2000 Northwest Airlines Our cover depicts the new Detroit terminal, due to open in 2001. N O RT H W EST A I R LI N ES is the world's fourth largest airline with domestic hubs in Detroit) Minneapolis/St. Paul and Memphis) Asian hubs in Tokyo and Osaka) and a European hub in Amsterdam. Northwest Airlines and its alliance partners) including Continental Airlines and KLM Royal Dutch Airlines) offer customers a global airline network serving more than 785 cities in 120 countries on ix continents. Table of Contents THE NEW DETROIT TERMINAL (PAGE 8) will feature many new conveniences, among them elevated tram cars to transport passengers between gates. To Our Shareholder ... . ... pages 2-5 Operational Excellence ........ . ...... . ... . ..... . . . . . . . pages 6-7 Investment for the Future. . .. page -15 Alliance Development ...... pages 16-17 I\T A Cargo .. .... ..... . ........ . ...... .. . . page 1 fLT Vacation . ................ page 19 Focus on People .. .. . ............... ... ............... . ..... pages 20-23 Board of Directors . ......... ............ . . ............ pages 24-25 enior Officers ..... .. . .................... .. . . ...... page 25 Vi ion and Mis ion .. .. ............... . . .... . . . . ... . .. page 26 Financial Report . ... . ... . ............... .. ... . . . .. page 27 Stockholder ' Information ..... . ........ .... ... . . . ............ page 70 Route Maps . . .. .... ... ...... . .................. .. . . .. back cover Annual Report 2000 CONDENSED FINANCIAL HIGHLIGHTS Northwest Airlines Corporation Year Ended December 31 (Dollars in millions, except per share data) FINANCIALS Operating Revenue Operating Expen e Operating Income Operating 1fargin Net Income Earning Per Common hare: 2000 $ 11 ,415 10,846 569 5.0 0 256 Ba ic $ 3.09 Diluted 2.77 Iumber of Common har Out tanding (million) 85.1 OPERATING STATISTICS ch duled ervice: vailable eat ile M) (million ) Re, enue Pa enger ile (RPM) (million ) Pa enger Load Factor Revenue Pa enger (million ) Revenue Yield Per Pa enger Mile Pa nger Revenue Per cheduled Cargo Ton Mile (million ) Operating Revenue Per Total M (RA 1) Operating Expen e Per Total 1 ( M) 103,356 79,128 76.6 58.7 12.04c 9.21 2,501 10.01 9.33 Operating Income (Loss) millions Cash Flows from Operations millions $1 ,200 1,000 800 600 400 200 0 ~.....::...~.::...::...----,,...,......_,._~..,.,_,,._____. '96 '97 '99 '00 -200 '98 Financial Highlights $2,000 1,600 1,200 800 400 '96 '97 '98 '99 '00 1999 10 276 6.9% 300 3.69 3.26 4.6 99,446 74 16 74.6% 56.1 11.5 .64~ 2 336 9.44 .71 Long-Term Debt millions $5,000 4,000 3,000 2,000 1,000 Percent Change 11 .1 13.4 (1. )pts. 3.9 6.7 2.0 pt. 4.6 4.0 6.6 7.1 6.0 7.1 '96 '97 '98 '99 '00 Northwest Airlines A MESSAGE FROM THE CHAIRMAN ,\ new L earn ha a umecl Lhe LOp leadership po ition al l onhwe L Airline . The l onhwc t Board of Director ele Led Richard r\ncler,on hief ex cu tiv offi r and Doug L een land pr ident. J ohn Da burg wa pre ident and chief xe utiv offi er in e 1990. We tb ankjohn for his leader hip in building a global network and guiding 1 onhw L th rough the decade of the 1990 . Planning for a chang in leader hip ha b en a pri ri ty fo r the onhw t board . vVe have long recognized that cl v lapin a ound u c sion trategy and implem ming iL at the right tim i among o ur mo L important dutie . Accorclino-ly, w previou ly id ntified Richard and Doug a talem ed , seasoned leader r ady L o a um e critical role at 1 orthwe t. Too-e ther, th e , offer com plementar kill that make th em an out L anding team . Having worked with them both oY er the pa t decade, I am confident we hav in place traL egic, d ci ive and highly energetic leader wh o will rve the com pany extreme! well for the long term. a North, est ex cu Live vice pre ident and our chief operating offi cer, Richard has been responsible for our op ration ince 199 . Doug, al o fo rmer! a 1 orthwe t executive vice pre ident and ur chief corporate officer ince 1999. ha led our corporate taffand guided the formation and implementation of our alliances with KLM Royal Dutch Airlin e and Continental Airline . Their deep knowledge of the company and the industry, combined with their pro\'en leader hip kill , enabled u to make thi change confident that th transition wo uld be mooth and orderly. Richard and Doug have been in trumental in de io-ning and implementing the trategies that have served 1 onhwest well durino- a period of normou change and challeno-ing conditions in the airline indu try. The e core strategie remain fundamentally unchan ged and are further di cu ed in our letter to hareholder . The board is anticipating great benefits to all Nonhwest take holders from the vigo r and enthusia m of thi new leadership. Gary L. Wil on Chairman of Lhe Board Annual Report 2000 TO OUR SHAREHOLDERS In the ear 2000, rising fuel price , record air traffic lev I and ren wed attemp at indu try con olidation d fin d the competitive land cape for our company. gain t chi backdrop, lorthw t Airline delivered trong operating and financial performance. v\Te car1ied more pas enger , flew more mile and g nerat d more r venue than at any point in our histor . Our operating margin, xcludino- fuel expen e and non-recurring item , wa the be t of the network carrier . We ranked first i.n on-time p rformance through mo t of the ar and improved our ranking n all the customer atisfaction mea ure tracked b)' the .. Department of Tran portation (DOT). The mi ion of 1 orthwest A..irline is to pro\'ide reliable, convenient and on i tent air tran portaLion that exceed customer expectation and earn a substantial profit. To fulfill this mis ion, we ha\'e de ignated five area for empha i - our heckli t for the Futur - that reflect continued and c n i t nt implementation of our core trategie . The e five focu area and our ke achievements in each of them ar de cribed below. R LJ N A G R EAT A I R LI N E - We will provid afe, clean, on-tim air cran ponation with dependabl luggage service, coupled with friendly, profe ional, con i tent and ca.ring u-eatm nt. Our promi e f reliability includ prompt, appropriate service recovery when, de pite our be t efforts, \\'e do not meet our cu comer ' e 'pectation . v\ e focu relentle ly on being tl1e indu try' on-time-arrival 1 ad r. From 1990 tl1rough 2000, Northw t Airlin was exactly that, ba ed on DOT ta.ti tic for . network canier . Throughout 2000, w wer one of tl1e I ading car1i r in on-time performance, fewe t con umer complaints, lowe t level of mi handled luggage and lea t involuntary denied boarding . On a compo ite of tl1e e mea ure of operational integ1ity, we were the indu cry leader in 2000. P LJ T ( LJ ST O M E RS FI RS T - \ e will maintain our industr -lead in a- u comer Fir t plan, d livering clear, conci e communication about flight tacus. \-\'e will crive to be the fir t choice airline for pa enger and hipper , with innovative products. orthwe t ha been inve ting millions of dollars in new technologie that help cuscomers conveniently buy tickets, ea e check-in and improve the boarding process. In 2000, we became the fir t major airline to inu-oduc onlin ch ck-in via our web it . Dome tic customer can now obtain a boarding pas at their home or offices, bypa ino- check-in line at the airport. Northwe t cuscomer now al o enjoy the convenience of electronic ticket e en when their itinera1ie include travel on multiple carriers. \-\re are leading the development of interline e-ticketing capabilitie and with allianc parmer Continental Airline operate the indu try' largest interline e-ticket network. v\e are also enhancing in-flight comfort for customers with tl1e introduction of enhanced v orld Business Cla ~ " ervice. The centerpiece of this service is more per onal space - enou0 h to comfortably,, ork, relax or leep in flight. Thi product, which, e began rolling out in 2000, al o offers higher quality food ervice and other pa enger amenitie . The improvements re tore v\ orld Busines Class as the industry-leading product on trans-Pacific routes and a product leader in tl1e trans-Atlantic market. Letter to Shareholders Northwest Airlines FOCUS ON PE O PL E - B Laking care of Norlhwest people - our greatest a et - we will Lak b tter car of our ustomer . V-le will achieve this objective through enhanced communications, fair and progressiv labor relation , ~tate-of-Lhe-an training and continued improvements t mployee ervice and facilitie . Durina th year, we r a bed a new five-year agreement with our flight attendants. Seven f the eight contracts overing ur .S. and anadian employ e have updated agreem nts, and our mechanic , cleaner and custodians w re in th ratifi at.ion proce for a new contract as we beaan printing thi report. Th qualit)' of our service ultimately rest on the qualit'y and enthusia m of our people. Throughout this report we recognize 14 employ e for their out tanding effort on behalf of our ompany and our customer . They are the recipients of th 2000 President's Award our highest distinction. B LJ I L D O LJ R N ET WO R K - We will create robust, profitable and ustainable growth by expanding ervice from each Northwe t hub and by building our alliances with other carriers. We will aggressively develop argo, our fa test growi1w bu ines , which produced a 17 percent increase in revenues in 2000. 1 orthwest is the leader in creating global networks. Long-term alliances are the most economic way to expand gl bally du to r enue, co t and capital ynergie that are hared by the partners. World coverage also diver ifies ri k among international regions. Diversity has ser eel us well as strong dome tic and trans-Atlantic markets helped offset Asian weakne in 1998, while in 1999 and 2000 the re urging A ian economie helped off et tran -Atlantic over capacity. The Continental Airlines alliance provide Northwest access to additional domestic hubs in ewark and Houston and aenerate significant incremental revenue witl1 minimal capital e, pense for both carriers. Together, our systems have a 21 percent share of the U.S. market, which is equivalent to United Airline , American Airlines or Delta. We have extended our Continental alliance agreement through 2025 and received from Continental a special cla s of preferred stock tl1at provide adequate protection of our mutual interests in this partnership. Vl/e are very entlrn iastic about our partnership wi.tl1 Continental. The alliance is on schedule to achieve our projected 500 million in annual joint benefit. In 2000, we expanded our ian route network through enhancing our exi ting alliances with Air China and Japan Air Sy tern and a new alliance with I falaysia Airlines, the fir t between a U.S. and A ian carrier to be granted antitrust immunity by the DOT. Antitru t immunity permit tl1e partner to pur ue unlimited economic and operatio 1al coordination and thus offers both the traveling public and tl1e alliance partner great benefits. Northwest and Japan Airlines established a long-term cargo alliance. Richard H. Ander on Gary L. Wil on Dougla M. Steenland Annual Report 2000 Going forward, our operating reliability and effi iency, a , II a our cu tom r ' in-flight omfort, will ben fiL from planned addition to our fleet. Early in 2001, w announced order for 52 ne, air raft, including 24 comfortable and reliable Airbu 330-300 wide-bod aircraft and 20 757-300 aircraft. Deliv rie on the order b gin in 200_ and continue through 2006. ombined with other planned acqui iti n , we will be taking deliver ofa new air raft approximate! every two week for the next fi ars. SE ( LJ RE O LJ R F LJ T LJ RE - W will en ur u tainable finan ial tabili through a ommitmenL co improve profitability and create hareholcl r valu . We will xecute our trategie LO improve financial performance by increa ing revenues in high potential area for 'pan ion - uch a cargo - and aggre ivel)' conuolling co orthwest is the only .S airlin with con truction of ne, runwa)' and terminal faciliti at all of its hub . To enhance cu tamer ervi and operating efficienc , the large t fa ilil:)1 expan ion and r n wal in nh, t' hi tor i underway at our dome tic hub in Detroit, Minn apoli / t. Paul and l\Iemphi , and in our international hub , Tokyo and Amsterdam.B I far the mo t dramatic i the con. tru tion of the new terminal in Deuoit. \'\'hen the Late-of-th -an terminal open in December it will be th mot effici nL pa enger-conn ctin hub in the world. Becau e ofD u it' unique geograph ic po ition thi new airport will be the connecting hub of hoice ford me Li de ti.nations and for international flights to both Europe and ia for travel r from ea L of the lid we t. LOOKING AH EA D - W are confronting an ov rly taxed Air Traffic ontrol y t m ( T ) infra tructure. Thi i a principal cau e of dela , which lead to pa en er fru uation with our indu tr ' 1orthwe t will continue to take a leader hip role in working with the Federal viation dmini Lration to find long term olution to ATC problem . We upport the indu try po ition that the AT hould b reorganiLed L er ate am re performanc -based model. The eventual oluti n hould involve a vernm nt own d entit) with ind p ndent authority to budg t, plan for growth and manage its work force. Averag jet fuel co t hav xceed d Gulf War price for more than one ,ear due to the action of the OPE cart I. We encourage the new admini uation to adopt policie and take action LO coumer OPEC dictating oil price . Allowing a cartel of foreign producers to control the price of oil i bad for the American e onom and it con umer . Thi i particularly important to our indu tr a the U .. economy tagnate in 2001 and r v nu com und r pr ur We celebrate our 75th year of ervice in 2001. Thi is a ignifi ant mile tone in an indu tr where market force continuall re hape the competitive land cap . 1o other .. airline ha operated independently under one name as long a Northwe t Airline . We look forward to better erving our cu tomer , emplo ee and harehold r . Thank you for your int r t and upport. (~~-/~ Gary L. Wil on Chairman of the Board Richard H . Anderson Chief Executive Officer Dougla M. Steenland Pre ident 5 Northwest Airlines .... V') uJ 3: :::c .... 0::: 0 V') z ::> Operational Excellence On-time operations are the foundation of Northwest's reliability. DEPARTURES $dlodulod Adual GIie ~INlrk 03:31 PM AO" P- 0,,- - .... (!NW2771CONI' ~ - '::.,: (!NW2'1111L1 . y (!NWtO'Sl!LiOll ....... llT _,,. (!h'WIOOIIILSOltSliOIII.IIT (!h"W'31611L5395~ND :::::=~;'.~ (!NW213'11LIPI ........ ILl;"?'i;'. (!NWt2731!Llll3 -io%&,.'\ . ~ m111.m,1101t<11.IIA (!NW71'1!1.171'Baolao.llA (!JNWnll!Lffll l!(i(l d,1ilv clqiartuns in '.!00 I. The Ill'\\' 1crn1in:tl will k.1ttlll' n g,1tes. IO(i ticketing posi1inns, '.! I ntrbside rhl'ck-in st,111cls. I~ luggagl' c:11011,l'b .111cl lour \\'O! ldCl11bs. 1\ 1H11 IOO-rnu111 lto1rl in the trr111i11:tl is pn~jl'rtl'd l'or a '.!00'.! rn111pklin11 . l'ltc 11111 ll'I 111i11,tl 11ill oll\1 i111rr11.11mnal-10-do11Hs1ic ro111Hrtio11~ 11ithi11 !Ill' ~.tnH f'.1rili1\'. Otltr, ,111 prn t i111prnH'ttll'I\I~ ll'ill inrludl' .1 fourth p.tralkl I u11w:1\ 1ll:11 will L nabll' .1 '.!:1 jH'1C1111 in< H',1,1 111 c.1p.1rit1 ,llld du.ti . ~i111ul1,1ncnus 1 .1kco1Ts and L111clings. 11e11 in inrlc111l'11t ll'l',tlhl'1 . P,e id nt's Aw < rd Winn , Carla L. Glenn Flight Attendant Detroit Carla Glenn set a positive tone and inspire a team spirit to assure consi tent ervice delivery to cu tamers on her flights. She has maintamed an outstanding record throughout her more than 30-year cateer and is known as the ultimate professional in meeting the needs of passenger and fellow crew members onboard the aircraft. Carla also can be counted on to implement a flawless recovery plan when things do not go as planned. Annua l Report 2000 Construction is on schedule for the new Northwest Airlines terminal in Detroit, the premier airline hub facility in the United States. Northwest Airlines A more luxurious design standard for new WorldClubs was introduced in 2000 with the opening of this 11,000 square foot facility at Minneapolis/ St. Paul International Airport. Memphis improvements include 15 new Northwest gates, the redesign of eight gates to accommodate regional jet service, a new WorldClub and the addition of 11 new ticket counters. AL Iinn apolis/ L. Paul In tern ational Airport, $2.4 billion in airport funded improvemenls are und r way. The improv menL include a 50 percen t increase in parking, 15 new j et gales, 30 new co mmut r gat s, 10 additi nal orthwest tick t counters and a spectacular new WorldClub~ the airport' third. Like Detroit, the Minneapolis/ SL. Paul lnL rn ational Ai r1 ort features international arrival , departures and conn ections with dome tic flights within the same facility. A new skyway and au tomated peopl mover hort n tran it time between concour e and the parking garage. In fem phis, orthwest launched the large t single service increase in its hi tory, adding a fourth bank of fligh ts accounting for 104 new takeoffs and landings daily. With this 25 p rcent increase in ervice, Memphis gained additional daily non top service to 44 destinations. Memphi was the number one hub in the U.S. in 2000 for on-tim arrivals. Memphis airport funded renovations total "400 million, including a 13,000-foo t runway which opened in late 2000 to accommodate additional arrivals and departure . The new runway also will enhance long-range flying from Memphis to international destinations. President's Award Winner Lex Cralley Lead Mechanic - Plant Maintenance Minneapolis/St. Paul Throughout his 13-year career, including service in Memphis and Boston as well as the Twin Cities, Lex Cral/ey has displayed and lived Northwest's values and guiding principles. In his present position, Lex and his crew of third shift mechanics are responsible for maintaining 383 pieces of motorized ground equipment. Lex and the crew renovated and upgraded two maintenance shops in 2000 and he ensured that his crew was appropriately recognized for their accomplishments. Annual Report 2 0 0 0 At Tokyo's arita airport, 600 million in hub improvement are currently under way. In 2002, orthwe t and alliance partner KLM will relocate airport operations to Satellite 3 in Terminal 1, which ha been de igned by Northwest in cooperation with the ew Tokyo International Airport Authority to better serve our 18 daily flights. In 2003, we will expand to include atellite 5, which is an extension of Satellite 3. Northwest's Tokyo hub will move to the new Satellite 3 in 2002 and expand into Satellite 5 in 2003. SATELLITE 4 SATELLITE 1 Am terdam's chiphol Airport serve a T orthwe t' European hub by virtue of orthwest' highly integrated alliance with KLM Royal Dutch Airline . Already regarded a one of Europe' premier hub airports becau e of its ease of connections and its shopping, dining and entertainment option , Schiphol is now undergoing improvements to accommodate ubstantially higher pas enger and