Northwest Airlines Annual Report 1997

Northwest Airlines Corporation
1997 Annual Report
ABOUT THE COMPANY
Northwest Airlines is the world's fourth largest airline
with domestic hubs in Detroit, Minneapolis/St. Paul
and Memphis, Asian hubs in Tokyo and Osaka,
and a European hub in Amsterdam.
Northwest Airlines serves more than 400 cities in over 80 countries
on six continents. With global alliance partner KLM Royal Dutch
Airlines, Northwest Airlines serves more than 85 cities in Europe,
Asia, Africa and the Middle East. With Alaska Airlines and its Airlink
partners. Northwest Airlines serves more than 250 U.S. cities.
TABLE OF CONTENTS
Letter to Shareholders
Pages 2-5
Board of Directors
Pages 26-27
Building Together
Pages 6-11
Financial Reports
Pages 29-72
The World's Most Preferred Airline
Pages 12-19
Stockholders' Information
Page 73
With The Best People
Pages 20-25
Route Maps
Back Cover
Senior Officers
Page 74
Condensed Financial Highlights
'Northwest Airlines Coi~poration Year Ended December 31
(Dollars in millions, except per share data) 1997 1996
Percent
Change
Financial
Operating Revenues S 10,225.8 S 9,880.5 3.5
Operating Expenses 9,068.6 8,826.'^ 2.7
Operating Income S 1,157.2 s 1,053.8 9.8
Operating Margin 11.3 % 10.7 % 0.6 pts.
Net Income S 596.5 s 536.1 11.3
Earnings Per Common Share
Before Extraordinar)' Item:
Basic s 5.89 s 5.05
Diluted s 5.29 s 4.52 17.0
Number of Common Shares Outstanding 97.0 9''. 6
Operating Statistics
Scheduled Service:
Available Seat Miles (ASM) (millions) 96,963.6 93,913.^ 3.2
Revenue Passenger Miles (RPM) (millions) 72,031.3 68,639.1 4.9
Passenger Load Factor 74.3 % 73.1 % 1.2 pts.
Revenue Passengers (millions) 54.7 52.7 3.8
Revenue Yield Per Passenger Mile 12.11 c 12.53 c (3.4)
Passenger Revenue Per Scheduled ASM 9.00 c 9.16 c (1.7)
Cargo Ton Miles (millions) 2,282.8 2,215.8 3.0
Operating Revenue Per Total ASM (RASM) 9.76 c 9.85 c (0.9)
Operating Expense Per Total ASM (CASM) 8.63 c 8.^8 c (1.7)
Return on Capital Long-Term Debt
S millions
To our Shareholders from
the Chairman and the President & CEO
^
,
V.
r.
^ *
^ Hubs. Alliances. Networks. These are the words that shaped 1997 for
"
I
i Northwest Airlines. Our strong hubs in Detroit, Minneapolis/St. Paul,
^ Memphis, Tokyo, Osaka and Amsterdam form the heart of our system,
y
A SYSTEM THAT CARRIED MORE PEOPLE AND GOODS LAST YEAR THAN IN ANY OTHER

IN OUR HISTORY. OUR STRATEGIC ALLIANCES WITH KLM ROYAL DUTCH AIRLINES,
f
Alaska Airlines and now Continental Airlines form a complementary
GLOBAL NETWORK WITH STRONG AND WELL MANAGED PARTNERS. OUR NETWORK ,
IS WHAT WE OFFER TO OUR CUSTOMERS, A NETWORK WITH A GLOBAL WINGSPAN
I
THAT NOW COVERS EVERY MAJOR TRAFFIC FLOW IN THE WORLD. ,
Oiir vision in tlic 199()s lias been
to build a finaneially sound global
airline that is preferred by our
customers because we provide the
most convenient and reliable air
transportation network, with the
best people. It is our view that
strategic alliances are the best
mechanism to create a global airline-
network in today's aero-politieal
and economic environment.
I'o participate in the high growth
international travel markets of the
21st century, an airline must be part
of a global network. Such networks
also diversify risks among various
international regions. There will onl)
be a few global airline networks as
we pass the millennium and
Northwest is the leader in creating
these networks which provide
.security and growth opportunities
for our employees and shareholders,
and the employees and shareholders
of our partners.
fogether with KLM, we broke new
ground in 19S9 and pioneered alliance
technology that has changed the face
of the airline industr)' worldwide.
In 1992, The Netherlands became
the first eountr)' to negotiate an
Open Skies agreement with the U.S.
Since then 2S countries have
negotiated similar Open Skies
agreements with the United States,
opening markets and increasing
world trade. Northwest and KLM in
199.-^ became the first carriers to be
granted antitrust immunity by the
U.S. government, 'fhis allows the
two carriers to operate as one in
realizing maximum benefits from the
alliance. During the past five years
we have increased revenues, reduced
costs, and utilized capital assets
more productively as we exploit
the tremendous potential from our
combined .systems. This alliance has
benefited consumers, our people,
and the many communities we
jointly serve around the world. In
1997, Northwest and KLM signed a
permanent alliance agreement that
will allow us to more fully integrate
our operations with the .security that
flows from a permanent relationship.
KLM has a memorandum of
understanding with Alitalia that
provides hubbing opportunities in
Southern Europe and greater European
scope that will benefit our network.
In January 199S, we concluded the x
first long-term alliance between two "
large domestic carriers, (a)ntinental ^
and Northwest have eomplementarv "
systems that give us the global 7
coverage to compete effectively
with American and United. Our
domestic presence is enhanced by
(aintinentafs hubs in Newark,
Houston and (develand.
Internationally, Northwest covers
Asia, (a)ntinental is a leader in Latin
America, and together with KLM and
Alitalia, we are a major competitive
force across the North Atlantic into
Europe, Africa, the Middle East,
and South Asia.
Superior financial performance has
allowed us to reduce long-term debt
from $4.4 billion in 199.4 to $2.1 billion
in 1997. Caincurrcntly, we have-
invested about $2.75 billion prineipalh'
in aircraft, product improvements, and
advanced technology to serve our
customers more prod net iveh .
'fhe
high returns generated from our
investments during the last several
years will lead to sustained,
predictable and consistent profit
growth for the years ahead.
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In addition, we invested in Northwest
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by purchasing 24 percent of our
outstanding shares from KLM. Our
2 liquidit}' was over $2 billion at year end.
\r.
^ The stock market has recognized
^ Northwest's outstanding performance,
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Our shares have increased from the
initial IPO price of S13 in 1994 to
the high $50s presently. We are
particularly gratified that the women
and men of Northwest Airlines, who
made an $855 million investment
in their Company in 1993 for about
27 percent of its shares, have received
superior returns on their investment.
Those shares are now worth
approximately $1.6 billion at
a share price of $55. Every dollar of
compensation invested in Northwest
on a tax-deferred basis has produced
an average 187 percent return for
those people who have retained
their shares.
Northwest has a solid strategic
foundation and as a financially
strong global airline, we must
compete effectively with the other
mega carriers. This means all
Northwest stakeholders --
employees, shareholders, suppliers,
partners, and the communities we
serve --
must work together to be
cost competitive and provide a high
quality product to our customers.
We are confident that all stakeholders
will enthusiastically work as a team
to build on our strong strategic
foundation to provide growth and
security for all of us.
As we look to the future, government
intervention is one of the airline
industry's major challenges in
offering low-cost, efficient
transportation to our customers.
For every dollar Northwest receives
from its U.S. passengers,
approximately 15 cents is taken by
the Federal government in
transportation and fuel taxes.
No other industr}' -- except
tobacco --
is subject to this tax
burden. In "The Taxpayer Relief Act
of 1997" Congress actually increased
certain taxes by $28 billion. Our
industry absorbed 14 percent of this
increase. Tourism employs more
people than any other industry and
air transportation is the backbone of
this business. As a presidential
commission recommended in 1993,
government should be reducing taxes
on airlines, not increasing them.
In J997, wc celebrated
50 years of sustained sers ice
to and from Asia.
BRIDGING
P A C I F I C
4
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The new aviation agreement
between the IJ.S. and Japan has
secured Northwest's position in the
Pacific. The original 1952 agreement
had been periodically updated, most
recently in 1989- Japan had been
threatening to renounce the
agreement for 20 years and even
eliminate Northwest's rights to
pick up passengers in Japan and
fly beyond.
The new agreement appears to
have ended all these threats and
thus secures one of our important
strategic assets. The U.S. has also
received assurances from Japan
confirming our slot portfolio at
Japan's airports --
the largest of any
U.S. carrier --
and our right to
receive new slots as new airport
capacity is added. In addition, the
agreement actually improves our
rights to operate beyond Japan with
total flexibility, and allows us to build
alliances serving Japan with carriers
Building together the world's
most preferred airline with
the best people."
in the U.S. and in Asia. Northwest
will have unlimited rights to operate
between any point in the U.S. and
any point in Japan, and will be the
airline in the best position to operate
single-carrier service, supplemented
by alliances, linking all of the U.S.
with all of Asia, via our hubs in
Toky'o and Osaka.
Increased competition can be
expected, but over the longer term,
Asian traffic is expected to resume
its strong rate of growth in an
environment of constrained airport
capacity in Japan. The new
agreement will place Northwest
in an advantageous position to
ser\"e these traffic flows.
Finalh', in Februarv^, the distinguished
airline industry' publication. Air
Transport World awarded its "1997
Airline of the Year" honor to the
Northwest/KLM alliance and named
our Airlink partner Mesaba Aviation
the "Regional Airline of the Year."
These awards are fine recognition for
the service that dedicated Northwest,
KLM and Mesaba people deliver each
and ever}' day. These recognitions
also challenge us to continuously
improve our product and service for
our customers. For the Northwest
people who received this award --
50,000 strong -- we pledge to work
together to exceed your expectations
when you travel our expanding
network around the world.
Thank you for your interest
and support.
Sincerely,
Garv' L. Wilson
Chairman
John H. Dasburg
President and Chief Executive Officer
5
0
In January 1998, Northwest Airlines received
THE FIRST OF 20 AIRBUS A320S ORDERED IN 1996.
These twin-engine, 1 50-seat aircraft will be
USED PRIMARILY ON NORTH AMERICAN ROUTES.
In 1997, Northwest agreed to purchase
50 Airbus A319s with options on up to
100 MORE. The A319S ARE TWIN-ENGINE, 125-SEAT
AIRCRAFT THAT ARE VIRTUALLY IDENTICAL TO THE
A320S ALREADY IN THE FLEET AND BOTH OFFER THE
WIDEST PASSENGER CABIN OF ANY SINGLE-AISLE
AIRCRAFT. Deliveries under this agreement
ARE SCHEDULED TO BEGIN IN 1999.
A FLEET TO EEF NORFIIWEST'S
UNIQl IE RF:QI]IRIIMENTS
Northwest's global route striietiire
emphasizes hiib-and-spoke Hying
on routes as long as Minneapolis-
Ilong Kong and as short as Detroit-
Lansing and encompasses more than
1,700 departures daily. 'I'o deploy
the best possible mix of airc raft types
for this operating environment,
Northwest makes fleet planning
decisions based on thorough analysis
of market reciuirements, aircraft
operating economies, capital costs
and environmental concerns such
as noise abatement. All this is done
in order to satisf)' our customers and
create positive shareholder value.
6
Northwest made commitments
during 1997 to invest $2.6 billion in
licet upgrades, faeilit)' improvements
and new technologies --
in\estment.s that will enhance serv'iee
and convenience for travelers
while improving procluetivit)' and
containing costs.
Northwest increa.sed its fleet overall
by six aircraft during 1997. Additions
ineluded two Boeing 747-2()()s, three
l)Cl{)-30s and six DC9-30s. y\t year end,
the operating fleet ineluded 405 airenitt.
During 1997, Northwest completed
the project to refurbish 1 13 DC9-30
aircraft, upgrading them to the
DC9-2()()() configuration in
which everything the customer sees
is new. A similar refurbishing of
D(:9-4()s, D(:9-5()s and D(:9-l()s
will be completed in 1998.
I
o
405
(lin iajl con>i)risc
the 1997
Northwest fleet.
Independent evaluations of the DC9
airframe confirm that it is one of the
best constructed passenger aircraft
ever built. Before the refurbishing
commitment was made, Northwest
engineers and independent
consultants confirmed that the.se
aircraft are safe for man>' )'ears of
additional flying life.
Northwest is also on schedule to
complete hushkitting D(I9s and
Boeing 727s to comply with Stage 3
noise reciuirements. At year end,
90 aircraft had been hushkittecl.
In addition, the airline is currently
upgrading the interiors of all
wide boch' aircraft in the international
fleet. This $126 million project is
expected to be complete in 2002.
In connection with this project.
Northwest will take delivery of a
new Boeing 747-400 in the spring
of 1999, four years earlier than initially
planned under a firm order with
Boeing for four 747-400s. The earlier
delivery of the new 747-400 will
provide Northwest with added
flexibility in managing the wiclebocly
upgrade and refurbishment project.
35S ciirerajt in the 1993
Northwest fleet.
113
DC9-30 (lireraft
had been
coniiiletely
refitrhished
by 1997.
The Midfield Terminal complex, being jointly
DEVELOPED BY NORTHWEST AIRLINES AND WAYNE COUNTY,
MICHIGAN, IS SCHEDULED TO OPEN IN 2001 AND IS
EXPECTED TO ACCOMMODATE GROWTH IN NORTHWEST'S
SERVICE THROUGH DETROIT FOR THE NEXT 30 YEARS.
o
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new gates coming in
Detroit's Mid/icW
Terminal complex.
During 1997, Northwest completed
improvements to passenger and
cargo facilities that will significantly
enhance customer service.
FACILITIES GROW TO xMEET
OPERATING NEEDS
E Concourse, from which 90 percent
of Northwest's international flights
depart. The E Concourse WorldClub
will be significantly expanded in 1998
to accommodate more international
World Business Class and First Class
passengers traveling via Detroit.
Northwest also completed a 210-foot
moving walkway linking the C and
D Concourses and added six gates to
Concourse C. These improvements
are part of a $60 million investment
Northwest is making to enhance
comfort and convenience for
passengers traveling via Detroit while
construction of a new Midfield
Terminal is in progress.
Northwest is managing the design and
construction of the new $960 million
Midfield Terminal, which will provide
the airline with more than 70 gates
compared to the 60 Northwest gates
in the present Davey Terminal.
In Detroit, Northwest's busiest hub,
the airline opened a new international
departures facility in September.
This 17,000-square-foot
addition to the Davey
Terminal permits
passengers for Northwest's
29 daily international Detroit
departures to proceed directly
from 24 new check-in positions
to Northwest's WorldClubsf''
duty-free shopping areas or the
iX'cH international
departures facility
ill Detroit.
8
The design phase of the terminal's
eonstruction is seheduled to be
eompleted by the end of 1998.
The Minneapolis/St. Paul International
Airport mo^ed up in eustomer
satisfaetion rankings compiled by
PLOG Research as Northw est, the
Metropolitan Airports Commission
and an independent janitorial
services contractor worked together
to improve cleanliness, convenience
and comfort at the hub.
Luggage-handling systems at Detroit
have been improved to aecommodate
the growth in passenger traffic.
In Anchorage, Northwest has
completed facilities improvements
that will create a "cargo hub" w here
freight inbound from Asia can be
cross-loaded for delivery to various
points in the I'nited States.
Northwest's eight 74? freighters stop
in Anchorage as part of their normal
flight schedules. Creation of the
cross-load operation there allows
Northwest more options in the use
of Tokyo landing slots for freighters
or passenger flights.
In addition, all gates for flights
operated by Nortlmvest Airlink
partner Mesaba A\ iation have been
brought together in an expanded
Regional Airline Terminal. This new"
facility and improved shuttle services
help make connections to Airlink
flights easier and more convenient.
Bringing all the Airlink flights
together in one location also makes
servicing the flights more efficient.
To improve ser\ ice for its cargo
customers. Northwest, one of the
world's largest air freight carriers, is
investing in new facilities at New
York's John H Kenned) International
Airport and in Anchorage, Alaska. In
New" York, a new, highh automated
facilit)' will enable Northwest Cargo
to handle 110 million import and
export pounds annualh". The
new" facilit)' is scheduled to be
completed in the fall of 1998.
million
is commitlcd in 1998
to rcfiirhisli customer
contact areas in Detroit,
Minneapolis/St. PaiiI
and Memphis.
9
46
CUSTOMERS EMBRACE NEW
SYSTEMS AND TECHNOEOCiY; AND
NEW rOOES REDUCE NORTHWEST'S
DlS TRllUrnON COSTS
Northwest Airlines eontiniies to
harness new teehnolog)' to improve
enstomer eonvenienee and lower
sales and distribution eosts.
[IccironU Scnii
insiallt'u in i997
During 1997, Northwest heeame the
first major airline to deploy eompaet
selt'-serviee kiosks to enhance its
electronic ticketing services. 'I'hese
Electronic Ser\ iee (xmters enable
E-'flekeT'' customers to obtain
boarding passes, make current-day
flight or seat changes, obtain
WorldPerks (iolci upgrades and, at
moiiilily incrccisc
in liclifls iniirluiscd
online dining IWJ.
10
some kiosks, cheek their own bags --
all from one easy-to-use touch screen.
Electronic' Service (xmters have been
installed at the Detroit, Minneapolis/
St. Paul and Memphis hubs and also
at the Chieago/O'Hare, Milwaukee,
San Eraneiseo and Seattle/d'acoma
airports. Plans call for Electronic
Service Centers to be installed in an
additional 12 cities in 1998, to support
the rapid growth of electronic ticketing,
which is approaching 40 percent of
domestic ctistomers.
Northwest also continues to enhance
the capabilities of its award-winning
web site (www.nwa.com) by adding
new features to provide convenient,
efficient travel content including online
booking and electronic ticketing --
and great deals for travelers. Since June
1996, highly discounted (AberSaver''''
lares have been a popular web site
destination for bargain hunters. Since
March 1997, Northwest has sold more
than 1 {)(),()()() tickets online.
Northwest's WorldPerks (iold and
International (iold Elite customers
are now greeted by name when they
call the Northwest (loldline for
reservations and information.
The industry-leading travel planning features of the
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Northwest Airlines' web site were recognized in 1997 by
Unique call center technology
that integrates telecommunications
capabilities with a computer database
enables Northwest to handle calls
from these most profitable customers
more personalh' and effieienth',
eliminating the need for customers to
repeat information already provided
to an agent if a call is transferred.
Internet World magazine, Inside Flyer International
MAGAZINE, WEBFLYER MAGAZINE, TWIN CITIES BUSINESS
MONTHLY AND BY HOSPITALITY SALES AND
Marketing Association International.
resolution color images that enhance
the efficiency and quality of engine
safety inspections.
Web-based technolog)' is also benefiting
other functions at Northwest. (Caterers
ser\'ing Northwest aircraft can tise
the web to identib' menu specifications
at a savings to Northwest of an
estimated $2 million annually.
I'hroughout Northwest, new
technology and systems are being
applied to a wide range of ojicrations.
At gates serving international flights,
new automated boarding control
devices, more commonly called "gate
readers," help cut boarding times by
as much as 30 percent.
In aircraft maintenance, a newly
implemented Aircraft Maintenance
Information and Task System provides
maintenance mechanics with better
detail, including technical illustrations,
to assign and track maintenance
projects. Northwest is also the first
commercial airline to use a remote
control visual inspection system that
can peer inside aircraft engines and
transmit to Northwest technical
staff and consulting engineers high
During 1997, Northwest completed
installation of its ResNeT'' reservations
sales system at all domestic reservations
centers. 4'his microcomputer-based
system helps reservations sales agents
focus on quickly fulfilling customer
requests for flight information and leads
agents through the booking process in
a manner that helps increase sales of
direct tickets. An audit completed in
earh' 1997 confirmed that ResNet is
helping Northwest increase revenue
and productivity, improve customer
sen ice and reduce training costs.
11
54.7 ^
During 1997, Northwest Airlines continued its
DISCIPLINED EXPANSION OF DOMESTIC AND
INTERNATIONAL ROUTES. OUR MISSION GUIDES
THE EXPANSION: WE WILL PROVIDE RELIABLE,
CONVENIENT AND CONSISTENT AIR TRANSPORTATION
THAT MEETS OR EXCEEDS CUSTOMERS' A
EXPECTATIONS AND EARNS A
SUSTAINABLE PROFIT.
Northwest invited children from around the
globe to create dramatic art depicting their
home towns. The art was applied to WorldPlane,
a 747-400 aircraft, to commemorate the
50th anniversary of Asian service.
35.8 million
passengers
carried in 1988.
Our Strategic assets --
domestic hubs
in Detroit, xMinneapolis/St. Paul and
Memphis; Asian hubs in Tok)^o and
Osaka; and a European hub in
Amsterdam -- are the cornerstones
for expansion of the airline's global
route system. Tlie creation of positive
shareholder value results from the
growth of these strong assets.
