Northwest Airlines Annual Report 1987

CORPORATE PROFILE
NWA Inc. is the parent company of five transportation-related subsidiaries, the principal one
being Northwest Airlines. This annual report deals directly with Northwest and its operations
in 19 8 7 following its acquisition of Republic Airlines.
The other NWA Inc. subsidiaries and their 1987 accomplishments are:
MLT Vacations, Inc., a leading wholesaler of vacation travel packages, named Edward
Neer, formerly Northwest's western regional sales director, as president and chief executive
officer. Neer and his staff sold MLT's retail division to Northwestern Business Travel and
acquired Passage Tours, a highly regarded wholesaler of package tours to Europe.
Northwest Aerospace Training Corporation moved into its 246,000-square-foot head-
quarters and has begun the 24-month process of installing ten new simulators and relocating
12 existing simulators into the facility. Ground was broken in September at the University of
North Dakota, Grand Forks, for a $6 million NATCO facility that will support an innovative
program of training beginning pilots to meet airline standards.
Northwest Aircraft Inc. continued its aircraft lease activities as well as negotiated
contracts with Boeing, Airbus and CFM International as part of Northwest's fleet expansion
program. Key elements of that activity are described on pages 17 and 19.
Northwest PARS was involved in 19 87 in the marketing of the PARS computer reserva-
tions system to travel agencies and in the comprehensive planning to adopt PARS as Northwest's
internal reservations and passenger handling system. These programs are described on page 16.
CONTENTS
HIGHLIGHTS
3
LETTER TO STOCKHOLDERS
4
OPERATIONS REVIEW
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
22
FINANCIAL STATEMENTS
28
NOTES TO FINANCIAL STATEMENTS
33
REPORT OF INDEPENDENT ACCOUNTANTS
41
STOCK PRICE AND DIVIDEND INFORMATION
41
TEN-YEAR SUMMARY
42
DIRECTORS AND OFFICERS
44
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NORTHWEST CITIFS
NORTHWEST AIRLINK CITIES ONLY
OP E RATED BY USAIR AS WORLD! INK
FLEET SCHEDULE
Fleet as of o. of On
February 1, 1988 Seats Owned Leased Total Order
AIRBUS:
A340 ::~ 20,:
A320 146 1ow:-
BOEING:
757 184 6 22 28 5
747-400 422 10
747 400 27 5 32
747F 5 3 8
727-200 146 67 67
727-100 118 9 9
MCDONNELL DOUGLAS:
DC-10-40 284 19 1 20
MD-80 143 6 2 8
DC-9-50 122 16 12 28
DC-9-30 100 57 11 68
DC-9-10 78 31 3 34
CONVAIR 580 48 13 13
TOTAL 256 59 315 135
''The Company has entered into a preliminary agreement to
purchase 20 A340 aircraft to be delivered between 1992 and
1995. These aircraft are designed to carry between 262 and
295 passengers.
,,. ,:
Twenty-five A320 are under firm order. Subject to
confirmation by the Company, an additional 75 delivery
positions are available between 1992 and 1995.
TWO
HIGHLIGHTS
1987 1986
FI ANCIAL
Operating Revenues $5,142,224,000 $3,589,174,000
Operating Expenses 4,946,094,000 3,422,529,000
Operating Income 196,130,000 166,645,000
Operating Margin 3.8 % 4.6%
Net Earnings 103,011,000 76,941,000
Per Share 3.59 3.26
Stockholders' Equity 1,523 126,000 1,105,916,000
Per Share 52.32 46.29
Dividends Paid 25,487,000 19,645,000
Number of Shares Outstanding at Year End 29,110,000 ': 23,890,000
STATISTICAL (SCHEDULED)
Passengers 37,247,000 23,167,000
Revenue Passenger Miles 39,549,501,000 28,814,957,000
Available Seat Miles 61,420,541,000 48,408,440,000
Passenger Load Factor 64.4% 59.5%
Yield Per Revenue Passenger Mile 11.05a: 10.14a:
Ton Miles-Mail, Freight and Express 1,442,455,000 1,253,847,000
OPERATING EXPE SES
Per Available Seat Mile 7.9a: 6.8a:
Per Available Ton Mile 49.la: 41.2a:
NUMBER OF EMPLOYEES AT YEAR E D 33,724 33,427
Excludes 1,000,000 shares held in treasury.
OPERATI G
REYE UESA D
EXPE SES OPERATf GI COME NET EARNINGS
(In Billions)
$4.5
$3.0
$1.5
83 84 85 86 87
Operating Revenues
Operating Expenses
(In Millions) On Millions)
83 84 85 86 87
THREE
83 84 85 86 87
*After extraordinary loss
of $30.9 million from the
settlement of a lawsuit.
Percent
Change
43.3
44.5
17.7
(0.8 ) pts.
33.9
10.1
37.7
13.0
29.7
21.9
60.8
37.3
26.9
4.9 pts.
9.0
15.0
16.2
19.2
0.9
TO OUR STOCKHOLDERS
NWA Inc. earned $103 million, or $3.59 per share, in 1987-the highest earnings in the
company's 61-year history and the 38th consecutive year of net profits. Revenues increased
43.3 percent over 1986 to $5 .14 billion while expenses grew 44.5 percent to $4.95 billion,
reflecting the first full year of financial results following the August 1986 acquisition of
Republic Airlines.
Your company substantially strengthened its balance sheet in 1987 by:
selling three million shares of common stock. Investors purchased the shares at $66.50,
and the company received net proceeds of $197.6 million.
converting subordinated debentures. These debentures were converted into 3,070,022
shares of common stock, reducing debt and adding $172.7 million to stockholders'
equity.
As a result, our long-term debt-to-equity ratio improved to .6 to 1 as of December 31,
1987, from 1.3 to 1 at the end of 1986.
In another move affecting our financial structure, NWA Inc. repurchased one million
shares of common stock following the precipitous decline of the stock market in October
1987. The average repurchase price was $38.50 per share, well below book value. These
shares currently are held as treasury stock.
The balance sheet was strengthened further in early 19 8 8 when the company redeemed
$149 .4 million in high-interest equipment trust notes, a move that reduces interest cost by
$22.2 million per year. The trust notes were inherited by Northwest in the acquisition of
Republic and were redeemed at the earliest date provided for under terms of the notes.
FOUR
These are impressive strides. Yet simpl being profitable is not enough. We must build
a financial reserve to ensure our continued growth, and to accomplish this, we must offer
high-quality products and services that engender customer lo alty. In these areas, we did not
meet our 1987 objectives despite aggressive action and dedicated persistence.
In 1987, our operating profit margin, calculated by di iding operating income by
operating revenues, reached only 3. 8 percent. NWA Inc. should consistently earn a higher
margin to, among other things, finance our planned fleet acquisition and expansion programs.
Our ability to significantly improve the profit margin is contingent, in part, on the
quality of the service we offer, an area where we stumbled in 19 87 as we integrated the opera-
tions of Republic and Northwest. Our on-time reliability and customer service clearl lagged
behind industry standards. Our performance was negatively affected by a number of factors,
including an organized, coordinated work slowdown during the summer by a small cadre
within our machinist union.
Northwest's operational performance improved measurably during the last quaner
of 1987 and into 1988, reflecting not only greater team spirit among our workforce but also
significant enhancements to aircraft scheduling and facilities modernization. You will read
more about these developments in the pages that follow both from a corporate perspective
and as viewed through the eyes of some of our front-line service employees.
Challenges remain to be addressed in 1988, particularly in the labor relations area as
we continue negotiations with unions representing pilots, flight attendants, maintenance and
ground service employees. As we address the concerns of each of our employee groups, it
is important for you, as stockholders, to be aware that we are not seeking to undercut the
quality of life Northwest workers have come to enjoy. Our unit costs need not be lower than
competing airlines, but they must be in close relationship to them. We do not seek wage con-
cessions. In fact, we seek to raise the wages of many of our former Republic employees. But
to do so, we must commit ourselves to working harder and smarter than our competitors-
in other words, improve our productivity. If we accept that challenge, we can use the strength
of our balance sheet to buy high-technology aircraft and other equipment that will give us
a competitive edge and ensure our long-term success.
Fl E
Our goal for Northwest is nothing less than to become the preferred airline for domestic
business travel and for international flying as well. To achieve the recognition, preference and
repeat patronage we desire, we must follow six concrete strategies:
develop our domestic hubs, including addition of a traffic center in Milwaukee by
mid-1988, to offer as many nonstop and one-stop travel opportunities as possible;
strengthen international service by expanding connecting opportunities at U.S. and
overseas gateways;
provide dependable, stylish customer service through programs that emphasize employee
training and inspire employee dedication;
enlarge our role as a major force in computer reservations systems by aggressively mar-
keting our PARS travel agency network;
keep constant downward pressure on expenses and upward pressure on productivity to
control seat-mile and ton-mile costs, and
develop freight and mail programs to increase cargo revenues.
These strategies will enable us to attain our objectives over time. They will remain the
focus of your company in the years ahead because they form the blueprint for our continued
growth and success.
Sincerely,
Steven G. Rothmeier
Chairman and Chief Executive Officer
February 22, 1988
JOHN F. HORN
(LEFT)
STEVEN G . ROTHMEIER
(RIGHT)
John F. Horn
President and Chief Operating Officer
"I understand that we are com-
peting against airlines like Con-
tinental that have lower costs
than ours. But this company
made $103 million in 1987, and
I think we can make a lot more
when we settle union issues.
We've got to strive to be the
best and we can be the best:'
MARK MCCOMBS
STATION AGENT
Ill
STRE GTHE I G OUR COMMITME T TO QUALITY CUSTOMER SERVICE
The spotlight of public attention was focused on the airline industry in 1987 as customers,
legislators and the media questioned the flight dependability, schedule integrity and service
standards of the nation's airlines.
Among the manifestations of this attention was the creation in 19 87 of an industry
scorecard issued monthly by the Department of Transportation. It records airline performance
data in a number of key areas including complaints, on-time statistics and baggage handling.
In industry comparisons, Northwest did not rank favorably. In fact, Northwest received
more DOT customer complaints per 100,000 enplanements than any other major airline for
the four consecutive months from August through November 19 87. Northwest also ranked
near the bottom of 14 airlines measured in the areas of on-time reliability and baggage
service. The reports for December 1987 and January 1988 showed an improving trend for
Northwest in all major categories.
Northwest has taken positive steps to improve its performance and restore customer
confidence. Much of that effort has centered on training and motivation of front-line service
employees, in addition to improving airport facilities.
Greeters Northwest now employs customer service assistants at its three largest hubs to help
customers by directing them to connecting flights, familiarizing them with airport facilities,
escorting children traveling alone and roving the airports to offer information and assistance.
This program was implemented in November and was especially effective during peak
Thanksgiving and Christmas travel in allowing transportation agents extra time in ticketing,
seat assignment and boarding customers.
Idea Exchange Committee During 1987, every Northwest airport manager spent one week
at the airline's headquarters to share ideas with senior management on plans and programs
to improve the quality of customer service. The managers met in small-group forums, called
Idea Exchange Committees, to improve communication between field and staff managers
and give each station manager an opportunity to express concerns and suggestions directly to
senior management. Idea Exchange Committees will continue in 1988 and will be broadened
to involve other key managers.
. 'I. 'E
"The new Northwest has the
potential to be a great airline.
Our increased size, while present-
ing us with significant challenges,
creates greater opportunities for
the future. I'm confident that we
are putting it together and that
Northwest is emerging a stronger
carrier."