cargo capacity, with particular empha i With KLM, Northwest offers service between Amsterdam and 13 U.S. cities. From Amsterdam, the airlines serve 108 destinations in Europe, Africa and India. on the airport' luggage sorting sy tern and the con truction of a fifth runway. Hub Airport improvements total nearly $6 billion. President's Award Winner Eric McMahon Manager - Customer Service Amsterdam Eric McMahon volunteered tor a temporary assignment in Amsterdam and is making a difference every day in improved luggage reliability from Northwest's European hub. He first established a detailed communications link with all destinations served from Amsterdam, vastly improving the quality of information available on luggage status and service recovery. He also has researched and developed new processes to expedite cargo shipments on flights to Europe from Detroit. Airport Improvements Northwest Airlines NEW AIRCRAFT ADDED TO FLEET The fir t of 24 Airbu 330-300 aircraft will begin ani\'i.ng in 2003 a part of an order for 52 new aircraft, one of the large Lin orthwe t hi tory. Th twi.n-ai le 330 wi.11 repla e our D 10-30 fleet a ro the tlantic and offer 10 percent more capacity, wi.th 302 pa enger - 34 in World Bu ine Class~'1 compared with 26 in the D 10. The new aircraft will feature a new, more paciou interior and in Coach la no pa nger i ever more than one eat away from an ai I . Beyond tate-of-th -an technology, the A'330-300 ha the !owe t operating co t per eat of any long-range jetliner e\'er de igned. In addition LO the A330, the recent order include two Boeing B747-400 aircraft for tran -Pacific route , 20 Br7-300 , which will replace Nonhwe t' DCl0-40 fleet on dome tic routes, and i additional Airbu A319 . ccelerated 2001 deli\'erie of previou ly ordered B7 7-200 aircraft and Airbu 320 aircraf will allow u to retire our Boeing 727 a year earlier than initially planned, moving forward ome of the cost saving and efficiencie that will re ult from op rating and maintaining ju Lone fleet type in the 150- eat category. The . orthwe t Airlin fle t, including Airlinkjet aircraft, con i ted of 469 aircraft at the end of 2000. By the end of 2004, that total will increa e to 56- aircraft. The aircraft deliver chedule for the next five year will m and livery of a new aircraft about ever 1 two week . President's Award Winner Theodore F. Mallory Ill Director - Chief Pilot Regulatory Compliance General Manager, NATCO Ted Mallory walks the talk every dar, in multiple Northwest roles. As NATCO general manager he contracts with other airlines for pilot training at Northwest Aerospace Training Corporation, among the world's largest aircraft simulation facilities. Now in his 30th year, he took on another major assignment as a primary resource for regulatory matters affecting flight operations. Captain Mallory is an expert in human factors and crew resource management training. His dynamic leadership is recognized throughout the industry as evidenced by his many appointments to chair industry training committees and task forces. Annual Report 2000 WORLD BUS IN ES S CLASS sM EN HANCE D FOR GREATER COM FOR T World Busines Cla customer on both Northwest and KL\1 Royal Dutch Airline are traveling in ea that offer nearly a 30 percent increase in per onal pace and a full 150 degree of seat recline, making it more comfortable for pas enger to relax or Jeep in flight. Northwe t' wide-body aircraft ha\'e been reconfigured to accommodate the increa ed pace. All of KLM' wide-body aircraft will be reconfigured by :vlay 2001. ~orthwe t and KLM, the only airline alliance offering a co-branded premium bu ine clas product, introduced the improvements in World Bu ine Cla ervice in September 2000. The enhancements include greater choice and premium quality in meal ervice. In 2001 , N rthw t international flights will be taf cl with a purser to en ure that cu tomer receive the be t po sible ervice. Initially offered in 1994, the original v orld Bu ine Cla service helped differentiate the 1 orth\ e t/ KLM alliance from competing airline alliance . The international fleet has been equipped with a new digital audio system offering greater choice and quality and premium headsets in World Business Class. More Personal Space 14 Northwest Airlines -- ~"" NORTHWEST AIRLINES ______ 7~~ - . . . Travel Pla- nner- -worldPerks - - Deals & Promotions Northwest Services About Northwest R=iew Check-In Process if this i:, your fif"\l , isi( to nwa.tom C:hecl-.-ln Go To Check-In Process if ,ou ha,e an E-Ti l..ct and arc read, to chccl-.-111 nwa.com Check-In Thank you for u ing orthwesl Airline nwa.com Check-In. Please note: The nwa.com Check-In service _ is avail~ble less than 24 hours and more than 90 minutes pnor t? flight wa (:0 m departure. Please see a Northwest agent at the a.rrport for n assistance if you are within 90 minutes of departure or try e again later if you are more than 24 hours from departure. '91> Northwe t Airline i pleased to announce the following enhancemenL to nwa.com Check-In. Change seat hange flight. lJ pclatc Frcqu ,t FI 1 ]) I ,I( l I LEADERSHIP IN TECHNOLOGY In 2000, we became the first network airline to permit online check-in via the Northwest Airlines web site, nwa.com. Northwe t Improved Access to NWA cu tamer in the U.S., with acce s to the Internet and a ptinter, can now create their own boarding pa e from the convenience of their home or offices. If there is no luggage to check, customer can bypas all airport lines and walk traight to the gate for boarding. Enhancement to the nwa.com web site make it possible to reach nearly every feature in d1ree or fewer mou e-clicks. Sales through nwa.corn continue to grow dramatically, accounting for nearly 400 million in revenue in 2000, doubling from the 1 ear before. Al o growing dramatically are sales of -Ticket ~" which accounted for nearly 60 percent of all tickets for North we t in 2000, including rough] 75 percent of all domestic tickets. nwa.com is repeatedly recognized as the best web site in the industry. @NORTHWES'I AlRLl N E. S woru.nP 123 456 789 'W1 KLM MR JOHN Q SAMPLE VALID 1HRU 2/0~ M6ER SINCE ~996 woRLDPERKS ME E-Tickets are the catalyst for e-commerce at orlhwe t, improving service and reducing co ts. That' wh orth, e tis er ating int rline e-ticketing capabilities which allow customers Lo use electronic LickeL even when their itinerarie include travel on more than one carrier. In Annual Report 2000 fa October 2000, Northwe t and alliance partner Continental Airline launched the industry' largest interline E-Ticket network. a re ult, traveler can not only make connections on an E-Ticket, but can al o u e eiLher Northwest or Continental E- rvice Center for check-in. We expect toe tabli h interline e-ticketing capabilitie with other carriers in 2001. E-Tickets will be available to all de tinations erved b Northwest To help travelers avoid airport check-in lines, Northwest has deployed more than 225 E-Service Centers5 M systemwide. These centers enable travelers globally once KLM launches it e-ticketing capabilitie in the fir t half of 2001. to obtain boarding passes, check-in luggage and change seat assignments all without waiting to see a gate agent. O ur E-Service Centers handled more than 4 million check-ins in 2000. WorldPerks frequent flyer members can now fully manage their accounts online through WorldPerks Direc "at mva.corn. Through WorldPerks Direct, cu tomer can enroll themselves in the WorldPerks progran1, check mileage balance and accow1t historie , book award travel and report mileage di crepancie . with our new WorldPerks partner MilePoi.nt, we also have begw1 offe1ing travelers exciting new way to redeem WorldPerks mile . MilePoi.nt.com enable WorldPerk members to u e WorldPerk miles toward purcha es from many of the web's most popular retailers. A new WorldPerk database was successfully launched in July. The enhancements increase Northwe t' knowledge of customer needs and provide customer more option for the u e of their WorldPerks miles. The new ystern al o further ecures the accuracy and operational integrity ofWorldPerk . E-Servi ce President's Award Winner David Linnes-Bagley Applications Consultant Minneapolis/St. P aul Dave Linnes-Bagley was a key leader in establishing a new customer focused WorldPerks database. A 21-year employee, fellow team members acknowledge him tor his leadership and willingness to tackle the tough projects, including his work on Y 2K preparations. David's innovations also helped to control costs through new business-to-business technology. Northwest Airlines AL LI ANCES EXTEND OUR NETWORK onhwe Land Conlin ma! irline ~ rmed a groundbr aking allian betw en major dome tic carri r in 199 . bouL one milli n cu tom r are exchang cl ea h year b tween the two canier ' n twork . Th alliance add onhwe L code- hare hub in ke . market , Newark and Hou ton. It al o provide cu tamer eamle s conn cting ervice LO Continental's exten ive Latin American nenvork. Our combined network provide om pre hen ive coverage of 1 orth America, Latin America, ia and Europe. orthwe t achieve competitive ize through ode-share aureem nt with ConLinental and its other alliance partners. These agreement n arly triple the number of citie erved and nearly quadruple the daily frequencie available from onhwe t. orthwe t ha alliance relation hip with more than nvo dozen carrier . Alliance maximize the reach of orthwe t' global nenvork. Today, Northwe t, in combination with it alliance partner , erve more than 7 5 de tination in 120 countrie on ix continent . Alliance Development Continental ~ ORTHWEST A I R LIN ES. Airlines~ lll HIRCHINH ~/m,~r#H~ AMERl(A WEST AIRLINES BRAATHENS ~ 0 HAWAiiAN. AIRLINES ?%r!Pm~ JET AIR\NA'V President's Award Winner Lisa Perry Account E xecutive Billings -.f:.: KLM Royal Dutch A1rl1nes Allitalia "f:j CY PRUS A IRWAYS J.M B*:X:J>:.,;l.7'.. Lisa Perry's efforts to promote Northwest and her contributions to the communities and economies throughout Montana earned her the distinction of Montana's Tourism Person of the Year 2000. She has served three terms on the Governor's Tourism Advisory Council, including two as chair. Her promotion of official delegations representing Montana on overseas trade missions includes the Governor's delegation to Japan, and other delegations to China, Taiwan and elsewhere in Asia. Annual Report 2000 ::-Jorthwe t' allianc with KLY.1 Royal Dutch Airline i the mo t advanced and deeply integrated tran -Atlantic alliance in the indu try, enabling A'orthwe L to extend its network eamle 1 into Europe, the Middle East, India and Africa. ince 1993, the alliance ha operated with antitrust immunity, which allow the carrier to jointl price and market their ervice , and i governed b a long-term alliance agreement. Operating a a true joint enture under which both airline hare profi equal! , the alliance' operation ha e more than doubled ince 19 9 and now encompa 32 daily flights erving 162 citie . Of particular importance to our net\ ark' reach are our alliance with Air hina and Japan Air y tern for tran -Pacific code-share and intra-countr connection in hina and Japan, re pectivel . Late in 2000, our alliance with ::Vfalay iaAirline was granted antitru t immunity by the G. . Department of Tran portation. Thi too i a groundbreaking alliance - the fir t alliance between a ' .. and ian carrier to enjo antitru t immunity. With antitru t immunity now in place, we will expand code- hare ervice. Y.!alay ia Airline i the large t carrier erving outhea t ia. President's Award Winner Jie "Claire" Xia Ticketing Supervisor Beijing Claire Xia has a way of converting passengers into lifelong loyal Northwest customers as she assists U.S. expatriates and local Chinese with complex ticketing issues. Claire is similarly skillful in managing Nor1hwest's major ticketing agency partners. She regularly works late or on weekends on various special issues. Her dedication and spirit inspire all those in her office. Global Convenience Northwest Airlines NWA Cargo NWA CARGO PREPARED FOR RAPID GROWTH 1 orthwe t Airline Cargo, Inc. seek to be the fir t choice for air cargo tran portation. Cargo revenue were 857 million in 2000, an increa e of 17.1 percent over 1999. This rapid increase was driven by improved management of trans-Pacific capacity to match the strongest traffic flows in Asia, and improved collaboration ,vith KLM Cargo to maximize trans-Atlantic load factor . During 2000, N A Cargo took steps to trengthen it competitive position and t0 prepare for the rapid growth of international trade. To improve chedule frequency and coverage, a cargo alliance wa launched with Japan Airlines Cargo, one of the largest and mo t quality-focused air cargo carrier in Asia. To supplement it cargo hub in Tokyo, A Cargo expanded and enhanced its cargo hub operation in Anchorage with a new facility, with capacity to triple Northwest' freighter operation . Northwest i the only U.S. pa senger carrier to operate a fleet of Boeing 74 7 all cargo freighter . Since 1999, Northwest ha increased the freighter fleet by 50 percent with the acqui ition of four aircraft. Two of the additional aircraft are now in service and the other two will enter revenue ervice in 2001. Northwest's 2001 cargo revenue is expected to exceed 1 billion for the first time in the Company's history. President's Award Winner Michael McKinley District Manager - Cargo Operations & Customer Service Anchorage The Anchorage cargo hub, under Mike McKinley's leadership, plays a critical role to keep the cargo network running on schedule. He led the planning and implementation of the new Anchorage facility in October, the implementation of a fourth freighter crossload operation and is active in the Anchorage community on behalf of Northwest. Mike has one of the most motivated work groups at Northwest, a direct reflection of his leadership and professionalism. Annual Report 2000 MLT VACATIONS INC. - CHANGING AND GROWING YI.LT Inc., a, holly owned sub idiary of orthwe t Airline Corporation, develop and markets vacation program that include air tran portation, hotel accommodations, car rentals, ightseeing option and much more. LT Vacation Inc. offer two product line . Northwest Airline WorldVacation '1 utilize cheduled air ervice on Northwest and KL f to offer a \.vide election of vacation de tination in Europe, Asia, entra1 America, Mexico, the Caribbean, Canada and the nited State with custom-made, package-priced vacation . Worry-Free Vacation offers charter ervice from 12 U .. 01igin markets to the mo t popular vacation de tination in entral America, Mexico, the Caribbean and the ' nited tate . The e vacation program , in addition to providing a competitive and quality tour product, increase the ale of~orthwe t ervices and promote and upport new and exi ting Northwest de tination . YI.LT acations Inc. experienced significant growth and change in 2000. The transition of call center and office operation to Minot, ~D was completed. Vlorry-Free acations expanded into four additional origin markets - olorado pring , Honolulu, La ega and Memphis. Additional origin will be added in 2001. Tra el agent and con umer web ite were launched providing online booking capabilitie for both program . Revenue have exceeded expectation . Added technology enhanced the efficiency of call handling, reduced both elling and operational co ts, and increased the wa s MLT acations Inc. products are old. www.nwaworldvacations.com www.worryfreevacations.com MLT Vacations Northwest Airlines President's Award Winner Richard E. Dudley Equipment Services Employee Boston Rich Dudley's energy, enthusiasm, positive attitude, persistence, and commitment to the safety and welfare of his fellow employees are well known. Rich has developed a singular expertise in the areas of injury prevention and the sate performance of ramp and counter activities through behavioral change. He shares with his colleagues his knowledge of the safest procedures tor loading and unloading luggage, mail and cargo as he continues to enhance his own education and experience. His self- initiated work in these areas has demonstrated that one person can make Northwest is investing in more training for manager and front line customer ervice personnel, more frequent communication about goals and re ult , improved employee facilities and meaningful r cognition program . orthwe t's leading position in Cu tomers First reports from the Department of Transportation is a mea ure of how well our people have been trained and equipped to work together. This focus on people is one of the five elements of our Checklist for the Future. The other items on the checkli t include: run a great airline, put cu tomer first, build our network and secure our future. "Catch the Spirit," a new training program for Northwest's 14,000 ground operations employees emphasizes meeting customers' needs through better communication, coordination, and collaboration with other work groups. Entering 2001 , onhwest has finalized even of eight labor contracts for its .S. and Canadian emplo ees. In June 2000, , e signed a new five-year agreement with the International Brotherhood of Teamster , which rep re ents our 11 000 flight attendants. this annual report went to pre , a new contract with the Aircraft 1echanic Fraternal ociation, representing mechanics, custodian and cleaner , wa in the ratification proce P resident's Awar d Winner Debbie L. Danielson Manager - Central Reservations Control Minneapolis/St. Paul Debbie Danielson began her career in 1967 as a reservations sales agent and has worked in almost every area of reservations. She is highly respected and valued by customers, peers, agents, and management staffs throughout the company and is constantly striving to improve performance and service to customers. In addition to her systems knowledge, she advises many departments in managing schedule changes, irregular operations and the VIP program. Her expertise has helped establish procedures for identifying, notifying and tracking passengers and also has improved the hiring and recruiting process. Training, Communications Annual Report 2000 President's Award Winner Emory "Pinky" Alexander General Inspector Atlanta Maintenance Base For most of his 40 years at Northwest, "Pinky" Alexander's enthusiasm to meet new challenges has made him a mainstay in the Northwest inspection department. Pinky was responsible for all Stage Ill hushkitting conversions for JTBD engines, used on Northwest's fleet of 172 DC9 aircraft. His technical expertise and certification for JTBD engine maintenance have led to cost savings of up to $275,000 per engine for Northwest, and additional revenue from performing these same procedures for other airlines. Northwest Airlines IN MEMORIAM President' s Award Winner 1 orthwest's focus on people extends beyond our company to include the communitie we erve. That' why we created the orthwest AirCares charitable support program. Northwe t KidCares is a unique AirCares program. Through KidCare , WorldPerks - D lroit, Minneapolis/St. Paul and Mernphi'i, and its international hubs in rfokyo and Armtndarn. arly . 