Northwest Airlines Annual Report 1998

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, WITH KLM ROYAL DUTCH AIRLINES, A
EUROPEAN HUB IN AMSTERDAM. NORTHWEST AIRLINES AND ITS ALLIANCE
PARTNERS, INCLUDING CONTINENTAL AIRLINES, SERVE MORE THAN 500 CITIES
IN 90 COUNTRIES ON SIX CONTINENTS AND OFFER CUSTOMERS AN INDUSTRY
LEADING GLOBAL AIRLINE NETWORK.
CONDENSED FINANCIAL HIGHLIGHTS
orthwest Airlines Corporation Year Ended December 31
(Dollars in millions, except per share data)
Financial
Operating Revenues
Operating Expenses
Operating Income (Loss)
Operating Margin
et Income (Loss)
Earnings (Loss) Per Common Share
Before Extraordinary Item:
Basic
Diluted
umber of Common Shares Outstanding
Operating Statistics
Scheduled Service:
Available Seat Miles (ASM) (millions)
Revenue Passenger Miles (RPM) (millions)
Passenger Load Factor
Revenue Passengers (millions)
Revenue Yield Per Passenger Mile
Passenger Revenue Per Scheduled ASM
Cargo Ton Miles (millions)
Operating Revenue Per Total ASM (RASM)
Operating Expense Per Total ASM (CASM)
$
1998
9,044.8
9,236.2
(191.4)
(2.1)%
(285.5)
(3.48)
(3.48)
84.0
91 ,310.7
66,738.3
73.1%
50.5
11.26
8.23
1,954.4
9.12
9.21
et Income (Loss) Return. on Capital
MILLIONS
$600 14%
450
300
150
-150
-300
12%
10%
8%
6%
4%
2%
0%
-2%
$
1997
10,225.8
9 06 .6
1,157.2
11.3%
596.5
5.89
5.29
97.0
96,963.6
72,031.3
7-+.3%
5-+.7
12.ll<t
9.00
2,282.8
9.76
8.63<!:
Long-Term Debt
MILLIONS
$5,000
4,000
3,000
2,000
1,000
Percem Change
(11.5)
1.8
(116.5)
(13.-+)pts.
(l-+7.9)
(5.8)
(7.3)
(1.2) pts.
(7. 7)
(7.0)
(8.6)
(H-+)
(6.6)
6.7
'94 '95 '96 '97 '98
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1
-LETTER TO OUR
SHAREHOLDERS
2
r01n the Chairn1an and the
President & CEO
Our \'i ion in Lhe 1990 has been Lo creaLe a global
airline LhaL is preferred by our cusLomers because we
pro\'ide Lhe mosL omeniem and reliable air
Lransponation network. Lono-Lerrn alliances are the
mo t economic way LO exp:md olobally due LO Lhe
revenue, o L and capiLal synergies shared by Lhe
panners. Worldwide coverage also diversifies risks
among variou imernational regions. DiversiLy has
served u well as sLrong domestic and Lrans-ALlantic
markeL have helped offseL Asian weaknes .
onhwe L i Lhe leader in creaLino global networks and
made great progress in 1998. We concluded a lono-term
allian c agreemem with Cominental Airlines, Lhe fir L
such aoreem m betwe n two large domesLic carriers.
Nonhwe t al o purchased 13.5 percent of Cominemal,
represeming 50.3 percem of Lhc voling shares. The
combinaLion of our Lwo complememary y Lems will
allow onhwesL and Cominemal Lo compete effecLively
wi.Lh American, Uni.Led and Della on a global basis. We
expecL Lhe alliance ynergi.es Lo provide si.gnifi.cam fULure
profiL growLh for bOLh l onhwest and Cominemal
beginning in 1999.
NORTHWEST
AIRLINES
KLM and onhwesL conLinued Lo increase Lrans-ALlamic
markeL share and revenues while realizing subsLamial
joim cosL savings. KLM concluded an alliance agreemem
with Aliwlia Lhat will increase Lheir European scope and
provide new alliance hubs in Milan and Rome.
The sLrong foundation of our global neLwork is now
esLablished wiLh onhwesL, Continental, KLM and
Alitalia working closely together Lo provide the scope
our cusLOmers demand, Lhe opportunities our employees
seek, and the profiL growth our shareholders expect as
we move imo Lhe 21sL Cemury.
Our goal was to negotiate labor ontracts with all unions
in 1998. Unfonunately, we experienced a 15-day strike
before an agreement was reached with Lhe pi.lots' union.
Lrikes hurt all parties involved in the dispute and some
Lhat are not - most importantly, our customers.
The strike and preceding work slowdowns throughout
1998 are the reasons for orthwest's 1998 loss. We have
reached agreement vviLh fi e unions, covering eight
contracts, as of February 1999. These comracts are for
terms ranging from four to six years. We are negotiating
with the union represeming our l1ight aLtendams and
awaiting the outcome of a representation election with
our mechanics. Our objective is Lo promptly conclude
agreements on fair terms \vith our remaining unions.
The prime cause of protracted negotiations in our
industry is The Railway Labor Act, which governs airline
labor relations. Many industry and union leaders agree
this is an anachronism that should be changed for the
benefit of air transportation companies and their
employee and customers.
FOR NORTHWEST AIRLINES, 1998 WAS A YEAR OF EXTREMES. WE CONTINUED TO
DEVELOP OUR GLOBAL ALLIANCE NETWORK: WE ADDED A LONG-TERM ALLIANCE
AGREEMENT WITH CONTINENTAL AIRLINES AND ACQUIRED A SIGNIFICANT
OWNERSHIP INTEREST IN THEM; WE STRENGTHENED OUR ALLIANCE AND JOINT
VENTURE WITH KLM ROYAL DUTCH AIRLINES; AND WITH KLM, WE WELCOMED
ALITALIA TO OUR GLOBAL NETWORK. BUT WE WERE UNABLE TO REACH A
NEGOTIATED SETTLEMENT WITH OUR PILOTS UNION AND SUFFERED A COSTLY
STRIKE, RESULTING IN A LOSS FOR THE YEAR. 3
. . .
LETTER TD DUR
. - -
SHAREHOLDERS
4
ln 1999, governmem imervemion cominue Lo be one
of the major challenoe Lo offering the world's most
reasonably priced and efficient air transportation service
Lo our cuswmer . onhwesL pays 15 percent of U.S.
pa enger revenues in transportation and r uel Laxes Lo
the government. A presidential commission
recommended in 1993 LhaL the government reduce
Laxe on airlines. lnsLead, Laxes have increased and
go\'ernmern is proposing more Lax increases in 1999. ln
addition, Congre s i oncerned about high ticket prices
and indu try concentration in airline hub - all this in
an indu try that ranks in the lower quanile of profit
margm and return on capital. lL' Lime that government
either re-reg-ulated the airline industry or let us compete
freely. lf deregulation is LO corninue Lo be national
policy, then the industry should noL be re-regulated
indirectly through a series of ad hoc government
imer\'cmions Lo the demmem of our employees,
cu Lamers, and shareholder .
As we enter the 10th year under new ownership and
management, our challenge is Lo renew the spirit and
enthusiasm LhaL propelled orthwest from service
oblivion LO the inclustry'.s leading carrier in on-Lime
performance and service from 1990 Lo 1996. We are
commiued Lo giving onhwesL people the LOols, training
and leadership to return our service Lo industry leading
levels that will make onhwest our customers' preferred
carrier. We thank the vast majority of our employees
who performed at superior levels during a LUmulLUous
year. We encourage all onhwest people to put 1998
behind us and work LOgether to regain the loyalty of the
many customers whom we inconvenienced.
To our customers we apologize for the service
problems caused by labor disruptions during the past
two years. ln addition Lo safety, which is our highest
priority, we are dedicated to consistently meeting five
customer requirements:
On-Lime performance
Reliable luggage, mail and freight delivery
Cleanliness of aircraft and facilities
Couneous service
Prompt and fair problem resolution
~onh,,rt ha- been an indu try leadin seni e pn..1,ider
in the p:.-n. and "e pledoe to return to thLs bel-.
Our cu tome1 tell u- that they want comeniem and
frequent enice to popular de-tinations. Expansion of our
hub in Detroit. :\linneap lisrr. P~ml. :-.lemphi . Tokyo
and O-aka. and the hub- operated by our allian parmer-
in. e"ark. H u~wn. Cbebnd .. ..\m-terdam. \liL n and
Rome prmide our pL en ers ,nth a crlobal nel\\ork that
can meet their requirern nt . Hub- are bein mlini:ed
bm are ,ital to traYeler throu hout Lhe ,,orld and are
critically important to th ommunitie th y ene.
Thi key i -ue i di-cu ed more fully on paoe 13.
Thank you for your interet and uppon.
~f~r_jjp~
Gary L. \\'il on John H. Da-bur
Chainnan Pre idem -:r Chief hecuti\e fficer
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5
. ~ BUl~DING THE WORLD'S MOST
SUCCESSFUL AIRLINE NETWORK
orthwest/Continental Alliance
Transf orn1s "Big Three" into
"Big Four"
It all begins
with a
handshake.
ln January 1998, onhwesL and Cominemal Airlines
announced Lhe firsL-ever alliance beL'v een Lwo major
U. . airline . ln ovember 1998, the carriers began
implememina this allian e which, in effect, farms a
founh major U .. airline neLwork to rival Lhe
dome Li indusLry's Lhree largesL net, arks. This
improved posiLion in Lhe orth American markeL is
criLical noL only to orthwest's abiliLy to compeLe
domestically, bm also to iLs abiliL
y Lo cominue to
amacL new pann rs a global alliance building in the
airline indusLry cominues.
Unlike the lonhwesL/KLM
Lrans-ALlamic alliance, in which the
Lwo partners share equally mosL
revenues and cosLs for joim vemure
rouLes, onhwesL and Cominental
will remain independent
compeLiLors and will benefit
indi\'i.dually from Lhe incremental
revenues and profits generated by
linking each airline's network.
BendiLing from orthwe t's long
experience as KL l's global partner,
Lhe onhwest/Continernal alliance
While the two airlines will remain separate
companies, the growtl1 generated by the
alliance will help stimulate employment at
both Northwest and Continental.
i , from the sLan, more deeply
imegrated Lhan announced alliances
beLween OLher major U.S. caniers.
6
For instance, onhwesL and Corninemal will share
designaLor codes on substarnially all of their
domestic and many of their imernational routes.
onhwest's midwest and northern Lier suengths
complimem Cominemal's southern Lier and eastern
U.S. strengths. Because there is vi.rtually no overlap
in their end-on-end route structures, code-sharing
under the alliance agreement adds 52 destinations to
onhwesL's route system and 40 LO Continental's,
thus enabling new online service in more than 2,000
potemial markets.
The code-sharing agreement contemplates new online
service on the majority of each partner's flights from
the U.S. to trans-ALlamic, trans-Paci.fie and South
American destinations. The alliance also dramatically
expands travelers' airport lounge privileges, allowi.ng
members in either carrier's airport clubs liberal use of
3 7 domestic airport lounges.
The onh, est/Cominental alliance offers reciprocity
between the orthwesL \tVorldPerks and Continental
OnePass frequem flyer programs, both already
recognized as among the industry's best. WorldPerks
and OnePass members are able to earn and redeem
miles on either carrier. In addition, members in the
cominental U.S., Alaska and Canada now enjoy
i.n reased opponuniLies for award travel thanks to
fewer blackouL dates and expansion of the "off peak"
redemption period from 10 weeks to nine months.
IN 1998, NORTHWEST STRENGTHENED ITS POSITION IN AN INDUSTRY-LEADING GLOBAL
AIRLINE ALLIANCE. NORTHWEST IMPLEMENTED AN ALLIANCE WITH CONTINENTAL
AIRLINES - THE FIRST SUCH ALLIANCE BETWEEN MAJOR U.S. CARRIERS - AND
FURTHER INTEGRATED OPERATIONS WITH KLM ROYAL DUTCH AIRLINES.
NORTHWEST'S ALLIANCE-BUILDING WORK ENTERS A NEW PHASE IN 1999 WITH
THE LAUNCH OF A GLOBAL AIRLINE ALLIANCE.
' . --il!=l
Ul~DING THE WORLD'S MOST
SUCCESSFUL AIRLINE NETWORK
trengthening the
'Alliance Jar Life"
The global link between orthwest and KLM is the
world's most fully integrated airline alliance. Today,
the alliance provides service to more than 500 cities
in 90 countries on six continents. The number of
alliance flights and passengers we carry has more
than doubled over the last five years. By
coordinating passenger service systems and
procedures, orthwest and KLM now operate as
one airline from the traveler's point of view for
reservations, ticketing, luggage handling, airport
lounge privileges and accumulaLion and redemption
of frequent flyer benefits. Total revenues on joint
venture routes exceeded $2 billion in 1998.
In September 1997, orthwest and KLM signed a
long-term enhanced commercial cooperation
agreement that made the alliance between
them virtually permanent.
With the agreement as a governing framework and a
orthwest/KLM Alliance Steering CommitLee to
guide implementation, orthwest and KLM are now
further synchronizing inventory management,
developing broad and deep links between their
respective information systems and more closely
coordinating product development, marketing and
sales, purchasing, catering, ground-handling and
other services.
For example, in April 1998, orthwest assumed
responsibility for KLM's sales, marketing and
operations in orth America while KLM assumed
similar responsibilities for orthwest in Europe,
Africa and the Middle EasL. In most instances, this
integration now results in a single person representing
one "product" - the onhwest/KLM alliance.
Amsterdam's Schiphol Airport
is cleared to add about 20,000
flights per year through 2010 . +

KLM
Iobal Alliance
Takes Wings
In 1999, orthw st xpect Lo evohe it
participation in alliance to a ne\\' le\'el with
the launch of our fully operati nal global
"branded" alliance.
The cornerstone partners 'vvi.11 b onhwest and
Corninental in I nh America and I Ul and Alitalia
in Europe. onhwe t and Continental bring the
convenience and scope of their combined dome Lie
route structures a well as their respecti\'e trengths
in Asia and Latin merica. KL 1 and Alitalia,
Europe's fifth and se,enth largest carriers
respectively, have a combined 15 percent share of
European air travel.
Ali.tali.a is expected to join the orthwest/KL
alliance subject to receipt of U.S. antitrust
immunity. \ ith Ali.tali.a as an additional
European partner, orthwest ,,vi.ll benefit
from online access to both Rome and Milan's
Malpensa Airport, a ne'v facility v ith
substantial capacity for expansion.
Alliance Plane - a Northwest
Airlines DC1 O aircraft will display
this paint scheme for at least a
year, to commemorate the
Northwest/KLM alliance.
B nefiLin from Lhe alliance experien e, Lechnoloay
and expertise de,eloped by 'onh\\' L, KL 1 and
their re pe ti, regional panncr , Lhi alobal alliance
i well positioned to compete again L the L
lliancc
offering of Lhe other major arriers. The
corner LOn partners and their reaional panner
LOgether pro,ide online enice Lo more than 530
itie in 97 ountrie on ix ontin nt .
orthwest/KLM
people-evolving
a global
all"ance
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: . ~--~- a vi .:
c i NG B -E 'T TE R
CUSTOMER SERVICE
10
mproving Airport Convenience
and Comf art in Detroit
Construction began in 1998 on the new Midfield
Terminal at Detroit Metro Airport, Northwest's busiest
hub. Completion is scheduled for 2001. The terminal,
which amounts to an entirely new passenger facility for
Detroit, will be welcome relief from the congestion and
capacity constraints at the current Davey Terminal.
In the interim, Northwest continues to work with
Wayne County to improve passenger comfort at the
Detroit Airport. For instance, curbside check-in at the
Davey Tern1inal was renovated and personnel were
added to speed check-in. orthwest also opened a new
WorldClub on the F concourse and added an automated
passenger connector to the C concourse which was
recently expanded by si,-x new gates.
The design for the new Midfield Terminal was
completed as the year ended. In June 1998, the airport
issued $1 billion in general airport revenue bonds to
fund the Midfield Terminal project. Progress on the
new terminal is more visible with each passing month.
Site preparation was in progress throughout the latter
half of 1998.
The Midfield Terminal will provide Northwest with
74 new jet gates and a large regional aircraft facility.
Domestic and international departures and arrivals will
be consolidated in the same building, easing
connections. Thanks to favorable conditions in the
municipal bond market and increased revenues from
higher passenger volumes, the new Midfield Terminal
will benefit from an additional $174 million in upgrades
over and above those in the plans for the terminal.
The additional amenities include substantially more
concession space, enlarged Northwest WorldClubs5
M,
higher quality finishes, larger ticketing areas and
significant luggage handling system upgrades.
Passengers originating in Detroit will also benefit from a
750-foot covered curbside drop-off area and a new,
12, 000-space parking facility.
The new Detroit Midfield Terminal's high arched ceilings, bathed
in natural light, will give the terminal a spacious feel.
NORTHWEST CONTINUES TO MODERNIZE THE FACILITIES MOST IMPORTANT TO
CUSTOMERS, UPGRADE AND SIMPLIFY ITS FLEET AND INTRODUCE INNOVATIVE
INFORMATION SYSTEMS TECHNOLOGY TO SERVE CUSTOMERS MORE EFFECTIVELY
AND EFFICIENTLY.
11
~- :~>Taufi:o'ING . BETTER
'--"!,. -
CUSTOMER SERVICE
dding Airport Convenience and
Comfort in Minneapolis/St. Paul,
Men1phis and Hong Kong
In 1998, Northwest
opened new airport
WorldClubs at Detroit,
Washington, D.C. (Dulles),
Philadelphia and Seattle.
12
At 1inneapolis/St. Paul International Airport,
major renO\'ations have brought nationally known
retailers and restaurants to the main terminal, while the
interior finishes such as carpet, tile and \\'all coverings
have been renovated. Additional moving walkways have
been added to the Green Concourse.
In 1999, extension of the airport's Green Concourse
will begin. When completed in 2002, the Green
Concourse will have 12 new gates for jets and a new
regional aircraft facility.
1emphis has embarked on a major rehabilitation of its
airfield and will add a new 11 , 100-foot runway which
will support the onhwest/KL 1 alliance to service the
trans-Atlantic market. Additional improvements to the
terminal facility include more moving sidewalks, gate
expansions for onhwest and its airlink partner and
interior renovations are planned for 1999 as pan of a
new agreement released with the airport in 1998.
In Asia, orthwest's service is benefiting from the
opening of the new Chek Lap Kok airport serving
Hong Kong. An increase in available gates means most
passengers no longer have to be bussed to and from the
terminal. In addition, orthwest's WorldClub at
Chek Lap Kok has three times the capacity of the
orthwest lounge at the former Hong Kong airport.
orthwest is streamlining customer service processes
and has improved luggage handling and on-time
performance. onhwest Cargo operations will benefit
from access to Chek Lap Kok's "Super Terminal l ," a
high capacity, high efficiency cargo-handling facility
designed to handle 22 freighters daily.
ubs - Keystones for
Convenience &
Commerce
Hub airports are the keystones of the U.S. air
transportation sy tern and are responsible for much of
the service expansion and fare reductions that have
occurred since deregulation. In the growing public
discussion about hubs, four trnths are fundamental for
orthwest Airlines:
Hubs enable frequent service to many cities.
Hub airports often offer nonstop flights to twice the
number of cities as comparably sized non-hubs, with
more daily departures per city served. This is the
experience at orthwest's two largest hubs in Detroit
and Minneapolis/St. Paul. Since 1990, orth American
destinations from Detroit have grown 52 percent while
international service has increased by 100 percent. ln
Minneapolis/St. Paul, the growth has been 26 percent
for orth America and 50 percent internationally.
