Northwest Airlines Annual Report 2001

~NORTHWEST
V A I R LINE s.
TABLE
OF CONTENTS
To Our Shareholders ........... . ................................ pages 2-5
Run a Great Airline ............................................. pages 6-9
Secure Our Future ....................... . ................. . .... pages 10-13
Put Customers First ................ .. ...................... ..... pages 14-15
Build Our Network .. . .......................................... pages 16-17
Focus on People ....... . .......... . ................... .......... pages 18-19
Board of Directors . ..... . ..... . ...................... . . . ........ pages 20-21
Vision and Mission ... ............... ..... ....... . .......... . .. . page 22
Financial Report . ........ ........ . ............. . .......... . .. .. . page 23
Stockholders' Information ..... .. . ............................... page 70
Route Maps ................................... . .......... . . . .. back cover
CONDENSED
FINANCIAL HIGHLIGHTS
Northwest Airlines Corporation
(Dollars in millions, except per share data)
FINANCIALS
Operating Revenues
Operating Expenses
Operating Income (Loss)
Operating Margin
Net Income (Loss)
Earnings (Loss) Per Common Share:
Basic
Diluted
Number of ommon Shares Outstanding (millions)
OP E RATING STATISTICS
Scheduled Service:
Available Seat Miles (ASM) (millions)
Revenue Passenger Mile (RPM) (millions)
Passenger Load Factor
Revenue Passengers (millions)
Revenue Yield Per Pas enger Mile
Pa enger Revenue Per Scheduled ASM
Cargo Ton Mile (millions)
Operating Revenue Per Total ASM (RASM)
Operating Expense Per Total ASM (CASM)
Year Ended December 31
2001 2000
$ 9,905 $11,240
10,773 10,671
$ (868) $ 569
(8.8)% 5.1%
$ (423) $ 256
$ (5.03) $ 3.09
$ (5 .03) $ 2.77
85.3 85.1
98,356 103,356
73,126 79,128
74.3% 76.6%
54.1 58.7
11.24 12.04
8.36 9.21
2,161 2,502
9.17 10.01
9.78 9.33
Percent
Change
(11.9)
1.0
(252.5)
(13.9) pts.
(265.2)
(4.8)
(7.6)
(2.3) pts.
(7.8)
(6.6)
(9.2)
(13.6)
(8.4)
4.8
Vl
~
z
.....
...1
1Z
<:I;
E-<
Vl
~
~
::r::
E-<
1Z
0
z
A MESSA GE
FROM T HE CHAIRMAN
With the tragedies of September 11 and industry
losse of $7.3 billion, 2001 was the most difficult
year ever experienced by .S. airlines. The year
te ted u , individually and corporately, in ways that
we had never been tested. As we conclude the year,
however, our confidence in the future of Northwest
Airlines is strong. This is based on the performance
of our new leaders and the consistent trategy we
all followed, which led us through the test of 2001.
LEADERSHIP
Early in the year, the Northwest Board of
Directors elected Richard Anderson chief executive
officer and Doug Steenland president - both
veteran Northwe t executives, ready for their new
roles. Over the past few years, Richard and Doug
had re-establi hed orthwest's leading reliability,
guided our efforts to build new facilitie , created
global alliances and improved labor relations after
several contentious years.
o one could have predicted in Februar: Just ho"
critical their leadership would be. Richard ,1nd
Doug acted quickly when economic conditions
began to deteriorate in the spring and summer.
Cost savings before and after September 11
combined for an annualized expense reduction of
$1. 7 billion. Our financial management enabled
Northwest to end the year with more cash than
competitors nearly twice our size.
STRA T EG Y
Immediately after assuming their new pos1t1ons,
Richard and Doug introduced the Checklist for the
Future, a clear declaration and affirmation
of our proven strategies for growth. The five
Checklist items are detailed in this annual report.
As air travel builds in 2002 we are confident that
our tested and proven leaders and our strategy will
guide orthwest Airlines to a successful and
secure recovery.
GARY L. Wt L O , Chamnan of the Board
TO OUR
SHAREHOLDERS
Everyone at Northwest Airlines breathed easier
when Flight 22, a Boeing 747 from Tokyo's arita
Airport, landed in Honolulu at 2:13 p.m. It was
Tuesday, September 11, 2001. The arrival signified
that all our aircraft were safely on the ground.
More than six hours earlier we had learned of the
terrorist attacks on the United States. We had
immediately directed all flights to land at the
nearest suitable airport, even before the order
came from the Federal Aviation Administration
to ground all U.S. aircraft. After Flight 22 landed,
we gathered our key leaders to assess the situation
and plan immediate tactics.
It was more than one of the most tragic days in the
history of the country and the airline industry. In
some ways, the day also represented the cycles of
2001 - a succession of critical challenges, followed
by quick analysis, tough decision-making, and
action. In facing the challenges of 2001, we rayed
true to our core business strategy, the Checklist for
the Future: Run a Great Airline, Secure Our Future,
Put Customers First, Build Our Network, and
Focus on People.
C HECKLIST P ROV I D ES
CONSISTENT DIRECTION
The five elements of the Checklist helped us to
navigate with agility and deliver impres ive
performance in the face of significant challenge .
The year started optimistically with January
financial performance tracking with our budget,
which called for a robust profit. After our new
leadership team was named in February, we
rolled out the Checklist for the Future - clearly
defining our strategy. We per onally met with
tens of thousands of our employees around the
world to communicate the Checkli t.
In February, we encountered the fir t of the year'
challenges - sign of the reces ion that tarted in
March. That month, we immediately implemented
revenue initiatives and cost reduction totaling
more than 200 million, the fir t of many a tiorn:,
to maintain our position a one of the !owe t o t
producers among network airline ,.
In May, orthwe t' mechanic , cleaners .md
custodian ratified a new four-year contract.
With thi contract complete, \ e now h,1d multi-
year agreement with all our union-repre enred
employee . Throughout the year we focu ed on
communicating openly and hone tly with all
employee , providing the training and equipment
required to do their job , and recognizing our
employees a the es enria I element in providing
excellent cu tomer ervice.
Unfortunately, May 200 L al o aw an e en more
precipitous drop in airline booking . Be au e of
the weak economy, dome tic unit r v nue for ., .
carriers decrea ed 11.8 percent from May 2000,
the large t decline in 20 year .
In re pon e, we adju red capacity during the
ummer, changed fleet plan and further r duced
taffing. The e measure re ulted in a 135 million
incremental financial improvement. By adju ting
capacity co reflect the new demand level , we pre-
served orthwe t' hi toric high load factor
advantage and continued co outpace rhe indu try
in unit revenue performance.
We thought at the time that we had reach d
equilibrium, matching e pen e with anticipar d
revenue. We were expecting to po t a net profit
for the third quarter. Then came eptember I l,
the mo t significant challenge ever experienced
in our industry.
CHALLENGES FROM SEP TE MBE R 11
The fir t challenge wa to en ure the afety of our
pa enger and crew . We immediately instructed
all aircraft on the ground not to depart and in the
fir t hour of the cri i , landed 14 l flights that
were in the air. After the afe landing of Flight 22
we began a recovery plan to tran port more than
9 000 rranded cu comers to their final destination ,
'
z
...;
'-
V'
f-,
~
0
p..
t.,.J
~
H
0
0
"1
and to reposition our aircraft and personnel for a
resumption of service. None of us knew when
that might occur.
Each day that passed meant tens of millions of
dollars in losses. But as an industry, our resolve was
firm - we would not operate our aircraft until
we could do it safely. On Friday, September 14,
we resumed service when orthwest Flight 152
departed from Seattle at 12:58 a.m. and arrived in
Minneapolis/St. Paul at 6:20 a.m. Shutting down
and starting up our airline was no easy task, but
Northwest's strong operational culture allowed
our employees to accomplish it successfully.
The second challenge was to recognize the massive
economic consequence of grounding Northwest
and the nation's airlines. Our conservative philoso-
phy of maintaining access to high levels of liquidity
was critical at this juncture, as we were able co
draw down our lines of credit to ensure a sufficient
cash position.
However, collectively, the airline industry - which
contributes, directly or indirectly, more than 10
percent of the U.S. gross domestic product -
forecast a 60 percent revenue decline in
September. Northwest and other airlines quickly
advised Congress of the magnitude of the expected
losses. In response, the U.S. government authorized
an immediate $5 billion grant program and $10
billion in loan guarantees to support the industry.
Northwest's share of the grant program was
$461 million.
The third challenge was to resize our operation
consistent with the reduced demand from the
September 11 events. orthwest cut capacity by
nearly 20 percent for the remainder of the year. We
al o reduced employment by 10,000 positions.
The fourth and continuing challenge is to en ure
safe operations, while providing an airport experi-
ence that encourages the growth of travel. We have
implemented new security measures a well as
enhanced airport convenience. These include
increased airport security checkpoint capacity and
the reservation of certain security lane for
premium value cu t mers. We also ha,e employed
advanced luggage-handling technology to imple-
ment positive bag-match for all domestic checked
luggage without adding to the required airport
arrival time.
Since February 17, airport security has become
the responsibility of the Transportation Security
Administration of the U.S. Department of Trans-
portation (DOT). orthwest and all airlines will
need to monitor DOT performance to ensure that
customer convenience is preserved and security
costs - for both airlines and passengers - are
reasonable.
YEAR END POSITION
Despite the unprecedented events of 2001,
orthwest ended the year ahead of the industry
on several key meas ures, and fortified with
powerful trategic assets.
We suffered a net loss of $423 million in 2001, on
pretax operating losses of $670 million, but
finished the year in a better financial position
than most industry competitors. Our five-year net
margin was better than all but one of our major
network competitors. Our unit revenues continued
to outperform the industry, reaching a more than
10 percent revenue premium to the industry
average in the fourth quarter. Unit costs were the
second lowest among all other U.S. network
carriers. We also maintained cash reserves at the
highest relative levels in the industry, totaling
$2.6 billion at year's end.
We strengthened our industry cost advantage
with the consistent reliability of our operations.
In 2001, our operating performance ranked
among the top three U.S. network carriers in all
four customer satisfaction measures of the
DOT - on-time arrival , luggage handling, fewest
consumer complaints, and fewe t denied board-
ings. We als were the on-time leader across the
Atlantic and Pacific.
Regarding a et mve tments, we are completing
major improvements at all our hubs the most
dramat1 hemg the new Northwest WorldGateway
m Detroit, which opened m February 2002.
We are also increasing our U.S. to A ia dominance
by further developing our Tokyo hub.
Our fleet strategy selects aircraft that are best
suited to our markets, with the lowest opera ting
and ownership costs. This strategy resulted in lower
fleet capital cost and greater flexibility, which will
allow us to continue co upgrade our fleet.
Sixty-one new generation aircraft, including 23
regional jets, will be delivered in 2002. All firm
aircraft deliveries through 2005 are either pre-
financed or supported by manufacturer financing
commitments.
We continue to build our highly integrated strategic
alliance with KLM Royal Dutch Airlines. Our
Continental Airlines alliance significantly increa e
our domestic pre ence and increa e our market
share. We are al o developing new alliance partners,
which help to build our network.
LOOKING AHEAD
When the indu try recover , we belie c orthwcst
will be among the fir t airlines to return to
profitability. This confidence is based on the man;
factor we have discussed: a clear and proven ,;tratcgy,
financial and operating performance that lead the
indu try, trong liquidity and a combination of
asset that position u for long-term growth. The
greatest of these a et is our 45,000 employee~
around the world who male this .iirline work.
Thirteen of them - all President's Aw.ird winner<; -
arc featured in this annual report.
In 2002, we celebrate the enduring nature of
Northwest Airlines - our 75th year of pai;sengcr
service. In an indu try where global event<; and
the economy regularly reshape the compet1t1vc
land cape, thi long hi tory providec; the foundation
for our confidence. Thank you for your intcrc..,t
and i;upport.
~f~ ~~
GARY L. WILSON
Chairman of the Board
RICHARD H. ANDER 0
Chief Executive Officer
DouGLAS M. 1 u ~NLA n
President
6
RUN A GREAT AIRLINE
CONSISTENT PERFORMANCE
Through out 2001, Northwest Airlines
employees stayed focused on providing
safe, clea n, on-time air transportation and
dependable luggage service, coupled with
the courtesy that our cu tomers expect.
Northwest was again one of th e leading
carriers in on -time performa nce, fewest
consumer complaints, lowest levels of m is-
handled luggage a nd least involuntar y
denied boardings. Combined ervice quality
rankings demonstrate that orthwe t was
again an industry leader in 2001 - rank ing
in the top three U.S. network airline
for each component of the D epartment
of Transportati on' (DOT) Air Travel
Consumer Report. We were also the leading
on-time international airline for t ra ns-
Atlantic and tran -Pacific flights.
EFFICIENT AIRPORT
PROCESSES AND FACILITIES
In addition to the immediate implementation
of the new ecurity initiative mandated
by the Federal Avia tion dmini tration
following eptember 11, we al o v orl ed to
add more efficiency and c n enien e to the
travel e perience.
We qu ickly in r a ed a ir po rt e uriry
heckpoint capacity at o ur thre dom tic
hub and at even other maj r rrln e t
ga teway airp rr . ineteen n ,.: ecuriry
checkpoint were in p lace b the end of
2001, with plan to add 11 m r . Thi
increa e ena bled u to re erve orne ecurir
lane f r our mot va lued cu comer ' - tho e
traveling World Bu ine la "', dome tic
Fir t Class and for Platinum or old mcml r
of the WorldPerks ' fr quent flyer program.
PRESIDENT'S AWARD
JOHN IE HALL Lead Cleaner, Memphis
Johnnie's energy, skill and reliability through 22 years with Northwest have helped the
Memphis hub dispatch clean aircraft. Johnnie volunteered to work the third shift and lead
newer cleaning crews. His commitment and leadership led to a 200 percent improvement
for aircraft cleaners on the third shift. A talented portrait and landscape artist, Johnnie
will soon have his paintings displayed in a local gallery.
z
<
r
V"
Ill
~
:r:
r
a:
0
z
8
f-<
0::
0
Q..
w
..::
...l
<C
:::i
z
z
<
>-i
0
0
N
Northwest's three domestic hubs in Detroit,
Minneapolis/St. Paul and Memphis achieved
higher combined rankings for on-time
arrivals in 2001 than the domestic hubs of
any other network airline.
The capacity of the Northwest World-
Gateway in Detroit has increased 31 percent
with the addition of a fourth parallel run-
way in December. The simultaneous landings
and takeoffs permitted by this new runway,
coupled with the dual taxiways at the new
terminal facility, will enable Northwest's
largest hub to provide superior operating
reliability.
COMMITM ENT TO SAFE TY
AN D S EC U R I TY
Our expertise in providing safe and secure
service was tested like no other time in our
history after September 11. Northwest was
the first airline to complete modifications
to enhance flight deck door security on its
entire operating passenger fleet. We finished
these modifications in just 17 days.
Richard Anderson, CEO, was a member
of the DOT's Rapid Response Team on
Airport Security, which quickly addressed
ecurity issues at all U.S. airport .
Anderson frequently serves a an industry
representative on the subject of aircraft
and airport security .
We have also improved the application of
technology to enhance security. For example,
Northwest has invested heavily in the past
few years on advanced luggage-handling
technology. Therefore, we were well pre-
pared to implement positive bag match for
all luggage on domestic flights, without
lengthening the amount of time travelers
need to spend at the airport.
Most importantly, the professional experience
and constant vigilance of our mechanics,
airport employees, pilots and flight attendants
is the foundation of our safety culture at
Northwest Airlines.
NWA CARGO ENHANCES
R EL I AB I LI TY
Northwest is the leading U.S. passenger
airline providing worldwide air cargo service,
utilizing a fleet of 12 Boeing 747 air cargo
freighters and additional capacity in its
passenger fleet.
The focus for 2002 will be to increase
freighter reliability, which achieved all-time
highs in 2001. This focus will be maintained
even as we implement the latest security
procedures available.
PRESIDENT'S AWARD
JEFFREY JACOB ON Project Engineer - Interiors, Minneapolis/St. Paul
In his 17 years with Northwest, Jeff has impacted customers in two fundamental ways - their security
and comfort. After September 11, Jeff designed the reinforcements for cockpit doors on Boeing 7475 while
assisting with the same for DC-10 aircraft. He also was pivotal to the success and timely completion of
most interior enhancements, including the airline's World Business Class aircraft interiors.
PETE SHEAFFER Customer Service Agent, Minneapolis/St. Paul
Whether Pete is showing a passenger to the correct lobby check-in line, making announcements or
checking in a family at the ticket counter, it's done with a professional, pleasant demeanor. A 22-year
veteran, in 2001 Pete performed CPR and resuscitated a passenger who suffered a heart attack and
was not breathing. Paramedics credited Pete with saving the passenger's life.
F O C U S O N S E RV I C E Q U A L I TY
We understand that safe, on-time service
is a basic expectation of our customers.
Running a great airline for orthwest also
includes a focus on service that is convenient,
hassle-free and courteous.
Whether in our WorldPerks Service Center,
our reservations sales centers, at our airports
or on board our aircraft, our employee
have the authority and duty to re pond to
customer needs on the spot.
Our improved customer atisfaction ranl ing
in 2001 were al o the re ult of pr mpt,
appropriate service recovery when de pitc
our best efforts, we did not m t cu tomer
expectations. For e ample during the final
four months of 2001 our u to mer
relations raff maintained a remarkable
record of initiating a re pon e within the
ame bu ine s day for each reque t received
via the airline's Web it , ww.nwa. m
.
PRESIDENT ' S AWARD
SIDNEY OL O Customer Service Supervisor - NWA Cargo, Minneapolis/St. Paul
Sid has been the consummate teacher in his 35 years with Northwest - always sharing knowledge
and teaching others how to resolve issues for the benefit of customers. In 2001, he was handpicked to
lead the testing of Cardinal+, the updated Cargo booking system. Sid is a personal history aficionado
who has traced his Norwegian lineage to the late 1400s.
ANNETTE Ru CIMAN Reservations Sales Agent, Los Angeles
Annette, with Northwest for 33 years, has improved the company's competitive position through her knowledge
of complex sales programs. In a year when airline bookings were under great pressure, her efforts helped
Northwest exceed its revenue goals for airline ticket wholesalers. Annette and her husband spend most week-
ends riding motorcycles as part of a local club, which raises funds for area organizations.
10
SECURE OUR FUTURE
F I N A N C I A L ST A B I L I TY
A key to securing our future to retain
the industry unit revenue and unit cost
advantage that Northwest Airlines achieved
in 2001, and to continue to invest in our
long-term strategic assets. Our unit revenue
advantage was approximately 10 percent
above the industry average in the fourth
quarter of 2001.
Aggressive co t controls will lead to further
unit cost advantages. We established a $100
million cost savings initiative in September
that will be continued throughout 2002, sup-
porting savings chat are in addition to those
related to reduced flying. By early in 2002,
the initiative had already reached $58 million
in cost savings.
Northwe t ended 2001 with capacity that
was down about 16 percent from 2000
levels. In 2002, , e will add capacity con-
servatively when it i clear that it , ill
improve our financial po ition.
STRATEGIC INVESTMENTS
orthwesc is the only U.S. airline w ith new
construction of runway and terminal fa iii-
tie at all of it hub . The opening of the
o rthwe t WorldGateway in Detroit and
the completion of a fourth para II I runway
there, are ignifi ant mile tone in the
large t hub renewal effort in the airline'
hi tory. Thi commitment will c ntinue.
Our new 1.2 billion Detroit terminal facility
raises the tandard for terminal worldwide
and offer pa enger unprecedented conven-
ience . It i the larg t combined dome tic and
international hub facility in th Unit cl tate .
PRESIDENT'S AWARD
KEITH SuBSTAD Manager - Revenue Analysis and Development,
Mznneapo!ts!St. Paul
Keith, a 17-year employee, was a leader in developing the successful yield management
system that is a key element of Northwest's strong revenue performance versus the industry.
Keith designed several booking control and traffic selection computer models that earn
$900 million annually. Keith is also a leader in his church community, where he is a
Sunday school teacher.
V)
'1l
z
.J
0::
<
f--
V)
i-1-l
~
::c
f-
0::
0
z
11
E--
0::
0
0...
ll-1
0::
H
0
0
<'I
12
orthwest is now the only earner with
integrated international arrivals and
domestic departures in the same building,
at all three domestic hubs.
The new Detroit terminal facility provides
ample capacity for growth with 97 gates,
enhanced comfort with four WorldClubs,
and quick connections with the assistance
of the Express Tram and 1.5 miles of extra-
wide moving walkways. Because of the
terminal's state-of-the-art features, and
Detroit's geographic location, we are confi-
dent that the WorldGateway will be the
connecting hub of choice for both domestic
destinations and for trans-Pacific and trans-
Atlantic international flights.
Further expansions at our hub m
Minneapolis/St. Paul are almost complete.
Concourses A and B, serving Airlink carriers,
plus six more jet gates on the east end of
Concourse C, will open in June. An auto-
mated people mover will begin serving
this extended concourse this summer and
more improvements will be finished by the
end of 2002.