6 billion in infrastructur , upgrades, which al( almost entirely financ d through publi sourc s, wil l enhanc u<;torn r conv,nience and in r as airport capabilitie'i. orthwes1's domestic hubs will still rank in th five Jowe'>L-C()St .S. hubs, whil pr(Jviding onhwe<,L and iL', allian e partner<, 3 o unconstrain d growth opportunities. 2,000 20 0 UT LOOK 1,000 10 ALLIANCE AND OTHER DEVELOPMENTS In 2000, orthwest mad significant advancem nts to improv iL<, competitive position to enhance the long-term finan ial stability and sustainable growth of the enterpri5 as th industry addr,sses consolidation issues. The alliance agr ement with Continent.al was xtend cl through 2025. orthwest received preferr d stock from Continental that provides protection of the alliance relationship. The alJiance is progressing on schedu le to achieving 500 million in projected annual joint benefits. orthwest combined with i s partner Air China has 2.5 w ekJy flights betwe n China and the U.S., which is more than any other carrier. , orthwest and j apan Airlines established a long-term carg alliance. 1onhwest continu s to b an ind 1stry leader in CJrrrating p ,rformanc . Th airline i'> strategically w II pitionc:d as a strong and ind p ndent carrier in an volving mark tplac tha1 will in Jude industry cm<,o]idati l<>ng-term allianc s with Comin ntal and KLM, ensure'> orthwesl will 1 ,main a vial>], omp titiv force in the indw, ry. orthwest ontinu .'> to ffJc:u<; on its cc;rc: slrength'>, hy kveraging it'> hub fran his and strategic a'>'><:ls for sw,tainabl gmwth and long-term profitability. Th, airline r,main, at th, !or frnnt in t hnological innovation , focus cl <>n r ducing and improving ustomer conv nience. The Cc>mpany ha.'> be n inv ,sting significantly in mod rnizing iL'i fle t and upgrading its pr<>du top rsCJnalize and improv th ust cJmrnitt d to enhan ing shar own r value. W ar' confid nl that as w move into the 21st entury, Northwest wi ll r main an industry J adcr, apit.alizing on i s strategic str ngths to improve uslorn rs rvi e, build employee relations and inc.reas shareown r value. Northwest Airlines MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS orthwe t Airlines orporation ( "NWA orp." and, toge th r with it con olidated ubsidiaries, the "Company") reported net income of 256 million for the year ended D cember 31, 2000, compared with 300 million in 1999. Diluted earnings per common share were 2.77 in 2000 compared with $3.26 in 1999. Operating income was 569 million in 2000 compared with $714 million in 1999. Higher fuel prices negatively impacted the ear ended December 31, 2000 by approximately $622 million on a pre-tax basis compared to 1999. In the fourth quarter of 2000, the Company recorded a non- recurring pre-tax, non-cash fleet dispo ition charge of $125 million related to the accelerated retirement of a portion of its DCl0 fleet. Diluted earnings per hare, excluding this non- recurring charge were $3.63. Substantially all of the Company's results of operations are attributable to its principal indirect operating subsidiary, orthwest Airlines, Inc. (" orthwest"), which accounted for approximately 95% of the Company's 2000 consolidated operating revenues and expenses and the following discussion pertains primarily to Northwest. RESULTS OF OPERATIONS- 2OOO COMPARED TO 1999 Operating Revenues - Operating revenues increased 11.1 % 1.14 billion). System passenger revenue increased 10.9% 935 million), excluding Express Airlines I, Inc. ("Express"), primarily attributable to a 3.9% increase in scheduled service ASMs and a 6.6% increase in pas enger revenue per ASM ("RASM"). ASMs increased primarily due to the net addition of 14 aircraft in 2000. System passenger load factor increas d to a record 76.6% for the year ended December 31, 2000. Express revenues were 130 million and $104 million for the years ended December 31, 2000 and 1999, re pectively. Domestic passenger revenue increased due to a higher passenger load factor, more capacity and higher yields. Domestic passenger load factor increased 2.1 points to a record 72.9%, primarily due to favorable indu try market conditions. Capacity increa ed as a result of additional aircraft. Pacific passenger revenue was higher due to increased capacity and higher yields driven by Asia's recovering economic environment. The average yen per U.S. dollar exchange rate for the years ended December 31, 2000 and 1999 was 108 and 115, respectively, a 6.5% strengthening of the yen. The yen per U.S. dollar exchange rate wa 117 at February 28, 2001. Pacific passenger load factor increased 1.5 points to a record 81.7% as the Company continued to experience increased demand. Atlantic passenger revenue increased as a result of more capacity and a higher passenger load factor. Capacity increased as a result of new flying, including the initiation of Detroit-Italy service and higher frequency in Minneapolis/St. Paul-Amsterdam service, as well as improved operational performance. Cargo revenue increased 17.1 % ($125 million) due to a 7.1 % increase in cargo ton miles and a 9.4% increase in cargo revenue 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 2000 Passenger revenue (in millions) $ 9,523 $ 6,455 $ 2,090 $ 978 Increase I (decrease) from 1999: Passenger revenue (in millions) $ 935 $ 515 $ 288 $ 132 Percent 10.9 % 8.7 % 16.0 % 15.6 % Scheduled service ASMs (capacity) 3.9 % 2.2 % 3.4 % 14.1 % Passenger load factor 2.0 pts. 2.1 pts. 1.5 pts. 1.5 pts. Yield 4.0 % 3.3 % 10.2 % (.6) % Passenger RASM 6.6 % 6.4 % 12.1 % 1.3 % per ton mile. The Company' tenth Boeing 747 freighter entered ervice in August 2000. Also in 2000, the Company acquired two additional Boeing 747 aircraft, which are being converted into freighters and are scheduled to begin revenue service in the summer of 2001. Other revenue increased 6.2% ($53 million) due to a higher volume ofbusine s for MLT Inc., which was partially offset by lower KLMjoint venture alliance settlements. operating Expenses - Operating expenses increased 13.4% ($1.28 billion). Operating capacity increa ed 4.0% to 103.52 billion total service ASMs due to planned capacity increases. Operating expense per total ASM increased 7.1 %, excluding the fleet disposition charge, and increased only . 7% when the impact of higher fuel prices is also excluded. Salaries, wages and benefits increased 6.4% ($217 million) due primarily to wage and benefit increa e from settled con tracts with collective bargaining units and an increase in average full-time equivalent employees of 2.6%. Aircraft fuel and taxes ro e 57.2% ($681 million) due to an increase of 55.0% in average fuel cost per gallon to a record 82.99 cents, net of hedging transactions, and 3.6% higher fuel gallons con urned as a result of higher capacity. Hedging transactions reduced fuel costs by 119 million in 2000. Commissions decreased 9.9% ($73 million) primarily due to lower rate resulting from changes to the Company's commission structure, which were effective in October 1999, and a lower percentage of commissionable tran action partially offset by commission on higher passenger revenues. Internet sales represented approximately 8.0% of passenger revenue in 2000 compared with approximately 5.0% in 1999. Aircraft maintenance materials and repairs increased .8% ($5 million) due to a 1999 non-recurring credit of $34 million related to lower than anticipated costs associated with outside aircraft maintenance, offset by lower scheduled engine and airframe overhaul in 2000. Higher scheduled engine and airframe overhaul costs are expected in 2001. Depreciation and amortization increased 23.4% ($117 million) due to the fleet disposition charge of 125 million related to the accelerated retirement of a portion of the DCl O fleet recorded in the fourth quarter. See Note 1 to the Consolidated Financial Statements for additional discussion of the fleet disposition charge. Aircraft Annual Report 2000 rentals increased 19.2% ($68 million) due to additional leased aircraft. Other xpense (the principal components of which include outside services, selling and marketing expenses, passenger food, personnel expenses, advertising and promotional expenses, communication expenses and supplies) increased 10.7% ($242 million) due primarily to increas d business for MLT Inc. and higher variable co l as ociated with expanded capacity. Other Income and Expense - lntere t expense decrea ed 7.7% ($29 million) primarily due to reduced borrowings and lower interest rate . Earnings of affiliated companies increased 9.5% ($8 million) due largely to th Company' hare of higher WORLD P I earnings. Other income increased primarily due to a $58 million gain from the sale of a portion of Northwest's investment in priceline.com in 2000, partially offset by a 48 million gain from the sale of a portion of orthwest's inve tment in Equant .V. during 1999. RESULTS OF OPERATIONS - 1999 COMPARED TO 1998 The year ended December 31, 1998 was affected by labor-related di ruption , which included a pilots' strike. Becau e of these events, year-over-year comparisons are not useful to measure the underlying operating and financial performance of the Company. However, for continuity of reporting, the traditional comparisons are presented. The Company estimated the impact in lost revenue and incremental expenses to be approximately $1.04 billion on a pre-tax basis for the year ended December 31, 1998. operating Revenues - Operating revenues increased 13.6% ($1.23 billion). System passenger revenue increased 14.3% ($1.08 billion), excluding Express, primarily attributable to an increase in cheduled ervice ASMs and an increase in passenger RASM, both of which resulted from improved operational performance in 1999 and the recovery from the 1998 labor disruptions. The increase in passenger RASM was partially offset by the residual effects of lower premium traffic in early 1999 and lower Atlantic yields caused by industry wide capacity growth throughout 1999. Expres revenues were $104 million and $94 million for the years ended December 31, 1999 and 1998, respectively. 34 Northwest Airlines The following analysi b market i based on information reported to the DOT and excludes Express: System Domestic Pacific Atlantic 1999 Pa senger revenue (in millions) $ 8,588 $ 5,940 $ 1,802 $ 846 Increase/(decrease) from 1998: Pa enger revenue (in millions) $ 1,075 $ 750 $ 182 $ 143 Percent 14.3 % 14.4 % 11.2 % 20.4 % Scheduled service ASMs ( capacity) Passeng r load factor Yield Passenger RASM Domestic pa senger revenue increased due to more capacity and higher yields. Capacity increased as a result of normalized aircraft utilization and improved operational performance. Pacific passenger revenue was higher due to increased yields caused by the recovery from the 1998 labor disruptions and a 15.7% strengthening of the yen. The average yen per U.S. dollar exchange rate for the years ended December 31, 1999 and 1998 was 115 and 133, respectively. Capacity was decreased in 1999 in respon e to the continued weak A ian economic environment and increa ed competition and wa offset by the recovery from the labor disruptions. Passenger load factor increased 4.3 points in 1999 as the Company began to experience an increase in demand in the second half of 1999. Atlantic pa senger revenue increased due to an increase in capacity, which resulted primarily from new flying and wa partially offset by decreased yields caused by overall industry wide capacity growth. The new flying included increases in Minneapoli / St. Paul-Am terdam and Detroit-Amsterdam service. Cargo revenue increased 15.3% ($97 million) due to a 19.5% increase in cargo ton miles which was partially offset by a 3.5% decrease in cargo revenue per ton mile due to the weaker Asian economic environment. The Company's ninth Boeing 747 freighter entered service in September 1999. Other revenue increased 6.1 % ( 49 million) due to a higher volume of business for MLT Inc. and increased passenger charters, which was partially off et by lower KLMjoint venture alliance settlements. operating Expenses - Operating expenses increased 3.5% ( 326 million). Operating capacity increased 8.9% to 99.57 billion 8.9% 11.4 % (.7) % 22.2 % 1.5 pts. .3 pts. 4.3 pts. 1.3 pts. 2.8 % 2.3 % 5.9 % (3.0)% 5.0 % 2.7% 12.0 % (1.4) % total ervice ASMs which contributed to the 5.4% decrease in operating expense per total service ASM. Salaries, wages and benefit increased 4.0% ($132 million) due primarily to wage and benefit increases from settled contracts with collective bargaining units and an increase in average full-time equivalent employees of 2.7%, partially offset by 1998 provision for retroactive compensation related to collective bargaining agreements. Aircraft fuel and taxes increased 8.6% ($94 million) due to an 8.6% increase in fuel gallons consumed. Commissions increased 6.4% ($44 million) due to higher revenues, partially of et by a lower effective commission rate caused by a shift in revenue mix, a decrease in the percentage of commissionable ticket sales and change to the Company's commission rate structure which were effective in October 1999. Aircraft maintenance materials and repairs decreased 16.6% ($126 million) due to fewer engine and airframe overhauls and lower than anticipated costs associated with outside aircr.Jt maintenance. Depreciation and amortization increased 1.4% ($7 million) due to additional owned aircraft and aircraft modifications. Additionally, 1998 included a fleet disposition charge of $66 million for the accelerated retirement of seven of the Company's oldest Boeing 747 aircraft. Other expenses increased 6.0% ( 129 million) due primarily to increased business for MLT Inc. and increased variable costs associated with increased capacity, which were partially of et by reduced claims and advertising and promotions. Other Income and Expense - Interest expense increased 15.2% ( 50 million) primarily due to additional borrowings. Earnings of affiliated companies increased $75 million, mostly from the Company's recognition of its share of Continental and WORLDSPA.i, earnings. Other income increased primarily due to a 48 million gain from the sale of a portion of orthwest's inve tment in Equant .V. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company had cash and ca h equivalenLS of 693 million and borrowing capacity of 1.12 billion under its un ecured re olving credit facilities, providing total a ailable liquidity of . 1.81 billion. Operating activities in 2000 generated 893 million. The decrease of $366 million in operating ca h flows from 1999 was due primarily to higher than normal sale proceed of frequent flyer mile in exce s of revenue and an 84 million dividend from WORLDSPA.i's', both in 1999, with higher pension contribution , a $27 million dividend from WORLD PAX and a decrea e in working capital in 2000. Cash flows from operating activitie were 1.26 billion for 1999 and 88 million for 1998. et cash used in inve ting and financing activities during 2000, 1999 and 1998 wa $949 million, 990 million and $348 million , respectively. Investing Activities - Inve ting activitie in 2000 con i ted primarily of the purchase often AirbusA319 aircraft, even AVRO RJ85 aircraft and two used Boeing 747-200 aircraft (which will be converted to freighters), co ts to commi sion aircraft before entering revenue ervice, aircraft modification , depo its on ordered aircraft, facilities improvements and ground equipment purchases, partially of et by the sale of a portion of the Company's investment in priceline.com. In addition to the purchased aircraft discu sed above, the Com pan took delivery of nine Bombardier CRJ200 aircraft and two used DCl0 aircraft during 2000. The e aircraft were financed with operating leases. On January 22, 2001 , the Company sold to Continental 6.7 million shares of Continental Clas A Common Stock held by the Company for 450 million in cash. Sub equently, Continental effected a recapitalization as a result of which the Company' remaining 2.0 million hare of Continental Clas A Common Stock were converted into 2.6 million hare of Continental Cla B Common Stock. In conjunction with the e transactions, the term of the alliance agreement between 1 orthwest and Continental was extended through 2025. ub equent to year-end, the Company old the remaining 2.6 million share for 132 million. ee Note Annual Report 2000 13 to the Con olidated Financial Statements for additional discussion of the e transaction . Investing activitie in 1999 consisted primarily of the purchase of seven Airbu A320 aircraft, ten Airbus A319 aircraft, four Boeing 747-400 aircraft, 11 AVRO RJ85 aircraft and two used D 10 aircraft, the purchase off lea e of four D 9-50 aircraft, costs to commi ion aircraft before entering revenue service, engin hushk.itting, aircraft modifications, depo its on ordered aircraft and ground equipment purchases. Investing activi tie in 1998 con i ted primarily of the purcha e of 13 Airbus A320 aircraft, ten AVRO RJ85 aircraft, and three u eel D 10 aircraft, cost to commis ion aircraft before entering revenue ervice, engine hu hkitting, aircraft modification , depo its on ordered aircraft and ground equipment purchase . On ovember 20, 1998, , A orp. i sued 2.6 million hares of common stock and paid 399 million in cash to acquire the beneficial ownership of .7 million share of las A Common Stock of Continental. The Company funded its inve tment in Continental with ca h from its general working capital. Financing Activities - Financing acti,~tie in 2000 consi ted primarily of payment of debt and capital lease obligation , including 165 million in term loan prepayments, and the long-term leveraged operating lease financing through sale and lea eback of ten Airbu A3 l 9 aircraft and three VRO RJ85 aircraft. The Company' ecured credit facilitie were replaced on October 24, 2000. The new 1.125 billion un ecured agreement consists of (i) a 725 million five-year revolving credit facility, (ii) a 150 million 364-day revolving credit facility renewable annually at the option of the lender and (iii) a $250 million 364-day revolving credit facility renewable ann uall at the option of the lender ; however, to the extent any portion of the S250 million 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 uch borrowing mature in October 2005. The credit facilities are available to finance the working capital n eds of the Company and for other general corporate purposes. During 2000, the Company completed an offering of 522 million of pass-through certificate to finance the acqui ition of 13 new Airbus A3 l 9 aircraft delivered or cheduled for delivery throurrh May 2001 and to refinance