Hub markets also produce economic benefits for the
larger community. Economists generally agree that cities
with hub airports have a more favorable industrial
infrastructure that serves to
attract business to the region
and foster economic growth.
For example, U.S. cities that
are home to an airline hub
have attracted more high-
technology employment
during the 1990s.
Hub development improves airline economics.
As Lhe airline indusLry evolved to a deregulaLed
environment, Lhe need Lo efficiemly expand service to
more markeLs - and to abandon unprofiLable rouLes -
resulLed in Lhe hub-and-spoke strucLUre of Laday.
Economics are improved because it allows all rouLes
emanaLing from the hub Lo be served aL lower uniL costs
than would pmail if Lraffic 11ows could not be combined
at a hub.
Ticket prices debunk the "hub-premium" myth.
Travelers starting their trips from an airline hub generally
pay no more for their !1ights than do Lravelers originaLing
elsewhere, for Lrips of the same length. Average fares at
hubs are higher only because business demand is greaLer
at hubs and more unresLricted tickeLs are sold.
At orthwest hubs, aboUL 70 percem of customers
systemwide 11y on discoum fares, compared to 90
percent systemwide. These fares are significantly below
the comparable walk-up fares, which carry a premium
price but impose no restrictions.
orthwest is a strong but fair competitor.
Hub market residents generally enjoy expanded service by
the hub airline without a restriction in their choice of
carriers. About 97 percent of onhwest'.s customers have
other air alternatives for domestic service to and from the
Detroit and Minneapolis/St. Paul hubs. Travelers from
these cities have at least two carriers other than onhwest
from which to choose for a typical domestic flight. In
recent years new entrant carriers have established service
in all three of onhwest'.s hubs.
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. - B U 1-L D I N G B E T T E R
14
CUSTOMER SERVICE
Ieet Modernization Brings Comf art
and Added Simplicity
onhwesl continues to modernize and upgrade its
aircraft fleet while also simplifying the fleet's
composition. This ongoing program will have the
dual benefits of improving pa senger comfon and
reliability \\'hile reducing training, maintenance and
operating co t .
Nonhwesl plans to dispose of the eight remaining
}..[D80 aircraft from its fleet and take delivery of the
first 10 of 50 Airbus A319s in 1999. The A319s are
twin-engine, 125-seat aircraft, virtually identical to the
150-seat A320s already in onhwest's fleet.
orth\\'est was the first lorth American carrier to
operate the A320 and, with the 1998 delivery of
13 new A320s and seven more in 1999, the A320 fleet
\\~ll grow to 70 by mid-1999. The growth in the
onhwest Airbus fleet will create efficiencies in
training, maintenance and operations. In addition,
Airbus A3 l 9s and A320s offer the widest passenger
cabin of any single-aisle aircraft. This enhances
passenger seating comfort and in-flight service.
Nonhwest has accelerated by a number of years the
deh,ery of three ne\\' H 7--+00 aircraft Lo the second
half of 1999. The three new 7-+7--+00s join a fourth
H 7--+00 scheduled for delivery in the spring of 1999.
During 1998, onhwesL also completed the
replacement of the imerior on the DC9 fleet. All 1 73 of
orthwest's DC9s are now equipped with new seats,
larger overhead bins, new sidewall and ceiling panels,
an improved cabin lighting system, and redesigned
lavatories and galleys. The refurbishment initiative also
included a reconfiguration of the seating plan Lo provide
more First Class seats on all onhwest DC9s.
Similar comprehensive refurbishment of 5-+ widebody
aircraft in orthwest's fleet began in late 1997 and is
scheduled for completion in 1999 on the 747 fleet.
orthwest's 26 international DCl0s, and 18 74 7-200s
will see complete replacement of their interiors,
including wall CO\'erings, expansion of overhead bins,
upgraded lavatories and new coumertops, flooring,
wall coverings and lighting in their galleys. Ultra-thin
plasma screens will provide in-flight video programming
for 'Norld Business Class'~1 passengers as onhwesL
becomes the first commercial carrier Lo adopt the
lighter, higher resolmion plasma technology. onhwest's
7-+7--+00s, all less than 10 years old, ,vill receive new
wall rnverings and a general intetior upgrade.
riv ate-Label Vacation
Programs for Leisure
Travelers
MLI Inc., a wholly-owned indirect subsidiary of
orthwest Airlines Corporation, 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.
MLI Inc. offers two distinct product lines. The
orthwest Airlines WorldVacations5
M
product combines
the strength of orthwest, KLM and other partners'
worldwide route network with MLT's land service
buying power. MLI Vacations, celebrating its 30th year,
offers charter service to Las Vegas, Orlando, Mexico,
the Caribbean and Costa Rica for value-conscious
customers from nine U.S. origin markets, including
Minneapolis/St. Paul, Detroit and Dallas/Ft. Worth.
From London to Las Vegas or the Caribbean to China,
MLT Inc. offers vacation packages to just about
anywhere its customers would like to go.
MLT I c.
is a o g he
top vacation
who esale co panies
the U.S.,
serving a
mi lion customers
in 1998
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~-':~=~,; ~
ilHJ1
1-ri::-1:f1{1,ri:f "
a ETTER . ~- ~-.
_. .,,,.
. - -:::
.. - .,. . '
16
CUSTOMER SERVICE
ew Technology Builds Revenues,
Enhances Customer Convenience,
Reduces Costs
onhwest Airlines is an airline industry leader i.n
employing new technologies to serve customers beuer
and more efficiently.
1 onhwest's web si.Le (www.nwa.com), an award-winner
ince its irnroduction, earned additional accolades in
1998. The site was named "best airline web site" by the
Dow Jones Businc s Dirccto1y and by the Web Marketing
Association. }dost imponant, however, the iLe i.s doing
what iL is intended Lo do - generate revenue for
onhwest, enhance customer service and reduce sales
and distribution costs.
Revenue from online bookings in 1998 was nearly triple
the 1997 le\el, reaching 84 million. More than one
million cusLOmers have registered with nwa.com LO
purchase tickets online, most who have subscribed Lo
electronic mail services that notify them of special fares
and promotions, such as the deeply discounted fares for
weekend travel offered every Wednesday night.
During 1998, onhwest became the first airline to allow
participants i.n i.Ls WorldPerks frequent Oyer program LO
redeem mileage awards online. onhwesL's web site now
also permits online mileage credit requests. In
cooperation with KLM Royal Dutch Airlines, the web
site's expanded booking capability now allows customers
from the U.S., Canada, Japan, the United Kingdom,
weden, 1 orway, Denmark and Germany to arrange
their travel onli.ne. The continuing growth in customers'
self-di.reeled bookings through nwa.com reduces the
demand on orthwest's reservations and cusLOmer
service agents, f reei.ng them to help customers with more
complicated itineraries and service issues. It also
satisfies increasing customer demand for conducting
their own travel planning.
The Northwest Airlines web site is
currently attracting more than 400,000
page views per day, up 450% from
1997 levels. Online sales nearly tripled
in 1998.
the

qu c way
to check-n
Complementing the growth in customer use of
mva.com has been increasing customer acceptance for
electronic tickets. orthwest E-Tickets5
" are available for
travel from orth America to almost all of orthwesL's
destinations worldwide. Electronic tickeLs cost
orthwest significantly less to process while eliminating
the worry of misplaced tickets for customers and
simplifying itinerary changes. B) the end of 1998,
52 percent of orth, est's orth American customers
were using electronic tickets.
To further enhance the convenience of electronic
ticketing, Northwest continues to add Electronic Senice
Centers5
~
1 at airports nationwide. E-Ticket customers can
use Electronic Senri.ce Centers to obtain boarding
passes, make current day flight or seat changes, obtain
iVorldPerks Gold upgrades and, at some locations,
check their own bags. The easy-to-use touch screen
technology helps minimize lines at check-in, again
freeing orthwest customer senrice personnel to
assist customers with nonroutine needs. Electronic
Senrice Centers are now available at 18 orthwest
stations in orth America, including Detroit,
Minneapolis/St. Paul, Memphis, Baltimore, Boston,
Chicago O'Hare, Indianapolis, Kansas City,
ew York City (La Guardia), Los Angeles, Milwaukee,
Newark, Philadelphia, Phoenix, San Francisco,
Seattle/Tacoma, Tampa and \tVashington, D.C. ( ational)
In 1998, more than half of
Northwest's North American
customers flew on Northwest
E-Tickets. Nearly one-fourth of
those used self-serve check-in
technology in the 18 airports
where they are available.
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. _ _, B .UILDING CONNECTIONS WITH
OUR PEOPLE AND OUR COMMUNITIES
18
onnecting with the Community
The 199 panners of Lhe onhwesL AirCares" chariLable
a sisLance program were St. Jude Childrens Research
Ho piLal, Lhe Juvenile DiabeLes FoundaLion Imemmional,
Lhe UniLed I egro College Fund and the March of Dimes.
Laning in 1998, onhwesL enabled customers to donate
frequent flyer miles to AirCares partners. Panners redeem
Lhe miles for travel neces ary for Lheir organizations'
adminisLrative or program purposes. In 1998, onhwesL
passengers donated more than 51 million frequem flyer
miles Lo onhwest AirCares panners.
Each quaner, onhwest Airlines selects a different
nonprofit organization and promoLes iLS mission to
lonhwesL pa sengers Lhrough in-flight programming,
cabin announcemems and coverage in WorldTravc/er,
onhwesLs in-flighL maga:ine. Throuah this program,
onhwe L has helped iLs AirCares partners increase Lheir
,1.sibiliLy and raise more Lhan -+ million.
In 1998, onhwest sem relief supplies to flood-sLricken
communities along Chinas Yangtze River. Similarly,
nearly 50 ton of relief supplie flew from Detroit Lo
Honduras on a onhwesL 7--1-7 LO assisL Cemral American
survwors of Hunicane 1ilch. onhwesL 'Jam AgainsL
Hunger" events and a onh\\'eSL co-sponsored "Walk for
Hunger Relief" raised cash and food donaLions for Lhe
1innesOLa Food Bank eL\vork.
Northwest Cargo shipped
200,000 pounds of relief
supplies to China in 1998.
onhwest employees also volunLeer Lheir Lime and
Lalems under AirCares iniLiaLives. In SL. Paul, MinnesoLa,
more Lhan 250 onhwest people participaLed in a
Lwo-week HabiLat for HumaniLy work camp, helping
renovate a cemury-old row house in a hisLoric SL. Paul
neighborhood. onhwesLs annual Garage Sale was Lhe
single largest fund raiser for the United Way of SL Paul.
In Detroit, onhwesL provides volumeer and corporate
support to dozens of nonprofit and community
organizations including Lhe African World FesLival,
C.S. Mott Childrens HospiLal and numerous communiLy
culLural programs and evems. In Memphis, NorthwesL
people volumeer Lheir time and eArpertise to work with
school students Lhrough onhwests AdopL-A-School
program. At Tokyo ariLa, employees received special
recognition from the CiLy Council for their effons LO
coordinate blood drives.
In 1998, onhwesL again received multiple honors and
awards from chariLable and nonprofiL organizaLions in
recognition of Lhe conuibutions made by Lhe Company
and iLs people. The Panners Award, presented by the
Courage Cemer and Lhe MinnesOLa Business Pannership,
honored onhwests achievements in employing people
,vith disabilities. AddiLionally, Lhe Hazelden FoundaLion,
the Memorial Blood Cemers of MinnesOLa and Lhe
ational Marrow Donor Program all recognized
onhwest and iLS people on separate occasions for
comributions Lo their causes.
NORTHWEST'S COMMITMENT TO THE COMMUNITIES IT SERVES IS CARRIED OUT
THROUGH THE AWARD-WINNING NORTHWEST AIRCARES CHARITABLE ASSISTANCE
PROGRAM. SINCE 1992, NORTHWEST AIRCARES HAS RAISED MORE THAN
$4 MILLION AND PRICELESS GOODWILL FOR ITS CHARITY PARTNERS THROUGH
THE FUND-RAISING AND AWARENESS CAMPAIGN.
' ~-, eu1L-DING CONNECTIONS WITH
. - OUR .PEOPLE AND OUR COMMUNITIES
20
Judith Brant
orthwest Airlines
1998 President's Award Honorees
Each year orthwest Airlines beswws its highest
honor - the President's Award - on a select number
of outstanding achievers. Ten Northwest people
received Lhe prestigious award for their service in 1998.
These people epitomize orthwest's values and guiding
principles and have made a significant contribution to
achieving the airline's mission.
Judith Brant
Manager - Northwest WorldPerks Marketing
Operations, Minneapolis/SL. Paul
Judith Bram is responsible for the administration of the
WorldPerks free travel program, the backbone of the
program's operations. A 33-year employee, she has
consistently contributed to Northwest's success through
her commitment to the customer, fellow employees and
her values and guiding principles. Throughout her
career at Northwest, Judith has been recognized and
commended for the integrity of her behavior by her
co-workers, her industry peers and by her partners wi.th
travel agencies and suppliers.
Berniece Epple
Fli.ghL Attendant, Minneapolis/St. Paul
Bernie Epple celebrated her 52nd year as a Northwest
flight attendant in 1998 by continuing her excellent
care for passengers, especially on her preferred route,
the Minneapolis/St. Paul-London service. As the most
senior flight attendant at onhwest, Bernie not only
lives by the airline's values and guiding principles, but
she has done so for longer than any flight attendant in
Northwest's 72-year history. Bernie always projects
polished professionalism and, as lead flight attendant,
can be counted on to offer customer service that
inspires her peers and motivates her crew.
Midori Kushige
Analyst - Human Resources Planning, Tokyo
The 1998 downturn of the Asian economy created an
extraordinary challenge for Northwest, wi.th its 51-year
tradition of serving the region. Midori Kushige was
instrumental in performing the human resources
support functions needed as the airline restructured in
Japan. During her 13 years wi.th Northwest, she has
been truly committed Lo the needs of the airline and its
customers. Since she joined the human resources team
in 1991, Kushige-san has supported her co-workers and
dedicated the extra effort necessary to achieve success.
Richard Lien
Director - Air Traffic Control &. Systems Development,
Minneapolis/St. Paul
Dick Lien has been insLrumental in exploring
Northwest's new routes over China and Mongolia, as
well as developing the further use of Russian airspace.
Northwest was the first U.S. airline to use the Polar 2
Route, which saves up to one hour and 20 minutes
between Detroit and Beijing. Permission to fly the route
was the direct result of more than a year of negotiations
by Dick and numerous Russi.an aviation officials. Before
joining Northwest in 1996, Dick had an extensive and
varied career as a regional manager with the Federal
Aviati n Administration (FAA).
Gary Meyers
Lead Quality Service Assistant, Honolulu
Gary Meyers is motivated by the pleasure of serving
Northwest's customers. Gary knows Honolulu's
WorldPerks International Gold Elite and WorldPerks
Gold card members by name and they also know him.
Because of his unparalleled work performance, Gary's
reputation is recognized throughout Asia. He also leads
wi.th a supreme personal commitment. Gary regularly
trains new quality service assistants (QSAs) in better
methods to meet customer expectations and resolve
problems on the spot.
Harold Peters William Tarras
Thoma 1 iederer
Boeing 727 Captain l\linneapolis/ t. Paul
In addition to being a first-cla pilot, Tom iederer
conuibutes his time and personal resource LO Pilots for
Kids and anta's Flight of Fama y. Tom plays anta for
underpri\ileged children and \isit ho pitals dunno the
holiday eason. He also has rnlurneered his time to be
the captain for ta..\..i flioht , enablino underpmileoed
children to "fly" \\ith Santa to the , 1onh Pole and return
to a holiday party at the airport, ponsored by other
North\Yest volunteers. Tom is an example of the f!i\ing
spirit of North\\'est people.
Harold Peters
~tanager - Cu tamer enice, Dallas/Ft. Worth
Harold Peter was recently promoted as manaoer-
customer senice in charge of orth\\'est's operations at
Dallas/Fon \\ orth. After more than -+O year of senice,
Harold continues to learn, accept ne\\. challenges and
understand the importance of caring about the people
who \\'Ork \\ith him. Harold has set a standard of
leadership for all orthwest manager . Recently,
Harold's colleagues con\eyed their genuine ense of
respect and admiration. At a gathering of I onhwest
leaders in late 1998, 500 people spontaneously stood in
applause for more than fi\e minutes.
illiam Tarras
Information Senices Account tanager - Flight
Operations Business Results Team, linneapolis/ t. Paul
Bill Tarras has played a key role in automating flight
crew scheduling for _ orthwest pilots and flight
attendants. His proacti\'e and creati\e thinking has
helped to improve the efficiency of all pilot and flight
attendant schedulers and these internal customers ha\e
cited him on numerous occasions for the senice that he
and his staff pro\ide. His knowledge of ere\\' contracts
and FAA regulations sets him apart from his peers. Bill
is also a mentor to his colleagues and is sought out
frequently for ad\ice.
Amy Tellor David "Lamar" Thomas
m , Tellor
l\lanager - Benefits, ~lmneapolis/ L. Paul
In addition Lo her benefits manaoer duties, Am Tellor
totally redesigned the human resources communications
proce s which prO\ided employees with more timely
and accurate information, not only about benefits but
also for other human re ources programs. he is
dedicated LO the notion that satisfied employees lead to
atisfied customers. Her leader hip and take-charge
attitude in pre sure situauons haYe earned the trust of
colleague m many depanmems. my 1s often elected
Lo lead cnucal initiatwes because of her clear
communications and her discernmg direction.
David 'Lamar ' Thomas
Lead Pan :r laterials Inspector Atlanta
Impro\ing the qualit and output of jet engme
maintenance wa a critical goal of the Atlanta
maintenance base in 199 . The leadership of Lamar
Thomas \\as significant in f ulfi.lling that goal. Process
change that Lamar helped implement resulted in a
ignificant reduction in the cycle-time required for
heayy maintenance checks on the JT8D engines that
onhwest uses to power it DC9 and Boeing 72 7
aircraft. orthwests cycle-time is now among the lowest
in the world. The methods Lamar developed have been
institutionali=ed in other area in Atlanta's engine
maintenance operations. Lamar leads by example and
displays om tanding per onal ownership and
responsibility to get the job done.
2
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21
~ . BUILDING TOGETHER A
22
PREFERRED GLOBAL NETWORK
oard of Directors
Gar L. \Vil on
Chaim1an
Nonh\\'est Airline Corporation
John H. Dasburg
Pre ident Chief Exe uti\'e Officer
1 orthwest Airlines Corporation
Richard C. Blum
Chairman :.- Pre ident
Richard C. Blum :.- Associ Le , lnc.
Elaine L. Chao
Distinguished Fello"'
Heritacre Foundation
Alfred A. Checchi
1'1ember - Board of Directors
onh\\'est Airlines Corporation
Doris Kearns Goodwin
Histonan & Author
larvin L. Griswold
Retired lntemational Director
Team ters Airline Di\'i.sion
lnternational Brotherhood of Teamsters
Denni F. Hightower
Professor of 1anagement
Graduate School of Bu iness Administration
Har\'ard Uni\'ersity
George J. Kourpias
Retired International President
lnternational Association of 1achinists
& Aerospace Workers
Frederic V. Malek
Chairman
Thayer Capital Panners
Walter F. Mondale
Partner
Dorsey & Whitney
V. A. Ravindran
President
Paracor Finance, lnc.
Michael G. Ristow
Captain
onhwest Airlines, lnc.
Leo M. van Wijk
President & Chief Executive Officer
KL1'I Royal Dutch Airlines
Directors Emeritus
Thomas L. Kempner
Chairman & Chief Executive Officer
Loeb Partners Corporation
Melvin R. Laird
Consultant
The Reader Digest Association, lnc.