The Minneapolis/St. Paul improvements will
add nine additional orthwest gates and 30
new Northwest Airlink gates, which are
all equipped with jet bridges. A 2001
survey by the International Air Transport
Association rated Minneapolis/St. Paul
the top hub in the U.S. for international
connections. Construction of the airport's
fourth runway is projected to be complete
in 2004.
orthwest's hub in Memphis continues
to benefit from a new 13,000-foot runway
that opened in 2000, along with 15 new
Northwest gates and a new WorldClub.
The airline's international hubs in Tokyo
and Amsterdam are also undergoing signifi-
cant improvements. orthwest will utilize
a new second runway at Tokyo's arita
International Airport to strengthen its hub
services with intra-Asia flights using Airbus
A320 aircraft.
In Amsterdam, the anticipated opening of
a fifth runway in 2003 will further increase
the efficiency of Northwest's trans-Atlantic
service, in conjunction with alliance partner
KLM Royal Dutch Airlines.
PRESIDENT'S AWARD
HIROYUKI SONOBE Customer Service Supervisor, Tokyo's Narita International Airport
Since 1985, Hiroyuki has contributed to the operational success of Northwest's Japan and Asia service.
His efforts helped score 97.8 percent in a recent aircraft cleanliness audit. Hiroyuki has reduced the cost
of supplies by tens of thousands of dollars and has improved customer satisfaction through his careful
coordination and work with suppliers. Hiroyuki also manages the local customer service baseball team.
RALPH ED GAR Technician, Minneapolis/St. Paul
Ralph is a dedicated leader in the maintenance of Boeing 747 radios and other electrical systems.
In his 25 years at Northwest, his proficiency has been critical to the success of many projects. His fellow
employees often rely on his years of experience saying, "Let's RBR it," meaning "Let's run it by Ralph."
NEW GENERATION AIRCRAFT
orthwest received 43 new aircraft in 2001
and will take delivery of 61 aircraft in
2002. Our new deliveries are either replace-
ments for less efficient aircraft or growth
aircraft and will provide favorable economics
immediately upon their entry into service.
Two 2002 deliveries will be Boeing 747-
400s used in our trans-Pacific service.
'
The new Boeing 757-300 will begin
arriving in 2002 and will replace the less
efficient DC10-40s now used on domestic
routes. We will take delivery of seven of the
223-seat aircraft in 2002.
Thirteen Airbus A319s joined the fle t in
2001 and 24 more will be added in 2002.
The A319 has become the mo t reliable
aircraft in the Northwe t fleet.
Finally, the fleet plan include four n w
Airbus A320 in 2001 and two b ing
delivered in 2002. The A 20 and the
A319s are now being empl yed on many of
orthwe t' longer dome tic route .
PRESIDENT'S AWARD
GLEN FINK Captain and Instructor Pilot, Detroit
As an instructor pilot, Glen has helped certify more than 750 Northwest p_ilots. The su:cess of his.
students is a personal challenge and he often helps them in his personal time. He consistently receives
the highest marks on student critiques. Glen, a 16-year Northwest veteran, manages a ranch for 60
disadvantaged children between the ages of 5 and 12.
KAREN GROTH Flight Attendant, Minneapolis/St. Paul
Karen says she still loves her job after 36 years. She is a leader in many ways beyond her titles as inflight d
supervisor and purser. She knows how to make customers feel special. With her_ husband, she owns an
operates a turn-of-the-century, colonial Revival bed and breakfast in Winona, Minn., where she serves
the authentic English teas she purchases during trips to London.
13
14
PUT CUSTOMERS FIRST
NWA.COM CHECK-IN
Northwest is the first major network carrier
to offer Internet check-in. By the end of the
2001 holiday travel period, more than one
million Northwest customers had used the
airline's award-winning Web site, nwa.com,
to check in for their flights.
The service is available to all customers
flying on -TicketsTM within the U.S. and
allows travelers to print their own boarding
passes, change flights and select their seat
assignments. Elite members of Northwest's
WorldPerks frequent flyer program also can
obtain upgrades to First Class by clicking
the Flight Check-In link on the nwa.com
home page.
Northwest customers now also enjoy
the convenience of E-Tickets even when
their itineraries include travel on multiple
carriers. We are leading the development of
e-ticketing capabilities with other carrier
~
NOK'l ll\\l-_
'ril AUU 11\:l S
~
..
~
l~tlllMf \'01IOJt1h t-..,h4r,~,.,,. ~ .. -u1$t1,t,t) ~'.ol~rt"I
Save time wt.th nWl.com Oteck .. [nl
~ It's thlseasy ...
~ Stirp l :th.p1i1-----..-c1wan.-0ttdo.lliM..,k1Mwt
..,,o .......... ,_,..,. .. __
and, with alliance partner ontinental
Airline , operate the industry's lar e t int r-
line e-ticket network.
WORLDPERKS PROGRAM
ENHANCED
orthwe t' indu try-leading WorldPerk
free travel program i con tantly being
improved to better reflect cu comer trav I
patterns. In 2001, we eliminated blackout
dates for WorldPerks award travel, added
new program option and provided great r
recognition for customer loyalty.
One new program include the option to
purchase up to 7,500 WorldPerk mile p r
year on nwa.com. Purcha ed mile may
be u ed to top off individual account or
may be transferred to other WorldPerk
member as gift .
PRESIDENT'S AWARD
JOSEPH KELLY Consultant - Information Services, Minneapolisl t. Paul
With Northwest for 13 years, Joe is known for keeping nwa.com open 24 hours a day. After
September 11, Web traffic increased almost three-fold. While other major carriers' Web sites
were unavailable for a time, Joe immediately led efforts to bolster nwa.com's capacity to
ensure continuous status updates for Northwest customers. A committed recreational
runner, Joe completed his first triathlon last year.
V)
J
z
15
16
BUILD OUR NETWORK
HUBS AND ALLIANCES
Northwest Airlines built on the strength of its
domestic hubs in 2001 with 14 new routes
including three new domestic destination .
We also provided new service through our 28
alliance partners. We now connect almost 6
million passengers annually through seven of
our partners, including KLM Royal Durch
Airlines, Continental Airlines, Alaska
Airlines, Hawaiian Airline , America Wet
Airlines, Air China and Japan Air System.
With KLM, we launched service between
our hub in Amsterdam and Miami - our
23rd route operated as a joint venture. The
KLM trans-Atlantic alliance is a $2 billion
joint venture. The network ha more than
doubled since 1989, and it ha benefited
from anti-trust immunity ince 1993.
The orthwest alliance with Continental
Airlines significantly increa es our dome tic
presence and our ability to compete.
The combination of orth
Continental 1s the market hare
t and
ad r in
three of the air travel r gion in th
and rank in the top three in the remaining
region .
In addition to the alliance with Japan 1r
Sy tern and Air hina, the link with
Malaysia Airway provid orthwest with
even broader coverage of th Pa ifi r gi n.
orthwe t Airlines argo added a new
alliance partn r in 2001. DHL Worldwid
Expres , the world larg t pre m-
pany, u es orthwe t freighter capacity to
connect it U.S. hub in Cin innati with
10 citie in A ia. Meanwhile, the i ting
cargo alliance with Japan irline continue
to grow.
PRESIDENT'S AWARD
YVONNE ANG WorldPerks Marketing Specialist, Hong Kong
Yvonne, who marks her 10th year of service in 2002, oversaw the Asian introduction of a new
World Perks Program database, training the staff and making sure the system worked to benefit
Northwest's 3 million World Perks members in Asia. She has also displayed remarkable caring
and sensitivity in handling other critical issues with employees and the community.
V,
Ul
z
~
l:
E--<
p::
0
z
17
18
FOCUS ON PEOPLE
THE BEST PEOPLE
Northwest's 2001 sy tern load factor of
74.3 percent was the best among the nine
largest U.S. major airlines. That achieve-
ment is a demonstration of the collective
effort of 45,000 people, working together
to provide safe, secure, courteou and effi-
cient service during challenging and uncer-
tain times.
The completed agreement with mechanics,
cleaners and custodians in May began a
new era of labor accord at orthwest. It
meant that our employees could focus all of
their efforts on providing even better service
to our customers. We increa ed communi-
cation with labor leader hip in 2001 a we
encountered the indu try's cha llenges.
Beyond the trauma of September 11 for
the families directly involved, Northwest's
difficulty was felt mo t by our employee ,
with more than 10,000 men and women no
longer employed at orthwest. We are
worl ing to re tore tho e job a the on m
and indu try continue to re o er.
AIRCARES FOCUS
orthwe t employee de
extraordinary ommunity volunt r ffort 111
2001, including Habitat for Humanit ,
Special Olympic [nternational and Ti y f r
Tot , to nam a few. orthwe t' I id are \~1
medical trav l program pr vided tra v I f r
many everely ill chi ldren t obtain th urg nt
medical attention they needed. During 200 l
Northwe t and it g n rou WorldP rk
customer upported the f llowing organiza-
tions a quart rly Air are
partner : p ial
Olympic International, hildren'
Re earch Fund Am rican anc r ociety and
The American Red ro .
To learn m re about orrhwe t' Air ar
charitable a i ranee program, ee the b ut
Northwe t ection at nwa. om.
PRESIDEN T 'S AWARD
ANDREA FLYN Manager - Cruise, Ski and Leisure Programs, Miami
Andrea is considered by many to be the best sales rep in the business. In 10 years, she has
worked to advance the value of Northwest's brand by building strong relationships with the
leaders of cruise lines. Andrea consistently exceeds her annual revenue objectives, growing
reven ue by more than 250 percent since 1992. As president of a local sales and marketing
group, she leads fundraising efforts for local charities.
<.ll
.J
z
...J
~
<
f-,
<.ll
~
::r:
f-,
~
0
z
H
0
0
N
20
Board
OF DIRECTORS
GARY L. WILSON
Chairman
Northwest Airlines Corporation
ALFRED A. CHECCHI
Member, Board of Directors
Northwest Airlines Corporation
WALTER F. MONDALE
Partner
Dorsey & Whitney LLP
RICHARD H. ANDERSON
Chief Executive Officer
DORIS KEARNS GOODWIN
Historian & Author
V.A. RAVINDRAN
Chairman & President
Paracor Company, Inc.
DOUGLAS M. STEENLAND
President
DENNIS F. HIGHTOWER
Retired Business Executive
MICHAEL G. R ISTOW
Captain
Northwest Airlines, Inc.
RAY W. BENNING, JR.
Director, Airline Division
International Brotherhood
of Teamsters
GEORGE
J. KOURPIAS
Retired International President
International Association of
Mechanics & Aerospace Workers
LEO M. VAN WIJK
President & Chief Executive
Officer
KLM Royal Dutch Airlines
RICHARD C. BLUM
Chairman
Richard C. Blum & Associates, Inc.
FREDERIC V. MALEK
Chairman
Thayer Capital Partners
DIRECTORS EMERITUS
THOMA L. KEMPNER
Chairman & Chief Executive Officer
Loeb Partners Corporation
MELVIN R. LAIRD
Consultant
The Readers Digest Association, Inc.
SENIOR OFFICERS
RICHARD H. ANDERSON
Chief Executive Officer
DOUGLAS M. STEENLAND
President
MICKEY P. FORET
Executive Vice President and Chief Financial Officer
Chairman and Chief Executive Officer,
Northwest Airlines Cargo Inc.
J. TIMOTHY GRIFFIN
Executive Vice President - Marketing and Distribution
PHILIP C. HAAN
Executive Vice President - International, Sales
and Information Services
MICHAEL
J. BECKER
Senior Vice President - Human Resources
DOUGLAS C. BIRDSALL
Senior Vice President - Alliances
ROBERT A. BRODIN
Senior Vice President - Labor Relations
MARY CARROLL LINDER
Senior Vice President - Corporate and Brand
Communications
DANIEL B. MATTHEWS
Senior Vice President and Treasurer
DIRK C . McMAHON
Senior Vice President - Customer Service
ANDREA FISCHER NEWMAN
Senior Vice President - Government Affairs
TIMOTHY
J. RAINEY
Senior Vice President - Flight Operations and System
Operations Control
ANDREW C. ROBERTS
Senior Vice President - Technical Operations
21
V)
~
z
I-<
~
0
0..
~
~ OUR VISION
H
0
0
N
22
To build together the first choice airline and
global alliance network with the best people;
each committed toe ceeding our customer '
e pectation every day.
OUR MISSION
The people of orthwest Airlines will provide
reliable, convenient and consistent air trans-
portation that meet or exceeds customer
expectations and earn a sustainable profit.
FINANCIAL REPORT
TABLE OF CONTENTS
Financial Review ................ ...... .................. . ...... pages 23-26
Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. . ..... pages 27-37
Quantitative and Qualitative Disclosures about Market Risk ........ pages 38-39
Consolidated Balance Sheets . .. .. . ....... . ....................... pages 40-41
Consolidated Statements of Operations ........................... page 42
Consolidated Statements of Cash Flows ........... . .. . ............ page 43
Consolidated Statements of Common Stockholders'
Equity (Deficit) ....... . ........................ . . . ............. page 44
Notes to Consolidated Financial Statements .... . ....... .... . . ..... pages 45-67
Report of Ernst & Young LLP, Independent Auditors ..... .. .. ... . . . page 68
Five-Year Summary .................. .. . . ....................... page 69
Stockholders' Information ...... .. . . .................. .. ..... . ... page 70
FINANCIAL REVIEW
As a result of the economic recession that began last February
and the terrorist attacks on September 11, 2001, Northwest
Airlines and the U.S. airline industry experienced the most
challenging year in U.S. aviation history. The industry
reported its largest annual loss with Northwest reporting a
net loss of $423 million. However, Northwest's preparation
for, and its quick and decisive reaction to, the events
experienced in 2001 will enable Northwest to endure
these challenges and emerge from them in a significantly
improved competitive position.
Northwest was relatively well prepared for the recession and
economic impact of the terrorist attacks, primarily due to:
- the Company's conservative philosophy of maintaining
access to high levels of liquidity,
- its philosophy of utilizing an economic, flexible and low
capital cost fleet, and
- Northwest's practice of obtaining precommitted financing
for every aircraft on order.
As a result of this preparation, Northwest will be able
to continue to focus on its strategy even during these
difficult times.
Northwest will continue to:
- develop its unconstrained, under-served domestic hubs
at Detroit, Minneapolis/St. Paul and Memphis,
- upgrade its fleet by replacing those aircraft that have
reached the end of their useful economic life,
- rapidly expand its regional jet feeder network,
- pursue development of alliances with current and new
alliance partners,
- increase its U.S. to Asia dominance through further
development of its Tokyo hub, and
- invest in cost-effective technology that lowers distribution
costs, and improves operational reliability and customer
convenience.
The Company's ability to continue to focus on its strategy
will position it to benefit significantly from the inevitable
economic recovery.
FINANCIAL RESULTS
Northwest's 2001 financial performance was severely
impacted by the downturn in the economy and the events of
September 11, 2001. The Company reported a net loss of
$423 million, including $461 million in pretax grants received
from the government under the Stabilization Act to
compensate for losses related to the terrorist attacks.
Excluding the federal grants and non-recurring items,
Northwest reported a net loss of $536 million.
The challenges of 2001 echoed throughout the industry as
airlines experienced a decline in traffic resulting from the
economic slowdown that began in February, followed by
the unprecedented events of September 11, 2001, which
further exacerbated the decline in air travel demand.
Northwest adapted to this changing environment by
aggressively reducing costs and by reducing its flight
schedule by 20%, furloughing over 10,000 employees. These
actions resulted in $1. 7 billion in annualized cost savings.
While these 2001 financial results were disappointing,
Northwest's full year net margin was better than all but
one of its major network competitors and its second-half
net margin was the best within that group.
2001 INDUSTRY NET MARGINS
co NW D L AA UA us
Reported results excluding non-recurring items and federal grants
CosT AND REVENUE PERFORMANCE
Northwest continues to be an industry leader in providing
low cost network air transportation. As a result of
Northwest's strong operational integrity and the aggressive
cost-cutting initiatives it took at the onset of the economic
downturn and post-September 11, 2001, the Company
tr)
w
z
,..;i
1Z
<:
r-<
tr)
w
~
::r:
r-<
1Z
0
z
23
H
0
0
('I
24
continues to maintain one of the lowest cost structures
in the industry.
2001 INDUSTRY COST PER SEAT MILE
EXCLUDING NON-RECURRING ITEMS
CO NW D L AA UA
Source: Press releases
us
2001 operating cost per ASM of 9.69 cents per seat mile was
up year-over-year 3.9% on a 4.8 % reduction in capacity.
A major contributing factor to Northwest's industry cost
advantage is the consistent reliability of its operation.
Northwest has a history of being a punctual operator and
ranks number one in on-time arrival performance among
the network carriers for the period that the Department of
Transportation has been measuring on-time performance
(1987-2001).
Northwest's 2001 operating track record continued as it
ranked near the top of the industry in all four customer-
satisfaction measures of the Department of Transportation:
on-time arrival performance, luggage handling, fewest
denied boardings and customer complaints.
us
2001 AVERAGE OPERATIONAL RANK
AMONG NETWORK CARRIERS
NW co D L AA UA TW
On-time arrivals (Domestic, Pacific, Atlantic), mishandled luggage, denied boardings and customer complaints
Source: DOT Air Trove/ Consumer reports, carrier exchange
Unit cost performance also continues to benefit from the
reduction in distribution expenses. Northwest remains the
innovator in reducing distribution costs through the develop-
ment and application of technology to maximize distribution
through the most economical cost channels. In addition to
continuing to grow its award-winning Web site, nwa.com,
Northwest is a co-founder of the comprehensive online
travel site Orbitz, the opaque online site Hotwire and the
newly created online joint venture Tabini for international
travel distribution in Japan. Northwest also continues to
lead the industry in offering the most convenient check-in
options through its network of -ticket check-in kiosks
as well as Internet check-in from any home or business
computer at nwa.com.
Complementing 2001 's cost control performance, Northwest
continues to outpace the industry in unit revenue performance.
Northwest achieved a 5% advantage to the industry in
domestic unit revenue in 2001, which widened to 10%
above the industry in the fourth quarter 2001.
NORTHWEST'S DOMESTIC RASM AS A
PERCENT OF INDUSTRY RASM 1994-2001
110% 109% 108%
1050/0 106% 106% 105%
102% 102%
100%
98%
95%
1994 1995 1996 1997 1998 1999 2000 2001
This unit revenue premium to the industry is in part due to
Northwest's historic load factor advantage compared to its
major network competitors. That advantage continued in
2001 as Northwest properly sized its capacity to system
demand and led the industry with a load factor of 74.3%.
NW
co
UA
AA
us
D L
2001 INDUSTRY SYSTEM
LOAD FACTO RS
70.8%
68.8%
Source: Press releases
74.3%
FLEET DELIVERIES AND INITIATIVES
Northwest's fleet strategy is to select aircraft with the range
capability and size best suited for its markets that also
deliver the lowest total operating and ownership cost.
Northwest replaces aircraft in its fleet when new aircraft
operating and owner.ship cost advantages provide improved
profits and cash flow and acceptable returns on additional
invested capital. Northwest's fleet strategy has resulted in
a lower fleet capital cost than that of most of its competitors.
In addition, after September 11, 2001, Northwest's fleet
strategy also provided greater flexibility to adjust its system
capacity economically.
In addition, since Northwest replaces aircraft in its fleet only
when the economics of new aircraft provide attractive returns
on their capital investment and pre-finances all aircraft
orders, Northwest will be able to continue to execute its
fleet strategy even in this economic environment.
The Company expects pretax profits to improve by over $250
million per year by 2005 due to current fleet replacement
plans, which will result in over 69% of Northwest's fleet
mix consisting of new technology aircraft.
Major fleet transactions completed in the year:
NORTHWEST FLEET MIX
2001 2005
- Northwest placed an order for 24 Airbus A330s to replace
its trans-Atlantic DC10-30s. The more economical Airbus
A330 will reduce operating costs while improving
passenger and cargo capabilities. Aircraft deliveries
will start in 2003 and run through 200f
- Northwest ordered 20 Boeing B757-300/200 aircraft to
replace its domestic DC10-40 fleet. The B757-300 has the
lowest seat-mile cost of any single-aisle jetliner and, due in
part to improved fleet commonality, will significantly
reduce training, maintenance and other operating
expenses. Deliveries start in 2002 and will continue
through 2004.
- Northwest placed an order to acquire 75 Bombardier
Canadair Regional Jets (CRJ). Aircraft deliveries began
in early 2002 and run through 2005, with options and
purchase rights for an additional 17 5 CRJ aircraft.
- Two Boeing B747-200 freighters were placed into scheduled
service in mid-2001 in conjunction with Northwest's
new cargo alliance with DHL Worldwide Express.
- Northwest took delivery of 13 124-seat Airbus A319
and four 148-seat A320 aircraft to replace retiring
Boeing B727s and DC9s.
- The Company took delivery of five Boeing B757-200
aircraft.