CAPTAIN MURRY J. PRUYN
CHECK PILOT /INSTRUCTOR PILOT
Academies Customer-contact employees learned tactics and techniques for dealing
effectively with Northwest customers during an eight-hour training course called "We Set
the Standards;' an ongoing program of employee motivation and service improvement.
Front-line supervisors are the focus of three Northwest training academies, each lasting
five days. More than 1,500 Northwest employees have attended the equipment service chiefs
academy, maintenance chiefs academy and transportation agent supervisors academy. Another
1,300 workers took part in the airline's professional leadership program and more than 2,000
participated in leadership knowledge series.
The goal of each of these programs is to foster team spirit, develop customer service
skills and ensure that each employee understands that Northwest's success is the result of the
cumulative effect of thousands of individual efforts.
In 19 8 8, this base of effective employee training and motivation will be expanded
through development of "Quality First" programs in ground services, in-flight services and
maintenance and through creation of a company-wide Quality Service College.
Responsiveness In October, Northwest hired a highly regarded consumer advocate to head
its customer relations division. The immediate goal was to clear a backlog of customer cor-
respondence and respond to every customer inquiry within seven days. These objectives have
been achieved and now each inquiry receives a response within three days. Similarly, Northwest is
resolving baggage claims within 25 days, better than the industry-wide average of 35 days.
During 1987, Northwest developed a program under which station managers and
transportation agent supervisors are given additional authority to resolve customer service
problems on the spot rather than directing customers to the company's headquarters.
Northwest also established two hotlines for employees. One is Team Line for ground
service workers to voice ideas for improved service and to get answers to customer service
questions. The second, Clean Line, is for use by flight attendants and ground service workers
to report aircraft in need of interior cleaning in addition to the normal service schedule.
Northwest customers received improved responsiveness from the airline's reservations
system. For the entire year, reservations agents answered more than 38 million calls. This per-
formance is the result of increased automation and consolidation of the 12 reservations offices
into seven state-of-the-art facilities.
ELEVE
"Our next big challenge ts to
become known as the number
one airline. I want people to
know us and like us for the qual-
ity of service we offer as well as
for our frequent flier program.
And I think the customers are on
our side. They are aware of the
improvements we have made.
They are telling us that our
company ts coming together:'
LY . PAHL
TRANSPORTATION AGE T
NEW GROU D F CILITIES FOR GRO I G PASSE GER VOLU ES
Key ingredients to quality customer service are the facilities at an airline's key traffic centers.
Major revitalization programs were necessary at each Northwest hub to support the added
passenger volume resulting from Northwest's acquisition of Republic.
In total, Northwest has invested more than $90 million in facilities improvements at
Detroit, Minneapolis/St. Paul, Memphis and Milwaukee since August 1986.
Detroit As Northwest grew at Detroit Metropolitan Airport, the airline invested more than
$50 million for facilities improvements. Some of these are apparent to customers traveling
through the terminal: moving sidewalks, a new baggage claim area and improved access to it,
a second WORLDCLUB lounge, doubling of ticket counter space and relocation of security
checkpoints. Some important construction programs are not visible to customers but are ele-
ments vital to the airline's infrastructure: baggage handling system, control tower to direct
ramp operations, hydrant fueling system and flight kitchen.
Minneapolis/ St. Paul The investment at Minneapolis/St. Paul exceeded $20 million with
the centerpiece being expansion of the south terminal to increase ticket counter space, double
baggage claim facilities and enlarge baggage service offices. Also planned is expanding the
ramp control tower and upgrading the ticket counter baggage conveyor system.
Memphis Six new passenger loading bridges, a hydrant fueling system, an aircraft heating
and cooling system, a new baggage claim area and 7,200 additional square feet of customer
seating areas are highlights of the $15 million construction effort at the Memphis airport.
Future improvements, for which $33.2 million of bonds have been sold, include extensive
remodeling of the west concourse, a new baggage handling system, 14 additional ticket
counter positions, additional WORLDCLUB capacity and a walkway connecting the center
and west concourses.
Milwaukee Flight operations at Milwaukee's Mitchell International Airport will more
than double by mid-1988 as Northwest develops Milwaukee as its fourth hub. To support the
hub, Northwest spent $5 million to increase its gates from five to 12 and to fully modernize
Concourse E. This included construction of a WORLDCLUB.
T HI RTEE
"The biggest challenge in dealing
with change is giving up the old,
familiar way of doing things.
We are experiencing that in
reservations now as we pre-
pare for PARS, our new res-
ervations system. One of the
best features of PARS is its pric-
ing capabilities. It automati-
cally calculates the lowest price
that passenger qualifies for. This
speed and automation wasn't
available in our old system~'
RHONA DAUPHI E-DRIGHT
RESERVATIONS SALES AGENT
A
~
[ill
Congestion The strain of hub operations on Northwest facilities was significantly eased
during the summer and fall by a refining of the flight schedule that included selective flight
reductions and lengthening of the time aircraft remained on the ground at traffic centers. The
net effect was an improvement in on-time performance that resulted from giving the ground
staff more time to service aircraft and process customers, baggage, freight and mail.
AGGRESSIVELY MARKETING THE NEW NORTHWEST
Northwest was saddled throughout 1987 with a troubled image in the eyes of some of the
traveling public. Some of this reputation, flowing from merger difficulties with Republic, was
warranted, while some of it related to declining industry-wide service levels brought on by
capacity constraints within the nation's airport and airway system.
Frequent Fliers One program that fostered customer loyalty among a key segment of pas-
sengers was WORLDPERKS, Northwest's frequent flier program. Acknowledged as one of the
industry's most innovative programs, WORLDPERKS continued to attract business travelers
despite lagging on-time performance and related service issues. More than 3.5 million cus-
tomers now are WORLDPERKS members, with the highest mileage fliers rewarded with extra
benefits through WORLDPERKS Gold and WORLDPERKS Preferred status.
Competing airlines introduced enhancements to their frequent flier programs in
December to spur travel in the traditionally slow first quarter. These airlines are offering triple
mileage awards throughout the year to members who fly during the first quarter. Northwest
unveiled a similar promotion to maintain the competitiveness of its program. Fortunately,
Northwest is able to effectively manage its inventory of free travel because WORLDPERKS
automatically issues its members a free ticket for each 20,000 miles and that ticket expires in
two years. Other airlines allow members to bank mileage for unlimited periods and thus
perpetuate a free travel liability without forcing its redemption. While Northwest is concerned
about excessive issuance of free tickets, the airline remains in a far better position than other
carriers to withstand future developments because its accumulated earned mileage liability is
much smaller than other airlines.
F I FTEE
On-Time Guarantee Northwest inaugurated hourly shuttle service between Minneapolis/
St. Paul and Chicago in November and devised a promotion to draw attention to the service
and to demonstrate to customers the airline's commitment to on-time performance. During
the first month of the hourly shuttle, Northwest guaranteed that its flights would arrive within
15 minutes of schedule or customers would receive their choice of a free, one-way ticket
between those cities or bonus frequent flier mileage. The on-time commitment marked the
first time since the industry was deregulated that a major airline had guaranteed its perform-
ance and backed that guarantee with a tangible reward.
The results proved the effectiveness of the promotion in building traffic as well as in
inspiring Northwest teamwork to ensure these flights operated on-time, every time.
PARS In addition to explaining traditional marketing programs to travel agents, Northwest
sales personnel have been actively promoting PARS, a computer reservations system in which
Northwest has acquired half ownership. More than 80 percent of an airline's customers book
their flights through travel agents who use automated computer reservations systems. As a
result, it is important for Northwest to convince travel agencies to adopt PARS. During the
year, more than 1,100 travel agencies installed approximately 4,000 PARS computers in their
offices, including PARS placements in England, Scotland, Finland, Denmark, Sweden and
Norway. By promoting the use of PARS with existing subscribers and by enrolling new users,
Northwest realized a 50 percent increase in PARS bookings iri 1987. As a result of the
increased share of bookings through PARS, Northwest saved approximately $2 million in
segment booking fees that would have been paid to competitors if PARS had not been used.
PARS also received significant additional booking fees from other airlines as a result of
the transportation arranged by new PARS subscribers.
In 1988, another 1,300 PARS subscribers are expected to be enrolled. Also in 1988,
Northwest will adopt PARS as its internal reservations and passenger-handling system.
SIXTEEN
BUILDING A FLEXIBLE FLEET OF ADVANCED AIRCRAFT
With orders and options for more than $7 billion of new aircraft, Northwest has one of the
most well-conceived fleet development plans among the world's airlines. The plan is charac-
terized by the broad flexibility it offers the airline to adjust its aircraft needs to correlate with
changing economic and market conditions.
Immediate Needs Northwest took delivery of eight Boeing 757s and two Boeing 747
freighters during 1987. These aircraft, with a cost of $433.6 million, were financed with long-
term leveraged leases. Northwest also took delivery of three used McDonnell Douglas
DC-9-30s and a used MD-80. Northwest will take delivery of five more B757s in 1988,
boosting the airline's fleet of high-technology, fuel-efficient B757s to 33.
During 1988, Northwest expects to acquire 12 more used DC-9-30 aircraft. These 100-
passenger jetliners will be used to support development of Milwaukee as the airline's fourth
largest traffic center and will be employed on new routes to be opened from existing hubs.
Northwest got a glimpse of its future in transpacific markets during January 1988
rollout ceremonies for the Boeing 747-400. Northwest will be the first to fly this newest addi-
tion to the jumbo jet family. The B747-400 is about 25 percent more fuel efficient per seat
than current Northwest 747s, has greater range and, through the use of high-technology
advancements, can be flown with two, rather than three, pilots.
Northwest will take delivery of the first two of its 10 B747-400s in December and will
operate the initial pair on New York-Tokyo nonstop service where the airplane's fuel and range
advantages will allow the route to be operated nonstop at full payload year round.
Consistent with its fleet modernization efforts, Northwest plans to reduce its Boeing 727
fleet by seven aircraft in 1988.
Long-Term Acquisitions Northwest advanced the delivery schedule for its initial order of
10 Airbus A320-200s and firmed up deliveries for an additional 15 of the planes. The aircraft
are part of a 100-plane agreement announced in October 1986.
Delivery of the first A320 will be in June 1989, almost one year earlier than originally
scheduled. By March 1992, Northwest will operate 25 of the new, high-technology airplanes.
SEVENTEEN
''What I enjay most about my job
is the variety. It's never boring.
There is always new equipment,
new challenges. Northwest has
always had a good fleet of air-
craft. We can see by the high
prices we get when we sell our
planes that we have good main-
tenance. The other airlines are
happy to buy from Northwesf'
GEORGE BENSON
INSPECTOR
MAfN BASE ENGINE SHOP
~ f
Northwest also reached agreement with Airbus in April 1987 under which the airline
can purchase up to 20 Airbus A340 aircraft to be delivered between 1992 and 1995. The
$2. 7 billion agreement also includes an option for 10 A330s.
The A340 with its long-range, low seat-mile cost and underfloor cargo capability
is an _
ideal aircraft for Northwest's Pacific, Atlantic and domestic routes. It also offers a high
degree of commonality with the A320, resulting in savings for maintenance and parts pro-
visioning costs. The A340, designed to carry between 262 and 295 passengers, will provide
Northwest with flexibility to replace older, mid- to long-range aircraft in the Northwest fleet,
to begin new services that would not be economically viable with the current fleet, and to
provide additional frequencies over long-haul routes.
