Republic AmliNES FINANCIAL REPORT FOR THE FIRST QUARTER ENDED MARCH 31, 1986 To our stockholders: Republic Airlines stockholders, at their annual meeting in Wausau, Wisconsin, April 23, voted in favor of the planned merger with NWA Inc., parent company of Northwest Airlines, Inc. A hearing is being held and an Administrative Law Judge will make a recommendation to the Department of Transportation, which then will make its decision. We expect this decision to be favorable. The procedure being used by the Department of Transportation will offer further evidence of the contribution this merger will make to improved service for travelers, to the stability of the economy of Republic's and Northwest's home state, Minnesota, and to a more secure future for Republic's employees as a result of the opportunities offered by the combined carrier. Republic's stockholders will be paid $17 per share by NWA Inc. when the merger is consummated. The management of Republic is pleased that the stockholders, many of whom have supported Republic for decades, will benefit appreciably as a result of the merger. Republic, in the meantime, continues to offer quality, competitive service. During the first quarter of 1986, when the nation's major airlines incurred substantially reduced profits compared with last year's level, Republic experienced a first-quarter loss, which was anticipated, totaling $5.8 million, or 14 cents per share (primary). A year ago, Republic earned $5.3 million, or 12 cents per share. First-quarter traffic increased more than 33 percent over the similar period last year, but yield (revenue per passenger mile) was affected by industry-wide fare discounting and was reduced to 13.45 cents from 16.13 cents a year ago. Operating revenues for the first quarter reached $418.7 million compared with $380.9 million for the similar 1985 period. Operating expenses totaled $421.8 million versus $362.9 million a year ago. Republic's 33 percent first-quarter revenue passenger mile increase was the largest among the major carriers. The first-quarter load factor, up six points over the previous year, also led the major airlines. Republic continues to strengthen its financial position. Most notable, during the first quarter of 1986, was the reduction in the amount of debt relative to stockholders' equity. During January, the Company called for the redemption of all of its outstanding convertible subordinated debentures. As a result, over $85 million of debt was eliminated when the debentures were converted into common stock. New service was inaugurated to Cancun, Mexico, in January and to Dayton, Ohio, and Cedar Rapids, Iowa, in February. Planning was completed for the May 18 inauguration of service to Allentown/Bethlehem/Easton, Penn., and to the Quad Cities of Davenport/Bettendorf/ Rock Island/Moline. Peoria, Ill., will join the Republic route system June 1. Memphis-based Republic Express continued to be the fastest growing regional carrier in the nation. The airline began service last June and now is boarding 50,000 passengers monthly. More than 80 percent of these passengers connect with Republic flights at Memphis and Minneapolis/St. Paul. In January, Republic announced the addition of Western Airlines and Radisson Hotels to its Frequent Flyer program. They join Pan American World Airways, Hertz and National Car Rental making Republic's Frequent Flyer program even more attractive to air travelers. Republic now has more than one million Frequent Flyers with several thousand new members signing up every week. With the new airline partners, Frequent Flyers are able to fly to new destinations such as Hawaii and Alaska. It is part of the new "Pick-a-Perk" program enabling passengers to exchange their free Republic tickets for free travel on Pan Am and Western. Frequent Flyers also can earn a free Hertz car on weekends, a luxury upgrade with National and free weekend nights at any Radisson Hotel, Inn or Resort. Three new Boeing 757s will be added to Republic's fleet this month joining the three that entered service in December. The 190-passenger 757s, with quiet, fuel-efficient Rolls-Royce engines, have won immediate passenger acceptance. Traffic will strengthen as the peak summer travel season approaches. With the continued support of Republic's employees, the sustained effectiveness of innovative marketing programs and further improvements at the three main hubs, Republic expects to continue its strong financial performance. This positions the company well for the merger with NWA Inc. Sincerely, DANIEL F. MAY (/ STEPHEN M. WOLF Chairman of the Board President and Chief Executive Officer May 1, 1986 Republic AIrUnes Consolidated Balance Sheets (unaudited-in thousands) Consolidated Statements of Operations (unaudited-in thousands, except per share amounts) ASSETS CURRENT ASSETS Cash and short-term cash investments Accounts receivable-less allowances Parts and supplies-less reserves Prepaid expenses and other PROPERTY AND EQUIPMENT Flight equipment owned Flight equipment leased Ground property and equipment owned Ground property and equipment leased Less accumulated depreciation, amortization DEFERRED CHARGES, OTHER ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt Current obligations under capital leases Air traffic liability Accounts payable Accrued compensation and vacation benefits Other accrued expenses LONG-TERM OBLIGATIONS Long-term debt-less current maturities Noncurrent obligations under capital leases Long-term pension liability and other STOCKHOLDERS' EQUITY Preferred stock, $.01 par value Common stock, $.20 par value; 43,557,376 shares outstanding Additional paid-in capital Retained earnings Employee stock to be issued Unearned compensation for stock to be issued March 31, 1986 $ 276,919 185,456 41,493 30,670 534,538 931,401 153,828 128,283 12,468 1,225,980 496,926 729,054 13,967 $1,277,559 $ 76,295 8,982 133,785 79,940 61,204 58,590 418,796 419,989 119,762 40,588 580,339 8,711 218,038 49,233 10,435 (7,993) 278,424 $1,277,559 December 31, 1985 $ 300,085 158,108 35,657 34,435 528,285 924,199 153,828 130,067 12,468 1,220,562 482,230 738,332 19,680 $1,286,297 $ 83,802 9,207 128,647 76,776 58,230 59,039 415,701 509,434 124,225 40,856 674,515 6,713 129,097 55,076 15,699 (10,504) 196,081 $1,286,297 OPERATING REVENUES Passenger Cargo Other OPERATING EXPENSES Salaries and benefits Aircraft fuel Agency commissions Rentals and landing fees Maintenance materials and repairs Depreciation and amortization.... Other Operating profit (loss) OTHER EXPENSES (INCOME) Interest expense Interest income Gain on disposition of property, equipment and lease rights .. Other-net Earnings (loss) before income taxes and extraordinary item INCOME TAXES (CREDIT) Earnings (loss) before extraordinary item . EXTRAORDINARY ITEM Effect of utilization of tax loss carryforwards NET EARNINGS (LOSS) EARNINGS (LOSS) PER COMMON SHARE PRIMARY Before extraordinary item Extraordinary item Net earnings (loss) EARNINGS (LOSS) PER COMMON SHARE- FULLY DILUTED Before extraordinary item Extraordinary item Net earnings (loss) Three Months Ended March 31 1986 1985 $387,173 $344,755 19,072 21,061 12,499 15,089 418,744 380,905 140,833 125,689 94,544 83,940 34,880 26,628 24,100 18,168 21,195 17,975 19,807 18,932 86,400 71,562 421,759 362,894 (3,015) 18,011 19,804 22,696 (5,061) (2,551) (9,807) (6,018) (1,258) (1,409) 3,678 12,718 (6,693) 5,293 (850) 2,887 (5,843) 2,406 _ 2,847 $ (5,843) $ 5,253 $(.14) $.04 - .08 $U4) $.12 $(.10) $.04 - .08 $(.10) $.12 Operating Statistics (in thousands, except rates) Three Months Ended March 31 1986 1985 Passengers 4,465 3,640 Revenue passenger miles . . . . 2,878,817 2,160,510 Available seat miles . . 4,865,375 4,034,904 Passenger load factor 59.2% 53.5% Yield 13.45