- Northwest Airlink affiliate Pinnacle Airlines, formerly
Express Airlines I, took delivery of 21 50-seat CRJ-200
regional_ jets.
CAPITAL STRUCTURE MANAGEMENT
A key element of Northwest's financial strategy has been to
maintain adequate levels of liquidity in order to maximize
strategic and operating flexibility. This financially prudent
strategy proved invaluable as the airline industry faced its
worst liquidity crisis ever in the aftermath of the September
11, 2001, events. Northwest ended the year with the high-
est cash balance of all U.S. carriers relative to its size, as a
percentage of revenue.
YEAR-END CASH AS A PERCENT OF 2001 REVENUE
NW UA DL AA us co
Source: Company reports
The Company's $2.6 billion year-end cash position provides
an adequate cushion in uncertain economic times and
will allow the Company to continue to pursue its core
business strategies.
In 2001, Northwest successfully accessed the capital markets
by arranging approximately $2 billion in low-cost financing.
Additionally, over $6 billion in future financing commitments
for new aircraft orders were arranged on favorable terms
to Northwest.
25
V')
~
z
,-l
<:
0
z
z
<:
H
0
0
N
26
The Company completed several major financial transactions
during the year, including:
- The sale of its holdings in Continental Airlines common
stock for $582 million.
- A public offering of $581 million of pass-through
certificates (EETCs) to pre-fund the financing of nine
new Airbus A319s, three Boeing B757-300s and two
Boeing B747-400s. The blended average fixed rate
coupon is 7.18% and the term is up to 21 years.
- The issuance of a 12-year $396 million European floating
rate EETC at 60 basis points over LIBOR, to pre-fund
the financing of 14 Airbus aircraft. This transaction won
the award for "Aircraft Debt Deal of the Year - U.S.,"
by Jane's Transport Finance and was placed entirely in
the European capital markets.
- A $300 million public issuance of five-year 8.875%
fixed rate unsecured notes.
- $538 million in privately placed European bank financings,
for six Boeing B757-200s, two B747-200 freighters, six
Airbus A319s and one A320 aircraft. Terms of the
financing were up to 18 years, with average floating
rates of LIBOR plus 1 %.
- The completion of two long-term airport special facility
revenue bond financings of $136 million and $64 million
related to airport improvements in Minneapolis/St. Paul
and Seattle at average fixed rates of 6.9% and 7.2 %,
respectively.
All future Northwest aircraft firm delivery commitments
have been pre-financed or have financing commitments.
OTHER DEVELOPMENTS
In 2001, despite the difficult environment, Northwest made
significant advancements to improve its competitive position
and enhance its long-term financial stability.
- Northwest and Continental extended their alliance
agreement through 2025. Northwest received preferred
stock from Continental that protects its alliance
relationship with Continental.
- The Company is completing new runways and major
airport facility improvements at all of its hubs, the
most dramatic being the new Northwest WorldGateway
in Detroit. The new Detroit terminal will be the premier
U.S. airport facility, greatly enhancing customer
convenience, while providing significantly improved
operating and financial benefits.
- Northwest's hubs remain the most reliable, yet fastest
growing in the United States. Relative to its competitors,
Northwest's hubs have nearly unconstrained runway
and gate capacity, and are well-positioned to capitalize
on future growth opportunities as the economy and
passenger demand continues to rebound.
- Northwest entered into a multi-year cargo alliance
with DHL Worldwide Express in July 2001. Two
newly-acquired Boeing B74 7 aircraft, the 11th and
12th in Northwest's dedicated all-cargo fleet, provide
service between Asia through a cargo hub in Tokyo
and DHL's Cincinnati hub. This new alliance will
enable Northwest to participate in the fastest-growing
segment of the international air freight business.
- Northwest plans to sell its wholly owned regional
affiliate Pinnacle Airlines, formerly Express Airlines I,
in early 2002 through an initial public offering.
OUTLOOK
Northwest Airlines remains confident in its long-term outlook
and is committed to its business strategies, which capitalize
on its strong core assets. The airline is strategically well
positioned with strong hub franchises, sustainable competitive
advantages and a powerful global alliance network.
Northwest continues to benefit from the industry's most
integrated and advanced alliance with joint venture
partner KLM and has a strong domestic partner in
Continental Airlines. Although the Asian economies,
particularly in Japan, have been weak, Northwest's stands to
benefit from its strong Pacific franchise with its strategic
hub in Tokyo when the Asian markets recover.
Northwest's experienced management team is committed
to returning the business to profitability and enhancing
shareholder value, and has positioned Northwest to endure
and prosper well into the 21st century.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Northwest Airlines Corporation ("NWA Corp.") is a
holding company whose principal indirect operating
subsidiary is Northwest Airlines, Inc. ("Northwest"). The
Consolidated Financial Statements include the accounts of
NWA Corp. and all consolidated subsidiaries (collectively,
the "Company"). The Company reported a net loss of
$423 million for the year ended December 31, 2001,
compared with net income of $256 million in 2000._Loss
per common share was $5 .03 in 2001 compared with
diluted earnings per share of $2.77 in 2000. Operating
loss was $868 million in 2001 compared with operating
income of $569 million in 2000. Operating revenues for
the year ended December 31, 2001, decreased by $1.34
billion compared to 2000 primarily due to a decline in
business travel caused by an economic slowdown in the
United States, weakness in the Asian economies and
reduced demand for travel resulting from the September 11,
2001, terrorist attacks. In 2001, the Company recognized
$461 million of grant income from the U.S. government
under the Air Transportation Safety and System Stabilization
Act ("Airline Stabilization Act"), which was recorded as
non-operating income.
On September 11, 2001, terrorists hijacked and intentionally
crashed four commercial aircraft operated by two U.S.
air carriers, causing substantial loss of life and property.
While the aircraft were neither owned nor operated by
the Company, these events had an immediate and_ severe
impact on the U.S. airline industry's passenger traffic and
yields. Immediately following these events, the Federal
Aviation Administration ("FAA") ordered all aircraft
operating in the U.S. to be grounded, an order that
remained in place for over 48 hours. In addition, the
Company was only able to operate a limited portion of
its scheduled flights for several days after the grounding
order was lifted as it repositioned displaced aircraft and
crews. Passenger traffic and yields on both domestic and
international flights declined significantly when flights
were permitted to resume, and the number of tickets
refunded was substantially above normal. The Company
has continued to experience significantly lower revenue
and has incurred additional costs ( e.g., higher security
costs and insurance premiums) as compared to periods
prior to September 11, 2001. In addition to increased
rates, aviation insurers have also significantly reduced
the maximum amount of insurance coverage available
to commercial air carriers for liability to persons other
than employees or passengers for claims resulting from
acts of terrorism, war or similar events.
On September 21, 2001, Congress passed, and the
President subsequently signed into law, the Airline
Stabilization Act which provides, in part, (i) $5 billion
in payments to compensate U.S. air carriers for losses
incurred by the airline industry as a result of the terrorist
attacks on the U.S. that occurred on September 11, 2001;
(ii) $10 billion of federal credit instruments (loan guarantees)
to be made available to U.S. air carriers to guarantee loans
from lenders, subject to certain conditions and fees, including
the potential requirement that the Government be issued
warrants or other equity instruments in connection with
such loan guarantees; (iii) limitations on air carrier officer
and employee compensation if the air carrier receives
federal loan guarantees; (iv) provisions designed to ensure
the continuity of air service to communities, including
Government subsidized essential air service to small
communities; (v) reimbursement to U.S. air carriers by the
Government of certain increased insurance costs incurred
for the operation of aircraft; (vi) deferral of the deposits
by U.S. air carriers for payments on certain taxes; (vii)
limitations of liability for U.S. air carriers and, at the
discretion of the Secretary of Transportation, limitations
of liability for U.S. air carriers for acts of terrorism
committed during a 180-day period following enactment
of the Airline Stabilization Act; (viii) the FAA was
authorized to provide third party war risk liability coverage
to each carrier, their vendors, agents, and aircraft lessors
and lenders; and (ix) establishment of a federal victims
compensation fund and claims procedure, relating to the
terrorist attacks of September 11, 2001.
Under the Airline Stabilization Act, each air carrier is entitled
to receive compensation payments equal to the lesser of (i)
its direct and incremental pretax losses attributed to the
terrorist attacks for the period of September 11, 2001, to
December 31, 2001, or (ii) its available seat mile and/or
revenue ton mile allocation of the $5 billion compensation
available under the Airline Stabilization Act. The Company
had received a total of $410 million as of December 31,
2001, and expects to receive $51 million of additional
funds under the Airline Stabilization Act in early 2002.
The Company expects decreased passenger traffic and yields
to continue for the foreseeable future. In response, the
Vl
~
z
27
H
0
0
N
28
Company has taken several steps to mitigate the impact
on its results of operations and financial condition.
These steps included a significant reduction in scheduled
capacity on an available seat mile ("ASM") basis, a reduction
in its work force related to the decrease in capacity, and
deferrals and cancellations of discretionary and other non-
operationally critical spending. The reduction in capacity
resulted in 24 aircraft being temporarily removed from
scheduled service, of which 12 remained out of service at
December 31, 2001. For the quarter ended December 31,
2001, capacity was 15.9% below 2000 levels.
While the Company expects that these steps will help to
offset the financial impact of the events of September 11,
2001, certain of these actions do not necessarily result in
the immediate reduction of costs. For example, the lower
capacity may not result in lower airport facility charges
due to the fixed nature of these costs. The Company will
continue to evaluate its operations and financial position
in light of the future operating environment and will take
additional steps it deems necessary, including adding back
capacity as warranted.
The Company's aviation insurance for war and terrorism
liability coverage was cancelled effective September 26,
2001, .and then reinstated that same day at substantially
higher rates. The aviation insurers also significantly reduced
the maximum amount of insurance coverage available to
airlines for liability to persons other than passengers and
liability for property damage arising from claims resulting
from acts of terrorism, war or similar events to $50 million.
The Company previously carried a significantly higher
amount of coverage per event in war risk coverage. In light
of this development, under the Airline Stabilization Act, the
FAA has provided the Company and other U.S. airlines with
excess war risk coverage. This coverage is in force until
March 20, 2002. The Airline Stabilization Act also provided
for reimbursement of certain premium increases, at the
option of the Secretary of Transportation. Thus far, the FAA
has reimbursed airlines for increased costs of war risk
insurance for a period of 30 days. War risk, hull and liability
insurance expenses are expected to be significantly higher
than the 2001 amounts.
On November 19, 2001, Congress passed, and the
President signed into law, the Aviation and Transportation
Security Act ("Aviation Security Act"). This law federalizes
substantially all aspects of civil aviation security and
requires, among other things, the implementation of certain
security measures by airlines and airports, such as the
requirement that all passenger bags be screened for
explosives. Funding for airline and airport security
under the law is primarily provided by a new $2.50 per
enplanement ticket tax; however, the Company is responsible
for costs in excess of this fee which may not exceed 2000
security expense levels. Implementation of the requirements
of the Aviation Security Act will result in increased costs for
the Company and its passengers.
Substantially all of the Company's results of operations are
attributable to its principal indirect operating subsidiary,
Northwest, which accounted for approximately 95%
and 96% of the Company's 2001 consolidated operating
revenues and expenses, respectively, and the following
discussion pertains primarily to Northwest.
RESULTS OF OPERATIONS-
2001 COMPARED TO 2000
Operating Revenues - Operating revenues decreased
11.9% ($1.34 billion). System passenger revenue
decreased 13.7% ($1.30 billion), excluding Pinnacle
Airlines, Inc. ("Pinnacle Airlines"), formerly Express
Airlines I, Inc. The decrease in system passenger revenues
was primarily attributable to a 4.8% decrease in scheduled
service ASMs and a 9.2% decrease in passenger revenue
per ASM ("RASM"). System passenger load factor
decreased 2.3 points to 74.3% for the year ended
December 31, 2001. Pinnacle Airlines passenger revenues
increased 52.3% ($68 million) to $198 million due to
increased capacity from 21 additional Bombardier
Canadian Regional Jet ("CRJ") 200 series aircraft.
Domestic passenger revenues decreased due to lower
yields, passenger load factor and capacity. Northwest
experienced a decline in business and leisure travel due
to the impact of the slowing U.S. economy and the
events of September 11, 2001. Approximately 78%
of the decrease in domestic passenger revenues occurred
between September 1 and December 31, 2001. In response
to the resulting decline in demand for air travel after the
terrorist attacks, domestic fourth quarter capacity was
reduced 14.7%, as compared to 2000, on an ASM basis.
The following analysis by market is based on information reported to the U.S. Department of Transportation ("DOT") and
excludes Pinnacle Airlines:
2001
Passenger revenues (in millions)
Increase (Decrease) from 2000:
Passenger revenues (in millions)
Percent
Scheduled service ASMs (capacity)
Passenger load factor
Yield
Passenger RASM
Pacific passenger revenues decreased due to lower yields,
passenger load factor and capacity. Approximately 64%
of the decrease in Pacific passenger revenues occurred
between September 1 and December 31, 2001. In response
to the reduced demand for air travel, Pacific fourth quarter
capacity was reduced 19.5%, as compared to 2000, on an
ASM basis. The introduction of a reconfigured World
Business Class product, which improved seat pitch from
48 inches to 60 inches and replaced international first
class, also reduced capacity. Passenger load factor and
yields declined primarily due to slowing Asian economies
and the events of September 11, 2001. The average yen per
U.S. dollar exchange rates for the years ended December
31, 2001 and 2000 were 122 and 108, respectively, an
11.5 % weakening in the buying power of the yen. The yen
per U.S. dollar exchange rate was 134 at February 28,
2002. Additional information regarding the Company's yen
exposure and currency hedging activities is provided in
Quantitative and Qualitative Disclosures about Market Risk.
Atlantic passenger revenues decreased due to a decline
in yields and passenger load factor resulting from the
terrorist attacks on September 11, 2001. In response to
the reduced demand for air travel, Atlantic fourth quarter
capacity was reduced 14.3%, as compared to 2000, on
an ASM basis.
Cargo revenues decreased 16.0% ($137 million) to $720
million due to a 2.8 % decline in revenue per ton mile and
13.6% fewer cargo ton miles. These decreases resulted
primarily from reduced U.S. demand for Asian goods
caused by the slowing U.S. economy, the weakened yen
per U.S. dollar exchange rate, and a decline in total cargo
$
System Domestic Pacific Atlantic
8,219 $ 5,635 $ 1,677 $ 907
(1,304) (820) (413) (71)
(13.7)% (12.7) % (19.7)% (7.3)%
(4.8) % (4.8) % (9.2)% 3.8%
(2.3) pts. (1.5) pts. (3.1) pts. (3.3) pts.
(6.6) % (6.3) % (8.1) % (7.0)%
(9.2) % (8.3) % (11.6) % (10.7)%
space on passenger aircraft as a result of the reduction in
system passenger capacity. Service began in July 2001
under a new five-year agreement with DHL Worldwide
Express to provide daily freighter service from its U.S.
hub operations in Cincinnati to various points in Asia.
The Company's eleventh and twelfth freighters have been
placed in revenue service to support this agreement.
Other revenues (the principal components of which are
MLT, Inc. [a wholly-owned subsidiary], other transportation
fees and charter revenues) increased 5.2% ($38 million)
primarily due to higher charter revenues and other
transportation fees.
Operating Expenses - Operating expenses increased 1.0%
($102 million). Operating capacity decreased 4.8 % to
98.54 billion total service ASMs due to capacity reductions
primarily related to the events of September 11, 2001.
Operating expense per total ASM increased 4.8 %,
excluding fleet impairment charges.
Salaries~ wages and benefits increased 9.8 % ($353 million)
primarily due to wage and benefit increases from settled
contracts with collective bargaining units, retroactive
wages and benefits of $89 million related to the new
Aircraft Mechanics Fraternal Association ("AMFA")
collective bargaining agreement, and higher pension
and group insurance expenses. Aircraft fuel and taxes
declined 7.7% ($145 million) due to a decrease of 4.5% in
average fuel cost per gallon to 79 .26 cents, net of hedging
transactions, and 4.0 % fewer fuel gallons consumed
as a result of the reduced capacity. Depreciation and
amortization increased 11.8% ($73 million), primarily
U)
IJ.-l
z
'"""'
,(
f-<
U)
IJ.-l
~
::i::
f-<
~
0
z
29
1-1
0
0
N
30
due to fleet disposition charges of $161 million related
to the reductions in the estimated market values of aircraft
recorded in the third and fourth quarters of 2001, partially
offset by $ 125 million of DClO impairments recorded in
2000. See Note 1 to the Consolidated Financial Statements
for additional discussion of the fleet disposition charges.
Aircraft maintenance materials and repairs increased
4.5 % ($29 million) due to a higher level of scheduled
work within the routine engine and airframe maintenance
cycle. Commissions decreased 24.6 % ($163 million)
primarily due to lower passenger revenues, increased use
of lower cost distribution channels and a decline in the
percentage of commissionable transactions. Internet
sales, which typically have lower commission rates than
other distribution channels, represented approximately
13 % of passenger revenues in 2001 compared with
approximately 8.0% in 2000. Aircraft rentals increased
5. 7% ( $24 million) due to additional leased aircraft.
Other expenses (the principal components of which
include outside services, insurance, selling and marketing
expenses, passenger food, personnel expenses, advertising
and promotional expenses, communication expenses and
supplies) decreased 3.8 % ($89 million) principally due
to lower variable costs associated with reduced capacity
and a favorable foreign currency impact on expenses,
partially offset by higher insurance costs incurred following
the September 11, 2001 terrorist attacks. Insurance costs
are expected to increase dramatically in 2002 as a result
of those events.
Other Income and Expense - Interest expense increased
5.4% ($19 million) primarily due to the borrowings under
the Company's revolving credit facilities. Earnings of affiliated
companies decreased $97 million, due principally to the
Company no longer recognizing its share of Continental
Airlines, Inc.'s ("Continental") earnings in 2001 as a result
of the sale of its investment in Continental, WORLDSPAN's
lower earnings in 2001 and Orbitz, LLC's loss in 2001. Other
income decreased $25 million 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 $2 7 million gain
recorded in 2001 on the sale of the Company's remaining
investment in Continental.
RESULTS OF OPERATIONS-2000
COMPARED TO 1999
Operating Revenues - Operating revenues increased
10.9% ($1.11 billion). System passenger revenues increased
10.9% ($935 million), excluding Pinnacle Airlines,
primarily attributable to a 3.9% increase in scheduled
service ASMs and a 6.6% increase in RASM. ASMs
increased primarily due to the net addition of 14 aircraft
in 2000. System passenger load factor increased to a
record 76.6% for the year ended December 31, 2000.
Pinnacle Airlines passenger revenues were $130 million
and $104 million for the years ended December 31,
2000, and 1999, respectively.
Domestic passenger revenues increa~ed 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 industry
market conditions. Capacity increased as a result of
additional aircraft.
Pacific passenger revenues were 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
The following analysis by market is based on information reported to the DOT and excludes Pinnacle Airlines:
System Domestic Pacific Atlantic
2000
Passenger revenues (in millions) $ 9,523 $ 6,455 $ 2,090 $ 978
Increase (Decrease) from 1999:
Passenger revenues (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 2.0pts. 2.lpts. l.5pts. l.5pts.
Yield 4.0% 3.3% 10.2% (0.6)%
Passenger RASM 6.6% 6.4% 12.1 % 1.3%
1999 was 108 and 115, respectively, a 6.5% strengthening
of the yen. Pacific passenger load factor increased 1.5 points
to a record 81.7% as the Company continued to experience
increased demand.
Atlantic passenger revenues increased as a result of more
I
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 revenues increased 17.1 % ($125 million) due to a
7 .1 % increase in cargo ton miles and a 9 .4 % increase in
cargo revenue per ton mile. The Company's tenth Boeing
747 freighter entered service in August 2000. Also in 2000,
the Company acquired two additional Boeing 747 aircraft,
which were converted into freighters and began revenue
service in the summer of 2001. Other revenue increased
3.0% ($21 million) due to a higher volume of business for
MLT Inc., which was partially offset by lower KLM joint
venture alliance settlements.
Operating Expenses - Operating expenses increased
13.3% ($1.25 billion). Operating capacity increased 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
0.7% when the impact of higher fuel prices is also excluded.
Salaries, wages and benefits increased 6.4% ($217 million)
primarily due to wage and benefit increases from settled
contracts with collective bargaining units and an increase
in average full-time equivalent employees of 2.6%. Aircraft
fuel and taxes rose 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 consumed 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 rates resulting from changes to the Company's
commission structure, which were effective in October 1999,
and a lower percentage of commissionable transactions
partially offset by commissions 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
0.8% ($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 overhauls in 2000. Depreciation and
amortization increased 23 .4 % ( $117 million) due to a 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 rentals increased 19.2 % ($68 million) due
to additional leased aircraft. Other expenses (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 9.9% ($210 million) due
primarily to increased business for MLT Inc. and higher
variable costs associated with expanded capacity.
Other Income and Expense - Interest expense decreased
7.7% ($29 million) primarily due to reduced borrowings
and lower interest rates. Earnings of affiliated companies
increased 9.5% ($8 million) due largely to the Company's
share of higher WORLDSPAN 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 Northwest's investment in Equant N.V.
during 1999.