ix Boeing 757 aircraft delivered in Northwest Airlines 1996. The ca h proceed from the pas -through certificates were depo ited with an e crm agent and enable the Company to finance or refinance (through either leveraged lease or ecured debt financing) the acquisition of these aircraft. If leveraged leases are obtained for the e aircraft, under which the aircraft will be sold and leased back to Northwe t, the equipment notes, which are the assets of the pass-through trusts, are not direct obligations of A Corp. or orthwest. At December 31, 2000, the Company had 174 million in proceeds from the offering held in escrow and not recorded as an asset or direct obligation of NWA Corp. or orthwest. Financing activities in 1999 consisted primarily of the public issuance of 200 million of unsecured notes, the public issuance of 143 million of 40-year senior unsecured quarterly interest bonds (which are callable after five years), the long-term leveraged operating lease financing through sale and leaseback of four Boeing 747-400 aircraft, seven Airbus A320 aircraft, two Airbus A319 aircraft and ten AVRO RJ85 aircraft and various secured aircraft and ground equipment financings, offset by full repayment of the 825 million revolving credit facilitie and $562 million of aircraft delivery bridge financing, and the payment of cheduled debt and capital lease obligations. During 1999, the Company completed three public offerings totaling 1.22 billion of pass-through trust certificates to finance the acquisition of 39 new aircraft delivered in 1999 and 2000. Financing activities in 1998 included the Company's repurchase of its remaining Common Stock held by KLM, Lhe public issuance of 400 million of unsecured notes, the incurrence of $240 million of debt ecured by ix Boeing 757 aircraft, the payment of debt and capital lease obligations, and the sale and lea eback of 13 A320 aircraft and four AVRO RJ85 aircraft. During the third quarter, in anticipation of potential labor disruptions, the Company borrowed the $2.08 billion available under its then existing credit facilities, and subsequently repaid such borrowings. In October 1998, the Company borrowed $835 million to fund its cash requirements. On May 1, 1998 NWA Corp. purcha ed from KLM the remaining 1 .2 million share of NWA Corp. Common Stock held by KLM. The Company had previously agreed to repurchase the shares over a three-year period ending in September 2000. The purchase price of $780 million was paid with a combination of $337 million of cash and three senior unsecured 7.88% notes, all of which have been repaid. See Note 3 to the Consolidated Financial Statements for maturitie of long-term debt for the five years subsequent to December 31, 2000. Capital Commitments-In]anuary 2001, the Company entered into agreements to purchase 52 new aircraft, some of which will be used to replace most of the DCl0 fleet. The aircraft consist of 24 A330 aircraft, 20 Boeing 757 aircraft, two Boeing 747-400 aircraft and six A3 l 9 aircraft. Deliveries of the A330 aircraft will begin in 2003 and continue through 2006, deliveries of the 757 aircraft will begin in 2002 and continue through 2004 and the A319 aircraft and 747 aircraft will be delivered in 2002. Financing commitments from the manufacturers have been arranged for most of these aircraft. The current aircraft delivery schedule, including the aircraft discussed above, provides for the acquisition of 117 aircraft over the next six years, with 22 aircraft in 2001. See Note 10 to the Consolidated Financial Statements for additional discu sion of aircraft capital commitments. Other capital expenditures, including costs to commission presently owned aircraft that have not yet entered revenue service and aircraft modifications, are projected to be approximately $310 million in 2001, which the Company anticipates funding primarily with cash from operations. The Company currently has an effective shelf registration statement for the issuance of $975 million of unsecured debt and equipment trust certificates. Working Capital - The Company operates, like its competitors, with negative working capital, which aggregated to $1.50 billion at December 31, 2000. This position is primarily attributable to the $1.31 billion air traffic liability for advance ticket sales. OTHER INFORMATION Labor Agreements - Approximately 90% of the Company' employees are members of collective bargaining units. Under direction from the ational Mediation Board (" MB"), the Company was in mediated negotiations with Lhe Aircraft Mechanics Fraternal Association ("AMFA"), which represents the Company' mechanics. On February 9, 2001, the NMB relea ed 1 orthwest and AMFA from mediated negotiations after AMFA rejected the MB's offer of binding arbitration. The MB notified orthwest and AMFA that a 30-day "cooling off" period would begin on February 10, 2001, and tl1at beginning at 11:01 PM CST on March 11, 2001 either side could re ort to self-help remedies which could include, but are not limited to, a strike by the members of AMFA. On March 9, 2001, President Bush, following the recommendation of the NMB, announced tl1e establishment of a Presidential Emergency Board ("PEB"). The establishment of a PEB stopped any self-help remedies and started the process during, hich the PEB reviews the positions advocated b orthv est and AlvfFA and proposes a solution. On April 9, 2001, prior to the issuance of tl1e PEB's recommendation, the Company and AMFA reached a tentative agreement, which i subject to ratification by Ai\tfFA member hip. The PEB recommendation will be deferred pending ratification of the tentative agreement. If the tentative agreement is not ratified, the PEB will make its recommendation to the President on May 14, 2001 and if the PEB recommendation i not accepted by both parties and unless Congre take additional action, either party will be permitted to resort to self-help remedies 30 days after the PEB makes its recommendation to the President. A prolonged work stoppage, if it were to occur, could have a material adverse impact on the Com pan . Detroit Midfield Terminal - The Company is managing and upervising the design and construction of a 1.2 billion terminal at Detroit Metropolitan Wayne County Airport. The new terminal is scheduled to open in December 2001 and will offer 106 ticket- counter positions and 97 gates as well as over 80 shops and re taurants, four WorldClubs, an 11,500- pace parking facility and luggage handling sy terns. The new terminal has been funded by the issuance of general airport revenue bonds by Wayne County payable p1imarily from future passenger facility charges and federal and State of Michigan grants. The Company and the County have entered into agreements pursuant to which the Company will lease space in the new terminal for a term of 30 years from the date the terminal opens. Mesaba Holdings, Inc. - On ovember 1, 2000, the Company offered to purchase all of the outstanding common stock of Mesaba Holdings, Inc. not already owned by the Company at a Annual Report 2000 price of$13 per share, or an aggregate purchase price of approximate I 190 million. Mesaba's Board of Directors has formed a special committee to evaluate the offer. Forward-Looking Statements - Certain statements made throughout Management' Discu ion and Anal sis of Financial Condition and Results of Operations are forward-looking and are based upon information available to the Compan on the date hereof. The Company through its management may al o from time to time make oral forward-looking statements. In connection with the " afe harbor" provi ions of the Pri ate Securities Litigation Reform Act of 1995, the Company i hereb identifying important factor that could cau e actual re ults to differ materially from tho e contained in any forward-looking statement made by or on behalf of the Company. Any uch statement i qualified by reference to the following cautionary statements. It is not rea onably possible Lo itemize all of the many factors and specific event that could affect the outlook of an airline operating in the global economy. Some factors that could significantly impact expected capacity, load factors, revenue , expenses and ca h flow include the airline pricing environment, fuel costs, labor negotiation both at the Compan and other carriers, low-fare carrier ex pan ion, capacity decision of other carriers, actions of the .S. and foreign government , foreign currency exchange rate fluctuation , inflation, the general economic environmenc in the .S. and other regions of the world and other factor discussed herein. Developments in any of these areas, a well as other risk and uncertainties detailed from time to time in tl1e Company's Secmitie and Exchange Commis ion filings, could cause the Company's results to differ from results that have been or may be projected by or on behalf of the Company. The Company cautions that tl1e foregoing list of important factors is not inclu ive. The Company undertakes no obligation to publicly update or revi e any forward-looking tatement , whether as a result of new information, future events or othenvi e. These tatements deal with the Company's expectation about the future and are ubject to a number of factors that could cause actual re ults to differ materially from the Company's expectations. Northwest Airlines QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The ri k inh rent in the Company's market risk en itive in truments and positions i the potential las arising from adver e change in the price of fuel, foreign currency exchange rate and intere t rates a di cus ed below. The ensitivity analyses pre ented do not con ider the effects that uch adverse changes may have on overall economic activity nor do they consider additional action management may take to mitigate its exposure to such changes. Actual re ults ma differ. See Note 14 to the Con olidated Financial Statements for accounting policies and additional information. Aircraft Fuel - The Company' earnings are affected by changes in the price and availability of aircraft fuel. In order to provide a measure of control over price and supply, the Company trades and ship fuel and maintain fuel storage facilities to support its flight operations. The Company also manages the price risk of fuel co ts primarily utilizing futures contracts traded on regulated exchange and fuel wap agreements. Market ri. k is estimated as a hypothetical 10% increase in the December 31, 2000 cost per gallon of fuel based on projected 2001 fuel u age, which would result in an increase to aircraft fuel expense of approximately 180 million in 2001, compared to an estimated 110 million at December 31, 1999. As of December 31, 2000, the Company had hedged approximately 12% of its fir t quarter 2001 fuel requirements, compared to 20% of the first quarter of 2000 and 24% of the full year 2000 at December 31, 1999. Foreign Currency - The Company i expo ed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expense . The Company's largest exposure comes from the Japanese yen. From time to time, the Company uses financial instruments to hedge its exposure to the Japane e yen. The result of a uniform 10% trengthening in the value of the U.S. dollar from December 31, 2000 levels relative to each of the currencies in which the Company's revenues and expenses are denominated would result in a decrease in operating income of approximately ;70 million for the ear ending December 31, 2001, net of gain realizable from yen hedge instrument outstanding at December 31, 2000, compared to an estimated 53 million decrease at December 31, 1999. This is due to the Company's foreign currenc -denominated revenues exceeding its foreign currency-denominated expense, . The Company also has a foreign currency non-ca h expo ure. The result of a 10% weakening in the value of the U.S. dollar would result in a decreas to other income cau ed by the remeasurement of net foreign currency-denominated liabilities of an estimated $17 million in 2001 compared with an estimated $14 million at December 31, 1999. This ensitivity analysi was prepared based upon projected foreign currency-denominated revenues and expenses and foreign currency-denominated assets and liabilities as of December 31, 2000 and 1999. In 2000, the Company's yen-denominated revenues exceeded its yen-denominated expenses by approximately 54 billion yen (approximately $525 million) and its yen-denominated liabilities exceeded its yen-denominated assets by an average of 11 billion yen (approximately 100 million) compared with 45 billion yen (approximately 386 million) and eight billion yen (approximately $70 million), respectively, in 1999. In general, each time the yen trengthens (weakens), the Company's operating income is favorably (unfavorably) impacted due to net yen-denominated revenues exceeding expenses and a non-operating foreign currency loss (gain) is recognized due to the remeasurement of net yen-denominated liabilities. Tl1e Company's operating income in 2000 was favorably impacted by approximately $70 million due to the average yen being stronger in 2000 compared to 1999 and in 1999 by approximately $45 million due to the average yen being stronger in 1999 compared to 1998. The average yen to U.S. dollar exchange rate, including hedge activity impact, during December 31, 2000, 1999 and 1998 was 104, 117 and 132, respectively. The Japanese yen financial instruments utilized to hedge net yen-denominated cash flows resulted in gains of $23 million in 2000 and losses of $14 million in 1999. As of December 31, 2000, the Company had entered into forward contracts to hedge approximately 38% of its anticipated 2001 yen-denominated sales, compared to 31 % at December 31, 1999, which also repre ents approximately 100% of the Company's excess of yen-denominated revenues over expense in 2000 and 2001. Interest - The Company's earnings are also affected by change in interest rate due to the impact tho e changes have on it interest income from cash equivalents and sh rt-term investments and its interest expense from floating rate debt instruments. The Company has mitigated this risk by limiting it floating rate indebtedness to approximately 21 % and 34% of long-term debt and capital leases at December 31, 2000 and 1999, respectively. The Company used financial in truments to hedge its exposure to interest rate fluctuations on the variable rate portion of its pass-through certificates issued in 2000. If long-term floating interest rates average 10% more in 2001 than they did during 2000, the Company' net interest expense would increase by approximately 6 million, compared to an estimated $10 million for 2000 measured at December 31, 1999. If short-term intere t rate average 10% more in 2001 than they did dming 2000, the Company's interest income from cash equivalents and short-term investments would increase by approximately $9 million compared to an estimated 4 million for 2000 measured at December 31, 1999. These amounts are determined Annual Report 2000 by con idering the impact of the hypothetical interest rates on the Company' floating rate indebtedness, cash equivalent and hort- term investment balances at December 31 , 2000 and 1999. Market risk for fixed-rate indebtedness is estimated a the potential increa e in fair value resulting from a hypothetical 10% decrea e in interest rates and amounts to approximately $70 million during 2001 , compared to an estimated 77 million for 2000 mea ured at December 31 , 1999. The fair value of the Company' indebtedness were estimated using quoted market price or discounted future cash flows based on the Company's incremental borrowing rates for similar types of borrowing arrangements. 39 Northwest Airlines CONSOLIDATED BALANCE SHEETS Northwest Airlines Corporation (In millions) ASSETS Current Assets Cash and ca h equivalents Re u-icted hort-term inve unents Accounts receivable les allowance (2000- 16: 1999- 16) Flio-ht equipment pare parts, less allowance (2000- 131 1999- 131) Deferred income taxe Maintenance and operating upplies Prepaid e. pen es and other Total current assets Property and Equipment Flight equipment Le s accumulated depreciation Other property and equipment Less accumulated depreciation Total property and equipment Flight Equipment Under Capitnl Leases Flight equipment Less accumulated amortization Other Assets Inve tments in affiliated companies International route , les accumulated amortization (2000- 310; 1999- 2 6) Other Total Assets The accompanying note are an imegral part of the e consolidated fin ancial statements. $ 2000 693 35 534 313 108 103 228 2,014 6,498 1,896 4,602 1,826 794 1,032 5,634 846 281 565 836 657 1,171 2,664 $ 10,877 December 31 $ 1999 749 41 521 348 116 79 209 2,063 6,374 1,644 4,730 1,761 743 1,018 5,748 846 258 588 690 681 814 2,185 10,584 Annual Report 2000 December 31 (In millions, except share data) 2000 1999 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Air traffic liability $ 1,307 s 1,422 Accounts payable 592 494 Accrued compensation and benefits 549 523 Accrued aircraft rent 229 222 Accrued commissions 106 95 Other accrued liabilities 482 449 Current maturities of long-term debt 191 312 Current obligations under capital leases 62 60 Total current liabilitie 3,518 3,577 Long-Term Debt 3,051 3,354 Long-Term Obligations Under Capital Leases 494 537 Def erred Credits and Other Liabilities Deferred income taxe 1,353 1,222 Long-term pension and postretirement health care benefits 882 542 Other 558 535 2,793 2,299 Mandatorily Redeemable Preferred Security of Subsidiary Which Holds Solely Non-Recourse Obligation of Company -Note 5 (Redemption value 2000-$61 O; 1999-3692) 558 626 Preferred Redeemable Stock (Liquidation value 2000-S234; 1999-3245) 232 243 Common Stockholders' Equity (Deficit) Common stock, $.01 par value; shares authorized-315,000,000; share issued (2000-110,088,522; 1999-109,576,810) 1 1 Additional paid-in capital 1,459 1,454 Accumulated deficit (94) (349) Accumulated other comprehensive income (loss) (5) (9) Treasury stock (2000-26,994 364 shares; 1999-27,497,612 share ) (1,130) (1,149) 231 (52) Total Liabilities and Stockholders' Equity (Deficit) $ 10,877 10,584 ~------<( Northwest Airlines ) CONSOLIDATED STATEMENTS OF OPERATIONS Northwest Airlines Corporation Year Ended December 31 (In millions, except per share amounts) 2000 1999 1998 Operating Revenues Passenger $ 9,653 8,692 $ 7,607 argo 857 732 635 Other 905 852 803 Total operating revenue 11,415 10,276 9,045 Operating fapenses Salari s, wag sand benefits 3,610 3,393 3,261 Aircraft fuel and taxes 1,872 1,191 1,097 Commis ion 663 736 692 Aircraft maintenance material and repairs 640 635 761 Depreciation and amortization 617 500 493 Other rentals and landing fees 513 486 450 Aircraft rentals 423 355 345 Other 2,508 2,266 2,137 Total operating expen e 10,846 9,562 9,236 Operating Income (Loss) 