Northwest Airlines Annual Report 1994

North, est Airlines Corporation
1 994 Annual Report
To build together the
world's most preferred
airline with the best people;
each committed to
exceeding our customers'
expectations every day.
- The Vision Of
Northwest Airlines
Corporation
Condensed Financial Highlights (Dollar amounts in millions, except per share data)
Northwest Airlines Corporation
Year Ended Dec mber 31 P rent
1994 1993 Change
Financial
Operating Revenues $ 9,142.9 $ 8 64 .9 5.7
Operating Expenses $ 8,312.5 $ 8,376.5 (0.8)
Operating Income $ 830.4 $ 272.4 204.8
Operating Margin 9.1 % 3.1 % 6.0 pt .
Net Income (Loss) $ 295.5 $ (115.3)
Net Income (Loss) Per Share:
Primary $ 2.92 $ (2.82)
Fully Diluted $ 2.87 $ (2. 2)
Number of Common Shares Outstanding (million ) 84.3 58.0
Operating Statistics
Scheduled Service:
Available Seat Miles (ASM) (millions) 85,015.6 87,212.5 (2.5)
Revenue Passenger Miles (millions) 57,873.2 58,130.1 (0.4)
Passenger Load Factor 68.1 % 66.7% 1.4 p ts.
Revenue Yield Per Passenger Mile 13.36 12.58 6.2
Revenue Passengers (millions) 45.5 44.1 3.2
Cargo Ton Miles (millions) 2,322.3 2,188.0 6.1
Revenue Per Total ASM 10.65 9.82 8.5
Total Operating Expense Per Total ASM 9.69 9.51 1.9
Cash from Operations
1500-------------
Revenues & Expenses
9500 - - - - - - - - - - - - -
OperaLing Revenue
1000
VJ
C
~ 500
s
Yr
0
1992
-500
9000
VJ
8500
C
~
' 8000
Yr
1993 1994 7500
7000
Total Liquidity
1500
VJ
1000
C
;5
s
500
Yr
0
Revolving credit facility
U nre tricL
ed ha rt-term
investrnen ts
Cash & cash quivale nLS

1992 1993
1
OperaLing Expe n es
1992 1993 1994
1994-
2
This is the first published Annual Report
to shareholders of orthwest Airlines
since 1988. The " ew orthwest" that
we present in this report is quite a bit different
from its publicly known predecessor. There
are many reasons for this, not the least of
which has been the need to adapt our company
to meet the challenges of a radically changed
U.S. and global airline industry.
In this report you will read the Vision, Mission,
and Principles which were developed by our
people to guide our company during the past
several years. Adherence to these
fundamentals has gotten us where we are
today and it is through their continued
application that we intend to guide orthwest
in the future .
As these statements reflect, orthwest is
focused on people:
First, our customers, for whom we work -
quite simply we are dedicated to providing
them service that is convenient, reliable and
consistent.
Second, our employees, who are our greatest
asset- we are committed to improving their
work environment and empowering them
individually and collectively to express and
enrich themselves through the creative use
of their talents.
Third, our communities, which support
us - we recognize the importance of air
transportation to their economic development.
We acknowledge our dependence on our
communities and our responsibility to be
productive corporate citizens wherever we
do business.
To the e, e, ould add the network of
financial and comm rcial relation hip that
upport our effor ; , e al o recognize that
v e are a capital inten i e compan ,,ho
future growth and pro p ri dep nd upon
fulfilling our commercial obligation and
pro ding appropriat financial r tum to
our in e tor . v\ e ar dedicated to ju tifying
the confidence that ha been placed in u .
, e reflect upon the tran formation of
orth, e t o er th pa t e ral ar and th
re ul ts for 1994 which are di cu ed in thi
report, we note, th particular ati faction
the achie ements of the extraordinary and
di er e executi e managem nt team that has
been attracted to thi compan . Recruited
both from within and out ide the airlin
indu tr , thi group ha demon trated
uncommon energy, dedication and kill in
addre ing the problem and capitalizing
upon the opportunitie of an indu tr in
proce of tran ition. e are parti ularl ,
appreciati e of the leader hip and kill
provided b John Da burg, ortlrn e t
Pre ident and Chief Executive Officer.
On behalf of our fellm board member , e
welcome with pecial pride and gratitude the
more than 40 000 employee hareholder of
orthwe t Airline . Your enthu iasm,
dedication, and excellent cu tomer sen c
are the em of the .S. airline indu t
Through our financial and per onal
inve tment in our com p an , ou ha
defined the new orth, e t and et an example
not onl for the air tran portation indu try
3
but all of indu t . To ou we mak a p ial
pledge: To dir ct the re ource of orthwe t
'rline to produ e not onl a profit on our
financial im e trnent but a trong op rating
platform upon ,,,hi h to ba our long t rm
financial cun .
On a p r nal n t man peopl ha a ked
u if the hard work and ffort during th
pa t ral ar h b n w rth it. n oth r
, ord ' If ,ou kn w, hat ou knm nm .... ?'
, e look at, hat the peopl of ortl1, e t
have collectivel , achieved and reflect on th
opportunitie that lie ahead, , e a in the
vernacular of our home tate, 'You bet. '
'\1
\
hope that th following page help ou to
under tand better toda orthv, e t rline
orporation and the people , ho through
their dail , effort continue to build and
hape thi compan for a pro perou futur
for our cu tomer , hareholder and the
comm uni tie that,, e er e. \ e appreciate
our intere t and upport.
Checchi
Co-Chairman
Ga il on
Co-Chairman
The Mission Of
Northwest Airlines
The people of Northwest Airlines will provide
reliable, convenient and consistent air
transportation that meets or exceeds customer
expectations and earns a sustainable profit.
Reliable means safe, clean, on-time air
transportation created by. the best people
providing friendly, professional, consistent and
caring service. A cornerstone of Northwest's
reliability is prompt and appropriate service
recovery when, despite our best efforts,
something goes wrong.
Convenient means making it as easy as possible
for customers in the markets we serve to do
business with us, with the best schedules and the
simplest access to our network.
Consistent means delivering reliable and
convenient service every time the customer
flies or ships on our airline.
4
The Guiding Principles
Of Northwest Airlines
1. Never compromise safety.
2. Always emphasize cleanliness.
3. Always put customers first.
,. Learn what makes a difference
to each customer and deliver it.
,. Resolve customer problems on
the spot whenever possible.
'Y Obtain the training and tools we need
to serve our customers.
4. Always support and inspire each other.
,. Work together to achieve common goals.
'Y Recognize the good work of others.
'Y Recruit and promote to the highest standards
of performance and professionalism.
'Y Build self-esteem and pride in each other.
5. Always strive to improve.
,. Measure against the best.
,. Solicit and offer ideas for improvement.
,. Search out and break down barriers that
get in the way.
5
To Our Shareholders:
I am plea ed to welcome you a a
hareholder of orthwest Airline and to
report how we have developed strategies to
compete in a radically changing competitive
environment; how we have managed our
a ets to produce indu try-high profits in 1994;
and how we have po itioned your company
for solid performance in the years ahead.
New Strategies
During the early 1990 the U.S. airline indu try
was affected b war, deep worldwide rece sion,
attempted unilateral imposition of an
uneconomic pncmg tructure and flaw d
federal taxing policy.
gainst this backdrop U.S. airline truggled
to ab orb billion of dollars of lo es and
to complete the tran formation from
government-protected and -regulated route
y terns to competitive customer-focu ed global
enterprise . During thi period many great
name in commercial aviation di appeared;
everal airlines continue to struggle financially
and many are trying to determine the
appropriate mission and strategy to conform
to the nev.r competitive environment.
In contending with the e political and market
force we undertook to redefine our mi sion
and trategie with the help of cu tomer and
employee . Our cu tomer told u they want
air tran portation that is con istently
convenient and reliable. Our employee told
u they want the opportunity to be their be t.
We developed our trategie accordingly.
Convenience. To achieve convenience, which
our cu tomer largely define a frequent air
ervice, we manufacture connections wh re we
hav the competitive advantag of peed and
6
frequency. Thus we have concentrated our
domestic flying through three large and efficient
connecting hubs in Detroit, Minneapolis/
St. Paul and Memphis. We serve the high-
growth Pacific market through connections
with our major hub in Tokyo. Additionally,
via our strategic alliance with KLM, we make
connections with Europe, Africa, and the
Middle Ea t through a hub in Amsterdam.
Providing more frequency at higher profit
margins ha resulted in high levels of
cu tomer atisfaction and sub tantially
increased profits for orthwest Airlines.
Thi focu on convenient connections has
in pired ignificant restructuring of our
domestic and Pacific route systems over the
pa t few years. Consi tent with our strategy
we have eliminated the previously un-
profitable domestic flying dispersed among
Wa hington D.C., Milwaukee, and the north-
south corridor on each coa t. Likewise, we
have focu ed our Pacific service by reducing
our flying to Seoul, Kor a; Taipei, Taiwan;
and Sydney, Australia.
In addition to passenger ervice, orthwest,
unique among U .S. pas enger airlines,
operat a main deck freighter operation to
meet cargo customer ' tran portation need .
Including the cargo capacity afforded by our
extensive pa enger fleet, the orthwest Cargo
operations constitute the ninth-largest air
cargo bu iness in the world. These operation
are targeted to capitalize on high-growth
area of world trade, particularly in the
Pacific rim.
Pt>ople ofNorLhwcsLAi rlin (I fl LO righL): I leidi Porch; L vc Taylor; Teresa i\lontgome1
y CranL \,\ alkcr;
John Dasburg, Pr -sidcnL and ,hi r Exe UU\'C ITicer; Kat , Juckel; i\lontc Tukumocatu and Kathleen Lau_
Reliability. To achi v r liability , turn d t
the p ople of orthw t. As onvenien i
achiev d through a hub-and- pok op ratino-
y tern, r liability is a hi v d by p opl . Our
custom r tell us th y want afe cl an air
transportation that arrive on tim with
luggag . Th y want pro s ional, friendly and
caring s rvic and prompt and appropriat
ervic r covery wh n, despit our b t efforts,
som thing go wrong. And in rea ingly
they ar t lling us th y are delight d wh n
we exc d their xpe tation .
To provid r liabl air tran portation, we hav
inv ted in hiring th be t p opl providino-
training and er ating an nvironm nt that
fost r high If-est m and i d dicated to
erving our cu tom rs.
7
An oro-anization r quir th b t p ople
mino- at th ir b L if it i to be th b t.
thw t rr
opl hav di tingu
by achi vi raordinary in1pr0\ m nt in
u tom r c
nd mad th ir om pan ,
numb r on ir p rformanc am no-
t n larg airlin for an
unpre dented fiv traio-ht ar . A hio-h
1 v l of on-time p rformanc riti al to
our hub-and- poke trat oJ.
It i diffi ult to ino-le out tho r
r gniti n f, r ntributing to uch dramatic
r ult . W ar fortunate to hav man
p opl to eel brate. Tho ivitw t11i ar'
Pr id nt' :
ward x -mplif , rthw t
Airlin atit b t (e - pao- - 21).
Improved Profitability
In business it is not ufficient to satisfy
customers, employ the best people and possess
strategic assets, or even to adopt thoughtful
strategies. It is essential to earn sustainable
profits and appropriate returns on capital. If
we are not profitable, capital markets will not
be accessible or will be prohibitively expensive
and product and morale will erode. Ultimately,
the competitive edge will be lost.
To achieve improved profits and return on
capital we have improved revenue per unit,
reduced costs and improved the productivity
of our assets.
Our revenue programs are based upon
increased flying at Detroit, Minneapolis/
St. Paul and Tokyo, where connecting
opportunities are maximized.
V\T
e have reduced expenses by lowering
overhead and increasing productivity through
the application of process improvement and
applied technology.
V\ e have increased the production of our
assets by eliminating redundant inventory,
selling unproductive assets, and investing in
existing aircraft rather than uneconomic
new aircraft.
The accompanying financial statements
provide a detailed description of the past year's
performance. Our focus on per unit revenue
growth and co t containment has produced
a ignificant increase in year-over-year profits
from a $115.3 million net loss in 1993 to a
$295.5 million net profit in 1994, the largest
1994 net profit in the U.S. airline industry.
During this past year we also rai ed more
than $1. 7 billion of new capital to refinance
our intermediate term liabilities at reduced
co t and extended maturitie .
8
Future Prospects
While the results of 1994 are significant,
the strategies adopted and actions taken to
produce them are the foundation for our
future success. We are well positioned to
continue to improve our products and service
and to improve our revenue per unit while
tightly managing our cost per unit. Using
our hubs in Detroit and Minneapolis/
St. Paul, we can take advantage of the new
U.S.-Canada bilateral agreement by increasing
profitable flying to and from Canada. Using
our hubs in Detroit and Japan we are well
positioned to expand profitably in high
growth Asia/ Pacific markets.
In summary, 1994 has been a most rewarding
year. We have achieved strategies with the
necessary balance and focus to meet our
customers' needs while building upon our
competitive strengths. We have produced
industry-high profits while building the
foundation for long-term financial success.
We have developed as an organization the
flexibility necessary to respond to the profitable
opportunities presented by our continually
evolving industry.
I wish to thank the people of Northwest Airlines
for their tremendous effort over the past year.
Through their actions they have proved that
some people really know how to fly!
Sincerely,
John H. Dasburg
President and Chief Executive Officer
Viewpoint:
Real Tax Reform Can Prevent The Next Airline De pression
The domestic U.S. airline industry lost
$9 billion between 1990 and 1993, the
worst financial battering in industry
history. What went so wrong? What can keep
it from happening again?
Clearly, many factors contributed. However,
an examination of the profit and loss
statements of the largest U.S. airlines for the
period beginning in 1988 ( the industry's
most profitable year) and ending with 1993
suggests that the single leading cause of the
last airline depression (and the greatest
potential cause of the next airline depression)
may be a factor beyond the airlines' control -
namely, the staggering increase in government-
imposed taxes and charges.
During these six years capacity increased at
the fairly modest compound annual growth
rate (CAGR) ofl.2 %. Revenue during the
same period grew faster at a 3.8% CAGR, a
respectable rate given the overall recessionary
state of the U.S. economy during several of
the relevant years. These statistics suggest
that costs rather than revenue hold the key
to understanding the industry's profitability
problems.
But many costs, such as fuel, increased less
than revenue, posing no problem. Costs
such as payroll grew at about the same rate
as revenue and total operating expenses
grew only slightly faster than revenue. However,
the airline industry's government-imposed costs
increased significantly more and significantly
faster than either revenue or other costs.
Consider the following:
T Benefits, many mandated by the government,
increased at an 8.4% CAGR.
T Landing fees went up 7.4% CAGR.
T Federal ticket and passenger taxes rose a
chilling 13.6% CAGR.
9
ew taxes and fees levied during the airline
industry's darkest financial hour included
a 25% ticket tax increase that in one troke
added more than one billion dollar a year
to airline costs; passenger facility charge
that already have cost the industry an
additional $1.3 billion and continue to rise;
customs and immigration fee hikes of about
$275 million per year; and a new fuel excise
tax that is scheduled to start draining an
additional $530 million per year from the
industry starting in October 1995.
It is not difficult to appreciate the devastating
impact of such cost increases on an indu try
that operate on thin after-tax margin of
about two percent in its best years. The
story of the airline industry in the '90s is a
textbook example of the damage that ill-
conceived tax policy can do to a vital
industry. Fortunately, there are cures for this
damage that will safeguard the jobs of highly
skilled workers, allow for repairs to our
industry's breached capital structure and help
protect the industry from the next inevitable
cyclical downturn.
President Clinton's ational Commission
to Ensure a Strong and Competitive Airline
Industry called on Congress to "relieve the
airline industry of its unfair tax and user fee
burden" and recommended that the passenger
ticket tax increase be rolled back. More
recently, 56 Senators wrote the President a
bipartisan letter urging cancellation of the jet
fuel excise tax increase.
The U.S. airline industry is the most
competitive in the world. We could be one
of America's most successful global industries
as well. We simply need the unfair tax burden
lifted. Congress and the White House know
this. They simply must choose to act.
1 994 In Review
North, tAirline Corporation's 1994
r ults r fl t d three ear of ffort
to impl ment a new and highly-
focused busines strategy. The company set
annual record for both operating revenue
and net incom , r porting a net profit in
each quart r.
uch of th improvement in profitability
re ulted from increa ed marketing focu on
orthwest key trategic a sets. The irline
launched new or expanded ervice in more
than 20 dome tic and international markets,
with nev flying focu ed on the company'
network hub . The airline upported thi
o-rm th b) hifting a ets from und r-
p rforming market rather than by adding
capacity (available at mile flown actually
declined 2.5% year-over-year). As a r ult,
th compan ' operating mar in increased
almo t three-fold from 3.1 % in 1993 to 9.1 %
in 1994 and orthwe twas one of the few
major airline to record grm th in r v nue
p r availabl at mile (RASM) in 1994,
improving .5% to 10.65/ ASM from a 1993
RASM of 9.82/ ASM. Profitability also
benefited from continued aggr i co t
control. Ov rall operating ex pen es declined
on percent ear-over-year and op rating
co tsp r w r e entiall flat at 9.69.
orthwe t Airlin Corporation trengthened
it balance heet in 1994 improving liquidity
and ecuring a more conservative debt
amortization chedule. The company
ompleted more than $1. 7 billion in financing
in 1994 including a $265 million common
10
stock of ring in March and a $450 million
refinancing of its major bank loan. The
company' year-end total liquidity of $1.3
billion included cash and cash equivalents
of $468 million, short-term investments of
$500 million and $291 million in borrowing
capacity under its revolving credit facility.
et d bt wa reduced by $1.3 billion during
th y ar.
orthwest further refined its fleet plan to
meet current and anticipated system needs.