Northwest has
expanded service
from the U.S. to:
Hong Kong
Osaka
Tokyo
Amsterdam
Beijing
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NEW ELYING BUIEDS ON
STRONG HUBS
W * Detroit hub is the airline's key
gateway to Asia and Europe. During
1997, Northwest increased Detroit-
Tokyo service to twice daily and
expanded Detroit -
Amsterdam
service. New North American
destinations serv^ed from Detroit include
Reno, Nevada; San Jose, California; and
New York's JEK International Aiqoort.
Minneapolis/St. Paul also offered
expanded service to Asia and
Europe during 1997, thanks to a
runway extension that permits
fully loaded widebody aircraft to
depart Minneapolis/St. Paul forTok)'o.
In October, Northwest inaugurated
service on the longest commercial
flight operated by an}' airline on a
year-round basis; Minneapolis/St. Paul-
Hong Kong three times a week.
Northwest also began daily flights
between Minneapolis/St. Paul
and Osaka, and expanded
Minneapolis/St. Paul-Tokyo service
from three times weekly to daily.
Minneapolis/St. Paul is one of only
three mainland U.S. cities with
year-round, nonstop service to Tokyo,
Hong Kong and Osaka --
the three
largest air traffic markets in Asia.
In addition to expanded service to
Asia, Northwest also increased
Minneapolis/St. Paul-Amsterdam
service to twice daily during peak travel
season and inaugurated Minneapolis/
St. Paul-Toronto service. Studies cited by
the Minnesota Department of Trade and
Economic Development estimate that
the direct and indirect economic
benefits of these international routes
for the host region total in the tens of
millions of dollars annually.
Memphis remains the foundation
for Northwest's presence in the
southern United States, as well as
a European gateway througli
Northwest's alliance with KLM.
During 1997, Northwest began offering
service to Jackson, Mississippi and daily
seasonal nonstop service to Portland,
Oregon from its Memphis hub.
HP
At Osaka's Kansai aiq:)ort in
Japan, Northwest has continued
fiV to build its presence. Weekly
departures from Osaka have
increased since 1994 from 18 to 56.
Osaka-Seattle service was increased to
daily in 1997 and Osaka-Minneapolis/
St. Paul service was inaugurated.
Tokyo (Narita)-Anchorage
service will cater to Japanese
leisure travelers when
Northwest begins seasonal
nonstop service in June
1998. Tliis service will
operate once weekly through
September. In addition. Northwest will
begin offering service between Los
Angeles and Las Vegas, thus providing
a convenient connection for Japanese
passengers through Los Angeles to and
from Osaka and Tokyo.
On September 29, 1997, Northwest Airlines
AND KLM Royal Dutch Airlines sealed a new
ALLIANCE. Together, the presidents of the two
AIRLINES, KLM's Leo van Wijk and Northwest's
JOHN DASBURG announced THAT THE TWO
COMPANIES HAD FORMED A GLOBAL JOINT VENTURE
UNLIKE ANYTHING THE WORLD HAD SEEN BEFORE.
EXPANDING A PIONEERING
GLOBAL ALLIANCE
The Northwest/KLM alliance was
already the oldest airline alliance in
the world, benefiting from antitrust
immunity and an Open Skies
agreement. While many airlines share
flight codes, Northwest/KLM is the
most deeply integrated, coordinating
schedules, pricing and capacity under
an Open Skies agreement between the
United States and The Netherlands.
Airline of the Year
Northwest Airlines
1997
The enhanced global joint-venture
agreement offers a level of seamless
service that other airline alliances are
only beginning to approach, with
convenient connections and a single,
fulh'-coordinated seat inventory
between 266 cities in North America
and 132 cities in Europe, the Middle
East and Africa.
Under terms of the expanded joint-
venture agreement. Northwest and
KLM will link trans-Atlantic routes and
seiwice between Amsterdam and India
with services between Europe, Canada
and Mexico. In addition. Northwest
and KLM plan to more closely
synchronize inventory management,
passenger processing, computer
reservation systems, information
systems, joint purchasing and their
respective frequent flyer programs.
14
Air Transport World magazine
named the Northwest/KLM alliance
the `1997 Airline of the Year"
z
The agreement will also further
streamline joint sales and marketing
activities, improve operating
productiviU', broaden cooperation in
Asia and deepen integration of the
carriers' respective cargo operations
which, when combined, represent
the world's second largest air cargo
carrier. Northwest will coordinate all
KLM operational and marketing and
sales activities in the U.S. KLM will do
the same for Northwest in Europe,
the Middle East, India and Africa.
In recognition of this premier global
airline alliance. Air Transport World
magazine named Northwest and KLM
the "1997 Airline of the Year."
The alliance is expected to produce
more than S2 billion in total
revenue in 1998.
Si
rn
'y:
Amsterdam's Schiphol Airport
consistently rates as one of the
best in the world. Serving as
Northwest's European hub, these
ratings are a strategic advantage.
NEW ALLIANCE EL^TxNG
Amsterdam-lndia service began in
October and illustrates the
convenience offered through the
global alliance. Independently,
each carrier could offer only
less-than-daily service to either of
India's tw'o largest cities, Delhi and
Mumbai. Together, with Northwest
operating service to these cities on
the days KLM does not, the joint
venture provides flights to both
destinations every day.
Northwest and KLM also began
offering daily Newark-Amsterdam
service during 1997, increased
Minneapolis/St. Paul-Amsterdam
service to twice daily, and added
a third daily Detroit-Amsterdam
flight during the peak summer
travel season. Atlanta-Amsterdam
service w^as increased to daily and
Los Angeles-Amsterdam flights
increased from seven to nine weekly
for peak travel periods. In 1998,
Northwest and KLM will begin daily
Seattle-Amsterdam and Philadelphia-
Amsterdam service.
The Northwest/KLM
alliance provides
daily sen ice to India's
two largest cities:
.Mumbai and Delhi.
15
Strategic alliances and marketing affiliations throughout
THE WORLD ENABLE NORTHWEST AND KLM TO INCREASE CONVENIENCE AND
PROVIDE 60,000 CODE-SHARE SERVICE FLIGHTS PER MONTH.

The stars represent the scope
of Northwest alliance partners
and inarheting affiliates:

*

* -k

NOirrHWEST AIRLINES:
EHE ALLIANCE EXPERTS
Toledo, Ohio and Dusseldorf, Cermany
arc two ot the 400 cities conveniently
connected by Northwest Airlines and
its 18 partner airlines. Through the
Detroit and Amsterdam hubs,
travelers can make the trip in less
than 11 hours via Mesaba Aviation,
Northwest/KLM and Eurowings, all
with one phone call or web site
visit to Northwest, one ticket and
one luggage check-in. Each segment
of the trip earns Northwest
WorldPerks* miles.
Northwest and KLM have written the
book on airline alliances. When
Air Transport World named the "1997
Airline of the Year" the magazine
noted, "Northwest and KLM have
transformed the very structure of the
airline indu.stry through their succes.sful
alliance." 'Hie same respected publication
named Mesaba the "Regional Airline of
the Year" for its outstanding service as
an exclu.sive Northwest Airlink partner.
^ Our new agreement with Continental
Airlines will result in a domestic
partnership as large as any other
IJ.S. carrier. (T)ntinentars hubs in
Newark, Houston and (develand fit
well with Northwest's hubs and
(k)ntinentars service to Latin America
complements Northwest's strength
in the Asian market.
Alaska Airlines and 1 lorizon Air are
among Northwest's largest U.S.
partners. 'Ibgether, we served well
over one-half million passengers in
1997, when Alaska Airlines was
honored --
for the seventh
consecutive year --
1st or 2nd
most preferred U.S. carrier by
Conde Nast magazine.
Our seven-year partnership with
America West links their Las Vegas
and Phoenix hubs with Northwest's
Cailifornia gateways and Asia.
This efficient, quality service is
utilized by nearly a quarter of a
million passengers each year.
In addition, Northwest's developing
alliance with Hawaiian Airlines provides
convenient links to the neighbor
islands for Northwest flights between
Honolulu and both Japan and the U.S.
mainland. Northwest, as Honolulu's
largest major airline, provides this link
with Hawaiian Airlines, Honolulu's
largest regional airline.
Alaska Airlines
Pacific Northwest

.
& Alaska *
k
America West Airlines
Las Vegas & Phoenix
Braathens SAFE
Norway & Scandinavia
Business Express Airlines
Boston & New England
Continental Airlines
North & South America,
Europe
Eurowings
Germany
Express I Airlines
Memphis
Garuda Indonesia
Indonesia
Hawaiian Airlines
The Hawaiian Islands
Horizon Air
Pacific Northwest
Japan Air System
Osaka & Japan
Jet Airways Private Ltd.
India
KLM UK
United Kingdom
KLM Royal Dutch Airlines
Europe, Middle East
& Africa
Mesaba Aviation
Minneapolis/St. Paul & Detroit
Midwest Express Airlines
Milwaukee
Pacific Island Aviation
Saipan & Guam
Trans States Airlines
California

16
o
Lhe arrangements summarized here
extend the airline's global scope to
serve more customer travel needs and
increase access to Northwest's own
worldwide route system while
minimizing the investment and risk
associated with network expansion.
Logether, Northwest and KLM, and their
29 respective airline partners operate
60,()()() code-share flights per month.
During 1997, Northwest signed a
frequent flyer agreement with Japan
Air System in support of our
connections at our hub in Osaka.
Domestically, the highly regarded
Midwest Express Airlines is
also allied through its frequent
flyer program.
KLM has signed a memorandum of
understanding with Alitalia that will
link its Southern I-urope hubs with
Northern Europe and with the
Northwest/KLM trans-Atlantic ^
joint-venture operation.
(a)ncurrent with the start of
Northwest/KLM service to .Mumbai
and Delhi, India, Northwest entered
into a cooperative marketing
agreement with Jet Airways of India,
India's fastest growing and best
regarded domestic airline.
In Europe, Northwest has
established a new cooperation
agreement with Braathens SAL'li,
Norway's largest regional airline,
offering connections through
Amsterdam to destinations
throughout Scandinavia.
4'hrough an existing relationship
with KL.M UK (formerly Air UK),
Northwest provides connections
through Amsterdam to 14 European
cities. Also connecting through
Amsterdam are flights to ten
German cities^)ffered by Northwest
marketing partner Eurowings.
Northwest's commercial
cooperation pact with Garuda
Indonesia is the first alliance
between U.S. and Indonesian
^
air carriers.

Northwest's Airlink relationships
extend the airline's reach to nearly
1 50 additional cities in North
America via Mesaba, Express 1,
Business Express, and 4'rans States.
It is Northwest's intent to create
a highly integrated global air
transportation network that services
virtually all the travel needs of our
customers and maximizes the value
of our franchise for our shareholders.
20^
110P
200P
This sample itinerary shows how Toledo, Ohio
U.S.A. is conveniently linked with Dusseldorf,
Germany in 11 hours oj flying time.
NEW "BONSAI" SCHEDULE
IMPROVES EEEICIENCX
ENHANCES CARGO SERVICE
Northwest Charge, in 1997, added
trans-Paeifie flying during the peak
air freight shipping season through
implementation of the most extensive
change to its freighter schedule in
ten years. Overall, the new Northwest
(iargo schedule increases peak season
Hying time by 10.5 percent and was
a ke^' factor in (Cargo's record
1997 revenues of $790 million, a
5.7 percent increase over 1996. The
more efficient Bonsai schedule was
achieved by pruning domestic stops
less integral to Cargo's operations and
customer recpiirements while
improving connections with all
important U.S. destinations.
PRI\ATE -
L\BEL \'ACATK:)N
PROGRAMS EOR EEISl'RE TRA\'EEERS
MET Inc., a \\ holly-owned indirect
subsidiary of Northwest Airlines
Ca)rporation, develops and markets
vacation programs that include air
transportation and land arrangements.
In addition to offering a competitive
vacation product. Northwest benefits
from the revenues gained by these
air/land sales. These programs are
used to increase the sale of Northwest
services, offer a competitive tour
product and promote new Northwest
destinations.
MET Inc. offers two distinct product
lines. The Northwest WbiidX acations"''
product combines the strength of
Northwest's worldwide route
network with MIT's land service
blu ing power. MIT \'acations offers
charter service to Eas \'egas,
Grlando, Mexico and the (airibbean
for value-conscious customers from
nine H.S. origin markets, including
Minneapolis/St. Paul, Detroit and
Dallas/Ft. Worth.
MLT Inc. is among the top vacation
wholesale companies in the U.S., serving
more than 800,000 customers in 1997.
Duf to (I la\onihlc
ciinrmy
\Vorlil\'cncilions
cU sliihiiions. such us
Bunghoh. uir in inure
(Icinunil ihun ever hcjoir.
19
The success of a service business such
^ AS AIR TRANSPORTATION RESTS ULTIMATELY ON
i THE ACTIONS OF ITS PEOPLE. THAT'S WHY
''I Northwest Airlines strives to create an
y
ENVIRONMENT SHAPED BY WELL UNDERSTOOD
VALUES AND GUIDING PRINCIPLES, IN WHICH
PEOPLE KNOW HOW THEY INDIVIDUALLY AND
COLLECTIVELY CONTRIBUTE TO PROVIDING THE
SAFE, RELIABLE AND CONSISTENT SERVICE
THAT FOSTERS PROFITABLE GROWTH.
50,000
people now comprise
Nortliwesi Airlines.
NEVER COMFROMISH SAFin'Y
44,000 \orlhwesl
people in 199.}.
Northwest's guiding i')rinciplcs liclp
define the eliaraeteristies of the
eonipany's growing workibree. I'he
Fresideni's /Uvard winners profiled in
tliese pages show liow these principles
come to life in tlie workplace.
Northwest Aerosiiace'l'raining
(a)rporation (NA1'(X)), a wholly-
owned indirect subsidiary of
Northwest Airlines (iorporation, is an
acknowledged world leader in air
travel safety training for pilots, flight
crews, ground services and support
personnel and systems operations
control professionals. In a
demonstration of its leadership in
safety training, NA'I'CO became the
first large jet training facility to
become certified under new federal
Air Regulation (I-AR) Fart 142. I bis
certification enables NA'fCO to
provide airlines and jet operators with
a complete j'laekage of pilot training
services as required by the ll.S. federal
Aviation Administration (f'AA).
14
niojor airlines in
Asia conirael for
irainiii}' seiyiees
lliroiif^h NA TCO.
In 1997, NA'IXX) provided training for
106 airlines, operators and government
agencies worldwide. NA'IXX) currently
has relationshi|')s with 14 major
airlines in Asia to provide various
training serxices. NA'IXX) is afso
training dispatchers in (China's Civil
Ax'iation Administration to ensure that
they are working within standards
established by Northwest and other
international carriers.
During 1997, more than .^,100
Northwest line and hangar mechanics
began participating in Northwest's
buman I'actors training, fhe training
emphasi/es teamwork, open
communication, workplace discipline
and situational awareness to reduce
human error. Northwest instituted
human factors training before it
became mandated by the f'AA. fhe
airline has previously provided human
factors training to its flight crews and
systems operation center I'lensonnel.
Northwest Airlines
1997 President's
Award Honorees
Each year Northwest bestows its
highest honor --
the Fresidenfs
Award --on a select number of
out.standing achievers.
In 1997, ten Northwest people
received the prestigious award,
which is given to Northwest
people who epitomize Northwest's
values and guiding principles,
and who have made a significant
contribution to achieving the
airline's mission. I'he ten people
selected in 1997 follow:
Ikian Anderson's expcrti.se in
the field of de-ieing has earned
him international recognition and
Northwest acclaim as a leader
in this eriieial procedure. He
eo-authored the airline's de-ieing
training manual and the high-wind
standard operating procedures that
have been adopted as the company
standard. Brian travels throughout the
Northwest system, teaching other
instructors in the best and safe.st
methods of ramp operations.
Brian Anderson
EcjuipmeiU Service
Employee and
Certified
Ramp Instructor,
Boston
Jackie Astleford is responsible for
126 distinct projects to maintain
and improve the WORl.DSFAN
central re.servations .system.Jackie's
commitment to excellence has
been critical to projects such as
fyfieket, fleetronie Service ('-enters,
ResNet and the online re.servations
product. As the leader of a .strong and
elo.se team,Jackie has instilled dedication
in the people with whom she works.
Jacqueline
Astleford
Account Manager-
Information
Services Business
Results,
Minneapolis/
St. Raul
Northwest Airlines finished second among major
global airlines in Fortune magazine's first ever
survey of the world's most admired companies.
3,100
mechanics
participated in
human factors
training in 1997.
ALWAYS EMPHASIZE CLEANLINESS
Northwest's concerted effort in 1996
to improve overnight interior cleaning
of its aircraft was rewarded with a
significant improvement in customer
cleanliness ratings in 1997, according
to an independent sur\^ey. Encouraged
by the progress, and recognizing that
customers associate cleanliness with
operational integrity. Northwest
embarked on a major initiative to
further improve cleanliness in
customer ser\'ice areas and other
"back room" areas in 1997.
In addition to aircraft cleaning goals,
standards for faciliU' cleaning were
strengthened in 1997. Northwest
established a cleanliness department
and initiated self and third-part)'
audits to measure progress. At year
end both the domestic and
international systems were meeting
most of their cleanliness goals.
At Tok)'o's Narita airport. Northwest
employees instituted a "one minute
to cleanliness" program under which
they take a minute to clean up their
work areas before starting work
each day. At stations systemwide.
Northwest is testing new processes
and equipment for cleaning aircraft
between flights more thoroughly
without adding ground time.
ALWAYS PUT CUSTOMERS EIRST
The C (ioncourse at Detroit's Metro
Airport is the busiest concourse at
Northwest's busiest hub. Operations
there affect customer semce for
thousands of Northwest passengers
dail)'. Northwest people from customer
11,138
flight attendants
received initial or
recurrent training
in 1997.
22
sen'ice, maintenance and parts, fleet
service, and ramp areas worked
together with representatives of the
International Association of Machinists
to improve operations and ensure on -
time departures. Dubbed "Vitamin C,"
these collective efforts reduced ramp,
fleet service, maintenance and
passenger service delays, not only
improving customer service but also
saving thousands of dollars in delay-
related costs. Many of the ideas tested
during the Vitamin C initiative remain in
place and continue to improve serv ice.
To be the preferred carrier in the
Pacific, Northwest continues to
enhance the appeal of its service to
Asian customers. Key to tliis effort
has been increasing the number of
multi-lingual personnel in front-line
customer contact positions. Northwest
is increasing the number ofJapanese-
speaking fliglit attendants, inflight
service representath es and qualirt'
service assistants dedicated to serving
in-transit passengers and during the
year also graduated its first class of
flight attendants recruited from China.
Northwest also was the first U.S.
airline to launch a Japanese-language
web site and operates a special toll-free
reserv ations number to handle the
needs of Japanese customers. Tlie
airline continues to adjust infligltt
sen ices to accommodate the
preferences ofJapanese travelers in
everything from cabin design and
reading materials to food and
be^erage selections.
Sher Stramer has amassed an
outstanding service record during
her 18 years with Northwest. In
1997, she found a unique new
way to serve. Sher played a pivotal
role in the organization and
implementation of the Northwest
Airtiares Habitat for Humanity project
in the Twin Cities. The effort resulted in
the construction of a Habitat home in
St. Paul last August with the exclusive use
of Northwest employees as the builders.
Sher Stramer
Flight Attendant,
Minneapolis/
St. Paul
Mike Barnett excels at tackling
tough systems problems, staying
with an aircraft for several days to
personally direct maintenance
troubleshooting. In one particular
instance, Mike hand-carried samples
to a lab in St. Louis for testing, but there
wasn't a motel room within 40 miles.
.Mike slept in the back seat of his rental
car until the test w'as completed so that
he could make the correct engineering
decisions based on the results.
Michael Barnett
Systems Engineer-
Technical
Operations,
Atlanta Base
Carl Bolenbaugh is affectionately
known as "Mr. Northwest" among
his peers and his community.
Because of his genuine approach
with travel agents and passengers,
his 199"' revenues set an all-time
record for sales by a single agent. Carl
also assists fellow agents in learning his
customer service skills and techniques.
Carl Bolenbaugh
Reservations
Sales Agent,
Los Angeles
2
Jon Austin's tenacious defense of
the iiirline against the allegations of
WCCO television scored a stunning
victory before the Minnesota News
Council. Austin played a key role
on the team that presented the
case to the News Council. Last June, the
Public Relations Society of,America
bestowed one of its highest honors, the
Silver Anvil of Excellence, for the work
Austin led in maintaining public trust.
Jon Austin
Managing
Director-Corporate
Communications,
Minneapolis/
St. Paul
23
As Northwest accelerates deliveries
of new aircraft, the maintenance
department is keeping a watchfnl eye
out for defective components covered
by manufacturers' warranties. This
important initiative delivered
approximately S75 million in
cost-savings in 1997.
NORTHWEST AIRCARES:
A CHARITABLE ASSISTANCE PROGRAjM
UNIQUE IN THE INDUSTRY
Northwest AirCares, a charitable and
community support program, takes
advantage of unique Northwest assets to
help improve the lives and communities
of the people Northwest serves.