569 714 (191) Other Income (Expense) Interest ex pen e (350) (379) (329) Intere t capitalized 23 16 17 Interest of mandatorily redeemable preferred security holder (27) (27) (22) Investment income 62 40 79 Earnings of affiliated companies 92 84 9 Other, net 66 39 7 Total other income (expense) (134) (227) (239) Income (Loss) Before Income Taxes 435 487 (430) Income ta.x expense (benefit) 179 187 (145) Net Income (Loss) 256 300 (285) Preferred stock requirements (1) (1) (1) Net Income (Loss) Applicable To Common Stockholders $ 255 $ 299 $ (286) Earnings (Loss) Per Common Share: Basic $ 3.09 $ 3.69 $ (3.48) Diluted $ 2.77 $ 3.26 $ (3.48) The a ompaming notes are an imegral part of the econ olidated financial tatements. Annual Report 2000 CONSOLIDATED STATEMENTS OF CASH FLOWS Northwest Airlines Corporation Year Ended December 31 (In millions) 2000 1999 1998 Cash Flows From operating Actiuities let income (lo s) $ 256 300 $ (285) Adjustments to reconcile net income (lo s) to net ca h provided by operating activitie : Depreciation and amortization 617 500 493 Income tax expen e (benefit) 179 187 (145) et refund (payments) of income taxe (61) (65) 8 Pension and other postretirement benefit contribution (in exce s of) less than expen e 72 166 (26) Sale proceed of frequent flyer mile le s than revenue (161) (42) (78) et earnings of affiliate (65) (9) Other, net (26) (5) 11 Change in certain assets and liabilitie : Decrease (increa e) in accounts receivable (31) 103 44 Decrea e (increase) in flight equipment pare parts (2) 12 (46) Decrease (increa e) in upplie , prepaid expen e and other (54) (57) 91 Increase (decrea e) in air traffic liability (27) 250 (140) Increa e (decrease) in accounts payable and other liabilitie 140 (71) 113 Increase (decrease) in accrued liabilities 56 (19) 57 et ca h provided by operating activities 893 1,259 8 Cash Flows From Investing Actiuities Capital expenditures (672) (1,038) (1,068) Purchase of hort-term inve tments (194) (288) (257) Proceeds from maturities of shon-term inve tments 198 330 641 Proceeds from sale of property, equipment and other assets 97 63 29 Investments in affiliated companie (14) (13) (415) Other, net 6 (27) (43) et cash used in investing activitie (579) (973) (1,113) Cash Flows From Financing Actiuities Payment oflong-term debt (1,268) (1,681) (1,732) Payment of capital lease obligations (60) (57) (618) Payment of hort-term note pa able (102) Repurchase of common and preferred stock (437) Proceeds from long-term debt 614 779 2,910 Proceeds from sale and leaseback tran actions 387 1,095 669 Other, net (43) (51) (27) Net ca h provided by (used in) financing activitie (370) (17) 765 Increase (Decrease) In Cash and Cash Equivalents (56) 269 (260) Cash and cash equivalents at beginning of period 749 480 740 Cash and ca h equivalents at end of period $ 693 $ 749 s 480 A\'ailable to be borrowed under credit facilitie $ 1,116 $ 1,573 $ 1,004 The accompanying notes are an integral part of these consolidated financial tatements. Northwest Airlines CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT) Northwest Airlines Corporation Accumulated Additional Other Common Stock Paid-In Accumulated Comprehensive Treasury (In millions) Shares Amount Capital Deficit Income (Loss) Stock Total Balancej anuary 1, 1998 103.8 $ 1 $ 1,274 $ (362) $ (102) $ (1,122) $ (311 ) et los (285) (285) Other comprehensive income 34 34 Comprehensive loss, net of tax (251) Common Stock carrying value over repurchase price 68 68 Shares issued to purchase an interest in Con tin en ta! Airlines, Inc. 2.6 65 65 Accretion of Series C Preferred Stock (1) (1) Tax benefit related to stock issued to employees 12 12 Series C Pref erred Stock converted to Common Stock 1.4 46 46 Common Stock held in rabbi trusts 32 (152) (120) Other 1.2 16 (1) 15 Balance December 31, 1998 109.0 1 1,445 (649) (68) (1,206) (477) Net income 300 300 Other comprehensive income 59 59 Comprehensive income, net of tax 359 Accretion of Series C Preferred Stock (1) (1) Series C Preferred Stock converted to Common Stock .6 19 19 Common Stock held in rabbi trusts (11) 57 46 Other 1 1 2 Balance December 31, 1999 109.6 1 1,454 (349) (9) (1 ,149) (52) et income 256 256 Other comprehensive income 4 4 Comprehensive income, net of tax 260 Accretion of Series C Preferred Stock (1) (1) Series C Preferred Stock converted to Common Stock .3 11 11 Common Stock held in rabbi trusts (11) 19 8 Other .2 5 5 Balance December 31, 2000 110.1 $ 1 $ 1,459 $ (94) $ (5) $ (1,130) $ 231 The accompanying note are an integral part of these consolidated financial statements. Annual Report 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - orthwest Airlines Corporation ("NWA Corp.") is a holding company whose principal indirect operating subsidiary is orthwest Airline , Inc. (" orthwest"). The consolidated financial tatements include the accounts of A Corp. and all con olidated ubsidiaries (collectively, the "Company"). All ignificant intercompany transactions have been eliminated. In estments in 20% to 50% owned companie and A Funding, LLC are accounted for by the equity method. Other inve tments are accounted for by the cost method. Certain prior year amounts have been recla sified to conform to the current year financial statement presentation. Business - orthwest's operations comprise approximately 95% of the Company's consolidated operating revenue and expenses. orthwest is a major air carrier engaged principally in the commercial transportation of passengers and cargo, directly serving more than 155 cities in 24 countries in orth America, Asia and Europe. orthwest's global airline network includes domestic hubs at Detroit, inneapoli / St. Paul and Memphi , an extensive Pacific route sy tern with hubs at Tokyo and Osaka, a trans-Atlantic alliance with KLM Royal Dutch Airlines ("KLM"), which operates through a hub in Amsterdam, and a global alliance with Continental Airlines, Inc. ("Continental"). Flight Equipment Spare Parts - Flight equipment pare parts are carried at average co t. An allowance for depreciation is provided at rates which depreciate cost, less residual value, over the estimated useful lives of the related aircraft. Property, Equipment and Depreciation - Owned property and equipment are stated at cost. Property and equipment acquired under capital leases are stated at the lower of the present value of minimum lease payments or fair market value at the inception of the lease. Property and equipment are depreciated to residual values using the straight-line method over tl1e estimated u eful lives of the assets, which generally range from four to 25 years for flight equipment and three to 32 years for other property and equipment. Leasehold improvements are generally amortized over the remaining period of the lease or the estimated service life of the related asset, whichever i less. Property and equipment under capital leases are amortized over the lease term or the e timated useful lives of the as ets. The Company accounts for certain airport lea es under the Emerging Issues Task Force ("EITF") Issue o. 99-13, Application of EITF Issue No. 97-10, The Effect of Lessee Involvement in Asset Construction, and FASB Interpretation No. 23, Leases of Certain Pmperty Owned IYy a Governmental Unit or Authority, to Entities that Enter into Leases with Governmental Entities, which require the financing related to certain airport construction projects committed to after September 23, 1999, to be recorded on the balance sheet. The e capitalized expenditure are recorded in other property and equipment with the corresponding obligation included in long-term obligation under capital lease . Airframe and Engi,ne Maint,ena,nce - Routine maintenance, airframe and engine overhauls are charged to expense as incurred, except engine overhaul costs covered by third-party maintenance agreements, which are accrued on the ba i of hour flown. Modification that enhance the operating performance or extend the useful Ii e of airframe or engines are capitalized and amortized over the remaining estimated u eful life of the as et. International Routes - Int rnational route are amortized on a straight-line basi , generally over 40 years. Governmental policy and bilateral agreements between nation regulate international operating route authorities and alliance . hange in such policies or agreements could materially impact orthwe t. Impairment of Long-Lived Assets- - The Company evaluates impairment of long-Ii ed a e in compliance with taternent of Financial Accounting Standards ("SFAS") 10. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed OJ The Company record impairment losses on long-lived assets used in operations when events and circum tances indicate the assets might be impaired and the undi counted cash flows estimated to be generated by tho e assets are les 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 December 2000, the Company decided to accelerate the retirement of 21 DCl0-40 and six DCl0-30 aircraft, replacing them with recently ordered Airbu A330-300 and Boeing 757-300 aircraft. As a result of this deci ion, the Company recorded a non- cash fleet disposici.on charge of $125 million in depreciation and amortization. The Company considered recent tran actions involving ales of similar aircraft and market trend in aircraft di positions to reduce the aircraft net book value to reflect the fair 45 ( __ N _ o_ r_ t_ h_ w _ e_s_ t_A _ i r _L _ i_ n_ e_ s_) market value of the e as ets. The fleet di position charge included a 29 million write-down of related spare parts to their e timated fair market value. In 199 , the Company accelerated the retirement of its seven oldest Boeing 747 aircraft and recorded a non-ca h fleet disposition charge of 66 million in depreciation and amortization. The e retirement were earlier than scheduled as a result of decrea ed demand in the Pacific, the timing of major overhauls and the opportunity to accelerate the delivery of certain new Boeing 747-400 aircraft in partial replacement of the retired aircraft. The Company con idered recent transactions in olving 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 a sets. The fleet di position charge included a 14 million write- down of related spare parts to their estimated fair market value. Frequent Flyer Program - The e timated incremental cost of providing travel awards earned under Northwest's WorldPerk frequent fl er program is accrued. The Company also sells mileage credits to participating companies in its frequent flyer program. A portion of such revenue is deferred and amortized as tran portation is provided. Operating Revenues - Passenger and cargo revenues are recognized when the transportation is provided. The air traffic liability repre ents the estimated value of old but unused tickets and is regularly evaluated by the Company. Advertising-Advertising costs included in other operating expen e , are expensed as incurred and were $127 million, $124 million and 137 million in 2000, 1999 and 1998, respectively. Employee Stock options - The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion I o. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for employee stock options. Under the intrin ic value method compen ation expense is recognized only to the extent the market price of the common tock exceeds the exercise price of the stock option at the date of the grant. Foreign Currency -As ets and liabilitie denominated in foreign currency are remeasured at current exchange rate with resulting gains and losses generally included in net income. The Preferr d Security (see ote 5) and other assets and liabilities associated with certain properties located outside of the U.S. whose cash flows are primarily in the local functional currency are translated at current exchange rates, with translation gains and losses recorded directly to accumulated other comprehensive income (los ) , a component of common stockholders' equity deficit. Income Taxes - The Company accounts for income taxes utilizing the liability method. Deferred income taxes are primarily recorded to reflect the tax consequences of difference between the tax and financial reporting bases of assets and liabilities. Use of Estimat.es - The preparation of consolidated financial statements in conformity with generally accepted accounting principle 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. Holding Company Reorganization - On November 20, 1998, NWA Corp. effected a holding company reorganization. As a result, orthwest Airlines Holdings Corporation (formerly known as orthwest Airlines Corporation and prior to the reorganization the publicly traded holding company, "Old NWA Corp.") became a direct wholly-owned ubsidiary of NWA Corp. and NWA Corp. became the publicly traded holding company. Pursuant to the reorganization, each share of Common Stock and Series C Preferred Stock of Old NWA Corp. was converted into one share of Common Stock and Series C Preferred Stock, respectively, of NWA Corp. with the same rights and privileges as such shares of Old NWA Corp. References to NWA Corp., Common Stock and Series C Preferred Stock for time periods prior to ovember 20, 1998 refer to Old NWA Corp. and the Common Stock and Series C Preferred Stock of Old NWA Corp., respectively. Annual Report 2000 NOTE 2-EARNINGS (LOSS) PER SHARE DATA The following table sets forth the computation of basic and diluted earnings (los ) per common share for the years ended December 31 (in millions, excep t share data): NUMERATOR: Net income (loss) applicable to common stockholders for basic earnings (loss) per share Effect of dilutive securities - Series C Preferred Stock Net income (loss) applicable to common stockholders after assumed conversions for diluted earnings (loss) per share DENOMINATOR: $ $ 2000 255 $ I 256 $ 1999 299 $ 1 300 $ 1998 (286) (286) Weighted-average shares outstanding for basic earnings (loss) per share 82,629,233 81,255,097 82,341,741 Effect of dilutive securities: Series C Preferred Stock Shares held in non-qualified rabbi trusts Employee stock options Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings (loss) per share 6,941,938 7,378,216 2,183,978 3,031,275 500,317 373,012 92,255,466 92,037,600 For additional disclosures regarding the Series C Preferred Stock, shares held in rabbi trusts and employee stock options, see otes 6 and 7. 82,341,741 Northwest Airlines NOTE 3-LONG-TERM DEBT AND SHORT-TERM BORROWINGS Long-term debt a of December 31 consisted of the following (in millions, with interest rates as of December 31, 2000): 2000 1999 Unsecured notes due 2004 through 2008, 8.2% weighted average rate (a) $ 847 $ 847 Pas -through trust certificates due through 2019, 8.2% weighted-average rate (b) 579 196 Secured notes due through 2009, 8.1 % weighted average rate 349 349 Aircraft notes due through 2016, 6.0% weighted average rate (c) 331 347 Equipment pledge notes due through 2013, 8.4% weighted-average rate 300 556 NWA Trust No. 2 aircraft notes due through 2012, 9.8% weighted average rate (d) 241 251 Sale-leaseback financing obligations due through 2020, 9.9% imputed rate (e) 223 223 NWA Trust No. 1 aircraft notes due through 2006, 8.6% weighted average rate (f) 161 180 Senior unsecured quarterly interest bonds due 2039, 9.5% (g) Secured notes due through 2016 (h) Term loans Unsecured note due 2000 Other Total debt Less current maturities Long-term debt (a) In March 1997, the Company 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 of7.625% notes due ~005 and $200 million of 7.875% notes due 2008. In April 1999, the Company issued $200 million of 8.52% notes due 2004. Interest on the notes is payable semi-annually. (b) In June 2000, the Company completed a public offering of $522 million in pass-through trust certificates to finance 13 new Airbus A319 aircraft delivered or scheduled for delivery through May 2001 and to refinance six Boeing 757-200 aircraft delivered in 1996. In 1999, the Company completed public offerings of $795 million in pass-through certificates to finance seven Airbus A320, 14 Airbus A319 and 14 AVRO RJ85 aircraft. The cash proceeds from the pass-through certificates were deposited with an escrow agent and enable the Company to finance or refinance (through either leveraged leases or secured debt financing) the acquisition of these aircraft. If leveraged leases are obtained for these aircraft, under which the aircraft will be sold and leased back to orthwest, the equipment notes, which a.re the assets of the pass-through trusts, are not direct obligations of NWA Corp. or orthwest. 