~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 -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:: 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:: 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 ~'- 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