Northwest AirCares raised more than
$750,000 and 500 Ely-Write free
travel certificates in 1997, culminating
five years of assistance for charitable
organizations.
spring for a "Spirit of Success" open
house and reception intended to
recognize employees for their efforts
during a particularh' tough winter
in 1996-1997 and to launch several
initiatives designed to improve
teamwork during the upcoming
summer travel season and its heav}'
traffic. A committee of 15 Detroit
customer senice employees led
efforts to identifi' wa)'s to improve
customer satisfaction while also
making Detroit a better place to work.
ALWAYS STRIVE TO IMPROVE
An ever-widening array of training
and development is being offered to
Northwest people to help them
sharpen their skills.The Professional
Growth Program provided course-
work for about 40 percent of the
airline's salaried employees in 1997.
ALWAYS SUPPORT AND INSPIRE
EACH OTHER
Keeping customers satisfied is a
daunting challenge in an industry in
which weather and air traffic are onh'
two of many uncontrollable factors
that can erode service quality.
Northwest Airlines strives to foster a
strong sense of shared goals among
its people to help sustain the effort
required to meet the daily challenges
in this demanding environment.
In one example of how Northwest
people support and inspire each
other, more than 1,000 Detroit-area
Northwest employees gathered last
$75.million
in cost-savings was achieved by
technical operations' improved
tracking of components covered
by manufacturers' warranties.
Promoting and hiring the right
people for the right jobs is an
ongoing priority. In 1997,
Northwest human resources
developed enhanced methods to
assess the strengths that job
candidates offer.
24
Since 1992, Northwest AirCares has
partnered with more than 20 non-profit
organizations for tliree-month programs
to promote their respective missions
and services.
In 1997, Northwest AirCares charin^
partners included the Children's
Diabetes Foundation, Operation Smile,
the Red River Valley flood relief
efforts of the Red Cross and Salvation
Army and the National Marrow
Donor Program.
Record flooding this spring drove
thousands from their homes in
Minnesota and North Dakota.
Northwest responded by airlifting
more than 220,000 pounds of relief
supplies to Grand Forks, North Dakota
and shuttling more than 1,500
\'olunteers from the Minneapolis/St. Paul
area to Grand Forks to assist with flood
clean-up over three weekends. A
Northwest-sponsored FloodAid
concert raised funds for the Red Cross
and Salvation Arm\^ for the ongoing
rebuilding effort.
The Northwest AirCares Program
earned a 1997 "Quality of Life Award"
from the Minneapolis Chamber of
Commerce in recognition of the
Company's commitment to flood relief
Mariko Isa has helped Northwest
people break down cultural
barriers and work as one global
team. She has worked diligently
with the product development staff
and inflight services in the U.S. to
improve Japanese meal service, the
beach product in general and the
re-design of the interport meal. And she
makes the airline a better place to work
in the Pacific.
Mariko Isa
Manager-Inflight
Ser\'ices, Pacific
Division,
Tokyo
z
Steve Ma)t)err) 's concept for the nets'
Midfield Temiinal building at Detroit
Metro Airport paved the way for a
successful agreement with Wayne
Counw, Michigan. Steve designed
the new Minneapolis/St. Paul
customs facilirt' that has revolutionized
international arrivals. And he led
successful renovation plans at
Seattle/Tacoma and Washington National,
presert'ing strong Northwest positions at
both airports.
Stephen Mayberry
Senior Design
Manager-Facilities,
Minneapolis/
St. Paul
Karen Young took immediate
ossmersliip of testing a new passenger
securiw program at W'ashington
National Airport. She represented
Northwest at \'arious meetings with
the Federal Aviation Administration
tliat provided a S2.2 million grant to ftmd
Northwest's development of the industn'
leading s}'stem. She also briefed other U.S.
Federal agencies on the s\'stem's benefits.
Karen Young
Customer Sen ice
Supenisot;
Washington, D.C.
National
Jim Franklin shows special wamith
to kids and his caring goes well
beyond the cockpit door. During a
recent aircraft change in Memphis
he obser\'ed a motlier having trouble
deplaning widi her tliree cliildren, all
under the age of five. Captain Franklin
picked up one of the kids, and the
woman's luggage while she pushed a
stroller all the way to the connecting gate
at the opposite end of the terminal.
James Franklin
DC9 Captain,
Minneapolis/
St. Paul
25
Ciary I.. Wilson
Cluiii iiuin
Northwest Airlines
Corporation
Marvin L. Griswold
Retired International
Director
Teamsters Airline
Division
International Brotherhood
of Teamsters
Walter I'. Mondale
Partner
Dorsey & Whitney
John H. Dasburj*
President & Chief
Executive Officer
Northwest Airlines
Corporation
Dennis F. Hightower
Professor of Management
Graduate School of
B u s i n e ss Aclm i n i s (rci (ion
I la rva rd Un iversi ty
V. A. Ravindran
President
Paracor Tinance Inc.
Richard C. Rhiin
Chairman & President
Richard C. Blum &
Associates, Inc.
rhonias L. Kenipner
Chairman & (diief
Executive Officer
Eoeh Partners
Corporation
Leo M. van Wijk
President & C'.hief
Executive. Officer
KEM Royal Dutch
Airlines
o
Alfred A. CJiecehi
Member -
Board
of Directors
Northwest Airlines
C.orporation
(ieorgej. Kourpias
Retired International
President
International
Association of
Machinists and
Aerospace Workers
CieorgeJ. Vojta
Vice Chairman
of the Board
Bankers Trust
New York Corporation
Doris Kearns (ioodwin
Historian and Author
I'rederic V. Malek
(diairimm
Thayer Capital
Partners
Duane F^ Woerth
Eirst Vice President
Air Tine Pilots
Association International
o
X
H
27
THE VALUES OF NORTHWEST AIRLINES
Safety First in all the services
we provide to each other and
to our customers.
Honesty and Integrity
in all we say and do.
Triistwoj'thiness... honoring our
commitments and doing all that
we say we're going to do.
Respect for Self, Others, and
Property in our behavior toward
each other and for company or
personal property.
Caring for our customers,
for each other, and for the
communities we sei've.
Resourcefulness and
Innovation in the quality
of our services, processes
and technology to increase
productivity and revenue
and control cost.
Commitment to Profitability
to ensure financial stability
and our careers.
Enthusiasm and Camaraderie
in our contributions to
the success of each other and
Northwest Airlines.
28
FINANCIAL TABLE OF CONTENTS
Financial Review
Pages 30-33
Management's Discussion and
Anal>"sis of Financial Condition
and Results of Operations
Pages 34-42
Consolidated Statements
of Income
Page 43
Consolidated Balance Sheets
Pages 44-45
Consolidated Statements
of Cash Flows
Page 46
Consolidated
Statements of Common
Stockliolders' Equity (Deficit)
Page 47
Notes to Consolidated
Financial Statements
Pages 48-70
Report of Ernst & Young LLP,
Independent Auditors
Page 71
Five-Year Sunuuary
Page 71
Stockliolders' Information
Page 73
Financial Review
Northwest Airlines Corporation adhered to its
complementary operating, marketing, and financial
strategies in 1997. Through targeted deployment of
assets into markets of competitive advantage, cost
effective fleet planning, rigorous cost control, and
strategic capital structure management, the Company
has increased return on assets while improving strategic
and operating flexibility. Our objective is to enhance
shareholder value and to build the foundation for
sustained profit growth.
Maximize Return on Assets
Northwest deploys existing assets where they can generate
maximum returns, and we invest in additional assets only
when they can produce superior returns. Northwest has
led U.S. network carriers in focusing on core strategic
markets and by expanding beyond its core asset base
largely through the use of domestic and international
alliances and code-share agreements. Through use of
alliances we have shown how Northwest can expand its
network and provide greater utility to its customers wliile
avoiding the financial and human cost of acquisitions.
Our expanded relationship with KLM and our new
agreement with Continental Airlines are prime examples
of how this strategy allows us to conserve capital while
dramaticall)' increasing net revenues and providing more
convenience to our customers.
Operating Activities
Northwest grew its capacity 3.2% in 1997 while RPMs
increased 4.9%. International ASM growth outpaced
domestic at 4.8%, versus 2.2%. Despite continuing
increases in capacity. Northwest has consistently
produced increases in load factor, specifically rising
from 73.1% in 1996 to 74.3% in 1997.
Scheduled ASMs and RPMs
Load Factor 66.7% 68.1% 71.5% 73.1% 74.3%
IASMS ^iRPMs
Northwest expects to grow ASMs nearly 4% in 1998,
with the majority of the growth occurring in the
Atlantic region to support our alliance with KLM.
Fleet Initiatives
In 1997 Northwest continued its strategy of employing
the aircraft best suited to the Company's route structure
at the optimum capital cost. Several major fleet
transactions were completed during the year.
Northwest signed an agreement with Airbus Industrie
for the purchase of fift}^A319 aircraft to be delivered
ten per year beginning in 1999. The order included
options for up to 100 additional Airbus aircraft. These
aircraft are intended primarily to serve domestic
growth needs from our strategic hubs.
Northwest invested over $125 million on life extension
of the DC9 fleet, which included new interiors, systems
upgrades, and hushkitting. Approximately $200 million
additional is budgeted in 1998. Over 75% of the DC9
fleet will be huslikitted by the end of 1998.
Northwest entered into a services agreement, under
which Northwest will operate five Boeing 727-200
aircraft for seven National Basketball Association teams
and one National Hockey League team. During the
teams' off-season, which occurs during the summer
airline high season. Northwest will utilize the aircraft
for commercial service.
30
z
Operating Results
1997 operating income and net income of S1.16 billion
and $597 million, respectively, were Company records, and
were achieved despite negative foreign currency impact
and the reinstatement of the federal ticket tax in
March 1997. Foreign currency translation in 1997 cost
Northwest $185 million in passenger revenue, and the
reinstatement of the ticket tax negatived impacted
passenger revenue by S183 million. Still, the Company
continued to improve its operating margin to 11.3% in 1997.
operating .Margin
I 1993 1994 1995 1996 1997
Cost Management - Unit costs in 1997 improved by
1.7% versus 1996. At Northwest we place a significant
focus on cost containment and expect to be involved
in meaningful initiatives throughout 1998.
Cost per AS.M
1993 1994 1995 1996 1997
Capital Structure Management f
A kev element of Northwest's financial strategv is to >
Z
minimize capital costs while maintaining adequate ^
levels of liquidity in order to maximize strategic and ^
operating flexibility. -
Transactions -
Northwest has completed several major ^
transactions to advance these goals in 1997:
Northwest completed its first public unsecured
offering in ten years.The S250 million transaction at
a blended interest rate of 8.5% had an average life of
8.2 years with no material covenants.
Northwest and KTM signed tw'O primari' agreements --
a 13-year enhanced alliance agreement and a stock
purchase agreement.The alliance agreement joint
ventures North Atlantic operations, thus formalizing
and expanding the level of cooperation. Under the
stock agreement, the Company will purchase KI.M's
entire 25 million Northwest common shares over the
next three years. In 1998, an agreement in principle was
reached to accelerate the stock purchase.The Company
also purchased all outstanding Series A and Series B
Preferred Stock for S251 million. The transaction
eliminated all preferred stock dividend payments,
which carried an effective pretax interest rate of 12.7%.
In September, Northwest received $408 million cash in
a bulk sale of frequent flyer miles to WorldPerks
partners.This transaction extended several partnership
agreements while strengthening Northwest's liquidity.
Northwest increased the size of its unsecured bank
credit facility from $650 million to $1.0 billion. The
facility includes a basic revolving credit facility of
$675 million expiring in 2002, a one-year S175 million
revolving facility, and a $150 million five-year term loan.
Northwest prepaid S39 million on a loan received from
Minnesota's Metropolitan Airports Commission in 1992.
Northwest repurchased $65 million of NWA Trust
No. 2 13.875% Class D Notes due December 2006,
thus reducing interest expense.
In December, Northwest received an unsecured debt
rating upgrade by Standard and Poors to BB. After the
Continental alliance announcement, the Company was
put on "w'atch list" with a "positive outlook'.'
31
Financial Results Returns to Shareholders
S Northwest's financial management is focused upon
reducing the total cost of capital, enhancing overall
financial stability, and providing operating flexibility,
^ thereby increasing the value of stockholders' equity.
o
Northwest's focused financial strategy is reflected in our
results. In 1997 cash flow from operations improved to
more than $1.6 billion.
Cash Flow from Operations
Debt levels have declined markedly from $5.37 billion in
1993 to $2.78 billion in 1997. The graph below contrasts
this debt reduction with the growth of the enterprise as
measured by revenue.
Revenues vs. Total Debt
(Balance Sheet Debt
and Capital Lease Obligations)
g 1993 1994 1995 1996 1997
m Revenues BlTol^lDebt
As a result of strong earnings, in combination with financing
transactions, liquidity at year end was over $2.1 billion. Tliis
is an improvement of over 43% versus 1996 liquidity of
$1.5 billion.
The Company has experienced a steadily improving return
on capital, rising from 2% in 1993 to 13% in 1997.
Return on Capital
1993 1994 1995 1996 1997
Growth in return on capital will be aided by our
increased commitment to alliances, specifically with
KLM and Continental, where earnings are increased with
minimal capital investment. Diluted earnings per share
have improved significantly from a loss of $2.85 per
share in 1993 to $5.29 per share in 1997. Diluted
earnings per share have grown at a compound annual
growth rate of 22% since 1994.
Diluted EPS'
1993 1994 1995 1996 1997
'Before extraordinart' items and preferred stock transactions.
1993 1994 1995 1996 1997
'includes cash, unrestricted short-term investments and capacity
under revolving credit agreement and 757 bridge facility.
32
The steady improvement in Northwest's financial
performance has been beneficial to shareholders. Since
the initial public offering of common stock in March of
1994, the Company has outperformed both the S&P 300
Index and the S&P Airline Index.
VW.\C Equirv' Relative Performance'
3/18/9-* 12/31/94 12/31/95 12/31/96 12/31/97
VW .A.C " S&P 500 S&P .Airline
Index Index
'Assumes reinvested dividends, indexed to 100.
Average annual price appreciation has been 4l'o.
Recent Developments
In earh' 1998, several major developments have taken
place which will improve Northwest's competitive
position and increase shareholder value.
The Company and KLM reached an agreement in
principle to accelerate the purchase of KLM's
remaining shares. Northwest will repurchase the
remaining 18.2 million shares by May 1, 1998 for
approximately million in cash and unsecured
notes.This transaction will reduce shares outstanding
to about 88 million and is accretive to 1998 EPS by
approximately SO.50.
Northwest signed a 13-y^ar marketing alliance agreement
with Continental Airlines. In addition, the Company
will acquire 8.5 million shares of Continental's Class A
stock (14% equit)' stake; 52% voting interest) currently
held by the .Mr Partners group.The share purchase and
certain aspects of the alliance are subject to regulator)'
and other approvals.
The U.S. and Japan signed an aviation agreement
which modified the existing 1952 bilateral agreement.
Northwest had significant rights under the 1952
agreement, but in recent years, many of those rights
had been restricted by the Japanese government.
While this new agreement presents the challenge of
increased capacit)' in this market, it both secures the
rights the Company originally had and contains several
new provisions which are beneficial to Northwest.
Therefore, this agreement provides security for
Northwest's valuable Pacific asset. As the Japanese
economy recovers, the Asia-Pacific region will offer
significant profit potential for Northwest Airlines.
Outlook
Northwest will continue to enhance shareholder value.
The Company has assembled the building blocks that will
allow for consistent and predictable earnings growth.
Over the last five years, the U.S. airline industr)' has been
in an equilibrium, characterized by controlled groA\th,
price rationalization, and increased financial discipline.
We currently operate in a robust domestic economic
environment. Mthough the Asian economies, particularly
Japan, have been weak. Northwest stands to benefit
handsomely from its strong Pacific presence and from the
recover)' to come. Our alliance partnerships, especially
the new agreement with Continental and the expanded
agreement with KLM, place the Company in a strong
competitive position. This position has been achieved
with minimal capital outlay. A truly formidable global
force has been formed with the combination of KLM,
Continental, and Northwest's other alliance partners.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Northwest Airlines Corporation ("NWA Corp." and,
together with its subsidiaries, the "Company")
reported record net income of $596.5 million and
operating income of $1.16 billion for the year ended
December 31, 1997. Diluted earnings per share were
$5.21 compared with $5.20 per diluted share in 1996.
Excluding the impact of the 1997 extraordinary item
and 1996 preferred stock transaction, diluted earnings
per share were $5.29 in 1997 compared with $4.52 in
1996, a 17% improvement. Operating income increased
by $103.4 million compared with 1996, with operating
margin increasing to 11.3% from 10.7% in 1996.
The Company completed several transactions in 1997 to
strengthen its long-term financial position and enhance
earnings as described in "Liquidit)^ and Capital Resources."
As of December 31,1997, total available liquidity was
$2.12 billion, the highest level in Company history.
Northwest Airlines, Inc. ("Northwest") is the principal
indirect operating subsidiary of NWA Corp., accounting
for more than 95% of the Company's 1997 consolidated
operating revenues and expenses. The Company acquired
Express Airlines I, Inc. ("Express") on April 1,1997 and
the operating results of Express are included in the
consolidated financial statements commencing on that
date. Tlie Compam^'s operating results are significantly
impacted by both general and industry economic
environments. Small fluctuations in revenue per
available seat mile ("RASM") and cost per available seat
mile ("CASM") can have significant impacts on the
Company's profitability.
Results of Operations --
1997 Compared to 1996
Operating Revenues. Operating revenues were
$10.23 billion, an improvement of $345.3 million (3.5%).
Operating revenue per total service available seat mile
("ASM") decreased .9%. System passenger revenue
increased $223.8 million (2.6%) due to a 3-2% increase
in scheduled service ASMs and the inclusion of Express
revenues of $100.1 million. These increases were offset
by a 1.7% decrease in passenger RASM driven by
unfavorable foreign currency translation and the
reinstatement of federal ticket taxes in March 1997.
The composition of the Company's operating revenues
in each of the past three years is summarized below:
1997 1996 1995
Passenger revenue
Domestic 57.5% 57.9% 56.1%
Pacific 21.5 22.8 23.8
Atlantic 6.3 6.4 5.5
Express 1.0 -- --
Total passenger revenue 86.3 87.1 85.4
Cargo revenue 7.7 7.5 8.3
Other revenue 6.0 5.4 6.3
Total operating revenues 100.0% 100.0% 100.0%
Domestic passenger revenue, excluding Express, increased
$165 5 million (2.9%) to $5.88 billion. A 2.2% increase in
scheduled service ASMs and a .7% increase in passenger
RASM resulted in the improved performance. The
Company increased frequencies to ten cities and entered
six new markets which accounts for the increase in
scheduled service ASMs. Tlie increase in RASM was due to
a 2.6% (1.8 points) increase in passenger load factor offset
by a 2.0% decrease in yield due to the reinstatement of
federal taxes on airline tickets and international departures.
Tlie Company benefited from the absence of ticket taxes
for only two months in 1997 versus eight months in 1996.
See also "Other Information --
U.S. Transportation Taxes."
Pacific passenger revenue decreased $58.4 million (2.6%)
to $2.19 billion due to a 7.7% decrease in Pacific passenger
RASM which was partiall}^ offset by a 5.6% increase in
scheduled service ASMs related to initiation of
Minneapolis/St. Paul-Osaka service and additional trans
pacific frequencies, mainly for the Minneapolis/St. Paul-
Tok\'0 service.Tlie decrease in Pacific RASM was primarily
due to a 7.4% decrease in yield wliich was largel)^
attributable to a weaker Japanese yen. The average yen per
United States ("U.S.") dollar exchange rate for the twelve
months ended December 31,1997 and 1996 was 120 and
108, respectively, a weakening of the yen of 11.2%. Atlantic
passenger revenue increased $16.6 million (2.6%) to $647.1
million due to a 1.7% increase in scheduled ser\4ceASMs
and an increase in passenger RASM of .9%.
J
34
Cargo revenue increased S43.6 million (5.8%) due to a
2.6% increase in cargo revenue per ton mile and 3.0%
more cargo ton miles primarily due to the development
of a more efficient freighter schedule. The increase in
cargo revenue per ton mile was primarily due to
increased import sales driven by the continued strength
of the U.S. dollar versus Asian currencies. Other revenue
increased $77.9 million (14.5%) due to settlements under
the joint venture alliance w ith KLM Royal Dutch Airlines
("KLM") and increased charter activip .