SEATED LEFT TO RIGHT: JOHN H . DASBURG, GARY L. WILSON, ALFRED A . CHECCHI
MIDDLE ROW: ELAINE L. CHAO, MARVIN L. GRISWOLD, V. A. RAVINDRAN,
FREDERIC V. MALEK, DENNIS F. HIGHTOWER, DORIS KEARNS GOODWIN
BACK ROW: THOMAS L. KEMPNER, LEO M. VAN WIJK, RICHARD C. BLUM,
WALTER F. MONDALE, MICHAEL G. RISTOW, GEORGE J. KOURPIAS
0
0
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23
- : BUILDING TOGETHER A
24
PREFERRED GLOBAL NETWORK
enwr Officers
John H. Da burg
Presidem & Chief Executive Officer
Richard H. Anderson
Executive Vice Presidem & Chief OperaLing Officer
Mickey Foret
Executive Vice President & Chief Financial Officer
J. Timothy Griffin
ExecULive Vi e President - MarkeLing & Distribution
Philip C. Haan
Executive Vice President - International, ales &
InformaLion Services
Douglas M. Steenland
ExecuLive Vice Presidem - General Counsel &
Alliance
Raymond J. Vecci
ExecULive Vice PresidenL - Customer Service &
Presidem - Michigan Operations
Christopher E. Clouser
Senior Vice President - Human Resources,
Communications & Administration
Stephen E. Gorman
Senior Vice Presidem - Technical Operations
Richard B. Hirst
Senior Vice President - Corporate Affairs
John S. Kern
Vice President - Regulatory Affairs &
Chief Safety Officer
Robert H. azarian
Treasurer
FINANCIAL REVIEW
Northwest experienced a challenging year in 1998. The airline's
financial performance suffered from labor disruptions and a
pilots strike. Additionally, earnings were negatively impacted
by settlement provisions for labor agreements and other
non-recurring charges. Northwest estimates these actions had a
negative pretax impact of $1.3 billion. Despite these difficulties
in 1998, Northwest continues to focus on its principal financial
goal of maximizing shareholder value.
Maximize Return on Assets
Northwest continually seeks to deploy existing assets where
they can generate maximum returns and invest in additional
assets only when they can produce superior returns. Since
1992, Northwest has been in the forefront in focusing on core
strategic strengths and expanding beyond its core asset base
largely through the use of long-term domestic and international
alliances and code-share agreements.
As an innovator of alliances, Northwest continues to lead in
creating the premier air transportation network by adding
Continental Airlines to our global alliance network. Together
with KLM and its new strategic partner, Alitalia, the Northwest
alliance network is well positioned to compete effectively in the
global marketplace and capitalize on the significant alliance
synergies and revenue opportunities. Long-term alliances have
proven to be a cost effective and capital efficient way to enhance
the value of the enterprise while improving its strategic and
operating flexibility.
1998 Performance
Capacity - Through strategic route structure rationalization
and, as a result of the labor disruptions and subsequent
pilots strike, orthwest's capacity declined by 5.8% in
1998. Northwest expects to increase ASMs in 1999 by
approximately 9%. Prudent capacity reductions were initiated
in the Pacific entity at the onset of a weakening Asian economic
environment with 1999 Asian capacity expected to remain flat
over 1998. We believe that the Asian economic environment
has stabilized and Northwest is positioned to benefit from the
inevitable recovery in the region. In the Atlantic entity,
Northwest expects to realize capacity growth as we capitalize on
our joint venture alliance with KLM. Joint venture trans-Atlantic
capacity will grow approximately 9% versus 1998 on a
strike-neutralized basis.
Despite Lhe labor disrupLions in 1998, orthwest still
experienced a 73.1 % load factor for the year, which was only
1.2 points lower than a 1997 record level.
Scheduled ASMs and RPMs
MILLIONS
100,000
LOAD FACTOR
75%
90,000
80,000
70,000
60,000
'93 '94 '95 '96 '97 '98
ASMs -0-- Load Factor
Results - Operating results for 1998 were disappointing.
We estimate that Lhe labor disruptions, Lhe strike and other
non-recurring charges cost orthwest $1.3 billion in lost
revenue and increased expenses. As a result, orthwest
70%
reported a 1998 operating loss of $191 million and a net loss of
$286 million. Adjusting 1998 for the impact of the strike and
non-recurring expenses, orthwest's pro fo1ma operating profit
of $1.05 billion and net income of $543 million were near 1997
record financial performance. Unit costs in 1998 increased by
6.7% versus 1997, but much of this increase is attributed to the
labor disruptions and the resulting ASM decrease experienced
during the year. At Northwest, we continue to recognize the
need to be vigilant in cost control and expect to be involved in
meaningful initiatives throughout 1999 to minimize unit cost
increases. We believe that orthwest will continue to have a
competitive cost structure.
25
26
A a re ult of the trike, onhwe t' operating margin
deteriorated to a n gati\'e 2 .1 % . However, adj us ting for 1998'
labor di mption and non-recurring charges, we estimate that
1 onhwe t would have generated an industry competitive
10.3% operatina marni.n.
Operating Margins
12%
10%
8%
6%
4%
2%
0%
2%
4%
Earnings Per Share - Diluted 1998 earnings per share were a
di appointin las of $3.4 , but adjusting for the 1.3 billion
pretax impact of 1998' labor disruptions and non-re urring
charge , we e timate orthwe t would have had diluted
earning per hare of 5.67.
Diluted EPS
$6
5
4
3
2
(1)
(2)
(3)
($4)
Fleet Initiatives - Northwest continued its strategy of
identifying and employi.na the aircraft best suited to the
Company' rout tructure while making the mo t efficient use
of invested capital. Several major fleet transactions have been
completed.
orthwest acquired 10 AVRO RJ85 regional aircraft in
1998, which are operated by Mesaba.
onhwest took delivery of 13 A320s, which were financed
with leveraged leases and long-term debt.
orthwest decided to retire seven of the oldest Boeing
74 7-100/200 aircraft in the fleet which were operated
primarily in the Pacific region. Four of these aircraft will be
replaced by the accelerated delivery of four new Boeing
7 4 7 -400 aircraft in 1999.
- 10 DC9-10s were removed from the fleet.
orthwest continued the life extension initiatives on the
DC9 fleet. orthwest's entire fleet of DC9s will be complete
with new interiors and hushkitted engines in 1999.
- In 1999, orthwest ordered 54 new 50 seat regional jets
to be delivered starting April 2000 v..ri.th options for up to
70 additional aircraft.
Capital Structure Management
orthwest's financial strategy is to minimize capital costs while
allowing the Company to maintain adequate levels of liquidity
in order to maximize strategic and operating flexibility. To this
end, liquidity at year-end was approximately $1.5 billion:
Liquidity
MILLIO
NS
$2,500
2,000
1,500
1,000
500
0
'93 '94 '95 '96 '97 '98
Northwest completed several significant financial transactions
during the year.
- The issuance of $200 million 7 5/8% senior unsecured
notes due in 2005 and $200 million of 7 7/8% senior
unsecured notes due in 2008.
Northwest accelerated the repurchase of 18.2 million shares
of common stock from KLM for $780 million. The
transaction was financed through cash payments in 1998
and senior unsecured notes of $23 7. 7 million.
- Northwest's financial exposure to the new Detroit Metro
Airport was minimized with the timely issuance of $1.02
billion in general airport revenue bonds by Wayne County,
Michigan at a rate of 5.27%.
- Northwest completed the purchase of 13.5% of
Continental's common stock for approximately
$465 million, which allows for 50.3% of the fully diluted
voting power of Continental as of December 31, 1998.
Growth in return on capital will be aided by our prudent fleet
decisions and continued commitment to alliances, specifically
with Continental and KLM, where earnings will grow with
minimal capital investment.
Operational Developments
Northwest made significant progress on strengthening the
foundation of the global alliance network to enhance its
competitive advantage.
- In early 1998, Northwest and KLM successfully
integrated European and North American workforces
to further capture alliance cost synergies by eliminating
redundant operations.
- Northwest and Continental began implementation of the
initial phases of our alliance, including frequent flier
reciprocity, joint lounge access, and code-sharing in Pacific
and domestic city pairs. Additional international and
domestic code-sharing is planned for in 1999.
- Northwest implemented a long-term cooperation agreement
with Air China that will generate online access to
99% of the China-U.5./Canada traffic flows.
- Northwest extended the current commercial cooperation
agreement with Alaska Airlines and Horizon Air.
Outlook
Northwest will rebound from the difficulties experienced in
1998 and focus on returning to an industry leading service
provider enhancing shareholder value in 1999 and beyond.
With strong system growth through our alliance network and
sound financial management, Northwest expects to capitalize on
its strengths and generate future profit growth. Our alliance
partnerships, especially the new agreement with Continental,
and the industry leading joint venture relationship with KLM
and its partner Alitalia, place the Company in a strong
competitive position to further improve shareholder value.
Our global network provides diversity among international
regions, which makes earnings less volatile. Strong domestic
and trans-Atlantic markets have helped offset recent Asia
weakness. We are confident Asia's dynamic growth will revive as
we move into the 21st century from which Northwest is well
positioned to benefit.
27
I
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
onhwest Airlines Corporation ("NWA Corp." and, together
with its subsidiaries, the "Company") incurred a net loss of
285.5 million for the year ended December 31, 1998,
compared with net income of $596.5 in 1997. Loss per share
was $3.48 in 1998 compared with diluted earnings per
share of $5.21 in 1997. An operating loss of $191.4 million
was reported in 1998 compared to operating income of
$1.16 billion in 1997.
The year ended December 31 , 1998 was affected by
labor-related disruptions which included the pilots' strike.
Because of these events, year-over-year comparisons are not
a useful measure of the underlying operating and financial
performance of the Company. However, for continuity of
reporting and as a measure of the impact of the labor
disruptions, the traditional comparisons are presented herein.
The Company estimates the cost of the labor disruptions in lost
re,enue and incremental expenses to be approximately $1.04
billion on a pretax basis for the year ended December 31 , 1998.
orthwest Airlines, Inc. (" orthwest") is the principal indirect
operating subsidiary of WA Corp., accounting for more than
95% of the Company's 1998 consolidated operating revenues
and expenses. The Company's operating results are significantly
impacted by both general and industry economic environments.
Small 0uctuations in revenue per available seat mile ("RASM")
and cost per available seat mile ("CASM") can have significant
impacts on the Company's profitability The Company acquired
Express Airlines I, Inc. ("Express") on April 1, 1997; the
operating results of Express are included in the consolidated
financial statements commencing on that date.
Results of Operations - 1998 Compared to 1997
Operating Revenues - Operating revenues were $9.04 billion,
a decrease of $1.18 billion (11.5%). Operating revenue per total
service available seat mile ("ASM") decreased 6.6%. System
passenger revenue decreased $1.22 billion (13.8%) primarily
attributable to a decrease in scheduled service ASMs and a
decrease in passenger RASM due to the labor disruptions. The
decrease in RASM was also a result of a weaker Asian economic
environment and weaker foreign currency exchange rates.
Passenger revenue included $93.6 million and
$100 .1 million of Express revenues for the years ended
December 31, 1998 and 1997, respectively
Domestic passenger revenue was lower due to decreased
capacity and yields resulting from the labor disruptions.
The following analysis by market is based on information reported to the U.S. Department of Transportation ("DOT') and
excludes Express:
System Domestic Pacific Atlantic
1998
Passenger revenue (in millions) $ 7,512.9 $ 5,190.1 1,619.9 $ 702.9
Increase!(decrease) from 1997:
Passenger revenue (in millions) $ (1,209.1) $ (691.8) $ (573.1) $ 55.8
Percent (13.9) % (11.8)% (26.1) % 8.6 %
Scheduled service ASMs (capacity) (5.8) % (6.3) % (12.1) % 22.2 %
Passenger RASM (8.6) % (5.8) % (15.9) % (11.1) %
Yield (7.0) % (5.4) % (13.4) % (5.4) %
Passenger load factor (1.2) pts. (.3) pts. (2.2) pts. (5.1) pts.
Pacifi, pc sscn;:er re\enue de reased foe to the bbor
di-ruptions, an unL \. rabk oeneral c 'Onorni , e1ffir nmem in
the Pa ifi , an \\'eaker Asian urrcn ies. of wh1 h the brgc-t
imp. t w::is ue tL th , Ja ancsc e on ,m\' and \'en. The :JYerac,c
yen per .: . dollar ex -han);,C r;1te for the \'Car ended
December 1. 1 :io ::1
nd 1 o 7 was b.., and l 2l. rcspe thclv. a
\\-C.:ikcnin ,f the \en of l l2c 1 .
ln rc-ponse to the l
ntinuLd
\\eak :\ 'ian c onomk crnirL nmcm, kmcr demand ,md
incr-ased c mpctition, th' Ltnp,rny reduce:! c:1p,KiLY in the
rc\!.ion during 1 l _
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..\.tbnti pas:cn
0
cr rcwnue in n :,1 d due tL an in rease in
'Jpacit\ \\hich resulted prinnril frnm new CTyin..., in luding
-en ice to l\lumbai and Delhi_ lndia fr rn Am terdam) ,md the
initiati n of Phihdclphia-A.m. tcrdan an :cJlll -Anucr :1111
- ni c and incrca--- in l\linncapolis/'t. Paul-Am tcrdam and
D troit-Am t rdarn seni . l ff-er by a de rc;.1 e in R..\. l a, a
re ult L f the lab r di rupti n
ar
0
0 rc\cnu' d er a -ed J
1 - - _
L mil hon ( l L. 7 ro) due LO
1-+.-+ 1
fewer carb t n rnilc and ab.- t}o d rea c in argL
re\ nuc p r Lon mile due Lo Lhc bbor di-ru Lion , 1 m:::aker
'ian conomic ernironm nt and w-::ikcr ian curren
ex hancre rJtes. $1 0. - million ( 1.0 )
du t in rea cd ren:nu from l,L l R 'al UL h Airline
("KL r joint \' nturc Jllian ukrncm - and lLT lnc.
Operating Ex]J 11sc - per:nin
.. 167.6 milli n (1 . 9o). pcraLin "pa 'll ' ecr ~nd 5.9l}o LL
1.-+ billi n total 1-v-i
6. 7% incr a in opernLina exp n e per Lot, l enicc l.
larie , wacr
du primaril ' to an incr a e in ;}\'Cl'c
e full-time equi\ alclll
coll ti\ bargainin a re m nt and the impn t of culcd
ontra L ir raft fuel and Lax d er ::i cd .. 2 . 7 million
(21. %) du to a 17.-+% de ros in the a\' ra fuel pri c per
aallon fr m 64. 6 nt Lo 5 0 ccnr ::ind a .0% d-cr as in
fu l aall n um d as< re ult of the lab r di rupLi n-.
C mmi i n d er a d $1 .3 milli n (l .1%) due le lower
reYenucs .1s J. result ,f the L1 ,r disrupti n -. ,1 k \\er eff-c 1Ye
ommi:si ,n r,uc ;1u,ed l \' ~1 _ hift in reY -nu ' mt. -111 I hangcs
Le the L1mp:1m's 1mm1ss1 n structure\\ hich bcg:111 in
-:,eptembcr l () 7 . . \ircrc1fL nuime1unce , m,ueruls Jnd rcp,1irs
in -rcJscd .. 1-+ lo mdli n ( __ _
7':i) due tli h1~hcr ullli::.illlrn l r
outsid' sup1 hers JS .1 result l rm 'rc:1sed _- -heduk :l L1\crh.rnb
Jnd Liming Lf check cYclcs. ,md dccre;1sed empk\ e'
p1\,du tiYll\ due w the L1l or 1
srupt1Lrn..: ther e'\pcns's (th ,
pnn -1p:1l compLmcnts l f \Yh1 -h inclu e ,utsidc scn1l.es. scllm':...
.md marketing C'\penses, passcnc-er food . pcrsL nncl , ,1Lhcnis111g
~111d pwmc1ti n;1l e:-.:1 en.::cs. commurn -,Hi ,n e:'\pcnscs .md
SUf plies) increJscd ,;-231.-+ milliLm ( 12.- '1.1\ du , pri111.1rih tL
in reJse :I busmes, kw ?\\LT Inc., bims. ;,dvcrusmg ,md
promotil,ns, JS well ;1 th - ,1-celcr.u -d retirement of , cYen of the
(1tnp;1m: oldest BL,cing , -+ 7 ,mcr:,ft rcsulllng in ,t llcct
li..:positiL,n ch.1r2,e of Il,-.o milliL,n re ord-d in the founh
qu,mcr. : cc NL,t ' A w the -c1nsol1d.1tcd Fin,mc1,1l St:ll m ' nLS
k r :1 ditional discussi ,n of the lket dist ositwn -h,ngc.
Ot l1 cr l11 0111 c n11rl Expense - lmcrcsL expense-net mcrc,1 ed
$7 L
.l milli rn ( .Yo) prim;1rih Luc w ;,ddiuoml l OtTO\\'l11gs
LO fun :l the L>mpa1w~- c,sh re uiremcnt- . fh1s lc\'Cl of in -re,1 e
i..: e:--:pencJ w -ominue into 1991 du - ro the higher k\'t'.l L)r
borro\\'ings. The foreign currency k ss k r the y 'Jr ' 11 led
ccmber l_ l 9L 8 was primarih attributable to b~1Lmec sheet
remc:.1 ur-ment of C,rci.~n cu1rn - -denL mi1Htcd asset: ~md
liabiliLi '. thcr, neL in r :1 cl primarily due to the s:1lc or an
equit i1westrncm in GHI Limited.
Re ult of Operations - l 9 7 om.pared to 1 6
pcrnli11g Rcvc1111cs - perating r'\'Cnucs \\'ere . l 0.2.., billit,n,
m impro\Tm nt of$ -+ . .., million . - <}c) . peratin6 rc\'Cnue
per tot, l servic A l decreased _
L 'A
i. tcm pa nger re\cnue
in r a cd $22 .8 millic n (2.ol ,) due Lo an increase in
heduled eni A ~ ( rnd the in lusion of E.1 res re\-nue
,f $ ll 0.1 milli ,n. The c incrc1 cs\ ere offset b ~.decrease
in pa-s no r Pi\ '1'1 riven b unfovorablc foreign urren y
ex han c raLc an l the rein tatemcnl or fed ral Li k ' t tax's
i n 1
la re h l 7 .
29
30
The following analysis by market is based on information reported to the DOT and excludes Express:
System
1997
Passenger revenue (in millions) $ 8,722.0
Increasel(decrease) from 1996:
Passenger revenue (in millions) $ 123.7
Percent 1.4 %
Scheduled service A Ms (capacity) 3.2 %
Passenger RASM (1.7)%
Yield (3.4) %
Passenger load factor 1.2 pts.
Domestic passenger revenue increased as a result of an increase in
capacity and an increase in RASM. The Company increased
frequencies to ten cities and entered six new markets. The increase
in RASM was due to an increase in passenger load factor offset by
a decrease in yield due to the reinstatement of federal taxes on
airline tickets and international departures. The Company
benefited from the absence of ticket taxes for two months in 1997
versus eight months in 1996.
Pacific passenger revenue decreased due to a decrease in RASM
which was partially offset by an increase in capacity related to the
initiation of Minneapolis/St. Paul-Osaka service and additional
trans-Pacific frequencies, mainly for the Minneapolis/St. Paul-
Tokyo service. The decrease in Pacific RASM was primarily due to
a decrease in yield, which was largely attributable to a weaker
Japanese yen. The average yen per U.S. dollar exchange rate for
the year ended December 31, 1997 and 1996 was 120 and 108,
respectively, a weakening of the yen of 11.2%. Atlantic passenger
revenue increased due to an increase in capacity and an increase
in RASM.
Cargo revenue increased $43.6 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 with KLM and increased charter activity.