After exhau tive engineering, economic and
marketing studies, the company finalized
plan to hu hkit and refurbi h its fleet of
100-seat McDonnell Douglas DC-9-30 aircraft.
The plan will bring the DC-9-30 fleet into
Stage III noise compliance and will allow
orthwest to forego an unnecessary $3 billion
inve tment in replacement of the DC-9-30
fleet with new aircraft. As of March 1, 1995,
orthwe t had placed firm orders for
hu hkits for 80 DC-9-30 aircraft, and held
option to order 50 additional hushkit shipsets.
In February 1995, the company announced a
re cheduling o Boeing aircraft deliveries,
moving 15 B-757 deliverie forward to 1995
and 1996, and deferring 25 remaining B-757
deliverie until 2003-2005. The new schedule
al o gi es orthwest the option to defer four
B-747-400 deliveries to as late as 2002 and
2003. orthwest has obtained financing for
the fir t 15 B-757 deliverie .
North America
North\,ve tAirline orth n ri an
route tern , a on-time and
exceeded profit expectation in
1994. For the fifth con cutiv y ar orthwe t
fini hed fir t among th e, en laro- t
airline in dome tic on-time performan e
tatistics compil db th U.S. Department
of Tran portation.
t the major domestic hub D troit and
Minneapolis/ St. Paul, the airline further
expanded schedule adding ight n ,
routes. At ear end T
orth, e t offered mor
than 445 dail jet and Airlink departure
from Detroit and more than 420 dail
departure from Minneapoli / St. Paul, up
from approximate! 400 and 40 dail
departures re pecti el at , ar-end 1993.
orthwe t continued it ucce ful
wintertime 'fun and un" eekend lei ure
flying packages, primaril targeting ki re ort
de tinations in the .S. and Canada and
beach destinations in Mexico.
In March, orthwe t completed the
rescheduling of the Memphi hub
converting six dail directional conn cting
bank into three dail omni-directional
connecting banks. Total dail jet and Airlink
departure at Memphi increased from
approximately 215 at year-end 1993 to
approximate! 220 at year-end 1994.
The com pan supported increa ed jet ervice
schedules at its three orth American hubs
with continued reductions in non-hub jet
flying and improved chedule utilization of
Airlink regional airline service. orthwe t
reduced dome tic jet ervice from Boston,
11
r ducing or liminating jet
B ton to Florida v\ a hington D.
\\ e t oa t. Th om pan , maintain a
p rtn r hip , i th Bu in
E, pre irlin t provid conne tion to
and from Bo ton. orth, t b o-an a r gional
n c partn r hip with Tran tat r1in
to prm de onn ction from ight alifornia
citi to orth, e tint mational and dom tic
g 1 and an Franci co.
h duled dom ti at mil
are nm, non-hub fl ng.
Th indu tr pricing rn ronm nt imprm ed
in 1994. major pricing i ue fa ing n twork
airlin lik orthw t, a how to maintain
far 1 , el that can upport fr qu nt and
con nient net'\ ork ervic , hil till making
airline ace ible to price- en iti, lei ur
tra, 1 r . orth" e t adopted a trateg , of
brief fr quent and car full targ ted 1 i ure
fare ale that made bargain fare a ailable
to budg t tra eler , hile a aiding ignificant
dilution of bu ine tra, el re, enue. The
trategy, a mo t ucce sful in the fir t half
of the year, before longer ale period and
le s car full tructured al originated b
competitor cau ed d t rioration of unit
re enue .
During 1994 the compan completed major
cu tomer ervice initiative to improve both
custom r ser i e and profitabilit . The
introduction of La Cart food ervice" a
completed throughout the dome tic t m.
A La Carte offers pa seng r a impler ervice
Northwest Alrllnc
e: orth American Route System
-- New or expanded service in 1994
St. Maarten
12 13
and the opportunity to choo e from a variety
of menu item , often featuring name-brand
food uch as Vie de France Corky's Barbecue
or Leeann Chin Chine e foods. A La Carte
both improve election and reduce waste.
As a re ult, A La Carte service costs less and
provides greater customer satisfaction
than traditional in-flight food service.
Pacific Region
In 1994 orthwestAirlines marked its
47th year of transpacific flying. orthwest
has flown the Pacific longer than any
other U.S. airline and offers the most service
of an airline in the U.S.-Japan market.
orthwe t's Japan presence capitalizes on
the airline's unique position under the 1952
.S.-Japan bilateral agreement, which gives
orthwest exten ive rights to carry traffic
between Japan and as many as 16 U.S.
gateway and between Japan and other Asian
destinations. Additionally, orthwest has
the largest slot portfolio of any non-Japanese
airline at lot-constrained ew Tokyo
International Airport ( arita) , with 316
weekly takeoff and landing lots (almost fifty
percent more slots than the next largest
non-Japane e competitor, United Airlines).
orthwest currently u es thi authority and
slot portfolio to operate a arita-based
network linking seven U.S. gateways and ten
ian and Micronesian destinations via Tokyo.
14
The company completed installation of AirOne
air-to-ground telephones in 225 DC-9/ MDS0,
727 and A320 aircraft. The new system offers
greater calling range through a larger network
of ground stations; more caller convenience
with telephone handsets permanently installed
in every seat row; and superior call quality
and data transmission compatibility resulting
from all-digital technology.
orthwest's Pacific strategy in 1994 focused
primarily on strengthening its strategic
presence in Japan. Aircraft were reallocated
from marginal Asian routes to more
profitable services to Tokyo and Osaka.
A second key to the airline's Pacific strategy
was increased focus on Detroit as a transpacific
gateway. Under its unique traffic rights
orthwest is able to operate unlimited
frequencies between Detroit and Japan, and
the airline's strong domestic passenger feed
into the Detroi hub makes Detroit the
quickest and most convenient transpacific
gateway for much of the Eastern and
Midwestern United States. orthwest
increased its Detroit- arita service to two
daily roundtrips.
These efforts and a gradually recovering
Japanese economy helped orthwest show
improved profitability in the Pacific.
The opening of Osaka's new Kansai
International Airport on September 4
offered opportunity for orthwest to expand
its presence in Western Japan. The Kansai
region,Japan's industrial heartland, i home
to 20 million people and boa t a gro
domestic product greater than that of
Canada. Like arita International Airport in
Tokyo, Osaka' former international airport,
Itami, was lot-con trained and accommodated
only 175 international departure each week.
With the opening of Kan ai, orthwe t
expanded service to O aka from Detroit, Lo
Angeles and Honolulu. The addition of
Osaka-Manila service and the inauguration of
exclusive Seattle-Osaka service on January 6,
1995, further solidified orthwe t' po ition
in the Kan ai market.
orthwest continued to build its lei ure trav 1
pre ence in the popular Japan - "beach
destination" markets of Honolulu, Guam and
Saipan. orthwest operates 19 weekly Boeing
747 flights from Tokyo to Honolulu, exten iv
service from Kansai, Fukuoka and agoya to
Honolulu and daily ervice from Tokyo to
Guam and Saipan.
The airline improved its on-board product in
the Pacific Region inl994 with the launch of
World Business Cla s service in February.
World Business Clas i an enhanced
busines cla s product jointly developed by
orthwe t and KLM and jointly introduced
on all international route flown by the
carrier . The focal point of World Bu ine
Class i a roomier, more comfortable eat.
Pitch, the di tance between eat row , wa
increased from 38 to 48 inche and eat recline
was increased from 7 to 11 inches. Thi
provides one of the best leeping environments
on long-haul international flights.
15
Other feature of World Bu in Cla
rvice include better quality pillow ,
blankets, lavatory amenitie , in-flight r ading
material , vid o programming and m nu .
In additi n, all of orthw t' ground and
in-flight taff: w r p cially train din th
new rvic
The airlin improv d i di tribution y tern
in Japan and i rang of tour pro due . One
of the unique a pee of th Japan mark t
i th iz of th organiz d tour gment,
which provid roughly 0% of orthwe t'
Japan outbound traffic. o t of thi bu in
i controll d by a w larg tour operator
and orthw t' u c in r cent year ha
benefited from effor to build trong
r lation hip with the companie .
The e combin d improv ments re ulted in
orthwe t boarding mor than on million
pa eng r in Japan in 1994 for the third
y ar in a row (accompli h d two w ek
earlier than in 1993). Today, alma tone out
of every 10 J a pane e trav 1 r who d parts
Japan by air lie on orthwe t. Thi izeable
market hare mak orthwe t the large t
foreign carrier erving Japan.
orthwe t al o continued its expan ion in
the rapidly growing Chine e market during
1994. ervice to China (Beijing and Shanghai)
doubled in the pring and exclusiv non top
ervice from Seattle to Hong Kong wa
launched in ovemb r. Th route wa
introduced with a no- making policy in all
compartments. Hong Kong remain the
primary gateway to China.
The U.S. Department of Transportation in
1994 awarded orthwest five addition al
weekly frequencies to China. Pending approval
by the Chinese government, orthwest will
use this new route authority to expand
service to Beijing and Shanghai in 1995.
orthwest eliminated unprofitable Pacific
services in 1994 in order to support expansion
of potentially profitable services at Kansai
and elsewhere in the region. Service to
Australia, inaugurated in 1991, was suspended
in August due to route over-capacity and
resulting poor yields.
In addition, orthwest dropped service from
Honolulu to Guam and further reduced
service to Seoul, Korea, elimin ating both
Seoul-Los Angeles and Seoul-Seattle service.
To maintain presence in the Korea market,
the airline signed a marketing agreement
with Asiana Airlines to provide code-share
service to Seoul from five destinations:
New York, San Francisco, Los Angeles,
Honolulu and Saipan.
While non-Japan markets in the region were
marked by over-capacity and continued yield
erosion in 1994, Japan markets saw a firmer
price environment and yield improvement.
A continuation of this trend along with the
general recovery of the Japanese economy,
continued enhancement of Northwest's
Pacific products and further development of
Northwest's Asia distribution system promise
continuing improvement in the Pacific
Region in 1995.
Northwest Airlines Japan Route System
- - Tokyo Routes
Nagoya Routes
Osaka Routes
Fukuoka Routes
16
to Los Angeles
Atlantic Region
Northwe t Airline in 1994 continued
it ucc ful tlantic trat gy of
erving Eur p , Africa and th
Middle Ea t via trat gic allianc .
Taking advantag of the unique grant by th
.. governm nt of antitru t immunity,
orthw t and KLM Royal Dutch irlin
jointly op rate tran atlantic rvic , including
pricing, cheduling, product d v 1 pment
and mark ting.
orthwe t and KL pre en tly op rat und r
a joint venture agr m nt which includ all
of the two airline ' ervic betw n t n
citie and KLM' Am terdam hub. Thi j int
ervice has b en particularly ucc ful in th
Minneapolis/ t. Paul-Am t rdam and D tr it-
Am terdam markets which link orthw t'
powerful hub to Am terdam and d tination
beyond Am t rdam. rvice on both of th
route i planned for twic -daily in 1995 and
non- top ervice betw n m t rdam and
orthwe t' mphi hub will be launch d.
In 1994 orthwe t and KLM expand d c d -
hare ervice to a total of 8 orth American
citie beyond orthwe t' D troit and
inneapoli / t. Paul hub , and to 29
European, Middle Ea tern and rth
Northwest Cargo
Northw t 'rline i the only
pas enger airline that al o op rat a
dedicated fle t of main-deck freighter
aircraft. Northw t Cargo ight Bo ing
747 freighter fly regularl ch dul d r ut
between the . . and ia and along with
orth e t ext n i bell fr ight capacity
in the pas ng r fleet make th airline n f
the leading air freight c mp titor b th in
orth America and in ia.
17
Afri an iti b y nd KLM's AmsL rdam
hub. od - har rvi provid s nveni nL
ingl - y t m rvi n r uL s su h as
D M in - bu Dh abi, a r uL LhaL w uld
b impra Li al r airlin L . rv by
it lf. Pa ng in gl -Li k L
k-th r ugh and
onv ni nc , lu
fr qu nt fli r di t f r all gm n L5
on ith r airlin .
rLhw t' tran all anti rout . trat gy al.
in lud d . u n und r-
p r rmi n w s rv1
wa u p airlin e
d mar Lrn re enl
y ar whi h l d apa ity and d lining
yi lds. In arly 1 thw sL al nd d
B t n-Pari an -Frankf
Aircraft and ta ur . fr m th
rout will b r d t in er as d
D tr it-Frankfurt 1yin an d L Lh J D Lr iL-
L n d n r u t , with rvi c plan n d t m
in th nd quart r f 1 95, p ndin
g v rnm nt appr val.
arg ac
rthw
v r igh t p r en t f
rp rati n '. L Lal
ally ha b n a stabl
contribut r t rp rat r v nu . . hi
tr nd c ntinu d in 1 94, a th ompany's
fr ight r ft n p rat d at m r than 9( %
capacity and rall ar t n mil
d .l o/c.
In 1994, orthwest launched an effort to
further improve this performance and
develop orthwest Cargo to its full potential.
William D. Slattery was named President of
orthwe t Cargo in addition to serving as an
executive vice president of orthwest Airlines
Corporation. The new management team's
goal is to increa e orthwest Cargo's revenue
contribution to 15 to 20% of total corporate
revenue by the end of the century by
developing additional capacity, alliances and
interline arrangements.
orthwest Cargo's principal focus will
remain on the Pacific Region. More than
60% of orthwest Cargo traffic is carried on
transpacific and intra-Asia routes and
orthwest is second only to J apan Airlines in
the amount of cargo capacity in the region.
In 1995 and beyond, significant increases in
cargo traffic are expected in markets such as
Hong Kong, China and Singapore.
Domestically, orthwest Cargo in 1994
realigned its sales regions emphasizing the
importance of customer service and marketing.
The new sales efforts are designed to enhance
the pricing structure and to improve yields
and revenue from all products. These new
sale regions will complement expansion
efforts in the ational Accounts, Government
and Military Accounts and International
Cargo Management programs.
Northwest Aerospace Training Corporation (NATCO)
Northwest Aerospace Training
Corporation ( ATCO), based in
Eagan, Minnesota, is the world's
largest independent, airline-affiliated training
corporation. The wholly-owned indirect
subsidiary of orthwest Airlines Corporation
offers full service pilot and air crew training
programs for eight different aircraft types.
ATCO operates 20 full-motion, full-video,
computer- controlled flight simulators
housed in its 285,000 square foot classroom
and training facility in Minnesota, plus an
MD82 simulator in Seattle, Washington.
In 1994, approximately 62% of ATCO's
training revenues were from orthwest
Airlines. ATCO grew its non- orthwest
revenues by 21 % year-over-year, strengthening
it position as one of the leading airline
training centers in the world.
The corporation increased it global market
hare by gaining a ixth major Chinese
1
airline customer for pilot training, adding
two contracts from Taiwanese airlines, and
signing its first Russian training contracts.
ATCO added Continental Airlines to its
U.S. customer base and added a Boeing 727
simulator to its "fleet" to meet the increased
training demands of its largest U.S. customer,
orthwest Airlines.
In response to new FAA regulations and
industry training demands, ATCO also
developed several new training programs.
An advanced qualification program (AQP)
was designed to market to major national
and regional airlines, along with regional
airline programs aimed at satisfying recent
industry training and safety concerns for
these carriers.
ATCO currently provides training services
to more than 100 airlines, non-airline jet
operators and government agencies.
MLT Inc.
MLT Inc., a wholly-owned indirect
subsidiary of orthwest Airline
Corporation, is one of the large t
vacation wholesaling companie in the
United States. From their headquarter in
the Minneapolis suburb of Minnetonka,
MLT's 900 employee provide lei ure travel
and vacation products and service to almo t
a million customer each year.
MLT's product offering include both MLT
Vacations and orthwe t WorldVacation .
These package typically include components
such as discounted charter or cheduled air
travel, hotel accommodations, rail pa e ,
event tickets, sightseeing tour and ar rental.
As a tour wholesaler, MLT relie on volume
purchasing discounts to offer cu tamers
significant savings on vacation travel package .
MLT sells its vacation product through
travel agencies as well as direct to con umer .
In 1994, MLT's gross revenue was $341 million,
an increase of 9.3% over 1993 revenue of
$312 million. Enhancement of several MLT
products contributed to this growth.
19
WorldVacation , orthwest and KLM'
private label vacation product, expanded its
European de tination to include Bergen,
orway, and Antwerp and Bruge , Belgium.