LIQUIDITY AND CAPITAL
RESOURCES
At December 31, 2001, the Company had cash, cash
equivalents and restricted short-term investments of $2.61
billion. This amount includes $100 million of restricted
short-term investments, resulting in total liquidity of
$2.51 billion, an increase in liquidity of $703 million
from December 31, 2000. As discussed later, the
Company's secured credit facilities were fully drawn as
of December 31, 2001.
Cash flows from operating activities were $646 million
in 2001. The decrease of $24 7 million in operating cash
flows from 2000 was due primarily to significantly lower
pretax income, partially offset by higher depreciation and
amortization, reductions in working capital, a greater
excess of pension expense over pension contributions, a
31
V)
~
z
,.;
0
0
N
32
smaller excess of frequent flyer mile revenue over ales
proceeds and a higher dividend from WORLDSPAN. Cash
flows from operating activities were $893 million for 2000
and $1.26 billion for 1999.
Investing Activities - Investing activities in 2001 consisted
primarily of the purchase of 13 Airbus A319 aircraft, four
Airbus A320 aircraft, and five Boeing 757-200 aircraft,
engine purchases, costs to commission aircraft before
entering revenue service, deposits on ordered aircraft,
facilities improvements and ground equipment purchases
partially offset by $582 million in proceeds from the sale
of the Company's investment in Continental. See Note 13
to the Consolidated Financial Statements for additional
discussion of the Company's investment in Continental.
In addition to the purchased aircraft discussed previously,
the Company took delivery of 21 Bombardier CRJ200
aircraft during 2001. These aircraft were financed with long-
term leveraged operating leases provided by the manufacturer
and simultaneously subleased to Pinnacle Airlines.
Investing activities in 2000 consisted primarily of the
purchase of 10 Airbus A319 aircraft, seven AVRO RJ85
aircraft and two used Boeing 747-200 aircraft (which
were converted to freighters), costs to commission aircraft
before entering revenue service, aircraft modifications,
deposits on ordered aircraft, facility improvements and
ground equipment purchases, partially offset by $58 million
of proceeds from the sale of a portion of the Company's
investment in priceline.com.
Investing activities in 1999 consisted primarily of the
purchase of seven Airbus A320 aircraft, 10 Airbus A319
aircraft, four Boeing 747-400 aircraft, 11 AVRO RJ85
aircraft and two used DC10 aircraft, the purchase off lease
of four DC9-50 aircraft, costs to commission aircraft before
entering revenue service, engine hushkitting, aircraft
modifications, deposits on ordered aircraft and ground
equipment purchases.
Financing Activities - Financing activities in 2001
consisted primarily of the Company's borrowing in
March and subsequent repayment in May of $1.10
billion under its revolving credit facilities, the borrowing
on September 11 of $1.12 billion under its revolving credit
facilities, of which $150 million was repaid in October as
scheduled, the issuance of $300 million of 8.875% public
unsecured notes due 2006, $120 million received under airport
facility revenue bonds, the payment of debt and capital lease
obligations and the receipt of $678 million in financing for:
(i) 13 Airbus A319 aircraft; seven of which were financed
with funds from pass-through certificates and six with long-
term bank debt; (ii) five Boeing 757-200 aircraft financed
with long-term bank debt; (iii) four Airbus A320 aircraft;
three of which were financed with funds from pass-through
certificates and one with long-term bank debt.
The Company's unsecured credit facilities were amended
on October 23, 2001 from a negative pledge to a secured
position on certain assets. The amended secured credit
agreement consists of (i) a $725 million revolving facility
available until October 2005, and (ii) a $250 million 364-
day revolving credit facility expiring in October 2002 and
renewable annually at the option of the lenders; however,
to the extent any portion of the $250 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 such borrowings would then mature in October
2005. This credit agreement is secured by the Company's
Pacific route system and certain aircraft. Borrowings under
these secured credit facilities currently bear interest at
a variable rate equal to three-month LIBOR plus 2.0%
(4.1 % as of December 31, 2001, 3.9% as of February 28,
2002). See Note 3 to the Consolidated Financial Statements
for additional discussion of these credit facilities.
In June 2001, the Company completed a pre-funded offering
of $581 million of pass-through certificates at a blended
fixed coupon rate of 7.18%. Proceeds from sales of the
certificates will be used to finance the acquisition of 14
aircraft consisting of nine new Airbus A319 aircraft,
three new Boeing 757-300 aircraft and two new Boeing
747-400 aircraft scheduled for delivery between March
and December 2002. In July 2001, the Company completed
an offering of $396 million of European pass-through
certificates due in 2013 at a blended floating rate of
three-month LIBOR plus 0.60% (2.5% as of February
28, 2002) to finance the acquisition of nine new Airbus
A319 aircraft and five new Airbus A320 aircraft scheduled
to be delivered from November 2001 through July 2002.
The pre-funded portion of cash proceeds from the offerings
of certificates are invested and held in escrow with a
depository bank and are not assets or direct obligations
of, or guaranteed by, the Company and are therefore
not included in the Consolidated Financial Statements.
As aircraft are delivered or refinanced, the Company
utilizes the cash proceeds to finance the acquisition of
these aircraft as secured debt financing for ownership or
as non-recourse debt for leveraged lease financing. If a
leveraged lease is obtained for any aircraft, under which
the aircraft would be sold and leased back to Northwest,
the debt associated with the aircraft will become part of
the lease and not a direct obligation of the Company or
Northwest. Lease obligations for any lease that qualifies as
an operating lease under Statement of Financial Accounting
Standards ("SFAS") No. 13 are disclosed in Note 4 to the
Consolidated Financial Statements. If any funds remain
as deposits with the escrow agent for such pass-through
certificates at the end of the delivery period, such funds
will be distributed back to the certificate holders. Such
distribution will include interest on such amounts payable
by the Company. Management believes that the likelihood
funds would be distributed from escrow back to investors
and that the interest due would be a material amount, is
remote. At December 31, 2001, $886 million of the unused
offering proceeds were held in escrow.
Financing activities in 2000 consisted primarily of payment
of debt and capital lease obligations, including $165 million
in term loan prepayments, and the long-term leveraged
operating lease financing through sale and leaseback of 10
Airbus A319 aircraft and three AVRO RJ85 aircraft.
During 2000, the Company completed a public offering
totaling $522 million of pass-through trust certificates
to finance the acquisition of 13 new aircraft delivered in
2000 and 2001 and to refinance six other aircraft
delivered in 1996.
Financing activities in 1999 con isted 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 five years
after issuance), 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 10 AVRO RJ85 aircraft and various secured
aircraft and ground equipment financings, offset by full
repayment of the $825 million revolving credit facilities and
$5 62 million of aircraft delivery bridge financing, and the
payment of scheduled debt and capital lease obligations.
During 1999, the Company completed three public offerings
of pass-through trust certificates totaling $1.22 billion to
finance the acquisition of 39 new aircraft delivered in
1999 and 2000.
The following table summarizes the Company's commitments to make long-term debt and lease payments for the years
ending December 31:
(in millions) 2002 2003 2004 2005 2006
Long-term Debt 111 $ 223 $ 170 $ 517 $ 1,341 $ 469
Capital Leases 12
'
287 101 75 64 50
Operating Leases: 131
Aircraft 560 555 547 536 545
Non-Aircraft 147 144 132 118 114
Total Debt and Lease Obligations 141 1,217 970 1,271 2,059 1,178
(1) This amount represents principal amounts due only. The amount due in 2005 includes $962 of principal outstanding on the Company's credit facilities. ee
Note 3 to the onsolidated Financial Statements for additional discussion of long-term debt and future maturities.
(2) Amount represent minimum capital lease payments with initial or remaining terms of more than one year. See Note 4 to the Consolidated Financial
Statements for additional discussion of capital leases.
(3) Amount represent minimum lease payments with initial or remaining terms of more than one year and exclude related sublea e rental income. See ote 4
co the Consolidated Financial Statements for additional discu sion of operating leases.
(4) The above table excludes amounts relating to the mandatorily redeemable preferred security of subsidiary. See Note 5 to the Consolidated Financial
Statements for additional discussion of the mandatorily redeemable preferred security of subsidiary which holds solely non-recourse obligations of company.
The cable also excludes amounts relating to the Series C preferred stock. See Note 6 to the Consolidated Financial Statements for additional discussion of
the Company's obligations related to the Series C preferred stock.
V)
'-'-l
z
...l
i:i:::
-<
E-<
V)
'-'-l
~
::r:
E-<
i:i:::
0
z
33
H
0
0
N
34
On January 15, 2002, the Company disbursed $216 million
of aviation taxes deferred pursuant to federal authorization
for payments otherwise due between September 11, 2001,
and January 15, 2002. Additionally, through NWA Funding,
LLC, the Company repaid $61 million outstanding under
the Receivables Purchase Agreement (the "Agreement"). The
Agreement with NWA Funding, LLC, a wholly-owned,
non-consolidated subsidiary of the Company, provided for
the early termination of the Agreement and repayment of the
NWA Funding, LLC outstanding revolving facility upon
occurrence of certain events, including exceeding a rolling
three-month threshol~ of passenger refunds as a percentage
of sales and the lowering of the Company's unsecured credit
rating, both of which occurred following the events of
September 11, 2001. See Note 13 to the Consolidated
Financial Statements for additional discussion concerning
NWA Funding, LLC. The lower credit rating did not trigger
acceleration of any other repayments.
Capital Commitments - The Company's firm orders for
94 new aircraft to be operated by Northwest consist of
scheduled deliveries for 24 Airbus A330 aircraft from 2003
through 2006, eight Airbus A320 aircraft from 2002
through 2004, 41 Airbus A319 aircraft from 2002 through
2003, 19 Boeing 757-200/300 aircraft from 2002 through
2003 and two Boeing 747-400 aircraft in 2002. Eight of the
A330 aircraft orders may be cancelled. As of December 31,
2001, the Company also had firm orders for 99 Bombardier
CRJ200/440 aircraft, which will be leased or subleased
to and operated by Northwest Airlink regional carriers.
The Company has the right to defer the scheduled delivery
of certain aircraft listed above for up to a maximum of
four years. The Company has the option to finance the
CRJ200/440 aircraft through long-term operating lease
commitments from the manufacturer.
Committed expenditures for these aircraft and related
equipment, including estimated amounts for contractual
price escalations and predelivery deposits, will be
approximately $2.01 billion in 2002, $2.05 billion in
2003, $1.38 billion in 2004, $1.31 billion in 2005, $220
million in 2006 and $33 million in 2007. Consistent with
prior practice, the Company intends to finance its aircraft
deliveries through a combination of internally generated
funds, debt and leveraged lease financing. Financing
commitments available for use by the Company are in
place for all of the aircraft on firm order.
During 2001, the Company guaranteed two long-term
airport special facility bond financings for $136 million
and $64 million related to airport improvements in
Minneapolis/St. Paul and Seattle, respectively. These
financings have final maturities in 2025 and 2030 at
fixed rates of 7.27% and 7.49%, respectively, and will be
recorded as other property and equipment and long-term
obligations under capital leases when the funds are drawn
for construction purposes.
The Company currently has an effective shelf registration
statement for the issuance of $1.50 billion of unsecured
debt and equipment trust certificates.
Working Capital - The Company operates, like its
competitors, with negative working capital, which aggregated
to $35 6 million at December 31, 2001. This position
is primarily attributable to the $1.28 billion air traffic
liability, largely representing cash received from tickets
that customers have purchased in advance and not yet
used. Revenue is recognized and the liability is reduced as
customers use these tickets for transportation provided
by the Company. The Company also performs bi-monthly
evaluations of this estimated liability and recognizes any
adjustments as passenger revenues for that period. These
adjustments relate primarily to ticket usage patterns, refunds,
exchanges, inter-airline transactions, and other items for
which final settlement occurs in periods subsequent to
the sale of the related tickets at amounts other than the
original sales price. While these factors generally follow
predictable patterns that provide a reliable basis for
estimating the air traffic liability, significant changes in
business conditions and/or passenger behavior that affect
these estimates could impact operating income.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial
condition and results of operations are based upon the
Consolidated Financial Statements, which have been
prepared in accordance with accounting principles
generally accepted in the United States. The preparation
of the Consolidated Financial Statements requires the
Company to make estimates and judgments that affect
the reported amount of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets
and liabilities at the date of the financial statements.
Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and
potentially result in materially different results under
different assumptions and conditions. See Note 1 to the
Consolidated Financial Statements for additional discussion
of the application of these and other accounting policies.
Aircraft Valuation and Impairments - The Company
has evalu'ated its long-lived assets for possible impairments
in compliance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of The Company records impairment losses
on long-lived assets used in operations when events and
circumstances indicate the assets might be impaired and the
undiscounted cash flows estimated to be generated by those
assets are less than their carrying amounts. Impairment
losses are measured by comparing the fair value of the
assets to their carrying amounts. In the third and fourth
quarters of 2001 the Company recorded, as depreciation
expense, impairment charges of $161 million related
to reductions in the estimated market values of certain
aircraft. See Note 1 to the Consolidated Financial Statements
for additional discussion of impairment of long-lived assets.
In August 2001, the Financial Accounting Standards
Board issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144
supersedes SFAS No. 121 but retains its fundamental
provisions for recognition and measurement of the
impairment of long-lived assets to be held and used and
the measurement of long-lived assets to be disposed of
by sale. The Company adopted the provisions of this
statement on January 1, 2002, implementation of which
will have no material effect on the Company's results of
operations or financial condition.
Goodwill and Intangible Assets - In June 2001, the
Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS 142 requires
that companies test goodwill and indefinite lived intangible
assets for impairment on an annual basis rather than
amortize such assets. The Company adopted SFAS 142 on
January 1, 2002, and as a result will no longer amortize
its indefinite lived intangible assets and goodwill.
Presently, the Company's indefinite lived intangible asset
derives from the U.S.-Japan bilateral aviation agreement,
which establishes rights to carry traffic between Japan
and the U.S., and extensive "fifth freedom" rights
between Japan and India, the South Pacific and other
Asian destinations. "Fifth freedom" rights allow
Northwest to operate service from any gateway in Japan
to points beyond Japan and carry Japanese originating
passengers. These rights have no termination date, and
the Company has the supporting infrastructure (airport
gates, slots and terminal facility leases) in place to operate
air service to Japan from its U.S. hub airports indefinitely.
Governmental policy and bilateral agreements between
nations regulate international operating route authorities
and alliances. The Company's carrying value of international
route authorities was $634 million at December 31,
2001. Should any changes occur in policies, agreements,
infrastructure or economic feasibility of air service to
Japan, the Company will assess this asset for impairment
and re-evaluate the economic life of these international
routes and, if the life is then determined to be finite,
begin amortizing the asset. The Company's goodwill
balance of $18 million relates solely to the 1997 purchase
of Pinnacle Airlines, a regional air carrier.
Amortization of goodwill and intangible assets was
$24 million in 2001, approximately $23 million of
which related to the international route authorities
discussed above. During the first half of 2002, the
Company will perform impairment tests of goodwill
and indefinite lived intangible assets by comparing the
carrying values to prices of similar assets in the market
place or other appropriate valuation techniques. Any
impairment recorded as a result of adopting this
standard will be recorded as a change in accounting
principle. Any subsequent impairment charge would be
recorded as an operating expense. The effect, if any, of
these tests on the earnings and financial position of the
Company has not yet been determined.
Pension Liability and Expense - The Company has
several noncontributory pension plans covering substantially
all of its employees. The Company accounts for its
defined benefit pension plans in accordance with SFAS
No. 87, Employers' Accounting for Pensions, which
requires that amounts recognized in financial statements
be determined on an actuarial basis. Benefits associated
35
CJ)
iJ,,l
z
,..;i
P:.
<
f--4
CJ)
iJ,,l
~
::i::
f--4
P:.
0
z
0
0
N
with the e plan are ba ed primarily on year of service
and in some case , employee compensation. ee Note 12
to the Con olidated Financial Statement for additional
di cu ion of actuarial a sumption u ed in determining
pen ion liabilit and e pen e.
A ignificant element in determining the ompany'
pension e pense in accordance with SFAS No. 87 is
the e pected return on plan a ets, which i based on
hi torical results for imilar allocation among asset
cla e . The Company has assumed that the e pected
long-term rate of return on plan assets will be 10.5%.
The Company's pension plan as ets have hi torically
earned in excess of 10.5% and the Company believe
that this assumption for future returns is reasonable.
The difference between the expected return and the
actual return on plan a secs is deferred and, under
certain circum ranees, amortized over future years of
ervice. Therefore, the net deferral of past asset gains
(lo es) ultimately affects future pension expense. The
plan assets have earned a rate of return sub tantially
les than 10.5% in each of the last two years. Should
this trend continue, future pension expense would
likely increase.
At the end of each year, the Company determine the
discount rate used to measure plan liabilities. The discount
rate reflects the current rate at which the pension liabilities
could be effectively settled at the end of the year. In
estimating this rate, the Company looks to rates of
return on fixed-income investments of similar duration
to the liabilities in the plan that receive high, investment
grade ratings by a recognized ratings agency. A change in
the discount rate in future periods could have a material
impact on pension expense. By applying this methodology,
the Company determined a discount rate of 7.5% to be
appropriate at December 31, 2001.
For the year ended December 31, 2001, the net effect of
accounting for changes in the Company's pension plans
decreased accumulated other comprehensive income by
$287 million, up from $19 million for the year 2000.
The negative impact on accumulated other comprehensive
income was principally due to asset returns below the
long-term expected rate and additional pension benefits
pr-ovided for in new agreements with contract employees.
For the year ended December 31, 2001, the Company
recognized consolidated pretax pension expense of $231
million, up from $134 million in 2000. Pension expense
is anticipated to increase in 2002.
Plan as et for the Company's pension plans are managed
by external investment professionals who are registered
investment advisors. These advisors are prohibited by the
investment policies of the plan from investing in Company
securities, other than as a portion of a market index fund
that could have a diminutive proportion of such securities.
OTHER INFORMATION
Labor Agreements - Approximately 91 % of the
Company's employees are members of collective bargaining
units. On May 11, 2001, Northwest's mechanics, custodians
and cleaners ratified a new four-year agreement. The
agreement provides for lump sum retroactive payments,
a one-time pay adjustment, increased wages and pension
benefits and various work rule modifications. At
December 31, 2001, all of the Company's union workers
were under contract.
KLM Alliance - Northwest and KLM operate their trans-
Atlantic flights pursuant to a commercial and operational
joint venture alliance, which has antitrust immunity that
facilitates coordinated pricing, scheduling, product
development and marketing. In addition, Northwest
and KLM act as one company in North America and
Europe, where Northwest and KLM coordinate ground
handling and sales in North America and Europe,
respectively. Trans-Atlantic operating profits/losses are
shared equally by Northwest and KLM and any net alliance
settlements are recorded in other operating revenues in
Northwest's Consolidated Financial Statements. Northwest
and KLM have a minimum of nine years remaining under
their current joint venture alliance.
Detroit Mfdfield Terminal - The Company was
responsible for managing and supervising the design and
construction of a new $1.2 billion passenger terminal at
Detroit Metropolitan Wayne County Airport. The new
terminal was completed in February 2002 and offers 97
gates, 106 ticket-counter positions, 14 security check points,
a fourth parallel runway, nearly 85 shops and restaurants,
four WorldClubs, an 11,500-space parking facility, covered
curbside drop-off areas and 18 luggage carousels. The new
terminal also offers international-to-domestic connections
within the same facility. In addition, a new hotel in the
terminal is scheduled to be completed in September 2002.
The new terminal has been funded by the issuance of
general airport revenue bonds by Wayne County, payable
primarily from future pa~senger 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.
Subsequent Event - On February 25, 2001, Pinnacle
Airlines Corp. ("Pinnacle Corp."), an indirect subsidiary
of the Company, filed a registration statement with the
Securities and Exchange Commission for an initial public
offering of Pinnacle Corp. common stock. Pinnacle Corp.
was incorporated in Delaware on January 10, 2002, for
the sole purpose of becoming a holding company of
Pinnacle Airlines. Immediately prior to the consummation
of the offering, the Company will transfer all of the
outstanding stock of Pinnacle Airlines to Pinnacle Corp. in
exchange for all of the outstanding common stock of
Pinnacle Corp., one share of Series A preferred stock of
Pinnacle Corp. and a $150 million note issued by Pinnacle
Corp. After the offering is complete, the Company will
own 13 % of Pinnacle Corp. 's outstanding common stock
if the over-allotment option granted to the underwriters
is not exercised. If the over-allotment option is exercised
in full, the Company will not own any shares of
Pinnacle Corp.
FORWARD-LOOKING STATEMENTS
Certain of the statements made throughout Management's
Discussion and Analysis of Financial Condition and
Results of Operations are forward-looking and are based
upon information available to the Company on the date
hereof. The Company through its management may also
from time to time make oral forward-looking statements.