DEVELOPING A THREE-CONTINENT ROUTE SYSTEM
Northwest's three-continent route system proved a key advantage during 1987 as the airline
was able to adjust seat allocation to meet geographic travel demands. Thus, when domestic
yield (revenue per passenger mile) softened in early 1987, Northwest was able to shift capacity,
based on strong international traffic projections, to Europe and Asia. This strategy worked
well as the passenger load factor on Atlantic sectors reached 68.7 percent in 1987, up from
61.3 percent in 1986. A 70 percent load factor was recorded in the Pacific, while domestic
service registered a 61. 8 percent mark.
Transatlantic In 1987, Northwest began augmenting its Boeing 747 service across the
Atlantic with its McDonnell Douglas DC-10s. These 284-seat aircraft allow the airline to
offer added flight frequencies on a year-round basis-a schedule attractive to international
business travelers. Concurrent with the use of DC-10s, Northwest selected Boston as its prin-
cipal gateway for transatlantic flights, although New York Kennedy and Minneapolis/St. Paul
retain gateway status. Boston-Frankfurt nonstop service was launched, and frequencies were
increased in other markets. This focus on Boston will be expanded in 1988 when Amsterdam,
The Netherlands, joins the Northwest system on June 1 with four roundtrips weekly from
Boston. Boston-Copenhagen nonstops also will commence in the summer. As a result,
Northwest will be the leading transatlantic carrier from Boston.
N I NETEEN
':.-\.s an interpreter, my role is
to en:ure good communication
betioeen flight attendants and
passengers on flight~ beti(;een my
home in Seoul and the United
States. I welcome passengers in
my traditional Korean clothing
and explain cabin features and
menu choices. I am busiest dur-
ing in-flight duty free shopping,
a popular attraction, especially
for Koreans returning home:'
NHOHEJU G
IN-FLIGHT SER \'ICE
REPRESE TATIVE,
INTERPRETER
SEOUL, KOREA
Transpacific In 1987, Northwest marked several major transpacific accomplishments.
The airline celebrated 40 years of service across the Pacific. Northwest pioneered the Great
Circle, or polar route, to Asia on July 15, 194 7, becoming the first airline to operate regularly
scheduled flights between the United States and Japan.
In 1987, Northwest flew more customers across the Pacific than any other U.S. airline, the
third consecutive year Northwest has earned that distinction. The company opened two new
Pacific routes in 1987-Detroit to Tokyo and Tokyo to Bangkok, Thailand-and increased
frequencies on a number of other key flight sectors. As a result, Northwest provided 152
weekly transpacific crossings during the summer of 1987 and offered more seats across
the Pacific than any other airline.
A prolonged, illegal strike by Northwest workers in Korea forced flights to and from
Seoul to be canceled from September 25, 1987, until January 4, 1988. The work stoppage was
part of general labor unrest affecting Korean and non-Korean companies in the politically
charged election year.
Domestic Flights were inaugurated from U.S. hubs to four cities: Jackson, Miss.; Lansing,
Mich.; Montego Bay, Jamaica; and Steamboat Springs, Colo.
In addition, other Northwest cities were linked to the airline's hubs, giving customers in
those feed markets greater access to the Northwest system. For example, Denver, Las Vegas
and Fort Myers were linked with Detroit while Baltimore, Des Moines, Madison, Omaha,
West Palm Beach, Tucson and San Diego were connected with Memphis. Receiving non-
stop service to Minneapolis/St. Paul were Buffalo, Baltimore, Fort Lauderdale, Hartford/
Springfield, Pittsburgh and West Palm Beach.
The addition of Milwaukee as a fourth domestic traffic center will be a major focus of
the domestic route network for 1988. Initial service plans call for 43 daily flights to 15 desti-
nations. The Milwaukee hub will relieve some of the traffic and facilities congestion at Detroit
and Minneapolis/St. Paul and will increase Northwest's presence in its traditional home terri-
tory, the Upper Midwest.
T W ENTY ONE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RE SUL TS OF OPERA TIO NS
NWA Inc. (NWA), a Delaware corporation, is the
parent of Northwest Airlines, Inc. (Northwest), its
principal subsidiary. Airline operations comprise
more than 98% of consolidated operating revenues
and expenses.
In October 1985 NWA purchased MLT Vacations,
Inc. (MLT), formerly Mainline Travel, Inc. MLT is a
major wholesaler of vacation travel packages.
On August 12, 1986, NWA purchased all of
the outstanding stock of Republic Airlines, Inc.
(Republic), a major U.S. air carrier. Airline opera-
tions of Northwest and Republic were combined on
October 1, 1986, and Republic was merged into
Northwest in November 1986.
Consolidated financial statements of the Company
include results of operations for Republic since
August 12, 1986, which accounts for the majority
of the increase in revenues and expenses from 1985
to 1986 and 1986 to 1987. Other significant fac-
tors affecting NWA's consolidated results are dis-
cussed below.
RESULTS OF OPERATIONS
Earnings and Dividends NWA's 1987 consolidated
net earnings totaled $103,011,000 ($3.59 per share)
and compare with net earnings of $76,941,000
($3.26 per share) in 1986 and $73,119,000 ($3.18 per
share) in 1985. Total operating revenues increased
43.3% to $5,142,224,000 during 1987, primarily
from substantial growth in passenger revenue. Oper-
ating expenses grew 44.5% to $4,946,094,000
resulting in operating income of $196,130,000 com-
pared with $166,645,000 in 1986. In 1985, operating
income was $77,087,000. The 1987 operating mar-
gin of 3.8% decreased from 4.6% in 1986. The
1985 operating margin was 2.9%.
In 1987 NWA paid dividends to shareholders
totaling $25,487,000 (90a: per share) continuing an
unbroken string of quarterly cash dividends paid for
more than 32 years. This compares with $19,645,000
(90a: per share) in 1986 and $19,586,000 (90a: per
share) in 1985.
NWA common stock is principally traded on the
New York Stock Exchange. A table showing sales
prices and dividends paid per share in 1987 and 1986
is included on page 41.
Operating Revenues Passenger revenue for 1987
rose 49.7% to $4,371,624,000, representing 85% of
total operating revenues. This resulted from a 3 7.3 %
increase in traffic (revenue passenger miles) and a
9 .0% increase in yield (revenue per passenger mile)
from 10.14a: in 1986 to 11.05a: in 1987. Yield increased
partially due to the integration of the long-haul
Northwest and shorter-haul/ higher yield Republic
route systems, as well as fare increases which have
taken place since the spring of 1987. Passenger reve-
nue of $2,920,458,000 in 1986 was 35.6% greater
than 1985 due to a 29 .0% increase in traffic and a
5.2% increase in yield.
The 37.3% increase in revenue passenger miles in
1987 compares with a 26.9% increase in capacity
(available seat miles), resulting in an increase in pas-
senger load factor to 64. 4 % from 5 9. 5 % in 19 8 6.
Load factor in 1985 was 60.1%. Break-even pas-
senger load factors were 61.5% in 1987, 56.0% in
1986 and 58.0% in 1985.
Freight revenue increased 11.4 % to $453,160,000
in 1987 due to a 19.2% increase in freight ton miles
partially offset by a 4.1% decrease in revenue per ton
mile. Freight revenue totaled $406,726,000 in 1986
and was 23.9% higher than 1985, due to a 15.4%
increase in freight ton miles and 7.2% increase in
revenue per ton mile. The increases in freight ton
miles were attributable to the 1986 acquisition of
Republic and the addition in 1987 of two 747
freighter aircraft. Mail revenue increased 15.9%
to $101,393,000 in 1987 and compares with
$87,459,000 in 1986 and $80,126,000 in 1985.
Charter and other transportation revenue
decreased 10.9% to $69,589,000 in 1987, primarily
due to decreased military charters as the Company
chose to deploy charter resources to scheduled
service markets. Charter and other transportation
revenue totaled $78,110,000 in 1986 and $55,959,000
in 1985, with the 1986 increase primarily due to
combined airline operations and increased charters.
TWE TY TWO
Other revenue totaled $146,458,000 in 1987,
$96,421,000 in 1986 and $36,612,000 in 1985. The
increase from 1986 to 1987 is primarily attributable
to a full year of combined airline operations in 1987
compared with a partial year in 1986 (from August 12
forward). This also accounts for part of the increase
from 1985 to 1986. Revenues of MLT subsequent to
its purchase in October 1985 are included in other
revenue and account for the majority of the remain-
ing increase in 19 8 6.
Operating Expenses Salaries and benefits, which
represent 30.8% of operating expenses in 1987,
increased $494,451,000, or 48.1 % , in 1987 and
$313,306,000, or 43.8%, in 1986. The increases
were largely due to the increased number of employ-
ees from the acquisition of Republic and higher pay
rates. Full-time equivalent employees totaled 33,724
at December 31, 1987; 33,427 at December 31, 1986,
and 16,864 at December 31, 1985. The Company
adopted Statement of Financial Accounting Stan-
dards No. 87, "Employers' Accounting for Pensions;'
during the first quarter of 1987. Pension expense
for 1987 reflected a $4.8 million decrease due to
this change.
Fuel, oil and taxes increased $198,685,000, or
31.2%, in 1987 due to a 1.7% increase in the average
fuel price and a 28 .1 % increase in gallons consumed.
The 11.4% decrease in 1986 fuel expense reflects a
3 2. 9 % decline in the average fuel price partially off-
set by a 17.0% increase in gallons consumed. Expan-
sion of service, together with the net addition of 3
aircraft in 1987 and 181 aircraft in 1986 (including
171 from the Republic acquisition) resulted in the
additional fuel consumption. Fuel prices averaged
56.72<t in 1987; 55.78<t in 1986 and 83.07<t in 1985.
Commissions increased $243,286,000, or 51.3%,
from 1986 to 1987, and $146,090,000, or 44.6%,
from 1985 to 1986. Increases in both years were due
to increased revenues, higher levels of sales by com-
mission agents and increased commission rates.
Increased rentals and landing fees in 1987 and
1986 primarily reflect additional operating leases
and an increase in departures. The Company entered
into 15 aircraft operating leases during 1987. The
Company also assumed 15 aircraft operating leases
from Republic and entered into 9 additional oper-
ating lease agreements in 1986. There were no
operating leases for aircraft in 19 85. The increase
was partially offset by the disposition of six aircraft
under operating leases in 19 8 7 and three in 19 8 6.
Departures, which impact the amount of landing fees
paid, increased 55.8% in 1987 and 81.9% in 1986.
Aircraft maintenance materials and repairs
increased $91,588,000, or 52.7%, in 1987 and
$62,117,000, or 55 .6%, in 1986 with the acquisition
of Republic, higher level of operations, aircraft
modifications and increased spare engine repairs.
Depreciation and amortization rose 40. 5 % in 19 8 7
to $340,338,000 compared with $242,213,000 in
1986 and $182,563,000 in 1985. The increases were
primarily the result of additional depreciation for
assets acquired in the Republic purchase and for
ETEARNI GS
PER SHARE
CAPACITY AND
ThAFFIC- SCHEDULED
FREIGHT TO
MILES-SCHEDULED
S3
S2
S1
83 g4 85 86 87
~After extraordinary
loss of 51.30 per share
from the settlement of
a lawsuit.