143 143 240 165 100 68 69 3,242 3,666 191 312 $ 3,051 $ 3,354 At December 31, 2000, $579 million of the escrowed proceeds had been used to finance 25 aircraft owned by Northwest. The equipment notes issued for these aircraft are direct obligations of Northwest. Interest on the pass-through certificates is payable semi-annually. Sale and leaseback transactions have been completed on 22 other aircraft. The Company also had 174 million in proceeds from the offering held in escrow and not recorded as an asset or direct obligation ofNWA Corp. or Northwest. (c) During 1998, tht> Company secured long-term debt financing on 13 Airbus A320 aircraft delivered during the year. Interest on the notes is payable semi-annually. The Company combined these debt financings with fully-clefeased German cross border transactions. (d) In December 1994, the Company completed a structured aircraft financing transaction in which 13 Airbus A320 aircraft were transferred from Northwest (subject to existing indebtedness) to an owner trust (NWA Trust No. 2). The limited partnership, of which Northwest is the limited partner and Norbus, Inc. (an affiliate of Airbus Industrie A.LE.) is the general partner, is the sole equity participant in the owner trust. All proceeds from the transaction were used to repay equipment pledge notes, which had previously been issued to finance the acquisition of these aircraft by orthwest. The aircraft were simultaneously leased back to orthwest. Financing of 352 million wa obtained through the i suance of , 176 million of 9.25% Cla A Senior Aircraft ote , 66 million of 10.23% Class B Mezzanine Aircraft Notes, 44 million of 11.30% Clas C Mezzanine Aircraft otes and 66 million of 13.875% Clas D Subordinated Aircraft otes. The Class D notes were repaid in December 1997. The notes are payable semi- annual! from rental payments made by orthwest under the lease of the aircraft and are ecured by the aircraft ubject to the lease as well a the lea e itself. (e) In March 1992, the Company completed agreements with the Minneapoli / St. Paul Metropolitan Airports Commis ion ("MAC") for the sale and leaseback of various corporate assets. The sale- lea eback agreements, which are accounted for as debt, call for increa ing quarterly payments over a 30-year term and include a provision which gi es the Company the option to repurchase the assets. The agreements vvith the MAC are part of a group of financing arrangements with the State of Minnesota and other government agencies. (f) In March 1994, orthwest consummated a financing transaction in which six Boeing 747-200 and four Boeing 757 aircraft were sold to an owner trust (NWA Trust o. 1) of which NWA 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 Notes and 66 million of 9.36% Class B Subordinated Aircraft Notes. The aircraft were simultaneously leased back to Northwest. The notes are payable semi-annually from rental payments made by orthwest under the lease of the aircraft and are ecured by the aircraft subject to the lease as well as the lea e itself. (g) In August 1999, the Company completed the retail issuance of 143 million of senior unsecured quarterly interest bonds, maturing in 2039. These bonds may be redeemed by Northwest beginning in 2004 without penalty. (h) In August 1998, the Company borrowed $240 million under an existing credit facility. The floating rate note were secured by six Boeing 757 aircraft. This facility was paid off with proceeds from the issuance of the June 2000 pass-through certificates. Annual Report 2000 Maturities of long-term debt for the five years subsequent to December 31, 2000 a.re as follows (in millions): 2001 2002 2003 2004 2005 191 143 129 486 348 The Com pan 1's Credit Agreement provides for un ecured revolving credit facilities con is ting of a five- ear revolving credit facility and two 364-day revolving credit facilitie . The 725 million five- ear revolving facility ($9 million of which has been utilized as letters of credit a of December 31, 2000) is a ailable until October 2005. The $250 million 364-day revolving credit facility expires in October 2001 and i renewabl annually at the option of the lenders; however, to the extent any portion of this facility i not renewed for an additional 364-da period, the Company may borrow up to th entire non-renewed portion of the facility and all such borrowing mature in October 2005. The $150 million 364-day revolving credit facility expires in October 2001 ai1d is renewable annually at the option of the lenders. Borrowing under these unsecured credit facilities b ar intere tat a variable rate equal to the London Interbank Offered Rate plus 1.5%. Commitment fees are payable by the Company on the unused portion of these revolving credit facilities at a variable rate equal to .35% at December 31 , 2000, and are not considered material. At December 31, 2000, $1.12 billion wa available under these revolving credit facilities. The Credit Agreement contain certain financial covenants, including limitations on secured indebtedness (but which do not apply to secured indebtedness for new aircraft ai1d airport facilities) and certain equity redemption and dividends, as well as requirements to maintain certain financial ratios. The Company also agreed to maintain a pool of assets unencumbered during the term of this Credit Agreement. At December 3), 2000, the Company was in compliance with the covenant of all of its debt and lease agreements. Various assets, principally aircraft, having an aggregate book value of $2.7 billion at December 31, 2000, were pledged under various loan agreements. Northwest Airlines The weighted-average interest rate on hort-term borrmving out tandino- at December 31 were 6.57%, 5.83% and 5.99% for 2000, 1999 and 199 , re pectively. Ca h payment f intere t. net of capitalized intere t, aggregated 312 million, 342 million and 277 million in 2000, 1999 and 199 , re pectively. Manufacturer financing obtained in connection with the acqui ition of aircraft, which is considered non-cash, was r 4 million, 5~3 million and 408 million in 2000, 1999 and 199 , respectively. NOTE 4-LEASES The Company lease under noncancelable operating lea e certain aircraft, pace in airport terminals, land and buildings at airports, ticket, sale and re ervation offices, and other property and equipment, which expire in a.rious years through 2029. Certain aircraft and portions offacilitie are subleased under noncancelable operating lea es expiring in various years throuo-h 2020. Rental expense for all operating leases for the years ended December 31 con isted of the following (in million ) : Gross rental expense Sublease rental income Net rental expense 2000 $ 765 (110) $ 655 1999 $ 650 (88) 562 1998 $ 630 (87) $ 543 At December 31, 2000, the Company leased 126 of the 424 aircraft it operates. Of these, 21 were capital leases and 105 were operating lease . Ba e term lease expiration dates range from 2002 to 2009 for aircraft under capital leases, and from 2001 to 2023 for aircraft under operating leases. The Company's aircraft lea e can generally be renewed for terms ranging from one to eight years at rate based on the aircraft's fair market value at the end of the lea e term. 116 of the 126 aircraft lease agree men ts pro\'ide the Corn pan with purchase option at the end of the lea e term which approximate fair market value. At December 31, 2000, future minimum lea e payments under capital lea es and noncancelable operating leases with initial or remaining terms of more than one year were as follow (in million ) : Capital 2001 2002 2003 2004 2005 Thereafter Less sublease rental income Total minimum operating lease payments Le amounts representing interest Pre ent value of future minimum capital lease payments Less current obligations under capital leases Long-term obligations under capital leases Leases $ 106 280 87 62 51 146 732 176 556 62 $ 494 Operating Leases Aircraft Non-aircraft $ 517 $ 138 534 134 527 123 523 118 513 109 4,977 947 7,591 1,569 487 29 $7,104 $1,540 The above table includes operating leases for 37 aircraft operated and leased by Express Airlines I, Inc., a wholly-owned subsidiary, and 74 aircraft operated by and subleased to Mesaba Aviation, Inc. ("Mesaba"). Base term lease expiration dates range from 2002 to 2019. These aircraft leases can generally be renewed for terms ranging from one to eight years at rates based on the aircraft' fair market value at the end of the lease term. NOTE 5-MANDATORILY REDEEMABLE PREFERRED SECURITY OF SUBSIDIARY WHICH HOLDS SOLELY NON-RECOURSE OBLIGATION OF COMPANY In October 1995, the Company completed a restructuring of its yen-denominated non-recourse obligation secured by land and building the Company own in Tokyo. A newly formed con olidated ubsidiar of the Compan (the "Subsidiary") entered into aJapane e busines arrangement de ignated under Japane e law as a tokumei kumiai ("TK"). Pur uant to the TK arrnng ment, the hold r f then )n-rec urse obligation r -uu tured uch obligation and then assigned Litle to rnd mrner hip of u h oblio-ation to the ubsidiary as opcrat r under the TK arrangement in exchange for a preferred interest in the profit' and returns of capital from the business of the ' ubsidi, rv (the "Preferred e uritv"). The re tru cured non-r onr.e obligation is t.hc ole a et of the ubidiary. A. a r sult or this restructuring, the origi1nl holder of such n n-r course obligation a ed to b a direct reditor of the ompanv and th obli0 ation i reflected in the C mpanv's Con olidated Balan e heet as ~hndatarily Red emable Preferred S curit\' of ub, idiar '1\'hi h Hold ol I on-R our e Obligation or Company. onhwest irlines Holdings Corporation has guaranteed the oblicrati n of the ubsidiar to distribute pa~1.nents on the Preferred ecurit:y pur uant to the TK arrangement if and to the extent. payments are received by the ubsidiary. Th re tru tur cl obligat.:ion mature in three approximately equal annual in tallm nts du in 2005, 2006 and 2007. ln addition to these in tallmen , ash paym nts of int. r st and prin ipal ar made emi-annually throu0 110ut the term. The rate of interest Yarie from period to period and is capped at 6%. The obligation i non-recourse to the Company. The ,ornpany has Lhe ability (exercisable at an , time after eptember 30. 2001) t Lransfrr the property in full saLi faction of all ornpany obligations related t the financing. The carr ring value is b ing accret d ov r 12 year from October 199 to th ultimat maturity value of70.16 billion yen ( 610 million ba ed on the December 31, 2000 exchange rate). Such acer cion is included a a omponent of Interest of mandatorily redeemable preferred security hold r. NOTE 6-PREFERRED, REDEEMABLE AND COMMON STOCK Series C Preferred Stock -A part f labor agreernent r ach din 1993 the Com pan I issued Lo trusts for th b n fit of part.:icipaLing emplo ees 9.1 million bar sofa n w cl s or rie C cumulative, voting, co1w rtible, r deem a bl preferred tock, par value of $.01 per shar (the "Series C Pr ferred Stock") and 17.5 million share - of omrnon to k and provided the union group with three po itions on the Board of Directors. W ,orp. ha auLhorized 25 million hare of ries C Pr ~ rred to k. The Series C Pr ~ rred tock ranks s nior Lo ornmon tock with r s1 cl to Annual Report 2000 liquidation and certain di, idend rights .. \s long as the Common St d. is publi h- traded, no diYidends accrue on the ' eries C Preferred tock. Each sbar of the eries C Pref rred ' tock i co1wenible at an" Lime into l.36-l share , of Common Stock. ,\.: of December ~1 l. '.2000. --l. l million shares of eries C Pr 'frrred t< ck h,l\'e been < n\'erted into Common tocl:- and the remaining 5.0 million shares outsLanding are onYcniblc into 6., million shares of Common , tock. During '.:?000 . . 2 million shan:s of erics Preferred tock \\e1-e 01wcned into.: million 'hares or Common Stock. All th, out tanding shares or eries . Preferred ' to k are required to be rcdt'cmed in 20():) for a pro rat,1 share or actual wage s:wings ( ~2:13 million as or December ::I l. 2000) . 't\,.\\'A Corp. has the option to redeem , u h shares in cash. bv the is:uance or additional Common to k. orb, the use or cash and :to k. deci ion to i .. ue onlv ,1dditional Common tock rnwt be approved lw a majority of the three directors elected bv the holder or the Serie: C Preferred Stock. If 1 \\'A Corp. fail to redeem the erics C Preferred tock. di,idends \\"ill accrue at th higher of (i) 12 or (ii) the high ::-t pcnaltv rate on a1w then outstanding series of pref rred :tock. and the t mp! wet' unions will receive three additional Board of Directors positiow. he fmanci,11 statemt>nt a1-rYing value or the Serie- C Preferred Stock is being a creted twer ten years commencing ugust 199'.1 to the ultimate redemption amount. Prior to 200'.~. \\'A ,orp. at its option may redeem in \\'hole or in pan the Series C Preferred tock at its liquidation value. Common Stoch - The Company was required to adopt the provisions ofElTF Issue o. 97-1--l. Arrou11ti11gforDefirrcd Co111pe11 a/ion . lrm11ge111enls 117,err' l11101111ls Earned arl' 1-J.l'ld in a Rabbi Trust on e1 tember 30. 1998. As a re ult. the ,ompany revised its on olidation or the asset , and liabilities of the non- qualified rabbi Lrusts. The 2.0 and 2.5 million shares of Common Stock as f December 31, 2000 and 1999. re I ectivel '. that are h Id in the tnn1 arc recorded similar to trca"ury stock and the deferred compensation liability is recorded in other long-term liabiliti s. Th' ,om pan ' lected to record the difference b 'tween the market value of the common shares and the historical cost of the shares in the trusts at the date of aclc pt ion 1s a credit to common stockholders' cquit de(icit. net of tax. ftcr th adoption date, but prior to settlement through either conuibution t qualified trusts r diversification, increase or Northwest Airlines decrease in the deferred com pen ation liability will be recognized in earning to the extent the Common Stock market price exceed the average histo1ical cost of th share of $38.04 per hare or fall below the September 30, 1998 price of $25.06 per hare, re pectivel . For the purpose of computing diluted earnings per share, the shares held by the rabbi trusts are con idered potentially dilutive ecuritie . The Company has clas ified the diversified as ets held by the rabbi trusts as trading and recorded them at fair market value. Stockholder Rights Plan - Pursuant to the Stockholder Rights Plan (the "Rights Plan"), each share of Common Stock has attached to it a right and, until the right expire or are redeemed, each new hare of Common Stock issued by NWA Corp., including the hares of Common Stock into which the Series C Preferred Stock i convertible, will include one right. Upon the occurrence of certain events, each right entitles the holder to purchase one one- hundredtl1 of a hare of Series D Junior Participating Preferred Stock at an exercise price of 150, subject to adjustment. The rights become exercisable only after any person or group (other than the trusts holding Common Stock for the benefit of employees) acquires beneficial ownership of 19% or more (25% or more in the case of certain Institutional lnve tors) of NWA Corp.'s "outstanding" Common Stock (as defined in the Rights Plan) or commences a tender or exchange offer that would result in such person or group acquiring beneficial ownership of 19% or more (25% or more in the case of certain Institutional Investors) of NWA Corp. 's outstanding Common Stock. If any per on or group acquires beneficial ownership of 19% or more (25% or more in the case of certain Institutional Investors) of NWA Corp.'s outstanding Common Stock, the holders of the rights (other than the acquiring person or group) will be entitled to receive upon exercise of the rights, Common Stock of NWA Corp. having a market value of two times the exercise price of the right. In addition, if after the rights become exercisable NWA Corp. is involved in a merger or other business combination or sells more than 50% of its assets or earning power, each right will entitle its holder (other than the acquiring person or group) to receive common stock of the acquiring company having a market value of two times the exercise price of the rights. The rights expire on ovember 16, 2005 and may be redeemed by NWA Corp. at a price of $.01 per right prior to the time they become exercisable. NOTE 7-STOCK OPTIONS NWA Corp. has stock option plans for officers and key employees of the Company. 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. 's policy is to grant option with the exercise price equal to the market price of the Common Annual Report 2000 Stock on the date of grant. To the extent 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 for the years ended December 31 (shares in thousands): 2000 1999 1998 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 5,067 $ 31.79 4,059 $ 32.41 5,204 $ 27.09 Granted 1,959 25.05 1,499 29.75 509 43.35 Forfeited (620 ) 33.67 (428) 33.16 (485) 33.36 Exercised (171 ) 15.05 (63) 14.29 (1 169) 13.08 Outstanding at end of year 6,235 29.94 5,067 31.79 4,059 32.41 Exercisable at end of year 2,425 30.28 2,252 27.78 1,910 24.35 Reserved for issuance 16,806 10,948 7,948 Available for future grants 5,613 2,092 163 At December 31, 2000: Options Outstanding Options Exercisable Weighted- Weighted- Weighted- Average Average Average Remaining Exercise Exercise Range of Exercise Prices Shares Contractual Life Price Shares Price $ 4.740 to $25.125 2,664 7.6 years $ 21.12 773 $ 13.60 25.406 to 39.375 2,755 7.4 33.58 1,189 35.18 40.000 to 64.406 816 6.8 46.45 463 45.55 The weighted-average fair value of options granted during 2000, 1999 and 1998 is $10.77, $11.84 and $17.65 per option, respectively. The fair value of each option grant is estimated as of the date of grant using the Black-Scholes single option-pricing model assuming a weighted-average risk-free interest rate of 6.4%, 5.1 % and 5.5% for 2000, 1999 and 1998, respectively, and expected lives of six year and volatility of 30% for all years presented. .---------t( __ N _o _r _ t_ h _w _e _ s _ t _A _1 _ r _L _ i _ n_ e_ s_) In eptember 199 , in conjunction with the labor agreement reached between Northwest and the Air Line Pilots Association, International, T A Corp. establi heel the 1998 Pilots Stock Op tion Plan ( the 'Pilot Plan"). The Company ha reserved for i uance 2.5 million share of Common Stock under the Pilot Plan. Following is a ummary of the Pilot Plan for the years ended December 31 (shares in thousands): 2000 1999 1998 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Outstanding at beginning of year 1,497 $ Granted 500 Exercised (10) Outstanding at end of year 1,987 All outstanding options are exercisable at December 31, 2000 with a weighted-average remaining contractual life of 8.5 years. The weighted-average fair value of options granted during 2000, 1999 and 1998 i 11.56, 10.20 and $10.84 per option, respectively. The fair value of each option grant is estimated as of the date of grant u ing the Black-Scholes single option-pricing model assuming a weighted-average risk-free interest rate of 5.9%, 5.8% and 4.7% for 2000, 1999 and 1998, respectively, an expected life of six year and volatility of 30%. During September 2001, an additional 500,000 options will be granted with an exercise price equal to r.he closing market price of the Common Stock on the applicable gra.n t date. The Company has adopted the di closure only provisions of SFAS o. 123, Accounting for Stock Based Compensation. Had the Company recorded compensation expense using the fair value method prescribed by SFAS o. 123, the Company's net earnings (loss) and earnings per share would ha e been reduced to the pro forma amounts indicated below: 2000 1999 1998 Price Shares Price Shares Price 26.81 1,000 $ 27.88 $ 27.88 500 24.69 1,000 27.88 26.82 (3) 27.79 27.08 1,497 26.81 1,000 27.88 Shares of restricted stock were awarded at no cost to certain officers and key employees in 1999 and 2000. These shares are subject to forfeiture and will be issued when vested. Unearned com pen ation, representing the fair market value of the stock on the measuremen t date is amortized over the four-year vesting period. As of December 31, 2000, 535,136 shares were outstanding and not vested. A long-term in centive performance plan was established in 2000 and awarded 464,000 phan tom stock units to certain key officers. The units vest over five performance periods upon satisfaction of certain e tablished performance standards. Each unit represen ts the right to receive a cash payment equal to the market price of the Company's stock as defined in the plan . The fair value of the performance units is equal to the market price on the date of grant, which was $24.69 for the 2000 grant. et income (loss) (in millions): $ 244 $ 290 $ (300) Earning (lo s) per share: Basic $ 2.95 $ 3.56 $ (3.65) Diluted $ 2.65 $ 3.15 $ (3.65) Annual Report 2000 NOTE 8-ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table se forth information with respect to accumulated other comprehensive income (loss) (''OCI") (in million ) : Foreign Deferred Minimum Accumulated Currenc , Gain (Loss) Pension OCI