In connection with the "safe harbor" provisions of the
Pfivate Securities Litigation Reform Act of 1995, the
Company is hereby identifying important factors that
could cause actual results to differ materially from those
contained in any forward-looking statement made by or
on behalf of the Company. Any such statement is qualified
by reference to the following cautionary statements.
It is not reasonably possible to itemize all of the many
factors and specific events that could affect the outlook
of an airline operating in the global economy. Some of the
risks and uncertainties are listed in the Company's Annual
Report on Form 10-K for the year ended December 31,
2001, under Business Risk Factors Relating to Northwest
and NWA Corp. Such risks and uncertainties include,
among others, the future level of air travel demand, the
Company's future load factors and yields, the airline pricing
environment, inc;reased costs for security, the cost and
availability of aviation insurance coverage and war risk
coverage, the general economic condition of the U.S. and
other regions of the world, the price and availability of
jet fuel, labor negotiations both at other carriers and the
Company, low-fare carrier expansion, capacity decisions of
other carriers, actions of the U.S. and foreign governments,
foreign currency exchange rate fluctuation, inflation and
other factors discussed herein.
Developments in any of these areas, as well as other
risks and uncertainties detailed from time to time in the
Company's Securities and Exchange Commission 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 the foregoing
list of important factors is not inclusive. The Company
undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise. These statements
deal with the Company's expectations about the future
and are subject to a number of factors that could cause
actual results to differ materially from the Company's
expectations.
37
....
P::
<t:
f-<
V)
~
~
:r:
f-<
p::
0
z
H
0
0
N
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risks inherent in the Company's market-sensitive
instruments and positions are the potential losses arising
from adverse changes in the price of fuel, foreign currency
exchange rates and interest rates as discussed below. The
sensitivity analyses presented do not consider the effects
that such adverse changes may have on overall economic
activity nor do they consider additional actions management
may take to mitigate its exposure to such changes. Actual
results may differ from the outcomes estimated in the
analysis due to factors beyond the Company's control.
See Note 14 to the Consolidated Financial Statements for
accounting policies and additional information.
Aircra~ Fuel - The Company's earnings are affected by
changes in the price and availability of aircraft fuel. In
order to provide a measure of control over price and supply,
the Company trades and ships fuel and maintains fuel
storage facilities to support its flight operations. The
Company also manages the price risk of fuel costs primarily
utilizing futures contracts traded on regulated exchanges
and fuel swap agreements. Market risk is estimated as a
hypothetical 10% increase in the December 31, 2001,
cost per gallon of fuel, assuming projected 2002 fuel
usage, which would result in an increase to aircraft fuel
expense of approximately $118 million in 2002, com-
pared to an estimated $180 million for 2001 measured at
December 31, 2000. As of December 31, 2001, the
Company had hedged approximately 9% of its first quarter
2002 fuel requirements, compared to 12 % of the 2001 first
quarter requirements at December 31, 2000.
Foreign Currency - The Company is exposed to the
effect of foreign exchange rate fluctuations on the U.S.
dollar value of foreign currency-denominated operating
revenues and expenses. The Company's largest exposure
comes from the Japanese yen. From time to time, the

Company uses financial instruments to hedge its exposure to
the Japanese yen. The result of a uniform 10% strengthening
in the value of the U.S. dollar from December 31, 2001,
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
$25 million for the year ending December 31, 2002, net of
gains realizable from yen hedge instruments outstanding at
December 31, 2001, compared to an estimated decrease
of $70 million for 2001 measured at December 31, 2000.
This sensitivity analysis was prepared based upon projected
foreign currency-denominated revenues and expenses as of
December 31, 2001 and 2000. The variance is due to the
Company's foreign currency-denominated revenues exceeding
its foreign currency-denominated expenses.
The Company also has foreign currency non-cash exposure.
The result of a 10% weakening in the value of the U.S.
dollar would result in a decrease to other income caused
by the remeasurement of net foreign currency-denominated
liabilities of an estimated $12 million in 2002 compared
with an estimated $13 million at December 31, 2000. This
sensitivity analysis was prepared based upon projected
foreign currency-denominated assets and liabilities as of
December 31, 2001 and 2000. 1
In 2001, the Company's yen-denominated net cash
inflow was approximately 34 billion yen (approximately
$369 million) and its yen-denominated liabilities exceeded
its yen-denominated assets by an average of 12 billion
yen (approximately $97 million) compared with 52 billion
yen (approximately $501 million) and 11 billion yen
(approximately $100 million), respectively, in 2000. In
general, each time the yen strengthens (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. The Company's operating income in 2001 was
unfavorably impacted by approximately $12 million due
to the average yen being weaker in 2001 compared to 2000
and favorably impacted in 2000 by approximately $70 million
due to the average yen being stronger in 2000 compared
to 1999. The average yen to U.S. dollar exchange rate,
including the impact of hedge activity, for the years ending
December 31, 2001, 2000 and 1999 was 92, 104 and 117,
respectively. The Japanese yen financial instruments utilized
to hedge net yen-denominated cash flows resulted in gains
of $85 million in 2001 and $23 million in 2000. As of
December 31, 2001, the Company had entered into forward
contracts to hedge approximately 60% of its anticipated
2002 yen-denominated sales at an average rate of 114 yen
per U.S. dollar, compared to 38% at December 31, 2000.
Interest - The Company's earnings are also affected by
changes in interest rates due to the impact those changes
have on its interest income from cash equivalents and
short-term investments and its interest expense from
floating rate debt instruments. The Company's floating
rate indebtedness was approximately 39% and 21 % of the
total long-term debt and capital lease obligations at
December 31, 2001 and 2000, respectively. If long-term
floating interest rates increased by 100 basis points during
2002 as compared to 2001, the Company's interest
expense would increase by approximately $22 million,
compared to an estimated $7 million for 2001 measured at
December 31, 2000. If short-term interest rates increased
by 100 basis points during 2002 as compared to 2001,
the Company's interest income from cash equivalents and
short-term investments would increase by approximately
$17 million compared to an estimated $13 million for
2001 measured at December 31, 2000. These amounts are
determined by considering the impact of the hypothetical
interest rates on the Company's floating rate indebtedness,
cash equivalent and short-term investment balances at
December 31, 2001 and 2000.
Market risk for fixed-rate indebtedness is estimated as
the potential increase in fair value resulting from a
hypothetical 100 basis point decrease in interest rates
and amounts to approximately $142 million during 2002,
compared to an estimated $151 million for 2001 measured
at December 31, 2000. The fair values of the Company's
indebtedness were estimated using estimated or quoted
market prices and discounted future cash flows based on
the Company's incremental borrowing rates for similar
types of borrowing arrangements.
39
VJ
~
z
r-'
CONSOLIDATED BALANCE SHEETS
iz
0
p..
~
iz Northwest Airlines Corporation
...:I December 31
<
:::::i (in millions) 2001 2000
z
z
< ASSETS
H
0
0 Current Assets
<'I Cash and cash equivalents $ 2,512 $ 693
Restricted short-term investment 100 35
Accounts receivable, less allowance
(2001-$20; 2000-$16) 512 534
Flight equipment spare parts, less allowance
(2001-$121;2000-$131) 273 313
Deferred income taxes 122 108
Maintenance and operating supplies 64 103
Prepaid expenses and other 207 228
Total current assets 3,790 2,014
Property and Equipment
Flight equipment 7,015 6,498
Less accumulated depreciation 1,981 1,896
5,034 4,602
Other property and equipment 1,886 1,826
Less accumulated depreciation 854 794
1,032 1,032
Total property and equipment 6,066 5,634
Flight Equipment Under Capital Leases
Flight equipment 846 846
Less accumulated amortization 303 281
Total flight equipment under capital leases 543 565
Other Assets
Intangible pension asset 943 375
International r,outes, less accumulated amortization
(2001-$333; 2000-$310) 634 657
Investments in affiliated companies 213 836
Other 766 796
Total other assets 2,556 2,664
Total Assets $ 12,955 $ 10,877
The accompanying notes are an integral part of these consolidated financial statements.
40
V)
"1,,l
z
,-.l
~
December 31 <
2000 E-<
(in millions, except share data) 2001 V)
"1,,l
~
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ::i::
E-<
~
Current Liabilities 0
Air traffic liability $ 1,275 $ 1,307
z
Accrued compensation and benefits 737 549
Accounts payable 691 592
Collections as agent 298 112
Accrued aircraft rent 253 229
Other accrued liabilities 476 476
Current maturities of long-term debt 223 191
Current obligations under capital leases 193 62
Total current liabilities 4,146 3,518
Long-Term Debt 4,828 3,051
Long-Term Obligations Under Capital Leases 393 494
Deferred Credits and Other Liabilities
Long-term pension and postretirement health care benefits 1,749 882
Deferred income taxes 1,005 1,353
Other 546 558
Total deferred credits and other liabilities 3,300 2,793
Mandatorily Redeemable Pref erred Security of
Subsidiary Which Holds Solely Non-Recourse
Obligation of Company - Note 5
(Redemption value 2001-$530; 2000-$610) 492 558
Preferred Redeemable Stock
(Liquidation value 2001-$228; 2000-$233) 227 232
Commitments and Contingencies
Common Stockholders' Equity (Deficit)
Common stock, $.01 par value; shares authorized-315,000,000; shares issued
(2001-110,344,796; 2000-110,088,522) 1 1
Additional paid-in capital 1,451 1,459
Accumulated deficit (518) (94)
Accumulated other comprehensive income (loss) (305) (5)
Treasury stock (2001-25,136,582 shares; 2000-26,994,364 shares) (1,060) (1,130)
Total common stockholders' equity (deficit) (431) 231
Total Liabilities and Stockholders' Equity (Deficit) $ 12,955 $ 10,877
41
r<
CONSOLIDATED STATEMENTS OF OPERATIONS
p::
0
~
r...
p::
Northwest Airlines Corporation
,-l Year Ended December 31
<
;:) (in millions, except per share amounts) 2001
z 2000 1999
z Operating Revenues
< Passenger $ 8,417 $ 9,653 $ 8,692
H Cargo 720 857 732
0
0 Other 768 730 709
N
Total operating revenues 9,905 11,240 10,133
Operating Expenses
Salaries, wages and benefits 3,963 3,610 3,393
Aircraft fuel and taxes 1,727 1,872 1,191
Depreciation and amortization 690 617 500
Aircraft maintenance materials and repairs 669 640 635
Other rentals and landing fees 533 513 486
Commissions 500 663 736
Aircraft rentals 447 423 355
Other 2,244 2,333 2,123
Total operating expenses 10,773 10,671 9,419
Operating Income (Loss) (868) 569 714
Other Income (Expense)
Airline Stabilization Act funds 461
Interest expense (369) (350) (379)
Interest capitalized 29 23 16
Interest of mandatorily redeemable preferred security holder (25) (27) (27)
Investment income 66 62 40
Earnings of affiliated companies (5) 92 84
Other, net 41 66 39
Total other income (expense) 198 (134) (227)
Income (Loss) Before Income Taxes (670) 435 487
Income tax expense (benefit) (247) 179 187
Net Income (Loss) (423) 256 300
Preferred stock requirements (1) (1) (1)
Net Income (Loss) Applicable to Common Stockholders $ (424) $ 255 $ 299
Earnings (Loss) Per Common Share:
Basic $ (5.03) $ 3.09 $ 3.69
Diluted $ (5.03) $ 2.77 $ 3.26
The accompanying notes are an integral part of these consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF CASH FLOWS VJ
w
z
.....
,-l
p:;
Northwest Airlines Corporation .....
Year Ended December 31
~
!-<
(in millions) 2001 2000 1999 VJ
w
Cash Flows From Operating Activities ~
Net income (loss) $ (423) $ 256 $ 300 ::r:
!-<
Adjustments to reconcile net income (loss) to net cash provided p:;
by operating activities: 0
Depreciation and amortization 690 617 500
z
Income tax expense (benefit) (247) 179 187
Net payments of income taxes (24) (61) (65)
Pension and other postretirement benefit contributions
less than expense 189 72 166
Sale proceeds of frequent flyer miles less than revenue (48) (161) (42)
Net loss (earnings) of affiliates 64 (65)
Other, net 46 (26) (5)
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable 102 (31) 103
Decrease (increase) in flight equipment spare parts 8 (2) 12
Decrease (increase) in supplies, prepaid expenses and other 79 (54) (57)
Increase (decrease) in air traffic liability 16 (27) 250
Increase (decrease) in accounts payables 91 97 (143)
Increase in other liabilities 220 43 72
Increase ( decrease) in accrued liabilities (117) 56 (19)
Net cash provided by operating activities 646 893 1,259
Cash Flows From Investing Activities
Capital expenditures (1,253) (672) (1,038)
Purchases of short-term investments (205) (194) (288)
Proceeds from maturities of short-term investments 135 198 330
Proceeds from sale of property, equipment and other assets 602 97 63
Investments in affiliated companies and other, net (9) (8) (40)
Net cash used in investing activities (730) (579) (973)
Cash Flows From Financing Activities
Payment of long-term debt (152) (1,268) (1,681)
Payment of capital lease obligations (65) (60) (57)
Payment of short-term borrowings (1,261) (102)
Proceeds from long-term debt 2,102 614 779
Proceeds from short-term borrowings 1,245
Proceeds from sale and leaseback transactions 84 387 1,095
Other, net (50) (43) (51)
Net cash provided by (used in) financing activities 1,903 (370) (17)
Increase (Decrease) in Cash and Cash Equivalents 1,819 (56) 269
Cash and cash equivalents at beginning of period 693 749 480
Cash and cash equivalents at end of period $ 2,512 $ 693 $ 749
Available to be borrowed under credit facilities $ $ 1,116 $ 1,573
The accompanying notes are an integral part of these consolidated financial statements.
43
t""'
JZ
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
0
i:i..
...i
JZ Northwest Airlines Corporation
.....
<:
::> Accumulated
z
Common Additional Other
z
<: Stock Paid-In Accumulated Comprehensive Treasury
H (in millions) Shares Amount Capital Deficit Income (Loss) Stock Total
0
0 Balance January 1, 1999 109.0 $ 1 $ 1,445 $ (649) $ (68) $(1,206) $ (477)
<'l 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 0.6 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)
Net 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 0.3 11 11
Common Stock held in rabbi trusts (11) 19 8
Other 0.2 5 5
Balance December 31, 2000 110.1 1 1,459 (94) (5) (1,130) 231
Net loss (423) (423)
Other comprehensive loss (300) (300)
Comprehensive loss, net of tax (723)
Accretion of Series C Preferred Stock (1) (1)
Series C Preferred Stock converted to
Common Stock 0.2 6 6
Common Stock held in rabbi trusts (16) 70 54
Other 2 2
Balance December 31, 2001 110.3 $ 1 $ 1,451 $ (518) $ (305) $(1,060) $ (431)
The accompanying notes are an integral part of these consolidated financial statements.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF
SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation - Northwest Airlines Corporation
("NWA Corp.") is a holding company whose principal
indirect operating subsidiary is Northwest Airlines, Inc.
("Northwest"). The consolidated financial statements
include the accounts of NWA Corp. and all consolidated
subsidiaries (collectively, the "Company"). All significant
intercompany transactions have been eliminated. Investments
in 20% to 50% owned companies, as well as Orbitz,
LLC and NWA Funding, LLC are accounted for by the
equity method. Other investments are accounted for by
the cost method.
Certain prior year amounts have been reclassified to conform
to the current year financial statement presentation.
Business - Northwest's operations comprise approximately
95% and 96% of the Company's consolidated operating
revenues and expenses, respectively. Northwest is a major air
carrier engaged principally in the commercial transportation
of passengers and cargo, directly serving more than 145
cities in 22 countries in North America, Asia and Europe.
Northwest's global airline network includes domestic hubs
at Detroit, Minneapolis/St. Paul and Memphis, an extensive
Pacific route system with a hub in Tokyo, 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
spare parts are carried at average cost. An allowance for
depreciation is provided at rates which depreciate cost,
less residual value, over the estimated useful lives of the
related aircraft.
Property, Equipment and Depreciation - Owned property
and equipment are stated at cost. Property and equipment
acquired under capital leases are stated at the lower of the
present value of minimum lease payments or fair market
value at the inception of the lease. Property and equipment
are depreciated to residual values using the straight-line
method over thee timated useful 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 is less. Property and equipment
under capital leases are amortized over the lease terms or
the estimated useful lives of the assets.
The Company accounts for certain airport leases under the
Emerging Issues Task Force ("EITF") Issue No. 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 Property Owned
by a Governmental Unit or Authority, to Entities that Enter
into Leases with Governmental Entities, which requires the
financing related to certain guaranteed airport construction
projects committed to after September 23, 1999, to
be recorded on the balance sheet. These capitalized
expenditures of $150 million at December 31, 2001,
are recorded in other property and equipment with the
corresponding obligation included in long-term obligations
under capital leases, and relate to airport improvements at
Minneapolis/St. Paul, Memphis and Seattle.
Airframe and Engine Maintenance - Routine mainte-
nance, 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 basis of hours flown. Modifications that enhance the
operating performance or extend the useful lives of airframes
or engines are capitalized and amortized over the remaining
estimated useful life of the asset.
International Routes - The Company's international routes
result from the U.S.-Japan bilateral aviation agreement, which
establishes rights to carry traffic between Japan and the
U.S., and extensive "fifth freedom" rights between Japan
and India, the South Pacific and other Asian destinations.
"Fifth freedom" rights allow orthwest to operate service
from any gateway in Japan to points beyond Japan and
carry Japanese originating passengers. These rights have
no termination date, and the Company has the supporting
infrastructure (airport gates, slots and terminal facility
leases) in place to operate air service to Japan from its U.S.
hub airports indefinitely. Through the end of 2001, the
international routes were amortized on a straight-line basis
over 40 years. In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other
45
Vl
.i.l
z
H
0
0
N
Intangible Assets. SFAS 142 requires that companies test
goodwill and indefinite lived intangible assets for impairment
on an annual basis rather than amortize such assets. The
Company adopted SFAS 142 on January 1, 2002, and as
a result will no longer amortize its international routes
and goodwill.
During the first half of 2002, the Company will perform
the required impairment tests of goodwill and indefinite
lived intangible assets by comparing the carrying values
to prices of similar assets in the market place or other
appropriate valuation techniques. Any impairment recorded
as a result of adopting this standard will be recorded as a
change in accounting principle. Any subsequent impairment
charge would be recorded as an operating expense. The
effect, if any, of these tests on the earnings and financial
position of the Company has not yet been determined.
Impairment of Long-Lived Assets - The Company
evaluates long-lived assets for potential impairment in
compliance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of The Company records, in
depreciation expense, impairment losses on long-lived
assets used in operations when events and circumstances
indicate the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets. The impairment
loss is measured by comparing the fair value of the asset
to its carrying amount.
In August 2001, the Financial Accounting Standards Board
issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes
SFAS No. 121, but retains its fundamental provisions for
recognition and measurement of the impairment of long-
lived assets to be held and used and the measurement of
long-lived assets to be disposed of by sale. The Company
adopted the provisions of this statement on January 1, 2002,
the implementation of which will have no material effect on
the Company's results of operation or financial condition.
The Company recorded non-cash impairment charges of
$161 million to reflect reductions in the estimated market
values of certain aircraft and related inventory in the third
and fourth quarters of 2001 due to reduced demand resulting
from the events of September 11, 2001. The impairment
charge consisted of a $96 million write-down to market
value of 25 Boeing 727 aircraft and five Boeing 747 freighter
aircraft. The remaining $65 million of impairment charges
related to seven non-operating aircraft that had been stored
for future sale, two DC9 aircraft and three Boeing 72 7 aircraft
retired during 2001, and four Boeing 747-200 aircraft retired
or scheduled to be retired by 2004. In reducing these net
book values, the Company considered recent transactions
involving sales of similar aircraft, outside appraisals and
market trends in aircraft dispositions to determine the fair
market value of these assets. These impairment charges,
which were recorded in depreciation and amortization,
also included a $9 million write-down of related spare
parts to their estimated fair market value.
In December 2000, the Company decided to accelerate
the retirement of 21 DCl0-40 and six DCl0-30 aircraft,
replacing them with recently ordered Airbus A330 and
Boeing 757-300 aircraft. As a result of this decision, the
Company recorded a non-cash fleet disposition charge
of $125 million in depreciation and amortization. The
Company considered recent transactions involving sales of
similar aircraft and market trends in aircraft dispositions
to reduce the net book value to reflect the fair market
value of these assets. The fleet disposition charge included
a $29 million write-down of related spare parts to their
estimated fair market value.
Frequent Flyer Program - The estimated incremental
cost of providing travel awards earned under Northwest's
WorldPerks frequent flyer program is accrued. The Company
also sells mileage credits to participating companies in its
frequent flyer program. A portion of such revenue is deferred
and amortized as transportation is provided.
Operating Revenues - Passenger and cargo revenues are
recognized when the transportation is provided. The air
traffic liability represents the estimated value of sold but
unused tickets and is regularly evaluated by the Company.
Advertising - Advertising costs, included in other operating
expenses, are expensed as incurred and were $98 million,
$127 million and $124 million in 2001, 2000 and 1999,
respectively.