Additional .S. de tination al o were
added. The e new de tination include
Bran on, i ouri, Memphi , a hville and
ew Orlean - all part of WorldVacation
new "Mu ic Citie " package .
MLT Vacation , a acation whole ale product
upported by charter ervice added Wichita,
Kan a to its li t of origin cities for La Vegas
vacation packages. MLT Vacation al o added
additional flights in its mo t popular markets,
e pecially the Dalla -Mexico market where
MLT Vacation ' ummer trav 1 package
have been in high demand.
Together, WorldVacation and MLT Vacation
offer package to more than 100 de tination
worldwide throughout the Caribbean, Mexico,
Asia and the nited States.
Employee Recognition
"Al" a upp rt and in pir a h Lh r" i
a o-uidino- prin ipl f rthv L 'rlin .
Th mpan r o-niLi n pr gram for
empl y e upporL and in pire b ingling
outou rb t.
Honor Roll i th quar
publi alion that alut
wh iv d a omm a
u up rvi rk r.
In 199 R niz d 12 67
employ xc dino- u tom r ' or a-
rk
The Caring Award honor
p h
d liv r ul ta ndino- u tom
orth, t r o-niz d 13 n 111
1994 with thi award.
The Global Partner Award hon r
rth, t and KLM mplo
rovid UL tandino- rv1
th orthw t/ KLM lian
wa pre nt d t 12 mplo
ach of th partn r airlin .
- ix from
Twenty-five Year Service Anniversary Awards
w r pre nt d t 1,2 0 mplo in 1994,
honorino- th ir 1 no--t rm ommitm nt
L rth, t. Tw nt -fiv ar mpl
ar honor d a h fall at a a-ala banqu
th ir h n r in Minn ap li .
In 199 rLhv L will pr nt for Lh
fir t tirn thr m r mpl y
r o-niLi n award :
20
The Northwest Medal of Honor will be
pr nt d to employ es who heroi m
pr nt injury, lo of life or severe
damao- to quipment or property.
The Support & Inspiration Award will b
pr ented to orth, t p opl who
d mon trat out tandino- concern for
th ir coll ague in th b t pirit of th
company' Guiding Principl to upport
and in pir each other.
The Excellence Award will be pre ented to
mpl who h av contributed
e ' traordinaril to th profitability and
of orthwe t.
Employee Profile
Flirrht tt ndants
Mechani
Equipm nt ervice Employee
Cu tom r Service Agents
Pilots
Management/ echnical
Re rvation ales Agents
Se retarie / Clerical
Other
Cleaner
ubsidiarie - primarily MLT
Total Employment
1994
8,603
6,495
5,385
5,015
4,965
3,667
3,356
2,363
1,947
1,296
987
44,079
1993
8,688
6,413
5,092
4,849
4,984
3,520
3,385
2,375
1,955
1,242
855
43,358
The President's Awards
In 19~4 rthwe t Airlin Corp ra6 n
Pre 1dent and CEO John Da burg
pre ented th Pre id nt' ward L fiv
mployee .
Th Pr ident' ward honor p rforman at
the highe t level, r cognizing tho wh hav
made ignificant contribution to a hi ving
orthw t' mi ion, goal and guiding
principl .
The five honor
were:
and their achi v m nLs
Sandra Shull, a 24-y ar flight
att ndant ba ed in attle.
hull ncount r d av ry up et,
eld rly pa ng r in th
attle-Tacoma InternaLional
Airport. Th elderly woman
had mi d h r Briti h
Airway flight to London when h r Ala ka
Airline flight arrived too lat . hull to k th
di traugh ~, lo t pa eng r und r h r wing
and, de p1te the fact that hull' family wa
waiting for her at home, tayed ov might
with the pa senger at her hot 1. Th next day
Shull returned to Briti h Airway with h r
new friend in tow, happy and well car d for,
even walking her to her at on the plan
Marni Kasuya, manager-
government affair in Tokyo.
Managing orthwe t'
governm nt and political
affair in J apan require a
tremendou amount of
diplomacy and di cretion,
particularly given the importanc of
orthwe t' relation hip with the Japan
government, e pecially the Mini try f
Tran port. Ka uya capably and f ctively
repre ents orthwe t' intere ts before the
J apane e government and ha won great
re pect for her work a w 11 a improving
21
onhw L
' imag and r p L Lhrough uL
Japan. In ] 994, Ka uya wa r gnjz d by the
Laff of th Japan Mini Lry of Tran. p rL
~ r h r w rk - an un fficial h n r, buL als
an xLr m ly rar al uL L an employ f
any mpany, p ially a for ign- wn d
mpany.
Dann Runik, D tr iL aptain.
phy i ally di abl d
pa ng r n n f Runik'
Di h Ls was on rn d Lhat hi
xp rim n Lal m dicaLi n -
whi h n d d t b k pl
fr z n - w ul d L L warm
d~ring a flighL d lay. Runik Lo k iL up n
him lf t g ut and find m r dry i and
mak ur th u t m r' m dicati n wa
repa k d and k pt fr z n. H al h lp d
th pa ng r in and ouL f hi wh lchair
wh 1 d him t th r tr om, and wait d '
with him during th d lay. Wh n th f1ighL
wa r ady f r r b arding, th cu L m r wa
hock d t 1 am Lhat Runik wa th plan '
captain - h 'd had n id a.
Rick Beaudoin,
eqmpm nt rvic
mpl y , and
Dave Cabralin,
mechani , b th in
D troit. In F bruary
1994 Beaudoin and
abralin av d th lif fa f 11 w mpl y
who wa. accidentally truck by a ramp tug.
B audom and abralin, first n the c n ,
found the injured employe rapidly ble ding
to d ath from . v r cuts. alling n th ir
xten ive em rg n y m di al training and
reacting quickly, th y appli d a t urniqu t t
t p th bl ding and assi t d th injur d
mployee until m dical h lp arriv d.
Northwest AirCares
Along with a commitment to providing
reliable, convenient and con istent air
travel, orthwest Airlines is committed
to enhancing the quality of life in the
communitie where we live and work. That's
why the orthwe t AirCare charitable upport
program wa created in 1992.
Each quarter, AirCares works with a different
non-profit organization in a public awareness
and onboard fund-raising campaign On every
flight pas enger learn about the mi sion of
the charity partner through a flight attendant
announcement or a de criptive video. In
addition, orthw t's in-flight magazine
WorldTraveler features an article de cribing
the organization and includes an envelope
for passenger contributions. As an incentive,
orthwest offer 500 WorldPerks bonus miles
to anyone who donates a WorldPerks FlyWrite
ticket or $50 or more.
In 1994, the orthwe t AirCares program
benefited four organizations that address a
wide-range of problems that affect society
today - from world hunger to blindness.
They include:
Share Our Strength (SOS)
Share Our Strength is one of the nation's
largest non-profit hunger relief organizations,
with the goal of alleviating and preventing
hunger in the nited States and around the
world. With the help of volunteers who
contribute skills and resources, SOS di tributes
grants, educate the public, and organize
community outreach programs.
SightFirst
Thi Lion Club International program i
dedicated to eliminating preventable and
rever ible blindness throughout the world.
From recycling u ed eyeglasse to funding
mobile units and eye ho pital in foreign
countrie , SightFir ti leading the charge
again t sight impairment.
22
The Nature Conservancy
The ature Conservancy helps preserve
plants, animals and natural communities
that repre ent the diversity oflife on Earth by
protecting the lands and waters they need to
survive. The Conservancy and its members
have been responsible for the protection of
over 7.5 million acres in 50 states and Canada.
Toys For Tots
Founded on the premise that "every child
deserves a little Christma ," the U.S. Marine
Corp Re erve Toys for Tots program has
been dedicated to providing millions of toy
annually to needy children for almost 50
year . The Toys for Tots Foundation reported
that the AirCares program was "by far" their
most succe sful fund-raising project of tl1e year.
In addition to working with four on-board
charity partners each year, AirCares swings
into action as needed with special projects to
answer community need . In 1994, for example,
orthwe t conducted a pecial summer fare
sale in which $1 from every ticket sold was
donated to AirCares partners. And when an
eartl1quake de astated the Kobe region of
Japan in 1995, AirCares worked with orthwest
Cargo and the ArneriCares organization to
launch special 74 7 freighter relief flights.
The flights were filled with donated disaster
supplies and donated fuel, and crewed by
orthwest people donating their free time
to work the relief missions.
The AirCares program i unique to the
indu try and recognized nationally for its
innovation in community relations, including
a special Platinum Award a outstanding
entry in its category.
orthwe t and its employees are also major
contributor to the United Way, and our
employee volunteer countl s hours to
vanou cau es.
Financial Review
N orthwe t Airlines Corporation has
complementary operating and
financial trategies to maximiz
shareholder value. The Company' financial
strategy ha two primary components:
T Maximize financial return on as ets
T Improve the Company' trategic and
operating flexibility through capital
tructure manag ment
Maximize Return on Assets
orthwest seeks to maximize return on
assets by deploying exi ting as ets where
~hey can generate maximum return and by
mve ting in additional a sets only when they
can produce superior return . Two recent
initiatives demonstrate the Company'
commitment to this objective: the strategic
route re tructuring and the DC-9
refurbishment program.
Route Restructunng. orthwe t ha
restructured its route ystem to redeploy
aircraft to markets where the Company has
the competitive advantage of speed and
frequency. Available seat miles (ASMs) in
Minneapoli / t. Paul and Detroit have
increased significantly since 1992 and
domestic hub flying now represents 93% of
dome tic ASMs. J apan now represents 92 %
of Pacific ASMs compared to 66% two years
ago. The focus on hub flying ha greatly
improved the return on the redeployed
assets by increasing the revenue generating
capability of these assets. This strategy ha
23
al o reduced revenue ri k by reducing
operation in hort haul, high den ity
markets which are u ceptible to high-
frequency, lm -fare competition. Le than
% of orthwe t' r v nue are now
generated in the e mark ts.
DC-9 Refurbi hment Program. orthw t
announc d plan to inve t $430 million over
fi e year to hu hkit and r furbi h its fleet of
highly efficient DC-9-30 aircraft. Thi deci ion
allow th ompany to continue to operate
thi highly reliable aircraft profitably, while
foregoing a $3 billion unnece ary in e tm nt
in new aircraft. a two-pilot, t\ o-engine
aircraft, the DC-9-30 doe not have a ignificant
operating co t di advantage ver u new
aircraft. Thu b producing imilar operating
economic at significantly lower capital co t,
thi program greatly enhance return on
a et compared to replacement of the DC-9s
with new aircraft.
Other Initiatives to Improve Return on Assets.
orthwe t ha undertaken a number of other
initiative to maximize return on a sets
including re tructuring its fleet plan to ~atch
future capital inve trnent with the Company'
trategic plan. Since 1992, the Company ha
cancelled over $10 billion of firm aircraft
order and option and deferred deliveries
of an additional $4 billion. ew aircraft
commitments over the next five years are
now limited to five B-757's in 1995, ten
B-757' in 1996 and eightA330's in 1999.
Other inve tments that are contributing to
profitability are product improvements and
state-of-the-art management information
s terns. Investrnent in product improvement
ha helped to increa e unit revenues, while
investment in automation has both increa ed
revenue and decreased unit costs.
An employee uggestion program,
orthwest ow, was launched in 1992.
Thi program has produced over 4,500
implemented id as worth an e timated
$140 million in increased a et productivity,
revenue improvement and cost reduction.
Results. Operating return have improved
dramatically with operating margin
increa ing from - 4.6% in 1992 to 9.1 % in
1994. Operating income of $830.4 million
and net income of $295.5 million in 1994
were company records.
N orthwest Operating Margin
10% - - - - - - - - - - - - - - - - - -
5% -
0%
I
I
-5% - -- -- -- -- - - -- - - - - -
1992 1993 1994
24
The major driver of this improvement has
been revenue/ ASM which has increased
18% since 1992. The redeployment of assets
to areas of competitive strength and the
investments in product improvement and
management information systems played a
major role in this increase.
Northwest Revenue per ASM
11
1992 1993
Improve the Company's Strategic
and Operating Flexibility through
Capital Structure Management
1994
orthwest's financing strategy focuses on
maintaining adequate levels of liquidity,
prudent debt amortization schedules, and
capital structure management that
minimizes capital costs. orthwest's 1994
financing requirements were met through
sub tantial cash flow from operations and
new external financings.
Free Cash Flow. orth, e t' record profitability
combined with prudent inve tment in capital
generated ignificant ca h flm in 1994. Free
ca h flow ( ca h from operation le capital
expenditure ) , a $1.2 billion. Free ca h v,ra
used to impro e the Compan ' liquidity
po ition and reduce debt.
External Financings. orthwe t completed
more than $1.7 billion of ne, , co t-effecti e
financing in 1994, the maj ori of, hich
were refinancing that er ed to either pa
down the 1997 debt amortization or extend
and le el exi ting maturitie . Highlights of
the 1994 financing activity include:
T A $265 million initial public equi
offering which returned orthv e t to the
public equity markets for the fir t time
since 1989.
T A $450 million refinancing of the
Compan ' major bank loan, hich
lengthened its term and le eled
maturities.
T Two inno ative tructured aircraft
financing totaling $645 million which
lowered borrowing co ts and extended
maturitie .
T A $1 75 million receivables financing
which also lowered borrowing co ts and
extended maturitie .
T $248 million of DC-9 hu hkit and other
financings.
25
Results. orth, e t' 1994 financing action
re ulted in major impro ements in liquidi ,
debt amortization and capital tructure.
Liquidi ( ca h and ho rt-term in e tmen
plu a, ailable re ol er capacity) impro ed to
$1.3 billion b ear-end 1994, gi ing the
ompan ignificant financial flexibility.
orth" e t debt amortization chedule, a
dramatical! impro ed in 1994 with the 1997
maturi being reduced from $1.6 billion to
under $500 million. The Compan now ha
no annual amortization greater than $480
million for the ne t fi e ear and believe
the e obligation can be comfortabl met
, hile maintaining orthwe t operating and
trategic flexibili .
orthwest Amortization Schedule
1600 _ _ _ _ _ _ _ -==---------
-~ l@O _ _ _ _ _ _ _
1 1200 _ _ _ _ _ _ _
~ 1000 _ _ _ __ _ _
~ 00 - - - - - ---t
?;---
:._ 600 -------:= - ----,
~
0
400 _ _ _ _
~ 200
0
1995 1996
of July 93
of December 94
1999
Capital structure was also dramatically
improved in 1994 by both reducing debt and
raising equity. Debt (net of cash) was reduced
by $1.3 billion. Interest coverage has improved
from 1.1 in 1992 to 2 .4 in 1994 and now
compares favorably with orthwest's major
network airline competitors. Equity was
raised through the $265 million initial public
offering and through the generation of
significant retained earnings. Balance sheet
net worth improved by $660 million.
Outlook
orthwest has excellent opportunities to
further improve return on assets by continuing
to focus on areas of competitive strength.
The recently signed U.S.-Canada open skies
agreement enhances strategic assets at
Minneapolis/ St. Paul and Detroit which are
particularly well located hub to provide
convenient service between markets in
26
Canada and the U.S. orthwest's greatest
growth opportunity is in the Pacific. As the
largest canier in the U.S.:Japan market, the
Company is well positioned to share in the
economic rebound when it occurs in Japan.
Furthermore, orthwest's strategic Tokyo
hub provides an ideal opportunity to participate
in high-growth Pacific markets such as China,
where the Company recently gained authority
to increase frequency by 125%.
orthwest is now well positioned with
efficient aircraft and relatively modest future
capital commitments. The Company will
review future capital investment opportunities
as they arise and will make additional
investments if they are consistent with the
objective to produce superior returns. Cash
flow from operations in excess of that which
the Company believes can be invested at
superior returns will be used to reduce debt.
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Northwest Airlines Corporation ("NWA
Corp." or the "Company") reported net
income of $295.5 million and operating
income of $830.4 million for the year ended
December 31, 1994, the highest annual net
income and operating income in the
Company's history. Net income and
operating income increased by $410.8
million and $558.0 million, respectively,
compared with 1993. Primary earnings per
share was $2.92 ($2.87 fully diluted),
compared with a loss of $2.82 per share
(both primary and fully diluted) in 1993.
The improved profitability was primarily the
result of a $416.6 million increase in
passenger revenue over 1993.
During the past three years the Company has
taken actions to improve its financial
condition and operating performance by
improving its product, reducing and revising
its route structure to focus on its strategic
assets, strengthening its marketing and other
operating relationships, reducing labor and
other operating costs, canceling or deferring
new aircraft deliveries, rescheduling debt
maturities, reducing preferred stock
dividends and deferring preferred stock
redemption obligations. The effect of these
changes, coupled with improved general
economic and industry conditions, resulted
in a significant operating income
improvement during 1994.
27
orthwest Airlines, Inc. ("Northwest") is
the principal operating subsidiary of NWA
Corp., accounting for more than 96% of the
Company's 1994 consolidated operating
revenues and expenses. The Company's
operating results are significantly impacted
by both general and industry economic
environments. Small fluctuations in yield per
revenue passenger mile ("RPM") and cost
per available seat mile ("ASM") can have a
significant impact on profitability.