Domestic Pacific Atlantic
$ 5,881.9 $ 2,193.0 $ 647.1
$ 165.5 $ (58.4) $ 16.6
2.9 % (2.6) % 2.6 %
2.2 % 5.6 % 1.7 %
.7 % (7.7) % .9 %
(2.0)% (7.4) % (1.4) %
1.8 pts. (.4) pts. 1.9 pts.
Operating Expenses - Operating expenses increased
$241.9 million (2.7%) compared to the 3.3% capacity 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 $314. 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
$3.1 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 orth 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 being included in
maintenance mate1ials and repairs expense. Other expenses
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 year ended December 31,
1997 was primarily attributable to balance sheet remeasurement
of foreign currency-denominated assets and liabilities.
Extraordinary Item - The Company repurchased for
$78.7 million certain WA Trust o. 2 aircraft notes in
January 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.
Liquidity and Capital Resources
At December 31, 1998, the Company had cash and cash
equivalents of $480 million and borrO\vi.ng capacity of
1.0 billion under its revolving credit facilities, providing total
available liquidity of $1.-+8 billion.
Cash flows from operating activities were 88.3 million for
1998, a decrease of $1.52 billion compared with 1997 due
primarily to the labor disruptions as well as higher than normal
sale proceeds of frequent flyer miles in 1997 of 387.7 million.
Cash flows from operating activities were $1.61 billion for
1997 and $1.37 billion for 1996. et cash used in investing
and financing activities during 1998, 1997 and 1996 was
$348. 7 million, $1.4 3 billion and 1.66 billion, respectively.
Investing Activities - Investing activities in 1998 consisted
primarily of the purchase of 13 Airbus A320 aircraft,
ten RJ85 aircraft and three used DCl0 aircraft, costs to
commission aircraft before entering revenue service, engine
hushkitting, aircraft modifications, deposits on ordered aircraft
and ground equipment purchases. On ovember 20, 1998,
WA Corp. issued 2.6 million shares of common stock and
paid $399 million in cash to acquire the beneficial ownership of
8. 7 million shares of Class A Common Stock of Continental
Airlines, Inc. ("Continental"). The Company funded its
investment in Continental with cash from its general
working capital. In a related transaction, orthwest and
Continental entered into a thirteen-year global strategic
commercial alliance that connects the two carriers' networks
and includes extensive code-sha1ing, frequent flyer reciprocity
and other cooperative activities.
Investing activities in 1997 consisted p1imarily of costs to
commission aircraft before entenng revenue service, deposits on
ordered aircraft, the refurbishment of DC9 aircraft, engine
hushkitting, ground equipment purchases, the acqmsiuon of
Express, the purchase off lease of four aircraft and the purchase
of eight RJ85 aircraft, one DCl0-30 aircraft and three DC9-30
aircraft. Capital expenditures for 1996 pertained primarily to
the acquisition of 13 Boeing 757 aircraft, seven DC9-30 aircraft,
three DCl0-30 aircraft and two 7-+7-200 aircraft; the purchase
off lease of 22 aircraft and the refurbishment of DC9 aircraft.
Financing Activities - Financing activities in 1998 included the
Company's repurchase of its remaining Common Stock held by
KLM, the issuance of -+00 million of unsecured notes, the
incurrence of 2-+0 million of debt secured by six Boeing 757
aircraft, the payment of debt and capital lease obligations, and
the sale and leaseback of 13 A320 aircraft and four RJ85
aircraft. During the third quarter, in anticipation of potential
labor disruptions, the Company borrowed the 2.08 billion
available under its credit facilities, and subsequently repaid
such borrowings. In October 1998, the Company borrowed
$835 miliion to fund its cash requirements.
On May 1, 1998, VA Corp. purchased from KLM the remaining
18.2 million shares of "1-vA Corp. Common Stock which had
been reclassified as redeemable common stock. The Company had
previously agreed to repurchase the shares over a three-year period
ending in September 2000. The purchase price of $780.4 million
was paid ,vi.th a combination of $336. 7 million of cash and three
senior unsecured 7 .88% notes ,vith principal amounts of
$206 million, $137.7 million and $100 million. The Company
repaid the first note on September 29, 1998; the remaining two
notes are due on eptember 29, 1999 and 2000, respectively.
31
32
The Company's Credit Agreement was amended in December
1997 to increase its existing revoking credit facility from
$500 million to $675 million and to extend the availability
period to December 2002. In addition, the facility added a new
$175 million 36-+-day unsecured revolving credit facility due in
December 1998. In December 1998, $10.2 million of the
175 million 364-day revolver was convened i.mo a term loan
due December 2002. The remaining $164.8 million was
renewed for another 36-+ days; however, to the extent this
facility is not renewed for an additional 364-day period, the
Company may borrow up to the entire non-renewed portion of
the facility and all such borrov-rings mature in December 2002.
In fay 1998, the Company provided certain collateral to secure
its previously unsecured term loan and revohring credit
facilities under the Credit Agreement.
In lay 1998, the Company obtained a secured 36-+-day
$1.0 billion additional revohring credit facility. This revohring
credit facility was renewed in February 1999,
which extended the expiration date from May 11, 1999 to
February 8, 2000 and reduced the amount available from
1.0 billion to $750 million. Interest is calculated at a floating
rate based on the London Interbank Offered Rate plus 2.25%
\\'1th a .5% per annum commitment fee payable on the unused
portion of such revolving credit facility.
In February 1999, the Company completed an offering of
--l-21.2 million of pass through certificates to be used to
finance , directly or through leveraged lease arrangements, the
acquisition of four new Boeing 7 4 7-400 aircraft scheduled for
delivery in 1999.
Financing acti\rities in 1997 pertained primarily to WA Corp. 's
repurchases of its Common tock and Seri.es A and B Preferred
tock, 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. On September 29, 1997, the
Company repurchased 6.8 million shares of WA Corp.
Common tock held by KLM for 273.1 million. Concurrently,
all of WA Corp.'s e1ies 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.
Financing activities in 1996 pertained pri.mari.ly 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 July 1996, WA Corp. acquired from KLM
3,691.2 shares of WA Corp. Series A Preferred Stock and
2,962.8 shares of WA Corp. Seri.es B Preferred Stock in
exchange for $3 79 million of unsecured promissory notes
which were repaid in December 1996.
See ote D to the Consolidated Financial Statements for
maturities of long-term debt for the five years subsequent to
December 31, 1998.
Capital Commitments - The current aircraft delivery schedule
provides for the acquisition of 102 aircraft over the next eight
years. See otes Kand to the 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, but e eluding those costs discussed below,
are projected to be approximately $250 million in 1999,
which the Company anticipates funding primarily wi.th 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, 1998, the Company hushkitted 130 of
these aircraft and plans on completing the remaining aircraft
by December 31, 1999 for 68 million. The agi.ng aircraft
modifications are expected to aggregate $14 7 million during
the next three years for these aircraft. Capital expenditures
for engine hushkits and aging aircraft modifications were
$157 inillion in 1998. The Company has also elected to
upgrade aircraft systems and refurbish interiors for the
1 73 DC9 aircraft. Capital expenditures associated wi.th
upgrading systems and interior refurbishment were $31 million
in 1998, which completed the interior refurbishment of the
DC9 aircraft. Aircraft system upgrade costs are expected to
aggregate $2 7 million during the next three years.
The Company completed the interior refurbishment of three
74 7 aircraft and fiYe DClO aircraft and plans to refurbish the
interiors of 25 additional 7 4 7 aircraft and 21 additional
DClO aircraft. The program to refurbish the interior of the
Companys international H 7 and DClO aircraft is estimated
to aggregate S67 million during the next three years. As of
December 31. 1998. the Company hushkitted 10 of its 29
Boeing 727-200 aircraft. Remaining costs are esnmated to
aggregate approximately 13 million in 1999.
1n February 1999. the Company entered into an agreemen to
purchase 54 Canadian Regional Jet aircraft. ,,ith options to
purchase up to 70 additional aircraft. The scheduled deliYery
for such aircraft is nine in 2000. 22 in 2001. 10 in 2002 . eight
in 2003 and fi,-e in 2004. Committed expenditures for the e
aircraft. including estimated amounts for contractual price
escalations and its predefo-ery deposits, "ill be approximately:
S50 million in 1999. Sl 75 million in 2000. 400 million in
2001. S200 million in 2002, S150 million in 2003 and S100
million in 2004. Financing has been arranged for the
committed aircraft. The Company has not yet selected the
operator of these aircraft.
Working Capital - The Company operates, like its competitors,
\\ith a working capital deficit. which aggregated 1.59 billion at
December 31 , 1998. The \Yorking capital deficit is primarily
attributable to the S 1.11 billion air traffic liability for adYance
ticket sales.
Labor Agreements - The labor cost sa,ings discus-~ed in _ -ate C to
the Consolidated Financial Statements irnprmed the Company'.s
1993 to 1996 cash flov, from operating activities. The Companys
1993 agreements ,,ith the employee unions prO\ided that ,-~age
scales at the end of the \Vage Sa,ings Period snapback to August
1, 1993 lewls and snap-up pursuant to formulae based in part on
wage rates and wage rate increases at other large G.S. airlines.
Consequently at the end of the \Vage a,ings Period salaries and
wages increased by approximately Si340 million on an annualized
basis including S50 million for snap-ups. The Company'.s labor
contract with each of its unions became amendable as each labor
cost sa,ings agreement ended in 1996. Conuact negotiations
began at that time with the unions.
On August 28. 199 . _ onhwest ceased its flight operations
as a result of a strike by its pilots represented by Air Line Pilots
. ..\ssociation International ("ALPA} The_ -onhwest _ laster
ExecuriYe Council l--- onh,,est }-1EC) of ALPA announced the
commencement of the strike as a result of the failure to reach
agreement with_ orthwest on the terms of a new collective
bargaining agreement. The strike followed the e>..7Jiration of a
30-day .. cooling off' period that began July 30, 1998. ,,-hen
an impas-e ,,as declared by the _ ational ).[ediation Board
~ -- 1 _
1B"). The cessation of flight operations lasted 1 days. On
eptember 13. 1998. a ne\\' four-year agreement was ratified.
The agreement prO\ides for lump sum retroacti,e payments to
pilots equal to 3.5% of salarie since October 31. 1996, \\aae
increases of 3% annually through 2001. 2.5 million stock
options to be granted o,er a three-year period. elimination of
the "B pay scale .. over three years. enhanced vacation benefits
and a profit sharing plan. The agreement also permits the
implementation of the Continental alliance.
On October 28. 1998, the Company and its 15 meteorologists
reached and ratified an agreement on a new six-year contract.
On October 30. 199 . the 260 members of the Aircraft
Technical uppon Association. the Companys fourth largest
union. ratified a ne\\- six-year agreement. On December 1. 1998.
the 170 members of the Transport \\orkers "Cnion ratified a
new foe-year contract. On December 23. 199 , the Company
and its 148 flight kitchen employees represented by the
International .-\ssociation of :\lachini t and Aerospace \Vorkers
("L-0.f") signed a new four-year contract.
The Company and the IA\1 reached a tentati\e agreement in
June 199 , "hich \\as not ratified by the covered employees,
who included mechanics and related employees, clerks. agents,
equipment senice employees and stock clerks. In ~member
1998. at a representation election. a majority of the mechanics
and related employees elected the Aircraft \r
lechanics Fraternal
Association to be their collective bargaining representative.
The L-0.1 is protesting the election and certification of the ,ote
is currently under re\ie\\- by the ! l\iB. The remaining ground
employees continue to be represented by the IAl\L
2
2
l>
2
2
l>
33
34
On Fcbru,tr\' 16, 1999, the lr\i\1 r,11ifiecl ,l new four-year
,tgrccrnent. The ;tgrecment pre.wides [or lump sum retroactive
pJyinl.'nts l.'qu;:il to 3. <)<1
or salaries since ctober 2, 1991, a
I+%\\ ;1gc increase ewer th ' duration l r the contract and a
5U'\1 mneas' in pension benefits. The ornpany estimates the
i11LTC;tscd costs under the six ratified agrcemcms will be
;tpp1w,irnatCI) , 1 +"> million for \9C 9 based on currcnL
le\ els or empl ymenL.
\'he (01111 ~111) rem;t1ns in direct negotiations with the
lmernation,11 F\1\.1therhood or Teamsters ("lRT'), which rcprc ems
iL flight ,mcndants. ontract negotiations arc being m dialed by
the i\ rn. Because the terms or new bbor agrce1ncrns will be
determined by coll 'cti\ e bargaining, the ~orn1 any cannot predict
tlK c.1utcL1rne or tl1c negotiations aL this time.
lark.ct Risl cnsitive lnstrumcnts and Positions
The risk inherenL in the ompanys market risk sen ili\'C
instrurnems and positions is the potential loss ari ing from ad\'crse
changes in the price or fuel, foreign cunenc) xchange rates and
interest r,llc. as dis 'Usscd bclo\\. The scnsiti\'iLy analyses pre emcd
dl1 not C'<..1nsidcr the cff ccLs that such ad\ crsc changes may ha\'C on
O\ crall eC(\nomi, act i\'ity nor do they consider additional actions
man,1gemc11t ma' take Ll) mitigate its cx1 ,sure Lo such changes.
;\ 't ml results may differ. Sec otc O to the Consolidated Fin:111dal
SL1temcnts l~,r accounting l olicic ;-ind additional inkwmmion.
Aircrnft Fuel - The omparn s earnings ,1n' affected by
changes in the price ,lnd :wa1bbiluy l)r aircraft fuel. ln order Lo
pmYidc ,1 measure Li col1lrl1l LWcr price and suppl , the ompan)
lLtdes ,md ships fuel and maintains fuel storage facilities Lo
SU\ pon 11s night opcr,uions. The 01111 any also manage the price
irk or Cucl costs pnrnaril utili:ing futures comracts traded 011
reguLucd ex hanges. lark 'L risk is cstirnaLcd as a h vmheLical
10'\, incr 'asc in the c - rnber 31, 1998 cost per gallon or fuel
l ;t_ 'd ln projected l 999 rucl us,tgc \\'hich \n,uld rculL in an
mcrc:1se LO ,1irnart fuel c:,.,.pcnse of a1 pro>sm,atcly -,0 million in
1990, net or gains rcali:c I [wrn fuel hedge instn.m1Crn
outsundmg at De "mbcr 31, 1998. As of December 31, l 998, the
-l1rnp,m\ h;1d hedged appro>,.1matcl I O')o of its l 999 fuel
r'qwrcm 'nLS, including +O<),, of the Grst quarter.
Foreign urrc11cy - The ornpany is e>qJo ed LO the effect of
foreign exchange rate nuctualions on the U.S. dollar value of
foreign currency-denominated operating revenues and expenses.
The ornpanys largest exposure comes from the Japanese yen.
horn Lime to Lirne, the ompany uses financial instrurnems L
o
hedge its exposure Lo the Japanes yen. The result of a uniform
] 0% Lrcnc,Lhenin in Lhe value of the U.S. dollar from December
l, 1998 levels rebLi\'c Lo each of the currenci sin which Lhe
ornpan 1
s revenues and e pen es are denominated would result
in a decrease in operating income o[ approximately $60 million
for the year ending December 31, 1999, net o[ gains realized from
yen hedge insLrumcrns outstanding al December 31, 1998. This is
due Lo Lhe ompany' foreign curren y-denominated revenues
exceeding its foreign currency-denominmed expenses. The
increase Lo other income clue Lo the remea urcrnem of net foreign
currency-denominated liabilities and Lhe increase Lo common
stockholders' equity deficit due to the translation o[ neL
yen-denominated liabilitie resulting from a 10% strengthening in
the \'aluc of the U. -. dollar is not material. Thi sensitivity analysis
was prepared based upon projected 1999 rorcign currency-
denominatcd revenues and expenses and foreign currency-
denominated assets and liabilities as o[ December 31, 1998.
ln 1998, Lhc ompanys yen-denominated revenue exceeded its
yen-denominated cx7)enscs by appr xirnatcly 38 billion yen
(approximately $286 rnillion) and iL yen-denominated liabilities
exceeded its 'cn-dcno1T1inated a sets by an average o[ 16.4 billion
yen ($12 5 million). ln general, each Lime the yen strengthens
(weakens), the ompanys operating in ome is favorably
(unfavorably1 impacted due Lo net yen-denominated revenue
ex eding expen cs and a nonoperaLing foreign currency loss
(gain) is rccoiTnized due Lo Lhe remeasurement of net yen-
denominated liabilities. The Cornpanys operating income was
negatively irnpactcd by approximately , 20 million due LO the
a\'craoe yen being weaker in 1998 compared Lo 1997. The yen to
U. -. dollar exchange rate al December 31, 1998, 1997 and 1996
was 113 yen LO l , 131 yen Lo $1 and 116 yen Lo $1, respecL
i\'cly.
There was no material impact on l 998 ean1ings a ociated \,viLh
the Japanese yen puL options purchased to hedge iL 1998 net
ycn-dcnorninated cash flows. As of December 31, 1998, the
Cornparlv had entered imo forward comra L Lo hedbe
approximately 35% of its 1999 yen-denominated ticket sales,
which also represents approximately 95% of the Company's excess
of yen-denominated re enues o er expenses.
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 eJ\.rpense from floating rate debt
instruments. The Company has mitigated this risk by limiting
its floating rate indebtedness to approximately 46% of
long-term debt and capital leases at December 31 , 1998. If
long-term interest rates average 10% more in 1999 than they
did during 1998, the Company's net interest expense would
increase by approximately $14 million. If short-term interest
rates average 10% more in 1999 than they did during 1998, the
Company's interest income from cash equi alents and short-
term investments would increase by approximately $3 million.
These amounts are determined by considering the impact
of the hypothetical interest rates on the Company's floating rate
indebtedness, cash equivalent and short-term investment
balances at December 31, 1998.
Market risk for fixed-rate indebtedness is estimated as the
potential increase in fair value 1esulting from a hypothetical
10% decrease in interest rates and amounts to approximately
$50 million. The fair values of the Company's indebtedness
were estimated using quoted market prices or discounted future
cash flows based on the Company's incremental borrowing rates
for similar types of borrowing arrangements.
Other Information
Income Taxes - Sections 382 and 383 of the Internal Revenue
Code of 1986, as amended (the "Code"), and Treasury
regulations limit the amounts of net operating losses (" OLs"),
alternative minimum tax net operating losses ("AMT OLs") and
credits that can be used to offset taxable income (or used as a
credit) in any single tax year if the corporation experiences
more than a 50% ownership change, as defined therein, over a
three-year testing period ending on the testing date. See Note J
to the Consolidated Financial Statements for information
regarding income taxes and OLs, AMT OLs 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
before that time. If such an ownership change did occur as a
result of the offering, management believes that, even as limited
by the Code, the Company would use the OLs, AMTNOLs
and credits significantly earlier than their expiration, and the
annual limitation would not adversely impact the Company.
However, if the Internal Revenue Service (the "IRS") were to
successfully assert that an ownership change had occurred on
any date prior to ovember 1995 (including August 1, 1993,
when the Company entered into labor agreements that provided
stock for labor cost saving ) , the Company's ability to use its
OLs, AMT OLs and credits would be significantly impaired
because the value of WA Carp's stock on certain prior testing
dates was relatively low. uch value would adversely affect the
annual limitation.
Year 2000 Readiness - The Year 2000 issue is the result of
computer programs being written using two digits to identify
the applicable year and not taking into account the change in
century that will occur in the year 2000. As a result, such
systems may fail completely or create erroneous results when
the year 2000 is defined by the system as "00." The Company
uses a significant number of information technology ("IT') and
non-IT ("embedded operating systems") systems that are
essential to its operations. As a result, the Company
implemented a Year 2000 project to modify its computer
systems to function properly in 2000 and in the years after that.