Employee Stock Options - The Company uses the intrinsic
value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for employee stock
options. Under the intrinsic value method, compensation
expense is recognized to the extent the market price of the
common stock exceeds the exercise price of the stock
option at the date of the grant.
Foreign Currency - Assets and liabilities denominated in
foreign currency are remeasured at current exchange rates
with resulting gains and losses generally included in net
income. The Preferred Security (see Note 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 (loss),
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
differences between the tax and financial reporting bases
of assets and liabilities.
Use of Estimates - The preparation of consolidated
financial statements in conformity with generally accepted
accounting principles requires management to make estimates
and assumptions that affect the amounts reported in its
consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
NoTE 2-EARNINGS (Loss) PER SHARE DATA
The following table sets forth the computation of basic and diluted earnings (loss) per common share for the years ended
December 31:
(in millions, except 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:
Weighted-average shares outstanding for basic
earnings (loss) per share
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
2001
$ (424)
$ (424)
84,280,222
84,280,222
2000 1999
$ 255 $ 299
1 1
$ 256 $ 300
82,629,233 81,255,097
6,941,938 7,378,216
2,183,978 3,031,275
500,317 373,012
92,255,466 92,037,600
For the year ended December 31, 2001, no incremental shares related to dilutive securities were added to the denominator
because the inclusion of such shares would be anti-dilutive.
For additional disclosures regarding the Series C Preferred Stock, shares held in rabbi trusts and employee stock options, see
Notes 6 and 7.
47
V')
~
z
H
0
0
N
NOTE 3-LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt as of December 31 consisted of the following:
(in millions, with interest rates as of December 31, 2001) 2001 2000
Unsecured notes due 2004 through 2039, 8.5% weighted-average rate (a) $ 1,291 $ 990
Revolving Credit Facilities due 2005, 4.1 % (b) 962
Pass-through trust certificates due through 2019, 7.8% weighted-average rate (c) 820 579
Equipment pledge notes due through 2013, 4.1 % weighted-average rate (d) 654 300
Secured notes due through 2009, 3.2% weighted-average rate 339 349
Aircraft notes due through 2016, 6.0% weighted-average rate 315 331
NWA Trust No. 2 aircraft notes due through 2012, 9.8% weighted-average rate (e) 230 241
Sale-leaseback financing obligations due through 2020, 9.9% imputed rate (fJ 219 223
NWA Trust No. 1 aircraft notes due through 2006, 8.6% weighted-average rate (g) 141 161
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
of 7.625% notes due 2005 and $200 million of 7.875%
notes due 2008. In April 1999, the Company issued $200
million of 8.52 % notes due 2004. In August 1999, the
Company completed the retail issuance of $143 million
of 9.5% of senior unsecured quarterly interest bonds,
maturing in 2039. These bonds may be redeemed by
Northwest beginning in 2004 without penalty. In May
2001, the Company issued $300 million of 8.875% notes
due 2006. Interest on the notes is payable semi-annually.
(b) The Company's unsecured credit facilities were
amended on October 23, 2001. The amended secured
credit agreement consists of (i) a $725 million revolving
facility ($13 million of which has been utilized as letters of
credit as of December 31, 2001) available until October
2005, and (ii) a $250 million 364-day revolving credit
facility expiring in October 2002 and renewable annually
at the option of the lenders; however, to the extent any
portion of the $250 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 such
borrowings would then mature in October 2005. This
credit agreement is secured by the Company's Pacific route
system and certain aircraft. Borrowings under these secured
credit facilities currently bear interest at a variable rate equal
to the three-month London Interbank Offered Rate
("LIBOR") plus 2.0% (4.1 % at December 31, 2001).
80 68
5,051 3,242
223 191
$ 4,828 $ 3,051
Commitment fees are payable by the Company on the
unused portion of the revolving credit facilities at a variable
rate equal to .35% per annum at December 31, 2001, and
are not considered material.
The credit agreement contains certain financial
covenants, including limitations on secured indebtedness
(excluding secured indebtedness for new aircraft and
airport facilities) and certain equity redemptions and
dividends, as well as the requirement to maintain a
certain level of liquidity.
(c) 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.
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 in 2001 and to refinance
six Boeing 757-200 aircraft delivered in 1996. In June 2001,
the Company completed a pre-funded offering of $5 81
million of pass-through trust certificates to finance the
acquisition of 14 aircraft consisting of nine new Airbus
A319 aircraft, three new Boeing 757-300 aircraft and
two new Boeing 747-400 aircraft scheduled for delivery
between March and December 2002. In July 2001, the
Company completed a public offering of $396 million in
European pass-through trust certificates to finance nine new
Airbus A319 aircraft and five new Airbus A320 aircraft
delivered or scheduled for delivery beginning in November
2001 through July 2002.
The pre-funded cash proceeds from the pass-through
certificates were deposited with an escrow agent and
are not assets or direct obligations of, or guaranteed
by, the Company and are therefore not included in the
Consolidated Financial Statements. As aircraft are delivered
or refinanced, the Company utilizes the cash proceeds
to finance these aircraft as secured debt financing for
ownership or as non-recourse debt used for leveraged
lease financing. If a leveraged lease is obtained for any
aircraft, under which the aircraft would be acquired, then
sold and leased back to Northwest, the debt associated with
the aircraft becomes part of the lease and will not be
a direct obligation of the Company or Northwest. Lease
obligations for any lease that qualifies as an operating
lease under SFAS No. 13 are disclosed in Note 4 to the
Consolidated Financial Statements.
At December 31, 2001, $820 million of the equipment notes
underlying the pass-through certificates issued for 35 aircraft
are direct obligations of Northwest. Interest on the pass-
through certificates is payable semi-annually. At December
31, 2001, $886 million of the unused proceeds from the
offerings were held in escrow and are not recorded as an
asset or direct obligation of NWA Corp. or Northwest.
(d) The equipment pledge notes include new financing
completed during 2001, of $413 million for the acquisition
of six Airbus A319 aircraft, one Airbus A320 aircraft and
five Boeing 757 Aircraft. Interest on the notes is payable
semi-annually.
(e) 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
Northwest. The aircraft were simultaneously leased back
to Northwest.
Financing of $352 million was obtained through the issuance
of $176 million of 9.25% Class A Senior Aircraft Notes, $66
million of 10.23% Class B Mezzanine Aircraft Notes, $44
million of 11.30% Class C Mezzanine Aircraft Notes and
$66 million of 13.875% Class D Subordinated Aircraft
Notes. The Class D notes were repaid in December 1997.
The notes are payable semi-annually from rental payments
made by Northwest under the lease of the aircraft and are
secured by the aircraft subject to the lease as well as the
lease itself.
(fJ In March 1992, the Company completed agreements
with the Minneapolis/St. Paul Metropolitan Airports
Commission ("MAC") for the sale and leaseback of various
corporate assets. The sale-leaseback agreements, which are
accounted for as debt, call for increasing quarterly payments
over a 30-year term and include a provision that gives
the Company the option to repurchase the assets. The
agreements with the MAC are part of a group of financing
arrangements with the State of Minnesota and other
government agencies.
In January 2002, the MAC refinanced the debt that financed
the MAC's original purchase of Northwest assets. The
refinanced bonds carry an average coupon rate of 8.92%.
The savings generated by this refinancing will be passed
on to Northwest as reduced lease payments to the MAC.
(g) In March 1994, Northwest consummated a financing
transaction in which six Boeing 747-200 and four Boeing
757 aircraft were sold to an owner trust (NWA Trust No. 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 Northwest under the lease of the
aircraft and are secured by the aircraft subject to the lease
as well as the lease itself.
Maturities of long-term debt for the five years subsequent
to December 31, 2001 are as follows (in millions):
2002
2003
2004
2005
2006
$ 223
170
517
1,341
469
49
V)
>1-l
z
E-<
p::
0
P...
P-l
p::
....:i
<::
::i
z
z
<::
I-!
0
0
N
50
At December 31, 2001, the Company was in compliance
with the covenants of all of its debt and lease agreements.
Various assets, principally aircraft and route authorities,
having an aggregate book value of $4.6 billion at December
31, 2001, were pledged under various loan agreements.
The weighted-average interest rates on short-term borrowings
outstanding at December 31 were 3.59%, 6.57% and 5.83%
for 2001, 2000 and 1999, respectively.
Cash payments of interest, net of capitalized interest,
aggregated $307 million, $312 million and $342 million
in 2001, 2000 and 1999, respectively.
Manufacturer financing utilized in connection with the
acquisition of aircraft was $21 million, $254 million and
$658 million in 2001, 2000 and 1999, respectively. These
amounts are considered non-cash transactions and are
therefore excluded from proceeds from long-term debt
and capital expenditures in the Consolidated Statements
of Cash Flows. These amounts are included in the
Consolidated Balance Sheets as long-term debt and
flight equipment.
NOTE 4-LEASES
The Company leases under noncancelable operating leases
certain aircraft, space in airport terminals, land and buildings
at airports, ticket, sales and reservations offices, and other
property and equipment, which expire in various years
through 2030. Certain aircraft and portions of facilities are
subleased under noncancelable operating leases expiring in
various years through 2020.
Rental expense for all operating leases for the years ended
December 31 consisted of the following:
(in millions)
Gross rental expense $
Sublease rental income
Net rental expense $
2001
811
(129)
682
2000 1999
$ 765
(110)
$ 655
$ 650
(88)
$ 562
At December 31, 2001, Northwest leased 129 of the 428
aircraft it operates. Of these, 21 were capital leases and
108 were operating leases. Base term lease expiration dates
range from 2002 to 2009 for aircraft under capital leases,
and from 2002 to 2023 for aircraft under operating leases.
Northwest's aircraft leases can generally be renewed for
terms ranging from one to nine years at rates based on
the aircraft's fair market value at the end of the lease
term. Of the 129 aircraft lease agreements, 119 provide
Northwest with purchase options-during the lease, at the
end of the lease or both on terms that approximate fair
market value.
At December 31, 2001, future minimum lease payments
under capital leases and noncancelable operating leases
with initial or remaining terms of more than one year
were as follows:
Capital Oeerating Lease
(in millions) Leases Aircraft Non-aircraft
2002 $ 287 $ 560 $ 147
2003 101 555 144
2004 75 547 132
2005 64 536 118
2006 50 545 114
Thereafter 527 4,799 850
1,104 7,542 1,505
Less sublease rental income 411 26
Total minimum operating
lease payments $ 7,131 $ 1,479
Less amounts representing
interest 518
Present value of future
minimum capital
lease payments 586
Less current obligations
under capital leases 193
Long-term obligations
under capital leases $ 393
The above table includes operating leases for 58 aircraft
operated and leased by Pinnacle Airlines, Inc. ( "Pinnacle
Airlines"), formerly Express Airlines I, Inc., a wholly-owned
subsidiary, and 74 aircraft operated by and subleased to
Mesaba Aviation, Inc. ("Mesaba") an equity investee of the
Company. Base term lease expiration dates for Northwest
range from 2002 to 2020. These aircraft leases can generally
be renewed by Northwest for terms ranging from one to
nine years at rates based on the aircraft's fair market value
at the end of the lease term.
The Company began utilizing the new Detroit Northwest
WorldGateway in February 2002. Incremental airport
space rentals associated with this facility are not included
in the non-aircraft operating lease amounts above and
approximate $5 million per year.
NOTE 5 - MANDATO RILY
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 buildings the Company owns in Tokyo. A newly formed
consolidated subsidiary of the Company (the "Subsidiary")
entered into a Japanese business arrangement designated
under Japanese law as a tokumei kumiai ("TK"). Pursuant
to the TK arrangement, the holder of the non-recourse
obligation restructured such obligation and then assigned
title to and ownership of such obligation to the Subsidiary
as operator under the TK arrangement in exchange for a
preferred interest in the profits and returns of capital from
the business of the Subsidiary (the "Preferred Security").
The restructured non-recourse obligation is the sole asset of
the Subsidiary. As a result of this restructuring, the original
holder of such non-recourse obligation ceased to be a direct
creditor of the Company and the Company's obligation is
reflected in the Company's Consolidated Balance Sheet as
Mandarorily Redeemable Preferred Security of Subsidiary
Which Holds Solely on-Recourse Obligation of Company.
orthwest Airlines Holdings Corporation has guaranteed
the obligation of the Subsidiary to distribute payment on
the Preferred Security pursuant to the TK arrangement if and
to the extent payments are received by the Subsidiary.
The restructured obligation matures in three approximately
equal annual installments due in 2005, 2006 and 2007. In
addition to these installments, cash payments of interest and
principal are made semi-annually throughout the term_. The rare
of interest varies from period to period and is capped at 6%.
The obligation is non-recour e to the Company. The Company
has the ability (exercisable at any time after September 30,
2001) to tran fer the land and buildings in full satisfaction of
all Company obligations related to the financing.
The carrying value is being accreted over 12 year from
October 1995 to the ultimate maturity value of 69 .98
billion yen ( 530 million based on the December 31,
2001 exchange rate). Such accretion is included as
a component of interest of rnandarorily redeemable
preferred security holder.
NOTE 6 - PREFERRED
REDEEMABLE AND COMMON
STOCK
Series C Preferred Stock - As part of labor agreements
reached in 1993, the Company issued to trusts for the
benefit of participating employees 9 .1 million shares of
a new class of Series C cumulative, voting, convertible,
redeemable preferred stock, par value of S.01 per share
(the "Series C Preferred Stock") and 17.5 million shares of
Common Stock and provided the union groups with three
positions on the Board of Directors. -;wA Corp. has
authorized 25 million shares of Series C Preferred Stock.
The Series C Preferred Stock ranks senior to Common
Stock with respect to liquidation and certain dividend
rights. As long as the Common Stock is publicly traded,
no dividends accrue on the Series C Preferred Stock. Each
share of the Series C Preferred Stock is convertible at any
time into 1.364 shares of Common Stock. As of December
31, 2001, 4.2 million shares of Series C Preferred Srock have
been converted into Common Stock and the remaining
4.9 million shares outstanding are convertible into 6.6 million
shares of Common Stock. During 2001, 127,305 shares
of Series C Preferred Srock were converted into 1 3,642
shares of Common Stock.
All the outstanding shares of Series C Preferred Srock are
required to be redeemed in 2003 for a pro rara share of
actual wage savings ($228 million as of December 31,
2001). 'A Corp. has the option to redeem such shares in
cash, by the issuance of additional Common Stock, or by the
use of cash and stock. A decision to issue only additional
Common Stock must be approved by a majority of the three
directors elected by the holders of the Series C Preferred
Srock. If 'A Corp. fails to redeem the Series C Preferred
Stock dividends will accrue at the higher of (i) 12 % or
(ii) the highest penalty rare on any then outstanding eries
of preferred stock, and the employee unions will receive
three additional Board of Directors positions. The financial
statement carrying value of the Series C Preferred Stock is
being accreted over 10 years commencing August 1993
to the ultimate redemption amount. Prior to 2003, A
Corp. at its option may redeem in whole or in part the
Series C Preferred Stock at its liquidation value.
Common Stock - The Company was required to adopt
the provisions of EITF Issue o. 9 -14 Accounting for
51
UJ
.z
,..;
<
r
Ul
;::
E--
~
0
z
E-<
1Z
0
~
w
1Z
H
0
0
c--1
52
Def erred Compensation Arrangements Where Amounts
Earned are Held in a Rabbi Trust, on September 30, 1998.
As a result, the Company revised its consolidation of the
assets and liabilities of the non-qualified rabbi trusts.
The 141,021 and 1,998,806 shares of Common Stock
as of December 31, 2001, and 2000, respectively, that are
held in the trusts are recorded similar to treasury stock
and the deferred compensation liability is recorded in
other long-term liabilities. The Company elected to record
the difference between the market value of the common
shares and the historical cost of the shares in the trusts at the
date of adoption as a credit to common stockholders' equity
(deficit), net of tax. After the adoption date, but prior to
settlement through either contribution to qualified trusts
or diversification, increases or decreases in the deferred
compensation liability will be recognized in earnings to the
extent the Common Stock market price exceeds the average
historical cost of the shares of $38.04 per share or falls
below the September 30, 1998 price of $25 .06 per share,
respectively. For the purpose of computing diluted earnings
per share, the shares held by the rabbi trusts are considered
potentially dilutive securities. The Company has classified
the diversified assets held by the rabbi trusts as trading and
recorded them at fair market value.
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 rights expire
or are redeemed, each new share of Common Stock
issued by NWA Corp., including the shares of Common
Stock into which the Series C Preferred Stock is convertible,
will include one right. Upon the occurrence of certain
events, each right entitles the holder to purchase one
one-hundredth of a share of Series D Junior Participating
Preferred Stock at an exercise price of $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 Investors) 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 person 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 November 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 options with the exercise price equal to the
market price of the Common 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.
The weighted-average fair value of options granted during
2001, 2000 and 1999 is $6.96, $10.77 and $11.84 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 weighted-average
risk-free interest rates of 4.5%, 6.4% and 5.1 % for 2001,
2000 and 1999, respectively, and expected lives of six
years and volatility of 30% for all years presented.
In September 1998, in conjunction with the labor agreement
reached between Northwest and the Air Line Pilots
Association, International, NWA Corp. established the
1998 Pilots Stock Option Plan (the "Pilot Plan"). The
Company has reserved for issuance 2.5 million shares of
Common Stock under the Pilot Plan.
Following is a summary of stock option activity for the years ended December 31:
(shares in thousands)
Outstanding at beginning of year
Granted
Forfeited
Exercised
Outstanding at end of year
Exercisable at end of year
Reserved for issuance
Available for future grants
At December 31, 2001:
(shares in thousands)
Range of
Exercise Prices
$ 4.740 to $25.125
25.406 to 39.375
40.000 to 64.406
Shares
5,483
2,515
759
2001
Weighted-
Average
Exercise
Shares Price
6,235 $ 29.94
3,454 17.98
(850) 29.61
(82) 14.76
8,757 25.40
3,259 30.60
21,815
7,150
Options Outstanding
Weighted-
Average
Remaining
Contractual Life
8.3 years
6.5
5.9
2000
Weighted-
Average
Exercise
Shares Price
5,067 $ 31.79
1,959 25.05
(620) 33.67
(171) 15.05
6,235 29.94
2,425 30.28
16,806
5,613
Weighted-
Average
Exercise
Price
$ 18.75
33.49
46.63
Following is a summary of the Pilot Plan activity for the years ended December 31:
(shares in thousands)
Outstanding at beginning of year
Granted
Exercised
Outstanding at end of year
2001
Weighted-
Average
Exercise
Shares Price
1,987 $ 27.08
500 19.62
(1) 26.33
2,486 25.58
2000
Weighted-
Average
Exercise
Shares Price
1,497 $ 26.81
500 27.88
(10) 26.82
1,987 27.08
1999
Weighted-
Average
Exercise
Shares Price
4,059 $ 32.41
1,499 29.75
(428) 33.16
(63) 14.29
5,067 31.79
2,252 27.78
10,948
2,092
Options Exercisable
Weighted-
Average
Exercise
Shares Price
1,153 $ 17.50
1,531 34.69
575 45.95
1999
Weighted-
Average
Exercise
Shares Price
1,000 $ 27.88
500 24.69
(3) 27.79
1,497 26.81
All outstanding options are exercisable at December 31,
2001, and the weighted-average remaining contractual life
was 7.9 years. The weighted-average fair value of options
granted during 2001, 2000 and 1999 is $7.37, $11.56
for 2001, 2000 and 1999, respectively, an expected life of
six years and volatility of 30%.
and $10.20 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 weighted-
average risk-free interest rates of 4.1 %, 5.9% and 5.8%
The Company has adopted the disclosure only provisions of
SFAS No. 123, Accounting for Stock Based Compensation.
Had the Company recorded compensation expense using
the fair value method prescribed by SFAS No. 123, the
Company's net income (loss) and earnings (loss) per share
V)
~
~
....
....l
~
....
<:
r'
V)
w
~
:r:
r'
~
0
z
53
I-<
p::;
0
Q..
i:..l
p::;
H
0
0
N
54
would have been reduced (increased) to the pro forma
amounts indicated below:
et income (loss)
(in millions):
Earnings (loss) per share:
Basic
Diluted
2001
$ (433)
$ (5.14)
$ (5.14)
2000
$ 244
$ 2.95
$ 2.65
1999
$ 290
$ 3.56
$ 3.15
Shares of restricted stock were awarded at no cost to
certain officers and key employees in 2001, 2000 and
1999. These shares are subject to forfeiture and will be
issued when vested. Unearned compensation, representing
the fair market value of the stock on the measurement
date, is amortized over the four-year vesting period. As
of December 31, 2001, 910,186 shares were outstanding
and not vested.
A long-term incentive performance plan was established
in 2000 under which 464,000 phantom stock units were
awarded to certain key officers and continued in 2001
with 492,496 phantom stock units awarded. The units
vest over five performance periods upon satisfaction of
certain established performance standards. Each unit
represents 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 $24.55 and $24.69 for the 2001 and 2000 grants.