Results Of Operations - 1994 Compared
With 1993
Operating Revenues. Operating revenues were
$9.1 billion, an improvement of $494.0
million (5.7%). System passenger revenue
(which represented 84.6% of total operating
revenue) also increased 5.7%. The increase
was primarily attributable to a 6.2% increase
in system yield and a 2.1 % (1.4 points)
increase in passenger load factor, partially
offset by the impact of a 2.5% decrease in
capacity as measured by scheduled service
ASMs. The increase in passenger revenue
resulted largely from the redeployment of
aircraft to more profitable markets, an
improved U.S. economy and Company-
initiated pricing actions. Revenue per total
service ASM increased 8.5%.
Domestic passenger revenue of $4. 7 billion
increased $343.8 million (7.9%) primarily
because domestic yield increased 6.6% to
13.92 cents and passenger load factor
increased by 2.2 % (1.4 points). Pacific
passenger revenue increased .6% to $2.6
billion, due to a 5.3% increase in yield and a
1.7% (1.2 points) increase in passenger load
factor; partially offset by the impact of a
6.1 % decrease in scheduled service ASMs.
Transatlantic passenger revenue increased
14.4% to $455.1 million, primarily due to a
10.2% increase in yield and a 4.1 % (3.1
points) increase in passenger load factor.
The composition of the Company's
operating revenues in each of the past three
years is summarized below:
1994 1993 1992
Passenger revenue
Domestic 51.5% 50.5% 49.0%
Pacific 28.1 29.5 30.8
Transatlantic 5.0 4.6 5.1
Cargo revenue 8.3 8.5 9.1
Other revenue 7.1 6.9 6.0
Total operating
revenues 100.0% 100.0% 100.0%
Cargo revenue increased $21.0 million (2.9%)
due to an $18.0 million increase in freight
revenue and a $3.0 million increase in mail
revenue. Other revenue increased by $56.4
million (9.4%) due to increased passenger
charter revenue, transportation service
charges and other incidental services
provided to third parties.
28
Operating Expenses. Operating expenses
declined $64.0 million (.8%) while operating
capacity decreased 2.6% to 85.8 billion total
service ASMs and operating expense per
total service ASM increased 1.9%. Salaries,
wages and benefits decreased $111.8 million
( 4.6%) primarily due to the labor cost savings
resulting from the labor agreements which
became effective August 1, 1993. Non-cash
stock-based employee compensation expense
was $107.2 million and $93.1 million during
1994 and 1993, respectively. Commissions for
1994 rose $86.1 million (5.7%) primarily as a
result of a 5.7% increase in passenger
revenue. Aircraft fuel, oil and taxes
decreased $107.2 million (9.2%) due to a
9. 4 % decrease in average fuel price per
gallon to 56.2 cents and a .5% decrease in
gallons consumed. Aircraft maintenance
materials and repairs increased $28.0 million
(7.6%) due/ to the timing of maintenance
activities and increased engine parts usage.
As a consequence of its DC-9-30
enhancement program discussed below,
effective January 1, 1994, the Company
extended the depreciable lives of its DC-9-30
aircraft. The net effect of the revision and '
certain other changes was to reduce 1994
depreciation as discussed in Note A to
Consolidated Financial Statements. Other
expenses ( the principal components of
which include outside services, passenger
food, selling and marketing expenses,
personnel and advertising) grew $7 4.5
million ( 4.6%), due primarily to increased
advertising related to the launch of the
Northwest/ KLM World Business Class
product, and increased computer
reservation system fees.
Other Income And Expense. Interest expense
increased $12.8 million (3.4%) primarily
due to an increase in the weighted average
interest cost oflong-term debt (from 6.7% in
1993 to 7.6% in 1994) caused by higher
market interest rates and an increase in fixed
rate debt from 32.8% to 51.2% of outstanding
debt, partially offset by a decrease in total
outstanding debt. Investment income
increased by $22.8 million due to increased
cash balances. The foreign currency loss of
$20.2 million for 1994 was primarily
attributable to balance sheet translation of
foreign currency-denominated assets and
liabilities. The $38.8 million decrease in
other-net for 1994 was largely due to a $46.4
million foreign tax refund received in 1993
related to commissions.
Results Of Operations - 1993 Compared
With 1992
Operating results improved substantially
with operating income increasing by $648.6
million to $272.4 million. An increase in
passenger revenues of $410.6 million
together with efforts to reduce and control
operating expenses contributed to this
improved performance. Loss per share was
$2.82 in 1993 compared with $17.78 in 1992.
The 1993 and 1992 non-operating expenses
included $74.3 million and $792.7 million,
respectively, of nonrecurring special charges.
The 1992 results also include the impact of
a $108.8 million ($1.67 loss per share)
cumulative effect of adopting Statement of
Financial Accounting Standards o. 106
"Employers' Accounting for Postretirement
Benefit Other Than Pensions." See ote L to
Consolidated Financial Statements.
29
Operating Revenues. Operating revenues
totaled $8.6 billion, an improvement of
$521.3 million ( 6.4%). System passenger
revenue increased 5.9% to $7.3 billion. The
increase was attributable to a 6.8% increase
in system yield, offset by a .8% decrease in
system RPMs. Domestic passenger revenue of
$4.4 billion increased $380.5 million, due
mainly to a 7.0% increase in domestic yield
which was largely the result of the recovery
of yields from 1992 pricing discounts, flight
schedule changes and targeted promotion .
Pacific passenger revenue of $2.6 billion was
up $48.8 million. The performance in the
Pacific market was affected by a 9.0% reduction
in capacity as measured by scheduled service
ASMs, primarily in Korean markets, which
was more than offset by improvements in
yield and load factor. The improvement in
yield was largely attributable to the
strengthening of the Japanese yen and
reduced flying in low yield markets. The
$18. 7 million decrease in transatlantic
passenger revenue was attributable primarily
to a 9.2% decrease in yield, offset by a 5.2%
increase in RPMs.
Cargo revenue decreased $1.4 million (.2%),
as a decrease in freight revenue was largely
offset by an increase in mail revenue. Other
revenue-increased $112.1 million (23.0%).
This increase primarily resulted from a 53%
increase in charter revenue volume, increased
transportation service charges related to
ticket exchanges, higher frequent flyer
mileage sales revenue and higher revenue for
contracted airport handling of other airline .
Operating Expenses. Operating expenses
declined $127.3 million (1.5%). Operating
capacity decreased 2.3% to 88.0 billion total
service ASMs and operating expense per
total service ASM increased .9%. Salaries,
wages and benefits decreased $130.6 million
(5.1 %) primarily due to a 6.5% decrease in
average number of full-time equivalent
employees and the labor cost savings
resulting from the new labor agreements
which became effective August 1, 1993, offset
by $20.0 million of nonrecurring special
charges relating to an early retirement plan
offered to contract employees. Non-cash
stock-based employee compensation of $93.1
million was recorded in 1993 to reflect the
December 31, 1993, value of the stock
earned by Northwest employees during the
period August 1, 1993, to December 31,
1993. Commissions increased $122.2 million
(8.9%) primarily due to a 5.9% increase in
passenger revenue and higher incentive
commissions paid to international travel
agents which resulted from changes in
currency exchange rates. Aircraft fuel, oil
and taxes decreased $76.7 million (6.2%)
due to a 3.7% decrease in average fuel price
per gallon to 62.1 cents and a 2.5% decrease
in gallons consumed. Aircraft rentals
increased $16.2 million (4.9%), reflecting
additional A320 aircraft leased in 1992 and
1993. Aircraft maintenance materials and
repairs in 1993 decreased $13.0 million
(3.4%) due largely
30
to introduction of new aircraft into the fleet
and fewer required airframe checks.
Depreciation and amortization increased
$16.9 million (4.2%) due primarily to the
acquisition of eight additional Airbus A320
aircraft in 1993 and aircraft modifications.
Other operating expenses decreased $164.2
million (9.1 % ) . The reduction was principally
caused by a decline in spending for personnel
expenses and uniforms of $44.2 million, a
decline in passenger meal expense and
supplies of $41.4 million primarily due to the
implementation of A La Carte food service,
and a decline in advertising expenditures of
$27.6 million.
Other Income And Expense. Although 1993
interest expense was virtually unchanged,
the weighted average interest cost of long-
term debt decreased in 1993 to 6.7%,
compared with 8.2% in 1992, due to lower
interest rates and renegotiation of the Tokyo
land mortgages. Offsetting the effect of the
reduction of average interest rates was an
increase in debt related to new aircraft and
increased borrowings under the Company's
revolving credit facility. Capitalized interest
decreased $33.9 million (93.4%) because of
lower advance payments for flight equipment.
During 1993, the Company experienced a
$37.1 million currency exchange loss
compared with a $10.3 million loss for 1992
primarily due to changes in the exchange
rate between the U.S. dollar and the
Japanese yen.
In 1993 a $46.4 million tax refund related
to foreign commissions was included in other-
net: In 1993 $74.3 million of estimated non-
operating nonrecurring special charges
were recorded related to the cancellation of
two Boeing 747-400 aircraft and financing
expenses.
Liquidity And Capital Resources
AE, of December 31, 1994, the Company had
cash and cash equivalents of $468.0 million,
unrestricted short-term investments of $500.3
million and $290.8 million in borrowing
capacity under its revolving credit facility,
providing total available liquidity of $1.3
billion. Cash flows from operating activities
for 1994 were $1.4 billion, including
nonrecurring working capital improvements
of $224.0 million.
1994 Financings. The Company completed
more than $1. 7 billion in capital market
transactions in 1994, substantially -
rescheduling its debt maturities and
reducing overall scheduled 1997 maturities
by more than $1.1 billion. These financings,
coupled with the Company's strong financial
performance over the past 18 months and
approval from certain lenders and labor
groups, have allowed the Company to
eliminate its obligation to raise new equity
capital or long-term subordinated debt
previously required under its debt and labor
agreements.
31
Maturities of long-term debt for the five
years subsequent to December 31, 1994, are
as follows: $334.2 million, $4 78.1 million,
$476.7 million, $397.2 million and $468.5
million. In addition, the Company is
obligated under its Credit Agreement to
make annual term loan prepayments and
revolving credit facility reductions under
certain circumstances (see ote D to
Consolidated Financial Statements). At
December 31, 1994, there were no
borrowings outstanding under the
Company's revolving credit facility.
Capital Commitments. The current aircraft
delivery schedule includes the acquisition of
60 aircraft, with 15 Boeing 757-200 aircraft to
be delivered in 1995 and 1996. See ote I to
Consolidated Financial Statements for a
discussion of aircraft capital commitments.
on-aircraft capital expenditures are projected
to be $175 million for 1995, which the
Company anticipates, to a large extent,
funding with cash from operations.
In August 1994, the Company adopted a
program to refurbish and hushkit its DC-9-30
aircraft fleet which will require $200 million
over the next five years to meet noise and
aging aircraft requirements. The Company
has also elected to invest $230 million for
the upgrade of aircraft systems and interior
refurbishment which is currently scheduled
over the next five years. The Company
believes that upgrading and refurbishing its
planned 106 DC-9-30 aircraft fleet rather
than acquiring a significant number of
expensive new aircraft will enable it to
reduce overall capital expenditures without
substantial increases in system operating
costs and long-term debt and without
impairing the quality of customer service.
The Company is evaluating similar
alternatives in order to comply with noise
and aging aircraft regulatory requirements
for 110 of its remaining Stage II aircraft.
If comparable programs are adopted for all
such aircraft, the Company estimates the
required additional costs over the next five
years would be approximately $335 million
for engine hushkits and aging aircraft
modifications. The Company has arranged
supplier financing of up to $225 million for
engine hushkit shipsets.
Labor Agreements. The labor cost savings
agreements discussed in Note C to
Consolidated Financial Statements will
improve the Company's 1993 to 1996 cash
flow from operating activities and will expire
on various dates from August through
November 1996. At the end of the Wage
Savings Period, wage scales 'Will revert to
1993 levels with potential increases pursuant
to the formula set forth in the labor cost
savings agreements. While the Company
cannot predict the precise wage rates that
will be in, effect at the expiration of the Wage
32
Savings Period (since such rates will be
determined by subsequent events), the
Company believes that its labor costs will
remain competitive in comparison to the
largest carriers.
Cash Flows. During 1994 and 1993, investing
activities were primarily for aircraft
modifications, spare parts and non-aircraft
property and, in 1994, the purchase of
highly liquid, short-term investments, and
the acquisition of 21 used DC-9-30 aircraft.
In 1992, investing activities were primarily
for property and equipment purchases
consisting principally of four new A320
aircraft, three used DC-10-30 aircraft, aircraft
modifications and non-aircraft property.
Financial Position. At December 31, 1994, the
Company had a common stockholders'
equity deficit of $1.4 billion, had aggregate
long-term debt and capital lease obligations
of $4.9 billion and, like its competitors,
operated with a working capital deficit which
aggregated $361.5 million. The working
capital deficit is attributable primarily to the
air traffic liability for advance ticket sales.
Additionally, substantially all of the
Company's assets are currently utilized to
secure its long-term debt. The common
stockholders' equity deficit is primarily the
consequence of the unprecedented losses
experienced by Northwest (and the other
largest U.S. airlines) during the 1990-1992
period. As discussed previously, the
Company has taken a variety of actions
which have substantially improved operating
performance, financial position and
liquidity. During 1994, the common
stockholders' equity deficit was reduced by
$659.8 million(32.5%) primarily due to the
issuance of common stock, favorable
operating results and stock earned by
employees. Importantly, the Company's 1995
through 1999 scheduled maturities oflong-
term debt have been reduced substantially
and liquidity aggregated $1.3 billion at
December 31, 1994. Long-term debt was
reduced by $424.4 million (9.6%) during
1994. The Company's ability to continue to
improve its financial position and meet its
financial obligations will be dependent upon
a variety of factors, including continued
profitable operating results, favorable
domestic and international airfare pricing
environments, absence of adverse general
economic conditions and continued
operating cost controls.
Other Information
Fully Distributed Earnings Per Share. The effect
of the accounting for stock-based
compensation on the Company's operating
results and earnings per share may make it
difficult to compare its earnings with other
companies. Accordingly, management
believes the proforma "fully distributed"
earnings per share amount, which excludes
stock-based compensation and includes all
33
the shares to be issued to its employees,
provides additional information and makes
analysis between years more comparable. On
a fully distributed basis, the Company's net
income applicable to common stockholders
would have been $309.5 million ($2.80 per
share) in 1994.
Def erred Taxes And et Operating Losses. As of
December 31, 1994, the Company had
deferred tax liabilities of $1. 7 billion and
deferred tax assets of $1.0 billion. The
Company has recognized its deferred tax
assets, including net operating loss
carryforwards (" OLs"), based on the
reversal of existing taxable temporary
differences and certain tax planning
strategies.
The Company utilized NOLs of $465.5
million in 1994 and alternative minimum tax
net operating loss carryfonvards
("AMTNOLs") of $35.8 million in 1993 and
$536.8 million in 1994. At December 31,
1994, the Company had NOLs of $741.0
million expiring in 2007 and 2008, available
on a tax basis to carry forward to future
years' tax returns. See ote H to
Consolidated Financial Statements for
additional information regarding deferred
taxes, NOLs, AMTNOLs and credit
carryforwards.
Sections 382 and 383 of the Internal
Revenue Code of 1986 and the regulations
thereunder impose certain limitations on
the carryforward amounts of NO Ls,
AMTNOLs and credits that can be used to
offset taxable income in any single tax year if
the corporation experiences a more-than-
50% ownership change, as defined therein,
over a three-year testing period ending on
any testing date. Management believes that
no such ownership change occurred through
December 31, 1994. Accordingly, no
valuation allowance relating to an ownership
change has been provided with respect to
NOLs or other carryforwards recognized as
deferred tax assets. However, the rules under
Sections 382 and 383 are complex and
ambiguous and their application involves
numerous legal determinations and complex
factual issues. The Company has not sought
or obtained a formal opinion of counsel or
an Internal Revenue Service ("IRS") ruling
with respect to these issues. Should the IRS
successfully assert that there has been an
ownership change, the Company's ability to
realize deferred tax assets already recognized
related to the NOLs, AMTNOLs and credit
carryforwards could be limited to an amount
substantially less than that recognized
(including those already utilized in 1993 and
1994) to date. The effect of an ownership
change would depend in part on the value of
the Company's stock at the date of any
ownership change. A successful assertion by
the IRS that an ownership change had
occurred on any prior date, including August
1, 1993 (the date of the labor cost savings
agreements), could have a significant adverse
impact on the Company's ability to use its
NOLs, AMTNOLs and credit carryforwards
since the value of the Company's stock on
34
certain prior testing dates was relatively low,
and such low value would be used in
computing the annual limitation with respect
to losses incurred prior to the testing date.
The amount allowed would also be realized
over a longer period of time than if no such
limitation had existed. Further, future
transactions or events could result in an
ownership change.
