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. \,.)