Operating Expenses. Operating expenses increased
$241.9 million (2.7%) compared to the 3 3% capacit)'
increase to 97.1 billion total service ASMs. Operating
expense per total service ASM decreased for the first
time in four years from 8.78 cents per total service ASM
to 8.63 cents, a decrease of 1.7%. Salaries, wages and
benefits increased S314.5 million (11.6%) due primarily
to the end of the Wage Savings Period as discussed
under "Liquidity and Capital Resources -
Labor
Agreements" and an increase in average full-time
equivalent employees of 3 3%. The increase in full-time
equivalent employees was attributable to the increased
flying of 3 3% and increased traffic of 3.7%. Offsetting
the increased salaries, wages and benefits expense was
$49.2 million in lower pension expense due to a higher
pension discount rate applied in 1997 compared to
1996. Aircraft fuel and taxes decreased $31 million
(.2%) due to a 3.5% decrease in the average fuel price
per gallon from 67.21 cents to 64.86 cents offset by an
increase of 2.6% in fuel gallons consumed. Commissions
decreased $13.2 million (1.5%) primarily due to
increased domestic revenue where effective commission
rates are lower than those paid internationally and also
due to changes in the Company's commission structure
beginning in September 1997 which reduced
commissions paid from 10% to 8% on tickets purchased
in the U.S. or Canada for travel to destinations outside
North America. Aircraft maintenance materials and
repairs increased $64.2 million (11.5%) due primarily to
$19.1 million (3.4%) related to Express and an increased
number of scheduled airframe and engine overhauls in
accordance with the Company's maintenance program.
The Company contracted for some of its additional
maintenance work with outside suppliers, resulting in
labor costs that would normally be classified as salaries
and wages to be included in maintenance materials and
repairs expense. Other expenses (the principal
components of which include outside services, selling and
marketing expenses, passenger food, persomiel, advertising
and promotional expenses, communication expenses and
supplies) increased $88.7 million (4.7%), due primarily to
increased volume and rates for outside services, selling and
marketing fees and personnel expenses.
Other Income and Expense. Interest expense-net
decreased $28.4 million (10.8%) primarily due to the
retirement of debt prior to scheduled maturity and
lower interest rates on debt. The foreign currency gain
for the rw^elve months ended December 31,1997 was
primarily attributable to balance sheet remeasurement
of foreign currency-denominated assets and liabilities.
Extraordinary Item. The Company repurchased for
$78."' million certain NWA Trust No. 2 aircraft notes in
Januar)' 1998 pursuant to a tender offer. An extraordinary'
loss of $9 3 million, net of tax, was recorded in 1997 as
99% of the notes were tendered by December 31,1997.
Results of Operations --
1996 Compared to 1995
Operating Resenues. Operating revenues were
$9.88 billion, an improvement of $795.6 million (8.8%).
Operating revenue per total service ASM increased 2.8%.
System passenger revenue increased 10.8% due to a 7.4%
increase in scheduled service ASMs and a 3.3% increase
in passenger RASM which was attributable to a .9%
increase in system yield and a 2.2% (1.6 points) increase
in passenger load factor.
Domestic passenger revenue of $5.72 billion increased
$6l8.1 million (12.1%). A 6.3% increase in scheduled
service ASMs and a 5.4% increase in RASM resulted in the
improved performance. Tlie increase in scheduled service
ASMs resulted primarily' from the addition of 19 aircraft,
which allowed the Company to increase frequencies to 23
cities and enter seven new markets. Tlie increase in RASM
was largely' driven by a 4.6% increase in yield which was
favorably' impacted by the lapsed federal ticket t^ixes. See
"Other Information --
U.S. Transportation Taxes."
35
Pacific passenger revenue increased $92.4 million (4.3%)
to $2.25 billion due to an 8.3% increase in scheduled
service ASMs resulting primarily from new service to
Beijing, China and additional frequencies due to higher
utilization of existing aircraft. However, RASM decreased
by 3-8% because of a 7.5% decrease in yield which was
somewhat mitigated by a 4.1% (3.1 points) increase in
passenger load factor. The Pacific yield decreased
primarily because of a weaker Japanese yen. The
average yen per U.S. dollar exchange rate for the years
ended December 31, 1996 and 1995 was 108 and 94,
respectively, a weakening of the yen of 14.9%. Atlantic
passenger revenue increased $125.9 million (24.9%) to
$630.5 million, due to a 12.0% increase in scheduled
service ASMs and an 11.5% increase in RASM which was
largely yield related.
Cargo revenue decreased $5.4 million (.7%) due to 1.4%
fewer cargo ton miles. Cargo capacity was reduced
because of increased passenger loads. Other revenue
decreased $35.3 million (6.2%) due primarily to
decreased charter activity.
Operating Expenses. Operating expenses increased
$655.2 million (8.0%). While operating capacity
increased 7.3% to 94.0 billion total service ASMs,
operating expense per total service ASM increased 1.4%
largely related to higher fuel prices and increased
maintenance costs somewhat offset by lower stock-
based compensation. Salaries, wages and benefits
increased $297.3 million (12.3%) due primarily to an
increase in average full-time equivalent employees of
4.7% and the end of the Wage Savings Period. The
increase in full-time equivalent employees was
attributable to the increased flying of 7.3% and increased
traffic of 6.8%. Additionally, included in the increased
salaries, wages and benefits expense was a $73-8 million
unfavorable impact of pension expense due to a lower
pension discount rate applied in 1996 compared to
1995. Non-cash stock-based employee compensation
expense is a function of shares earned by employees
and the period-ending common stock price. The 1996
stock-based compensation expense decreased to $242.8
million from $478.0 million for 1995 because fewer
shares were earned by employees in 1996 (7.2 million
common equivalent shares compared with 9.4 million
common equivalent shares earned in 1995) and the
common stock price used to measure expense
decreased to a weighted average of $33 77 per share for
1996 from $51.00 per share for 1995. Aircraft fuel and
related taxes increased 28.9% from $1.08 billion to $1.40
billion. A 20.8% increase in average fuel cost per gallon
and an excise tax increase which was effective October
1995 caused $256.6 million of the increase with the
balance attributable to increased flying. Commissions
increased $27.9 million (3.3%) as a result of a 10.8%
increase in passenger revenue somewhat offset by the
impact of a decrease in the effective domestic
commission rate. Aircraft maintenance materials and
repairs increased $ 160.8 million (40.7%) due to a
number of factors including the timing of maintenance
activities, increased flying, higher engine overhaul costs
and the impact of favorable vendor settlements in 1995.
Other rentals and landing fees decreased $22.2 million
(4.7%) due primarily to the weakening of the Japanese
yen. Other expenses increased $86.5 million (4.8%), due
primarily to increased volume and rates for outside
services, promotional and personnel expenses.
Other Income and Expense. Interest expense-net
decreased $124.8 million (32.2%) primarily due to the
retirement of debt prior to scheduled maturity and the
October 1995 restructuring of the Company's financing
arrangement related to certain property in Japan. The
foreign currency gain of $19-1 million was attributable
to balance sheet remeasurement of foreign currency-
denominated assets and liabilities. The $18.0 million
benefit in other-net was largely due to a $25.5 million
increase in income related to an equity investment in an
affiliate offset by the payment of $10.9 million made
related to the travel agency litigation settlement.
Liquidity and Capital Resources
At December 31, 1997, the Company had cash and cash
equivalents of $740.4 million, unrestricted short-term
investments of $299.5 million, borrowing capacity of
$839-2 million under its revolving credit facility and the
ability under another facility' to borrow up to $240
million using existing aircraft as collateral, providing
total available liquidity of $2.12 billion.
36
o
Cash flows from operating activities were $1.61 billion for
1997 wliich included higlier than normal sale proceeds of
frequent flyer miles in excess of revenue in the amount of
$387.7 million. Such liiglier thim normal side proceeds were
due to a 1997 bulk sale of such miles to the Company's
frequent fl)^er partners. Cash flows from operating activities
were $1.37 billion for 1996 and $1.46 billion for 1995. Net
cash used in investing and financing activities during 1997,
1996 and 1995 was $1.43 billion, $1.66 billion and
$ 1.08 billion, respectively.
Investing Activities. Investing activities in 1997
consisted primarily of costs to commission aircraft
before entering revenue service, aircraft deposits, the
refurbishment of DC9 aircraft, engine hushkitting,
ground equipment purchases, the acquisition of Express,
the purchase off lease of four aircraft and the purchase
of eight RJ85 aircraft, one DC 10-30 aircraft and three
DC9-30 aircraft. Investing activities in 1996 pertained
primarily to the acquisition of 13 Boeing 757 aircraft,
seven DC9-30 aircraft, three DC 10-30 aircraft and two
747-200 aircraft; the purchase off lease of 22 aircraft; and
the refurbishment of DC9 aircraft. Capital expenditures
for 1995 pertained primarily to aircraft modifications,
the acquisition of two Boeing 757 aircraft for sale and
leaseback, the acquisition of 14 DC9 aircraft and
deposits on ordered aircraft.
On January 25,1998, NWA Corp. entered into an
Investment Agreement pursuant to which NWA Corp.
will acquire the beneficial ownership of 8,535,868
shares of Class A Common Stock of Continental Airlines,
Inc. ("Continental"). These shares represent
approximately 14% of Continental's common stock and
52% of its outstanding common stock voting power. The
aggregate consideration was valued at approximately
$519 million and is expected to consist of $311 million
in cash and 4.1 million shares of newly issued common
stock. The cash is expected to be funded from the
Company's general working capital which may be
supplemented by the proceeds of unsecured
borrowings in the public capital markets. The
transaction is expected to close by the end of 1998. For
additional information regarding the formation of a new
holding company and the related corporate
restructuring, the (iovernance Agreement with
Continental and the operating alliance, see Note S to the
Consolidated Financial Statements.
H
X
Financing Activities. Financing activities in 1997
pertained primarily to NWA Corp.'s repurchases of its
common stock and Series A and B Preferred Stock, the
issuance of $250 million of unsecured notes, the sale
and leaseback of eight RJ85 aircraft and the payment of
debt and capital lease obligations. In December 1997,
the Company repurchased $39 million of its sale-
leaseback financing obligations. The Company's Credit
Agreement was amended in December 1997 to increase
its existing unsecured revolving credit facility from $500
million to $675 million and to extend the availability
period to December 2002, and to add a new $175
million 364-day unsecured revolving credit facility. If
the 364-day facility is not renewed for an additional
364-day period, the Company may borrow up to the
entire amount of the facility and all such borrowings
mature in December 2002.
On September 29,1997, the Company entered into
agreements to repurchase for $1.12 billion over three
years the 25 million shares of NWA Corp. common
stock held by KFM. On that date, 6.8 million of such
shares were repurchased for $273-1 million.
Concurrently, all of NWA Corp.'s Series A and B Preferred
Stock held by KLM and other holders was repurchased
for $251.3 million. Both repurchases were funded using
existing cash resources. The remaining 18.2 million
shares of common stock to be repurchased were
reclassified to redeemable common stock from common
stockholders' equity, as required for such stock
transactions. However, earnings per share calculations
will continue to include the 18.2 million shares until
actually repurchased. The Company and KFM also
expanded their alliance by entering into an enhanced
commercial and operational alliance providing for a
minimum term of 13 years.
Subsequently, on January 16, 1998, NWA Corp. reached
an agreement in principle with KLM to accelerate the
repurchase of the remaining 18.2 million shares of
common stock. The agreement in principle is subject to
the execution of definitive documentation and the
approval of the respective boards of NWA Corp. and
KLM. The estimated purchase price of $775 million will
be paid with a combination of approximately $335
million of cash and three senior unsecured notes for the
37
remainder. The cash is expected to be funded from the
Company's general working capital which may be
supplemented by the proceeds of unsecured
borrowings in the public capital markets. The
transaction is expected to close before May 1,1998 at
which time the 18.2 million remaining common shares
will be repurchased and excluded from the earnings per
share calculations. See Note H to the Consolidated
Financial Statements.
Northwest sells certain receivables on an ongoing basis
to Northwest Capital Funding Corp., pursuant to a
receivable financing program (the "Receivable
Program"). The Receivable Program provides for the
early retirement of the related term certificates upon the
occurrence of certain events, one of which occurred on
January 25,1998. Accordingly, the Company advised the
trustee for the certificateholders that these certificates
will be paid in full on February 25,1998.
Financing activities in 1996 pertained primarily to the
sale and leaseback of seven Boeing 757 aircraft and the
payment of debt and capital lease obligations, including
prepayments of $180 million. In October 1996, the
Credit Agreement was amended to increase the term
loan to $150 million and extend the final maturity to
2002. In July 1996, NWA Corp. acquired from KLM
3,691.2 shares of NWA Corp. Series A Preferred Stock
and 2,962.8 shares of NWA Corp. Series B Preferred
Stock in exchange for $379 million of unsecured
promissory notes which were repaid in December 1996.
In October 1995 the Company completed a
restructuring of its financing arrangement related to
certain property the Company owns in Japan. As a
result, long-term debt decreased by $695.9 million and
was replaced by a $622.0 million yen-denominated non
recourse obligation with longer maturities which is
reflected in the Company's balance sheet as a
Mandatorily Redeemable Preferred Security of Subsidiary
which holds a solely non-recourse obligation of Company.
In December 1995 the Company retired the 1989
acquisition loan by prepaying the remaining $837 million
loan outstanding using proceeds from a new credit
facility and available funds. Also during 1995, Bankers
Trust New York Corporation exchanged 1,727 shares of
NWA Corp.'s Series B Preferred Stock for 2,050,000
shares bf NWA Corp.'s common stock.
See Note D to the Consolidated Financial Statements
for maturities of long-term debt for the five years
subsequent to December 31,1997
Capital Commitments. The current aircraft delivery
schedule provides for the acquisition of 115 aircraft over
the next eight years. See Notes K and O to Consolidated
Financial Statements for additional discussion of aircraft
capital commitments. Other capital expenditures including
costs to commission presently owned aircraft that have not
yet entered revenue service are projected for 1998 to be
approximately $395 million wliich the Company
anticipates funding primarily with cash from operations.
The Company has adopted programs to hushkit and
modify 173 DC9 aircraft to meet noise and aging aircraft
requirements. As of December 31,1997, the Company
had hushkitted 89 of these 173 DC9 aircraft. Capital
expenditures for engine hushkits and aging aircraft
modifications were $51 million in 1997 and are
expected to aggregate $360 million during the next five
years for these aircraft. The Company has also elected to
upgrade aircraft systems and refurbish interiors for the
173 DC9 aircraft. Capital expenditures associated with
upgrading systems and interior refurbishment were
$74 million in 1997 and are expected to aggregate
$54 million during the next five years.
The Company has commenced its program, adopted in
1996, to refurbish the interiors of its international 747
and DCIO aircraft, estimated to aggregate $120 million
over the next five years. In 1996, the Company adopted
a program to hushkit and modify 29 Boeing 727-200
aircraft, estimated to cost approximately $65 million
over the next two years.
38
Labor Agreements. The labor cost savings discussed in
Note C to Consolidated Financial Statements which
improved the Company's 1993 to 1996 cash flow from
operating activities ended on July 31,1996 for flight
attendants, September 30,1996 for mechanics, ground
personnel and management and October 30,1996 for
pilots. The Company's agreements with the employee
unions provided that wage scales at the end of the Wage
Savings Period snapback to August 1, 1993 levels and
snap-up pursuant to formulae based in part on wage
rates and wage rate increases at other large U.S. airlines.
Consequently, at the end of the Wage Savings Period,
salaries and wages increased by approximately S340 million
on an annualized basis including $50 million for snap-ups.
The Company's labor contract with each of its unions
became amendable as each labor cost savings agreement
ended. Consequently, future labor wage rates and costs
are subject to collective bargaining. While the Company
cannot predict the wage rates that will ultimately be in
effect (since such rates will be determined by collective
bargaining), management believes that its labor costs
will remain competitive in comparison to other large
U.S. airlines. The Company cannot predict the ultimate
outcome of the negotiations at this time.
Working Capital. The Company operates, like its
competitors, with a working capital deficit which
aggregated $674.2 million at December 31, 1997. The
working capital deficit is primarily attributable to the
$1.22 billion air traffic liability for advance ticket sales.
Market Risk Sensitive Instruments and Positions
The risk inherent in the Company's market risk sensitive
instruments and positions is the potential loss arising
from adverse changes in the price of fuel, foreign
currency exchange rates and interest rates as discussed
below. Tlie sensitivity analyses presented do not consider
the effects that such adverse changes may have on overall
economic activity nor do they consider additional actions
management may take to mitigate its exposure to such
changes. Actual results may differ. See Notes A and P to
the Consolidated Financial Statements for accounting
policies and additional information, respectively.
Aircraft Fuel. The Company's earnings are affected by
changes in the price and availability of aircraft fuel. In
order to provide a measure of control over price and
supply, the Company trades and ships fuel and maintains
fuel storage facilities to support its flight operations.
The Company also manages the price risk of fuel costs
primarily utilizing futures contracts traded on regulated
exchanges. Market risk is estimated as a hypothetical
10% increase in the December 31,1997 cost per gallon
of fuel based on projected 1998 fuel usage which would
result in an increase to aircraft fuel expense of
approximately $90 million in 1998, net of gains realized
from fuel hedge instruments outstanding at December
31,1997. Gains or losses on hedge contracts are
deferred until the related fuel inventory^ is expensed. As
of December 31,1997, the Company had hedged
approximately 28% of its 1998 fuel requirements,
including 63% of the first quarter.
Foreign Currency. The Company is exposed to the
effect of foreign exchange rate fluctuations on the U.S.
dollar value of foreign currency-denominated operating
revenues and expenses. The Company's largest
exposure comes from the Japanese yen. From time to
time, the Company uses options and forward contracts
to hedge its anticipated yen-denominated net cash
flows. The result of a uniform 10% strengthening in the
value of the U.S. dollar from December 31,1997 levels
relative to each of the currencies in which the
Company's sales and expenses are denominated would
result in a decrease in operating income of
approximately $48 million for the year ending
December 31,1998, net of gains realized from yen hedge
instruments outstanding at December 31,1997, due to
the Company's foreign-denominated revenues exceeding
its foreign-denominated expenses. The increase to other
income due to the remeasurement of net foreign
currency-denominated liabilities and the increase to
common stockholders' equity deficit due to the
translation of net yen-denominated liabilities resulting
from a 10% strengthening in the value of the U.S. dollar
is not material. This sensitivity analysis was prepared
based upon projected 1998 foreign currency-
39
denominated revenues and expenses and foreign
currency-denominated assets and liabilities as of
December 31,1997.
In 1997, the Company's yen-denominated revenues
exceeded its yen-denominated expenses by
approximately `^5 billion yen (approximately $625
million) and its yen-denominated liabilities exceeded its
yen-denominated assets by an average of 13-3 billion yen
($109 million) during 1997. In general, each time the yen
strengthens (weakens), the Company's ongoing operating
income is favorably (unfavorably) impacted due to net
yen-denominated cash flows and a nonoperating foreign
currency loss (gain) is recognized due to the
remeasurement of net yen-denominated liabilities. The
Company's operating income was negatively impacted by
approximately $70 million due to a weaker yen in 1997
compared to 1996. The yen to U.S. dollar exchange rate at
December 31,1997,1996 and 1995 was 131 yen to $1,116
yen to $1 and 103 yen to $1, respectively. There was no
material impact on 1997 earnings associated with the
Japanese yen collar option and forward contracts. As of
December 31,1997, the Company had purchased put
options to hedge approximately 90% of its 1998 net yen-
denominated cash flows.
Interest. The Company's earnings are also affected by
changes in interest rates due to the impact those
changes have on its interest income from cash
equivalents and short-term investments and its interest
expense from variable-rate debt instruments. The
Company has mitigated this risk by limiting its variable-
rate debt instruments to approximately 47% of long
term debt at December 31, 1997. If long-term interest
rates average 10% more in 1998 than they did during
1997, the Company's net interest expense would
increase by approximately $7 million. If short-term
interest rates average 10% more in 1998 than they did
during 1997, the Company's interest income from cash
equivalents and short-term investments would increase
by approximately $7 million. These amounts are
determined by considering the impact of the
hypothetical interest rates on the Company's variable-
rate long-term debt and cash equivalent and short-term
investment balances at December 31,1997.
Market risk for fixed-rate long-term debt is estimated as
the potential increase in fair value resulting from a
hypothetical 10% decrease in interest rates and amounts
to approximately $45 million. The fair values of the
Company's long-term debt were estimated using quoted
market prices or discounted future cash flows based on
the Company's incremental borrowing rates for similar
U'pes of borrowing arrangements.
Other Information
Income Taxes. Sections 382 and 383 of the Internal
Revenue Code of 1986 (the "Code") and the regulations
thereunder impose limitations on the carryforward
amounts of net operating losses ("NOLs"), alternative
minimum tax net operating losses ("AMTNOLs") and
credits that can be used to offset taxable income (or
used as a credit) in any single year if the corporation
experiences more than a 50% ownership change, as
defined therein, over a three-year testing period ending
on any testing date. See Note J to the Consolidated
Financial Statements for information regarding income
taxes and NOLs,AMTNOLs and credits.