Foreign Currency. Changes in foreign currency
exchange rates impact operating income
through changes in foreign currency-
denominated operating revenues and
expenses. A strengthening (weakening) of
the yen tends to increase (decrease) reported
revenue and operating income because the
Company's yen-denominated operating
revenue exceeds its yen-denominated
operating expense. During 1994, yen-
denominated operating revenue net of yen-
denominated operating expense was
approximately 50.3 billion yen
(approximately $490.1 million). Other non-
operating income (expense) is also affected
as a result of foreign currency gains and
losses. A strengthening (weakening) of the
yen tends to increase (decrease) non-
operating expense because the Company's
yen-denominated liabilities exceed its yen-
denominated assets. At December 31, 1994,
yen-denominated liabilities exceeded yen-
denominated assets by approximately 16.6
billion yen ($165.8 million). The yen to U.S.
dollar exchange rate at December 31, 1994,
1993 and 1992 was 100 yen to $1, 112 yen to
$1 and 125 yen to $1, respectively.
Use Of Financial Instruments. In May 1994, the
Company began using a collar option
strategy to hedge its anticipated yen-
denominated cash flows. The Company
currently has hedged approximately 80% or
$455 million ( 45.5 billion yen) of its
anticipated 1995 yen cash flow. See Note M to
Consolidated Financial Statements. In the
ordinary course of business, the Company
manages the financial market risk of fuel
costs utilizing both regulated exchange based
futures contracts and over-the-counter
instruments. Gains or losses on hedged
contracts are deferred until the related fuel
inventory is expensed. As of December 31,
1994, the Company had contract volume
commitments for approximately 20% of 1995
fuel requirements.
35
Energy Tax Impact. In August 1993, the United
States increased taxes on fuel, including
aircraft fuel, by 4.3 cents per gallon. Airlines
are exempt from this tax increase until
October 1, 1995. When implemented, this
new tax will increase the Company's annual
operating expenses by approximately
$46 million based on Northwest's anticipated
fuel consumption.
Financial Reporting. For financial reporting
purposes, the Company reports certain
rebates to customers as commission expense
and the Company reports operating statistics
on a consolidated basis. Effective with first
quarter 1995 financial reporting, the
Company will report such rebates to
passengers as reductions to revenues and the
Company will report operating statistics for
Northwest only. These changes will conform
the Company's financial reporting with the
reporting practices of other large U.S. airline
companies.
Consolidated Balance Sheets (Dollars in millions)
Northwest Airlines Corporation
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance
(1994-$19.5; 1993-$22.0)
Flight equipment spare parts, less allowance
(1994-$86.2; 1993-$69.6)
Deferred income taxes
Prepaid expenses and other
Property And Equipment
Flight equipment
Less accumulated depreciation
Other property and equipment
Less accumulated depreciation
Flight Equipment Under Capital Leases
Flight equipment
Less accumulated amortization
Other Assets
Investments in affiliated companies
International routes, less accumulated
amortization (1994-$168.0; 1993-$144.5)
Other
$
December 31
1994 1993
468.0
601.9
640.4
226.7
88.0
160.2
2,185.2
3,695.0
820.8
2,874.2
1,465.9
435.5
1,030.4
3,904.6
940.9
193.3
747.6
156.6
79~.1
278.0
1,232.7
$ 139.6
52.7
725.5
196.9
76.2
353.8
1,544.7
3,636.5
764.4
2,872.1
1,394.5
356.2
1,038.3
3,910.4
940.9
155.8
785.1
160.5
821.6
349.0
1,331.1
$8,070.1 $7,571.3
The accompanying notes are an integral part of these consolidated financial statements.
36
Liabilities And Stockholders' Equity (Deficit)
Current Liabilities
Air traffic liability
Accounts payable and other liabilities
Accrued compensation and benefits
Accrued commissions
Accrued aircraft rent
Current maturities of long-term debt
Current obligations under capital leases
Short-term borrowings
Long-Term Debt
Long-Term Obligations Under Capital Leases
Def erred Credits And Other Liabilities
Deferred income taxes
Long-term pension, postretirement health care
and other insurance benefits
Other
Redeemable Preferred Stock
Series A and B
Series C, aggregate liquidation value (1994-$185.0; 1993-$112.1)
Common Stockholders' Equity (Deficit)
Common stock, $.01 par value; shares authorized-315,000,000;
shares issued and outstanding (1994-84,333,437;
l 993-58,009,946)
Additional paid-in capital
Accumulated deficit
Other
37
December 31
1994 1993
$ 761.1
607.4
418.2
172.0
177.3
334.2
52.7
23.8
2,546.7
3,679.3
837.6
768.5
462.4
351.3
1,582.2
703.7
91.3
795.0
0.8
636.6
(1,910.9)
(97.2)
(1,370.7)
~$8,070.1
$ 798.7
520.3
390.2
146.1
167.6
244.9
46.3
9.5
2,323.6
4,193.0
881.8
562.0
614.8
276.7
1,453.5
650.6
99.3
749.9
0.6
253.2
(2,147.1)
(137.2)
(2,030.5)
$7,571.3
Consolidated Statements Of Operations (In millions, except per share amounts)
Northwest Airlines Corporation
Year Ended December 31
1994 1993 1992
Operating Revenues
Passenger $7,730.6 $7,314.0 $6,903.4
Cargo 755.8 734.8 736.2
Other 656.5 600.1 488.0
9,142.9 8,648.9 8,127.6
Operating Expenses
Salaries, wages and benefits 2,325.6 2,437.4 2,568.0
Stock-based employee compensation 107.2 93.1
Commissions 1,588.2 1,502.1 1,379.9
Aircraft fuel, oil and taxes 1,052.8 1,160.0 1,236.7
Aircraft rentals 337.8 349.5 333.3
Other rentals and landing fees 436.0 412.1 403.3
Aircraft maintenance materials and repairs 396.0 368.0 381.0
Depreciation and amortization 357.4 417.3 400.4
Other 1,711.5 1,637.0 1,801.2
8,312.5 8,376.5 8,503.8
Operating Income (Loss) 830.4 272.4 (376.2)
Other Income (Expense)
Interest expense (387.2) (374.4) (374.0)
Interest capitalized 3.5 2.4 36.3
Investment income 42.2 19.4 10.4
Foreign currency loss - net (20.2) (37.1) (10.3)
Other - net 29.6 68.4 24.4
Nonrecurring special charges (74.3) (792. 7)
(332.1) (395.6) (1,105.9)
Income (Loss) Before Income Taxes and
Cumulative Effect Of Accounting Change 498.3 (123.2) (1,482.1)
Income Tax Expense (Benefit) 202.8 (7.9) (511.4)
Income (Loss) Before Cumulative Effect Of
Accounting Change 295.5 (115.3) (970.7)
Cumulative Effect Of Recognizing Postretirement Benefit
Obligations, Net Of $58.8 Million Tax Benefit (108.8)
Net Income (Loss) 295.5 (115.3) (1,079.5)
Preferred stock requirements (59.3) (92.2) (75.5)
Net Income (Loss) Applicable To Common Stockholders $ 236.2 $ (207.5) $(1,155.0)
Amounts Per Common Share:
Primary
Income (loss) before cumulative effect of accounting change $ 2.92 $ (2.82) $ (16.11)
Cumulative effect of accounting change ( 1.67)
et income (loss) $ 2.92 $ (2.82) $ (17.78)
Fully diluted
et income (loss) $ 2.87 $ (2.82) $ (17.78)
The accompanying note are an integral part of these consolidated financial statements.
38
Consolidated Statements Of Cash Flows (In millions)
Northwest Airlines Corporation
Year Ended December 31
1994 1993 1992
Cash Flows From Operating Activities
Net income (loss) $ 295.5 $ (115.3) $(1,079.5)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 357.4 417.3 400.4
Income tax (benefit) expense 202.8 (7.9) (511 .4)
Stock-based employee compensation 107.2 93.l
onrecurring special charges 68.5 774.8
Cumulative effect of accounting change 108.8
Increase in long-term pension liability 33.2 79.8 47.4
Net refunds (payments) of income taxes (22.2) 15.4 8.8
Other - net 18.8 38.7 49.6
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable 89.8 (14.6) (25.4)
Decrease (increase) in flight equipment spare parts (45.2) (0.3) 2.1
Decrease (increase) in prepaid expenses and other 233.9 ( 155.0) (42.6)
Increase (decrease) in accounts payable and other liabilities 149.7 (143.9) (105.2)
Increase (decrease) in air traffic liability (35.2) 77.4 147.0
Increase (decre_
ase) in accrued compensation and benefits (6.5) (15.9) 26.1
Net cash provided by (used in) operating activities 1,379.2 337.3 (199.1)
Cash Flows From Investing Activities
Additions to property and equipment (152.5) (81.1) (479.9)
Purchases of short-term investments (992.1)
Proceeds from maturities of short-term investments 452.2
Decrease (increase) in short-term investments (15.8) 12.6
Increase in other assets and long-term prepaids (19.4) (20.8) (34.2)
Proceeds from sale of property and other assets 11.8 25.4 25.2
Other- net 5.3 6.9 (6.6)
Net cash used in investing activities (694.7) (85.4) ( 482.9)
Cash Flows From Financing Activities
Issuance of common stock 249.1
Proceeds from long-term debt 1,182.0 724.8
Payment oflong-term debt and capital lease obligations (1,493.7) (124.8) (263.4)
Increase (decrease) in borrowings under revolving
credit facility (272.2) (221.0) 493.3
Cash dividends on preferred stock (35.4)
Other- net (21.3) (11.2) (9.3)
et cash provided by (used in) financing activities (356.1) (357.0) 910.0
Increase (Decrease) In Cash And Cash Equivalents 328.4 (105.1) 228.0
Cash and cash equivalents at beginning of period 139.6 244.7 16.7
Cash and cash equivalents at end of period $ 468.0 $ 139.6 $ 244.7
Cash and cash equivalents and unrestricted short-term
investments at end of period $ 968.3 $ 139.6 $ 244.7
Available borrowings under revolving credit facility $ 290.8 $ 240.1 $ 66.1
The accompanying notes are an integral part of these consolidated financial statements.
39
Consolidated Statements Of Common Stockholders' Equity (Deficit)
(In millions, except per share data)
Northwest Airlines Corporation
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Other Total
---
Balance January 1, 1992 52.7 $ 0.5 $ 232.2 $ (763.5) $ (14.9)$ (545.7)
Net loss (1,079.5) (1,079.5)
Cash dividends:
Series A Preferred Stock,
$6,016 per share (35.0) (35.0)
Series B Preferred Stock, paid
in lieu of fractional shares (0.4) (0.4)
In-kind dividends on Series B
Preferred Stock, 14% ( 46.3) ( 46.3)
Translation adjustments, net
of income taxes 0.6 0.6
Pension liability adjustment,
net of income taxes (26.2) (26.2)
Balance December 31, 1992 ~ 0.5 232.2 (1,924.7) ( 40.5) (1 ,732.5)
Net loss (115.3) (115.3)
Accrued cumulative dividends
on Series A, B and C
Preferred Stock (63.3) (63.3)
In-kind dividends on Series B
Preferred Stock, 14% (26.6) (26.6)
Accretion of discount on
Series C Preferred Stock (0.8) (0.8)
Translation adjustments, net
of income taxes (13.4) (13.4)
Pension liability adjustment,
net of income taxes (78. 7) (78.7)
Shares issued to Series A and
B Preferred stockholders 5.3 0.1 16.3 (16.4)
Other 4.7 ( 4.6) 0.1
Balance December 31, 1993 ~ 0.6 253.2 (2,147.1) (137.2) (2,030.5)
Net income 295.5 295.5
Issuance of common stock 20.4 0.2 248.9 249.1
Shares earned by employees
including shares issued to
employee benefit plans 5.8 121.4 121.4
Accrued cumulative dividends
on Series A, B and C
Preferred Stock (54.5) (54.5)
Accretion of discount on
Series C Preferred Stock (4.8) ( 4.8)
Tax benefit related to stock
issued to employee
benefit plans 9.2 9.2
Translation adjustments, net
of income taxes (14.1) (14.1)
Pension liability adjustment,
net of income taxes 53.9 53.9
Other 0.1 3.9 0.2 4.1
Balance December 31, 1994 84.3 $ 0.8 $ 636.6 $ (1,910.9) $ (97.2) $(1,370.7)
The accompany notes are an integral part of these consolidated financial statements.
40
Notes To Consolidated Financial Statements
Northwest Airlines Corporation
Note A - Summary Of Significant
Accounting Policies
Basis Of Presentation: Northwest Airlines
Corporation ("NWA Corp.:' and together with
its subsidiaries, the "Company"), a Delaware
corporation, is the parent company of NWA
Inc: ("NWA"), which in turn is the parent
company of Northwest Airlines, Inc.
("Northwest"), its principal subsidiary. The
Company changed its corporate name to
Northwest Airlines Corporation from Wings
Holdings Inc. ("Wings") effective December,
1993. Northwest's operations comprise more
than 96% of the Company's consolidated
operating revenues and expenses. The
Company's consolidated financial statements
include the accounts of NWA Corp., NWA,
Northwest and other majority owned
subsidiaries after elimination of intercompany
accounts and transactions. Investments in
20% to 50% owned companies are accounted
for by the equity method. Other investments
are accounted for by the cost method.
Wings and its wholly owned subsidiary,
Wings Acquisition Corp., were formed and
incorporated by a group of investors in
order to acquire all of the outstanding stock
of NWA (the "Acquisition"). In 1989, Wings
Acquisition Corp. was merged with and into
NWA, with NWA being the surviving entity.
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
of Acquisition, determined primarily by
independent appraisals. The estimated fair
market value of net assets acquired was in
excess of the purchase price, which resulted
in noncurrent assets being recorded at 65%
of the estimated fair market value on the
date of Acquisition.
Certain amounts for 1993 and 1992 have
been reclassified to conform with the 1994
financial statement presentation.
41
Flight Equipment Spare Parts: Flight
equipment spare parts are carried 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 alue at the inception of the
lease. Property and equipment are depreciated
to residual values using the straight-line
method over the estimated useful lives of the
assets. Estimated useful lives generally range
from 2 to 25 years for flight equipment and
3 to 32 years for other property and equipment.
Leasehold improvements are amortized over
the remaining period of the lease or the
estimated service life of the related asset,
whichever is less. Property and equipment
under capital leases are amortized over the
lease terms or the estimated useful lives of
the assets. Effective January 1, 1994, the
Company revised estimated salvage values
and depreciable lives for certain aircraft to
better reflect current estimates. The net
effect was to reduce depreciation expense
for the twelve months ended December 31,
1994, by $49.7 million ($31.1 million net of
tax or $.38 per share).
Airframe And Engine Maintenance: Routine
maintenance and airframe and engine
overhauls are charged to expense as
incurred. Modifications that significantly
enhance the operating performance or
extend the useful lives of airframes or
engines are capitalized and amortized over
the remaining useful life of the asset.
International Routes: International routes are
amortized on a straight-line basis, generally
over 40 years.
Free Travel Awards: The Company accrues
the estimated incremental cost of providing
free travel awards earned under its
WorldPerks frequent flyer program.
Postretirement Health Care And Other Insurance
Benefits: The Company provides medical,
dental and life insurance benefits to certain
eligible retirees and their dependents. Effective
January 1, 1992, the Company changed its
method of accounting to accrue the expected
future cost of providing such postretirement
benefits over the service life of active employees.
The Company previously recognized the
expense for such benefits on a cash basis.
Foreign Currency: Assets and liabilities
denominated in foreign currency are
translated at current exchange rates with
resulting gains and losses generally included
in net income. Realized and unrealized gains
and losses on Japanese yen collar option
contracts are recognized currently in net
income. Such open contracts are marked tQ
market based on current forward rates since
the do not qualify as hedges for financial
accounting purposes.
Assets and liabilities of certain properties
located outside of the United States whose
cash flows are primarily in the local functional
currency are translated at current exchange
rates, and translation gains and losses are
recorded directly to common stockholders'
equity deficit. The net cumulative foreign
translation loss was $41.0 million as of
December 31, 1994.
Futures Contracts: The Company enters into
futures contracts to hedge a portion of the
price risk associated with aviation fuel costs.
Gains or losses on hedged contracts are
deferred until the related fuel inventory is
expensed.
Operating Revenues: Passenger and cargo
revenues are recognized when the
transportation is provided. The air traffic
liability represents the estimated value of
sold but unused tickets and is included in
current liabilities.
Income Taxes: The Company accounts for
income taxes utilizing the liability method.
42
Deferred incomes taxes are recorded to
reflect the tax consequences of differences
between the tax and financial reporting
bases of assets and liabilities.
Earnings (Loss) Per Share: Primary earnings
per share is based on the weighted average
number of common and common stock
equivalent shares outstanding and includes
the common stock shares earned by employees.
Common stock equivalents include the
dilutive effect of the assumed exercise of
stock options using the treasury stock method.
Primary earnings per share in 1994 is based
on 80,888,543 shares. For fully diluted
earnings per share, net income applicable to
common stockholders and weighted average
shares outstanding are adjusted as if the
Se1ies C Preferred Stock earned by employees
was converted to common stock. Fully diluted
earnings per share in 1994 is based on
84,492,067 shares. Had the initial public
offering (see Note G) taken place on
January 1, 1994, primary and fully diluted
earnings per share for 1994 would have been
$2.78 and $2.74, respectively, after adjustment
for reduced interest expense on the long-
term debt repaid with a portion of the
proceeds of such offering.