NoTE 8-AccuMULATED OTHER COMPREHENSIVE INCOME (Loss)
The following table sets forth information with respect to accumulated other comprehensive income (loss) ("OCI"):
(in millions)
Balance at January 1, 1999
Before tax amount
Tax effect
Net-of-tax amount
Balance at December 31, 1999
Before tax amount
Tax effect
Net-of-tax amount
Balance at December 31, 2000
Before tax amount
Tax effect
Net-of-tax amount
Balance at December 31, 2001
Foreign
Currency
Translation
Adjustment
$
$
(41)
(8)
3
(5)
(46)
11
(4)
7
(39)
14
(5)
9
(30)
Deferred
Gain (Loss)
on Hedging
Activities
$
$
(21)
82
(30)
52
31
3
(1)
2
33
(3)
1
(2)
31
Minimum
Pension
Liability
Adjustment
$
$
(6)
9
(3)
6
(30)
11
(19)
(19)
(452)
165
(287)
(306)
OCI of
Affiliated
Companies
$
$
(5)
2
(3)
(3)
13
(5)
8
5
(8)
3
(5)
Accumulated
Unrealized Other
Gain on Comprehensive
Investments Income (Loss)
$
$
15
(6)
9
9
9
(3)
6
15
(23)
8
(15)
$
$
(68)
93
(34)
59
(9)
6
(2)
4
(5)
(472)
172
(300)
(305)
NOTE 9-INCOME TAXES
Income tax expense (benefit) consisted of the following for
the years ended December 31:
(in millions) 2001 2000 1999
Current:
Federal $ (103) $ 57 $ 75
Foreign 2 1 3
State 1 6 3
(100) 64 81
Deferred:
Federal (118) 110 98
Foreign (5) (1) (2)
State (24) 6 10
(147) 115 106
Total income tax
expense (benefit) $ (247) $ 179 $ 187
Reconciliations of the statutory rate to the Company's
income tax expense (benefit) for the years ended
December 31 are as follows:
(in millions) 2001 2000 1999
Statutory rate applied to
income (loss) before
income taxes $ (235) $ 152 $ 171
Add (deduct):
State income tax expense
(benefit) net of federal
benefit (24) 7 8
Non-deductible meals and
entertainment 10 11 9
Adjustment to income
tax accruals 6 5
Other (4) 4 (1)
Total income tax
expense (benefit) $ (247) $ 179 $ 187
The net deferred tax liabilities listed below include a current
net deferred tax asset of $122 million and $108 million
and a long-term net deferred tax liability of $ 1.01 billion
and $1.35 billion as of December 31, 2001 and 2000,
respectively.
Significant components of the Company's net deferred tax
liability as of December 31 were as follows:
(in millions) 2001 2000
Deferred tax assets:
Expenses not yet deducted for
tax purposes $ 376 $ 341
Pension and postretirement benefits 413 180
Gains from the sale-leaseback
of aircraft 154 165
Rent expense 93 90
Travel award programs 48 55
Leases capitalized for financial
reporting purposes 41 52
Net operating loss carryforwards 20
Alternative minimum tax
credit carryforwards 62 43
Other tax credit carryforwards 23 2
Total deferred tax assets 1,230 928
Deferred tax liabilities: ,
Accounting basis of assets in
excess of tax basis 1,779 1,744
Expenses other than accelerated
depreciation and amortization 323 412
Other 11 17
Total deferred tax liabilities 2,113 2,173
Net deferred tax liability $ 883 $ 1,245
The Company has certain federal tax deferred assets
available for use in the regular tax system or the alternative
minimum tax ("AMT") system. The deferred assets available
for utilization in the regular system include: AMT credits
of $62 million, net operating loss carryforwards of $28
million, general business credits of $9 million and foreign
tax credits of $7 million. The deferred assets available for
utilization in the AMT system are: net operating loss
carryforwards of $85 million and foreign tax credits of
$7 million. AMT credits available for use in the regular
system have an unlimited carryforward period and all
other tax deferred assets in both systems are available for
carryforward to years beyond 2001, expiring in 2003
through 2021.
The Company also has the following tax deferred assets
available at December 31, 2001 for use in certain states:
net operating losses with tax benefit value of approximately
$10 million available for carryover and state job credit
carryovers of $7 million both available for carryforward
to years beyond 2001, expiring in 2006 through 2021.
55
U)
Ill
z
,-.l
i:z::
<I:!
f-<
U)
Ill
~
::r::
f-<
i:z::
0
z
H
0
0
N
56
NOTE 10-COMMITMENTS
The Company's firm aircraft orders for 94 new aircraft
to be operated by Northwest consists of scheduled
deliverie for 24 Airbus A330 aircraft from 2003 through
2006, eight Airbu A320 aircraft from 2002 through
2004, 41 Airbus A319 aircraft from 2002 through 2003,
19 Boeing 757-200/300 aircraft from 2002 through 2003
and two Boeing 747-400 aircraft in 2002. Eight of the
A330 aircraft orders may be cancelled. As of December 31,
2001, the Company also had firm orders for 99 Bombardier
CRJ200/440 aircraft, which will be leased or sublea ed to
and operated by Northwest Airlink regional carriers. The
Company has the right to defer the scheduled delivery of
certain aircraft li ted above for up to a maximum of
four years. The Company has the option to finance the
CRJ200/440 aircraft through long-term operating lease
commitments from the manufacturer.
Committed expenditures for these aircraft and related
equipment, including estimated amounts for contractual
price escalations and predelivery deposits, will be
approximately $2.01 billion in 2002, $2.05 billion in
2003, $1.38 billion in 2004, $1.31 billion in 2005, $220
million in 2006 and $33 million in 2007. Consistent with
prior practice, the Company intends to finance its aircraft
deliveries through a combination of internally generated
funds, debt and long-term lease financings. Financing
commitments available for use by the Company are in
place for all of the aircraft on order.
NOTE 11- CONTINGENCIES
The Company is involved in a variety of legal actions
relating to antitrust, contract, trade practice, environ-
mental and other legal matters pertaining to the
Company's business. While the Company is unable
to predict the ultimate outcome of these legal actions,
it is the opinion of management that the disposition of
these matters will not have a material adverse effect on
the Company's Consolidated Financial Statements taken
as a whole.
NOTE 12-PENSION AND
OTHER PosTRETIREMENT
HEALTH CARE BENEFITS
The Company has several noncontributory pension plans
covering ubstantially all of its employees. The benefits for
these plans are based primarily on years of service and, in
some cases, employee compensation. It is the Company's
policy to annually fund at least the minimum contribution as
required by the Employee Retirement Income Security Act of
1974. In 2000, the Company made contributions of $36
million in excess of its minimum requirement. The Company
did not make any excess contributions in 2001 or 1999.
The Company sponsors various contributory and
noncontributory medical, dental and life insurance benefit
plans covering certain eligible retirees and their dependents.
The expected future cost of providing such postretirement
benefits is accrued over the service life of active employees.
Retired employees are not offered Company-paid medical
and dental benefits after age 64, with the exception of
certain employees who retired prior to 1987 and receive
lifetime Company-paid medical and dental benefits.
Prior to age 65, the retiree share of the cost of medical
and dental coverage is based on a combination of years
of service and age at retirement. Medical and dental
benefit plans are unfunded and costs are paid as incurred.
The pilot group is provided Company-paid life insurance
coverage in amounts which decrease based on age at
retirement and age at time of death.
On June 1, 2000, the Company amended the pension plan
of contract employees represented by the International
Brotherhood of Teamsters ("IBT"). The plan amendment
resulted in an 85% benefit level increase for IBT workers
and is retroactive to participants who terminated after
December 31, 1992. The plan liability was remeasured as
of June 30, 2000 at a discount rate of 8.2% and resulted
in increases to pension expense on a prorated basis for 2000
of $13 million and on an annual basis of $30 million.
On May 11, 2001, the Company amended the pension
plan of contract employees represented by the Aircraft
Mechanics Fraternal Association ("AMFA"). The plan
amendment resulted in a benefit level increase of 113 %
for mechanics and 84 % for cleaners and custodians. The
amended benefit increases are retroactive to participants
who terminated after October 2, 1996 and to certain
participants that retired after April 30, 1992, subject to
specific criteria. The plan liability was remeasured as of
June 30, 2001 at a discount rate of 7.9% and resulted in
increases to pension expense on a prorated basis for 2001
of $30 million and on an annual basis of $59 million.
The following is a reconciliation of the beginning and ending balances of the benefit obligation and the fair value of plan assets:
(in millions) Pension Benefits Other Benefits
2001 2000 2001 2000
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,491 $ 4,647 $ 531 $ 391
Service cost 188 149 19 14
Interest cost 451 397 40 32
Plan. amendments 356 157 16 23
Actuarial loss (gain) and other 497 381 73 96
Benefits paid (309) (240) (32) (25)
Benefit obligation at end of year 6,674 5,491 647 531
Change in plan assets:
Fair value of plan assets at beginning of year 5,005 5,166 5 5
Actual return on plan assets (370) (7)
Employer contributions 73 86 32 25
Benefits paid (309) (240) (32) (25)
Fair value of plan assets at end of year 4,399 5,005 5 5
Funded status - underfunded (2,275) (486) (642) (526)
Unrecognized net actuarial loss (gain) 1,082 (280) 234 166
Unrecognized prior service cost 905 630 48 36
Net amount recognized $ (288) $ (136) $ (360) $ (324)
Amounts recognized in the Consolidated Balance Sheets as of December 31 were as follows:
(in millions)
Prepaid benefit cost
Intangible asset
Accrued benefit liability
Accumulated other comprehensive loss
Net amount recognized
The Company's pension plans with accumulated benefit
obhgations in excess of plan assets as of December 31
were as follows:
(in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2001
$ 6,661
6,086
4,384
2000
$ 2,064
1,923
1,450
$
$
Pension Benefits Other Benefits
2001 2000 2001 2000
6 $ 89 $ $
943 376
(1,719) (631) (360) (324)
482 30
(288) $ (136) $ (360) $ (324)
Weighted-average assumptions for pension and other
benefits as of December 31 were as follows:
2001 2000 1999
Discount rate 7.5% 7.9% 8.2%
Rate of future compensation
mcrease 3.9% 3.9% 3.9%
Expected long-term return
on plan assets 10.5% 10.5% 10.5%
57
Vl
w
z
H
0
0
N
58
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed
for 2002. The rate was assumed to decrease .5% per year for six years to 5% in 2008 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
2001 2000 1999 2001 2000 1999
Service cost $ 188 $ 149 $ 167 $ 19 $ 14 $ 14
Interest cost 451 397 363 40 32 27
Expected return on plan assets (514) (468) (403) (1) (1)
Amortization of prior service cost 75 55 46 3 1 1
Recognized net actuarial loss
and other events 31 1 21 6 2 3
Net periodic benefit cost $ 231 $ 134 $ 194 $ 68 $ 48 $ 44
Assumed health care cost trend rates have a significant impact on the amounts reported under other benefits, above, for the
health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
(in millions)
Effect on total of service and interest cost components
Effect on accumulated postretirement benefit obligations
NOTE 13-RELATED PARTY
TRANSACTIONS
Continental Airlines, Inc. - On November 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. Northwest and Continental also
entered into a 13-year global strategic commercial alliance
that connects the two carriers' networks and includes
extensive code-sharing (the joint designation of flights
under the Northwest "NW" code and the Continental
"CO" code), frequent flyer program reciprocity and other
cooperative activities. In connection with the Company's
investment in Continental and Northwest's alliance with
Continental, the Company entered into agreements with
Continental which contained certain restrictions 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's Board of Directors for a 10-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 cost of the
Company's investment and the proportionate share of the
One-Percentage-
Point Increase
$ 8
68
One-Percentage-
Point Decrease
$ (7)
(59)
underlying equity of Continental of $319 million was
being amortized over 40 years.
On January 22, 2001, pursuant to an agreement reached
in November 2000, (i) the Company sold to Continental
approximately 6.7 million shares of the Continental Class A
Common Stock held by the Company for $450 million in
cash; (ii) subsequently, Continental effected a recapitalization
as a result of which the Company's remaining 2.0 million
shares of Continental Class A Common Stock were
converted into 2.6 million shares of Continental Class B
Common Stock; (iii) the Company and Continental
extended 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 similar
change of control transactions 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
standstill agreement that contains certain restrictions on
the Company's 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 Class A shares to Continental. At December
31, 2000, the remaining 2.6 million Class B shares were
being accounted for as marketable securities and $15
million was recorded in unrealized gains in accumulated
other comprehensive income (loss). In February 2001,
the Company sold the remaining 2.6 million Class B
shares for $132 million, as a result of which a pretax
gain of $27 million was recorded ($11 million after tax
or $.13 per common share).
Mesaba Holdings, Inc. - The Company owns 27.9%
of the common stock of Mesaba Holdings, Inc., the
holding company of Mesaba, a Northwest Airlink
carrier. The Company also has wa-rrants to acquire
Mesaba Holdings, Inc. common stock, none of which
were in-the-money as of December 31, 2001. The
Company accounts for its investment in Mesaba using
the equity method.
Northwest and Mesaba signed a 10-year Airline Services
Agreement ("ASA") effective July 1, 1997, under which
Northwest determines Mesaba's commuter aircraft
scheduling and fleet composition. The ASA is structured
as a capacity purchase agreement under which Northwest
pays Mesaba to operate the flights on Northwest's behalf
and Northwest is entitled to all revenues associated with
those flights. Under this agreement, Northwest paid
Mesaba $398 million, $442 million and $368 million
for the years ended December 31, 2001, 2000 and 1999,
respectively. These payments are recorded on a net basis
as a reduction to passenger revenues. The Company had
a payable to Mesaba of $48 million and $22 million as
of December 31, 2001 and 2000, respectively. As of
December 31, 2001, the Company has leased 49 Saab 340
aircraft, which are in turn subleased to Mesaba. In addition,
as of December 31, 2001, the Company has leased 11
owned and subleased 25 leased AVRO regional jet aircraft
to Mesaba under a Regional Jet Services Agreement
consummated in October 1996.
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") - In 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. Northwest sold $3.14 billion,
$3.68 billion and $122 million of accounts receivable on a
non-recourse basis to NWF during 2001, 2000 and 1999,
respectively. The amount of loss recognized related to
receivables securitized at December 31, 2001, was not
material. NWF maintained a variable undivided interest
in these receivables and was subject to losses on its share
of the receivables and, accordingly, maintained an
allowance for doubtful accounts. The agreement was a
five-year $85 million revolving receivable purchase facility
allowing Northwest to sell additional receivables to NWF
and NWF to sell variable undivided interests in these
receivables to the Purchaser. The fair value of securitized
receivables was estimated from the anticipated future cash
flows. The Company records the discount on the sale of
receivables and its interest in NWF's earnings in other
non-operating income (expense). The Agreement provided
for the early termination of the Agreement upon occurrence
of certain events, including a trigger caused by high passenger
refunds as a percentage of sales and a downgrade in the
Company's unsecured credit rating, both of which occurred
following the events of September 11, 2001. As a result
of the termination event, on January 3, 2002, NWF's
outstanding revolving facility of $61 million was paid
in full and terminated.
Orbitz - The Company owns a 15 .6% interest in
Orbitz, LLC, an affiliate that provides a travel Web site
for consumers providing airfares, rental cars, hotel rooms
and more. The Company accounts for Orbitz using the
equity method and recognized a $23 million loss in 2001,
which represents the Company's share of Orbitz losses.
NOTE 14-RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS
The Company adopted SFAS No. 133, Accounting 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
59
V)
p.,1
z
,-l
i:r.::
<:
f-;
V)
p.,1
~
::i::
f-;
i:r.::
0
z
[-<
i:z::
0
~
p.,l
i:z::
H
0
0
N
60
requires 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 loss be initially
reported as a component of other comprehensive income
(loss) in the equity section of the balance sheet 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.
Risk Management - The Company principally uses
derivative financial instruments to manage specific risks
and does not hold or issue them for trading purposes. The
notional amounts of financial instruments summarized
below did not represent amounts exchanged between parties
and, therefore, are not a measure of the 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 expenses. The Company's largest exposure
comes from the Japanese yen. In 2001, the Company's
yen-denominated net cash inflow was approximately 34
billion yen ($369 million).
From time to time the Company uses forward contracts,
collars or put options to hedge a portion of its anticipated
yen-denominated sales. The changes in market value of such
instruments have historically been highly effective at off-
setting exchange rate fluctuations in yen-denominated sales.
At December 31, 2001, the Company recorded $35 million
of unrealized gains in accumulated other comprehensive
income (loss) as a result of forward contracts to sell
53.10 billion yen ($464 million) at an average forward
rate of 114 yen per dollar with various settlement dates
through December 2002. These forward contracts hedge
approximately 60% of the Company's anticipated 2002
yen-denominated sales. Hedging gains or losses 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 $85
million and $23 million in 2001 and 2000, respectively,
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
counterparties based on credit ratings, limits exposure to a
single counterparty and monitors the market position with
each counterparty. It is the Company's policy to participate
in foreign currency hedging transactions with a maximum
span of 25 months.
Aircraft Fuel - The Company is exposed to the effect of
changes in the price and availability of aircraft fuel. In
order to provide a measure of control over price and
supply, the Company trades and ships fuel and maintains
fuel storage facilities to support its flight operations. To
further manage the price risk of fuel costs, the Company
primarily utilizes futures contracts traded on regulated
futures exchanges and fuel swap agreements. The changes
in market value of such contracts have historically been
highly effective at offsetting fuel price fluctuations. It is the
Company's policy to participate in hedging transactions with
a maximum span of 12 months.
At December 31, 2001, the Company recorded a nominal
amount of unrealized gains in accumulated other
comprehensive income (loss) as a result of the fuel
hedge contracts, which if realized, will be recorded in
fuel expense when the related fuel inventory is utilized
in 2002. As of December 31, 2001, the Company had
hedged approximately 9% of its first quarter 2002 fuel
requirements in the form of short-term contracts to
secure ongoing operating supplies.
Interest Rates - The Company used financial instruments
to hedge its exposure to interest rate fluctuations on the
variable rate portion of its pass-through certificates issued in
2000 and 2001 and rate resets on A320 aircraft financing
during the fourth quarter of 2001. As of December 31,
2001, the Company has $4 million of unrealized losses in
accumulated other comprehensive income (loss) which is
amortized over the term of the related obligations.
Equant N. V. - Equant N.V. is an international provider of
data network services to multinational businesses, including
desktop 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 tax or $.33 per diluted
share). During 2001, the Company sold its remaining
investment for a gain of $9 million ($6 million after tax
or $.07 per common share).
priceline.com - During 1999, the Company entered into
agreements with priceline.com, Inc. to provide ticket
inventory for sale through priceline.com's Internet site.
As part of the agreements, the Company received
warrants for 2,062,500 shares with various vesting
requirements. During 1999, the Company exercised
312,500 warrants to purchase 296,354 shares, which
were recorded as available for sale investments at
December 31, 1999. During 2000, the Company sold
its shares outstanding from 1999, additional shares
converted 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
share). During 2001, the remaining 625,000 warrants
were sold for a nominal gain.
Fair Values of Financial Instruments - Cash equivalents
are carried at cost and consisted primarily of unrestricted
money market funds as of December 31, 2001. These
instruments approximate fair value due to their short
maturity.
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. The carrying values of such
investments approximate fair value due to their short
maturity. Restricted short-term investments consist primarily
of money market funds. During 2001, there were no
purchases or sales of short-term investments classified as
available-for-sale. During 2000, there were no purchases
of short-term investments classified as available-for-sale
securities and proceeds from sales of such securities
were $18 million.
The financial statement carrying values and estimated fair values of the Company's financial instruments, including current
maturities, as of December 31 were:
(in millions)
Long-Term Debt
Mandatorily Redeemable Preferred
Security of Subsidiary
Series C Preferred Stock
$
Carrying
Value
5,051
492
227
2001
Fair
Value
$ 4,692
513
202
2000
Carrying Fair
Value Value
$ 3,242 $ 3,286
558 506
232 243
The fair values of the Company's long-term debt were estimated using quoted market prices, where available. For long-term
debt not actively traded and the Preferred Security, fair values were estimated using discounted cash flow analyses, based
on the Company's current incremental borrowing rates for similar types of securities. The fair value of the Series C Preferred
Stock shares was estimated using current market value of the Common Stock and the Black-Scholes option pricing model.
61
VJ
i:I.l
z
,-l
p::;
<
E-<
VJ
i:I.l
~
:r:
E-<
p::;
0
z
i-;
0
0
N
NOTE 15-SEGMENT INFORMATION
The Company is managed as one cohesive business unit of which revenues are derived primarily from the commercial
transportation of passengers and cargo. Operating revenues from flight segments serving 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) 2001 2000 1999
Domestic $ 6,726 $ 7,459 $ 6,833
Pacific, principally Japan 2,144 2,650 2,280
Atlantic 1,035 1,131 1,020
Total operating revenues $ 9,905 $ 11,240 $ 10,133
The Company's tangible assets consist primarily of flight equipment, which are utilized across geographic markets and
therefore have not been allocated.