Management believes that an offering of outstanding
common stock by existing stockholders in November
1995 triggered an ownership change, but that no
ownership change occurred prior to such offering. If
such an ownership change in fact occurred as a result of
the November 1995 offering, management believes that
even as limited by Sections 382 and 383 of the Code,
the NOLs,AMTNOLs and credits would be used
significantly earlier than their expiration, and the annual
limitation would not have an adverse impact on the
Company. However, if the Internal Revenue Service (the
"IRS") were to successfully assert that an ownership
change had occurred on any prior date, including August
1, 1993 (the date of the labor agreements), the
impairment of the Company's abilit)^ to use its NOLs,
AMTNOLs and credit carryforwards would be significant
because the value of the Company's stock on certain
prior testing dates (which adversely affects the annual
limitation) was relatively low.
U.S. Transportation Taxes. The United States 10%
passenger ticket tax applicable to domestic travel, the
6.25% domestic cargo waybill tax and the $6 per
40
passenger international departure tax expired on
December 31,1995. Consequently, the Company ceased
collecting these taxes on January 1,1996. These taxes
were reinstated for tickets sold subsequent to August 27,
1996 for travel through December 31, 1996. These taxes
lapsed again on December 31, 1996 and were reinstated
for tickets sold from March 7, 1997 to September 30,
1997. The Company estimates that the reinstatement of
the transportation taxes had approximately a $183 million
adverse impact on passenger revenues for the year ended
December 31,1997.
The Taxpayer ReliefAct enacted by Congress revised
transportation taxes and instituted new taxes for tickets
for travel from October 1,1997 to December 31, 2007.
The legislation included a reduction in the domestic
passenger ticket tax to 7.5% over three years (the rate
decreased to 9% on October 1,1997) with certain rural
airports subject to a 7.5% tax throughout the life of the
bill. The $6 international departure tax increased to $12
and a new $12 international arrival tax was imposed
(both began for tickets sold on or after August 13, 1997
for travel commencing on or after October 1,1997). The
departure tax on travel between the U.S. 48 states and
Alaska or Hawaii remained at $6. A new segment fee
applicable to domestic travel began at $ 1 for the period
from October 1,1997 to September 30,1998 and will
gradually increase to $3 for the calendar year 2002.
Rural airports are exempt from this segment fee, but
travel between the U.S. 48 states and Alaska or Hawaii is
subject to this new tax. Both the international
departure and arrival taxes and the segment fee will be
indexed each year to the consumer price index. In
addition, a 7.5% tax on the sale of frequent flyer miles
was included in the legislation. The impact of the
changes is expected to increase annualized U.S.
transportation taxes collected by Northwest from
current levels by approximately $50 million resulting in
an undetermined dilution of future passenger revenue.
U.S.-Japan Aviation Bilateral. On January^ 30,1998, the
U.S. and Japan signed a Memorandum of Consultation
("MOC"). The MOC outlines the agreement to modify^
the 1952 U.S. -
Japan bilateral aviation agreement until a
final Memorandum of Understanding is executed.
Among other things, the MOC (1) confirms Northwest's
"fifth freedom" rights between Japan and other Asian
destinations, (2) provides unlimited opportunities to fly
between any point in the U.S. and any point in Japan,
(3) allows certain code-sharing rights, (4) provides
opportunities for competitive pricing, (5) provides one
additional Japanese passenger airline and one additional
Japanese all-cargo airline with certificate authority
issued pursuant to the 1952 aviation agreement and (6)
permits expanded frequencies for U.S. and Japan airlines
not holding certificate authority issued pursuant to the
1952 aviation agreement. In addition, the U.S. has
received assurances that Northwest will retain all 316 of
its weekly takeoff and landing slots at Tokyo's slot-
constrained Narita International Airport, along with
Northwest's allocation of 142 slots at Osaka's Kansai
Airport and will have access to new slots as they
become available. As a result of the MOC, Northwest
expects its U.S. and Japan airline competitors to add
capacity between the U.S. and Japan. Northwest
expects to respond to the increased competition and to
take advantage of its affirmed and additional rights
resulting from the xMOC. The increased competitive
environment resulting from the MOC and the general
economic environment in Asia may adversely impact the
Company's Pacific revenues in 1998.
Detroit Midfield Terminal. In October 1996, the
Company and Wayne County, Michigan (the "County")
entered into an agreement pursuant to which, subject to
the satisfaction of certain conditions set forth in the
agreement, the Company will manage and supervise the
design and construction of a $960 million terminal at
Detroit Metropolitan Wayne County Airport. The new
terminal is scheduled to be completed in 2001 and is
anticipated to be funded from federal and State of
Michigan grants, passenger facility charges and the
County's issuance of airport bonds payable primarily
from future passenger facility charges. The Company
and the County have entered into agreements pursuant
to which the Company will lease space in the new
terminal for a term of 30 years from the date the
terminal opens.
Year 2000 Issue. The Company uses a significant
number of computer software programs and embedded
operating systems that are essential to its operations. As
h-
CiS
O
22
2
2
<
" a result, the Company implemented a Year 2000 project
2 in 1996 to ensure that the Company's computer systems
" will function properly in the Year 2000 and thereafter.
^ The Company anticipates completing its Year 2000
^ project in early 1999 and believes that with
H
modifications to its existing software and systems
o and/or conversions to new software, the Year 2000 Issue
z
will not pose significant operational problems for its
computer systems.
The Company has also initiated communications with its
significant suppliers and vendors with whom the
Company's systems interface and exchange data or upon
whom the Company's business depends and is
coordinating efforts with these outside third parties to
minimize the extent to which its business will be
vulnerable to such third parties' failure to remediate their
own Year 2000 Issues. The Company's business is also
dependent upon certain governmental organizations or
entities which provide essential aviation industr}'
infrastructure, such as the Federal Aviation Administration
("FAA"). There can be no assurance that the systems of
such third parties on which the Company's business
relies (including those of the FAA) will be modified on a
timely basis. The Company's business, financial condition
or results of operations could be materially adversely
affected by the failure of its systems or those operated by
other parties to operate properly beyond 1999. To the
extent possible, the Company will be developing and
executing contingency plans designed to allow
continued operation in the event of failure of the
Company's or third parties' systems.
The total cost of the Company's Year 2000 project is
currently estimated at $55 million (of which $10 million
has been spent and expensed) and is being funded
through cash from operations. The remaining costs for
the Year 2000 project will be expensed as incurred. The
costs of the Company's Year 2000 project and the date
on which the Company believes it will be completed are
based on management's best estimates and include
assumptions regarding third party modification plans.
However, in particular due to the potential impact of
third party modification plans, there can be no assurance
that these estimates will be achieved and actual results
could differ materially from those anticipated.
New Accounting Standards. See Note A to the
Consolidated Financial Statements for recent accounting
standards that impact future financial statement
disclosure requirements.
Forward-Looking StateincJits. Certain statements made
throughout the Management's Discussion and Analysis
of Financial Condition and Results of Operations are
forward-looking and are based upon information
available to the Company on the date hereof. The
Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
These statements deal with the Company's expectations
about the future and are subject to a number of factors
that could cause actual results to differ materially from
our expectations.
It is not reasonably possible to itemize all of the many
factors and specific events that could affect the outlook
of an airline operating in the global economy. Some
factors that could significantly impact expected
capacity, load factors, revenues, expenses and cash flows
include the airline pricing environment, fuel costs, labor
negotiations both at the Company and other carriers,
low-fare carrier expansion, capacity decisions of other
carriers, actions of the U.S. and foreign governments,
foreign currency exchange rate fluctuation, inflation, the
general economic environment in the U.S. and other
regions of the world and other factors discussed herein.
o
CONSOLIDATED STATEMENTS OF INCOME
Northwest Airlines Corporation
Year Ended December 31
(In millions, except per share amounts) 1997 1996 1995
Operating Revenues
Passenger $ 8,822.1 $ 8,598.3 $ 7,762.0
Cargo 789.4 745.8 751.2
Other 614.3 536.4 571.7
10,225.8 9,880.5 9,084.9
Operating Expenses
Salaries, wages and benefits 3,023.9 2,709.4 2,412.1
Stock-based employee compensation --
242.8 478.0
Aircraft fuel and taxes 1,393.8 1,396.9 1,083.8
Commissions 855.2 868.4 840.5
Aircraft maintenance materials and repairs 620.4 556.2 395.4
Other rentals and landing fees 456.7 454.0 476.2
Aircraft rentals 358.9 346.3 338.9
Depreciation and amortization 396.0 377.7 358.1
Other 1,963.7 1,875.0 1,788.5
9,068.6 8,826.7 8,171.5
Operating Income 1,157.2 1,053.8 913.4
Other Income (Expense)
Interest expense (244.7) (269.8) (401.2)
Interest capitalized 10.6 7.3 13.9
Interest of mandatorily redeemable preferred security holder (24.3) (27.2) (7.1)
Investment income 68.0 71.2 72.7
Foreign currency gain (loss) 1.8 19.1 (36.9)
Other--net 16.0 18.0 (11.3)
(172.6) (181.4) (369.9)
Income Before Income Taxes and Extraordinary Item 984.6 872.4 543.5
Income tax expense 378.8 336.3 201.4
Income Before Extraordinary Item 605.8 536.1 342.1
Gain (loss) on extinguishment of debt, net of taxes (9.3) --
49.9
Net Income 596.5 536.1 392.0
Preferred stock requirements (13.5) (37.5) (57.8)
Preferred stock transactions --
74.5 58.9
Net Income Applicable To Common Stockholders $ 583.0 $ 573.1 $ 393.1
Earnings Per Common Share:
Basic
Before effects of extraordinary item and
preferred stock transactions $ 5.89 $ 5.05 $ 3.11
Gain (loss) on extinguishment of debt (0.10) --
.55
Preferred stock transactions --
.75 .64
Earnings per common share $ 5.79 $ 5.80 $ 4.30
Diluted
Before effects of extraordinary item and
preferred stock transactions $ 5.29 $ 4.52 $ 2.90
Gain (loss) on extinguishment of debt (0.08) --
.50
Preferred stock transactions --
.68 .58
Earnings per common share $ 5.21 $ 5.20 $ 3.98
>
>
Z
2:
>
The accompan)ing notes are an integral part of these consolidated financial statements.
43
CONSOLIDATED BALANCE SHEETS
z
Northwest Airlines Corporation
December 31
(In millions) 1997 1996
Assets
Current Assets
Cash and cash equivalents $ 740.4 $ 559.4
Short-term investments 437.7 253.1
Accounts receivable, less allowance
(1997--$21.2; 1996--$19.7)
Flight equipment spare parts, less allowance
664.8 656.1
(1997--$148.9; 1996--$127.3) 376.1 262.2
Deferred income taxes 84.8 95.5
Prepaid expenses and other 294.0 263.6
2,597.8 2,089.9
Property and Equipment
Flight equipment 5,246.7 4,724.0
Less accumulated depreciation 1,295.6 1,107.6
3,951.1 3,616.4
Other property and equipment 1,489.0 1,484.2
Less accumulated depreciation 612.4 560.1
876.6 924.1
4,827.7 4,540.5
Flight Equipment Under Capital Leases
Flight equipment 907.1 927.4
Less accumulated amortization 270.0 255.9
637.1 671.5
Other Assets
Investments in affiliated companies
International routes, less accumulated amortization
185.9 164.4
(1997--$239.9; 1996--$216.3) 727.8 751.4
Other 359.9 294.0
1,273.6 1,209.8
$ 9,336.2 $ 8,511.7
Tlie accompanying notes are an integral part of these consolidated financial statements.
December 31
(In millions, except share data) 1997 1996
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Air traffic liability $ 1,222.5 S 1,010.7
Accounts payable and other liabilities 944.6 796.7
Accrued compensation and benefits 376.5 456.8
Accrued commissions 183.9 177.4
Accrued aircraft rent 207.5 196.7
Current maturities of long-term debt 227.4 144.4
Current obligations under capital leases 55.9 61.7
Short-term borrowings 53.7 38.8
3,272.0 2,883.2
Long-Term Debt 1,841.9 1,916.0
Long-Term Obligations Under Capital Leases 649.4 710.5
Deferred Credits and Other Liabilities
Deferred income taxes 1,161.5 947.2
Long-term pension and postretirement health care benefits 407.3 461.2
Other 674.1 348.9
2,242.9 1,757.3
Mandatorily Redeemable Preferred Security of
Subsidiary Which Holds Solely Non-Recourse
Obligation of Company - Note F
(Redemption value 199'^--S551.0; 1996--S628.8) 486.3 549.2
Redeemable Stock
Preferred, liquidation value (199"^-- S311.3; 1996--S610.8) 306.2 602.6
Common (18,177,874 shares) 848.5 --
1,154.7 602.6
Common Stockholders' Equity (Deficit)
Common stock, S.Ol par value; shares authorized--315,000,000;
shares issued and outstanding (1997--103,780,8"'5; 1996--97,604,056) 1.0 1.0
Additional paid-in capital 1,273.8 1,151.1
Accumulated deficit (362.2) (945.2)
Other (102.0) (114.0)
Treasury' stock (6,800,000 shares repurchased
and 18,177,874 shares to be repurchased) (1,121.6) --
(311.0) 92.9
$ 9,336.2 S 8,511.7
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
Northwest Airlines Corporation
Year Ended December 31
(In millions) 1997 1996 1995
Cash Flows From Operating Activities
Net income $ 596.5 $ 536.1 $ 392.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 396.0 377.7 358.1
Income tax expense 378.8 336.3 201.4
Payment of income taxes (114.3) (256.6) (116.9)
Pension and other postretirement benefit
contributions (in excess of ) less than expense (125.8) 14.7 (97.6)
Stock-based employee compensation --
242.8 478.0
Sale proceeds of frequent flyer miles in excess of revenue 387.7 31.3 7.5
Other--net (1.8) (40.2) (59.4)
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable 39.5 18.6 (56.0)
Decrease (increase) in flight equipment spare parts (136.7) 12.2 (59.7)
Decrease (increase) in prepaid expenses and other (13.3) (6.6) 28.3
Increase in air traffic liability 108.1 91.0 119.8
Increase (decrease) in accounts payable and other liabilities 82.3 (60.7) 243.3
Increase in accrued compensation and benefits 10.3 75.7 21.8
Net cash provided by operating activities 1,607.3 1,372.3 1,460.6
Cash Flows From Investing Activities
Capital expenditures (724.3) (1,205.3) (569.5)
Purchases of short-term investments (632.0) (501.2) (659.3)
Proceeds from maturities of short-term investments 469.3 511.2 991.4
Other--net 1.1 (46.6) (8.3)
Net cash used in investing activities (885.9) (1,241.9) (245.7)
Cash Flows From Financing Activities
Repurchase of common and preferred stock (524.4) -- --
Payment of long-term debt and capital lease obligations (407.8) (550.4) (1,279.3)
Payment of short-term notes payable --
(379.2) --
Proceeds from long-term debt 250.6 184.8 352.1
Proceeds from sale and leaseback transactions 168.0 350.0 100.0
Other--net (26.8) (27.1) (4.8)
Net cash used in financing activities (540.4) (421.9) (832.0)
Increase (Decrease) In Cash And Cash Equivalents 181.0 (291.5) 382.9
Cash and cash equivalents at beginning of period 559.4 850.9 468.0
Cash and cash equivalents at end of period $ 740.4 $ 559.4 $ 850.9
Cash and cash equivalents and unrestricted short-term
investments at end of period $ 1,039.9 $ 752.1 $ 970.9
Available to be borrowed under credit facilities $ 1,079.2 $ 726.8 $ 187.6
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMMON
STOCKHOLDERS' EQUITY (DEFICIT)
Northwest Airlines Corporation
(Tn millions)
Common Stock
Shares Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Treasury
Other Stock Total
Balance January 1,1995 84.3 $ .8 $ 636.6 $0,910.9) $ (97.2) S -
S (1,370.7)
Net income -- -- --
392.0 392.0
Exchange of preferred st(x:k for common stock
Shares earned by employees including
2.0 --
37.9 58.9 -- --
96.8
shares issued to employee h>enefit plans
Accrued cumulative dividends on Series
3.4 --
280.3 -- -- --
280.3
A and B Preferred Stock -- -- --
(50.3) -- --
(50.3)
Accretion of Series C Preferred Stock -- -- --
07) -- --
07)
Tax benefit related to stock issued to employees -- --
2.1 -- -- --
2.1
Translation adjustments, net of income taxes -- -- -- --
1.7 --
1.7
Pension liability adjustment, net of income taxes
Series C Preferred Stock converted to
-- -- -- --
(179.1) -
(179.1)
common stock .5 --
8.1 -- -- --
8.1
Other 1.1 .1 5.7 .2 2.0 --
8.0
Balance December 31,1995 91.3 0.9 970.7 (1,517.8) (272.6) --
(818.8)
Net income -- -- --
536.1 536.1
Acquisition of preferred st(x;k
Shares earned by employees including
-- -- --
1A5 74.5
shares issued to employee benefit plans
Accrued cumulative dividends on Series
4.8 --
137.5 --
137.5
A and B Preferred Stock -- -- --
(36.6) -- --
(36.6)
Accretion of Series C Preferred Stock -- -- --
(.9) -- --
(.9)
Tax benefit related to stcx:k issued to employees -- --
7.0 -- -- --
7.0
Translation adjustments, net of income taxes -- -- -- --
(.1) -
(.1)
Pension liability adjustment, net of income taxes
Series C Preferred Stock converted to
-- -- -- --
157.5 -
157.5
common stock 1.0 --
32.0 -- -- --
32.0
Other .5 .1 3.9 (.5) 1.2 --
4.7
Balance December 31,1996 97.6 1.0 1,151.1 (945.2) (114.0) --
92.9
Net income -- -- --
596.5 -- --
596.5
Repurchase of common stock
Common stock committed to be
-- --
7.0 -- -
(273.1) (266.1)
repurchased -- --
21.9 -- --
(848.5) (826.6)
Shares issued to employee benefit plans
Accrued cumulative dividends on Series
3.5 -- -- --
A and B Preferred StCKk -- -- --
(14.4) -- --
(14.4)
Accretion of Series C Preferred Stcx'k -- -- --
(1.1) -- --
(1.1)
Tax benefit related to stock issued to employees -- --
29.1 -- -- --
29.1
Translation adjustments, net of Income taxes -- -- -- --
5.8 --
5.8
Pension liability adjustment, net of income taxes
Series C Preferred Stcxrk converted to
-- --
5.3 -
5.3
common stcxrk 1.8 --
57.7 -- -- --
57.7
Other .9 --
7.0 2.0 .9 --
9.9
Balance December 31,1997 103 8 S 1.0 S 1,273.8 S (362.2) S (102.0) 5(1,121.6) $ (311.0)
The accomp>am ing notes are an integral part of these constilidated financial statements.
47
NOTES TO CONSOLIDATED
Note A --
Summary of Significant Accounting Policies
Basis of Presentation: Northwest Airlines Corporation
("NWA Corp") is a holding company whose principal
indirect operating subsidiary is Northwest Airlines, Inc.
("Northwest"). The consolidated financial statements
include the accounts of NWA Corp. and all subsidiaries
(collectively, the "Company"). All significant
intercompany transactions have been eliminated.
Investments in 20% to 50% owned companies are
accounted for by the equity method. Other investments
are accounted for by the cost method.
Certain prior year amounts have been reclassified
to conform with the current year financial
statement presentation.
Business: Northwest's operations comprise more than
95% of the Company's consolidated operating revenues
and expenses. Northwest is a major air carrier engaged
principally in the commercial transportation of passengers
and cargo, directly serving more than 150 cities in 18
countries in North America, Asia and Europe. Northwest's
global airline network includes domestic hubs at
Detroit, Minneapolis/St. Paul and Memphis, an extensive
Pacific route system w ith hubs at Toled o and Osaka, and
a trans-Atlantic alliance with KLM Royal Dutch Airlines
("KLM") which operates through a hub in Amsterdam.
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 value 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. Commencing with
the acquisition of the parent of Northwest in 1989,
estimated useful lives generally range from 4 to 25 years
for flight equipment and 3 to 32 years for other
property and equipment. Leasehold improvements are
generalh' amortized o^'er the remaining period of the
FINANCIAL STATEMENTS
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.
Airframe and Engine Maintenance: Routine maintenance
and airframe and engine overhauls are charged to
expense as incurred. Modifications that 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.
Frequent Flyer Program: The estimated incremental cost
of providing travel awards earned under Northwest's
WorldPerks frequent flyer program is accrued. The
Company sells mileage credits to participating
companies in its frequent fh er program. A portion of
such revenue is deferred and amortized as
transportation is provided.
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 regularly evaluated by the Company.
Advertising: Advertising costs, included in other
operating expenses, are expensed as incurred and were
$109.8 million, $120.4 million and $119.4 million in
1997, 1996 and 1995, respectively.
Employee Stock Options: The Company uses the
intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in
accounting for employee stock options. Under the
intrinsic value method, compensation expense is
recognized only to the extent the market price of the
common stock exceeds the exercise price of the stock
option at the date of the grant.