Loss per share in 1993 and 1992 was adjusted
to reflect retroactively the stock split discussed
in ote G. Also, pursuant to the Securities
and Exchange Commission rules, common
shares and stock options issued by the
Company and the Series C Preferred Stock
and common shares earned by employees
within one year prior to the initial public
offering have been included in the calculations
as if they were outstanding for all periods
using the treasury stock method. Weighted
average shares were 65,494,013 in 1993 and
64,951,547 in 1992. For the year ended
December 31, 1992, the Company's fully
diluted amounts per common share were
equal to the respective primary amounts per
common share.
Note B - Cash And Cash Equivalents And
Short-Term Investments
The Compan considers all unrestricted
imestments with an original maturi of
three months or less on their acquisition
date to be cash equivalents. The Compan)
classifies in estments with an original
maturity of more than three months and less
than one 1ear on their acquisition date and
those temporaril I restricted as short-term
investments. The Company's cash and cash
equi alents and short-term investments at
December 31 1994, consisted of the follmving
( cost approximates fair value, in millions):
Held-to-maturity
debt securities:
Cash and Cash Short-term
Equi, alents Im estments
Commercial paper $ 436.2 $ 490.3
111.6
Other .3
Available-for-sale
debt securities 20.5
Cash 11.0
Total $ 468.0 $ 601.9
Short-term investments included $101.6
million of temporarily restricted investments.
43
Note C - Labor Cost Savings Agreements
The employee unions ha, e ratified
amended labor agreernents \ hich provide
for, age and other compensation savings
( the Actual Savings ') b domestic emplo ee ,
including management, and other cost
reductions aggregating approximatel
$886 million over a 36 to 39 month period
(depending on the labor group) (the
' age Sa ings Period ') commencing
August 1993. As part of an overall re,ised
compensation plan provided by the
an1ended labor agreements, the Compan
agreed, among other thing to issue
18 214 419 shares of a new class of Series C
cumulative, '- oting com ertible, redeemable
preferred stock (the "Series C Preferred
Stock ) and provide the union groups ,vith
three positions on the Board of Directors.
The Compan has authorized 25,000 000
shares of Series C Preferred Stock par
value $.01 per share. ot,vithstanding
that these shares , ill be issued to trusts
for the benefit of emplo ees in seven
installments, the holders ha e the right to
, ote as if all shares were issued.
Pursuant to a one-time special conversion
right exercised in Februar 1994 the
Company will issue to such trnsts approximatel
17.8 million shares of common stock (in
lieu of approximatel 9.3 million shares of
Series C Preferred Stock). Information with
respect to the stock activity consists of the
follmving (in millions):
Series C Pref erred Stock Common Stock
Shares
to be Shares
Issued Issued
BalanceJanuary 1, 1993
Stock to be issued to trusts for the
benefit of employees 18.2
Shares earned by employees
Accretion and other
Balance December 31, 1993 18.2
Exercise of special conversion option (9.3)
Shares earned by employees
Shares issued to trusts (3.0) 3.0
Accretion and other
Balance December 31, 1994 5.9 3.0
The Series C Preferred Stock ranks junior
to Series A and B Preferred Stock and senior
to common stock with respect to liquidation
and certain dividend rights. The 8.9 million
shares of Series C Preferred Stock remaining
after the special conversion option are
convertible by the holders at any time into
approximately 12 .1 million shares of
common stock.
Series C Preferred Stock is redeemable in
2003 for a pro rata share of Actual Savings
(projected to approximate $408 million in
total for the remaining Series C Preferred
Stock which has not converted), plus accrued
dividends, if any. The carrying value of the
Series C Preferred Stock is being accreted
over ten years commencing August 1993 to
the ultimate redemption amount for the
Series C Preferred Stock shares. The Company
has the option to redeem in cash, issue
additional common stock, or use a
combination thereof, to satisfy the redemption
requirements. A decision to issue only
additional common stock must be approved
by a majority of the three Directors elected
by the Series C Preferred stockholders. If the
Company fails to redeem the Series C Preferred
Stock, dividends accrue at the higher of (i)
12 percent or (ii) the highest penalty rate on
any then outstanding series of preferred
stock, and the employee unions receive three
additional Board of Directors positions.
Because of applicable accounting
requirements, the Company must recognize
Financial Shares Financial
Shares Statement to be Shares Shares Statement
Earned Amount Issued Issued Earned Amount
$ - $ -
2.5 93.1
6.2
2.5 99.3
(1.4) (62.7) 17.8 '-
2.8 62.7
44
2.9 48.5 5.0 58.7
(5.8) 5.8
6.2
4.0 $ 91.3 12.0 5.8 7.8 $121.4
compensation expense for each twelve
month period ending December 31 based
on the values at December 31 of the Series C
Preferred Stock and the common stock
earned by employees during the preceding
twelve month period. Such non-cash stock-
based compensation expense will be calculated
each month by (1) determining the aggregate
current value of all Series C Preferred Stock
and common stock earned by employees since
the previous January 1 using current per
share values as of the balance sheet date
and then (2) subtracting the non-cash
compensation previously recognized since
January 1. Any increase (decrease) in share
value will increase (decrease) non-cash
compensation expense and the recorded
effect in any month of a change in share
prices wili be a function of all shares earned
since the previous January 1. Such changes
in share values may be unrelated to the period's
performance or cash flows. Such compensation
expense for shares earned in 1993 was
determined using share values as of June 21,
1994, when the Company and its labor
groups agreed to change to a calendar year
approach to allocating shares to employees.
The fair value of the Series C Preferred
Stock was estimated to be $87 million and is
based on the assumed conversion to common
stock for the shares earned through December
31, 1994, at the quoted market price of the
Company's common stock at such date.
Note D-Long-Term Debt, Credit Agreement And Short-Term Borrowings
Long-term debt consisted of the following (in millions, with interest rates as of
December 31, 1994):
December 31
1994 1993
Term loans due through 2000, 9.4% weighted average rate (a)
Revolving credit facility due 1997 (a)
$ 964.8 $1,525.4
272.2
Land mortgages due 2000, 4.0% (b) 695.9 621.4
Secured notes due through 2000, 8.1 % weighted average rate (c)
NWA Trust o. 2 aircraft notes due through 2012,
435.3 467.0
10.6% weighted average rate (d)
Equipment pledge notes due through 2013,
9.7% weighted average rate (e)
352.0
326.6 757.8
Sale-leaseback financing obligations due through 2020,
9.9% imputed rate (f) 263.5 263.9
NWA Trust o. 1 aircraft notes due through 2006,
8.6% weighted average rate (g) 239.1
8.625% unsecured notes due 1996, net of discount
(1994-$9.7; 1993-$14.9)
Term certificates due 1999, 6.8% (h)
Unsecured notes due through 1999, 12.1 % (i)
Unsecured notes due 1998, 10.8% U)
190.3
175.0
140.0
92.4
185.1
152.5
92.4
Yen-denominated construction loan due through 1995, 8.0%
Hushkit financing due through 2001, 7.3% weighted average rate (k)
Other
33.1
12.3
93.2
76.9
23.3
Total long-term debt
Less current maturities
(a) In December 1994, the Company entered
into a Fourth Amended and Restated Credit
Agreement ( the "Credit Agreemenf') with
various corporations and lending institutions
which amended and restated a credit
agreement orginally entered into in July 1989,
which had provided a term loan of $3.1 billion.
The principal is payable in installments
through December 2000, subject to certain
acceleration provision .
The Credit Agreement also currently provides
a $335.8 million revolving credit facility
scheduled to expire in June 1997, which
declines to $289 .5 million in 1995 and
$179.7 million in 1996. Repayment of all
borrowings under the revolving credit facility,
with permitted sub equent reborrowjng, i
required for a minimum of 30 days during
45
4,013.5 4,437.9
334.2 244.9
$ 3,679.3 $ 4,193.0
each rolling twelve-month period.
Commitment fees are 1/ 2% per annum on
the average unused levels and amounted to
$2.3 million in 1994, $.6 million in 1993 and
$1.7 million in 1992. At December 31, 1994,
$290.8 million remained available on the
revolving credit facility, as the Company had
utilized $45.0 million for letter of credit
issued by Credit Agreement participants on
behalf of the Company.
The term loan and borrowing under the
revolving credit facility are compri ed of one
or more specific floating rate borrowing at
any given date. Interest for each specific
borrowing is currently determined by adding
pecified margin ( exp res ed as rate per
annum and ranging from 2 % to 4%) to one
of the following: ( 1) the higher of prime rate
of Bankers Trust Company or 1/ 2% plus a
certificate of deposit rate; (2) an adjusted
Eurodollar rate; or (3) an adjusted certificate
of deposit rate.
(b) During 1990, the Company mortgaged
certain Tokyo property on a non-recourse
basis for two loans due in 2000 (aggregating
70 billion yen at December 31, 1994). To the
extent that cash interest payments on these
loans are less than interest calculated at a
4% rate, the difference will be additional
accrued interest due in 2000. At the Company's
option, the loans and accrued interest can
be liquidated by transferring the land to the
mortgagee.
(c) In 1990 the Company issued floating rate
notes to certain manufacturers. Principal
repayments are due quarterly through 2000.
(d) In December 1994, the Company
completed a structured aircraft financing
transaction in which 13 Airbus A320 aircraft
were transferred from orthwest (subject to
existing indebtedness) to an owner trust
(NWA Trust o. 2). Win-Win L.P., a limited
partnership of which orthwest is the
limited partner and orbus, Inc. (an affiliate
of Airbus Industrie A.LE.) is the general
partner, is the sole equity participant in the
owner trust. All proceeds from the
transaction were used to repay equipment
pledge notes which had previously been
issued to finance the acquisition of these
aircraft by orthwest. The aircraft were
simultaneously leased back to Northwest.
Financing of $352 million was obtained
through the issuance of $176 million of
9.25% Class A Senior Aircraft otes,
$66 million of 10.23% Class B Mezzanine
Aircraft otes, $44 million of 11.30% Class C
Mezzanine Aircraft otes and $66 million of
13.875% Class D Subordinated Aircraft
otes. Principal and interest on the new
notes are payable semiannually through 2012
from rental payments made by orthwest
under the lease. The notes are secured by
46
the aircraft subject to the lease as well as the
lease itself, subject to certain exclusions.
(e) In 1993 and 1992, floating rate
equipment pledge notes of $263. 7 million
and $158.7 million, respectively, were issued
to manufacturers in exchange for certain
aircraft.
(f) In March 1992, the Company completed
agreements with the Minneapolis-St. Paul
Metropolitan Airports Commission ("MAC")
for the sale and leaseback of various corporate
assets. The sale-leaseback agreements, which
are accounted for as debt, call for increasing
quarterly payments over a 30-year term and
include a provision which gives the Company
the option to repurchase the assets.
The agreements with the MAC are part of a
group of financing arrangements with the
State of Minnesota and other government
agencies. In December 1994, the Company
and the State of Minnesota entered into
agreements whereby the Company will build
and operate a maintenance facility in Duluth,
Minnesota, and a reservations center in
Chisholm, Minnesota. The State of Minnesota
and other government entities will provide
aggregate financing of approximately $55
million.
(g) In March 1994, Northwest consummated
a financing transaction in which six Boeing
747-200 and four Boeing 757-200 aircraft
were sold to an owner trust (NWA Trust
o.l) of which NWAAircraftFinance, Inc.,
an indirect subsidiary of the Company, is the
sole equity participant. A portion of the
purchase price was financed through the
issuance of $177 million of 8.26% Class A
Senior Aircraft otes and $66 million of
9.36% Class B Subordinated Aircraft Notes.
The aircraft were simultaneously leased
back to Northwest. The notes are payable
semiannually from rental payments made by
Northwest under the lease and are secured
by the aircraft subject to the lease as well as
the lease itself, subject to certain exclusions.
(h) In March 1994, orthwest agreed to
sell certain receivables on an ongoing basis
to orthwest Capital Funding Corp., an
indirect subsidiary of the Company, which
has issued through a master trust $175 million
of floating rate Term Certificates. These
privately placed Certificates are secured
by the purchased receivables and require
interest only during their term with the
principal due in 1999.
(i) In December 1989, the Company entered
into a funding facility, which was full utilized
at December 31, 1992. Principal and interest
payments are due monthly through 1999.
(j) In December 1992, the Company issued
floating rate notes due in 1998 to certain
manufacturers. Interest accrued until January
1995 and is payable monthly thereafter.
(k) In August 1994, the Company entered
into a credit agreement to finance engine
hushkit shipsets for DC-9 aircraft. The credit
facility allows for borrowings up to $225
million prior to December 31, 1998. Interest
is payable quarterly. Generally, amounts
borrowed during each annual period
through 1998 are payable in quarterly
installments over the six years following each
such annual period.
Maturities of long-term debt for the five
years subsequent to December 31, 1994, are
as follows (in millions):
1995 $334.2
1996 478.1
1997 476.7
1998 397.2
1999 468.5
In February 1995 the Company prepaid $200
million of its scheduled 1995 payments
under the Credit Agreement and certain
other financing agreements.
47
The debt and lease agreements of the
Company contain certain restrictive covenants,
including limitations on indebtedness, capital
expenditures, equity redemptions and the
declaration of dividends, as well as requirements
to maintain certain financial ratios, including
collateral co erage ratios. At December 31,
1994, the Company was in compliance with
the co enants of all of its debt and lease
agreements. Substantially all of the Company's
assets are pledged as collateral under certain
of its debt agreements. In addition, the
Compan is obligated under its Credit
Agreement to make annual term loan
prepayments and revolving credit facility
reductions in an aggregate amount equal to
70% of the first $200 million of Excess Cash
Flow (as defined) and 30% of Excess Cash
Flow in excess of $200 million, subject to an
overall limitation of $200 million for 1994
(which was paid in December 1994) and
$175 million for each year thereafter. Under
the terms of the agreements governing
certain other notes, the Company must pay
up to 15% of Excess Cash Flow to the holders
of such notes on an annual basis. The aggregate
amount expected to be paid in 1995 under
the agreements for such notes with respect
to 1994 Excess Cash Flow is approximately
$90 million.
Cash payments of interest, net of capitalized
interest, aggregated $332.7 million in 1994,
$322.9 million in 1993, and $239.9 million
in 1992. The fair value of long-term debt,
including current maturities, was estimated
to be $3.83 billion at December 31, 1994,
using discounted cash flow analyses based
on quoted market prices for these or similar
issues or on the current rates offered for
debt of the same remaining maturities.
The maximum and average outstanding
balances of short-term borrowings
(principally under the revolving credit
facility in 1992) and the weighted average
interest rates during 1994, 1993 and 1992
were as follows ( dollars in millions):
Maximum amount
of borrmvings
outstanding during
1994 1993 __lilll2_
period $46.4 $10.0 $637.5
Average daily
borrowings during
period $17.8 $ 4.8 $327.4
Weighted average
interest rate on
borrowings during
pe1iod 5.95% 4.18% 6.33%
Note E - Leases
The Company leases certain aircraft; space
in airport terminals; land and buildings at
airports; ticket, sales and reservations offices;
and other property and equipment under
noncancellable operating leases which expire
in various years through 2025. Portions
of certain facilities are subleased under
noncancellable operating leases expiring in
various years through 2020.
At December 31, 1994, the Company leased
150 of the 361 aircraft it operates. Of these,
34 were capital leases and 116 were operating
leases. Expiration dates range from 1997 to
2008 for aircraft under capital leases, and
from 1995 to 2016 for aircraft under
operating leases. The Company's aircraft
leases can generally be renewed for terms
ranging from one to three years at rates
based on the aircraft's fair market value at
the end of the lease term. Eighty-one of the
150 aircraft lease agreements provide the
Company with purchase options at the end
of the lease term which approximate fair
market value.
48
Rental expense for all operating leases
consisted of (in millions):
Year Ended December 31
1994 1993 1992
Gross rental
expense
Sublease rental
$578.8 $583.3 $536.9
income (57.2) (57.9) (37.8)
Net rental expense $521.6 $525.4 $499.1
At December 31, 1994, future minimum
lease payments under capital leases and
noncancellable operating leases with initial
or remaining terms of more than one year
were as follows (in millions):
Capital Operating
Leases Leases
1995 $ 115.1 $ 483.4
1996 124.5 473.5
1997 126.8 434.1
1998 116.7 388.5
1999 107.4 351.8
Thereafter 801.7 4,431.0
1,392.2 6,562.3
Less sublease rental
mcome 79.2
Total minimum
operating lease
payments $6,483.1
Less amounts
representing interest 501.9
Present value of future
minimum capital
lease payments 890.3
Less current obligations
under capital leases 52. 7
Long-term obligations
under capital leases $ 837.6
Note F - Series A And B Redeemable Preferred Stock
Series A and B Preferred Stock issued and outstanding consisted of the following
( dollars in millions):
Series A
Shares Amount
Balance January 1, 1992 5,000 $ 250.0
Stock dividends
Balance December 31, 1992 5,000 250.0
Stock dividends
Accrued dividends
Balance December 31, 1993 5,000 250.0
Accrued dividends
Balance December 31, 1994 5,000 $ 250.0
For each of the above series of preferred
stock, 10,000 shares are authorized, par
value is $.01 per share and the stated value
is $50 thousand per share. Both series are
entitled to a preference in voluntary and
involuntary liquidation, in the amount of
$50 thousand per share, plus accrued and
unpaid dividends. Holders of the Series A
and B Preferred Stock have voting rights for
the election of directors.