60
40
20
On Billions)
83 84 85 86 87
Revenue Passenger M iles
Available Seat Miles
T'w E . 'TY THREE
(In Billions)
1.2
.8
.4
83 84 85 86 87
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RES UL TS OF OPERA TIO NS
(Continued)
amortization of nine additional 7 57 s under capital
leases added in 1986. These were partially offset by
the conversion to operating leases of two aircraft in
1987 and four aircraft in 1986, the sale of three
727-200 aircraft in 1987, and the loss of one MD-80
due to an August 1987 accident.
Other operating expenses increased $290,946,000,
or 43.0%, in 1987 and $259,542,000, or 62.2%, in
1986. The increases reflect a higher level of opera-
tions due to the combination with Republic, partic-
ularly in marketing and passenger service expenses.
In addition, 1986 includes a full year, and 1985 a
partial year, of MLT expenses.
Other Income (Expense) Other income (expense) in
1986 includes $17,231,000 of integration expense,
representing nonrecurring costs associated with the
combination of Northwest and Republic. Interest
expense totaled $105,005,000 in 1987 compared
with $76,537,000 in 1986 and $19,873,000 in 1985.
Increases in 1987 and 1986 reflect higher levels of
debt and capital lease obligations assumed in the
acquisition of Republic and capital lease obligations
for new aircraft acquisitions. These were partially
offset by reductions in debt, including the conversion
into common stock of $100 million and $17 5 million
of convertible debentures, called in December 1986
and June 1987, respectively.
Investment income was $13,031,000 in 1987;
$5,501,000 in 1986 and $4,741,000 in 1985. The
increase from 1986 to 1987 primarily relates to inter-
est earned on proceeds from a public stock offering
in February 1987. Of the proceeds, $171,656,000 had
been earmarked for the early payment in February
1988 of 14.625% and 15.125% equipment trust
notes due in 1990 and 199 3, respectively.
The gain on disposition of assets totaled
$61,269,000 in 1987; $14,722,000 in 1986 and
$2,780,000 in 1985. The 1987 gains resulted pri-
marily from the sale of aircraft, gates and landing
slots which were surplus to the Company's opera-
tions after the combination with Republic. The
1985 and 1986 gains resulted from the sale of
miscellaneous assets.
Income Taxes Income taxes were $73,346,000 in
1987 compared with $25,300,000 in 1986 and a
credit of $8,376,000 in 1985. Earned investment tax
credits totaled $511,000 in 1987, $22,266,000 in
1986 and $37,749,000 in 1985. The Company also
passed the benefit of approximately $26.0 million of
investment tax credits in 1987 and $22.5 million in
1986 to lessors of certain of its aircraft in return for
lower future rental charges. 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. As
of December 31, 1987, unused investment tax credits
totaled $3,681,000, and under the Tax Reform Act
of 1986, will be reduced by 17% in 1988.
The Tax Reform Act of 1986 affects cash flows,
results of operations and the Company's financial
position. Certain provisions of the Act, such as the
repeal of investment tax credits, the reduction of
investment tax credit carryforwards, the lengthening
of depreciable lives for property and equipment and
the new alternative minimum tax, result in larger
future U.S. income tax payments for the Company.
Partially offsetting these negative provisions, however,
is the reduction in corporate income tax rates. The
change in depreciable lives and the new alternative
minimum tax generally only affects the timing of
U.S. income tax payments while the repeal of invest-
ment tax credits, the reduction of investment tax
credit carryforwards and the reduction in corporate
tax rates result in permanent tax differences as com-
pared to previous tax laws.
As of December 31, 1987, the Company had on
order approximately $656 million worth of equip-
ment which will qualify as transition property under
the Tax Reform Act of 19 8 6. As transition property,
this equipment will qualify for investment tax
credits, as reduced by the Act, and shorter deprecia-
tion lives than would otherwise be allowed under
the new tax law.
In December 1987 the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 96, "Accounting for
Income Taxes;' which adopts significant changes that
apply to all taxable companies. One of the main pro-
visions of the Statement enables companies to reduce
TWENTY FOUR
deferred tax liabilities to reflect the lower rates of
the 1986 Tax Act. Although the ultimate impact is
unknown, adoption of this Statement will reduce the
Company's deferred income tax liability and have a
positive impact on financial results in the year of
adoption. Part or all of that benefit could be offset
by future rate increases.
The Statement is effective for fiscal years begin-
ning after December 15, 19 8 8, but earlier adoption is
permitted. The Company elected not to adopt the
Statement for calendar year 1987.
INFLATION AND CHANGING PRICES
The Company is capital intensive, with flight equip-
ment and related inventory as major assets. Because
property, equipment and inventory are recorded at
cost, depreciation would be understated during
inflationary periods and net income overstated to
the extent current costs exceed original cost. The
acquired assets and liabilities of Republic were
written up to fair market value in accordance with
generally accepted accounting principles, thereby
eliminating some of this impact.
FINANCIAL CONDITION
Stockholders' equity at December 31, 1987,
totaled $1,523,126,000, up $417,210,000 from
December 31, 1986. This represented a book value per
share of $52.32 and $46.29 at December 31, 1987
and 1986, respectively. Increases in equity resulted
primarily from 19 87 net earnings, the conversion of
$175 million of 7.5% subordinated debentures, and
the sale of three million shares of common stock.
The increases were partially offset by dividend pay-
ments of $25,487,000 and the Company's purchase
of one million shares of its outstanding common
stock at an average price of $38.50 per share.
Long-term debt, excluding current maturities,
totaled $386,977,000 at December 31, 1987, and
long-term obligations under capital leases were
$562,082,000. These debt and lease obligations
were $808,684,000 and $577,548,000, respectively,
at December 31, 1986. The 1986 balances include
debt and lease obligations of $412,447,000 assumed
in the acquisition of Republic. The former Republic
debt is secured by certain aircraft and engines, while
the remaining NWA and Northwest obligations
(other than leases) are unsecured. Primarily because
of the sale of common stock, the conversion of sub-
ordinated debentures, the transfer to current maturities
of equipment trust notes retired in February 19 8 8,
and 1987 net earnings, the long-term debt to equity
ratio improved from 1.3 to 1 at December 31, 1986,
to .6 to 1 at December 31, 1987.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments were $154,730,000
at December 31, 1987, compared with $126,096,000
and $45,842,000 at December 31, 1986 and
19 8 5, respective! y. Operation provided cash of
$454,246,000 in 1987, $310,794,000 in 1986
and $221,432,000 in 1985.
PASSE GER
REVENUES LONG TERM DEBT,.
VS. STOCKHOLDERS'
EQUITY
60
40
20
PASSENGER LOAD
FACTOR
(Percent)
Break-Even Actual
BY GEOGRAPHIC
REGION
(In Billions)
83 84 85 86 87
Domestic Atlantic
Pacific
TWE. 'TY Fl VE
(In Billions)
83 84 85 86 87
Debt Equity
,. Includes capital lease
obligations.
MANA MENT'S DISCUSSION AND ANALYSIS OF
FlNAN IAL ONDITION AND RESULTS OF OPERATIONS
(Continued)
Additional fund were pr vided by the ale
of rhr e million hares of common 'tock to th
public in hJwu;:iry 1987, pro iding net proceed of
$19 , 10 000. The mpan had segregat d, and
subscqucnrl utilized $171,65 000 of the proceeds
for earl pa ment in Februar 1988 of 14.625% and
15.125% equipment tru t notes due in 1990 and
199 1, respcctivcl . The Stgregated 1 set were held in
an in vtmcnt account (with no v ithdrawal restric-
t ion), and cla. sifi ~
d as ca, hand hort-term invest-
ments ~
tt year end. A ain, which was n t material ,
, ;1 realized n the earl debt retirement. The
6~
1
bnce )f the proceed, was u ed for general
orp rate purpose '.
N\1 A enteraI into a rcvol ing credit agreement
in April l 8 . T his agn.:emcnt with a roup of
major banks pro ide , for the a ailabilit of up to
00 million in un ecured hort-term borrowin s to
Jul I, 1989, ith the a ailable amount periodically
dccn::_1sin thereafter until the final termination date
of Jul I, l l. N rthv l'. t also has a r vol in credit
focilit ith a group of m~
1jor banks hich provides
for ~111 addition~
1l $500 million of uns cured b r-
ro inp;s r June 0, 19 8. Thi amount de rea es
pcri di -all rhereaft r to the termination d3te of
90
60<t
J()<t
AVERAGE PRLC PER
GALL N OF FUEL
July 1, 1994. There were no amounts outstanding
under either agreement at December 31, 1987. The
$50 million balance outstanding at December 31,
1986, was repaid during the first quarter of 1987.
Terms of the revolving credit agreements provide
that available borrowings shall be reduced by any
amounts of commercial paper outstanding. Commercial
paper decreased $253,795,000 during 1987 resulting in
a balance of $137,204,000 at December 31, 1987. As
of December 31, 1987, there was $862,796,000 avail-
able for borrowing under the two revolving credit
agreements.
In June 1987, the Company called for redemption
all of its outstanding 7.5% convertible subordinated
debentures due 2010. As a result of the call for
redemption, $174,012,000 principal amount was
converted into 3,052,689 shares of the Company's
common stock. In addition, 17,333 shares were
issued to an underwriter in connection with a
standby purchase arrangement.
Purchases of property and equipment totaled
$640,786,000 in 1987, primarily due to the delivery
of eight new Boeing 7 57 passenger aircraft and two
new Boeing 7 4 7 freighter aircraft and the payment of
additional advance deposits on new aircraft. These
ALL -CAR: 0
0PERATI
(In Billions)
8J 84 85 86 87
R,z
c1w,To11Milcs
A1a1/,1hlc To11 Al zlcs
1 \ r, 1 ) s l \.
aircraft were sold and leased back under 22 to
24-year operating leases.
The sale/leaseback transactions, the loss of one
MD-80 aircraft in August 1987, and the sale of three
727-200 aircraftprimarilycomprisethe$505,229,000
net book value of property and equipment disposi-
tions during the year.
As of December 31, 1987, additional aircraft
on order consisted of five Boeing 7 57 aircraft to be
delivered in 19 8 8 and ten new-generation Boeing
7 4 7-400 passenger aircraft for delivery in 19 8 8
through 1990. Also on order are 25 Airbus A320 air-
craft scheduled for delivery in 1989 through 1992.
Deposits of $256,704,000 have been made with the
manufacturers, and additional committed expendi-
tures for these aircraft and related equipment will be
approximately $472,553,000 in 1988; $551,576,000
in 1989; $468,126,000 in 1990; $170,776,000 in
1991 and $120,557,000 in 1992.
In April 19 87 the Company entered into a
preliminary agreement to purchase 20 Airbus A340
aircraft to be delivered from 19 9 2 through 19 9 5,
with an option to purchase 10 A330 aircraft. The
Company has until 1989 to confirm the purchase.
The Company may, at its option, convert up to ten
of the A340 aircraft to A330 aircraft if done no later
than three years before scheduled delivery. The antic-
ipated cost for the 20 A340 aircraft and spare parts is
approximately $1.9 billion. Additional expenditures
of approximately 5800 million may be incurred
should the Company decide to purchase the
option aircraft.
Passenger $4,371,624
85.0%
Cargo 5554,553
10.8%
Charter and Ocher $216,047
4.2%
1987 SOURCES OF
OPERATI G
REVE T
UES
On Thousands)
The Company also has options to purchase up
to 75 additional Airbus A320 aircraft for delivery
in 1992 through 1995. Deposits of $17,183,000 have
been paid on these, of which $750,000 are non-
refundable. Amounts to be paid under these options,
assuming all aircraft are purchased, will approximate
$2. 7 billion.
