co-Registrars and Transfer Agents Norwest Bank Minneapolis,
N.A., Minneapolis, MN; Norwest Trust Company, New York, NY.
Notice of Annual Meeting The 1986 annual shareholders'
meeting will be held at Northwest Airlines General Offices,
Minneapolis/St. Paul International Airport, St. Paul, Minnesota,
on Monday, May 19,1986, at 9:30 A.M.
Accountants' Report
To the Stockholders and Board of Directors
NWA Inc.
Saint Paul, Minnesota
We have examined the consolidated statements of financial
position of NWA Inc. and subsidiaries as of December 31,1985
and 1984, 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, 1985.
Our examinations were made in accordance with generally
accepted auditing standards and, accordingly, included such
tests of the accounting records and such other auditing pro
cedures 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 31,1985 and 1984, 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, 1985, in conformity with generally ac
cepted accounting principles applied on a consistent basis.
Saint Paul, Minnesota
February 18,1986
33
^ 10 Year Summary* NWA Inc. (Dollars in Thousands Except Per Shai
Year Ended December 31
Operating Revenues
Passenger
Freight
Mail
Charter and other transportation
Nontransport
TOTAL OPERATING REVENUES
Operating Expenses
Depreciation and amortization
Other
TOTAL OPERATING EXPENSES
Operating income (loss)
Interest expense
Other income and (deductions)--net
Earnings (loss) before taxes and extraordinary item
Income taxes (credit)
Earnings1
Earnings per average share'
Cash dividends
Dividends per share
Stockholders' equity
Number of shares outstanding at end of year
Book value per share at end of year
Assets and Long-Term Debt
Flight property at cost
Flight property at net book value
Total assets
Long-term debt
Obligations under capital leases
Unit Expenses
Per available ton-mile
Per revenue ton-mile
Percent of operating revenues
Statistics--Scheduled Services
Revenue plane-miles (000)
Available seat-miles (000)
Revenue passenger-miles (000)
Passenger load factor
Revenue passengers carried
Freight ton-miles (000)
Total revenue ton-miles (000)
Statistics-Total Operations
Revenue plane-miles (000)
Available ton-miles (000)
*Not covered by Accountant's Report.
tStrikes adversely affected 1978 and 1982.
t After extraordinary loss of $30,903 or $1.30 per share resulting from the settlement of a
'See pages 18 through 21 for Management's Discussion and Analysis.
Figures)
J
1985 1984 1983
$ 2,154,394 $ 1,984,999 $ 1,812,227
328,400 355,336 289,170
80,126 58,339 55,585
55,959 38,559 36,198
36,612 7,741 2,856
$ 2,655,491 $ 2,444,974 $ 2,196,036
\
$ 182,563 $ 167,203 $ 146,908
2,395,841 2,181,495 1,980,242
$ 2,578,404 $ 2,348,698 $ 2,127,150
77,087 96,276 68,886
(19,873) (4,268) (3,548)
7,529 25,380 8,265 I
I
$ 64,743 $ 117,388 $ 73,603
(8,376) 30,521 23,530
$ 73,119 $ 55,964tt $ 50,073
3.18 2.44tt 2.19
19,586 17,933 17,367
.90 .825 .80
947,001 892,923 854,189
21,774,251 21,749,667 21,715,995
$ 43.49 $ 41.05 S 39.331
$ 2,784,553 $ 2,356,048 $ 2,080,299
1,427,114 1,151,930 976,501
2,320,006 1,754,233 1,602,236
332,992 100,000 100,000
$161,101 -- --
39.84 40.24 40.54
75.34 74.74 76.04
97.1% 96.1% 96.9%
159,337 143,410 133,699
37,148,562 32,663,660 29,511,287
22,341,334 19,772,355 17,711,929
60.1% 60.5% 60.0%
14,538,744 13,215,907 12,718,468
886,355 965,868 835,197
3,334,257 3,103,799 2,750,946
161,186 144,568 134,870 j
6,450,509 5,837,972 5,255,086
34
1982t
$ 1,567,986
205,018