Eoreign Operations: Operating revenues from foreign
operations, primarily in the Pacific region, totaled
approximately $3-43 billion, $3 39 billion and $317 billion
in 1997,1996 and 1995, respectively. International routes
are amortized on a straight-line basis, generally over 40
years. International operating route authorities and
alliances are regulated by governmental policy and
bilateral agreements between nations. Changes in such
policies or agreements could impact Northwest.
X
O
X
Assets and liabilities denominated in foreign currency
are remeasured at current exchange rates with resulting
gains and losses generally included in net income.
The Preferred Security (see Note F) and other 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, with translation gains and losses
recorded directly to common stockholders' equity
deficit.The cumulative foreign translation loss, net of
tax, was $33-6 million as of December 31, 1997.
Income Taxes: The Company accounts for income taxes
utilizing the liability method. Deferred income taxes are
primarily recorded to reflect the tax consequences of
differences between the tax and financial reporting
bases of assets and liabilities.
Earnings Per Share: In 1997, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 128 ("SFAS 128"),"Earnings per
Share'.' SFAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted
earnings per share. All earnings per share amounts for all
periods have been presented and restated to conform to
SFAS 128 requirements. Unlike primary earnings per
share, basic earnings per share excludes any dilutive
effects of stock options and convertible securities.
Diluted earnings per share is similar to the previously
reported fully diluted earnings per share.
Use of Estimates: The preparation of consolidated
financial statements in conformity with generally
accepted accounting principles requires management to
make estimates and assumptions that affect the amounts
reported in its consolidated financial statements and
accompanying notes. Actual results could differ from
those estimates.
New Accounting Standards: In June 1997, the Financial
Accounting vStandards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income" and Statement of
Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and
Related Information." SFAS 130 establishes standards for
the reporting and presentation of comprehensive
income and its components. SFAS 131 establishes
standards for defining operating segments and the
reporting of certain information regarding operating
segments. Because these statements only impact how
financial information is disclosed in interim and annual
reports, the adoption will have no impact to the
Company's financial condition or results of operations.
49
Note B --
Earnings Per Share Data
Tlie tbllowing table sets forth the computation of basic and diluted e^imings per common share (in millions, except share data):
Year Ended December 31
1997 1996 1995
Numerator:
Income before extraordinary item $ 605.8 $ 536.1 $ 342.1
Preferred stock requirements (13.5) (37.5) (57.8)
Preferred stock transactions --
74.5 58.9
Income appUcable to common
stockholders for basic
earnings per share 592.3 573.1 343.2
Effect of dilutive securities:
Series C Preferred Stock 1.1 0.9 7.7
Income appUcable to common
stockholders after assumed conversions
for diluted earnings per share $ 593.4 $ 574.0 $ 350.9
Denominator:
Weighted-average shares outstanding for
basic earnings per share 100,616,605 98,731,917 91,378,509
Effect of dilutive securities:
Series C Preferred Stock 9,981,547 10,216,939 7,441,240
Employee stock options 1,319,177 1,482,406 1,838,509
Common stock repurchase obligation 280,253 --
--
Adjusted weighted-average shares and
assumed conversions for diluted
earnings per share 112,197,582 110,431,262 100,658,258
For additional disclosures regarding the outstanding Series C Preferred Stock, the employee stock options, the common
stock repurchase obligation and additional shares to be issued, see Notes C, G, H, I and S.
z
Note C --
Labor Agreements
The Company's labor agreements provided for wage and
other compensation savings (the "Acmal Savings") by
domestic employees, including management, and other
cost reductions which aggregated S897 million over a 36
to 39 month period (depending on the labor group) (the
"Wage Savings Period") which ended between August and
November 1996. As part of an overall revised
compensation plan provided by the labor agreements, the
Company, among other things, issued to trusts for the
benefit of participating employees 9-1 million shares of a
new class of NWA Corp. Series C cumulative, voting,
convertible, redeemable preferred stock (the "Series C
Preferred Stock") and 17.5 million shares of NWA Corp.
Class A and Class B Common Stock and provided the union
groups with three positions on the Board of Directors.
Information with respect to the shares issued to trusts for the benefit of employees is as follows (in millions):
Series C Preferred Stock Common Stock
Shares Shares Financial Shares Shares Financial
to be Shares Held by Statement to be Shares Held by Statement
Issued Earned Trusts Amount Issued Earned Trusts Amount
Balance January 1,1995 5.9 4.0 3.0 S 91.3 12.0 7.8 5.8 S 121.4
Shares earned by employees --
2.9 --
197.7 --
5.5 --
280.3
Shares issued to trusts (1.8) --
1.8 --
(3.4) --
3.4 --
Series C Preferred Stock
converted to common stock -- --
(.4) (8.1) -- --
.5 8.1
Withdrawals from trusts -- -- -- -- -- --
(2.0) --
Accretion -- -- --
7.7 -- -- -- --
Balance December 31,1995 4.1 6.9 4.4 288.6 8.6 13.3 7.7 409.8
Shares earned by employees --
2.2 --
105.3 --
4.2 --
137.5
Shares issued to trusts (2.6) --
2.6 --
(4.8) --
4.8 --
Series C Preferred Stock
converted to common stock -- --
(.8) (32.0) -- --
1.0 32.0
Withdrawals from trusts -- -- -- -- -- --
(2.3) --
Accretion and other .2 -- --
.9 (.3) -- -- --
Balance December 31,1996 1.7 9.1 6.2 362.8 3.5 17.5 11.2 579.3
Shares issued to trusts
Series C Preferred Stock
(1.7) --
1.7 --
(3.5) --
3.5 --
converted to common stock -- --
(1.3) (57.7) -- --
1.8 57.7
Withdrawals from trusts -- -- -- -- -- --
(4.2) --
Accretion -- -- --
1.1 -- -- -- --
Balance December 31,1997 --
9.1 6.6 $ 306.2 --
17.5 12.3 $ 637.0
51
NWA Corp. has authorized 25,000,000 shares of Series C
Preferred Stock, par value $.01 per share. The Series C
Preferred Stock ranks senior to common stock with
respect to liquidation and certain dividend rights. As
long as the Class A Common Stock is publicly traded, no
dividends accrue on the Series C Preferred Stock. Each
share of the Series C Preferred Stock is convertible at
any time into 1.364 shares of common stock. As of
December 31,1997, 2.5 million shares of Series C
Preferred Stock have been converted into common
stock and the remaining 6.6 million shares outstanding
are convertible into 9.0 million shares of common stock.
Series C Preferred Stock is required to be redeemed in
2003 for a pro rata share ofActual Savings ($311.3 million
as of December 31,1997). NWA Corp. has the option to
redeem in cash, issue additional common stock, or use a
combination thereof, to satisfy the redemption
requirement. A decision to issue only additional
common stock must be approved by a majority of the
three directors elected by the holders of the Series C
Preferred Stock. If NWA Corp. fails to redeem the Series
C Preferred Stock, dividends accrue at the higher of (i)
12% 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. The financial statement carrying value of the
Series C Preferred Stock is being accreted over ten years
commencing August 1993 to the ultimate redemption
amount. Prior to 2003, NWA Corp. at its option may
redeem in whole or in part the Series C Preferred Stock
at its liquidation value.
Because of applicable accounting requirements, the
Company recognized compensation expense for each
year based on the values at the measurement date of the
Series C Preferred Stock and the common stock earned
by employees. Such non-cash stock-based compensation
expense was 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. The final measurement dates for 1996
coincided with the end of the Wage Savings Period for
each of the labor groups and the final measurement date
for 1995 was December 31,1995.
Approximately ninety percent of the Company's
employees are members of collective bargaining units.
All of the labor agreements became amendable in 1996
at the end of the Wage Savings Period and hence future
labor costs are subject to collective bargaining. The
Company is currently negotiating with each of the
collective bargaining units, but cannot predict the
ultimate outcome of the negotiations at this time.
o
Note D --
Long-Term Debt and Short-Term Borrowings
Long-term debt consisted of the following (in millions, with interest rates as of December 31, 1997):
December 31
1997 1996
Secured notes due through 2009,7.2% weighted average rate (a) $ 348.9 $ 348.9
NWA Trust No. 2 aircraft notes due through 2012,10.6% weighted average rate (b) 330.9 337.9
Unsecured notes due in 2004 and 2007,8.5% weighted average rate (c) 249.7 --
Equipment pledge notes due through 2013,7.8% weighted average rate 248.4 286.8
Sale-leaseback financing obligations due through 2020, 9 9% imputed rate (d) 223.0 262.5
NWA Trust No. 1 aircraft notes due through 2006,8.6% weighted average rate (e) 208.7 220.4
Term loan due through 2002,6.9% (0 150.0 150.0
Term certificates due 1999,7.0% (g) 135.0 145.0
Senior unsecured floating rate note due 1998,6.9% 76.0 152.0
Other 98.7 156.9
Total long-term debt 2,069.3 2,060.4
Less current maturities 227.4 144.4
$ 1,841.9 $ 1,916.0
(a) In April 1996, the Company restructured floating
rate notes with certain manufacturers. Principal
repayments are due semi-annually beginning 2001.
(b) In December 1994, the Company completed a
structured aircraft financing transaction in which 13 Airbus
A320 aircraft were transferred from Northwest (subject to
existing indebtedness) to an owner trust (NWA Trust No.
2). A limited partnership, of which Northwest is the
limited partner and Norbus, Inc. (an affiliate ofAirbus
Industrie A.I.E.) 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 Northwest. 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
Notes, $66 million of 10.23% Class B Mezzanine Aircraft
Notes, $44 million of 11.30% Class C Mezzanine Aircraft
Notes and $66 million of 13 875% Class D Subordinated
Aircraft Notes. The notes are payable semi-annually from
rental payments made by Northwest under the lease of
the aircraft and are secured by the aircraft subject to the
lease as well as the lease itself.
In December 1997, the Company initiated a tender offer
for the repurchase of the 13.875% Class D Subordinated
Aircraft Notes. The offer expired on December 30, 1997
with 99% of the notes tendered. On January 2,1998, the
notes were repurchased for $78.7 million. Consequently,
a loss of $9-3 million, net of $5.4 million in income
taxes, was recorded as an extraordinary item in 1997.
(c) In March 1997, the Company issued $150 million of
8.375% notes due 2004 and $100 million of 8.70% notes
due 2007. Interest on the notes is payable semi-annually.
(d) 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 1997, the Company prepaid
S39 million of these obligations.
53
O
K
T
(e) 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
No. 1) of which NWA Aircraft Finance, Inc., an indirect
subsidian' 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
Notes and $66 million of 9.36% Class B Subordinated
Aircraft Notes. The aircraft were simultaneously leased
back to Northwest. The notes are payable semi-annually
from rental payments made by Northwest under the lease
of the aircraft and are secured by the aircraft subject to
the lease as well as the lease itself.
(f) The floating rate term loan is payable in three equal
installments beginning 2001 with final maturity of the
loan in 2002. During 1996, the Company prepaid
$150 million of its $300 million term loan.
The Company's Credit Agreement was amended in
December 1997 to increase its existing unsecured
revolving credit facility from $500 million to $675
million and to extend the availability period to
December 2002, and to add a new $175 million 364-day
unsecured revolving credit facility. If the 364-day facility
is not renewed for an additional 364-day period, the
Company may borrow up to the entire amount of the
facility and all such borrowings mature in December
2002. Commitment fees are payable by the Company on
the unused portion of these revolving credit facilities at
a rate per annum determined by reference to the
Company's unsecured debt rating and are not considered
material. At December 31,1997, $839-2 million remained
available to be borrowed in the aggregate under both
facilities as a result of the issuance on behalf of the
Company of $10.8 million of letters of credit.
(g) In March 1994, Northwest agreed to sell certain
receivables on an ongoing basis to Northwest Capital
Funding Corp. ("NCF"), pursuant to a receivable
financing program (the "Receivable Program"). NCF, an
indirect subsidiary' of the Company, has issued through a
master trust floating rate Term Certificates. The
Receivable Program provides for the early retirement of
the related Term Certificates upon the occurrence of
certain events, one of which occurred on January 25,
1998. Accordingly, the Company advised the trustee for
the certificateholders that these certificates will be paid
in full on February 25, 1998.
Maturities of long-term debt for the five years subsequent
to December 31,1997, assuming the accelerated maturity
in (g) above, are as follows (in millions);
1998 $ 362.4
1999 50.1
2000 47.4
2001 125.8
2002 189.8
The debt and lease agreements of the Company contain
certain restrictive covenants, including limitations on
indebtedness, equity redemptions and the declaration of
dividends, as well as requirements to maintain certain
financial ratios, including collateral coverage ratios. At
December 31,1997, the Company was in compliance
with the covenants of all of its debt and lease agreements.
Various assets, principally aircraft, having an aggregate
book value of $2.2 billion at December 31,1997, were
pledged under various loan agreements.
Cash payments of interest, net of capitalized interest,
aggregated $231.3 million in 1997, $263 3 million in
1996 and $365.6 million in 1995.
The weighted average interest rates on short-term
borrowings outstanding at December 31 were 6.24%, 5.69%
and 5.73% for 1997,1996 and 1995, respectively. These
short-term borrowings were used primarily for financing
aircraft insurance premiums, fuel hedging activities and the
acquisition of preferred stock (see Note G).
54
Note E --
Leases
The Company leases under noneaneelable operating
leases certain aircraft, space in airport terminals, land
and buildings at airports, ticket, sales and reservations
offices, and other property and equipment which expire
in various years through 2027. Portions of certain
facilities are subleased under noneaneelable operating
leases expiring in various years through 2020.
At December 31, 1997, the Company leased 120 of the
405 aircraft it operates. Of these, 30 were capital leases
and 90 were operating leases. Expiration dates range
from 1998 to 2009 for aircraft under capital leases, and
from 1998 to 2019 for aircraft under operating leases.
The Company's aircraft leases can generally be renewed
for terms ranging from one to five years at rates based
on the aircraft's fair market value at the end of the lease
term. Ninety-five of the 120 aircraft lea.se agreements
provide the Company with purchase options at the end
of the lease term which approximate fair market value.
Rental expense for all operating lea.ses consisted of
(in millions):
Year Ended December 31
1997 1996 1995
Cross rental expense $ 627.1 $ 596.5 $ 601.9
Sublease rental income (79.5) (62.2) (57.6)
Net rental expense $ 547.6 $ 534.3 $ 544.3
At December 31, 1997, future minimum lease payments
under capital leases and noneaneelable operating lea.ses
with initial or remaining terms of more than one year
were as follows (in millions):
(Capital
Leases
Operating
Leases
1998 $ 112.8 $ 473.5
1999 105.3 460.2
2000 103.0 439.2
2001 103.5 425.8
2002 274.2 431.6
Thereafter 301.6 4,560.7
1,000.4 6,791.0
Less sublea.se rental income 327.4
T(Aal minimum operating
lea.se payments $ 6,463.6
Le.ss amounts
representing interest 295.1
Present value of future
minimum capital
lease payments 705.3
Less current obligations
under capital leases 55.9
Long-term obligations
under capital lea.ses .$ 649.4
Note F --
Mandatorily Redeemable Preferred
Security of Subsidiary Which Holds Solely
Non-Recourse Obligation of Company
In October 1993, the Company completed a
restructuring of its yen-denominated non-recourse
obligation secured by land and buildings the Company
owns inTok\'o. A newly formed consolidated subsidiary
of the Company (the "Subsidiary") entered into a
Japanese business arrangement designated under
Japanese law as a tokumei kumiai ("TK"). Pursuant to
the TK arrangement, the holder of the non-recourse
obligation restructured such obligation and then
assigned title to and ownership of such obligation to the
Subsidiary as operator under the TK arrangement in
exchange for a preferred interest in the profits and
returns of capital from the business of the Subsidiar}'
(the "Preferred Security"). The restructured non
recourse obligation is the sole asset of the Subsidiary. As
a result of this restructuring, the original holder of such
non-recourse obligation ceased to be a direct creditor of
the Company and the Company's obligation is reflected
in the Company's Consolidated Balance Sheet as
"Mandatorily Redeemable Preferred Securit}' of
Subsidiary which holds solely non-recourse obligation of
Company." NWA Corp. has guaranteed the obligation of
the Subsidiary to distribute payments on the Preferred
Security pursuant to theTK arrangement if and to the
extent payments are received by the Subsidiar}'.
Tlie restructured obligation matures in three approximately
equal annual installments due in 2()()5, 2006 and 2007.
In addition to these installments, cash payments on the
restructured obligation will be payable semi-annually at
the rate of 4% per annum until March 31, 2000 and at a
rate based upon a floating long-term Japanese prime
rate (capped at 6%) thereafter. During the first three
years, one-fourth of the cash payments are applied to
reduce the obligation. The obligation remains non
recourse to the Company. In addition, the Company
retains the ability (exercisable at any time after September
30, 2001) to transfer the property in full satisfaction of all
Company obligations related to the financing.
The initial financial statement carrying value of the
Preferred Securit}' reflected the fair value as of the closing
date. The excess of the financial statement carr}dng value
of the original non-recourse obligation over the fair value
of the Preferred Security at the date of the restructuring
resulted in a 1995 gain of $61.9 million, net of $36.6
million in income taxes. This gain, together with losses on
other debt extinguishments, is shown as an extraordinary^
item net of $29.4 million in income taxes in 1995.
The carry^ing value is being accreted over 12 y^ears from
October 1995 to the ultimate maturity value of 72.2 billion
yen ($551 million based on the December 31, 1997
exchange rate). Such accretion is included as a component
of "Interest of mandatorily^ redeemable preferred security
holder" in the Consolidated Statements of Income.
Note G --
Series A and Series B Redeemable Preferred Stock
Series A and Series B Preferred Stock consisted of the following (dollars in millions):
Series A Series B Accrued
Shares Amount Shares Amount Dividends Total
Balance January 1,1995 5,000.0 $ 250.0 6,853.0 $ 342.7 $ 111.0 $ 703.7
Exchange of preferred stock
for common stock -- --
(1,727.0) (86.4) (10.7) (97.1)
Accrued dividends -- -- -- --
50.3 50.3
Balance December 31,1995 5,000.0 250.0 5,126.0 256.3 150.6 656.9
Acquisition of preferred stock (3,691.2) (184.6) (2,962.8) (148.1) (121.0) (453.7)
Accrued dividends -- -- -- --
36.6 36.6
Balance December 31,1996 1,308.8 $ 65.4 2,163.2 $ 108.2 $ 66.2 $ 239.8
Acquisition of preferred stock (1,308.8) (65.4) (2,163.2) (108.2) (80.6) (254.2)
Accrued dividends -- -- -- --
14.4 14.4
Balance December 31,1997 -- -- -- -- -- --
In September 1997, NWA Corp. repurchased all of
the Series A and B Preferred Stock outstanding for
$251.3 million in cash.
For each of the Series A and Series B Preferred Stock,
10,000 shares were authorized, par value was $.01 per
share and the stated value was $50,000 per share. Both
series were entitled to a preference in voluntary and
involuntary liquidation, in the amount of $50,000 per
share, plus accrued and unpaid dividends. Holders of
the Series A and Series B Preferred Stock had voting
rights for the election of directors. Both series accrued
dividends at 8% per year and were cumulative if unpaid.
In July 1996, NWA Corp. acquired from KLM 3,691.2
shares of Series A Preferred Stock and 2,962.8 shares of
Series B Preferred Stock in exchange for two unsecured
promissory notes aggregating $379 million, both of
which were repaid December 1996. These transactions
resulted in an increase to net income applicable to
common stockholders of $74.5 million.
In January 1995, NWA Corp. consummated an agreement
with Bankers Trust New York Corporation to exchange
1,727 shares of NWA Corp.'s Series B Preferred Stock for
2,050,000 shares of newly issued Class B Common Stock.
This transaction resulted in a transfer from redeemable
preferred stock to common stockholders' equity
deficit of $96.8 million, net of expenses, and an increase
to net income applicable to common stockholders
of $58.9 million.
Note H --
Redeemable Common Stock
On September 29, 1997, NWA Corp. and KLM entered
into agreements providing for the acquisition by NWA
Corp. of all the NWA Corp. common stock held by KLM
(24,977,874 shares) for $1.12 billion, which included
3,293,775 million shares of common stock that KLM
acquired from other stockholders. On that date,
6.8 million shares were repurchased for $273.1 million.
Concurrently with the purchase of the first tranche, all
of KLM's existing governance rights under various
stockholder and other agreements were canceled, NWA
Corp. and KLM entered into an agreement containing
customary standstill obligations and KLM withdrew its
pending legal actions against the Company, its directors
and certain stockholders. The remaining 18.2 million
shares of common stock to be repurchased (4.9 million
in 1998, 3.2 million in 1999 and 10.1 million in 2000) f
were reclassified to redeemable common stock from
>
common stockholders' equity deficit, as required for z
such stock transactions. However, earnings per share =
calculations will continue to include the 18.2 million ^
shares until actually repurchased. The Company and
KLM also expanded their alliance by entering into an 7
enhanced commercial and operational alliance
providing for a minimum term of 13 years.