The Year 2000 project is being coordinated through a
senior-level task force that reports periodically to senior
management and the Board of Directors.
The Company is also reviewing the Year 2000 readiness of third
parties with whom the Company's systems interface and
exchange data or upon whom the Company's business depends
and is coordinating efforts "vith 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 U.S.
and foreign go ernmental agencies and certain governmental
35
36
organizations or entities, which provide essential aviation
industry 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. As part of this review, the Company is actively involved in
airline industry Year 2000 review efforts led by the Air
Transport Association and the International Air Transport
Association. The Company's business, financial condition or
results of operations could be materially adversely affected by
the failure of its systems or equipment to operate properly
beyond 1999, or failure of those operated by other parties such
as the air traffic control and related systems of the FAA and
international aviation and local airport authorities.
The five phases of the Company's Year 2000 project used
for identifying and modifying the various programs and
systems include inventory, assessment, conversion, testing and
implementation. The Company has completed all phases for
91 % of its internal IT systems and anticipates completion of the
remaining systems in the first quarter of 1999. The Company
is approximately 80% completed with the assessment phase of
the impact of Year 2000 on its non-IT systems and third party
relationships, which is expected to be completed in the
second quarter of 1999 with all phases anticipated to be
completed in 1999. To some extent, the Company's readiness in
this area is dependent on the readiness of third parties.
As a precautionary measure, the Company is also developing
entity-wide contingency plans designed to allow continued
operation in the event of failure of the Company's or third
parties' systems. Contingency plans are expected to be in place
by the end of the second quarter of 1999 and are expected to
be executed as necessary.
The Company has spent $25 million of its initial estimated
cost of $55 million, of which $15 million has been spent and
expensed during 1998. The Company now estimates that the
total project costs will be somewhat less than the estimated
$55 million. The costs associated with the Year 2000 project
are being funded through cash from operations and are not
expected to have a material effect on the Company's business,
financial condition or results from operations. Maintenance or
modification costs associated with making existing computer
systems Year 2000 compliant will be expensed as incurred. A
majority of the estimated total Year 2000 compliance cost has
been funded by reallocating existing resources rather than
incurring incremental costs.
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.
This section captioned "Year 2000 Readiness" is a "Year 2000
Readiness Disclosure" as defined in section 3(9) of the "Year
2000 Information and Readiness Disclosure Act" (Public Law
105-2 71), enacted in October 1998.
The Euro - Effective January 1, 1999, certain European
countries adopted a common currency, the "euro." Full
conversion to the euro is scheduled to be completed by
July 1, 2002. The Company has developed a plan to modify
the Company's operating systems to properly handle the euro
through the full conversion. Costs associated with the euro
project were accounted for in accordance with the existing
accounting policies and funded through cash from operations.
Management does not believe the implementation of this single
currency plan will have a material effect on the Company's
business, financial condition or results from operations.
U. S. Transportation Taxes - The United States passenger ticket
tax and other transportation taxes, which were reinstated in the
first quarter of 1997, expired on September 30, 1997. The
Taxpayer Relief Act enacted by Congress revised transportation
taxes and instituted new taxes for tickets for travel from
October 1, 1997 to December 31 , 2007. Over a five-year period
on a sliding scale, the passenger ticket tax will be reduced from
10% to 7.5% and a $3 per passenger segment fee will be
phased in. The fee for international arrivals and departures
was increased from $6 per departure to $12 for each arrival
and dq::anme. The c anLm,, ux "1!1 tran:l bcrnccr the c..:-.
+., cates :1nd :\.b b l r H-1\,,1ii r'maine ,1l : . -\ dui mlk
a , .5 '0
t:1x wa a ed ,n the pm lusc Lr frcquem l1\er mile:.
D u-oic ~fidfic ld Tc n11i11al - In t, er 1 G) . the ,mpam
and \Yayne ountr, :---richi an th -- ,umy" . cmcrc ml -11
1-::,re ment pur uanc co whi 'h. su je l k th sJtisfa u0n L [
cru.in onditi ,ns _ t f rth in the .1--=- cemcnc the 1 1~,1m
\\ill nL n. ge :rnd :upen-Lt:: the dc_ign ,1nd on Lru u ,n l
f J
: 1.0.., billion tem1inal at etroit :-ldr ,pdican \ \,1)TK Count\
Airport. Then \\" tennin, l i hedukd D be c m klcd in
_ 1 1 nd ha b n funde b\ the umy is_u,m c of ~
mpon
reH:nue bond pay, blc rinuril) fnm fulurc asscngcr fa ' ilitY
talc of;:., {d1ig~1n 6ram . The - l mpanY
and th ,umy ha,e mered into a -rrecmem pursu.ml co
,\hich th C mp< ny \,ill le,1 e pa c in th l1C\\" tcnnin.1l for ,1
term f .)0 y r fr m the date the t rrninal open.
Rc
0
1dati 11 - In A ril 1 Q '. Lhc D T i ucd roposcd
c,mp titi n ui line, \\hi h \\ould s \crcly limiL major
arrier ' ability to L mpete with nc\,. -mrarn arricr . ln
additi n. th cp, nment of Ju ti c i - inw ti6aLinw mpclition
at major hub airp rt . The out ornc f Lhc T ~uidclines and
th irff ci ati n ar unknO\\TI. Hl \\eyer, t the extent LhaL
r tri tion are impo ed up n orthm': c .1bility to re ond LO
comp titian, nhw ts bLLines may be ad,-er elr impa tc
w c 01mti11g t(mdards - ec ote A lo the on olidat d
Finan ial tat rnent fL r recent a c umincr tand"ud .
Forn1
ard-Loolli11g tatc,11 nts - en in srnt mcm nlJde
throu h ut th lana m nt's Di u sion and nal 'Si
Financial Condition and R ult peraLi n are [01ward-
lookin and are bas d upon inform< ti ,n \ailabl to the
C mp n ' n the dat hereof. The C mp n undertak no
kincr
L cement , ~
1
heth r a a r ult of n w informati n, future
r oth rwi ompan{
xp ctation about the futur - md ar sub_j t to a number )f
fa t r that could au a tual r ult iff r material! from
the Compan) 's xpecwti n .
ll is nol rc.1s n, bh- p ss1 t, w 1tenn=c 1ll l
f he num fa tors
.1nd pcc1fi c\cnt th:1l c ,uld Jffc t the L Llll k ,f ,m airlin
eratin m the ,.,lo .1I c ,n m\ S1.. 1111.: fa t ,1-- tlut uld
si.., 1ifi ~,mch impa t ex ctcd a J il\. l ,J fJ ,r:. r\cnuc .
cxprns .1nd osh t1 ,w: mclu c Lhc -1.i lrnc pn m
0
cmirL nmcnt. fuel c Ls. h r ne.:,l u,1u ,n_ th .ll Lhc
,m Jm , n thcr .1rncrs. l \\-fare .1rr1cr ex ,1l1Sll n.
a ,cit\ cci i ,ns of ther 'Jrricr. a llLn- d Lhe C -.
c1nd fLrcign u\-rnmcrns. foreign ' L\1T't1CY cx 'hrngc r,l
l1u w.1tiL n. iniluion. the , 'll 'rJI c ,norrn crn1rnnrn 'lll
in the '.:: . J 1d tht:r rc_;ill1S L f th' \\"t. rl -111 Lhcr
fa t ws iscu~_cd herein.
37
38
CONSOLIDATED BALANCE SHEETS
ortlnvest Airlines Corporation
an millions)
ASSETS
Cw7 nt Assets
Ca hand cash equivalents
hon-term inve tments
Ac aunts r ceivable, les allowance
(199 - 23.5; 1997- 21.2)
Flioht equipment pare parts, less allowance
(199 - ' 15 .8; 1997- 148.9)
Defened income taxe
Prepaid expen es and other
Propert and Equipment
Flight equipment
Less ac umulated depre iation
Other property and equipment
Less accumulated depre iation
Flight Equipment Under Capital Leases
Flioht equipment
L ss accumulated amortization
Other Assets
Investment in affiliated companies
International route , le s accumulated amortization
(199 - 263.4; 1997- 239.9)
Other
The accompan)ing notes are an integral pan of Lhese consolidated financial sLaLemems.
$
1998
480.0
47.9
664.7
386.6
114.3
176.6
1,870.1
6,168.4
1,485.8
4,682.6
1,654.5
678.6
975.9
5,658.5
873.3
263.3
610.0
675.9
704.3
762.0
2,142.2
$ 10,280.8
December 31
$
1997
740.4
437.7
664.8
376.1
84.8
294.0
2,597.8
5,246.7
1,295.6
3,951.1
1,489.0
612.4
876.6
4,827.7
907.1
270.0
637.1
185.9
727.8
359.9
1,273.6
$ 9,336.2
LL\BlUTIE - A.ND Tl KH D R . El_JUTY
mTcnr Lial Uirics
_-\.ir er, ffi, liJbili \ ..
A -- um- pya le
.'\ 'TUC
:'I. -rue
UITcnt nnruritks of l ,ng-Lcm1 e t
iul leases
Lona-Tenn Dcbc
De_f,-n-cd rcdirs and rhcr Liabilirics
derre in me ti\:CS
Fl 1T
Lon -term pen ion m p treLircmem heJlth are bcncflts
th r
fa11dato1ily Rcdcc111nblc Preferred c wiry of
ubsidiary \\lriclz Holds olcly ~011-Rc 01irsc
bliamio11 of ompany Note F
(Redemption \. lue 1
L .. : 1 97- - -1.
Redeemable t II
Pr ferred , liqui aticn \"3lue l) 92-J_ .7: 1007_J 11.
C mm n
0111111011 tocll!tolders' Equity (Deficit
C mmon st k, .01 p r ,alue: hare
-1
.-\ umulat on e lo. -
Tr a-ury l; 1 7- , 0, 0 hare r pm ha ed
and l
s
l
1.107.2
82.6
504 .2
207.7
150.3
424 .0
31 .2
57 .()
H.
3,4bl. 7
3.68 l.5
-97.3
1.112. 7
500.l
-64.l
2 0.7
260.7
1.1
l,+H.6
648..5)
68.1
1 205.8
(476.7)
$ 10 280.8
1,---.-
.:;
f"'tl.-
-- I.
- -.o
.".- 7 -
l .dl.0
t+o.+
Ut 1.-
-+ 17."'
l -
39
. CONSOLIDATED STATEMENTS OF OPERATIONS
orthwe l Airlin e Corporation
Year Ended December 31
(Tn 111illw11s, o:ccpt pc1 sha,c amounts) 1998 1997 1996
Operating Revenu
Pas eng r $ 7,606.5 $ 8,822.1 $ 8,598.3
argo 633.5 789.4 745.8
Lher 804.8 614.3 536.4
9,044.8 10,225.8 9,880.5
Operating Exp 11ses
alarie , \ age and benefiLs 3,260.6 3,023.9 2,709.4
LOck-ba ed employee compen aLion 242.8
AircrafL fuel and Laxes 1,097.1 1,393.8 1,396.9
ommis ion 691.9 855.2 868.4
AircrafL maimenance materials and repairs 761.0 620.4 556.2
OLher rental and landing fees 450.4 456.7 454.0
DepreciaLion and amonizaLion 427.0 396.0 377.7
Aircraft rentals 345.1 358.9 346.3
thcr 2,203.1 1,963.7 1,875.0
9,236.2 9,068.6 8,826.7
Operating Income (Los ) (191.4) 1,157.2 1,053.8
Otlier lnconi (Expense)
lrnere L expen e (328.9) (244. 7) (269.8)
lntere L capiLalized 16.8 10.6 7.3
lntere L of mandatorily redeemable preferred security holder (22.5) (24.3) (27.2)
lnve tmem income 79.3 68.0 71.2
Foreign currency gain (los ) (21.5) 1.8 19.1
OLher, net 38.2 16.0 18.0
(238.6) (172.6) (181.4)
Income (Loss) Before Income Taxes and Extraordinary Item (430.0) 984.6 872.4
Income Lax expense (benefit) (144.5) 378.8 336.3
lncorne (Loss) Before Extraordinmy Item (285.5) 605.8 536.1
Los on exLinguishmcnL of debL, neL of taxes (9.3)
et Tncome (Lo s) (285.5) 596.5 536.1
Preferred sLo k requi.remems (0.8) (13.5) (37.5)
Preferred sLOck transacLion 74.5
et Income (Loss) Applicable To Common Stochlwlders $ (286.3) $ 583.0 $ 573. 1
Earning (Los ) Per Common Share:
Basic
Before effecLs of exLraordinary iLem and
preferred sLOck Lran action $ (3.48) $ 5.89 $ 5.05
Loss on exLingui hmem of debt (.10)
Preferred sLOck LransacLion .75
Earnings Go s) per common share $ (3.48) $ 5.79 $ 5.80
Diluted
Before effecL of cxLraordinary iLem and
preferred LOck transacLion $ (3.48) $ 5.29 $ 4.52
Los on extinguishmem of debL (.08)
Preferred LOck Lran aCLion .68
Earning Gos) per common hare $ (3.48) $ 5.21 $ 5.20
40
The .1cct1mpan)1ng notes .uc an integral part of these consolidated financial statemcms.
CONSOLIDATED STATEMENTS OF CASH FLOWS
orthwest Airlines Corporation
Year Ended Dece111be, 31
On million ) 1998 1997 1996
Ca h Flows From Operating Acti ities
et income (loss) (285.5) 5 6.5 536.1
Adjustments to reconcile net income (lo ) to
net cash provided by operating activitie :
Depreciation and amortization 427.0 396.0 377.7
Income tax expense (benefit) (144.5) 37 .8 336.3
et refunds (payments) of income taxes 7.9 (11-+.3) (256.6)
Pension and other postretirement benefit contribution
(in excess oO less than expense (26.2) (125.8) 1-+.7
tock-based employee compen ation 2-+2.
ale proceeds of frequent flyer miles in excess of (less than) re enue (78.0) 3 7.7 31.3
Other, net 68.4 (1.8) ( 40.2)
Changes in certain assets and liabilitie :
Decrease in accounts receivable 44.3 39.5 18.6
Decrease (increase) in flight equipment spare parts (46.2) (136.7) 12.2
Decrease (increase) in prepaid expenses and other 91.4 (13.3) (6.6)
Increase (decrease) in air traffic liability (140.4) 10 .1 91.0
Increase (decrease) in accounts payable and other liabilities 84.2 2.3 (60.7)
Increase in accrued compensation and benefit 85.9 10.3 75.7
et cash provided by operating activities 88.3 1,607.3 1,372.3
Cash Flows From Investing Activities
Capital expenditures (1 ,067.6) (7H3) (1,205 .3)
Purchases of short-term investments (256.8) (632.0) (501.2)
Proceeds from maturities of short-term investments 640.9 469.3 511 .2
Investments in affiliated companies (414.6) (36. 7)
Other, net (15.0) 37. (-+6.6)
Net cash used in investing activities (1 113.1) (885.9) (1 ,241.9)
Cash Flows From Fi11a11ci11g Activities
Repurchase of common and preferred stock (436.7) (SH+)
Payment of long-term debt (1,731.8) (346.8) (+87.2)
Payment of capital lease obligations (618.5) (61.0) (63.2)
Payment of short-term notes payable (379.2)
Proceeds from long-term debt 2,909.6 250.6 18+.8
Proceeds from sale and leaseback transactions 669.0 168.0 350.0
Other, net (27.2) (26.8) (27.1)
Net cash provided by (used in) financing activities 764.4 (540.4) (421.9)
Increase (Decrease) In Cash and Cash Equivalents (260.4) 181.0 (291.5)
Cash and cash equivalents at beginning of period 740.4 559.-+ 850.9
Cash and cash equivalents at end of period $ 480.0 $ 740.4 $ 559.4
Cash and cash equivalents and unrestricted short-term
inve tments JL end of period $ 480.0 $ 1,039.9 $ 752.1
Available LO be borrowed under credit facilities $ 1,003.7 $ 1,079.2 $ 726.8
The accompanying notes are an integral pan of these consolidated financial statements.
41
42
CONSOLIDATED STATEMENTS OF- COMMON
STOCKHOLDERS' EBUITV C:DEFICITJ
orthwest Airlines Corporation
Accumulated
Additional Other
Common tock Paid-In Accumulated Comprehensive
On million) hares Amount Capital Deficit Income (Loss)
Balance January 1, 1996 91.3 .9 (1 517.8) (270.3)
et income 536.1
Other comprehen ive income 157.4
Comprehensive income, net of tax
Acquisition of pref erred tock 74.5
hares earned by employees including shares
issued to employee benefit plans +.8 137.5
Accrued cumulative di,idend on
erie A and B Preferred tock (36.6)
Accretion of eries C Preferred tock (.9)
Tax benefit related to stock issued to employees 7.0
eries C Preferred tock convened to
Common tock 1.0 32.0
Other .5 .1 5.1 (.5)
Balance December 31 , 1996 97.6 1.0 1,150.0 (945.2) (112.9)
1 et income 596.5
Other comprehensive income 11.1
Comprehensive income, net of tax
Repurchase of Common tock 7.0
Common tock committed to be repurchased 21.9
hares issued to employee benefit plans 3.5
Accrued cumulative dividends on
eries A and B Preferred tock (14.4)
Accretion of eries C Pref erred tock (1.1)
Tax benefit related to stock issued
to employees 29.1
eries C Pref erred tock cornerted
to Common tock 1.8 57.7
Other .9 7.9 2.0
Balance December 31 , 1997 103.8 1.0 1,273.6 (362.2) (101.8)
et loss (285.5)
Other comprehensive income 33.7
Comprehensive loss, net of tax
Common tock canying value over
repurchase price
hares i sued to purchase an interest in
Continental Airlines, Inc 2.6 .1 65.4
Accretion of eries C Preferred tock (.8)
Tax benefit related to stock issued to employees 12.0
eries C Preferred tock converted to
Common tock 1.4 46.3
Common tock held in rabbi trusts 31.5
Other 1.2 15.8
Balance December 31, 1998 109.0 $ 1.1 $1,444.6 $ (648.S) $ (68.1)
The accompan)1no note are an integral pan of these consolidated financial statements
Treasury
Stock Total
$ $ (818.8)
536.1
157.4
693.5
74.5
137.5
(36.6)
(.9)
7.0
32.0
4.7
92.9
596.5
11.1
607.6
(2 73.1) (266.1)
(848.5) (826.6)
(14.4)
(1.1)
29.1
57.7
9.9
(1,121.6) (311.0)
(285.5)
33.7
(251.8)
68.1 68.1
65.5
(.8)
12.0
46.3
(151.5) (120.0)
(.8) 15.0
$(1,20S.8) $(476.7)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ote - Summary of Significant Accounting Policies
Basis of Presentation - North,,est Airline Corporation
("r \"I\' Corp.'') i a holding compan \,ho e principal indirect
operatina ubsidiary is lorth\\est irlines, Inc. l"Northv:est").
The consolidated financial tatemem include the account of
\,'A Corp. and all ub idiaries (collecti,el , the "Company").
All significant interc mpan transactions ha\e been eliminated.
Ime tment in 20% to 50% O\\Tied companie and Continental
,.\irlines, Inc. ('"Continental") are accounted for by the equit'
method. Other in\'estmem are accounted for by the cost method.