NOTE 16-QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly results of operations for the years ended December 31 are summarized below:
(in millions, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2001:
Operating revenues $ 2,611 $ 2,715 $ 2,594 $ 1,985
Operating loss (236) (36) (155) (441)
Net income (loss) $ (171) $ (55) $ 19 $ (216)
Basic earnings (loss) per common share $ (2.05) $ (.65) $ .22 $ (2.55)
Diluted earnings (loss) per common share $ (2.05) $ (.65) $ .20 $ (2.55)
2000:
Operating revenues $ 2,509 $ 2,885 $ 3,141 $ 2,705
Operating income (loss) (3) 252 354 (34)
Net income (loss) $ 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)
The sum of the quarterly earnings per share amounts may not equal the annual amount reported since per share amounts
are computed independently for each quarter and for the full year based on respective weighted-average common shares
outstanding and other dilutive potential common shares.
NoTE 17-SuBSEQUENT EVENTS
(UNAUDITED)
Initial Public Offering of Regional Airline Subsidiary -
On February 25, 2001, Pinnacle Airlines Corp. ("Pinnacle
Corp."), an indirect subsidiary of the Company, filed a
registration statement with the Securities and Exchange
Commission for an initial public offering of Pinnacle
Corp. common stock. Pinnacle Corp. was incorporated
in Delaware on January 10, 2002, for the sole purpose
of becoming a holding company of Pinnacle Airlines.
Immediately prior to the consummation of the offering,
the Company will transfer all of the outstanding stock of
Pinnacle Airlines to Pinnacle Corp. in exchange for all of
the outstanding common stock of Pinnacle Corp., one
share of Series A preferred stock of Pinnacle Corp. and a
$150 million note issued by Pinnacle Corp. After the offering
is complete, the Company will own 13 % of Pinnacle
Corp.'s outstanding common stock if the over-allotment
option granted to the underwriters is not exercised. If the
over-allotment option is exercised in full, the Company
will not own any shares of Pinnacle Corp.
Effective March 1, 2002, the Company entered into a
new Airline Services Agreement ("ASA") with Pinnacle
Airlines. The new ASA is a capacity purchase agreement,
similar to the agreement previously held with Pinnacle
Airlines, where Pinnacle Airlines operates flights on
behalf of the Company and is compensated at specified
rates for each completed block hour and cycle, as well
as for specified fixed costs based on the size of its fleet.
The Company also reimburses Pinnacle Airlines for
specified expenses, such as fuel and aviation insurance.
The Company continues to control the scheduling, pricing,
reservations, ticketing and seat inventories and is entitled
to all revenues associated with the operation of Pinnacle
Airlines' aircraft under the new ASA. The ASA states that
Northwest will provide a target operating margin for
Pinnacle Airlines of 14% (with a minimum guaranteed
operating margin of 12 % ) on an annual basis through
December 31, 2006, excluding specific items such as
amounts exceeding market labor costs, performance
incentives and penalties. Beginning in 2007, the block
hour and cycle rates will be reset, based on the actual cost
structure during 2006. From 2008 to 2011, these rates
will increase annually based on increases in the Producer
Price Index. In addition, the target annual operating margin
will be reset to market, but the new annual operating
margin will be no lower than 10% and no higher than 14%.
However, the Company will not guarantee a minimum
operating margin from 2007 through the remaining initial
term of the agreement and any renewal terms.
Excluding the actual results of operations of Pinnacle
Airlines, the Company's net income (loss) would have
been $(437) million, $247 million and $297 million for
2001, 2000 and 1999, respectively.
The Company intends to use the proceeds from initial
public offering for general corporate purposes. The
amount and timing of the sale will depend on future
market conditions.
63
V)
i:,.,l
z
E-<
i:i:::
0
A.
~
i:i:::
NOTE 18-CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
...:i
<
::,
z The following tables present condensed consolidating financial information for: (i) Northwest, the principal indirect subsidiary
z
< of NWA Corp., the holding company, (ii) on a combined basis, NWA Corp. and all other subsidiaries of NWA Corp., and (iii)
H
NWA Corp. on a consolidated basis. The principal consolidating adjustment entries eliminate investments in subsidiaries and
0
0
inter-company balances and transactions.
N
Condensed Consolidating Statements of Operations for the years ended December 31:
Other Consolidating NWA Corp.
(in millions) Northwest Subsidiaries Adjustments Consolidated
2001:
Operating revenues $ 9,445 $ 639 $ (179) $ 9,905
Operating expenses 10,346 592 (165) 10,773
Operating income (loss) (901) 47 (14) (868)
Other income (expense) 150 (1,284) 1,332 198
Loss before income taxes (751) (1,237) 1,318 (670)
Income tax expense (benefit) (267) 20 (247)
Net loss $ (484) $ (1,257) $ 1,318 $ (423)
2000:
Operating revenues $ 10,844 $ 615 $ (219) $ 11,240
Operating expenses 10,290 586 (205) 10,671
Operating income 554 29 (14) 569
Other income (expense) (215) 821 (740) (134)
Income before income taxes 339 850 (754) 435
Income tax expense 138 41 179
Net income $ 201 $ 809 $ (754) $ 256
1999:
Operating revenues $ 9,790 $ 559 $ (216) $ 10,133
Operating expenses 9,122 489 (192) 9,419
Operating income 668 70 (24) 714
Other income (expense) (296) 896 (827) (227)
Income before income taxes 372 966 (851) 487
Income tax expense 149 38 187
Net income $ 223 $ 928 $ (851) $ 300
CJ)
.i-1
z
...:i
p,.::
Condensed Consolidating Statements of Cash Flows for the years ended December 31: <t:
E-<
Other Consolidating NWA Corp. CJ)
Northwest Subsidiaries Adjustments Consolidated .i-1
(in millions) ~
2001:
:r:
E-<
1Z
Net cash flows from operating activities $ 477 $ 169 $ $ 646 0
Net cash flows from investing activities (1,291) 569 (8) (730)
z
Net cash flows from financing activities 2,627 (732) 8 1,903
Increase in cash and cash equivalents 1,813 6 1,819
Cash and cash equivalents at beginning of period 659 34 693
Cash and cash equivalents at end of period $ 2,472 $ 40 $ $ 2,512
2000:
Net cash flows from operating activities $ 783 $ 110 $ $ 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 equivalents at beginning of period 735 14 749
Cash and cash equivalents at end of period $ 659 $ 34 $ $ 693
1999:
Net cash flows 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 equivalents at beginning of period 438 42 480
Cash and cash equivalents at end of period $ 735 $ 14 $ $ 749
65
E--<
~
0
~
~
~ Condensed Consolidating Balance Sheets as of December 31, 2001:
...:i
<G
::> Other Consolidating NWA Corp.
z (in millions) Northwest Subsidiaries Adjustments Consolidated
z
< ASSETS
1-,
0
Current Assets
0
<'4 Cash, cash equivalents and
restricted short-term investments $ 2,538 $ 74 $ $ 2,612
Accounts receivable, net 386 126 512
Other current assets 519 180 (33) 666
Total current assets 3,443 380 (33) 3,790
Property and Equipment 5,724 342 6,066
Flight Equipment Under Capital Leases 543 543
Other Assets 2,370 2,169 (1,983) 2,556
Total Assets $ 12,080 $ 2,891 $ (2,016) $ 12,955
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Air traffic liability $ 1,212 $ 69 $ (6) $ 1,275
Accounts payable and other liabilities 2,420 62 (27) 2,455
Current maturities of long-term debt and
capital lease obligations 388 28 416
Total current liabilities 4,020 159 (33) 4,146
Long-Term Debt and Capital Lease Obligations 4,963 258 5,221
Deferred Income Taxes 1,005 1,005
Other Liabilities 2,315 24 (44) 2,295
Mandatorily Redeemable Preferred Security 492 492
Preferred Redeemable Stock 227 227
Common Stockholders' Equity (Deficit) 290 1,218 (1,939) (431)
Total Liabilities and Stockholders' Equity (Deficit) $ 12,080 $ 2,891 $ (2,016) $ 12,955
66
CJ)
L1.l
z
....
i::.::
Condensed Consolidating Balance Sheets as of December 31, 2000: <
!-<
Other Consolidating NWA Corp. CJ)
Northwest Subsidiaries Adjustments Consolidated L1.l
(in millions} e3
ASSETS ::c
!-<
i::.::
Current Assets 0
Cash, cash equivalents and
z
restricted short-term investments $ 670 $ 58 $ $ 728
Accounts receivable, net 502 32 534
Other current assets 612 184 (44) 752
Total current assets 1,784 274 (44) 2,014
Property and Equipment 5,285 349 5,634
Flight Equipment Under Capital Leases 565 565
Other Assets 1,805 4,992 (4,133) 2,664
Total Assets $ 9,439 $ 5,615 $ (4,177) $ 10,877
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Air traffic liability $ 1,247 $ 68 $ (8) $ 1,307
Accounts payable and other liabilities 1,920 74 (36) 1,958
Current maturities of long-term debt and
capital lease obligations 229 24 253
Total current liabilities 3,396 166 (44) 3,518
Long-Term Debt and Capital Lease Obligations 3,259 286 3,545
Deferred Income Taxes 1,353 1,353
Other Liabilities 1,384 114 (58) 1,440
Mandatorily Redeemable Preferred Security 558 558
Preferred Redeemable Stock 232 232
Common Stockholders' Equity (Deficit) 842 3,464 (4,075) 231
Total Liabilities and Stockholders' Equity (Deficit) $ 9,439 $ 5,615 $ (4,177) $ 10,877
l-1
0
0
N
68
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Northwest Airlines Corporation
We have audited the accompanying consolidated balance sheets of Northwest Airlines Corporation as of December 31, 2001
and 2000, and the related consolidated statements of operations, common stockholders' equity (deficit), and cash flows
for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Northwest Airlines Corporation at December 31, 2001 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
Minneapolis, Minnesota
January 16, 2002
FIVE-YEAR SUMMARY V)
w
z
...:i
iz
Northwest Airlines Corporation Year Ended December 31
<
2001 (I )
2000 1999 1998 12) 1997
E-<
Statements of Operations V)
w
(In millions, except per share data) ~
::r:
Operating revenues E-<
Passenger $ 8,417 $ 9,653 $ 8,692 $ 7,607 $ 8,822 iz
0
Cargo 720 857 732 635 792 z
Other 768 730 709 686 519
9,905 11,240 10,133 8,928 10,133
Operating expenses 10,773 10,671 9,419 9,119 8,976
Operating income (loss) (868) 569 714 (191) 1,157
Operating margin (8.8)% 5.1% 7.0% (2.1)% 11.4%
Income (loss) before extraordinary item $ (423) $ 256 $ 300 $ (285) $ 606
Net income (loss) $ (423) $ 256 $ 300 $ (285) $ 597
Earnings (loss) per common share:
Basic $ (5.03) $ 3.09 $ 3.69 $ (3.48) $ 5.89 (J)
Diluted $ (5.03) $ 2.77 $ 3.26 $ (3.48) $ 5.29 13)
Balance Sheets (In millions)
Cash, cash equivalents and unrestricted
short-term investments $ 2,512 $ 693 $ 749 $ 480 $ 1,040
Total assets 12,955 10,877 10,584 10,281 9,336
Long-term debt, including current maturities 5,051 3,242 3,666 4,001 2,069
Long-term obligations under capital leases,
including current obligations 586 556 597 655 705
Mandatorily redeemable preferred security"
of subsidiary 492 558 626 564 486
Preferred redeemable stock 227 232 243 261 1,155
Common stockholders' equity ( deficit) l4
l (431) 231 (52) (477) (311)
Operating Statistics isi
Scheduled service:
Available seat miles (ASM) (millions) 98,356 103,356 99,446 91,311 96,964
Revenue passenger miles (millions) 73,126 79,128 74,168 66,738 72,031
Passenger load factor 74.3% 76.6% 74.6% 73.1% 74.3 %
Revenue passengers (millions) 54.1 58.7 56.1 50.5 54.7
Revenue yield per passenger mile (yield) 11.24 12.04 11.58 11.26 12.11
Passenger revenue per scheduled ASM 8.36 9.21 8.64 8.23 9.00
Operating revenue per total ASM 161 9.17 10.01 9.44 9.12 9.76
Operating expense per total ASM 16l 9.78 9.33 8.71 9.21 8.63
Cargo ton miles (millions) 2,161 2,502 2,336 1,958 2,287
Cargo revenue per ton mile 33.28 34.25 31.31 32.41 34.57
Fuel gallons consumed (millions) 2,029 2,113 2,039 1,877 1,996
Average fuel cost per gallon 79.26 82.99 53.55 53.60 64.86
Number of operating aircraft at year end 428 424 410 409 405
Full-time equivalent employees at year end 45,708 53,491 51,823 50,565 48,984
(1) 2001 was affected by significantly reduced demand for travel resulting (3) Excludes the effect of the 1997 extraordinary loss ($.10 per basic
from the September 11, 2001, terrorist attacks. The Company recognized share and $.08 per diluted share).
$461 million of grant income from the U.S. government under the Air (4) No dividends have been paid on common stock for any period
Transportation Safety and System Stabilization Act, which was recorded presented.
as other non-operating income. (5) All statistics exclude Pinnacle Airlines.
(2) 1998 was affected by labor-related disruptions, which included work (6) Excludes the estimated revenues and expenses associated with the
actions, a 30-day cooling off period, an 18-day cessation of flight operation of Northwest's fleet of 747 freighter aircraft, MLT Inc. and
operations due to the pilots' strike, a seven-day gradual resumption gain/loss on disposition of assets.
of flight operations and a rebuilding of traffic demand.
...,
0
0
N
STOCKHOLDERS' INFORMATION
Common Stock Prices
2001 2000
Quarter High Low High Low
1st 33.0625 19 24.3125 16.125
2nd 27.75 20.5 36.375 20.6875
3rd 27.63 9.04 39 24.5625
4th 18.71 11.25 31 20.25
No divide?ds were declared during the years ended 2001
or 2000.
Stock Listing
The Company's Common Stock is quoted on the Nasdaq
National Market under symbol NWAC. As of February 28,
2002, the Company had 1,623 stockholders of record.
Registrar and Trans( er Agent
Wells Fargo Bank Minnesota, N.A.
Post Office Box 738
South St. Paul, Minnesota 55075-0738
(800) 468-9716
Annual Meeting
The 2002 Annual Meeting of Stockholders will be held
at the Equitable Life Building, New York, New York,
on Friday, May 3, 2002, 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@generalmarketingservices.com
Direct all other inquiries to:
Investor Relations
Department A4110
2700 Lone Oak Parkway
Eagan, Minnesota 55121-1534
(800) 953-3332
E-mail: invrel@nwa.com
\
Cebu Pacific Air
(WortdPerks Partner)
Manila
/an de OroDavao
Zamboanga
Xi'an
Chengdu.
Chongqing
Kunming .
uilin.
Guangz
Hong
' .,,,,
..........
---
,,,
Bangkok
I
I
I
I
I
Perth
Saipan
rmian
Pacific Island Aviation
(Northwest Airlink)
Adelaide
Melbourne
Brisbane
Sydney.
Auckland'
Sapporo
International Route System
--- Northwest Airlines
- - - - Northwest Airlines Cargo
- - KLM Royal Dutch Airlines
--- Continental Airlines
Air China
- - Japan Air System
- - Kenya Airways (WorldPerks Partner)
--- Malaysia Airlines (WorldPerks Partner)
- - - - Japan Airlines Cargo
Gulfstream International Airlines
America West Airlines
L
os Angeles
Copa Airlines
(WortdPerks Partner)
Mexico City
Cancun
Guate~alaCity
T
ei'..
Los Angel
Las Vegas
Phoenix
To To 4
0 ,,.do Miami
American Eagle
Monterey~0
s Db~po
Barbara
Los aim Springs
San D
iego
ogota
I
a ito
~ ~
Parintins
Guayaq\,11
~
T
o i~n To \. To
Sa,1tiago Airest Lima '\. Sao Paolo
Islip
Quebec KLMuk
Aberdeen --~
Glasgow
Newcastle - --....___ """\
Eainburgh~
Sao Paolo
Tees~de - ""'
~
\
Leeds/Bradford '
M
anchester
Birmingham
--Humberside
----
- Norwich
Amsterdam

-/2/
London (Stansted). __ ____....--:
1/
London (City) ::::---------
Rio de Janeiro
Additional service operated by Bergen
KLM, KLM cityhopper
and KLM exel
Rotterdam
Dusseklort
E
indhoven
~talSledl London
lllea'!'-.)london
earo,nw~::-
Stavanger Sande fjord
; Gothenburg
II /
Breme2 Hamburg .
"Hal1over Bertm (Tegef)
Transavia Airlines, Air Alps,
Swillswings, and Malev
Naples 1
kl
:,,,:~r,
Maastricht/Aachen
Cologne
{Chs. de Gaulle) Paris
~
rankfurt
Luxembourg
stutigart
MuU\
Prague
Vienna
. ~ alma
Allcan?. catama R odes
PortBlair.e
-
T~louse
1 Genev~ Venice
Lyon Tunn
N
ice Bol~na
F
uno/ill casablanca
Tenfote
J Gran Ganaria Las Palmas
...-
O
~o ---- Helsinki St Petersburg
'y _.Stockholm
. eMosrow
Beirut
Damascus
Tel Aviv. Amman
Cairo
Jeddah
Kuwai
Dhah am
Ba Dubai
\
Dhalii Muscat
i
Zanziba~
~
Seychelles
Oar es Salaam
Jorhat
lllsa~ Ha:ngwe
~s~ ~:Sl
Penang
Medan
Johannesburg Ku~
Pe
cape Town
- Garuda Indonesia
- Malaysia Alnlnes
- TransaviaAirtnes
AlrAlps
Swisswilgs
- Malev
-
-
Delhi
Mumbai
maran
Garuda Indonesia and additional Yogya1<arta~So1o City su
Heraklion
Almaty
C.lcutta
service operated by Malaysia Airlines ---c,;~ =
(WortdPerks Partners)
Japan A
ir System
-----
----
Xi'an
Chengdu.
Wuh
C
hongqing
Kunming ngsha
Ulline Xi
Guangzhou
Hong ~on
-'--
,,.- .......
-----
\
ok
\
-
I
Memanbetsu
Asahikawa.
Syiporoe
Kushin>
~'-
Dbihlro
\ .,,.,,"'
I , ,
\
,,,,"' .,,..,,.,,
Ku' .,,,,.,,. _.,...,,..,,.
Perth
Adelaide
Melbourne
Brisbane
Sydney.
To Honolulu
Lihue
Honolulu
.
Molokai
I Kahului
Lanai City
To To
Pago Pago Papeete
Hawaiian Airlines
Barrow
Dutch Harbor
Alaska Airlines
.
Kana
Hilo
Prudhoe Bay
dalajara
Havre
Big Sky Airlines
Mexico Ci
lirtapa/Zihuatanejo
\ioulco
Veracruz
Bismarck
Northwest Airlines and Partners
North American Route System
- - Northwest Airlines
- - Continental Airlines
-- Alaska Airlines and Horizon Air
Quebec City
1
land
Panama City
's Vinyard
tucket
Id
Halifax
Winni e Kenora
al.Fall) Thunder Bay
1e 1ver
Grand Forks .__
Montreal
Bismarck
Portland
Wat
Siou~C1 ~--'= ~
~ Westchester
I town._ county/
/
Pierre Sioux F.alls
I
Binghamton
Fo/ D College White Plains
Omaha Harrisburg/
To Aspen Lancaster/York
~ Lineal
To Aspen
Mesaba Aviation
(Northwest Airlink)
Tulsa
Sioux Falls
s
Wichita
Minne
St.
rlottesville
Kf ~~~~ort/ Greensboro .
- - - - -Johnson City "' --.Raleigh/Durham
~\\~~:::::::=:..----;;::! ---Charlotte
Burlington
Harri~
Lancaster/York
us
xville"---... Geenville/
-------Spartanburg
ooga
Is
Charleston
Shrev:port Savannah.
Continental Express
Minneapolis/St. Paul
L fa tt ~atoi ouge b'I ensaco a ee- J~nville
a ye e. 1 e -. '--Pan.;;;a City
To
St. Lucia
-.1! / To Quebec City_,,..-To
Montreal / Halifax
Burlington
Portland
- ~,-;f,-;f--,t....L... Manchester
Boston
Providence
Haftford/Springfield
New York
(la Guardia)
Long Island
(MacArthur)
New York (JFK)
Philadelphia
Baltimore
Washington, D.C.
(National)
Washington, D.C.
(Dulles)
To:
Aguascalientes,
Brownsville, Chihuahua
Corpus Christi, Harlingen, lxtapa/Zihuatanejo:
Laredo,Mazatlan, Monterrey Saltillo
San Luis Potosi, Tampico, Torreon, Veracruz, and Zacateca~
NORTHWEST
A I R L I N E S@
Northwest Airlines Corporation
5101 Northwest Drive
St. Paul, MN 55111-3034
www.nwa.com
2002 Northwest Airlines Corporation
FI0045