Subsequently, on Januar)' I6, 1998, NWA Corp. reached
an agreement in principle with KLM to accelerate the
repurchase of the remaining 18.2 million shares of
common stock to 1998 versus over a three-year period.
The estimated purchase price of $775 million will be
paid with a combination of approximately S335 million
of cash and three senior unsecured notes for the
remainder. The notes will bear interest at 7.88% and
mature each September 29, 1998, 1999 and 2000. This
transaction will result in a transfer from redeemable
common stock to common stockholders' equity deficit
of approximately $73 million.
The cash requirements under the original repurchase
obligation compared to the cash requirements under the
accelerated repurchase are shown below (in millions);
1998 1999 2000
As of December 31,1997 $ 210.1 $ 147.4 $ 491.0
Initial cash payment
and maturity of the
unsecured notes $ 539.0 $ 136.0 $ 100.0
Tlie agreement in principle is subject to the execution of
definitive documentation and the approval of the respective
boards of NWA Corp. and KLM. The transaction is
expected to close before May 1,1998 at which time the
18.2 million remaining common shares will be repurchased
and excluded from the earnings per share calculations. In
certain limited circumstances (e.g., the failure of the
alliance to maintain certain antitrust immunit)' or
Northwest's default under the alliance agreement), KLM
will have an option to buy back from NWA Corp. up to
18.2 million shares.
57
Note I--Common Stockholders' Equity (Deficit)
NWA Corp.'s classes of common stock consisted of (shares in millions):
< Class A voting
Par value $.01
Class B non-voting
Par value $.01 Total
^ Balance at January 1,1995 77.1 7.2 84.3
H Exchange of Series B Preferred Stock for
-
common stock --
2.0 2.0
Shares issued to employee trusts 3.0 .4 3.4
Conversion of Class B to Class A 6.2 (6.2) --
Conversion of Series C Preferred Stock .4 .1 .5
Exercise of stock options 1.1 --
1.1
Balance at December 31,1995 87.8 3.5 91.3
Shares issued to employee trusts 4.2 .6 4.8
Conversion of Class B to Class A .3 (.3) --
Conversion of Series C Preferred Stock .9 .1 1.0
Exercise of stock options .5 --
.5
Balance at December 31,1996 93.7 3.9 97.6
Shares issued to employee trusts 3.1 .4 3.5
Conversion of Class B to Class A 3.1 (3.1) --
Conversion of Series C Preferred Stock 1.6 .2 1.8
Exercise of stock options .9 --
.9
Balance at December 31,1997 102.4 1.4 103.8
Authorized shares are 250 million and 65 million of
Class A and Class B Common Stock, respectively. Shares
of Class B Common Stock are convertible at any time
into an equal number of shares of Class A Common
Stock and vice versa.
Pursuant to the Stockholder Rights Plan (the "Rights
Plan"), each share of common stock has attached
thereto a right and, until the rights expire or are
redeemed, each new share of common stock issued by
NWA Corp., including the shares of common stock into
which the Series C Preferred Stock is convertible, will
include one right. Upon the occurrence of certain
events, each right entitles the holder to purchase one
one-hundredth of a share of Series D Junior Participating
Preferred Stock at an exercise price of S150, subject to
adjustment. The rights become exercisable only after
any person or group (other than the trusts holding
common stock for the benefit of employees) acquires
beneficial ownership of 19% or more of NWA Corp.'s
"outstanding" common stock (as defined in the Rights
Plan) or commences a tender or exchange offer that
would result in such person or group acquiring
beneficial ownership of 19% or more of NWA Corp.'s
outstanding common stock. If any person or group
acquires beneficial ownership of 19% or more of NWA
Corp.'s outstanding common stock, the holders of the
rights (other than the acquiring person or group) will
be entitled to receive upon exercise of the rights. Class
A Common Stock of NWA Corp. having a market value
of two times the exercise price of the right. In addition,
if after the rights become exercisable NWA Corp. is
involved in a merger or other business combination or
sells more than 50% of its assets or earning power, each
right will entitle its holder (other than the acquiring
person or group) to receive common stock of the
acquiring company having a market value of two times
the exercise price of the rights. The rights expire on
November 16, 2005 and may be redeemed by NWA
Corp. at a price of $.01 per right prior to the time they
become exercisable.
NWA Corp. has stock option plans for officers and key to the market price of the common stock on the date of
employees. Options generally become exercisable in grant. To the extent that options are granted with an
equal annual installments over four or five years and exercise price less than the market price on the date of
expire 10 years from the date of the grant. NWA Corp.'s the grant, compensation expense is recognized over the
policy is to grant options with the exercise price equal vesting period of the grant.
Following is a summary of stock option activity (in thousands, except per share amounts):
1997 1996 1995
Weighted-Avg Weighted-Avg Weighted-Avg
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Outstanding at beginning of year 4,774 $20.11 3,509 $ 10.56 4,525 $ 8.70
Granted 1,454 39.26 1,836 35.04 206 26.06
Forfeited (154) 36.24 (118) 15.55 (165) 10.72
Exercised (870) 7.49 (453) 792 (1,057) 5.38
Outstanding at end of year 5,204 27.09 4,774 20.11 3,509 10.56
Exercisable at end of year 1,894 15.55 1,907 9.16 1,594 795
Class A Common Stock:
Reser\"ed for issuance 7,948 7948 4,948
Available for future grants 187 1,487 205
At December 31,1997:
Options Outstanding Options Exercisable
Range of
Exercise Prices Shares
Weighted-Average
Remaining
Contractual Life
Weighted-Average
Exercise Price Shares
Weighted-Average
Exercise Price
$ 4.74 to $13.00 1,624 5.9 years $10.40 1,257 $ 9.90
14.00 to 31.875 1,061 7.6 26.25 428 21.75
34.00 to 44.125 2,519 9.2 38.20 209 36.87
The weighted-average fair value of options granted during
1997,1996 and 1995 is $16.50,514.89 and $11.68 per
option, respectively. The fair value of each option grant
is estimated as of the date of grant using the Black-
Scholes single option-pricing model assuming a weighted
average risk-free interest rate of 6.1%, 6.4% and 6.9% for
1997, 1996 and 1995, respectively, and expected lives of
six years and volatility of 30% for all years presented.
Had compensation expense for stock options been
determined based on the fair value method (instead of
intrinsic value method) at the grant dates for awards, the
Company's 1997 1996 and 1995 net income and earnings
per share would have decreased by less than 1%. The
effects of applying the fair value method of measuring
compensation expense for 1997,1996 and 1995 are likely
not representative of the effects for future years in part
because the fair value method was applied only to stock
options granted after December 31,1994.
59
In 1996, NWA Corp. adopted long-term performance and
retention arrangements under which 500,000 phantom
stock units were awarded at no cost. Vested units are
payable in cash based on the market value of NWA
Corp.'s common stock at the time of payment. Of the
units granted, 100,000 of the units vested and were paid
in 1996. The remaining 400,000 units can vest, subject to
the satisfaction of performance criteria, in eight
installments over two-year performance periods, the first
of which ended in 1997 and the final of which ends in
2004. Compensation expense is recorded over each two-
year vesting period. As of December 31,1997,400,000
units were outstanding, 50,000 of which were vested.
Note J --
Income Taxes
Income tax expense consisted of the following (in millions):
Year Ended December 31
1997 1996 1995
Current:
Federal $ 108.5 $ 175.0 $ 89.1
Foreign 3.7 4.1 3.9
State 10.9 22.3 13.0
123.1 201.4 106.0
Deferred:
Federal 236.8 112.1 91.4
Foreign --
16.6 .7
State 18.9 6.2 3.3
255.7 134.9 95.4
Total income tax
expense $ 378.8 $ 336.3 $ 201.4
Reconciliation of the statutory rate to the Company's
income tax expense is as follows (in millions):
Year Ended December 31
1997 1996 1995
Statutory rate
applied to income
before income taxes
and extraordinary
item $ 344.6 $ 305.3 $ 190.2
Add (deduct):
State income tax
net of federal
benefit 19.2 18.5 13.5
Adjustment to
valuation
allowance and
other income
tax accruals 5.8 6.2 (12.3)
Other 9.2 6.3 10.0
Total income tax
expense $ 378.8 $ 336.3 $ 201.4
The net deferred tax liabilities listed below include
a current net deferred tax asset of $84.8 million and
$95.5 million and a long-term net deferred tax liability
of $1,161.5 million and $947.2 million as of
December 31, 199"^ and 1996, respectively.
60
Significant components of the Company's net deferred
tax liability were as follows (in millions):
December 31
1997 1996
Deferred tax liabilities:
Financial accounting basis
of assets in excess of tax
basis $ 1,445.7 S 1,394.5
Expenses other than
depreciation accelerated
for tax purposes 305.0 283."'
Other 12.5 11.3
Total deferred tax
liabilities 1,763.2 1,689.5
Deferred tax assets:
Pension and postretirement
benefits 128.3 180.2
Expenses accelerated for
financial reporting
purposes 406.8 430.9
Leases capitalized for
financial reporting
purposes 97.0 123.8
Alternative minimum tax
credit carryforw'ards 54.4 102.9
Total deferred tax assets 686.5 837.8
Net deferred tax liability $ 1,076.7 S 851.7
During 1996, the Company utilized all of its regular net
operating loss carr>foiw^ards ("NOLs"). For tax purposes,
the Company utilized NOLs of approximately S 121.8
million, S684.4 million and S394.4 million in 1996,1995
and 1994, respectively, and alternative minimum tax net
operating loss carr\forx\^ards ("AMTNOLs") of S 105.1
million and S446.7 million in 1995 and 1994, respectively.
The Company has alternative minimum tax credits of
approximately S54.4 million available for carr^forw'ard to
future years' tax returns. The alternative minimum tax
credit has an unlimited carryforward period. In 1996, the
Company utilized its remaining foreign tax credit
carry forward available for regular tax purposes. In 1995,
the Company utilized its remaining AMTNOL carryfor\\ ard,
as well as its remaining investment tax credit carryforward
and its remaining foreign tax credit carryforward available
for alternative minimum Uix purposes.
Sections 382 and 383 of the Internal Revenue Code of
1986 (the "Code") and the regulations thereunder
impose limitations on the carry forward amounts of
NOLs, AMTNOLs and credits that can be used to offset
taxable income (or used as a credit) in any single y'ear if
the corporation experiences more than a 50%
ownership change, as defined therein, over a threewear
testing period ending on any testing date. The annual
limitation on the amount of such NOLs, AMTNOLs and
credits is calculated in part based on the value of NAVA
Corp.'s stock. Management believes that the offering of
outstanding common stock by existing stockholders in
November 1995 triggered an owmership change, but that
no ownership change occurred prior to the offering. If
such an ownership change in fact occurred as a result of
the November 1995 offering, management believes that
even as limited by Sections 382 and 383 of the Code,
the NOLs, AMTNOLs and credits w^ould be used
significantly earlier than their expiration, and the annual
limitation would not have an adverse impact on the
Company. How^ever, if the IRS w^ere to successfully
assert that an ownership change had occurred on any'
prior date, including August 1,1993 (the date of the
labor agreements), the impairment of the Company's
ability to use its NOLs, AMTNOLs and credit carryTorw'ards
w'ould be significant because the value of NAVA Corp.'s
stock on certain prior testing dates (w'hich adversely
affects the annual limitation described above) w'as
relativelv low'.
61
z
2
In November 1995, the IRS issued proposed adjustments
to the tax returns of the Company for the 1988 through
1991 tax years. Certain of these proposed adjustments
result from a disagreement between the Company and
the IRS as to the timing of the recognition of
approximately $385 million of taxable income. The
Company disagrees with the IRS' proposals. The
Company is vigorously contesting these proposed
adjustments and believes its positions are correct. To
the extent the IRS were to prevail on any of these
issues, the Company would recognize taxable income
and utilize net operating loss carryforwards sooner than
otherwise scheduled. For financial reporting purposes,
any adjustments to taxable income would largely be
accounted for as temporal')' differences and would not
result in a material charge to income tax expense.
Note K --
Commitments
As of December 31, 1997, the Company had firm orders
for 115 new aircraft including 20 Airbus A320 aircraft
(13 in 1998 and seven in 1999), 50 Airbus A319 aircraft
(ten per year beginning in 1999), 25 Boeing 757-200
aircraft from 2003 through 2005,16 Airbus A330 aircraft
(eight each in 2004 and 2005) and four Boeing 747-400
aircraft (one each in 1999 and 2000 and two in 2002).
Committed expenditures for these aircraft and related
equipment, including estimated amounts for contractual
price escalations and predelivery deposits, will be
approximately: $526 million in 1998, $665 million in
1999, $418 million in 2000, $425 million in 2001, $854
million in 2002 and $3-6 billion from 2003 to 2005.
The Company has substitution rights with respect to the
Airbus A330 aircraft and has the option to defer the
deliver)' of one Boeing 747-400 aircraft from 2000 to
2003. The Company has options to purchase 50
additional Airbus A319 and/or A320 aircraft for delivery
from 2000 through 2003 and 50 roll-over options which
would allow the replacement of the initial 50 options
and are assigned deliver)' slots commencing in January
2004 as the initial 50 options are exercised.
Consistent with prior practice, the Company intends to
finance its aircraft deliveries through a combination of
internally generated funds, debt and lease financing.
Financing has been arranged for the committed Airbus
A320 and A319 aircraft deliveries. This financing is
available for use at the option of the Company. In
addition, the Company has another facility (which
expires in October 1999) pursuant to which the lenders
have extended commitments to provide, at the option of
the Company, up to $240 million of debt financing for
up to six Boeing 757 aircraft delivered in 1996 and/or
the Airbus A320 aircraft to be delivered in 1998 and
1999. There were no borrowings outstanding under this
facility at December 31, 1997. Loans thereunder have a
final maturity not later than October 2016.
Note L --
Litigation
The Company is involved in a variety of legal actions
relating to antitrust, contract, trade practice, environmental
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
Consolidated Financial Statements taken as a whole.
62
Note M --
Pension Benefits
The Company has several noncontributor\' pension plans
covering substantially all of its employees. The benefits for
these plans are based primarily on years of service and/or
employee compensation. It is the Compam''s policv^ to
annually fund at least the minimum contribution as
required by the Employee Retirement Income Security Act
of 1974. In 1997 and 1996, the Company made
contributions in excess of its minimum requirements of
SI33 million and S85 million, respectively.
The net periodic pension cost of defined benefit pension plans included the following (in millions):
Year Ended December 31
1997 1996 1995
Service cost --
benefits earned during the period $ 113.2 S 115.7 s 77.3
Interest cost on projected benefit obligations 286.4 267.2 237.0
Actual gain on plan assets (623.6) (399.1) (564.8)
Net amortization and deferral 359.9 201.3 361.8
Net periodic pension cost $ 135.9 S 185.1 s 111.3
The following table sets forth the defined benefit pension plans' funded status and amounts recognized in the
Company's Consolidated Balance Sheets as of December 31 (in millions):
1997 1996
Assets
Exceed
Accumulated
Benefits
Accumulated
Benefits
Exceed
Assets
Assets
Exceed
Accumulated
Benefits
Accumulated
Benefits
Exceed
Assets
Actuarial present value of:
Vested benefit obligations $ 2,381.0 $ 1,077.0 S 218.9 S 2,792.4
Nonvested benefit obligations 204.8 116.0 25.3 245.7
Accumulated benefit obligations 2,585.8 1,193.0 244.2 3,038.1
Effect of projected future salary^ increases 389.0 83.5 42.2 374.5
Projected benefit obligations $ 2,974.8 $ 1,276.5 S 286.4 S 3,412.6
Plan assets at fair value $ 2,724.7 $ 1,033.4 s 292.4 S 2,716.3
Less projected benefit obligations 2,974.8 1,276.5 286.4 3,412.6
Projected benefit obligations (in excess of)
less than plan assets (250.1) (243.1) 6.0 (696.3)
Unrecognized prior service cost 121.6 60.3 5.1 198.0
Unrecognized net loss 172.2 152.5 5.4 346.7
Adjustment required to recognize
minimum liability --
(144.6) --
(188.4)
Prepaid (accrued) pension cost at
December 31 $ 43.7 $ (174.9) s 16.5 S (340.0)
As of December 31, 1997 and 1996, plan assets were invested primarily in equity and debt securities.
63
2
2
2
Assumptions used in the accounting for the defined
benefit plans as of December 31 were as follows;
1997 1996 1995
Weighted average
discount rate 7.10% 7.60% 7.10%
Rate of increase in future
compensation levels 3.50% 3.50% 3.50%
Expected long-term rate of
return on plan assets 10.50% 10.50% 10.50%
An additional minimum liability' is required to be
recorded to the extent that a plan's accumulated benefit
obligation exceeds plan assets. The minimum liabilip' is
recorded as a long-term liabilitv' with an offsetting
intangible asset. Because the intangible asset is not
allowed to exceed the unrecognized prior service cost,
the balance is reported as a reduction to equip' (net of
tax). The minimum pension liability adjustment resulted
in a $36.4 million intangible asset included in other
assets and a $68.2 million, net of tax, cumulative
reduction in common stockholders' equip' deficit at
December 31,1997.
Note N --
Postretirement Health Care Benefits
The Company sponsors various contributory and
noncontributory medical, dental and life insurance
benefit plans covering certain eligible retirees and their
dependents. The expected future cost of providing such
postretirement benefits is accrued over the service life
of active employees. Retired employees are not offered
Company-paid medical and dental benefits after age 64,
with the exception of certain employees who retired
prior to 1987 and receive lifetime Company-paid
medical and dental benefits. 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.
Net periodic postretirement benefit cost included the
following components (in millions):
Year Ended December 31
1997 1996 1995
Service cost $ 10.3 $ 10.3 $ 7.3
Interest cost 23.8 22.1 20.8
Net amortization
and deferral 2.1 3.2 .2
Actual gain on
plan assets (.4) (.4) (.4)
Net periodic
postretirement
benefit cost $ 35.8 $ 35.2 $ 27.9
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):
1997 1996
Accumulated postretirement
benefit obligation:
Retirees $ 99.5 $ 103.7
Fully eligible active plan
participants 78.1 67.1
(Other active plan
participants 169.5 142.8
347.1 313.6
Plan assets at fair value 5.3 5.1
Accumulated postretirement
benefit obligation in excess
of plan assets 341.8 308.5
Unrecognized net loss (85.0) (72.4)
Accrued postretirement
benefit cost $ 256.8 $ 236.1
64
At December 31, 1997, the weighted average annual
assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 6.5%
for 1998 and is assumed to decrease gradually to 4.5%
for 2002 and remain at that level thereafter (a rate of
7.0% was assumed for 1997). 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 postretirement benefit
obligation as of December 31, 1997, by S40.3 million and
the aggregate of the ser\ ice and interest cost
components of net periodic postretirement benefit cost
for 1997 by S4.8 million. The weighted average discount
rate used in determining the accumulated postretirement
benefit obligation was 7.1% at December 31,199"^ and
7.6% at December 31,1996.
Note O --
Related Party Transactions
KLM Royal Dutch Airlines owned 18,177,874
shares of Class A Common Stock of NWA Corp. at
December 31,1997. 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. Northwest and
KLM have been granted antitrust immunip,' by the U.S.
Department ofTransportation, enabling them to operate
their trans-Atlantic flights pursuant to a joint venture
alliance and to coordinate pricing, scheduling, product
development and marketing. Northwest and KLM
implemented code-sharing (the joint designation of
flights under the Northwest "NW" code and the KLM
"KL" code) on flights to certain European, Middle
Eastern, African and U.S. cities. In September 1997, the
Company and KLM expanded their alliance by entering
into an enhanced commercial and operational alliance
providing for a minimum term of 13 years. Under the
alliance agreement, the two airlines will expand their
current areas of cooperation to include services
between Europe and Canada, India and Mexico. In
addition, the two companies plan to increase the level
of cooperation between their respective cargo divisions
and will explore extending their alliance to include z
additional partners and to further develop strategies for
>
joint marketing and product development. |
The Company has an investment in WORLDSPAN, an ^
affiliate that provides computer reserv'ations services, ^
which it accounts for using the equity method. The 7
Company recorded expenses for certain reservation 7
system ser\'ices provided by this affiliate of S78.6 million,
S77.1 million and S81.8 million in 1997,1996 and
1995, respectively.
The Company owns 29.3% of the common stock of
Mesaba Holdings, Inc., the holding company of Mesaba
Aviation, Inc. ("Mesaba"), which operates as a Northwest
Airlink. The Company also holds warrants in Mesaba
stock, which, if exercised, would increase the Company's
ownership to 35.8% as of December 31,1997.
Northwest and Mesaba signed a new ten-year Airline
Ser\4ces Agreement ("ASA") effective July 1,1997 under
which Northwest determines Mesaba's commuter
aircraft scheduling and fleet composition. As of
December 31,1997, the Company has leased 2"" Saab 340
aircraft which are in turn subleased to Mesaba. The
lease agreements provide the Company with renewal
options ranging from one to five years and purchase
options at the end of the lease or renewal term which
approximate fair market value. The Company has
committed to lease an additional 45 aircraft which
Mesaba has agreed to sublease pursuant to the new ASA.