60,451
34,758
9,355
$ 1,877,568
$ 136,651
1,749,292
$ 1,885,943
(8,375)
(7,216)
16,279
$ 688
(4,331)
$ 5,019
.23
17,332
.80
820,605
21,678,458
$ 37.85
$ 1,996,925
1,019,071
1,377,387
40.7<t
80.34
100.4%
119,189
26,257,466
15,675,194
59.7%
11,356,165
600,198
2,307,475
120,378
4,635,415
1981
$ 1,521,856
221,691
59,786
21,766
29,191
$ 1,854,290
$ 133,489
1,719,054
$ 1,852,543
1,747
(14,135)
20,297
$ 7,909
(2,551)
$ 10,460
.48
17,326
.80
832,510
21,661,367
$ 38.43
$ 1,992,015
1,110,965
1,492,381
12,500
41.04
83.94
99.9%
120,139
24,813,981
14,251,932
57.4%
11,144,785
616,285
2,186,815
120,761
4,519,768
1980
$ 1,347,830
190,837
57,305
16,303
27,055
$ 1,639,330
$ 124,078
1,539,386
$ 1,663,464
(24,134)
(15,831)
3,862
$ (36,103)
(43,187)
$ 7,084
.33
17,317
.80
839,042
21,647,280
$ 38.76
$ 1,995,168
1,200,495
1,532,539
62,500
37.04
80.64
101.5%
120,709
24,904,355
13,810,889
55.5%
11,501,148
529,434
2,048,349
121,243
4,495,666
1979
$ 1,067,214
160,716
38,685
15,093
28,850
$ 1,310,558
$ 106,401
1,148,805
$ 1,255,206
55,352
(1,635)
30,643
$ 84,360
11,885
$ 72,475
3.35
17,306
.80
849,122
21,639,589
$ 39.24
$ 1,779,770
1,094,556
1,528,921
100,000
29.44
63.44
95.8%
116,105
24,028,928
13,298,161
55.3%
11,636,170
504,753
1,956,217
117,027
4,265,640
1978t
$ 557,401
87,077
18,944
10,997
115,743
$ 790,162
$ 104,970
617,907
$ 722,877
67,285
(3,376)
45,126
$ 109,035
47,194
$ 61,841
2.86
16,210
.75
793,691
21,626,284
$ 36.70
$ 1,525,442
922,615
1,392,865
100,000
27.94
65.74
91.5%
66,420
14,302,037
7,018,305
49.1%
6,574,901
302,153
1,079,681
67,471
2,594,632
1977
$ 861,053
121,185
29,894
25,871
8,352
$ 1,046,355
$ 103,152
838,619
$ 941,771
104,584
(6,518)
55,078
$ 153,144
60,425
$ 92,719
4.29
10,804
.50
747,672
21,606,686
$ 34.60
$ 1,510,447
962,957
1,299,451
100,000
22.94
54.44
90.0%
111,271
22,968,489
11,100,412
48.3%
10,354,808
458,143
1,676,470
114,643
4,109,110
1976
$ 786,414
119,882
25,137
25,955
6,420
$ 963,808
$ 102,713
758,147
$ 860,860
102,948
(14,035)
9,351
$ 98,264
46,527
$ 51,737
2.39
9,707
.45
665,744
21,606,036
$ 30.81
$ 1,448,402
924,537
1,151,562
122,000
21.64
50.5
89.3%
108,474
22,228,259
10,758,683
48.4%
9,818,343
467,399
1,647,317
112,279
3,982,743
35
^ Directors and Officers
Board of Directors
James A. Abbott
Executive Vice President--Finance and Administration
and General Counsel
Northwest 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 gas 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 N. Land, Jr*
Financial Consultant
New York, New York
M. Joseph Lapensky
Chairman of the Board, Retired
Northwest Airlines, Inc.
St. Paul, Minnesota
Donald G. McNeely*
Chairman of the Board
Space Center, Inc.
St. Paul, Minnesota
Logistics
Steven G. Rothmeier
President and Chief Executive Officer
Northwest Airlines, Inc.
St. Paul, Minnesota
*Member, Audit Committee
Officers of Northwest Airlines, Inc.
Steven G. Rothmeier*
President and Chief Executive Officer
James A. Abbott*
Executive Vice President--Finance and Adminstration
and General Counsel
Benjamin G. Griggs, Jr.
Executive Vice President--Operations
John F. Horn
Executive Vice President--Corporate
Planning and International
Thomas J. Koors
Executive Vice President--Marketing and Sales
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
Roger D. Hauge
Vice President--Atlantic Region
Allen W. Johnson
Vice President--Orient Region
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 NWA Inc.
36
JTOLAND STATUS
oo
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