Capital commitments for 1988 and thereafter
principally consist of scheduled aircraft acquisitions.
In addition, the Company continues to acquire prop-
erty and equipment to support its airline operations
and to make improvements to ground facilities
including terminal improvements and modifications
to office buildings. Major additions planned include
10 new flight simulators and upgrades for 12 existing
simulators; expansion of facilities at Memphis,
Detroit, Los Angeles, Chicago, and Minneapolis/
St. Paul; and additional ground support and com-
puter equipment to replace and upgrade existing
equipment.
The Company believes that internally generated
funds, lease financings and borrowings will provide
sufficient capital to meet all present commitments.
The Company has substantial assets that are unen-
cumbered, which could provide collateral for future
financings if needed.
On August 16, 1987, a Northwest MD-80 air-
craft crashed at the Wayne County Airport in Detroit.
It was the first Northwest accident in 24 years in
which passenger lives were lost. The Company is
adequately insured for all claims arising from
the disaster.
1987 DISTRIBUTIO
OFOPERATI G
EXPENSES
$1,522,929 Salaries and Benefits
30.8%
S 834,622 Fuel, Oil and Taxes
16.9%
S 717,084 Commissions
14.5%
S340,338 Depreciarion and
~---6_.9_%__ Amortization
Sl ,531,121 Rentals, Landing Fees,
30.9% Materials and Other
~ - - - - - - - - -
TWE. TY SEVE,.
NWA INC. CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31
ASSETS
Current Assets
Cash and short-term investments
Accounts receivable, less allowances (1987- $4,500; 1986- $4,500)
Flight equipment spare parts, less allowances (1987- $60,053;
1986- $44,450)
Maintenance and operating supplies
Prepaid expenses
Property and Equipment
Flight equipment
Less accumulated depreciation
Advance payments for flight equipment
Other property and equipment
Less accumulated depreciation
Flight Equipment Under Capital Leases- ote D
Flight equipment
Less accumulated amortization
Other Assets
Investments in affiliated companies- Note B
Other
TWE TY EIGHT
1987 1986
$ 154.730 $ 126,096
436,053 467,843
95 .011 108,581
44.078 33,395
50,682 44,527
780,554 780,442
3,513.432 3,485,972
1.695 ,790 1,493,838
1,817,642 1,992,134
273,887 237,406
2,091,529 2,229,540
742,103 695,350
224,138 179,257
517,965 516,093
616,620 623,581
65,204 22,322
551 ,416 601,259
147,900 144,537
130,133 50,983
278,033 195,520
$4,219,497 $4,322,854
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Commercial paper
Revolving line of credit-Note C
Accounts payable and other liabilities
Air traffic liability
Accrued compensation and benefits
Current maturities of long-term debt
Current obligations under capital leases
Long-Term Debt- T
ote C
Long-Term Obligations Under Capital Leases- ate D
Deferred Credits and Other Liabilities
Income taxes-Note F
Deferred gain on aircraft sale and leaseback-Note D
Other
Stockholders' Eauitv- ate E
Preferred stock, $1.00 par value, authorized 5,000,000 shares;
outstanding-none
Common stock, $2.00 par value, authorized 60,000,000 shares;
issued-30,110,325 shares in 1987 and 23,890,095 shares in 1986
Additional paid-in capital
Retained earnings
Unearned compensation
Treasury stock, 1,000,000 shares
Commitments and Contingencies- ates D, G and H
The accompanying notes are an integral part of these statements.
T\Y.' E TY I E
December 31
19 ..., 1986
$ 137.204 $ 390,999
50,000
413 . 3 495,177
263.205 298,819
216.015 186,820
196,346 16,725
17 855 17,844
1,244,158 1,456,384
386 977 808,684
562 082 577,548
283 961 237,853
145.981 77,936
~3.:1: 58,533
503 .154 374,322
60.220 47,780
577.290 212,580
926,954 849,430
(2.841 ) (3,874)
{38l497}
1.523.126 1,105,916
$4.219.497 $4,322,854
NWA INC. CONSOLIDATED STATEMENTS
OF EARNINGS
(Dollars in thousands, except per share data)
Year Ended December 31
1987 1986 1985
OPERATING REVENUES
Passenger $4,371,624 $2,920,458 $2,154,394
Freight 453,160 406,726 328,400
Mail 101.393 87,459 80,126
Charter and other transportation 69.589 78,110 55,959
Other 146-458 96,421 36,612
5,142 224 3,589,174 2,655,491
OPERATING EXPENSES
Salaries and benefits 1,522,929 1,028,478 715,172
Fuel, oil and taxes 834,622 635,937 717,870
Commissions 717,084 473,798 327,708
Rentals and landing fees 298,057 191,573 106,220
Aircraft maintenance materials and repairs 265,447 173,859 111,742
Depreciation and amortization 340,338 242,213 182,563
Other 967,617 676,671 417,129
4,946,094 3,422,529 2,578,404
Operating Income 196,130 166,645 77,087
OTHER INCOME (EXPENSE)
Integration expense (17,231)
Interest expense, net of capitalized interest (1987-
$21,024 1986-$18,145; 1985-$7,799) (105,005) (76,537) (19,873)
Investment income 13.031 5,501 4,741
Gain on disposition of assets 61.269 14,722 2,780
Other-net 10.932 9,141 8
(19,773) (64,404) (12,344)
Earnings Before Income Taxes 176,357 102,241 64,743
INCOME ThX EXPENSE (CREDIT)-NOTE F 73,346 25,300 (8,376)
et Earnings $ 103 ,011 $ 76,941 $ 73,119
1 et Earnings per Common and Common Equivalent
Share-Primary and Fully Diluted $ 3.59 $ 3.26 $ 3.18
The ace om panying note are an integral part of these statements.
THIRTY
NWA I C . CONSOLIDATED STATEME TS OF
CHA GES I FI A CIAL POSITIO
(Dollars in thousands)
Year Ended December 31
19 7 1986
FUNDS PROVIDED
Net earnings 103,011 $ 76,941
Add (deduct) non-cash item :
Depreciation and amortization 340 338 242,213
Increase (decrease) in deferred income taxes 46 108 (8,360)
Gain from asset exchange (22 114)
Other (13,097)
Total From Operations 454,246 310,794
Net book value of property dispositions 505 229 395,282
Sale of common stock, net of costs 197,610
Issuance of common stock upon debenture conversion,
net of costs 172,667 98,964
Increase in deferred gain on aircraft sale and leaseback 73 ,436 77,936
Increase (decrease) in accrued compensation and benefits 29 195 27 916
Decrease (increase) in accounts receivable 31 790 (34,832)
Decrease (increase) in flight equipment spare parts 1,700 (33,027)
Increase in capita! lease obligations 309,761
Issuance of long-term debt 284,679
Other 21 552 (16,324)
Total Funds Provided 1,487 425 1,421,149
Fu DS USED
Additions to property and equipment 640,786 668,906
Decrease (increase) in commercial paper 253,795 (238,808 )
Reduction and conversion of long-term debt 232 156 124,943
Decrease (increase) in accounts payable and other liabilities 81 ,644 2,948
Increase in other assets-other 67,933 452
Decrease (increase) in revolving line of credit 50 000 (50 000)
Acquisition of treasury stock 38,497
Decrease (increase) in air traffic liability 35,614 (25,192)
Dividends 25,487 19,645
Reduction of capital lease obligations 15,455 8,727
Investment in PARS 140,000
Acquisition of Republic:
Flight equipment and other property 1,422,807
Debt and lease obligations (455,753 )
Other long-term liabilities (55,336)
Working capital other than cash (237,770)
Net acquisition cost 673,948
Other 17,424 15,326
Total Funds Used 1 458,791 1,340,895
CREASE (DECREASE) I CASH AND SHORT-TERM
INVESTMENTS 28,634 80,254
Cash and short-term investments at the beginning
of the year 126,096 45,842
Cash and short-term investments at the end of the year 154,730 $ 126,096
The accompanying notes are an integral part of these statements.
THIRTY O E
1985
$ 73,119
182 563
(34 250)
221,432
775
(35,776)
(51,958)
(5,502)
167,290
236,988
27 338
560 587
693,116
(134,357)
(12,894)
24,946
(28,012)
19,586
1,924
564,309
(3,722)
49,564
$ 45 842
NWA INC. CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Additional
Common Stock Paid-In Unearned
Shares Amount Capital Compensation
Balance January 1, 1985 21,750 $43,499 $110,823 $
Exercise of stock options 30 60 753
Net earnings for 1985
Cash dividends-$.90
per share
Other ( 6) (10) (258)
Balance December 31, 1985 21,774 43,549 111,318
Exercise of stock options 74 148 2,603
Conversion of debentures 1,970 3,940 95,024
Restricted stock grant 78 155 3,977 (3,874)
Net earnings for 1986
Cash dividends-$.90
per share
Other (6) (12) (342)
Balance December 31, 1986 23,890 47,780 212,580 (3,874)
Exercise of stock options 159 319 6,602
Issuance of common
stock 3,000 6,000 191,610
Conversion of debentures 3,070 6,140 166,527
Amortization of unearned
compensation 1,033
Net earnings for 1987
Cash dividends-$.90
per share
Purchase of 1,000
treasury shares
Other (9) (19) (29)
Balance December 31, 1987 30,110~- $60,220 $577,290 $(2,841)
"
"Includes one million shares held in treasury.
The accompanying notes are an integral part of these statements.
THIRTY TWO
Retained Treasury
Earnings Stock
$738,601 $
73,119
(19,586)
792,134
76,941
(19,645)
849,430
103,011
(25,487)
(38,497)
$926,954 $(38,497)
NWA INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE A-SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation: The consolidated finan-
cial statements include the accounts of NWA Inc.,
Northwest Airlines, Inc. and all other wholly owned
subsidiaries after elimination of intercompany
accounts and transactions.
Short-Term Investments: Short-term investments
are stated at cost which approximates market and
amounted to $171,791,000 and $95,023,000 at
December 31, 1987 and 1986, respectively.
Flight Equipment Spare Parts: Flight equipment
spare parts are priced at average cost. An allowance
for depreciation is provided at rates which depreciate
cost, less residual value, over the estimated useful
lives of the related aircraft.
Property, Equipment and Depreciation: Owned
property and equipment are stated at cost. Property
and equipment acquired under capital leases are
stated at the lower of the present value of minimum
lease payments or fair market value at the inception
of the lease. Provision for depreciation is computed
by the straight-line method over the estimated useful
lives of the assets. Estimated useful lives range from 5
to 15 years for flight equipment and 3 to 32 years for
other property and equipment; residual values range
from zero to 15%. Property and equipment under
capital leases and leasehold improvements are amor-
tized over the lease terms or the estimated useful lives
of the assets, whichever is less.
Pension Plans: The Company has several non-
contributory and contributory pension plans cover-
ing substantially all of its employees. The benefits for
these plans are based primarily on years of service
and/ or employee compensation. It is the Company's
policy to annually fund at least the minimum pen-
sion contribution as required by the Employees
Retirement Income Security Act.
Effective January 1, 1987, the Company adopted
Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions;' for all of its
pension plans (see Note I).
Income Taxes: Income taxes are provided at stat-
utory rates applied to earnings before income taxes
regardless of when such taxes are paid. Deferred
income taxes arise principally from timing dif-
ferences between financial and tax methods of
accounting for depreciation, capitalized interest
and deferred gains.