On 10,ember 20, 199 , r \\ Corp. effected a holdin
compan reorgani=ation. As a re ult, onhwest Airlines
Holdings Corporation (formerly known a orthwe t Airline
Corporation and prior to the reorgani.=ation the publicl
traded holding company, "Old N \' Corp.") became a direct
wholl -0\med subsidiary of N\VA Corp. \'A Corp. i
no,..,, the publicly traded holding compan ~ Pursuant to
the reorganization each share of Common tock and
Series C Preferred tock of Old N \'A Corp. \\as con\'erted
into one share of Common tock and eries C Preferred tock,
respectively, of A Corp. with the same rights and privile0 e
a uch shares of Old \7 Corp. Reference to \'A Corp.,
Common tock and Series C Preferred tock for time periods
prior to No\'ember 20, 1998 refer to Old A Corp. and
the Common tock and eries C Preferred tock of
Old r 'A Corp., respectively
Certain prior year amounts have been reclas ified to conform to
the current year financial statement presentation.
Business - orthwest's operations comprise more than 95%
of the Company's consolidated operating re,enues and
e:;.,_'Penses. Northwest is a major air carrier engaged principal!,
in the commercial transportation of passengers and cargo,
directl sening more than 150 cities in 21 countrie in l orth
America, Asia and Europe. orthwest's global airline network
includes domestic hubs at Detroit, Minneapolis/St. Paul and
Memphis, an extensi e Pacific route ystem vvith hubs at Tokyo
and Osaka, a trans-Atlantic alliance with KLM Royal Dutch
Airlines ("KLM") that operates through a hub in Amsterdam
and a global alliance with Continental.
The year ended December 31. 199 \\a affected b labor-
related di ruption which included "ork action , a 3 -da
cooling off period, an 1 -da ce ation of fli
0
ht operation
due to th pil ts' uike durina the third quarter, a seven-day
gradu l re umption of flight operation and a rebuilding
of traffic demand.
Flight Equipment Spar Parts - Fliaht equipment spare part
are carried at a,eraae co t. An allowance for depreciation is
prO\ided at rates ,,hich depreciate co t, les re idual ,alue.
o,er the e timated useful li,e of the related aircraft.
Propert ,, Equipment and Depreciation - OY1ned propert and
equipment are stated at cost. Property and equipment a quired
under capital leases are stated at the lower of the pre em value
of minimum lea e payment or fair market \alue at the
inception of the lea e. Property and equipment are depreciated
to residual Yalues using the traight-lin method O\'er the
estimated useful foe of the a ets. Commencing \\ith the
acquisition of the parent of North,,est in 19 9, e timated u eful
lives generally range from four to 25 ears for flight equipment
and three to 32 years for other property and equipmem.
Leasehold impro,ements are generall moni.= d owr the
remaining pe1iod of the lea e or the e timated enice life of the
related asset, , hicheYer is le . Propeny and equipm nt under
capital leases are amoni=ed o,er the lea e terms or the
e timated u eful li,e of the a set .
Airframe and Engine Maintenance - Routine maintenance and
airframe and engine o,erhaul are charged to ex-pense a
incurred. lodification that enhance the operating performance
or extend the u eful foes of airframes or emtine are capitali=ed
and amortized m-er the remaining estimated useful life of the a et.
foteniationaI Routes - International routes are amoni.=ed on a
straight-line basi , generally 0\'er 40 year . International
operating route authoritie and alliances are regulated b
gm'ernmental policy and bilateral a2Teements bet,,een nations.
Change in uch policies or agreements could impact onhwe t.
z
C
43
:J
2
2
<(
<(
2
44
Impairment of Long-Lived Assets - The Company evaluates
impairment of long-lived assets in compliance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of " The Company records impairment losses on
long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets. The impairment loss
is measured by comparing the fair value of the asset to its
carrying amount.
In 1998, the Company accelerated the retirement of its seven
oldest Boeing 74 7 aircraft and recorded a fleet disposition
charge of $65. 9 million in other operating expenses. These
retirements are earlier than scheduled as a result of decreased
demand in the Pacific, the timing of major overhauls and the
opportunity to accelerate the delivery of certain new
Boeing 7 4 7 -400 aircraft in partial replacement of the retired
aircraft. The Company considered recent transactions involving
sales of similar aircraft and market trends in aircraft dispositions
to reduce the aircraft net book value to reflect the fair market
value of these assets. The fleet disposition charge included
a $13.5 million write-down of related spare parts to their
estimated fair market value.
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 flyer 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 $13 7 .3 million,
$109.8 million and $120.4 million in 1998, 1997 and
1996, respectively.
Employee Stock Options - The Company uses the intrinsic
value method prescribed by Accounting Principles Board
Opinion No. 25, "Accountingfor 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.
Foreign Currency - 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.
Income TaJCes - 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.
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 March 1998, Statement of
Position No. 98-1, "Accountingfor the Costs of Computer
Software Developed for or Obtained for Internal Use"
("SOP 98-1 ") was issued. SOP 98-1 defines the type of costs
that should be capitalized versus expensed as incurred. The
Company adopted SOP 98-1 on January 1, 1999, which
did not have a material impact on the Company's financial
condition or results of operations.
ote B - Earnings (Loss) Per Share Data
The following table sets forth the computation of ba ic and diluted earnings (loss) per common share (in million , e. cept share data):
umerator:
Income (loss) before extraordina1y item
Preferred stock requirements
Preferred stock transaction
Income (loss) applicable to common
stockholders for basic earnings (loss) per share
Effect of dilutive securities:
eries C Preferred Stock
Income (loss) applicable to common stochholders after
assumed conversions for diluted earnings per share
Denominator:
Weighted-average shares outstandingfor
basic earnings (loss) per share
Effect of dilutive securities:
eries C Preferred tock
Employee stock options
Common stock repurchase obligation
Adjusted weighted-average shares outstanding and assumed
conversions for diluted earnings (loss) per share
$
$
$
1998
(285.5)
(.8)
(286.3)
(286.3)
82,341 741
82,341,741
Year Ended December 31
s
1997
605.8
(13.5)
592 .3
1.1
593.4
100,616,605
9,981 ,547
1,319,177
280,253
112,197 582
1996
$ 536.1
(37.5)
HS
$ 573.1
.9
574.0
98,731 ,917
10,216,939
l,-+82,406
110,431,262
For additional disclosures regarding the outstanding Series C Preferred tock, the employee stock options and the limited
KLM option, see otes C, G and H.
ote C- Labor Agreements and Series C Preferred Stock
In 1993, the Company entered into labor agreements which
provided for wage and other compensation savings (the "Actual
Savings") by domestic employees, including management, and
other cost reductions which aggregated $897 million over 36 to
39 month periods (depending on the labor group) (collectively,
the "Wage Savings Period") which ended between August and
ovember 1996. As part of the 1993 labor agreements, the
Company issued to trusts for the benefit of participating
employees 9 .1 million shares of a new class of eries C
cumulative, voting, convertible, redeemable preferred stock, par
value of .01 per share (the "Series C Preferred tock") and
17.5 million shares of Common Stock and provided the union
groups with three positions on the Board of Directors.
45
46
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
hares
to be Shares
Issued Earned
Balance ]anuary 1, 1996 4.1 6.9
hares earned by employees 2.2
hares issued to trusts (2.6)
e1ies C Pref erred tock
converted to Common tock
Withdrawals from trusts
Accretion and other .2
Balance December 31, 1996 1.7 9.1
hares issued to trusts (1.7)
eries C Preferred tock
converted to Common tock
Withdrawals from trusts
Accretion
Balance December 31, 1997 9.1
eries C Preferred Stock
converted to Common Stock
Withdrawals from trusts
Accretion
Balance December 31 , 1998 9.1
WA Corp. has authorized 25,000,000 shares of Series C
Pref erred tock. The eries C Preferred Stock ranks senior to
Common tock with respect to liquidation and certain dividend
1ights. As long as the Common Stock is publicly traded, no
dividends accrue on the e1ies C Preferred Stock. Each share of
the eries C Preferred Stock is convertible at any time into
1.364 shares of Common Stock. As of December 31, 1998,
3.5 million shares of Se1ies C Preferred Stock have been
converted into Common Stock and the remaining 5.6 million
shares outstanding are convertible into 7. 7 million shares of
Common Stock.
All the outstanding shares of Series C Pref erred Stock are
required to be redeemed in 2003 for a pro rata share of Actual
avings ($263.7 million as of December 31, 1998). WA Corp.
Shares Financial Shares Shares Financial
Held by Statement to be Shares Held by Statement
Trusts Amount Issued Earned Trusts Amount
4.4 $ 288.6 8.6 13.3 7.7 $ 409.8
105.3 4.2 137.5
2.6 (4.8) 4.8
(.8) (32.0) 1.0 32.0
(2.3)
.9 (.3)
6.2 362.8 3.5 17.5 11.2 579.3
1.7 (3.5) 3.5
(1.3) (57.7) 1.8 57.7
(4.2)
1.1
6.6 306.2 17.5 12.3 637.0
(1.0) (46.3) 1.4 46.3
(3.4)
.8
5.6 $ 260.7 17.5 10.3 $ 683.3
has the option to redeem such shares in cash, by the issuance of
additional Common Stock, or by the use of cash and stock. 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 will accrue at
the higher of (i) 12% or (ii) the highest penalty rate on any then
outstanding se1ies of preferred stock, and the employee unions
will receive three additional Board of Directors positions. The
financial statement carrying value of the Series C Preferred
Stock is being accreted over 10 years commencing August 1993
to the ultimate redemption amount. Prior to 2003,
WA Corp. at its option may redeem in whole or in part the
Series C Preferred Stock at its liquidation value.
The Company recognized stock-based compensation e::>,.7Pense
for each year based on the values at the measurement date
of the Series C Preferred Stock and the Common Stock earned
by employees. The final measurement dates for 1996
coincided ,vith the end of the v age Savings Period for
each of the labor groups.
The Company was required to adopt the provisions of the
Emerging Issues Task Force (U
EITF'') Issue 1 o. 97-14,
' Accounting for Deferred Compensation Arrangements
Where Amounts Earned are Held in a Rabbi Trust" on
September 30, 1998. As a result, the Company revised its
consolidation of the assets and liabilities of the non-quahli.ed
rabbi trusts established as part of the 1993 labor agreements.
The 4.0 million shares of Common Stock as of December 31 ,
1998 that are held in the trusts are recorded similar to treasury
stock and the deferred compensation liability is recorded in
other long-term liabilities. The Company elected to record the
difference between the market value of the common shares
and the cost of the shares in the trusts at the date of adoption
as a credit to common stockholders' equity deficit, net of tax.
After the adoption date, but prior to settlement through either
contribution to the qualified trusts or diversification, increases
or decreases in the deferred compensation liability \vill be
recognized in earnings to the extent that the Common Stock
market price exceeds the average historical cost of the shares of
$38.04 per share or falls below the September 30, 1998 price
of 25.06 per share, respectively. For the purpose of computing
diluted earnings per share, the shares held by the rabbi trusts
are considered potentially dilutive securities. The Company has
classified the diversified assets held by the rabbi trusts as
trading and recorded them at fair market value.
Approximately 90% of the Company's employees are members
of collective bargaining units. In 1998, the Company signed
new agreements with fi e collective bargaining groups,
including the pilot group. The durations of the ne, agreements
range from four to six years. In ovember 1998, at a
representation election, a majority of the mechanics and related
employees elected the Aircraft Mechanics Fraternal
Association to be their collective-bargaining representative. The
International Association of Machinists and Aerospace Workers
("IAM") is protesting the election and certification of the vote is
currently under review. The remaining ground employees
continue to be represented by the 1AM. In 1999, the 1AM
ratified a new four-year tentative agreement for the remaining
ground employees. The Company is presently in mediated
negotiations with the union representing its flight attendants,
but cannot predict the ultimate outcome of the negotiations.
47
48
0 1 D- Long-Term D bt and Shon -Term Borrowing
Long-term debt con isted of th follov ing (in million , with interest rates as of December 31, 1998):
December 31
1998 1997
Revolving credit facilitie due 2002, 7.6% (a) $ $
Un e urcd notes due 200-+ through 2008, 8.0% weighted average rate (b)
Equipmem pledge note due throuah 2013, 7.1 % weighted average rate
824.8
648.9
482.5
362.2
348.9
258.3
240.0
237.7
223.0
195.l
160.2
249.7
248.4
ircrafL notes due 1hr ugh 2016, 6.0% weighted average rate (c)
_ecured notes due through 2009, 6.5% weighted average rate (d)
WA Tru L o. 2 aircraft note due through 2012, 9.8% weighted average rate (e)
_
ecured note due through 2016, 6.1 % (f)
348.9
330.9
Un ccured note due 1999 and 2000, 7.9% (g)
"ale-leaseback financina obliaa1ions due through 2020, 9.9% imputed rate (h) 223.0
208.7
150.0
135.0
v A Tru t o. 1 air raft notes due through 2006, 8.6% weighted average rate (i)
Term loan due through 2002, 7.6% weighted average rate (a)
Term certificates paid in 1998 (j)
cnior un ecured lloating rate note paid in 1998
1her
Total long-term debt
Le urrem maturities
(a) The ompan ,' rediL Agreemem was amended in
De ember 1 97 to increase its existin re olvmg credit facility
from 500 million 10 675 million and to e tend the
avaibbilny p ri)d LO December 2002. ln addition, the facility
added a n w 175 million, 364-day un ecured revolving
credit faciliL r due in December 1998. In October 1998, the
ornpany borrowed the available 835 million under iL Credit
Agreement. lmere Lis calculated al lloating rates based
on the London lmerbank Offered Rate ("UBOR") plus 2%. ln
December 1998, $10.2 million of the 175 million, 364-da
re\olver wa convened inLo a term loan due December 2002.
The remaining 16-+.8 million wa renewed for another 36-l
da ; however, LO the exLenL this fa ility i not renewed for an
additional 364-day penod, the ompany may borrow up Lo
the emire non-renewed ponion of the facility and all such
borrowing mature in December 2002.
19.1
4,000.7
319.2
$ 3,681.5
76.0
98.7
2,069.3
227.4
$ 1,841.9
In May 1998, the Company obtained a secured 364-day,
$ 1.0 billion additional revolving credit facility. In addition, the
Company provided certain collateral to secure its previously
un ecured term loan and revolving credit facilities under the
Credit Agreement described above. Commitment fees are
payable by the Company on the unused portion of all of its
revolving credit facilities at a rate per annum equal to .375%
and are noL onsidered material. At December 31, 1998,
$1.0 billion remained available to be borrowed in the aggregate
under both revolving credit facilities.
$150 million of the floating rate term loans is payable in three
equal installments beginning in 2001 with final maturity in 2002.
Cb) In arch 1997 the Compan) issued $150 million of
8.375% notes due 2004 and 100 million of 8.70% notes due
2007. In March 1998, the Company issued $200 million of
7.625% notes due 2005 and 200 million of 7.875% notes due
2008. Interest on the notes is payable semi-annually.
(c) During 1998, the Company secured long-term debt
financing on 13 Airbus A320 aircraft deli ered during the year.
Interest on the notes is payable semi-annuall . The Company
combined these debt financings with fully-defeased German
cross border transactions.
(d) In April 1996, the Company restructured floating rate notes
with certain manufacturers. Principal repayments are due
semi-annually beginning 2001.
(e) In December 1994, the Company completed a structured
aircraft financing transaction in , hich 13 Airbus A320 aircraft
were transferred from orthwest (subject to existing
indebtedness) to an owner trust ( A Trust o. 2). A limited
partnership, of, hich orthwest is the limited partner and
orbus, Inc. (an affiliate of Airbus lndustrie A.LE.) is the
general partner, is the sole equity participant in the owner trust.
All proceeds from the transaction were used to repay equipment
pledge notes, which had previously been issued to finance the
acquisition of these aircraft by orthwest. The aircraft were
simultaneously leased back to orth, est.
Financing of $352 million was obtained through the issuance
of 176 million of 9.25% Class A Senior Aircraft otes, 66
million of 10.23% Class B ezzanine Aircraft otes $44
million of 11.30% Class C Mezzanine Aircraft lotes and 66
million of 13.875% Class D Subordinated Aircraft otes. The
notes are payable semi-annually from rental payments made by
orthwest 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
otes. The offer expired on December 30. 1997 with 99% of
the notes tendered. Onjanuary 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 199 7.
CD In August 1998, the Company borrowed $240 million under
an existing credit facility. The floating rate notes are secured by
six Boeing 757 aircraft and principal payments are due semi-
annually beginning in 2008.
(g) On ay 1, 1998, in conjunction with its repurchase
of Common Stock from Kl , the Company issued three
senior unsecured 7 .88% notes with principal amounts of
$206.0 million, $137.7 million and $100.0 million. The
Company repaid the first note on September 29, 1998; the
remaining two notes are due on September 29, 1999 and
2000, respectively. See I ote G.
(h) In arch 1992, the Company completed agreements with
the Minneapolis/ t. Paul 1etropolitan Airports Commission
(' C ) 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 ,vi.th the Stale of Minnesota
and other government agencies. In December 1997, the
Company prepaid 39 million of these obligations.
(i) In March 1994 Northwest consummated a financing
transaction in which six Boeing 7 4 7 -2 00 and four Boeing
757-200 aircraft were sold to an owner trust ( VA Trust o. 1)
of which I
A Aircraft Finance, Inc., an indirect subsidiary
of the Company, is the sole equity participant. A portion of
the purchase price was financed through the issuance of
$177 million of 8.26% Class A Senior Aircraft otes and
66 million of 9.36% Class B Subordinated Aircraft otes.
The aircraft \\ ere simultaneousl) leased back to orthwest.
The notes are payable semi-annually from rental payments made
by 1onh, est under the lease of the aircraft and are secured
by the aircraft subject to the lease as well as the lease itself.
(j) In March 1994, 1 onhwest agreed to sell certain recei,ables
on an ongoing basis to lonhwest Capital Funding Corp
(" CF), pursuant to a receivable financing program (the
2
49
"Receivable Program"). NCF, an indirect subsidiary of the
ompany, issued through a master trust Doating rate Term
cnifi ates. The Receivable Program provided for the early
retirement of the related Term Certificates upon the occurrence
of cenain eve ms, one of which occurred on January 25, 1998.
Accordingly, the ompany p id these certificates in full in 1998.
Maturities of long-term debt for the five years subsequent to
December 31, 1998, are as follows (in millions):
1999
2000
2001
2002
2003
$ 319.2
168.0
148.0
1,046.3
107.9
The debt and lease agreements of the Company contain certain
restrictive co enants, including limitations on indebtedness, equity
redemptions and the declaration of dividends, as well as
requirements Lo maintain certain financial ratios, including
ollateral coverage ratios. At December 31, 1998, the Company
was in c mpliance with the covenants of all of its debt and lease
agreements. Various assets, principally aircraft and international
route authorities, having an aggregate book value of $5.1 billion at
December 31, 1998, were pledged under various loan agreements
Cash payments of interest, net of capitalized interest, aggregated
$277.4 million in 1998, $231.3 million in 1997 and
$263.3 million in 1996.
The weighted average interest rates on shon-term borrowings
out tanding at December 31 were 5.99%, 6.24% and 5.69%
~
for 1998, 1997 and 1996, respectively
50
Nole E-Leases
The Company leases under noncanc table operating leases
cenain aircraft, space in airport terminals, land and buildings
al airports, ticket, sales and reservations offices, and other
property and equipment, which expire in various years
through 202 7. Portions of certain facilities are subleased under
noncan dable operating leases expiring in various years
through 2020.
At December 31, 1998, the Company leased 113 of the 409
aircraft it operates. Of these, 25 were capital leases and 88 were
operating leases. Expiration dates range from 1999 to 2009 for
aircraft under capital leases, and from 1999 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-one of the 113 aircraft lease agreements
provide the Company with purchase options at the end of the
lease terms which approximate fair market value.