of nrealized 0th r Tran lation on Hedging Liability Affiliated Gain on Comprehen ive dju tment Companies Inve tment Income (Lo s) Balance at]anuary 1, 1998 (68) (102) Before tax amount (11) (33) 98 54 Tax effect 4 12 (36) (20) et-of-tax amount (7) (21) 62 34 Bawnce at December 31, 1998 (41) (21) (6) (6) Before ta..x amount (8) 82 9 (5) 15 93 Tax effect 3 (30) (3) 2 (6) (34) Iet-of-tax amount (5) 52 6 (3) 9 59 Balance at December 31, 1999 ( 46) 31 (3) 9 (9) Before tax amount 11 3 (30) 13 9 6 Tax effect (4) (1) 11 (5) (3) (2) et-of-tax amount 7 2 (19) 8 6 4 Balance at December 31, 2000 $ (39) $ 33 $ (19) $ 5 $ 15 $ (5) NOTE 9-INCOME TAXES Income tax expense (benefit) con isted of the following for the Reconciliations of the statutor ' rate to the Compan 1's income ta,x year ended December 31 (in million ) : expense (benefit) for the years ended December 31 are a follows (in million ) : 2000 1999 1998 2000 1999 1998 Current: Statutory rate applied to Federal $ 57 $ 75 $ (45) income (loss) before Foreign 1 3 3 income ta,'Ce $ 152 $ 171 (151) State 6 3 1 Add (deduct): 64 81 (41) State income tax (benefit) Deferred: net of federal benefit 7 8 (6) Federal llO 98 (90) Non-deductible meals and Foreign (1) (2) (3) entertainment ll 9 9 State 6 10 (11) Adjustment to valuation allowance and other ll5 106 (104) income tax accruals 5 6 Total income tax Other 4 (1) (3) expense (benefit) $ 179 $ 187 $ (145) Total income tax expense (benefit) $ 179 $ 187 $ (145) Northwest Airlines The net deferred tax liabilities Ii ted below include a current net deferred tax a el of 10 million and 116 million and a long- t rm net deferred tax liability of 1.35 billion and $1.22 billion as of December 31, 2000 and 1999, respectively. ignificant components of the Company's net deferred tax liability a of December 31 were as follows (in millions): 2000 Deferred tax assets: Expenses accelerated for financial reporting purposes $ 341 $ Pension and postretirement benefits 180 Gains from the sale-leaseback of aircraft 165 Rent expense 90 Travel award programs 55 Lease capitalized for financial reporting purposes 52 Alternative minimum and foreign tax credit carryforwards 45 Total deferred tax assets 928 Deferred tax liabilities: Accounting basis of as ets in excess of tax basis 1,744 Expenses other than accelerated depreciation and amortization 412 Other 17 Total deferred tax liabilities 2,173 et deferred tax liability $ 1,245 1999 341 145 154 85 98 67 86 976 1,724 348 10 2,082 1,106 The Company has alternative minimum tax credits of approximately 43 million available for carryforward to future years' tax returns. The alternative minimum tax credits have an unlimited carryforward period. The Company generated and utilized 1 million of foreign tax credits for both regular and alternative minimum tax purposes during 2000. During 1999, the Company utilized all of its 1998 foreign tax credit carryforward and 1 million of the 3 million in foreign tax credits generated in 1999 for both regular and alternative minimum tax purposes. The remaining $2 million of foreign tax credits generated in 1999 i available for carryforward to years beyond 2000. ection 382 and 383 of the Internal Revenue Code of 1986 as amended (the "Code"), and Treasury regulations limit the amounts of net operating lo carryforwards ( OLs), alternative minimum tax net operating lo s carryforwards (AMT OL ) and credits that can be used to offset taxable income (or used a a credit) in any single tax year if the corporation ha more than a 50% ownership change (as defined in the Code) over a three-year te ling period ending on the testing date. During 1994 and 1995, the Company utilized all of its regular NO Ls and AMTNOLs. In August 2000, the Company and the Internal Revenue Service reached an agreement regarding the Company's NOLs that did not result in a material change in the utilization of the OLs in any prior years. NOTE 10-COMMITMENTS The Company's firm aircraft orders for 117 new aircraft, including an order placed in January 2001, consists of 24 Airbus A330 aircraft from 2003 through 2006, 12 Airbus A320 aircraft from 2001 through 2004, 54 Airbus A319 aircraft from 2001 through 2003, 25 Boeing 757 aircraft from 2001 through 2004 and two Boeing 747-400 aircraft in 2002. As of December 31, 2000, the Company also had firm orders for 45 Bombardier CRJ200 aircraft, which will be operated by and leased to Northwest Airlink carriers and the Company has the option to finance these aircraft through long-term operating leases. Committed expenditures for these aircraft and related equipment, including estimated amounts for contractual price escalations and predelivery deposits, will be approximately $1.29 billion in 2001, $1.58 billion in 2002, $2.11 billion in 2003, $1.05 billion in 2004, $825 million in 2005 and $255 million in 2006. Consistent with prior practice, the Company intends to finance its aircraft deliveries through a combination of internally generated funds, debt and leveraged lease financing. Manufacturer financing has been arranged for most of the committed aircraft and is available for use at the option of the Company. Eight of the A330 aircraft may be cancelled and two of the Boeing 757 aircraft are subject to reconfirmation. The Company also has options to purchase 70 Bombardier CRJ200 aircraft for delivery from 2003 through 2007, eight Airbus A330 for delivery in 2006 and 2007 and 50 Airbus A319 and/or A320 aircraft for delivery from 2004 through 2007 and 14 rollover option which would be assigned delivery slots commencing in December 2007 as the initial options are exercised. NOTE 11-CONTINGENCIES The ompany is involved in a variety of legal actions relating Lo antitru t, contract, trad pracLice, nvironmental and other legal matters pertaining to Lhe Company's business. While Lhe Company is unable to predict the ultimate outcome of Lh se legal actions, it is the opinion of managemenL that the disposition of these matters will not have a material adverse effect on the Company' Consolidated Financial Statements taken as a whole. Approximately 90% of the Company's employees are members of collective bargaining units. Und r direction from the , ational Mediation Board(" MB"), the Company was in mediated negotiation with the Aircraft Me hanics Fraternal Association ("Ai\1FA "), which repre ents the Company's mechanics. On February 9, 2001, the MB released Northwest and Ai\1FA from mediated negotiation after A.\1FA rejected the NMB's offer of binding arbitration. The NMB notified Northwest and A,\,ff that a 30-day "cooling off" period would begin on February 10, 2001, and that beginning at 11:01 P.\1 CST on .\1arch ] J, 200] either side could resort to elf-help remedies which could include, but are not limited to, a strike by the members of A.\1FA. On March 9, 2001, Pre ident Bush, follov-.-ing the recommendation of the N.\1B, announced thee tablishment of a Presidential Emergency Board ("PEB "). The establishment of a PEB stopped any self-help remedie and tarted the proce s during which the PEB reviews the po ition advocated by ).'orthwe t and A.\1FA and proposes a solution, which i anticipated to be by mid- pril. If the PEB resolution is not accepted by both parties (or if the parties do not reach ome other agreement), and unless Congre stakes additional action, either party Vlrill be permitted to resort to self- help remedie 30 day after the PEB makes its recommendation to the President. A prolonged work stoppage, if it were to occur, could have a material adver e impact on the Company. The Company cannot predict the outcome of the negotiations at this time. Annual Report 2000 NOTE 12-PENSION AND OTHER POSTRETIREMENT HEALTH CARE BENEFITS The Company has several noncontributory pension plans covering substantially al l of i s employees. The benefits for th 'SC plans are based primarily on years of service and, in som cas s, employee compensation . It is the Company's policy to annually fund at least the minimum contribution as required by the Employee Retirement In come S curity Act of 1974. In 2000 and J998, the Company made r.ontributions of$36 million and . ]5() million, respectivly, in excess of its minimum rer1uirement. The Company did not mak, any excess contributions in l 999. The Company sponsors vario11s cc1ntributory and noncontributory medical, dental and life insurance ben Ii plan, overing certain eligible reti1 es and their dependents. The expected future cr1st of providing '>U h postreLirement hen fi sis a crued ov<:r Lhe ervice life of active employees. Retired employee'> are nrJt off red Company-paid medical and dental benefiLs after age 64, with the exception of certain emplo>1ees who retired prior based on a combinatirm ofyears of service and age at retirement. Medical and dental benefit plans are unfunded and cosLs are paid as incurred. The pil()t group is provided Company- paid life insurance coverage in amoun s which decrease based rm age at retirement and age at time Jf death. On June J, 2000, Lhe 'ompany amended the pension plan of contract employees represented by the International Brotherhood of Teamsters (WJBT"). The plan amendment resulted in an 85% benefit level increase for JBT workers and is retroactive to participanLs who terminated after De ember 31, 1992. The plan liability was remeasured as of June 30, 2000 at a disuJUnt rate of 8.2% and resulted in increases in pemion expeme on a prorated basis for 200(J of $13 million and on an annual basis of $30 million. ..------;( Northwest Airlines ) The f; Ilowing i a reconciliation of the beginning and ending balances of the benefit obligation and the fair value of plan assets (in million) : Pension Benefits Other Benefits 2000 1999 2000 1999 Oiange in benefit obligation: Benefit obligation at beginning of year $ 4,647 $ 5,022 $ 391 $ 376 Service cost 149 167 14 14 Interest cost 397 363 32 27 Plan amendments 157 228 23 8 Actuarial loss (gain) and other 381 (91 7) 96 (12) Benefits paid (240) (216) (25) (22) Benefit obligation at end of year 5,491 4,647 531 391 Ownge in plan assets: Fair value of plan assets at beginning of year 5,166 4,375 5 5 Actual return on plan assets (7) 957 Employer contributions 86 50 25 22 Benefits paid (240) (216) (25) (22) Fair value of plan assets at end of year 5,005 5,166 5 5 Funded status - overfunded (underfunded) (486) 519 (526) (386) Unrecognized net actuarial loss (gain) (280) (1,141) 166 72 Unrecogr ized prior service cost 630 527 36 14 et amount recognized $ (136) $ (95) $ (324) $ (300) Amount recognized in the Consolidated Balance Sheets as of December 31 were as follows (in millions): Pension Benefits Other Benefits 2000 1999 2000 1999 Prepaid benefit cost $ 89 $ 96 $ $ Intangible asset 376 121 Accrued benefit liability (631) (312) (324) (300) Accumulated other comprehensive loss 30 et amount recognized $ (136) $ (95) $ (324) $ (300) The Company's pension plans with accumulated benefit obligations in excess of plan assets as of December 31 were as follows (in millions) : 2000 1999 Projected benefit obligation $ 2,064 $ 399 Accumulated benefit obligation 1,923 262 Fair value of plan assets 1,450 Annual Report 2000 Weighted-average assumptions for pension and other benefit as of December 31 were as follows: 2000 1999 1998 Discount rate 7.9% 8.2% 6.9% Rate of future compensation increase 3.9% 3.9% 3.9% Expected long-term return on plan assets 10.5% 10.5% 10.5% For mea urement purposes, a 5.5% annual rate of increase in the per capita co t of covered health care benefits was assumed for 2001. The rate was a sumed to decrease to 5% for 2002 and remain at that level thereafter. The components of net periodic cost of defined benefit plans included the following (in millions): Pension Benefits Other Benefits 2000 1999 1998 2000 1999 1998 Service cost $ 149 $ 167 $ 133 $ 14 $ 14 $ 12 Interest cost 397 363 310 32 27 25 Expected return on plan assets (468) (403) (357) (1) (1) Amortization of prior service cost 55 46 20 1 1 Recognized net actuarial loss and other events 1 21 30 2 3 3 et periodic benefit cost $ 134 $ 194 136 $ 48 $ 44 40 Assumed health care cost trend rates have a significant impact on the amounts reported for the health care plan . 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 NOTE 13-RELATED PARTY TRANSACTIONS Continental Airlines, Inc. - On ovem ber 20, 1998, the Company issued 2.6 million shares of Common Stock and paid $399 million in cash to acquire the beneficial ownership of approximately 8.7 million shares of Class A Common Stock of Continental. In connection with the Company's investment in Continental and orthwest's alliance with Continental, the Company entered into agreements with Continental which contained certain restriction 1-Percentage- Point Increase $ 8 83 1-Percentage- Point Decrease $ (7) (70) on the Company's ability to vote shares of Continental common stock, to acquire additional shares of Continental common stock and to affect the composition and conduct of Continental' Board of Directors for a ten-year period. Due to the restrictions in these agreements, the Company accounted for its investment under the equity method and recognized its interest in Continental's earnings on a one-quarter lag. The difference between the co t of the Company's investment and the proportionate share of the underlying equity of Continental of 319 million was being amortized over 40 years. 60 Northwest Airlines On January 22, 2001, pur uant to an agreement reached in O\'ember 2000, (i) the Company sold to Conlin ntal approximately 6.7 million hare of the Continental Class A Common tock held by the Company for $450 million in cash; (ii) sub equently, Continental effected a recapitalization as a r ult of which the Company' remaining 2.0 million shares of Continental Class A Common Stock were converted into 2.6 million share of Continental Cla B Common Stock; (iii) the Compan and ontinental xtended the term of their alliance agreement through 2025; and (iv) Continental issued to the Company a special series of preferred stock that gives the Company the right to block certain business combinations and 'imilar change of control transaction involving Continental and a third-party major air carrier during the term of the alliance agreement. The preferred stock is subject to redemption by Continental in certain events, including a change of control of the Company. The Company also entered into a revised andstill agreement which contain certain restrictions on the Company' ability to vote and acquire additional shares of Continental common stock. In December 2000, the Company recorded a 26 million loss in other non-operating income (expense) as a result of the sale of the 6.7 million hares to Continental. At December 31, 2000, the remaining 2.6 million shares were being accounted for as marketable ecurities and 15 million was recorded in unrealized gains in accumulated other comprehensive income (loss). Subsequent to year-end, the Company sold the remaining 2.6 million share for $132 million, as a result of which a pre-tax gain of 27 million wa recorded in the first quarter of 2001. Mesaba Holdings, Inc. -The Company owns 27.9% of the common tock ofMesaba Holding Inc., the holding company ofMesaba, a I orthwest Airlink carrier. The Company also has warrants to acquire Me aba Holding , Inc. common stock, and if the Company were to exercise all its in-the-money warrants when fully vested, its mvner hip would increase to 35.1 % as of December 31, 2000. orthwest and M saba igned a ten-year Airline Services Agreement ("ASA") effective July 1, 1997 under which 1orthwest determines lesaba's commuter aircraft cheduling and fleet composition. As of D cember 31, 2000, the Company has leased -19 aab 340 aircraft, which are in turn sublea ed to Mesaba. In addition, as of December 31, 2000, the Company has leased 11 and sublea ed 25 AVRO regional jet aircraft to Mesaba under a Regional Jet Service Arrreement consummated in October 1996. On November l, 2000, the Company offered to purchase all of the outstanding common stock of Mesaba Holdings, Inc. al a price of $13 per share, or an aggregate purchase price of approximately $190 million. Mesaba's Board of Directors has formed a special committee to evaluate the offer. WORLDSPAN-The Company owns a 33.7% interest in WORLDSPAN, L.P., an affiliate that provides computer reservations services, which it accounts for using the equity method. NWA Funding, LLC ("NWF") - During December 1999, a Receivables Purchase Agreement (the "Agreement") was executed by Northwest, NWF, a wholly-owned, non-consolidated subsidiary of the Company, and a certain third-party purchaser (the "Purchaser") pursuant to a securitization transaction. Northwe t old $3.68 billion and $122 million of accounts receivable on a non-recourse basi to NWF during 2000 and 1999, respectively. The amount of loss recognized related to receivables securitized at December 31, 2000 was not material. NWF maintains a variable undivided interest in these receivables and is subject to losses on its share of the receivable and, accordingly, maintains an allowance for doubtful accounts. The agreement is a five-year $85 million revolving receivable purchase facility allowing orthwe t to sell additional receivables to NWF and NWF to sell variable undivided interests in the e receivables to the Purchaser. The fair value of securitized receivables is estimated from the anticipated future cash flows. The Company records the discount on the ale of receivables and its interest in NWF's earnings in other non-operating income (expense). NOTE 14-RISK MANAGEMENT AND FINANCIAL INSTRUMENTS Effective October 1, 1998, the Company adopted SFAS No. 133, Acco1tnting for Derivative Instruments and Hedging Activities, which requires the Company to recognize all derivatives on the balance sheet at fair value. The Company uses derivatives as cash flow hedges to manage the price risk of fuel and its exposure to foreign currency fluctuations. SFAS No. 133 requir s that for cash flow hedges, which hedge the exposure to variable cash flows of a forecasted transaction, the effective portion of the derivative's gain or lo s be initially reported as a component of other comprehensive income (loss) in the equity ection of the balance h et and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the derivative's gain or loss is reported in earnings immediately. The cumulative effect of adoption , as immaterial. llisk Management - The Company principally uses derivative financial in truments to manage specific risks and does not hold or i sue them for trading purposes. The notional amounts of financial in truments summarized below did not repre ent amounts exchanged between parties and, therefore, are not a measure of the Company's 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 expense . The Company's largest exposure comes from the Japanese yen. In 2000, the Company' yen-denominated revenues exceeded its yen-denominated expense by approximate! 