The Company uses the flow-through method
of accounting for investment tax credits. Investment
tax credits not applied currently on tax returns are
offset against deferred income taxes to the extent
they are applicable to deferred taxes becoming pay-
able in the investment tax credit carryover periods.
Operating Revenues: Passenger and freight revenues
are recognized when the transportation is provided.
The value of sold but unused tickets is included in
current liabilities.
Earnings Per Share: Primary earnings per share were
based on the weighted average number of common
and common equivalent shares outstanding of
29,631,000 in 1987; 26,915,000 in 1986 and
25,360,000 in 1985. This included shares for the
assumed conversion of the 7.5% convertible sub-
ordinated debentures due in 2007 and 2010 totaling
1,526,000 in 1987; 5,035,000 in 1986 and 3,552,000
in 1985. The 7.5% convertible subordinated deben-
tures due in 2007 and 2010 were called for redemp-
tion in December 1986 and June 1987, respectively.
Common equivalent shares also included the dilutive
effect of the assumed exercise of stock options.
Earnings were adjusted for interest relating to
the debentures, net of income taxes, amounting
to $3,444,000 in 1987; $10,793,000 in 1986 and
$7,423,000 in 1985. Fully diluted earnings per share
were equivalent to primary earnings per share.
Reclassifications: Certain amounts for 1986 and
1985 have been reclassified to conform with the 1987
financial statement presentation.
T HIR TY T HR EE
NWA INC. NOTES To CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
NOTE B-BUSINESS ACQUISITIONS
Republic: On August 12, 1986, the Company
acquired all of the outstanding stock of Republic
Airlines, Inc., a major U.S. air carrier, for approxi-
mately $862,000,000. After deducting Republic's
cash, the acquisition resulted in a net cash outlay of
approximately $674,000,000. The acquisition was
recorded using the purchase method of accounting
and, accordingly, the purchase price was allocated
to the assets and liabilities acquired based on their
estimated fair market value at the date f acquisi-
tion, largely determined by an independent appraisal.
The fair market value of the net assets acquired was
in excess of the acquisition cost which resulted in a
reduction of the amount assigned to property and
equipment. The consolidated financial statements
of the Company include results of operations for
Republic since August 12, 1986.
On October 1, 1986, the airline operations of
the Company's two major operating subsidiaries,
Northwest and Republic, were combined. As a result,
the Company accrued $17,231,000 of nonrecurring
costs associated with the combination. In November
1986 Republic was merged into Northwest.
The following presents the unaudited pro forma
results of operations of the Company and its subsid-
iaries, for the years ended December 31, 1986 and
1985, as if Republic had been acquired at the begin-
ning of each year. Actual results for the year ended
December 31, 1987, are shown for comparative
purposes (in thousands, except per share data):
Year Ended December 31
1987 1986 1985
Operating
revenues $5,142,224 $4,694,412 $4,389,888
Net earnings 103,011 95,231 47,499
Net earnings
per share 3.59 3.94 2.17
The above table includes additional interest
expense as if funds borrowed in connection with the
acquisition had been outstanding from the beginning
of 1986 and 1985. Not included in the table is a 1985
extraordinary gain of $62,175,000 ($2.45 per share)
resulting from a pension plan termination by
Republic. The proforma financial information is not
intended to reflect results of operations which would
have actually occurred had the purchase of Republic
been effective on the dates indicated and is not
intended to be indicative of future results.
P
ARS: On December 29, 1986, the Company
acquired a 50% interest in the PARS computerized
reservations system, previously wholly owned by
Trans World Airlines, Inc., for $140,000,000 which is
included in Other Assets. The reservations system
serves over 5,000 subscribing travel agencies.
MLT: On October 1, 1985, the Company acquired
all of the common stock of MLT Vacations, Inc.,
formerly Mainline Travel, Inc., a wholesaler of vaca-
tion travel packages. The transaction, which was not
material to the Company's financial results, was
accounted for as a purchase.
NOTE C-LONG-TERM DEBT AND CREDIT
AGREEMENTS
Long-term debt consisted of the following at
December 31 (in thousands):
1987 1986
8.625% notes due 1996 $200,000 $200,000
9% notes due 1992 50,000 50,000
9.15% notes due 1998 50,000 50,000
7.5% convertible subordinated
debentures due 2010 (a) 175,000
Installment notes (b) 58,953 107,137
Equipment trust notes (band c):
14.625% due 1990 74,400 75,000
15.125% due 1993 75,000 75,000
9% due 1993 17,250 20,400
Other 41,080 45,510
Debt premium (b) 16,640 27,362
Total long-term debt 583,323 825,409
Less current maturities (c) 196,346 16,725
$386,977 $808,684
THIRTY FOUR
On July 1, 1984, Northwest Airlines, Inc. entered
into a revolving credit agreement with a group of
major banks which provides for unsecured borrow-
ings up to $500,000,000 through June 30, 1988.
This amount decreases periodically thereafter to the
termination date of July 1, 1994. Interest on borrow-
ings is, at the Company's election, the lower of vari-
ous formula rates or the prin1e rate until June 30,
1991, and the formula rate or prime rate plus %
thereafter. Commitment fees ranged from _6
% to
1/s % per annum on the unused credit and amounted
to $604,000 in 1987. There were no outstanding
borrowings at December 31, 1987 and 1986.
On April 3, 1986, NWA Inc. entered into a
revolving credit agreement with a group of major
banks which provides for unsecured borrowings
up to $500,000,000 to July 1, 1989. This amount
decreases periodically thereafter to the termination
date of July 1, 1992. Interest on borrowings is, at the
Company's election, the lower of various formula
rates or the prime rate until July 1, 1992. Commit-
ment fees ranged from _ 6
% to 1/s % per annum on
the unused credit and amounted to $625,000 in
1987. There were no outstanding borrowings at
December 31, 1987. The balance outstanding
at December 31, 1986, which was classified as a cur-
rent liability, totaled $50,000,000 at an interest rate
of 6.985%. The balance was paid in February 1987.
The terms of the revolving credit agreements
provide that available borrowings shall be reduced by
any amounts of commercial paper outstanding.
(a) In June 1985 the Company issued $175,000,000
of 7.5% convertible subordinated debentures due in
2010. The debentures were convertible into common
stock at a rate of $57.00 per share. In June 1987 the
Company called the debentures for redemption. As a
result of the call for redemption, $174,012,000
principal amount of the debentures was converted
into 3,052,689 shares of the Company's common
stock. In addition, 17,333 shares were issued to an
underwriter in connection with a standby purchase
arrangement.
(b) The installment notes and equipment trust
notes were assumed with the acquisition of Republic.
The debt was revalued as of the acquisition date using
market interest rates ranging from 8.8% to 12.5%. The
resulting adjustment has been recorded as a debt
premium and is being amortized as a reduction of
interest expense over the term of the debt. These
notes are secured by certain aircraft and engines.
The installment notes have final maturity dates
from 1988 through 1998 at a weighted average interest
rate of 15%.
The 9% equipment trust notes due 1993 require
semiannual sinking fund payments of $1,575,000
from 1988 through 1992 and $1,500,000 at maturity
plus interest. The Company may make additional
semiannual sinking fund payments up to $1,575,000
and may pay off the remaining balance in full on or
after May 1, 1988, at a premium.
(c) Current maturities of long-term debt due for
the next five years are as follows (in thousands):
1988 $196,346
1989 10,669
1990 10,209
1991 15,479
1992 61 ,414
Exercising its early redemption option, the
Company retired the 14.625% and 15.125% equip-
ment trust notes due 1990 and 1993, respectively,
in February 1988. The $159,870,000 redemption
price is included in the 1988 current maturities stated
above.
The Company was in compliance with the
covenants of all debt agreements at the end of
the year. Dividends are restricted to 3 % of stock-
holders' equity at the beginning of the year.
NOTED-LEASES
The Company leases space in air terminals; land and
buildings at airports; ticket, sales and reservations
offices; and other property and equipment under
noncancelable operating leases which expire in
various years through 2025. Portions of these
facilities are subleased under noncancelable oper-
ating leases expiring in various years through 2020.
At December 31, 1987, the Company leased 59
of its 316 aircraft, 29 of which were capital leases.
Under 3 8 of the lease agreements, the Company has
the option to purchase the aircraft at prices approx-
imating fair market value at the end of the lease term,
with 14 other lease agreements providing for pur-
chase options ranging from approximately 10% to
20% of the lessor's cost. The remaining seven lease
agreements contain no purchase option provisions.
TH IR TY F I VE
NWA INC. NOTES To CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
During 1987 the Company sold eight Boeing
757-200 aircraft and two 747-200 freighter aircraft
and leased them back under operating leases. The
proceeds from the sales, which totaled $504,800,000,
exceeded the net book value of the aircraft by
$73,436,000. In 1986 the Company sold six Boeing
747-200 aircraft and leased them back under oper-
ating leases. The proceeds from these sales, which
totaled $465,415,000, exceeded the net book value
of the aircraft by $77,936,000. These gains have
been deferred and are being amortized over the terms
of the leases.
Rental expense for all operating leases consisted of
(in thousands):
1987 1986 1985
Gross $194 ,233 $101,619 $44,330
Sublease rental
mcome (12,632) (6,816) (1,818)
$181 ,601 $ 94,803 $42,512
At December 31, 1987, future minimum lease
payments under capital leases and noncancelable
operating leases with initial or remaining terms of
more than one year were as follows (in thousands):
1988
1989
1990
1991
1992
Thereafter
Less sublease rental
income
Less amounts representing
interest
Present value of future
minimum capital lease
payments and minimum
$
Capital
Leases
56,529
60,285
59,080
57,089
56,490
717,999
1,007,472
427,535
Operating
Leases
$ 161,343
154,564
172,001
148,017
141,835
2,213,938
2,991,698
38,980
rental commitments $ 579,937 $2,952,718
NOTE -STOCKHOLDERS' EQUITY
The Company has stock option and incentive
plans for officers and certain key employees. At
December 31, 1987, the Company had 1,137,150
shares of common stock reserved for issuances under
stock option and incentive plans. There were 541,800
and 914,400 shares of common stock available for
future stock option grants at December 31, 1987 and
1986, respectively. All of the options granted expire
on various dates through 1997. Grants during 1987
are exercisable as either stock options or stock appre-
ciation rights. The exercise of either a stock option or
stock appreciation right serves to cancel the other.
Common stock options at prices that were not less
than 100% of market at the date of grant were
as follows:
Price Per
Shares Share
Outstanding at
December 31, 1985 297,737 $23.31 - $44.06
Granted 205,500 47.69 - 48.50
Exercised (73,881) 23.31 - 47.69
Canceled or expired (500) 42.19
Outstanding and
exercisable at
December 31, 1986 428,856 23.31 - 48.50
Granted 376,250 64.81
Exercised (159,331) 23.31 - 48.50
Canceled or expired (50,425)~ 42.19 - 64.81
Outstanding and
exercisable at
December 31, 1987 595,350 42.19 - 64.81
,:Includes 46,275 options canceled upon exercise of
stock appreciation rights.
During 1986 the Company granted 77,600
shares of restricted common stock to certain officers
of NWA Inc. and Northwest Airlines. Until 1990,
certain restrictions limit the ability of the officers
to dispose of the stock. The estimated value of the
restricted stock is being amortized as additional
compensation expense over the term of the grant.