In 1993, the holders of Series A and B
Preferred Stock agreed to extend,the
mandatory redemption dates to August 1,
2002, for Series A and to August 1, 2003, for
Series B Preferred Stock and reduce the
dividend rates. The Series A and B Preferred
Stock, including accrued and unpaid
dividends, must be redeemed in three equal
installments starting two years prior to the
respective final redemption dates. The
Company issued simultaneously 5,270,038
shares of common stock to the holders of
the Series A and B Preferred Stock, which
was accounted for at fair value as a transfer
from accumulated deficit.
CommencingJuly 31, 1993, the Series A and
B dividends accrue semiannually at 8% per
year and for the next five years dividends will
be deferred until redemption and payable in
cash thereafter. Dividends are cumulative if
unpaid, and, beginning August 1, 1998, to
49
Accrued
Series B Cumulative
Shares Amount Dividends Total
5,397 $ 269.8 $ - $ 519.8
924 46.3 46.3
6,321 316.1 566.1
532 26.6 26.6
57.9 57.9
6,853 342.7 57.9 650.6
53.1 53.1
6,853 $ 342.7 $ 111.0 $ 703.7
the extent cash dividends are not paid, the
annual dividend rate will increase every six
months by 1/ 2% until it reaches 10%.
The Series A Preferred Stock ranks senior
to the Series Band Series C Preferred Stock
and all classes of common stock with respect
to liquidation and dividend rights. At any time,
at the option of the Company, the Series A
(in whole) and Series B (in whole or in
$50 million increments) Preferred Stock is
redeemable. All outstanding shares of Series
A Preferred Stock must have been previously
redeemed before an optional redemption of
any Series B Preferred Stock is permitted.
The fair value of the Series A and B Preferred
Stock was estimated to be approximately
$520 million at December 31, 1994.
On January 25, 1995, the Company
consummated an agreement with Bankers
Trust ew York Corporation ("BTNY'') to
exchange 1,727 shares of the Company's
Series B Preferred Stock previously held by
BTNY for 2,050,000 shares of newly issued
Class B Common Stock. This transaction
resulted in a $97 million transfer from
redeemable preferred stock to common
stockholders' equity (deficit) and an increase
to net income applicable to common
stockholders of $59 million in 1995.
Note G - Common Stockholders' Equity (Deficit)
The Company's classes of common stock consisted of (shares in millions):
Par value
Class A, voting $.01
Class B, non-voting $.01
In February 1994, the stock was split and each
share of common tock issued and outstanding
was effectively converted into approximately
659 fully paid shares of common stock for a
total of 58,009 946 common shares. All
applicable common share and per common
hare amounts have been adju ted to
retroactively reflect the stock split.
In 1994 the Company raised $249.1 million
from an initial public offering of 20.4 million
shares of Class A Common Stock. Of these
net proceeds, $103 million were utilized by
the Company to pay down scheduled principal
pa ments under the Credit Agreement in
inverse order of maturity, with remaining
proceeds used for general corporate purposes.
With respect to liquidation rights, all classes
of common stock rank junior to all classes of
pr ferred tock. Shares of non-voting Class B
Common Stock are. convertible at any time
into an equal number of shares of voting
Class A Common Stock. During 1994, 11.8
million shares of Class B Common Stock
were converted into Class A Common Stock.
The Compan has stock option plans for
officers and key employees. At December 31,
1994 and 1993 respectively, the Company
had 4,947 927 and 2,947,927 shares of
Class A Common Stock reserved for issuance
under the plans. There were 245,647 and
17,015 shares available for future grants at
50
Shares issued and outstanding
Shares as of December 31
authorized 1994 1993 1992
250.0 77.1 39.7 38.6
65.0 7.2 18.3 14.1
315.0 84.3 58.0 52.7
December 31, 1994 and 1993, respectively.
It is generally the Company's policy to grant
options at prices not below their fair value.
To the extent that options are granted at less
than fair value, compensation expense is
recognized over the vesting period of the
grant, which is generally four years. All stock
options expire ten years after their grant
date. Following is activity with respect to
stock options (in thousands, except per
share amounts) :
Outstanding at
January 1, 1993,
of which 403 were
exercisable
Granted
Forfeited
Cancelled
Exercised
Outstanding at
December 31, 1993,
of which 1,135 were
exercisable
Granted
Forfeited
Cancelled
Exercised
Outstanding at
December 31, 1994,
of which 1,835 were
exercisable
Shares
1,966
2,879
(321)
(1,593)
(40)
2,891
1,852
(61)
(19)
(138)
4,525
-
Price
Per Share
$18.98 - 28.46
$4.74
$4.74 - 28.46
$4.74
$4.74 - 28.46
Note H - Income Taxes
Income tax expense (benefit) consisted of
the following (in millions):
Year Ended December 31
1994 1993 1992
Current:
Federal $ 11.9 $ 0.1 $ (20.9)
Foreign 5.3 3.8 5.2
State 5.3 0.7 (0.1)
22.5 4.6 (15.8)
Deferred:
Federal 168.1 (6.4) ( 444.0)
Foreign (5.3) (3.8) (5.2)
State 17.5 (2.3) ( 46.4)
180.3 (12.5) ( 495.6)
Total income tax
expense (benefit) $ 202.8 $ (7.9) $(511.4)
Reconciliation of the Company's effective
income tax rate applied to the income (loss)
before income taxes and cumulative effect of
accounting change is as follows (in millions):
Year Ended December 31
1994 1993 1992
Statutory rate
applied to income
(loss) before
income taxes and
cumulative effect of
accounting change $174.4 $(43.1) $ (503.9)
Add (deduct):
State income tax
net of federal
benefit 16.0 (1.2) (34.8)
Non-deductible
meals and
entertainment 8.9 3.5 3.6
Effect of federal
rate increase on
deferred tax
balances 12.0
Adjustment to
valuation
allowance and
other income
tax accruals 3.0 20.8
Other 0.5 0.1 23.7
Total income tax
expense (benefit) $202.8 $(7.9) $(511.4)
51
The net deferred tax liabilities listed below
include a current net deferred tax asset of
$88.0 million and a long-term net deferred
tax liability of $768.5 million as of December
31, 1994, and a current net deferred tax
asset of $76.2 million and a long-term net
deferred tax liability of $562.0 million as of
December 31, 1993.
Significant components of the Company's
net deferred tax liability were as follows
(in millions):
December 31
1994 1993
Deferred tax liabilities:
Financial accounting basis
of assets in excess of tax
basis $1,398.9 $1 ,420.3
Expenses other than
depreciation accelerated
for tax purposes 241.9 215.6
Other 41.5 57.1
Total deferred tax
liabilities 1,682.3 1,693.0
Deferred tax assets:
Pension and postretirement
benefits 248.7 252.1
Expenses accelerated for
financial reporting
purposes 284.3 346.2
Leases capitalized for
financial reporting
purposes 126.6 136.0
Net operating loss
carryforwards 273.0 442.0
Alternative minimum tax
credit carryforwards 38.7 24.6
Investment tax credit
carryforwards 23.0 23.0
Foreign tax credit
carryforwards 20.0 17.1
Total deferred tax assets i,014.3 1,241.0
Valuation allowance for
deferred tax assets (12.5) (33.8)
Net deferred tax assets 1,001.8 1,207.2
Net deferred tax liability $ 680.5 $ 485.8
As of December 31, 1994, the Company
had regular net operating loss carryforwards
("NOLs") of $741.0 million available on a
tax basis for carryforward to future years'
returns, with $625.8 million expiring in 2007
and $115.2 million expiring in 2008. For
alternative minimum tax purposes, the
Company has net operating loss carryforwards
("AMTNOLs") of $15.0 million available on a
tax basis for carryforward to future years'
returns, which will expire in 2007. The Company
utilized NO Ls of $465.5 million in 1994 and
AMTNOLs of $35.8 million in 1993 and
$536.8 million in 1994. The Company has
alternative minimum tax, investment tax and
regular foreign tax credits of $38. 7 million,
$23.0 million and $20.0 million, respectively,
available on a tax basis for carryforward to
future years' tax returns. The alternative
minimum tax credit has an unlimited carry-
forward period. Investment tax credits totaling
$14. 7 million expire in 2003 and $8.3 million
expire in 2004. Foreign tax credits available
for alternative minimum tax purposes total
$19.8 million. Foreign tax credits for both
regular and alternative minimum tax purposes
expire through 1999.
Sections 382 and 383 of the Internal Revenue
Code of 1986 and the regulations thereunder
impose certain limitations on a corporation's
ability to use regular and alternative minimum
tax net operating loss and credit carryforwards
if such corporation experiences a more-than-
50% ownership change, assiefined therein,
over a three-year testing period ending on any
testing date. Since management believes that
no such ownership change has occurred
through December 31, 1994, no valuation
allowance relating to any ownership change
has been provided with respect to deferred
tax assets related to such NOLs, AMTNOLS
and credits. However, should the Internal
Revenue Service successfully assert that there
has been an ownership change, the Company's
ability to realize deferred tax assets already
recognized related to the net operating loss
and credit carryforwards could be limited to
an amount substantially less than that
recognized (including those already utilized
in 1993 and 1994) to date. Such amount allowed
would also be realized over a longer period of
time than if no such limitation had existed.
52
The Omnibus Budget Reconciliation Act of
1993 increased the corporate tax rate from
34% to 35% retroactive to January 1, 1993.
This rate change caused the Company to
increase its deferred tax assets and liabilities
and increase the effective tax rate. The net
effect of these changes was $9 .4 million of
additional tax expense recorded during 1993.
Note I - Commitments
The Company's aircraft orders as of
December 31, 1994, adjusted to reflect a
February 1995 revised delivery schedule,
included commitments to acquire 40 Boeing
757-200 aircraft, 15 in 1995 and 1996 and 25
in 2003 through 2005; and 16 Airbus A330
aircraft, eight each in 1999 and 2000.
Committed expenditures for these aircraft
and related equipment, including estimated
amounts for contractual price escalations and
predelivery deposits, will be approximately:
$340 million in 1995; $527 million in 1996;
$149 million in 1997; $94 million in 1998;
$750 million in 1999; and $2. 7 billion from
2000 to 2005. Financing has been arranged
for all 1995 and 1996 aircraft deliveries. In
addition, the Company has ordered four
Boeing 747-400 aircraft at an aggregate cost,
including related equipment and contractual
price escalations, of approximately $750
million. The Company may elect to take
delivery of these aircraft as early as 1997 and
1998 or as late as 2002 and 2003. Consistent
with prior practice, the Company intends to
finance its remaining aircraft deliveries through
a combination of debt and lease financing.
Note J - Litigation And Contingencies
The Company is involved in a variety of legal
actions relating to environmental, regulatory,
antitrust, trade practice and other legal matters
relating to the Company's business. While the
Company is unable to predict the ultimate
outcome of these legal actions, it is the
opinion of management that the disposition of
these matters will not have a material adverse
effect on the Company's financial statements
taken as a whole.
Note K- Pension Benefits
The Com pan has several noncontributory pension plans co ering substantiall all of its
emplo ees. The benefits for these plans are based primaril , on 'ear of service and/ or
emplo ee compensation. It is the Compan 's polic to annuall 'fund at least the minimum
cotribution as required b , the Emplo ee Retirement Income Securi ' ct of 1974.
The net periodic pension cost of defined benefit pension plans included the following
(in millions):
Service cost - benefits earned during the period
Interest cost on projected benefit obligations
Actual return on plan assets
et amortization and deferral
et periodic pension cost
Year Ended December 31
1994 1993 1992
$ 89.0 $ 90.0 $ 86.5
216.9 207.7 18-.4
23.4 (197.9) (95.6)
188.6) 42.3 (34.3)
$ 140.7 $ 142.1 $ 142.0
The following table sets forth the defined benefit pension plans funded tatus and amounts
recognized in the Com pan s consolidated balance sheets as of December 31 (in millions):
Actuarial present value of:
Vested benefit obligations
on ested benefit obligations
Accumulated benefit obligations
Effect of projected future salary increases
Projected benefit obligations
Plan assets at fair value
Less projected benefit obligations
Projected benefit obligations (in excess of)
less than plan assets
Unrecognized prior service cost
Unrecognized net loss
Adjustment required to recognize
minimum liability
Prepaid (accrued) pension cost at
December 31
1994
Assets
Exceed
Accumulated
Benefits
$ 175.8
12.1
187.9
20.6
$ 208.5
$ 220.4
208.5
11.9
4.6
9.2
$ 25.7
Accumulated
Benefits
Exceed
Assets
$1,960.2
110.5
2,070.7
353.0
$2,423.7
$1,667.8
2,423.7
(755.9)
233.6
229.0
(138.6)
$ (431.9)
1993
As ets
Exceed
ccumulated
Benefi~
$ 192.0
12.9
204.9
20.8
$ 225.7
$ 235.5
225.7
9.8
5.1
12.0
$ 26.9
Accumulated
Benefits
Exceed
As ets
$2 079.3
124.2
2,203.5
399.3
$2,602.8
$1 666.4
2 602.8
(936.4)
239.5
430.8
(293.0)
$ ( 59.1)
As of December 31 1994 and 1993 plan assets were in ested primarily in equity and debt securitie .
Assumptions used in the accounting for the defined benefit plans as of December 31 were as
follows:
Weighted average discount rate
Rate of increase in future compensation le els
Expected long-term rate of return on plan assets
1994
9.15%
3.75%
10.50%
1993
7.75%
3.10%
10.50%
1992
9.00%
5.00%
10.50%
The net pension liability adjustment included in common stockholders' equi (defi~it), as
$51.9 million at December 31 1994.
53
Note L - Postretirement Health Care And
Other Insurance Benefits
The Company sponsors various contributory
and noncontributory medical, dental and
life insurance benefit plans covering certain
eligible retirees and their dependents. With
the exception of certain employees who
retired prior to 1987 and receive lifetime
Company-paid medical and dental benefits,
retired employees are not offered Company-
paid medical and dental benefits after age
65. Prior to age 65, the retiree share of the
cost of medical and dental coverage is based
on a combination of years of service and age
at retirement. Medical and dental benefit
plans are unfunded and costs are paid as
incurred. The pilot group is provided
Company-paid life insurance coverage in
amounts which decrease based on age at
retirement and age at time of death.
Effective January 1, 1992, the Company
adopted Statement of Financial Accounting
Standards No. 106 ("SFAS 106"), "Employers'
Accounting for Postretirement Benefits
Other Than Pensions." The effect of adopting
the new rules increased 1992 net periodic
postretirement benefit cost for such benefit
plans by $13 million. The Company also elected
to recognize the entire transition obligation
effective January 1992 as the cumulative
effect of an accounting change. This
accounting change has no cash flow impact.
Net periodic postretirement benefit cost
included the following components
(in millions):
Year Ended December 31
1994 1993 - 1992
Service cost $ 6.8 $ 6.1 $ 5.4
Interest cost 15.1 16.3 15.1
Actual return on
plan assets (0.5) (0.5) (0.4)
Net amortization
and deferral 0.1 0.1 0.1
Net periodic
postretirement
benefit cost $21.5 $22.0 $20.2
====== ======
54
The following table sets forth the plans'
combined funded status and amounts
recognized in the Company's consolidated
balance sheets as of December 31 (in millions):
1994 1993
Accumulated postretirement
benefit obligation:
Retirees $ 81.7 $ 84.8
Fully eligible active plan
participants 13.4 16.8
Other active plan
participants 102.2 101.8
197.3 203.4
Plan assets at fair value 5.0 4.9
Accumulated postretirement
benefit obligation in excess
of plan assets 192.3 198.5
Unrecognized net (gain) loss 10.7 (6.2)
Accrued postretirement
benefit cost $203.0 $192.3
At December 31, 1994, the weighted average
annual assumed rate of increase in the per
capita cost of covered benefits (i.e., the health
care cost trend rate) is 8.0% for 1995 and is
assumed to decrease gradually to 5.0% for
2002 and remain at that level thereafter ( a
rate of 9.0% was assumed for 1994). This
health care cost trend assumption has a
significant impact on the amounts reported.
For example, increasing the assumed health
care cost trend rates by one percentage point
would increase the accumulated postretire-
ment benefit obligation as of December 31,
1994, by $23.1 million and the aggregate of
the service and interest cost components of
net periodic postretirement benefit cost for
1994 by $3.1 million. The weighted average
discount rate used in determining the
accumulated postretirement benefit
obligation was 9.15% at December 31, 1994,
and 7.75% at December 31, 1993.