54 billion en ( 525 million) . From time to time the ompany uses forward contracts, collar or put option to hedge a portion of it anticipated yen-denominated sale . The change in market value of such instruments have historically been highly effective at offsetting exchange rate fluctuations in yen-denominated sales. At December 31, 2000, the Company recorded 31 million of unrealized gains in accumulated other comprehensive income (los ) as a result of forward contracts to sell 50.25 billion yen ($500 million) at an a erage forward rate ofl00 yen per dollar with various ettlement dates through ovember 2001. These forward contracts hedge approximately 38% of the Company's anticipated 2001 yen-denominated ales, which also represents approximately 100% of the Company's excess of en-denominated revenues over expenses. Hedging gains or losse are recorded in revenue when transportation is provided. The Japanese yen financial instruments utilized to hedge net yen-denominated cash flows resulted in gains of $23 million in 2000 and losses of $14 million in 1999. 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 counterpartie based on credit ratings, limits expo ure to a ingle counterparty and monitors the market position with each counterparty. It is the Company's policy to participate in foreign currency hedging transaction with a maximum span of25 month . Annual Report 2000 Aircraft Fuel - The Com pan i expo ed to the effect of changes in the price and availability of aircraft fuel. In order to provide a mea ure of control over price and supply, the Compan trade and hip fuel and maintains fuel torage facilities to upport its flight operation . To further manage the price risk of fuel costs, the Company primaril utilizes future contract traded on regulated future exchange and fuel swap agreement . The change in market value of such con tracts have historically been highl effective at off et.ting fuel p1ice fluctuation . It is the Cornpan 's policy to participate in hedging tran action with a maximum span of 12 months. At December 31, 2000, the Company recorded a nominal amount of unrealized gains in accumulated other comprehen ive income (loss) as a result of the hedge 0-!1 uacts,, hich if realized, will be recorded in fuel e 'pense when the related fuel inventory i utilized in 2001. As of December 31, 2000, the Compan ' had hedged approximate! 12% of its first quarter 2001 fuel requirements in the form of hort-term contracts to secure ongoing operating upplie . Interest Rate - The Company used financial insuuments to hedge its expo ure to int.ere t rate fluctuations on the ariable rate portion of its pa -through certificates is ued in 2000. As of December 31, 2000, the Company has 2 million of gain remaining in accumulated other comprehensive income (loss). Equant N. V. - Equant .V. i an international provider of data network services to multinational busine es, including de ktop communications, network services, equipment installation, software development and others. During 1999, the Company sold a portion of its investment for a gain of $48 million ($30 million after ta.,x or $.33 per diluted share). As of December 31, 2000, the Company holds 443,897 depo itory certificates with an estimated fair market value of $12 million. Each depository certificate represents an int.ere tin Equant .V. common shares which are subject to certain transferability restriction and are carried at their original cost, which is nominal. Northwest Airlines priceline.com - During 1999, the Company ntered into agreem nts wi.th priceline.com, Inc. to provide ticket inventory for ale through pri.celine.com' internet site. As part of the agr em nts, the Compan , received warrants for 2,062,500 shares wi.th variou e ting requirements. During 1999, the Company exercised 312,500 warrants to purcha e 296,354 shares, which were recorded as available for ale investments at December 31, 1999. During 2000, the Company sold its hares outstanding from 1999, additional hare conven ed from warrants exercised during 2000 and a portion of its remaining warrants for a combined gain of $58 million ($36 million after tax or $.40 per diluted shar ) . The remaining 625,000 warrants are valued at fair market value which had a nominal valuation at December 31, 2000. Fair Values of Financial Instruments - The financial statement carrying values equal the fair values of the Company's cash and cash equivalents and restricted short-term investments. A of December 31, thee amount were (in millions): Cash and Cash Equivalents Restricted Short-Term Investments 2000 1999 2000 1999 Held-to-maturity debt securities: Commercial paper $ 558 $ $ 20 $ 16 Other 6 3 Available-for- ale debt securities 109 695 9 22 Cash 26 54 $ 693 $ 749 $ 35 $ 41 The Company con iders all unrestricted investments wi.th 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. During 2000, there were no purcha es of short-term inve tments classified as available-for-sale securities and proceeds from sale of such securities were $18 million. There were no purcha es or sales of short-term investments classified as available-for-sale securities during 1999. The financial statement carrying values and estimated fair values of the Company's financial instruments, including current maturities, a of December 31 were (in millions): 2000 1999 Carrying Fair Carrying Fair Value Value Value Value Long-Term Debt $ 3,242 $ 3,286 $ 3,666 $ 3,515 Mandatorily Redeemable Preferred Security of Subsidiary 558 506 626 536 Series C Preferred Stock 232 204 243 158 The fair value of the Company's long-term debt were e timated using quoted market prices, where available. For long-term debt not activel traded and the Preferred ecurity, fair alue were estimated u ing discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of securities. The fair value of the Serie C Preferred Stock shares is based on the a sumed conver ion to Common Stock and valuing such shares at the clo ing quoted market price for Common Stock. Annual Report 2000 NOTE 15-SEGMENT INFORMATION The Company is managed as one cohesive busines unit, of which revenues are derived prima1ily from the commercial transportation of passengers and cargo. Operating revenues from flight egments sen~ng a foreign destination are classified into the Pacific or Atlantic regions, as appropriate. The following table shows the operating revenues for each region for the years ended December 31 (in millions): Domestic Pacific, principally Japan Atlantic Total operating revenues 2000 $ 7,634 2,650 1,131 $ 11,415 1999 $ 6,976 2,280 1 020 $ 10,276 1998 $ 6,093 2,016 936 $ 9,045 The Company's tangible assets con i t primaril of flight equipment, which are utilized aero s geographic markets, and therefore, have not been allocated. NOTE 16-QUARTERLY FINANCIAL DATA (UNAUDITED) naudited quarterly re ults of operation for the years ended December 31, are ummarized below (in millions, except per share amounts): 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2000: Operating revenues 2,570 $ 2,927 $ 3,178 $ 2,740 Operating income (loss) (3) 252 354 (34) Iet income (los ) 3 115 $ 207 (69) Basic earnings (loss) per common share .03 1.40 2.49 (.84) Diluted earnings (loss) per common share $ .03 1.26 2.23 $ (.84) 1999: Operating re enues 2,281 $ 2,597 2,843 ~ 2,555 Operating income (loss) (14) 264 370 94 et income (lo s) $ (29) $ 120 $ 180 29 Basic earnings (loss) per common share (.36) $ 1.47 2.21 .35 Diluted earnings (loss) per common share $ (.36) $ 1.29 $ 1.96 $ .31 The sum of the quarterly earnings per share amounts does not equal the annual amount reported ince per share amounts are computed independently for each quarter and for the full year ba ed on re pective weighted average common share outstanding and other dilutive potential common hare . Northwest Airlines NOTE 17-CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The following table pre enl condensed con olidating financial information for: (i) Northwest, the guarantor for WA Corp. and (ii) on a combined ba is, NWA Corp., a holding company, and all other non-guarantor subsidiaries. The principal consolidating adjustment entries eliminate investments in subsidiaries and inter-company balances and transactions. Condensed Consolidating Statements of Operations for the years ended December 31 (in millions): Other Consolidating NWA Corp. Northwest Subsidiaries Adjustments Consolidated 2000: operating revenues $ 10,844 $ 790 $ (219) $ 11,415 operating expenses 10,289 761 (204) 10,846 operating income 555 29 (15) 569 Other income (expense) (215) 820 (739) (134) Income before income taxes 340 849 (754) 435 Income tax expense 138 41 179 Net income $ 202 $ 808 $ (754) $ 256 1999: operating revenues $ 9,790 $ 702 $ (216) $ 10,276 operating expenses 9,121 632 (191) 9,562 operating income 669 70 (25) 714 Other income (expense) (296) 896 (827) (227) Income before income taxes 373 966 (852) 487 Income tax expense 149 38 187 Net income $ 224 $ 928 $ (852) $ 300 1998: operating revenues $ 8,643 $ 626 $ (224) $ 9,045 operating expenses 8,863 576 (203) 9,236 operating income (loss) (220) 50 (21) (191) Other income (expense) (239) (855) 855 (239) Income (loss) before income taxes (459) (805) 834 (430) Income tax expense (benefit) (159) 14 (145) Net income $ (300) $ (819) $ 834 $ (285) Annual Report 2000 Condensed Consolidating Statements of Cash Flows for the years ended December 31 (in millions): O ther Consolidating NWACorp. orthwest Subsidiaries Adjustments Consolidated 2000: Net cash from operating activities $ 783 $ ll0 $ 893 Net cash flows from investing activities (540) (32) (7) (579) Net cash flows from financing activities (319) (58) 7 (370) Increase (decrease) in cash and cash equivalents (76) 20 (56) Cash and cash equivalen ts at beginning of period 735 14 749 Cash and cash equivalents at end of period $ 659 34 $ 693 1999: Net cash from operating activities $ 1,057 $ 202 $ 1,259 Net cash flows from investing activities (954) 215 (234) (973) Net cash flows from financing activities 194 (445) 234 (17) Increase (decrease) in cash and cash equivalents 297 (28) 269 Cash and cash equivalen ts at beginning of period 438 42 480 Cash and cash equivalents at end of period $ 735 14 $ 749 1998: Net cash from operating activities $ ll 7 $ (29) $ $ 88 Net cash flows from investing activities (775) 450 (o/88) (1,113) Net cash flows from financing activities 579 (602) 788 765 Decrease in Cash and Cash Equivalents (79) (181) (260) Cash and cash equivalen ts at beginning of period 517 223 740 Cash and cash equivalents at end of period 438 $ 42 $ 480 Northwest Airlines Condensed Consolidating Balance Sheets as of December 31, 2000 (in millions): Other Consolidating NWACorp. Northwest Subsidiaries Adjustments Consolidated ASSETS Current Assets Ca h and ca h equivalents and restricted short-term investments $ 670 $ 58 $ $ 728 Accounts receivable, net 502 32 534 Other current assets 611 185 (44) 752 Total current assets 1,783 275 (44) 2,014 Property and Equipment 5,280 350 4 5,634 Flight Equipment Under Capital Leases, net 565 565 Other Assets 1,806 4,990 (4,132) 2,664 Total Assets $ 9,434 $ 5,615 $ (4,172) $ 10,877 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Air traffic liability $ 1,247 $ 68 $ (8) $ 1,307 Accounts payable and other liabilities 1,919 74 (35) 1,958 Current maturities of long-term debt and capital lease obligations 229 24 253 Total current liabilities 3,395 166 ( 43) 3,518 Long-Term Debt and Capital Lease Obligations 3,259 286 3,545 Def erred Income Taxes 1,353 1,353 0th er Liabilities 1,384 114 (58) 1,440 Mandatorily Redeemable Preferred Security 558 558 Redeemable Preferred Stock 232 232 Common Stockholders' Equity (Deficit) 838 3,464 (4,071) 231 Total Liabilities and Stockholders' Equity (Deficit) $ 9,434 $ 5,615 $ (4,172) $ 10,877 Annual Report 2000 Condensed Consolidating Balance Sheets as of December 31, 1999 (in millions): Other on olidating VA Corp. 1 onhwe t Subsidiarie Adju tments Con olidated ASSETS Current Assets Ca hand ca h equivalen ts and restricted sh ort-term inve nnen ts 757 32 1 790 Accounts receivable, net 497 23 1 -21 O ther current assets 612 171 (31) 752 Total current assets 1, 66 226 (29) 2,063 Pro,perty and Equipment 5 351 393 - Flight Equipment Under Capital Leases, net 5 8 Other Assets 1,421 (3 314) Tow! Assets 9,226 (3,339) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Air traffic liability 1 362 65 (5) 1,422 Accounts payable and other liabilities 1,7-:1:5 62 (24) 1.783 Current maturitie of long-term debt and capital lease obligation 352 20 372 Total current liabilities 3 459 147 (29) 3 577 Long-Term Debt and Capit,al Lease Obligations 3,585 306 3, 91 Deferred Income Taxes 1,222 1,222 Other Liabilities 1,023 127 (73) 1.077 Mandatorily Redeemable Preferred Security 626 626 Redeemable Preferred Stock 243 243 Common Stockholders' Equity (Deficit) 533 2,652 (3,237) (52) Total Liabilities and Stockholders' Equity (Deficit) 9,226 4 697 (3,339) 68 Northwest Airlines REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Stockholders and Board of Directors Northwest Airlines Corporation We have audited the accompanying consolidated balance heets of orthwe tAirlines Corporation as of December 31, 2000 and 1999, and the related con olidated tatements of operation , common stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2000. Thee financial statements are the responsibility of the Company's management. Our re pon ibility is to expre an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 include asse ing the accounting principle used and significant estimates made by management, as well a evaluating the overall financial tatement pre entation. 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 lorthwe tAirline Corporation at December 31 , 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the nited State . Minneapolis, Minne ota January 18, 2001 Annual Report 2000 FIVE-YEAR SUMMARY Northwest Airlines Corporation Year Ended December 31 2000 1999 1998(1) 1997 1996 Statements of operations (In millions, except per share data) Operating revenues Passenger $ 9,653 $ 8 692 $ 7,607 $ 8,822 $ 8,598 Cargo 857 732 635 789 746 Other 905 852 803 615 537 11,415 10,276 9,045 10,226 9,881 Operating expenses 10,846 9,562 9,236 9,069 8,827 Operating income (loss) 569 714 (191) 1,157 1 054 Operating margin 5.0% 6.9% (2.1) % 11.3% 10.7% Income (loss) before extraordinary item $ 256 $ 300 $ (285) 606 536 Net income (loss) $ 256 $ 300 $ (285) 597 536 Earnings (loss) per common share: Basic $ 3.09 $ 3.69 $ (3.48) 5.89'21 5.05'2 ) Diluted $ 2.77 $ 3.26 $ (3.48) 5.29'21 4.52'21 Balance Sheets (In millions) Cash, cash equivalents and unrestricted short-term investments $ 693 $ 749 $ 480 1,040 752 Total assets 10,877 10,584 10,281 9,336 8,512 Long-term debt, including current maturities 3,242 3,666 4,001 2,069 2,060 Long-term obligations under capital lea es, including current obligations 556 597 655 705 772 Mandatorily redeemable preferred security of subsidiary 558 626 564 486 549 Redeemable stock 232 243 261 1,155 603 Common stockholders' equity (deficit) (3l 231 (52) (477) (311) 93 operating Statistics (4J Scheduled service: Available seat miles (ASM) (millions) 103,356 99,446 91,311 96,964 93,914 Revenue passenger miles (millions) 79,128 74,168 66 738 72,031 68,639 Passenger load factor 76.6% 74.6% 73.1% 74.3% 73.1% Revenue passengers (millions) 58.7 56.1 50.5 54.7 52.7 Revenue yield per passenger mile 12.04 11.58 11.26 12.11 12.53 Passenger revenue per scheduled ASM 9.21 8.64 8.23 9.00 9.16 Operating revenue per total ASM (5J 10.01 9.44 9.12 9.76 9.85 Operating expense per total ASM (SJ 9.33 8.71 9.21 8.63 8.78 Cargo ton miles (millions) 2,501 2,336 1,954 2,283 2,216 Cargo revenue per ton mile 34.26 31.32 32.46 34.54 33.70 Fuel gallons consumed (millions) 2,113 2,039 1,877 1,996 1,945 Average fuel cost per gallon 82.99 53.55 53.60 64.86 67.21 umber of operating aircraft at year end 424 410 409 405 399 Full-time equivalent employees at year end 53,491 51,823 50,565 48,984 47,536 (I) 1998 was affected by labor-relaLed di rupLions which included work actions, a 30-oay per diluLed share). cooling off pe1-iod, an 18-day cessation of flight operaLions due Lo tl1e piloLS' strike, a (3) No dividends have been paid on Common SLock for any period presemed. seven-day gradual resumption of CTighL operations and a rebuilding of traffic demand. (4) All staListics exclude xpres Airlines 1, Inc. (2) Excludes tlie effects of tl1e 1997 extraordinary loss ( .10 per basic share and .08 per (5) Exclude tlie estimaLed revenues and expen e associated witl1 tl1e operation of dilmed share) and tlie 1996 preferred stock transaction ($.75 per ba ic share and .68 ortliwe t's fl eel of 747 freighter aircraft and MLT Inc. Northwest Airlines STOCKHOLDERS' INFORMATION Common Stock Prices 2000 1999 Quarter High Low High Low 1st 24 6 16 1/s 31 22 2nd 36 20 11/16 35 26 3rd 39 24% 35 23 4th 31 20 29 21 o dividend were declared during the years ended 2000 or 1999. Stock Listing The Company' Common Stock i quoted on the Nasdaq National Market under ymbol NWAC. As of February 28, 2001 the Company had 1 356 stockholders ofrecord. Registrar and Transfer Agent Well Fargo Bank Minnesota, .A. Post Office Box 738 South St. Paul, Minne ota 55075-0738 (800) 468-9716 Annual Meeting The 2001 Annual Meeting of Stockholder will be held at the Equitable Life Building ew York, New York on Thursday,June 28, 2001 at 9:30 a.m. 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 (800) 358-3100 E-mail: nwairlines@2rcs.com Direct all other inquiries to: Investor Relations Department A4110 5101 Northwest Drive St. Paul, Minnesota 55111 (800) 953-3332 tt Cebu Pacific Air (WorldPerks Partner) Manila ... Japan Air System Memanbetsu Asahikawao Sapporo,e Kushiro . Obihiro To Seoul To Xi'an Na To Kagos T okunoshim a Aomori MiS3wa Akit.a Morioka Okayama Takamatsu ::Z:rr::.2S'<5gs;;'Y,'-- Tokushima \\ \\ " \\ \ \ \ ' \ \ \ \ \ ' \ \ \ ' ' ' Nankishirahama Matsuyama -------------- ,:'t",- International Route System --- Northwest Airlines - - - - Northwest Airlines Cargo - - KLM Royal Dutch Airlines - - Continental Airlines - - Alitalia Airlines Air China - - Japan Air System --- Kenya Airways (WorldPerks Partner) Gulfstream International Airlines Cabo San Lu Aguascalientes Puerto Vallarta Guadalajra / Leon bctapa/Zihuatanejo Mexico City I Tampico Acapulco I; Puebla Sapporo Saipan Seoul Niigata .____ Tinian Pacific Island Aviation (Northwest Airtink) Fuku j To Honolulu ~ . Kwajalein Pohnp Kosrae Majuro Additional service operated by KLM, KLM alps, KLM cityhopper Sandefjoro and KLM exel Londoo (Stansted) Londoo (Heathrow) C.rditt/Wales Sri (Chs \ \Pari \ (Orly) b~ T oulouse Nice Belo Horizorile"I ;r- Buenos Aires Gothenburg Malmo in(Tegel) in (Tempelho~ gue \ Vienna Linz urg 1venice Bologna u Bhuj Ahm R ajk~!" Porbandar~ KesM