In addition, as of December 31,1997, the Company has
subleased eight of twelve Avro Regional Jet aircraft to
Mesaba under a Regional Jet Senaces Agreement
consummated in October 1996. In October 1997, the
Compam' exercised an option to purchase 24 additional
Avro Regional Jet aircraft, bringing the number of aircraft on
order as of December 31,1997 to 28, with ten scheduled
for deliver}' in each of 1998 and 1999 and eight in 2000.
Committed expenditures for these aircraft, including
contracmal price escalations, are approximate!}' S600
million. The Company will lease four of the 28 aircraft to
Mesaba under its Regional Jet Ser\'ices Agreement. The
Company intends to lease the remaining 24 aircraft to one
or more regional commuter airline partners.
65
On April 1, 1997, NWA Inc., a wholly owned subsidiary of
the Company, purchased all of the outstanding stock of
Express Airlines 1, Inc. and an affiliate ("Express") and
their operating results are included in the Company's
consolidated financial statements commencing on that
date. Express is a regional carrier that provides
passenger traffic to Northwest at Memphis.
Note P --
Risk Management and Financial
Instruments
Risk Management. The Company uses financial
instruments to manage the price risk of fuel and its
exposure to foreign currency fluctuations. The
Company does not hold or issue derivative financial
instruments for trading purposes. The notional amounts
of financial instruments summarized below did not
represent amounts exchanged between parties and,
therefore, are not a measure of the Company's exposure
resulting from its use of derivatives.
Foreigtt Cwrency. The Company is exposed to the effect
of foreign exchange rate fluctuations on the U.S. dollar
value of foreign currency-denominated operating
revenues and expenses. The Company's largest
exposure comes from the Japanese yen. In 1997, the
Company's yen-denominated revenues exceeded its yen-
denominated expenses by approximately 75 billion yen.
Erom time to time, the Company uses options and
forward contracts to hedge its anticipated yen-
denominated net cash flows. The changes in market
value of such agreements have a high correlation to the
movements in the yen exchange rate fluctuations.The
Company is exposed to credit loss in the event of
nonperformance by counterparties to these financial
instruments, but it does not expect any of the
counterparties to fail to meet its obligations. The
amount of such credit exposure is generally the
unrealized gains in such contracts. To manage credit
risks, the Company selects counterparties based on
credit ratings, limits exposure to a single counterparty
and monitors the market position with each counteq:>arty.
As of December 31,1997, the Company had $523.5 million
(67.5 billion yen) in purchased yen put options
outstanding to hedge approximately 90% of its
anticipated 1998 yen-denominated net cash flows. The
fair value of the options is not recognized in the financial
statements and is not material at December 31,1997.
Premiums paid for the options are classified as prepaid
expense. Realized gains and the amortization of the
premiums will be recognized as a component of
passenger revenue.
Fuel. The Company manages the price risk of fuel
primarih' utilizing futures contracts traded on regulated
exchanges. The changes in market value of such
contracts have a high correlation to the price changes of
fuel being hedged. Gains or losses on open and closed
hedge contracts are deferred and included in the
statements of financial position as accounts payable and
other liabilities or prepaid expenses, respectively, until
the related fuel inventory is expensed, at which time
both the fuel cost and the gain or loss on the hedge
instrument are accounted for as fuel expense. As of
December 31, 1997, the Company had hedged
approximately 28% of its 1998 fuel requirements,
including 63% of the first quarter.
66
Fair Values of Financial Instruments. The financial statement carrying values and estimated fair values of the
Company's financial instruments, including current maturities, as of December 31 were (in millions);
Z
1997 1996
>
Carrying Fair Carrying Fair
Value Value Value Value -
Cash and Cash Equivalents:
Held-to-maturity debt securities:
Commercial paper $ 372.4 $ 372.4 $ 435.6 $ 435.6
Other 281.1 281.1 8.5 8.5
Available-for-sale debt securities 68.8 68.8 101.5 101.5
Cash 18.1 18.1 13.8 13.8
$ 740.4 $ 740.4 $ 559.4 $ 559.4
Short-term Investments:
Held-to-maturity debt securities;
Commercial paper $ 176.3 $ 176.3 $ 10.5 $ 10.5
Other 122.1 122.1 91.9 91.9
Available-for-sale debt securities 139.3 139.3 150.7 150.7
$ 437.7 $ 437.7 $ 253.1 $ 253.1
Long-term Debt $ 2,069.3 $2,239.7 S 2,060.4 $ 2,166.7
Mandatorily Redeemable Preferred Securit}'
of Subsidiary 486.3 434.1 549.2 536.2
Series A and B Preferred Stock -- --
239.8 198.7
Series C Preferred Stock 306.2 432.9 362.8 332.4
Redeemable Common Stock 848.5 767.7 -- --
Tlie Compan}' considers all mirestricted investments with
an origin^il maturity of tliree months or less on their
acquisition date to be cash equivalents. The Compan>'
classifies investments with an original mauirit}' of more than
tliree months that are expected to be sold or called by the
issuer witliin the next year, and those temporaril}' restricted,
as short-term ini'estments. Purchases of short-term
investments classified as available-for-sale securities during
1997 and 1996 were $63.1 and $ 161.3 million, respectively,
and proceeds from sales of such securities were $74.5 and
$10.6 million, respectively. At December 31,1997 iuid 1996,
short-term investments included $138.2 and $60.4 million,
respectiveh', of temporaril}' restricted ini estments. Tlie
temporaril}' restricted iiwestments were pledged as
collateral under various agreements.
Tlie fair values of the Company's long-term debt were
estimated using quoted niiirket prices, where available. For
long-term debt, preferred securities and redeemable
common stock not actively traded, fair values were
estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for
similar t}'pes of securities.The fair value of the Series C
Preferred Stock shares is based on the assumed conversion
to common stock and valuing such shares at the closing
quoted market price for Class A Common Stock.
67
c
<
2
2
<
r.
^ Note Q -- Quarterly Financial Data (Unaudited)
^ Unaudited quarterly results of operations for the years ended December 31, 1997 and 1996, are summarized below
(in millions, except per share amounts);
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
1997:
Operating revenues $ 2,373.5 $ 2,557.6 $ 2,801.4 $ 2,491.3
Operating income 135.0 291.1 503.8 227.3
Income before extraordinary item 64.6 136.2 290.3 114.7
Net loss on extinguishment of debt -- -- --
(9.3)
Net income $ 64.6 $ 136.2 $ 290.3 $ 105.4
Basic earnings per common share:
Before effect of extraordinary item $ .59 $ 1.29 $ 2.80 $ 1.18
Net loss on extinguishment of debt -- -- --
(.09)
Earnings per common share $ .59 $ 1.29 $ 2.80 $ 1.09
Diluted earnings per common share:
Before effect of extraordinary item $ .53 $ 1.16 $ 2.53 $ 1.06
Net loss on extinguishment of debt -- -- --
(.09)
Earnings per common share $ .53 $ 1.16 $ 2.53 $ .97
1996:
Operating revenues $ 2:,264.8 $ 2,540.4 $ 2,735.2 $ 2,340.1
Operating income 134.4 374.7 469.4 75.3
Net income $ 53.4 $ 202.8 $ 253.9 $ 26.0
Basic earnings per common share:
Before effect of acquisition of
preferred stock $ 0.42 $ 1.95 $ 2.48 $ 0.21
Acquisition of preferred stock -- --
0.74 --
Earnings per common share $ 0.42 $ 1.95 $ 3.22 $ 0.21
Diluted earnings per common share:
Before effect of acquisition of
preferred stock $ 0.38 $ 1.73 $ 2.22 $ 0.19
Acquisition of preferred stock -- --
0.67 --
Earnings per common share $ 0.38 $ 1.73 $ 2.89 $ 0.19
The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with SFAS 128.
The sum of the quarter!)' 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.
68
o
Note R --
Condensed Consolidated Financial
Information of Northwest Airlines, Inc.
Northwest Airlines Corporation (formerly Wings Holdings
Inc.) and its wholly owned subsidiar}^,Wings Acquisition
Corp.,were formed and incorporated by a group of
investors in order to acquire all of the outstanding stock
of NWA Inc. (the "Acquisition"), the parent company of
Northwest Airlines, Inc. In 1989, Wings Acquisition Corp.
was merged with and into NWA Inc., with NWA Inc.
being the surviving entity. The Acquisition was recorded
%
H
X
'j'.
>
5C
r-'
using the purchase method of accounting and, 2
accordingly, the purchase price was allocated to the
>
assets acquired and liabilities assumed based on their 2
estimated fair market value at the date of Acquisition, ^
determined primarily by independent appraisals.
After reflecting these values and certain acquisition q
indebtedness of NWA Inc. in the financial statements of h
Northwest, condensed financial information of
Northwest consists of the following (in millions):
Condensed Consolidated Statements Of Income
Year Ended December 31
1997 1996 1995
Operating revenues
Operating expenses
$ 9.882.9
8.773.9
$ 9,651.3
8,641.7
$ 8,806.6
7,937.0
Operating income
Other income (expense)
1,109.0
(212.9)
1,009.6
(183.6)
869.6
(316.4)
Income before income taxes
and extraordinary item
Income tax expense
896.1
342.6
826.0
308.8
553.2
215.9
Income before extraordinary item
Net gain (loss) on extinguishment of debt
553.5
(9.3)
517.2 337.3
50.4
Net income $ 544.2 $ 517.2 $ 387.7
Condensed Consolidated Balance Sheet Data
December 31
1997 1996
Current assets
Noncurrent assets
Current liabilities
Long-term debt and obligations under capital leases
Deferred credits and other liabilities
Mandatorily redeemable preferred security of subsidiary
$ 2,015.0
6.114.6
3.164.7
2,016.9
1,191.0
486.3
$ 1,626.8
5,818.3
2,832.2
2,103.9
935.7
549.2
69
Note S --
Subsequent Event
On January 25,1998, NWA Corp. and its newly-formed,
wholly-owned subsidiary, Newbridge Parent Corporation
("Newbridge"), and Air Partners, L.R, aTexas limited
partnership, its partners and certain of its affiliates,
entered into an Investment Agreement. Pursuant to the
Investment Agreement, NWA Corp. and Newbridge will
acquire the beneficial ownership of 8,535,868 shares of
Class A Common Stock of Continental Airlines, Inc.
("Continental"). These shares represent approximately
14 percent of Continental's common stock equity and
52 percent of its outstanding voting common stock. The
aggregate consideration was valued at approximately
$519 million and is expected to consist of $311 million
in cash and 4.1 million shares of newly issued Newbridge
Class A Common Stock, par value $.01 per share.
Concurrently with the execution of the Investment
Agreement, NWA Corp., Newbridge and Newbridge Merger
Sub, a wholly-owned subsidiar}' of Newbridge ("Merger
Sub"), entered into an Agreement and Plan of Merger
providing for the merger of Merger Sub with and into NWA
Corp. (the "Merger"), as a result of which NWA Corp. will
become a wholh^-owned subsidiar}' of Newbridge and each
outstanding share of Class A Common Stock of NWA Corp.
will be exchanged for one share of Newbridge Class A
Common Stock. The merger will occur concurrently with
the closing of the transactions contemplated by the
hivestment Agreement. Following the Merger, Newbridge
will change its name to "Northwest Airlines Corporation"
and NWA Corp. will change its name to "Northwest Airlines
Holding Corporation."
The closing of the transactions under the Investment
Agreement and the Merger, which are expected to close
by the end of 1998, are subject to approval under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended ("HSR"), and satisfactory review by the
Department ofTransportation.
In connection with the Investment Agreement and the
alliance agreement discussed below, NWA Corp. and
Newbridge have entered into a Governance Agreement
with Continental for a six-year term. The Governance
Agreement contains certain restrictions on NWA Corp.'s
and Newbridge's ability to acquire additional shares of
Continental common stock and to vote such shares and
restrictions on Northwest's and Newbridge's ability to
affect the composition and conduct of Continental's
Board of Directors. Due to the restrictions in the
Governance Agreement, the Company will account for
this investment under the equity method.
On Januar}^ 25,1998, Northwest and Continental entered
into an agreement providing for a global strategic
operating alliance (the "alliance agreement"). The
thirteen year alliance, when fully implemented, will
connect the two carriers' networks and will include
code-sharing, frequent flyer program reciprocity,
cooperation between Continental and KLM and other
cooperative activities. Full implementation of the
alliance agreement is contingent on approval under
HSR, approval of the Department ofTransportation and
the successful conclusion of negotiations with
Northwest's pilots' union. The two airlines have no
plans to merge their operations and will retain separate
boards, management and headquarters. No layoffs,
mergers of workforces, transfers of flying or assets or
closures of facilities are planned.
70
o
Report of Ernst & Young LLP, Independent Auditors
To the Stockholders and Board of Directors
Northwest Airlines Corporation
We have audited the accompanying consolidated
balance sheets of Northwest Airlines Corporation as of
December 31,1997 and 1996, and the related consolidated
statements of income, common stockholders' equity
(deficit), and cash flows for each of the three years in the
period ended December 31,1997. 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 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 opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
consolidated financial position of Northwest Airlines
Corporation at December 31,1997 and 1996, and the
consolidated results of its operations and its cash flows
for each of the three years in the period ended
December 31,1997, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota
January 25,1998
71
-
Five-Year Summary
<
2:
2
Northwest Airlines Corporation
Year Ended December 31
1997 1996 1995 1994 1993
Statements of Income
(In millions, except per share data)
Operating revenues
Passenger $ 8,822.1 $ 8,598.3 $ 7,762.0 $ 7,010.1 $ 6,619.5
Cargo 789.4 745.8 751.2 755.8 734.8
Other 614.3 536.4 571.7 559.0 510.5
Operating expenses
10,225.8
9,068.6
9,880.5
8,826.7
9,084.9
8,171.5
8,324.9
7,485.3
7,864.8
7,586.5
Operating income 1,157.2 1,053.8 913.4 839.6 278.3
Operating margin 11.3% 10.7% 10.1% 10.1% 3.5%
Income (loss) before extraordinar}^ item $ 605.8 $ 536.1 $ 342.1 $ 295.5 $ (115.3)
Net income (loss) $ 596.5 $ 536.1 $ 392.0 $ 295.5 $ (115.3)
Earnings (loss) per common share;
Basic $ 5.89(1) $ 5.05(1) $ 3.11(1) $ 3.00 $ (3.12)
Diluted $ 5.29(1) $ 4.52(1) $ 2.90(1) $ 2.90 $ (2.85)
Balance Sheets (In millions)
Cash, cash equivalents and unrestricted
short-term investments $ 1.039.9 $ 752.1 $ 970.9 $ 968.3 $ 139.6
Total assets 9,336.2 8,511.7 8,412.3 8,070.1 7,571.3
Long-term debt, including
current maturities 2,069.3 2,060.4 2,467.1 4,013.5 4,437.9
Long-term obligations under capital leases,
including current obligations 705.3 772.2 841.2 890.3 928.1
Mandatorily redeemable preferred
security' of subsidiary 486.3 549.2 618.4
Redeemable stock 1,154.7 602.6 945.5 795.0 749.9
Common stockliolders' equity (deficit)(2) (311.0) 92.9 (818.8) (1,370.7) (2,030.5)
Operating Statistics (3)
Scheduled service:
AvaUable seat miles (ASM) (millions) 96,963.6 93,913.7 87,472.0 85,015.6 87,212.5
Revenue passenger miles (millions) 72,031.3 68,639.1 62,515.2 57,873.2 58,130.1
Passenger load factor 74.3% 73.1% 71.5% 68.1% 66.7%
Revenue passengers (millions) 54.7 52.7 49.3 45.5 44.1
Revenue yield per passenger mile 12.11<t 12.531 12.421 12.111 11.391
Passenger revenue per
scheduled ASM 9.00<t 9.161 8.871 8.251 7.591
Operating revenue per total ASM(4) 9.76t 9.851 9.581 8.931 8.231
Operating expense per total ASM(4) 8.63<t 8.781 8.66i 8.081 8.001
Cargo ton miles (millions) 2,282.8 2,215.8 2,246.3 2,322.3 2,188.0
Cargo revenue per ton mile 34.5 33.71 33.41 32.51 33.61
Fuel gallons consumed (millions) 1,996.3 1,945.1 1,846.2 1,792.8 1,801.7
Average fuel cost per gallon 64.86 67.211 55.661 56.231 62.091
Number of operating aircraft at year end 405 399 380 361 358
Full-time equivalent employees at year end 48,984 47,536 45,124 43,673 43,358
(1) Excludes the effects of the 1997 extraordinan' loss ($.10 per basic share and $.08 per diluted share), the 1996 preferred stock transaction
($.75 per basic share and $.68 per diluted share), the 1995 preferred stock transaction ($.64 per basic share and $.58 per diluted share) and the
1995 extraordinan.- gain ($.55 per basic share and $.50 per diluted share).
(2) No dividends have been paid on common stock for any period presented.
(3) All statistics exclude Express Airlines I, Inc.
(4) Excludes the estimated revenues and expenses associated with the operation of Northwest's fleet of eight 747 freighter aircraft and MET Inc.
72
Stockholders' Information
Common Stock Prices
1997 1996
Quarter High Low High Low
1st 41% 331^ 55% 40%
2nd 43% 33^4 52% 38
3rd 42% 35% 40% 34
4th 49% 40% 42% 30%
No dividends were declared during the years ended
1997 or 1996.
Stock Listing
The Company's common stock is quoted on the
Nasdaq National Market under symbol NWAC. As of
Januar)^ 31,1998 there were 450 stockholders of record
and approximately 8,500 beneficial stockholders.
Registrar and Transfer Agent
Norwest Bank Minnesota, N.A.
Post Office Box 738
South St. Paul, Minnesota 55075-0738
(800) 468-9716
cr.
H
>
33
r--
Annual Meeting ^
c/^
The 1998 Annual Meeting of Stockholders will be held >
z
at the Equitable Life Building, New York, New York on ^
Friday, April 24, 1998 at 9:30 AM. ^
m
Independent Auditors ^
33
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,
without exhibits, will be provided without charge by
directing incpiiries to:
Northwest Airlines Distribution Center
Phone (800) 358-3100
Fax (612) 271-0120
E-mail: www.nwairlines@4midwest.com
Direct all other inquiries to:
Investor Relations
Department A4l 10
5101 Northwest Drive
St. Paul, Minnesota 55111
(800) 953-3332
73
Senior
John H. Dasburg
President & Chief Executive Officer
James A, Lawrence
Executive Vice President & Chief Einancial Officer
Michael E. Levine
Executive Vice President--Marketing & International
Raymond J. Vecci
Executive Vice President--Customer Service
Donald A. Washburn
Executive Vice President--Plight Operations & President Northwest Cargo
Richard H. Anderson
Senior Vice President--Technical Operations & Aujiort Affairs
Christopher E. Clouser
Senior Vice President--Administration
Joseph E. Francht,Jr.
Senior Vice President--Pinance & Treasurer
J.Timothy Griffin
Senior Vice President--Market Planning & Systems
Philip C. Haan
Senior Vice President--International
Richard B. Hirst
Senior Vice President--Corporate Affairs
Douglas M. Steenland
Senior Vice President--General Counsel & Secretary
74
John S. Kern
Vice President--Regulatory Affairs & Chief Safety Officer
Fairbanks
Additional service operated by KLM Cityhopper and Transavia
ToStovonger a
Arhus
Amster
LuxemboHrg
f4 /Toulouse
Tenerife J^ Malaga ^
Las Palmas
Malma
Hamburg
Bremen
Berlin (Tegel)
To Heraklion
Strasbourg
ilse/Mulhouse
Turin W * Venice
To Malta Bologna
j
Billund
Amsterdam^
Dublin
Antwerp /I \ \ \
/ /Maastricht \ \ \ Salzburg
y
Innsbriinck
Clermout-Ferrand
/
Marseille tNl
Additional service operated by Aer Lingus/Cyprus Airways/
Air Engiadina/Maersk AirAyrolean/Air Excel/Regional Airlines
X^Lnrnaca, Cyprus
To Paphos, Cyprus
Revised 1.12.98
To Juneau ToAnchoroge To Fairbanks
Operated by Hawaiian Airlines
Uhue
Honolulu
-
Kohului
Molokoi


lonoi
Gty
Kona
Ixtopo/Zihuotonejo
Acapulco
Northwest Airlines
North American Route System
Northwest Airlines service*
Operated by Alaska Airlines and Horizon Air
Operated by Hawaiian Airlines
`Regional jet service to Regina and Aspen operated by Mesaba Aviation
St. Maarten
1998 Norihwcst Airlines Corporation
est Airlines Corporation, using recycled paper to presene our environment.
On average. Northwest recvcles over WH) pairs of et eglasses per month. O
non' was produced h\ the ('oiyvorate Communication!
NORTHWEST
AIRLINES
Northwest Airlines Corporation
5101 Northwest Drive
St. Paul, MN 55111-3034
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