T H I R TY SIX
In February 1987 the Company sold 3,000,000
shares of previously unissued common stock to
the public, with net proceeds of $197,610,000. At
December 31, 1987, the Company had segregated
$171,656,000 of the proceeds for early payment in
February 1988 of 14.625% and 15 .125% equipment
trust notes due in 1990 and 1993, respectively, plus
premium and interest. The segregated assets were
held in an investment account ( with no withdrawal
restriction), which was classified as Cash and Short-
Term Investments. The balance of the proceeds was
used for general corporate purposes.
In October 1987 the Company authorized the pur-
chase of up to 1,000,000 shares of its outstanding
common stock. As of December 31, 1987, the Com-
pany had purchased 1,000,000 shares of treasury
stock at an average cost of $38.50.
NOTE F-INCOME TAXES
Reconciliation of the Company's effective income tax
rate is as follows (in thousands):
Year Ended December 31
1987 1986 1985
Statutory rate applied
to earnings
before tax $70 543 $47,031 $29,782
Add (deduct):
Investment tax
credit earned (511 ) (22,266) (37,749)
Rate change on
timing differences (5 436) (1,390) (1,444)
State income tax
net of federal
benefit 4,879 3,165 1,009
Other 3,871 (1,240) 26
Total income tax
expense (credit) $73 ,346 $25,300 $ (8,376)
Federal, foreign and state income tax expense
(credit) consists of the following (in thousands):
1987 1986 1985
Current:
Federal $28,2J7 $20,791 $(6,039)
Foreign 2,022 866 1,855
State 8,452 5,519 (868)
$38,691 $27,176 $(5,052)
Deferred:
Federal $34,975 $ (2,219) $(6,061)
State (3 20) 343 2,737
$34,655 $ (1,876) $(3,324)
The deferred income tax expense ( credit) consists
of the following (in thousands):
19 7 1986 1985
Settlement payment $ $ $ 28,094
Accelerated
depreciation 47,732 15,255 12,526
lnve tment ta and
other credits 42 009 20,117 (54,891)
Deferred gain on
sale and
leaseback l 028) (33 ,604)
Interest 8,409 7,608 3,588
Deferred employee
benefits (1 611) (10,313) (923 )
Deferred 7 57
training costs (954) 265 4,346
Deferred revenue (2,220) 2,220
Rate change on
timing differences (5 436) (1,390) (1,444)
Prepaid commissions ( 76) 5,709 443
Leases (15,3 17) (4,702) 648
Other (8,273) 1,399 2 069
$ 34 6 5 $ (1,876) $ (3,324)
Investment tax credits of $3,681,000 not applied on
tax returns but offset against deferred income taxes
at December 31, 1987, will expire if not used in the
amount of $3,170,000 in 2001 and $511,000 in 2002.
In December 1987 the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 96, '.ccounting for
Income Taxes;' which adopts significant changes that
apply to all taxable companies. One of the main pro-
visions of the Statement enables companies to reduce
deferred tax liabilities to reflect the lower rates of the
1986 Tax Act. Although the ultimate impact is
unknown, adoption of this Statement will reduce the
Company's deferred income tax liability and have a
positive impact on financial results in the year
of adoption.
The Statement is effective for fiscal years begin-
ning after December 15, 1988, but earlier adoption
of the Statement is permitted. The Company has
elected not to adopt the Statement for calendar
year 1987.
THIR T Y SE V EN
NWA INC. NOTES To CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
NOTE G-COMMITMENTS
As of December 31, 1987, the Company had con-
tracted to purchase 5 Boeing 757-200 aircraft for
delivery in 1988; 10 Boeing 747-400 aircraft for
deli ery from 1988 through 1990 and 25 Airbus
A3 20-200 aircraft for delivery from 19 8 9 through
1992. Deposits of $256,704,000 have been made
with the manufacturers, and additional committed
expenditures for these aircraft and related equipment
will be approximately $472,553,000 in 1988;
$551,576 000 in 1989; $468,126,000 in 1990;
$170,776 000 in 1991 and $120,557,000 in 1992.
The Company has options to purchase up to 75
additional Airbus A320 aircraft for delivery from
1992 through 1995, on which refundable deposits of
$16,433,000 and nonrefundable deposits of
$750 000 have been paid. These aircraft are subject
to periodic reconfirmation or cancellation. Amounts
to be paid under these options, assuming all aircraft
are purchased, will approximate $2,700,000,000.
In April 1987 the Company entered into a pre-
liminary agreement to purchase 20 Airbus A340 air-
craft to be delivered from 1992 through 1995, with
an option to purchase 10 A330 aircraft. The Com-
pany has until 1989 to confirm the purchase. The
Company may, at its option, convert up to ten of the
A340 aircraft to A330 aircraft if done no later than
three years before scheduled delivery. The anticipated
cost for the 20 A340 aircraft and spare parts is
approximately $1,900,000,000. Additional expendi-
tures of approximately $800,000,000 may be
incurred should the Company decide to purchase the
option aircraft.
In addition, the Company signed a letter of intent
to lease four McDonnell Douglas DC-9-30 aircraft
for a term of five years, with delivery in 1988.
NOTE H-LITIGATION AND CONTINGENCIES
The Company is involved in legal actions relating to
environmental issues (primarily noise and air pollu-
tion), trade practices, alleged employee discrimina-
tion, 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 opinion of
management that their disposition will not have a
material adverse effect on the Company's financial
position.
NOTE I-RETIREMENT BENEFITS
Effective January 1, 1987, the Company changed
its method of accounting for pension costs in accor-
dance with the provisions of Statement of Financial
Accounting Standards No. 87. The Company's pen-
sion expense was $42,440,000 in 1987; $24,613,000
in 1986 and $23,242,000 in 1985. Pension expense
for 1987 reflected a $4,800,000 decrease due to the
adoption of Statement No. 87. Pension expense for prior
years has not been restated.
The net periodic pension cost of defined benefit
plans for 1987 included the following (in thousands):
Service cost-benefits earned during
the penod
Interest cost on projected benefit obligation
Actual return on plan assets
Net amortization and deferral
Net periodic pension cost
$ 37,651
86,848
(89,217)
(3,244)
$ 32,038
THIRTY EIGHT
At December 31, 1987, the funded status of the
Company's defined benefit plans was as follows
(in thousands):
Plans Where Plans Where
Assets Exceeded Accumulated
Accumulated Benefits
Benefits Exceeded Assets
Actuarial present
value of:
Vested benefit
obligation $535,794 $235,024
Nonvested benefit
obligation 26,067 13,394
Accumulated bene-
fit obligation 561,861 248,418
Effect of projected
future salary
mcreases 188,442 7,560
Projected benefit
obligation $750,303 $255,978
Plan assets at fair
value* $825,110 182,017
Less projected
benefit obligation 750,303 255,978
Plan assets greater
than (less than)
the projected
benefit obligation 74,807 (73,961 )
Unrecognized net
(asset) liability (96,901 ) 43,480
Unrecognized net
gain during the
year (15,072) (6,948 )
Accrued pension cost
at December 31, 1987 $ (37,166) $ (37,429)
'-Plan assets were invested primarily in equity and
debt securities.
At December 31, 1986, the actuarial present value
of accumulated benefits for all defined benefit plans
was $746,267,000 (of which $706,054,000 was
vested), compared with a fair value of net plan assets
available for benefits of $997,439,000. The interest
rates used in computing the present value of accu-
mulated plan benefits were either 8% or 8.5% for
all plans except for certain retired plan participants
where a 13.75% rate was used. The rate for retired
plan participants was based upon the actual earnings
of a dedicated securities portfolio established for the
payment of their benefits.
At December 31, 1987, the weighted average dis-
count rate and rate of increase in future com-
pensation levels used in determining the actuarial
present value of projected benefit obligations were
9 .5% and 5%, respectively. The expected long-term
rate of return on plan assets was 9% in 1987.
The Company also has defined contribution pen-
sion plans covering former Republic pilots and flight
attendants. Company contributions to the plans,
which totaled $10,402,000 for 1987 and $2,541,000
for 1986, are based on employee compensation.
In addition to providing pension benefits, the
Company provides certain health care and life insur-
ance benefits for certain retired employees. The cost
of providing those benefits, which is not material, is
expensed when paid.
OTE ]-SALES TO CUSTOMERS IN FOREIG
COU TRIES
The operations of the Company consist primarily of
holding stock in orthwest Airlines, Inc., which is a
scheduled air carrier engaged in commercial trans-
portation of passengers, freight and mail. Sales by
Northwest Airlines to customers in foreign countries,
principally in Asia and Europe, were approximately
$965,000,000 in 1987; $733,000,000 in 1986 and
$658,000,000 in 1985.
THIRTY NI ' E
NWA INC. NOTES To CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
NOTE K-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED )
Quarterly results of operations for the years ended December 31, 1987 and 1986, are summarized below
(in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter;' Quarter*"
1987:
Operating revenues $1,169,215 $1,315,487 $1,443,712 $1,213,810
Operating expenses 1,206,251 1,216,793 1,301,537 1,221,513
Operating income (loss) (37,036) 98,694 142,175 (7,703)
Net earnings (loss) (34,993) 50,647 87,336 21
Net earnings (loss) per common and common
equivalent share (1.38) 1.73 2.89
1986:
Operating revenues 638,439 702,472 1,099,349 1,148,914
Operating expenses 689,221 674,937 950,534 1,107,837
Operating income (loss) (50,782) 27,535 148,815 41,077
Net earnings (loss) (16,444) 23,894 59,729 9,762
Net earnings (loss) per common and common
equivalent share (.75) .99 2.32 .45
'' The Company acquired all the outstanding stock of Republic Airlines, Inc. on August 12, 1986. Expense of
$1 . 2 million for nonrecurring costs associated with the combination of Northwest's and Republic's operations was
recorded in 1986.
'' ,; et earnings were reduced by approximately $12. 0 million in 1986 due to a change in tax laws which limited
allowable 1986 investment tax credits.
FORTY
REPORT OF I DEPE DE T ACCOU TA TS
To the Stockholders and Board of Directors
WA Inc.
Saint Paul, Minnesota
We have examined the consolidated balance sheets
of NWA Inc. and subsidiaries as of December 31, 1987
and 19 8 6, and the related consolidated statements of
earnings, stockholders' equity and changes in finan-
cial position for each of the three years in the period
ended December 31, 1987. Our examinations were
made in accordance with generally accepted auditing
standards and, accordingly, included such tests of the
accounting records and such other auditing proce-
dures 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, 1987
and 19 8 6, and the consolidated results of their opera-
tions and changes in their financial position for each
of the three years in the period ended December 31,
1987, in conformity with generally accepted account-
ing principles applied on a consistent basis.
f6~~w7-
saint Paul, Minnesota
February 19, 1988
STOCKHOLDERS' lNFORMATIO
Stock Prices and Dividends
Sales Price of Dividends
Common Shares Per Share
Quarter 1987 1986 1987 1986
1st High $76 $547
/2 $.225 $.225
Low 59 43
2nd High 755/s 53 .225 .225
Low 58 47
3rd High 73 52 .225 .225
Low 54 41
4th High 59 623/s .225 .225
Low 305
/2 52
Securities Listed
The Company's common stock is listed on the ew
York Stock Exchange, Pacific Stock Exchange, and
Midwest Stock Exchange. There were 5,827 share-
holders of record as of February 19, 19 8 8.
Registrars and Transfer Agents
Norwest Bank Minnesota, N.A.