Note M- Foreign Operations
The Company conducts passenger and cargo
operations in various foreign countries,
principally in Asia and Europe. Operating
revenues from these foreign operations
totaled approximately $3.60 billion, $3.52
billion and $3.50 billion in 1994, 1993 and
1992, respectively.
The Company is exposed to the effect of
foreign exchange rate fluctuations on the
value of foreign currency-denominated
operating revenues and expenses. The
Company's largest exposure to foreign
currency fluctuations comes from
Japanese yen representing approximately
50% of foreign currency-denominated net
cash flow. The Company has entered into
Japanese yen collar options to minimize
the impact of these foreign exchange rate
movements on its operating income. As of
December 31, 1994, the Company had $455
million ( 45.5 billion yen) in collar options
outstanding to hedge approximately 80% of
its anticipated 1995 yen cash flow. The
collars involve the purchase of Japanese yen
put options coupled with the simultaneous
sale of Japanese yen call options with
identical expiration dates and notional yen
amounts. The Company is exposed to credit
loss in the event of nonperformance by
counterparties to the yen collar options. The
counterparties to the option contracts as of
December 31, 1994, consist of five banks.
The Company does not anticipate
nonperformance by any_
of these
counterparties. The amount of such credit
exposure is generally the unrealized gains in
such contracts. As of December 31, 1994,
there are no unrealized gains or losses on
outstanding yen collar option contracts.
N ote N - Related Party Transactions
KLM Royal Dutch Airlines ("KLM") owned
16.4% of the voting stock of the Company at
December 31, 1994. On January 9, 1995,
55
KLM acquired all of the common and
preferred stock owned by Paracor Finance,
Inc. and Bright Star Investments Limited.
Following this acquisition of shares and the
BTNY transaction described in Note F, KLM
owned 22.0 % of the voting stock of the
Company.
During 1992, Northwest and KLM signed a
Commercial Cooperation and Integration
Agreement. The intent of the agreement is
to enhance the joint presence of each airline
in the United States, Europe and other
destinations by integrating the systems and
services of each carrier. orthwest and KLM
have been granted antitrust immunity by the
Department of Transportation, enabling
them to coordinate their flight schedules,
cooperate in pricing and sales, negotiate
revenue-sharing, and advertise jointly.
Northwest and KLM have implemented
code-sharing ( the joint designation of flights
under the Northwest "NW" code and the
KLM "KL" code) on flights to certain
European, African and U.S. cities, with
additional cities planned for 1995. During
1994, passenger revenues generated by the
Company's transatlantic flights comprised
5.0% of its total operating revenues. In
addition, in 1993 Northwest and KLM began
to coordinate operations. The Company
recorded net expenses related to engine
maintenance, airport handling and other
transportation-related services provided by
KLM of $28.8 million, $33.6 million and
$45.3 million in 1994, 1993 and 1992,
respectively.
The Company has an investment in an affiliate
which it accounts for using the equity method.
The Company recorded expenses for certain
reservation system services provided by this
affiliate totaling $86.4 million, $63.6 million
and $80.7 million in 1994, 1993 and 1992,
respectively.
Note 0-0ther Income (Expense)
During the years 1990 through 1992, the
U.S. airline indu try, including the Company,
expe1ienced unprecedented losses. As a result
of the losses it had sustained, during 1992
and 1993 the Company undertook to reduce
its costs and restructure its debt obligations
to extend their maturities in order to gain
access to the capital markets and facilitate a
return to profitability. As a result of agreements
obtained and actions taken, the Company's
financial results included nonrecurring special
charges. The 1993 financial results included
$94.3 million of nonrecurring special charges,
56
of which $74.3 million was classified as other
income (expense) and $20.0 million as salaries,
wages and benefits. These charges included
aircraft order cancellations of $48. 7 million,
financing fees of $13.7 million, write-down
of other assets of $11. 9 million and early
retirement pension benefits of $20.0 million.
The Company's 1992 financial results included
nonrecurring special charges of $792. 7 million
which consisted of charges for aircraft order
cancellations of $314.6 million, non-cash
write-off of aircraft delivery positions of
$291.1 million, write-down of aircraft held for
sale of $107.2 million and financing fees of
$79.8 million.
Note P - Quarterly Financial Data (Unaudited)
Unaudited quarterly results of operations for the years ended December 31, 1994
and 1993, are summarized below (in millions, except per share amounts):
1994:
Operating revenues
Operating income
Net income
Earnings per common share <
3>
:
Primary
Fully diluted
1993:
Operating revenues
Operating income (loss)
et income (loss)
Earning (loss) per common share <
3i:
Primary and fully diluted
1st 2nd 3rd
Quarter Quarter Quarter
$ 2,129.9 $2,273.0 $2,548.0
120.5 207.8 359.2
i 18.3 i 71.3 i 170.0
$ .05 $ .68 $ 1.80
$ .05 $ .67 $ 1.73
$ 2,011.7 $2,094.9 $2,392.6
(70.3) 19.2 268.7
$ (100.3} $ (136.2} <
2
J
$ 110. 7
$ (1.86) $ ~2.42) $ 1.45
4th
Quarter
$2,192.0 >
142.9
i 35.9
$ .23
$ .23
$2,149.7 )
54.8
$ 10.5
$ ~.03)
<
1
J Includes an $18 million and a $29 million increase in passenger revenue related to prior
quarters of 1994 and 1993, respectively, resulting from the normal review and adjustment
of the air traffic liability balance.
<
2
J Includes nonrecurring special charges of $99.3 million ($62.1 million net of income tax
benefit) related to aircraft order cancellations, employee early retirement and financing
expenses.
<
3
l
The sum of the quarterly earnings per share amounts does not equal the annual amount
reported since per share amounts are computed independently for each quarter and for
the full year based on respective weighted average common share equivalents outstanding.
57
Note Q- Condensed Financial Information Of Northwest Airlines, Inc.
As discussed in Note A, NWA Corp.'s 1989 Acquisition of NWA was recorded using the
purchase method of accounting and, accordingly, the purchase price was allocated to the net
assets acquired based on the estimated fair market value of such assets and liabilities at the date
of the Acquisition. After reflecting these new values and the related Acquisition indebtedness
of NWA in the financial statements of Northwest, condensed financial information of
Northwest consists of the following (in millions):
Condensed Statements Of Operations
Operating revenues
Operating expenses
Operating income (loss)
Other income (expense)
Nonrecurring special charges
Income (loss) before income taxes and
cumulative effect of accounting change
Income tax expense (benefit)
Income (loss) before cumulative effect
of accounting change
Cumulative effect of accounting change - net
Net income (loss)
Condensed Balance Sheet Data
Current assets
Noncurrent assets
Current liabilities
Long-term debt and obligations under capital leases
Deferred credits and other liabilities
58
Year Ended December 31
1994 1993
$ 8,875.1 $ 8,415.6 $
8,085.0 8,158.6
790.1 257.0
(288.9) (265.2)
(71.9)
501.2 (80.1)
198.2 (25.6)
303.0 (54.5)
$ 303.0 $ (54.5) $
December 31
1994
$ 1,752.4
5,242.1
2,511.5
3,751.7
967.6
1993
$ 1,363.1
5,641.0
2,277.0
4,702.9
872.1
1992
7,893.6
8,298.9
(405.3)
(262.0)
(571.9)
(1,239.2)
( 427.3)
(811.9)
(108.8)
(920.7)
Report Of Independent Auditors Ernst & Young LLP
To the Stockholders and Board of Directors
orthwest Airlines Corporation
We h ave audited the accompanying
consolidated balance sheets of orthwest
Airlines Corporation as of December 31,
1994 and 1993, and the related consolidated
statements of op erations, common
stockholders' equity (deficit), and cash flows
for each of the three years in the period
ended December 31, 1994. These financial
statements are the responsibility of the
Company's management. Our responsibility
is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform
the audit to obtain reasonable assurance about
whether the financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence
59
supporting the amounts and disclosures in
the financial statements. An audit also includes
assessing the accounting principles used and
significant estimates made by management,
as well as evaluating the overall financial
statement presentation. We believe that our
audits provide a reasonable basis for our
opllllon.
In our opinion, the financial statements
referred to above present fairly, in all material
respects, the consolidated financial position
of orthwest Airlines Corporation at
December 31, 1994 and 1993, and the
consolidated results of its operations and
its cash flows for each of the three years in
the period ended December 31, 1994, in
conformity with generally accepted accounting
principles.
AB discus ed in ote L to the financial
statements, in 1992 the Company changed
its method of accounting for postretirement
benefits.
Minneapolis, Minnesota
February 17, 1995
Five-Year Summary
Northwest Airlines Corporation
Statement Of operations Data
(in millions, except per share data)
Operating revenues
Passenger
Cargo
Other
Operating expenses
Operating income (loss)
Income (loss) before income taxes and
$
cumulative effect of accounting change $
Net income (loss) $
Net income (loss) applicable to
common stockholders $
Net income (loss) per common share:
Primary $
Fully diluted $
Cash Provided By (Used In)
operating Activities $~
Balance Sheet Pata ( in millions)
Cash, cash equivalents & unrestricted
short-term investments $
Total assets
Long-term debt, including
current portion
Long-term obligations under capital
leases, including current obligations
Redeemable preferred stock
Common stockp.olders' equity ( deficit) (3l
operating Statistics
Scheduled service:
Available seat miles (ASM) (millions)
Revenue passenger miles (millions)
Revenue yield per passenger mile
Passenger load factor
Revenue passengers (millions)
Break-even load factor
Cargo ton miles (millions)
Average fuel cost per gallon
Revenue per total ASM
Total operating expense per total ASM
Number of operating aircraft at year end
Average aircraft utilization
(hours per day)
Total full-time equivalent employees
at year end
1994
7,730.6 $
755.8
656.5
9,142.9
8,312.5
830.4
498.3 $
295.5 $
236.2 $
2.92 $
2.87 $
1,379.2 $
968.3 $
8,070.1
4,013.5
890.3
795.0
(1,370.7)
85,015.6
57,873.2
13.36
68.1%
45.5
65.5%
2,322.3
56.2
10.65
9.69
361
9.55
44,079
Year Ended December 31
1993 1992 1991 1990
7,314.0 $ 6,903.4 $ 6,499.4 $ 6,335.0
734.8 736.2 696.8 655.4
600.1 488.0 486.7 436.0
8,648.9 8,127.6 7,682.9 7,426.4
8,376.5 8,503.8 7,792.8 7,561.4
272.4 (376.2) (109.9) (135.0)
(123.2) (!) $ (1,482.1) (I )
$ ( 488.0) $ ( 465.2)
(115.3) $ (970.7) (2) $ (320.2) $ (302.5)
(207.5) , $ (1,046.2) (2
) $ (387.9) $ (361.2)
(2.82) $ (16.11 )(2)
$ (5.97) $ (5.66)
(2.82) $ (16.11) <
2
)
$ (5.97) $ (5.66)
337.3 $ (199.1) $ 341.5 $ 183.4
139.6 $ 244.7 $ 16.7 $ 187.1
7,571.3 7,545.4 7,956.7 7,663.7
4,437.9 4,271.4 3,252.6 2,899.3
928.1 966.0 1,004.3 1,036.4
749.9 566.1 519.8 486.0
(2,030.5) (1,732.5) (545.7) (153.3)
87,212.5 89,647.3 80,937.7 77,319.9
58,130.1 58,624.9 53,283.3 51,491.5
12.58 11.78 12.20 12.31
66.7% 65.4% 65.8% 66.6%
44.1 43.5 41.1 41.0
67.2% 69.8% 69.0% 69.8%
2,188.0 2,106.9 1,925.8 1,875.3
62.1 64.5 69.8 79.5
9.82 9.01 9.45 9.51
9.51 9.43 9.53 9.68
358 366 340 342
9.39 9.55 9.46 9.65
43,358 45,455 45,620 43,385
(IJ Includes nonrecurring special charges of $94.3 million and $792. 7 million for 1993 and 1992, respectively.
(
2
l Excludes the cumulative effect of accounting change of $108.8 million ($1.67 per share).
(3) o dividends have been paid on common stock for any period presented.
60
Board Of Directors
Melvin R. Laird
Director Emeritus
Alfred A. Checchi
Co-chairman
Gary L. Wilson
. Co-chairman
Rob J. N. Abrahamsen
Managi,ng Director-Chief Financial Officer
KLM Royal Dutch Airlines
Richard C. Blum
Chairman & President
Richard C. Blum & Associates, Inc.
Pieter Bouw
President
KLM Royal Dutch Airlines
John H . Dasburg
President & Chief Executive Officer
Northwest Airlines Corporation
Thomas Duey
Retired General Secretary & Treasurer
International Association of Machinists
and Aerospace Workers
Marvin L. Griswold
International Director, Teamsters Airline Division
International Brotherhood of Teamsters
Thomas L. Kempner
Chairman & Chief Executive Officer
Loeb Partners Corporation
Frederic V. Malek
Chairman
Thayer Capital Partners
V. A. Ravindran
President
Paracor Finance Inc.
Leo M. van Wijk
Managi,ng Director
KLM Royal Dutch Airlines
George J. Vojta
Vice Chairman
Bankers Trust New York Corporation
Duane E. Woerth
First Vice President
Air Line Pilots Association
61
Senior Officers
John H. Das burg
President & Chief Executive Officer
Mickey Foret
Executive Vice President -
Chief Financial Officer
Michael E. Levine
E ecutive Vice President -
Marketing & International
William D. Slattery
Executive Vice President
President - orthwest Cargo
Donald A. Washburn
Executive Vice President -
Customer Service & Operations
Richard H. Anderson
Senior Vice President -
Labor Relations, State Affairs & Law
Christopher E. Clouser
Senior Vice President - Communications,
Advertising & Human Resources
Joseph E. Francht,Jr.
Senior Vice President - Finance and
Treasurer
J. Timothy Griffin
Senior Vice President -Market
Planning & Systems
Richard B. Hirst
Senior Vice President - Corporate A.ff airs
John S. Kern
Senior Vice President - operations
Chief Safety Officer
Barry A. K.otar
Senior Vice President/Sa/,es &
Chief Information Officer
General Sa/,es Manager
Douglas M. Steenland
Senior Vice President -
General Counsel & Secretary
Puerto Vallarta
lxtapa/ Zihuatanejo
Acapulco
- - Northwest Airlines service
(operated or code-shored)
- - Operated by marketing partners
- - - - Northwest Cargo routes
A
ddition
al code-shore service via Amsterdam
.Mauritius
...
Geneva
Operating Aircraft Fleet (At December 31, 1994)
Northwest Airlines Corporation
o. of Capital Operating On A erage
Aircraft Type Seats Owned Lease Lease Total Order* Age (Years)
Airbus:
A320 141/ 150 22 4 24 50 3.1
A330 303 16
Boeing:
757 184 9 14 10 33 40 8.3
747-400 383 3 7 10 4 5.1
747 358-409 18 5 23 16.6
747F 5 3 8 14.6
727-200 146 22 33 55 16.6
McDonnell
Douglas:
DC-10-40 288 19 2 21 21.2
DC-10-30 267/ 271 5 3 8 19.3
m-80 143 6 1 1 8 12.5
DC-9-50 119/ 122 22 12 34 16.7
DC-9-40 112 12 12 26.3
DC-9-30 100 61 16 77 25.6
DC-9-10 78 22 22 28.0
Total 211 34 116 361 60 16.8
* In addition to new aircraft on order the Company ha purchased 18 DC-9-30 aircraft and will take
deli ery of an additional 11 DC-9-30 aircraft, all ofi\hich are expected to enter service in 1995.
Stockholders' Information
Stock Prices During 1994
Sales Price of
CQmmQn Shares
Quarter High Lm
1st 13 1/ 2 11 7/ 8
2nd 16 1/ 2 111/ 2
3rd 20 1/ 8 13 3/ 8
4th 21 3/ 8 14 3/ 8
o dividends 'Were declared during the year.
Stock Listing
The company's common stock is listed under
the symbol AC on the NASDAQ Stock
exchange. There, ere approximately 7,100
shareholders ofrecord as of February 28, 1995.
Registrar And Transfer Agent
Norwest Bank Minnesota, .A.
Post Office Box 738
South St. Paul, Minnesota 55075-0738
( 800) 468-9716
Annual Meeting
The 1995 Annual Shareholders' Meeting will
be held at the Equitable Life Building
New York, e York on Friday, April 21, 1995
at 9:30 A. L
Independent Accountants
Ernst & Young LLP
1400 Pillsbury Center
200 South Sixth Street
Minneapolis, Minnesota 55402
Financial Information
A copy of the Company's Annual Report on
Form 10-K will be provided without charge b
directing inquiries to:
Iorthwest Airlines Distribution Center
Phone (800) 358-3100
Fax (612) 885-8851
Direct all other inquiries to:
5101 orth, est Dri,e
St. Paul, Minnesota 55111
( 612) 726-2111
OT 0500
This report was produced b, the orporate Communication and finance departmentS of Northwest Airline Corporation, u ing recycl d paper to help pre ene our em;ronment. ~
E,cn Year, Northwest Airline recycle enough paper to saYe more than 33,000 trees. \,.)