Rental expense for all operating leases consisted of (in millions):
Gross rental expense
Sublease rental income
Net rental expense
Year Ended December 31
1998 1997 1996
$ 629.8 $ 627.1 $ 596.5
(86.8) (79.5) (62.2)
$ 543.0 $ 547.6 $ 534.3
At December 31, 1998, future minimum lease payments
under capital leases and noncancelable operating leases with
initial or remaining terms of more than one year were
as follows (in millions):
Capital Operating
Leases Leases
1999 $ 103.6 $ 495.8
2000 102.9 484.5
2001 103.9 472.8
2002 278.6 476.2
2003 84.5 456.7
Thereafter 223.1 4,442.3
896.6 6,828.3
Less sublease rental income ( 4 72.6)
Total minimum operating
lease payments $ 6,355.7
Less amounts representing interest 241.7
Present value of future minimum
capital lease payments 654.9
Less current obligations under
capital leases 57.6
Long-term obligations under
capital leases $ 597.3
ote F-Mandatorily Redeemable Preferred Securit of
Subsidiary Which Holds Solely I on-Recourse Obligation
of Company
In October 1995, the Company completed a restructuring of its
en-denominated non-recourse obligation secured by land and
buildings the Company owns in Tokyo. A nevvly formed
consolidated subsidiary of the Company (the " ubsidiary")
entered into a Japanese business arrangement designated under
Japanese law as a tol'Umei kumiai ("TK"). Pursuant to the TK
arrangement, the holder of the non-recourse obligation
restructured such obligation and then assigned title to and
O\vnership 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
Subsidiary (the "Preferred Security"). The restructured
non-recourse obligation is the sole asset of the ubsidiary.
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 Security of Subsidiary v hich Holds
Solely I on-Recourse Obligation of Company." WA Corp.
has guaranteed the obligation of the Subsidiary to distribute
payments on the Preferred Secmity pursuant to the TK
arrangement if and to the extent payments are received
by the Subsidiary.
The restructured obligation matures in three approximately
equal annual installments due in 2005 , 2006 and 2007. In
addition to these installments, cash payments of interest and
principal are made semi-annually throughout the term. The rate
of interest varies from period to period and is capped at 6%.
The obligation is non-recourse to the Company. The Company
has 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 carrying value is being accreted over 12 years from
October 1995 to the ultimate maturity alue of 71.4 billion yen
($631.8 million based on the December 31 , 1998 exchange rate).
Such accretion is included as a component of "Interest of
mandatorily redeemable preferred security holder" in the
Consolidated tatements of Operations.
ote G-Redeemable Stock
InJulr 1996 "\r A Corp. acquired from KLM 3,691.2 shares
of eries A Preferred Stock and 2,962.8 shares of eries B
Preferred tock in exchange for two unsecured promissory
notes aggregating 3 79 million, both of which were repaid
December 1996. These transactions resulted in an increase
to net income applicable to common stockholders
of 7-+.5 million.
On September 29, 1997, \, A Corp. entered into an agreement
with KL 1
1 to repurchase for 1.12 billion over three years
the 25 million shares of I A Corp. Common tock held by
KL 1. On that date, 6.8 million shares were repurchased for
$273.1 million. Concurrently with that purchase, all of KLM'.s
existing governance rights under \'arious stockholder and
other agreements were canceled, and A Corp. and KLM
entered into a customary standstill agreement. The remaining
18.2 million shares of Common Stock to be repurchased, ere
reclassified to redeemable common stock from common
stockholders' equit) deficit on that date. ln addition, on the
same day, A Corp. repurchased from KLM and others
all of the eries A and B Pref erred Stock outstanding for
$251.3 million in cash.
On May 1, 1998, A Corp. purchased from KLM the
remaining 18.2 million shares of Common tock which the
Company had previously agreed to repurchase over the three-
year period. The purchase price of $780.4 million was paid
with a combination of $336. 7 million cash and three senior
unsecured 7.88% notes. The $68.1 million excess of the
financial statement carrying alue of the redeemable Common
tock over the repurchase price " as trans[ erred to common
stockholders' equit deficit on the same date. As of May 1,
1998, earnings (loss) per share calculations do not include the
18.2 million shares repurchased. In certain limited
circumstances (e.g. , the failure of the orthwest/KLM alliance to
maintain certain antitrust immunity or onhwests default
under the alliance agreement), KLM will have an option to buy
back from A Corp. up to 13.3 million shares of Common Stock.
51
52
Note H-Stock Options and Stockholder Rights Plan
On April 30, 1998, NWA Corp. amended its Second
Amended and Restated Certificate of Incorporation to combine
and reclassify the existing separate classes of voting Class A
and non-voting Class B Common Stock into a single class
of Common Stock.
Stach Option Plans - NWA Corp. has stock option plans for
officers and key employees. Options generally become
exercisable in equal annual installments over four or five years
and expire 10 years from the date of the grant. NWA Corp.5
policy is to grant options with the exercise price equal to the
market price of the Common Stock on the date of grant. To the
extent that options are granted with an exercise price less than
the market price on the date of the grant, compensation
expense is recognized over the vesting period of the grant.
Following is a summary of stock option activity (in thousands, except per share amounts):
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 5,204 $ 27.09 4,774 $ 20.11 3,509 $ 10.56
Granted 509 43.35 1,454 39.26 1,836 35.04
Forfeited (485) 33.36 (154) 36.24 (118) 15.55
Exercised (1,169) 13.08 (870) 7.49 (453) 7.92
Outstanding at end of year 4,059 32.41 5,204 27.09 4,774 20. 11
Exercisable at end of year 1,910 24.35 1,894 15.55 1,907 9.16
Reserved for issuance 7,948 7,948 7,948
Available for future grants 163 187 1,487
At December 31, 1998:
Options Outstanding Options Exercisable
Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Shares Contractual Life Price Shares P1ice
$ 4.740 to $ 27.375 1,072
31.875 to 39.875 2,102
40.000 LO 64.406 885
The weighted-average fair value of all options granted during
1998, 1997 and 1996 is $17.65, $16.50 and $14.89 per option,
respectively. The fair value of each option grant is estimated as
of the date of grant using the Black-Scholes single option-
5.7 years $ 14.30 966 $ 13.04
8.2 35.78 800 34.57
8.8 46.34 144 43.39
pricing model assuming a weighted average risk-free interest
rate of 5.5%, 6. 1 % and 6.4% for 1998, 1997 and 1996,
respectively, and expected lives of six years and volatility of 30%
for all years presented.
In eptember 1998, in conjunction .,rith the labor agreement
reached between orthwest and the Air Line Pilots Association,
International ("ALPA"), NV A Corp. established the 199 Pilots
tock Option Plan ("the Pilot Plan"). The Pilot Plan has reserved
for issuance 2.5 million shares of Common tock. Options
under the Pilot Plan vvi.ll be granted over a three-year period.
The initial option grant was for 1.0 million shares of Common
Stock v\rith an exercise price of 27.875 per share. These
options became exercisable on ovember 1, 1998. The
weighted average fair alue of the options granted under the
Pilot Plan is $10.84. The fair value of each option grant is
estimated as of the date of grant using the Black- choles single
option pricing model assuming a weighted average ri k-free
interest rate of 4.7%, an expected life of ix ears and olatility
of 30%. On each of the next three anniversa1ies of the initial
grant date, an additional 500,000 options wi.11 be granted v\rith
an exercise price equal to the closing market price of the
Common tock on the applicable grant date.
Assuming the Company had accounted for its employee stock
options using the fair value method (instead of the intrinsic
value method), the 1998 net loss would have increased to $300
million, bringing the loss per share to $3.65 in 1998. The pro
forma effect of SFAS 123 is immaterial to the Company's 1997
and 1996 net income and earnings per share. In addition,
because the fair value method was applied only to options
granted subsequent to December 31, 1994, its pro forma effect
will not be fully reflected until 1999.
Stockholder Rights Plan - Pursuant to the Stockholder Rights
Plan (the "Rights Plan"), each share of Common tock has
attached to it 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 tock 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 eries D
Junior Participating Preferred Stock at an exercise price of $150,
subject to adjustment. The rights become exercisable only after
any pers n or group (other than the tru ts holding Common
tock for the benefit of emplo ees) acquires beneficial
ownership of 19% or more (25% or more in the case of certain
Institutional Im estors [as d fined in the Rights Plan]) of WA
Corp.'s "outstanding" Common tock (as defined in the Rights
Plan or commence a tender or exchange offer that would
result in such per on or group acquiring beneficial ov;rnership of
19% or more (25% or more in the case of certain Institutional
Investors) of A Corp.'s out tanding Common tock If an)
person or group acquires beneficial ownership of 19% or more
(25% or more in the case of certain Institutional In estors) of
N A Corp.'s outstanding Common tock, the holders of the
rights (other than the acquiring person or group) will be
entitled to rec ive upon exercise of the rights, Common tock
of V.A Corp. having a market value of two times the exercise
price of the right. In addition, if after the rights become
exercisable \ A Corp. is im oh ed in a merger or other
business combination or sells more Lhan 50% of its a ets or
earning power, each right will entitle its holder (other than the
acquiring person or group) to recei, e common stock of the
acquiring company having a market value of two time the
exercise price of the rights. The rights expire on November 16,
2005 and may be redeemed by A Corp. at a price of $.01
per right prior to the time they become exercisable.
53
Note I-Accumulated Other Comprehensive Income (Loss)
The following table sets forth information with respect to accumulated other comprehensive income (loss) (in millions):
Foreign Deferred Minimum Accumulated
Currency Loss on Pension Other
Translation Hedging Liability Comprehensive
Adjustment Activities Adjustment Income (Loss)
Balance at]anuary 1, 1996 $ (39.3) $ $ (231.0) $ (270.3)
Before tax amount (.1) 250.6 250.5
Tax effect (93.1) (93.1)
Net-of-tax amount (.1) 157.5 157.4
Balance at December 31 , 1996 (39.4) (73.5) (112 .9)
Before tax amount 9.2 8.6 17.8
Tax effect (3.4) (3.3) (6.7)
Net-of-tax amount 5.8 5.3 11.1
Balance at December 31, 1997 (33.6) (68.2) (101.8)
Before tax amount (10.9) (33.0) 97.5 53.6
Tax effect 4.0 12.1 (36.0) (19.9)
Net-of-tax amount (6.9) (20.9) 61.5 33.7
Balance at December 31, 1998 $ (40.S) $ (20.9) $ (6.7) $ (68.1)
Note J-Income Taxes
Income tax expense (benefit) consisted of the following Reconciliation of the statutory rate to the Company's income tax
(in millions): expense (benefit) is as follows (in millions):
Year Ended December 31 Year Ended December 31
1998 1997 1996 1998 1997 1996
Current: Statutory rate applied to
Federal $ (4S.0) $ 108.5 $ 175.0 income before income taxes
Foreign 3.4 3.7 4.1 and extraordinary item $ (1S0.S) $ 344.6 $ 305.3
State 1.0 10.9 22.3
Add (deduct):
( 40.6) 123.1 201.4 State income tax (benefit) net
Deferred: of federal benefit (6.S) 19.2 18.5
Federal (89.7) 236.8 112.1 Adjustment to valuation
Foreign (3.4) 16.6 allowance and other
State (10.8) 18.9 6.2 income tax accruals 6.4 5.8 6.2
(103.9) 255.7 134.9 Other 6.1 9.2 6.3
Total income tax Total income tax
expense (benefit) $ (144.S) $ 378.8 $ 336.3 expense (benefit) $ (144.S) $ 378.8 $ 336.3
54
The net deferred tax liabilities listed below include a current
net deferred tax asset of $114.3 million and $84.8 million and
a long-term net deferred tax liability of $1 .11 billion and
$1.16 billion as of December 31 , 1998 and 1997, respectively
Significant components of the Company's net deferred tax
liability were as follows (in millions):
December 31
1998 1997
Deferred tax liabilities:
Financial accounting
basis of assets in
excess of tax basis
Expenses other than
depreciation accelerated
for tax purposes
Other
Total deferred tax liabilities
Deferred tax assets:
Pension and postretirement
benefits
Expenses accelerated
for financial reporting
purposes
Leases capitalized for financial
reporting purposes
Alternative minimum tax
credit carryforwards
Other tax credit carryforwards
Total deferred tax assets
Net deferred tax liability
$ 1,489.4
$
313.0
15.9
1,818.3
84.7
547.9
80.4
103.2
3.7
819.9
998.4
$ 1,452.0
309.4
12.4
1,773.8
128.3
409.3
105.1
54.4
697.1
$1 ,076.7
During 1996, the Company utilized all of its regular net
operating loss carryforwards ("NOLs"). For tax purposes,
the Company utilized NOLs of approximately $121.8 million,
$684.4 million and $394.4 million in 1996, 1995 and
1994, respectively, and alternative minimum tax net operating
loss carryforwards ("AMTNOLs") of $105.1 million and
$446.7 million in 1995 and 1994, respectively The Company
has alternative minimum tax credits of approximately
$103.2 million available for carryforward 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 carryforward available
for regular tax purposes. In 1995, the Company utilized its
remaining AMTNOL carryforward, as well as its remaining
investment tax credit canyf orward and its remaining foreign tax
credit carryforward available for alternative minimum tax
purposes. During 1998, the Company generated $3.4 million of
foreign tax credit for both regular and alternative minimum tax
purposes and $.3 million of general business credit. These
credits are available for carryforward at December 31 , 1998.
Sections 382 and 383 of the Internal Revenue Code of 1986,
as amended (the "Code"), and Treasury regulations limit the
amounts of NOLs, AMTNOLs and credits that can be used to
offset taxable income (or used as a credit) in any single tax
year if the corporation has more than a 50% ownership
change (as defined in the Code) over a three-year testing period
ending on the testing date. The annual limitation on the
amount of such NOLs, AMTNOLs and credits is calculated in
part based on the value of NWA Corp.'s stock. 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 before that
time. If such an ownership change did occur as a result of the
offering, management believes that, even as limited by the
Code, the Company would use the NOLs, AMTNOLs and
credits significantly earlier than their expiration and the annual
limitations would not adversely impact the Company However,
if the IRS were to successfully assert that an ownership change
had occurred on any date prior to November 1995, (including
August 1, 1993 when the Company entered into labor
agreements that provided stock for labor cost savings), the
Company's ability to use its NOLs, AMTNOLs and credits
would be significantly impaired because the value of NWA
Corp.'s stock on certain prior testing dates was relatively low.
Such value would adversely affect the annual limitation
described above.
2
r
2
)>
2
2
55
56
ote K-Commitments
The Company's firm aircraft orders for 102 new aircraft as of
December 31 , 1998, adjusted to reflect a January 1999 revised
delivery schedule, includes seven Airbus A320 aircraft in 1999,
50 Airbus A319 aircraft (10 per year beginning in 1999),
25 Boeing 757-200 aircraft from 2004 through 2006, 16 Airbus
A330 aircraft (eight each in 2004 and 2005) and four Boeing
7 4 7-400 aircraft in 1999. Committed expenditures for these
aircraft and related equipment, including estimated amounts for
contractual price escalations and predelivery deposits, will be
approximately: 963 million in 1999, $290 million in 2000,
363 million in 2001, $498 million in 2002, $466 million in
2003 and $3.01 billion from 2004 to 2006.
The Company has substitution rights with respect to the Airbus
A330 aircraft and has the option to purchase four Boeing
747-400 aircraft in 2002. The Company also has options to
purchase 50 additional Airbus A3 l 9 and/or A320 aircraft for
delivery from 2000 through 2003 and 50 roll-over options
which replace the initial 50 options and would be assigned
delivery 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 A3 l 9
aircraft deliveries and is available for use at the option of the
Company. The Company plans on financing its four Boeing
7 4 7 -400 aircraft to be delivered in 1999 with enhanced
equipment trust certificates.
ote 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 mate1ial adverse effect on the Company's
Consolidated Financial Statements taken as a whole.
ote M - Pension and Other Postretirement
Health Care Benefits
The Company has several noncontributory 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 Company's policy to annually
fund at least the minimum contribution as required by the
Employee Retirement Income Security Act of 1974. In 1998,
1997 and 1996, the Company made contributions of
$150 million, $133 million and $85 million, respectively, in
excess of its minimum requirement.
The Company sponsors various contributory and
nonconnibutory 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.
The following i a reconciliation of the beginning and ending balanc of Lhe benefiL obligaLion and Lh fair alue of plan assets
(in millions):
Pen ion B nefit Other B 11efits
1998 1997 1998 1997
Change in benefit obligation:
Benefit obligation at beginning of year $ 4 251.3 3,699.0 $ 347.l 313.6
ervice cost 132.7 113.2 12.4 10.3
Interest cosL 309.6 2 6.4 25.0 23.8
Amendments 180.2 (.6) 6.1
Actuarial gain 316.9 30 .1 4.8 14.6
Foreign e change gain (los ) 7.0 (11.6)
Benefits paid (176.4) (143.2) (18.8) (15 .2)
Benefit obligaLion at end of year 5 021.3 4,251.3 376.6 347.1
Change in plan assets:
Fair value of plan asseLs at beginning of year 3,758.1 3,00 .7 5.3 5.1
Actual return on plan assets 608.2 623.6 .3 .4
Employer contributions 184.9 269.4 18.7 15.0
Benefits paid and other (176.6) (143.6) (18.8) (15.2)
Fair alue of plan assets at end of year 4,374.6 3,75 .1 5.5 5.3
Funded status (646.7) (-+93.2) (371.1) (341 .8)
Unrecognized neL actuarial loss 363.7 324.7 86.9 85.0
Unrecognized prior ervice cost 337.5 181.9 6.2
Net amount recognized $ 54.5 $ 13.4 $ (278.0) $ (256.8)
Amounts recognized in the Consolidated Balance heets as of December 31 were as follow (in millions):
Pension Benefits Other Benefits
1998 1997 1998 1997
Prepaid benefit cost $ 195.4 $ 125.4 $ $
Accrued benefit liability (287.4) (256.6) (278.0) (256.8)
Intangible asset 135.9 36.4
Accumulated other comprehensive income 10.6 108.2
Net amount recognized $ 54.5 $ 13.4 $ (278.0) $ (256.8)
The projected benefit obligation, accumulated benefit obligation and fair value of plan asseLs for the pension plans wiLh accumulated
benefit obligations in excess of plan assets were $451.4 million, $271.8 million and $2.7 million, respecLively, as of December 31,
1998 and $1.28 billion, $1.19 billion and $1.03 billion, respectively, as of December 31, 1997.
57
2
58
Weighted-average assumptions for pension and other benefits as of December 31 were as follows:
1998 1997 1996
Discount rate 6.9% 7.1% 7.6%
Rate of future compensation increase 3.9% 3.5% 3.5%
Expected long-term return on plan assets 10.5% 10.5% 10.5%
For measurement purposes, a 6.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for
1999. The rate was assumed to decrease gradually to 4.5% for 2002 and remain at that level thereafter.
The net periodic cost of defined benefit plans included the following (in millions):
Pension Benefits Other Benefits
1998 1997 1996 1998 1997 1996
Service cost $ 132.7 $ 113.2 $ 115.7 $ 12.4 $ 10.3 $ 10.3
Interest cost 309.6 286.4 267.2 25.0 23.8 22.1
Expected return on plan assets (356.5) (301.2) (256.8) (.4) (.4) (.4)
Amortization of prior service cost 20.2 20.3 20.2
Recognized net actuarial loss 25.7 17.2 38.8 2.9 2.1 3.2
Other events 4.7 2.2
Net periodic benefit cost $ 136.4 $ 138.1 $ 185.1 $ 39.9 $ 35.8 $ 35.2
Assumed health care cost trend rates have a significant impact on the amounts reported for the health care plans. A one-percentage
point change in assumed health care cost trend rates would have the following effects (in millions):
Effect on total of service and interest cost components
Effect on accumulated postretirement benefit obligations
ate N - Related Party Transactions
On ovember 20, 1998, the Company issued 2.6 million shares
of Common Stock and paid $399 million in cash to acquire the
beneficial ownership of 8. 7 million shares of Class A Common
Stock of Continental. These shares represent 13.5% of
Continentals outstanding common stock and, together ,vi.th
additional Continental shares for which the Company holds a
limited voting proxy, 50.3% of its fully diluted voting power as
of December 31, 1998.