South Saint Paul, Minnesota 55075
Norwest Trust Company
New York, ew York 10005
Annual M eeting
The 1988 Annual Shareholders' Meeting will be held
at NWA Inc. World Headquarters, 2700 Lone Oak
Parkway, Eagan, Minnesota on Monday, May 16,
1988, at 9:30 A.M.
FORTY 0 , E
NWA I NC. TEN-Y EA R SUMMARY
(Dollars in thousands except per share figures-unaudited)
1987 1986 1985 1984 1983 1982t 1981 1980 1979 1978t
OPERATING REVENUES
Passenger $4,371,624 $2,920,458 $2,154,394 $1,984,999 $1,812,227 $1,567,986 $1,521,856 $1,347,830 $1,067,214 $ 557,401
Freight 453,160 406,726 328,400 355,336 289,170 205,018 221,691 190,837 160,716 87,077
Mail 101 ,393 87,459 80,126 58,339 55,585 60,451 59,786 57,305 38,685 18,944
Charter and other transportation 69,589 78,110 55,959 38,559 36,198 34,758 21,766 16,303 15,093 10,997
Other 146,458 96,421 36,612 7,741 2,856 9,355 29,191 27,055 28,850 115,743
Total Operating Revenues 5,142,224 3,589,174 2,655,491 2,444,974 2,196,036 1,877,568 1,854,290 1,639,330 1,310,558 790,162
OPERA TING EXPENSES
Depreciation and amortization 340,338 242,213 182,563 167,203 146,908 136,651 133,489 124,078 106,401 104,970
Other 4,605,756 3,180,316 2,395,841 2,181,495 1,980,242 1,749,292 1,719,054 1,539,386 1,148,805 617,907
Total Operating .Expenses 4;946,094 3,422,529 2,578,404 2,348,698 2,127,150 1,885,943 1,852,543 1,663,464 1,255,206 722,877
OPERATING INCOME (LOSS) 196,130 166,645 77,087 96,276 68,886 (8,375) 1,747 (24,134) 55,352 67,285
Interest expense (105,005 ) (76,537) (19,873) (4,268) (3,548) (7,216) (14,135) (15,831) (1,635) (3,376)
Other income (expense)-net 85,232 12,133 7,529 25,380 8,265 16,279 20,297 3,862 30,643 45,126
Earnings (loss) before taxes and extraordinary item 176,357 102,241 64,743 117,388 73,603 688 7,909 (36,103) 84,360 109,035
Income tax expense (credit) 73,346 25,300 (8,376) 30,521 23,530 (4,331) (2,551) (43,187) 11,885 47,194
NET EARNINGS $ 103,011 $ 76,941 $ 73,119 $ 55,964tt $ 50,073 $ 5,019 $ 10,460 $ 7,084 $ 72,475 $ 61,841
Net earnings per share $ 3.59 $ 3.26 $ 3.18 $ 2.44tt $ 2.19 $ .23 $ .48 $ .33 $ 3.35 $ 2.86
Cash dividends 25,487 19,645 19,586 17,933 17,367 17,332 17,326 17,317 17,306 16,210
Dividends per share .90 .90 .90 .825 .80 .80 .80 .80 .80 .75
Stockholders' equity 1,523 ,126 1,105,916 947,001 892,923 854,189 820,605 832,510 839,042 849,122 793,691
Number of shares outstanding at year end 29,110,325tH 23,890,095 21,774,251 21,749,667 21,715,995 21,678,458 21,661,367 21,647,280 21,639,589 21,626,284
Book value per share at year end 52.32 46.29 43.49 41.05 39.33 37.85 38.43 38.76 39.24 36.70
ASSETS AND LONG-TERM DEBT
Flight equipment at cost $4,130,052 $4,109,553 $2,784,553 $2,356,048 $2,080,299 $1,996,925 $1,992,015 $1,995,168 $1,779,770 $1,525,442
Flight equipment at net book value 2,369,058 2,593,393 1,427,114 1,151,930 976,501 1,019,071 1,110,965 1,200,495 1,094,556 922,615
Total assets 4,219,497 4,322,854 2,320,006 1,754,233 1,602,236 1,377,387 1,492,381 1,532,539 1,528,921 1,392,865
Long-term debt and capital lease obligations 949,059 1,386,232 494,093 100,000 100,000 12,500 62,500 100,000 100,000
STATISTICS-SCHEDULED SERVICES
Revenue plane miles ( 000) 356,142 246,711 159,337 143,410 133,699 119,189 120,139 120,709 116,105 66,420
Revenue passenger miles ( 000) 39,549,501 28,814,957 22,341,334 19,772,355 17,711,929 15,675,194 14,251,932 13,810,889 13,298,161 7,018,305
Available seat miles ( 000) 61 ,420,541 48,408,440 37,148,562 32,663,660 29,511,287 26,257,466 24,813,981 24,904,355 24,028,928 14,302,037
Passenger load factor 64.4% 59.5% 60.1% 60.5% 60.0% 59.7% 57.4% 55.5% 55.3% 49.1%
Passengers 37,246,682 23,167,120 14,538,744 13,215,907 12,718,468 11,356,165 11,144,785 11,501,148 11,636,170 6,574,901
Freight ton miles (000) 1,219,456 1,022,864 886,355 965,868 835,197 600,198 616,285 529,434 504,753 302,153
Passenger and cargo revenue ton miles ( 000) 5,397,405 4,135,343 3,334,257 3,103,799 2,750,946 2,307,475 2,186,815 2,048,349 1,956,217 1,079,681
Yield per revenue passenger mile 11.05<t 10. l 4<t 9.64<t 10.04<t 10.23<t 10.00<t 10.68<t 9.76<t 8.03<t 7.94<t
STATISTICS-TOTAL OPERATIONS
Revenue plane miles ( 000) 357,047 249,168 161,186 144,568 134,870 120,378 120,761 121,243 117,027 67,471
Available ton miles (000) 9,882,269 8,123,450 6,450,509 5,837,972 5,255,086 4,635,415 4,519,768 4,495,666 4,265,640 2,594,632
Operating expenses per available ton mile 49. l<t 41.2<t 39 .8<t 40.2<t 40.S<t 40.7<t 41.0<t 37.0 29.4 27.9
Number of employees at year end 33 ,724 33,427 16,864 15,185 14,187 13,754 13,096 12,748 12,814 10,680
tStrikes adversely affected 1978 and 1982.
ttAfter extraordinary loss of $30,903 or $1.30 per share resulting from the settlement of a lawsuit.
tttExcludes 1,000,000 shares held in treasury.
FORTY THREE
FOR TY TWO
BOARD OF DIRECTORS
OFNWAI C.A D
NORTHWEST AIRLINE , I C.
James A. Abbott
Vice Chairman of the
Board and General
Counsel
WA Inc. and orthwe t
Airlines, Inc.
St. Paul Minnesota
James H. Binger
Former Chairman of the
Executive Committee
Honeywell Inc.
Minneapoli , Minne ota
Manufacturer of
aut0mation ystem
E.W Blanch, Jr.
Chief Executive Officer
and General Partner
E.W. Blanch Company
Minneapolis Minne ota
Rein urance brokerage
firm
Robert A. Charpie
Chairman of the Board
Cabot Corporation
Bo tan Mas achusetts
Producer of chemical ,
metal oil and ga
,:
-Raymond H. Herzog
Former Chairman of the
Board
3M Company
t. Paul, Minne ota
Multinational
manufacturing
John F. Horn
President and Chief
Operating Officer
WA Inc. and orthwe t
Airlines, Inc.
t. Paul Minne ota
,:- Melvin R. Laird
Senior Counsellor
Reader' Digest Inc.
Washingt0n, D.C.
Magazine publishing
,:
} ames . Land, Jr.
Financial Consultant
Short Hills, ew Jersey
M. Joseph Lapensky
Chairman of the Board
Retired
NWA Inc. and orthwest
Airlines, Inc.
St. Paul, Minnesota
Steven G. Rothmeier
Chairman of the Board
and Chief Executive
Officer
NWA Inc. and orthwest
Airline , Inc.
St. Paul Minne ota
Richard A. Trippeer, Jr.
Chairman of the Board
Union Planters
Corporation
Memphis, Tenne see
Bank holding company
,:
-Wm. Bew White, Jr.
Counsel
Bradley, Arant, Ro e &
White
Birmingham, Alabama
Law firm
Gary L. Wilson
Executive Vice President
and Chief Financial
Officer
The Walt Disney Company
Burbank, California
''Mem bers of the Audit Committee
OFFICERS OF NORTHWEST
AIRLINES, INC.
,:
-Steven G. Rothmeier
Chairman of the Board
and Chief Executive
Officer
,:
}ohn F. Horn
President and Chief
Operating Officer
,:
}ames A. Abbott
Vice Chairman of the
Board and General
Counsel
'}ohn A. Edwardson
Executive Vice President-
Finance and Chief
Financial Officer
Benjamin G. Griggs, Jr.
Executive Vice President-
Operations
Thomas]. Koors
Executive Vice President-
Customer Services
A.B. Magary
Executive Vice President-
Marketing
William H. Sitter
Executive Vice President-
Administration and
Chief Information
Officer
Brent ]. Baskfield
Vice President-Ground
Services
David W Behrends
Vice President-Cargo
G. Edward Bollinger
Vice President-
Purchasing and Stores
John W Campion
Vice President-Corporate
Planning
Terry M. Erskine
Vice Pre idem-Law &
Labor Relations
,:
-Bruce H. Fillips
Vice President-
Comptroller
Raymond G. Foss
Vice President-Sales and
Marketing Systems
Roger D. Hauge
Vice President-Atlantic
Region
Allen W Johnson
Vice President-Pacific
Region
Benjamin H. Lightfoot
Vice President-Technical
Services
,:- Robert A. Magnuson
Vice President-Treasurer
A.L. Maxson
Vice President-Financial
Planning
Donald F. elson
Vice President-Flight
Operations
Walter H. Pemberton
Vice President-
Communications &
Computer Services
Allan K. Pray
Vice President-Assistant
to the Chairman
James F. Redeske
Vice President-Personnel
Administration
R. Terrence Rendleman
Vice President-
Maintenance &
Engineering
Paul E. Schoellhamer
Vice President-
Government Affairs
John W Temple
Vice President-Marketing
Programs
R. James Thorne
Vice President-Properties
Lloyd R. Warren
Vice President-
In-Flight Services
,:-Steven D. Wheeler
Corporate Secretary
William C. Wren
Vice President-Corporate
Relations
'Also officers of WA Inc.
FOR TY FOUR
OFFICERS OF OTHER
PRINCIPAL SUBSIDIARIES
MLT Vacations, Inc.
Edward A. Neer,Jr.
President and Chief
Executive Officer
Richard A. Bjork
Vice President-Planning
Stanley D. Phillips
Vice President-Sales and
Marketing
Thomas M. Schmidt
Vice President-Finance
and Administration and
Treasurer
R. Carol Spalding
Vice President-Operations
Northwest Aerospace
Training Corporation
Benjamin G. Griggs, Jr.
President
H. Tom Nunn
Executive Vice President
and Managing Director
David V. Prentice
Vice President-Flight
Simulation
Gary L. Smith
Vice President-Computer
Services
Northwest Aircraft Inc.
Thomas E. McGinnity
President and Chief
Executive Officer
Corporate Mailing Address:
NWAinc.
Minneapolis/ St. Paul
International Airport
St. Paul, MN 5 51ll
( 612) 726-21ll