1-Percentage-
Point Increase
$ 5.8
48.8
1-Percentage-
Point Decrease
$ (4.9)
( 41.5)
In connection with the Company's investment in Continental
and Northwest's alliance with Continental, the Company
entered into agreements with Continental which contain certain
restrictions on the Companys ability to vote shares of
Continental common stock, to aquire additional shares of
Continental common stock and to affect the composition and
conduct of Continental's Board of Directors for a ten-year
period. Due to the resnictions in these agreements, the
Compan ' ,,ill a ount for it inve tment under the equit
method. The Compan , will reco(:!niz it interest in
Continental' earnings on a one-quarter lag. Th differ nee
b tween the cost of the Company's inve tment and the
proportionat share of the underlyina equity of Continental of
312 million will be amortiz d o, r 40 year .
In a related transacti n, orthwe t and Continental entered
into a 13- ear gl bal trategic comm rci.al alliance that c nne
the two carriers' networks and includes extensive cod - haring
frequent flyer program reciprocity and ther ooperative
activities. The two airlin s haYe no plans to merge their
operation and will retain eparate board , manabement
and headquarters. In Dec mber 1998, orth,, est nd
Continental began implementing their alliance. in e th n they
have initiat d code-sharing (the joint d signation of flights
under the orthw st" Vv" code and the Continental "CO"
code) to e, eral points in A ia and to many domestic citie .
orthwest anticipates that it will add additional code-sharing
with Continental in 1999; ho ver, further international
code-sharing is subject to certain regulatory approvals.
Other joint activities anticipated to be implemented in lude
airport facility coordination, joint purcha ing and certain
coordinated sales programs.
The Company has an inv stment in WORLD PAN, an affiliate
that provides computer reservations servic s, which it ac ounts
for using the equity method. The Company recorded e:x-penses
for certain reservation system services provided by this affiliate
of $83.0 million, $78.6 million and $77.1 million in 1998,
1997 and 1996, respectively
The Company owns 28.5% 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 has warrants in Mesaba Holdings, Inc. stock
and if the Company were to exercise all its warrants when
fully vested, its ownership would increase to 40.9% as
of December 31, 1998.
Northwest and Mesab signed a ten-y ar Airline ervices
Agreement ("A A") effective July 1, 1997 under which
Torthwest determines Mesaba' commut r aircraft scheduling
and fleet c mpo ilion. A of December 31 , 1998, the ompany
ha lea ed +8 aab 3+0 aircrafL which are in turn ublea ed to
1
le aba. The lease agr ernent provide Lh Company ,vith
renewal opLions rangina from one to five years and pur hase
option at the end of the lease or renewal term which
approximate fau market value.
ln addition, as of December 31 , 1998, Lhe Company ha leased
or ubleas d 1 vr R gional Jet aircra[L Lo Me aba under a
Reaional Jet ervices Agreement on ummaLed in October
1996. The Company has agre d to lea e 18 additional Avro
Regional J t aircraft to Mesaba, ,~ th ten scheduled for deli ery
in 1999 and eighL in 2000. Committed exp nditures for these
aircraft, including contracLUal price scalations, are approximatel
225 million in 1999 and $175 million in 2000.
On April 1, 1997, Lhe ompany purchased all of Lhe
outstanding stock of Ex-pre Airlines I, In . and an affiliate
("Expre s") and Lheir operating result are included in the
Compan ' consolidat d financial statements commencing on
that date. Expr ss is a regional arrier Lhat provides pas enger
Lraffic to North, est at M ~mp his.
Note 0- Risk Management and Financial Instruments
Hfe tive Oct ber 1, 199 , the Company adopted FAS
No. 133, "Accountingfor Dc,ivativc In trumcnts and Hedging
Activities,". hich require the Company to recognize all
derivatives on the balance sheet at fair v lue. The Company
uses derivatives as cash flow hedges to manage the p1ice 1isk
of fuel and its ex'Posure to foreign curr nc fluctuations. FA
No. 133 requires that for cash flow hedges, which hedge the
e 'posure to variable ash flo, s of a forecasted transaction,
the effective portion of the deri ati, e'.s gain or loss be initially
reported a a component of other omprehensive incom in
the equity section of the balance heet and subsequentl
reclassified into earnings when the fore asted transaction
affe ts earnings. The in ffe tive portion of the d rivative's gain
or loss is reported in earninbs immediately. The cumulati e
effect of adoption was immaterial.
59
60
Risk Management - The Company uses derivative financial
instruments to manage specific risks and does not hold or issue
them 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 Companys exposure resulting from its use of derivatives.
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.
In 1998, the Company's yen-denominated revenues exceeded its
yen-denominated expenses by approximately 38 billion yen.
From time to time, the Company uses forward contracts,
collars or put options to hedge a portion of its anticipated
yen-denominated ticket sales. The changes in market value
of such instruments have historically been highly effective at
offsetting exchange rate fluctuations in yen-denominated
ticket sales.
At December 31, 1998, the Company recorded $15.0 million
of unrealized losses in accumulated other comprehensive
loss as a result of forward contracts to sell 4 7. 5 billion yen
($405.8 million) at an average forward rate of 117 with various
settlement dates through ovember 1999. Hedging gains or
losses are recorded in passenger revenue when transportation is
provided. These forward contracts hedge approximately 35% of
the Company's anticipated 1999 yen-denominated ticket sales,
which also represents approximately 95% of the Company's
excess of yen-denominated revenues over expenses.
Counterparties to these financial instruments expose the
Company to credit loss in the event of nonperformance, but the
Company does not expect any of the counterparties to fail to
meet their obligations. The amount of such credit exposure is
generally the unrealized gains, if any, 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 counterpany. It is the
Company's policy to participate in foreign currency hedging
transactions with a maximum span of 12 months.
Fuel - The Company is exposed to the effect of 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. To further manage the price risk of fuel costs,
the Company primarily utilizes futures contracts traded on
regulated exchanges. The changes in market value of such
contracts have historically been highly effective at offsetting fuel
price fluctuations. It is the Company's policy to participate in
hedging transactions with a maximum span of 12 months.
At December 31, 1998, the Company recorded $5.9 million of
unrealized losses in accumulated other comprehensive loss as a
result of the fuel futures contracts, which if realized, will be
recorded in fuel expense when the related fuel inventory is
utilized throughout 1999. As of December 31, 1998, the
Company had hedged approximately 10% of its 1999 fuel
requirements, including 40% for the first quarter.
Fair Values of Financial Instruments - The financial statement carrying values equal the fair values of the Companys cash and cash
equivalents and short-tem1 investments. As of December 31, these amounts were (in millions):
Cash and Cash Equivalents Short-Term Investments
1998 1997 1998 1997
Held-to-maturity debt securities:
Commercial paper $ 320.4 l> 372.-+ $ 19.5 176.3
Other 109.1 281.1 22.8 122.1
Available-for-sale debt securities 27.3 68.8 5.6 139.3
Cash 23.2 18.1
$ 480.0 $ 7-+0.4 $ 47.9 437.7
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):
Carrying
Value
Long-Term Debt $ 4,000.7
Mandatorily Redeemable
Preferred Security of Subsidiary 564.1
Series C Preferred Stock 260.7
Redeemable Common Stock
The Company considers all unrestricted investments with a
remaining maturity of three months or less on their acquisition
date to be cash equivalents. The Company classifies investments
with a remaining maturity of more than three months on their
acquisition date that are expected to be sold or called by the
issuer within the next year, and those temporarily restricted, as
short-term investments. Purchases of short-term im estments
classified as a ailable-for-sale securities dming 1997 were
$63 .1 million and proceeds from sales of such secmities during
1998 and 1997 were $139.3 and $74.5 million, respectively.
At December 31, 1998 and 1997, short-term investments
included $4 7. 9 and $138. 2 million, respectively, of temporarily
restricted investments. The temporarily restricted in estments
were pledged as collateral under various agreements.
1998 1997
Fair Carrying Fair
Value alue Value
$ 4,074.2 2,069.3 l> 2,239.7
519.6 486.3 434.1
196.0 306.2 -+32.9
-+8.5 767.7
The fair values of the Company's long-tem1 debt were estimated
using quoted market prices, where available. For long-term
debt, Preferred Security and redeemable common stock not
actively traded, fair values \: ere estimated using discounted cash
flow analysis, based on the Companys current incremental
borrowing rates for similar types of securities. The fair value of
the Series C Preferred Stock shares is based on the assumed
conversion to Common tock and , aluing such shares at the
closing quoted market price for Common Stock.
61
62
Note P- cgmcnl Information
l'h, 01np:m is managed as one cohesive I u incs uniL, ol which r v-nu arc derived primarily rrom th commercial LransponaLion of
passcn.i 'r. and argo. ;co 1
raphi op raLing r venue arc based on allo ,llion guid lin s provided by Lhe U .. D panmenL of TransportaLion,
, hi h da~siGc:-, nights bet, -c11 the U .. ancl foreign de Linalion into region , and Lhus, differs from Lhe definiLion or foreign operaLions under
P,l'11L'r;tll a 'CL
'ptl'cl ac ounting prin i1 le The follm,ving table show the operaLing rcvcnu s ror acb region (in millions):
l)()l)lC,
ti .
Pacifi , pri11ci1 all , J11 :111
1
\1 Lu11i
fot;tl np 'r~
uing re.' 'nucs
otc Q- Quart -rl Financial Data ( nauditcd)
l ruu litL'd quartnl result of 01 crat ion for th ars -ndcd D ccmber
(i11 milli ns, n..:c .. 'l'J t I er h~
irc amounL ):
1 St uan r
8:
IJ)l'r,1t i ng 1
"\'Ct1 \CS $ 2,428.5
)pcrJtm 1
in -omc (I s) l 6.4
ct i11co111' (Jos.) $ 71.0
Basic earnings (loss) per co111111on share $ .72
I ilutcd cm 11i11,~s (loss) pa conm1011 hare $
19 7:
Op~'l.lting rcW1111L\ $ 2, 75.
pcr:11 m~ income 135.0
In ornc hcforc ':,..tra0rdi11;11y item 64.6
Cl l(\'S 011 o.L111<1l\t_hmcnt or dcl t
Cl 111 ()111(' $ 14.6
f 1 ic cor11i11gs per ommon share:
ncforc cfk -1
or o..t r:wrdin:u i1
c111 $ _1:-9
ct k1ss (m c;-,,tingu1shmcnt of debt
Farnings per common sh,11\' $ 9
Dilr,tcd earnings r er co111111011 ftnrc:
ndo1\' cff, t of l';-,,tr:1ordinar , item $
F:1rni112s per corn111on -h:1rc $
Year Encled December 31
1998
$ 6,093.0
2,015.7
936.1
$ 9,044.8
l, 1998 and 1997, ar
2nd Quaner
$ 2,476.0
J 20.2
$
$
$ .51
$ 2,5 7.6
291.l
6.2
$ 136.2
$ 1.29
$ l .29
1.16
1.16
1997
$ 6,793.0
2,670.9
761.9
$ 10,225.8
summa1ized below
rd QuarLer
$ 1,928.1
(275. )
$ (223.8)
$ (2.91)
$ (2.91)
$ 2,801.4
503.8
290.3
$ 290.3
$ 2.80
$ 2.80
$ 2.53
$ 2.5
1996
$ 6,492.7
2,699.1
688.7
$ 9,880.5
4Lh Quarter
$ 2,212.2
(192.2)
$ (181.3)
$ (2.31)
$ (2.31)
$ 2,491.3
227.3
J 14.7
(9.3)
$ 105.4
$ 1.18
(.09)
$ 1.09
$ 1.06
(.09)
$ .97
The sum 1f th ' FW'Lcrl , ',nnrng .. 1 er har arnounl do not equal the annual arnounL reported in. e per hare amoums are
- )111] utcd mdq end '11tl , for ca -h quarter and fo r Lhe full , ar ba d m re pccLive weighted average common hares ouL Landing and
,llh 'r liluti\c pot -ntbl omm rn sh:ff .
ote R-Condensed Consolidated Financial .Information of
1 orthwest Airlines, Inc.
orthv,est Airlines Holdings Corporation and its wholly-owned
subsidiaf), \ ings Acquisition Corp., \, ere formed and
incorporated by a group of investors in order to acquire all of
the outstanding stock of A Inc. (the "Acquisition '), the
parent company of orthwest Airlines, Inc. In 1989, v ings
Acquisition Corp. was merged \;1,rith and into I A Inc. with
\ 1
A Inc. being the surviving entity. The Acquisition was
recorded using the purchase method of accounting and,
accordingly, the purchase p1ice w s allocated to the assets
acquired and liabilities as urned based on their estimated fair
market value at the date of Acquisition, determined primarily
by independent appraisal .
After reflecting these values in the financial statements of onhwest, condensed financial information of orth\ est consists of the
following (in millions):
Condensed Consolidated Statements of Operations
Operating re, enues
Operating expenses
Operating income (loss)
Other income (expense)
Income (loss) before income taxes and extraordinary item
Income tax expense (benefit)
Income (loss) before extraordinary item
Loss on extinguishment of debt
et income (loss)
Condensed Consolidated Balance Sheet Data
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
$
$
$
Year Ended December 31
1998 1997 1996
8,642.7 9 882.9 9,651.3
8,862.2 8,773.9
(219.5) 1,109.0
(239.4) (212.9)
(458.9) 896.1
(159.3) 342.6
(299.6) 553.5 517.2
(9.3)
(299.6) 544.2 517.2
December 31
1998 1997
1,601.9 2,015.0
7,242.4 6,114.6
3,598.8 3,164.7
3,955.2 2,016.9
1,001.2 1,191.0
564.1 486.3
)>
)>
)>
r
m
'O
0
]]
-I
63
64
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 , 1998 and 1997, and the related consolidated statements of operations, common stockholders'
equity (deficit), and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
~"f'n-LLP
Minneapolis, Minnesota
January 18, 1999
FIVEVEAR SUMMARY
orthwest Airlines Corporation
Year Ended December 31
1998 (1) 1997 1996 1995 1994
Statements of Operations
(In mi!Iions, except per share data)
Operating revenues
Passenger $ 7,606.5 $ 8,822.1 $ 8,598.3 $ 7,762.0 $ 7,010.1
Cargo 633.S 789.4 745.8 751.2 755.8
Other 804.8 614.3 536.4 571.7 559.0
9,044.8 10,225.8 9,880.5 9,084.9 8,324.9
Operating expenses 9,236.2 9,068.6 8,826.7 8,171.5 7,485.3
Operating income (loss) (191.4) 1,157.2 1,053.8 913.4 839.6
Operating margin (2.1)% 11.3% 10.7% 10.1% 10.1%
Income (loss) before extraordinary item $ (285.S) $ 605.8 s 536.1 s 342.1 $ 295.5
et income (loss) s (285.S) s; 596.5 s 536.1 s 392.0 s 295.5
Earnings (loss) per common share:
Basic s (3.48) s 5.89 (2) s 5.05 (2) $ 3.11 (2) s 3.00
Diluted $ (3.48) s 5.29 (2) s 4.52 (2) s 2.90 (2) s 2.90
BaLance Sheets (In millions)
Cash, cash equivaients and unrestricted
short-term investments $ 480.0 s 1,039.9 $ 752.1 s 970.9 s 968.3
Total assets 10,280.8 9,336.2 8,511 .7 8,412.3 8,070.1
Long-term debt, including current maturities 4,000.7 2,069.3 2,060.4 2,467.1 4,013.5
Long-term obligations under capital leases,
including current obligations 654.9 705.3 772.2 841.2 890.3
Mandatorily redeemable preferred security of
subsidiary 564.1 486.3 549 2 618.4
Redeemable stock 260.7 1,154.7 602.6 945.5 795.0
Common stockholders' equity (deficit) (3) (476. 7) (311.0) 92.9 (818.8) C
U70.7)
Operating Statistics (4)
Scheduled senri.ce:
Available seat miles (ASM) (millions) 91,310.7 96,963.6 93,913.7 87,472.0 85,015.6
Revenue passenger miles (millions) 66,738.3 72,031.3 68,639.1 62,515.2 57,873.2
Passenger load factor 73.1% 74.3% 73.1% 71.5% 68.1%
Revenue passengers (millions) 50.S 54.7 52 7 49.3 45.5
Re,,enue yield per passenger mile 11.26c 12.llC 12.53C 12.42C 12.llc
Passenger revenue per scheduled ASM 8.23CZ 9.00c 9.16C 8.87C 8.25C
Operating revenue per total AS (5) 9.12ct 9.76C 9.85e 9.58C 8.93c
Operating expense per total AS. 1 (5) 9.2lct 8.63c 8.78C 8.66C 8.08C
Cargo ton miles (millions) 1,954.4 2,282.8 2,215.8 2,246.3 2,322.3
Cargo revenue per ton mile 32.4C 34.5C 33.7C 3J.4C 32.5C
Fuel gallons consumed (millions) 1,877.1 1,996.3 1,945.1 1,846.2 1,792.8
Average fuel cost per gallon 53.60C 64.86C 67.21c 55.66c: 56.23c
'umber of operating aircraft at year end 409 405 399 380 361
Full-time equivalent employees at year end 50 565 48,984 47,536 45,124 43,673
OJ 1998 .;as affected hr labor-related disruptions which mcluded ,:ork actions, a 30-day S.58 per diluted share) and the 1995 extraordinar/ gain (5.55 per baste share and
cooling off period, an 18-day cessation of flight operations due Lo he ptlots smke a S.50 per d1lu ed share)
se:en-day gradual resumpuon of flight operations and a rebmldmg of raffic demand. OJ : :o dhidends ha\e been paid on Common S ock for any period presented
(2) Excludes the effem of the 1997 ex raordinary loss (S.10 per basic share and S 08 per <.;J ?,II staus tcs exclude Express A1rlmes I Inc.
diluted share), the 1996 preferred stock ransacuon C.75 per baste share and S 68 (SJ Excludes he es ,mated re\enues and expenses associated v.1 h 1he
65
per diluted share,. :lie 1995 preferred stock ransaction 'S.64 per basic share and opera 10n of: onJ-o;es1s fleet of e1gh 747 freighter aircraf and .. !LT lnc
66
STOCKHOLDERS' INFORMATION
Common Stock Prices
1998 1997
Quarter High Low High
1st 65 5h6 45 41
2nd 62 3h6 37 43 3/.+
3rd 44 25 1/i6 42 19!32
4th 27 5/s 18 5/s 49 1/s
No dividends were declared drning the years ended
1998 or 1997.
Stock Listing
Low
33 1/s
33 7/s
35
40
The Company's Common Stock is quoted on the Nasdaq
ational Market under symbol WAC. As of January 31 , 1999
the Company had 1,270 stockholders of record.
Registrar and Transfer Agent
I orwest Bank Minnesota, .A.
Post Office Box 738
South St. Paul, Minnesota 55075-0738
(800) 468-9716
Annual Meeting
The 1999 Annual Meeting of Stockholders will be held
at the Equitable Life Building, New York, New York on
Friday, April 23, 1999 at 9:30 AM.
Independent Auditors
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 inquiries 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 A4 l 10
5101 Northwest Drive
St. Paul, Minnesota 55111
(800) 953-3332
Northwest Airlines & Partners
International Route System
03/01/99
Northwest Airlines
KLM Royal Dutch Airlines
Air China
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Pacific Island Aviation
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(B
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Eu rowings
.........
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