Republic AirUnes Financial Report For the Second Quarter Ended June 30, 1986 To our stockholders: Republic Airlines earned $35 million in the second quarter, equal to 72 cents primary earnings per share. It is our second best financial performance for a quarter ending June 30 and the third best quarter in our history. The $35 million net profit included $3 million, or six cents per share, in tax loss carryforwards. We achieved a quarterly operating profit of $55.3 million on operating revenues of $464.2 million and operating expenses of $408.9 million. Seat mile costs were down to 7.68 cents from 8.44 cents a year earlier. A year ago, our second-quarter net earnings of $120.1 million, or $3.26 per share, included extraordinary items totaling $80.2 million or $2.19 per share. Republic continued to strengthen its balance sheet by improving its debt-to-equity ratio from 3.7 to 1 at year end to 1.2 to 1 currently, through retirement of bank debt, conversion of debentures and exercise of warrants. Our share of the nation's passenger traffic continued to grow during the quarter. Revenue passenger miles increased 12.6 percent to 3.21 billion in the quarter with available seat miles growing 15.3 percent. This double-digit improvement in traffic is particularly significant because figures for the second quarter last year were inflated by passengers gained from a strike at United Airlines. For the first half of 1986, Republic and only one other major airline recorded traffic increases that outpaced growth in capacity. From January through June, our revenue passenger miles increased 21.5 percent to 6.09 billion while capacity was up 17.8 percent to 10.19 billion. This resulted in nearly a 2 point increase in load factor to 59.7 percent. The growth in capacity can be traced to the delivery in May of three more Boeing 757 jetliners, completing our purchase of six of these quiet, fuel efficient, 190-passenger aircraft. The new B-757s now are in use at each of Republic's main traffic centers in Detroit, Minneapolis/St. Paul and Memphis and fly high demand routes, principally among the hubs and from the hubs to the West Coast. Despite the traffic increases during the quarter, profits were moderated at Republic and industrywide by declining revenue per passenger mile. Our second-quarter yield decreased 9.2 percent to 13.49 cents from the same period in 1985. Nevertheless, careful cost control, effective marketing, declining fuel prices and employee support continued to be the basis for a profitable operation. A major highlight of the quarter was a June 27 recommendation from a Transportation Department judge that our merger with Northwest Airlines be approved. A final decision on the $884 million transaction, which you approved at our April 23 stockholders' meeting, is expected before the end of July. Considerable planning is underway at both airlines to ensure a smooth integration of Republic into Northwest. The new airline will continue our growth at Detroit, Minneapolis/ St. Paul and Memphis, and will emphasize quality service, convenient flying schedules and affordable fares. Routes will span 38 states and 19 countries. Your support of Republic as stockholders will be rewarded when Northwest purchases Republic stock at $17 per share once the anticipated merger receives government approval. Your support of Republic as a passenger also will be rewarded in your new association with Northwest. Northwest will acquire and expand Republic's domestic strength and at the same time will offer you attentive service to a broad range of international destinations. Your support has not gone unnoticed as it has made possible our accomplishments to date. We urge you to transfer your allegiance to the new Northwest Airlines when the merger is completed. Sincerely, DANIEL F. MAY t/ STEPHEN M. WOLF Chairman of the Board President and Chief Executive Officer July 28, 1986 Republic AIrUnes Consolidated Balance Sheets (unaudited-in thousands) 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 15% participating non-cumulative junior preferred stock, $.01 par value; 10,000 shares authorized, 7,199 shares outstanding in 1986 Common stock, $.20 par value; 60,000,000 shares authorized, 47,413,315 shares outstanding in 1986 Additional paid-in capital Retained earnings Employee stock to be issued Unearned compensation for stock to be issued Consolidated Statements of Earnings Operating Statistics June 30, 1986 December 31, 1985 $ 218,833 $ 300,085 189,116 158,108 44,863 35,657 27,819 34,435 480,631 528,285 940,435 924,199 153,893 153,828 133,475 130,067 12,694 12,468 1,240,497 1,220,562 517,016 482,230 723,481 738,332 13,032 19,680 $1,217,144 $1,286,297 $ 17,094 $ 83,802 8,368 9,207 159,153 128,647 81,864 76,776 55,555 58,230 73,274 59,039 395,308 415,701 293,438 509,434 120,841 124,225 54,916 40,856 469,195 674,515 9,483 6,713 257,989 129,097 84,245 55,076 6,408 15,699 (5,484) (10,504) 352,641 196,081 $1,217,144 $1,286,297 (unaudited-in thousands, except per share amounts) 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 OTHER EXPENSES (INCOME) Interest expense Interest income Gain on disposition of property, equipment and lease rights Other-net Earnings before income taxes and extraordinary items INCOME TAXES Earnings before extraordinary items . EXTRAORDINARY ITEMS Effect of utilization of tax loss carryforwards Gain on pension plan termination NET EARNINGS EARNINGS PER COMMON SHARE PRIMARY Before extraordinary items Extraordinary items Net earnings EARNINGS PER COMMON SHARE- FULLY DILUTED Before extraordinary items Extraordinary items Net earnings Three Months Ended Six Months Ended June 30 June 30 1986 1985 1986 1985 $432,636 $422,668 $819,809 $767,423 19,485 20,787 38,557 41,848 12,064 12,136 24,563 27,225 464,185 455,591 882,929 836,496 142,479 133,613 283,312 259,302 72,923 91,212 167,467 175,152 35,350 35,028 70,230 61,656 25,713 20,095 49,813 38,263 22,523 16,505 43,718 34,480 20,361 18,995 40,168 37,927 89,567 74,386 175,967 145,948 408,916 389,834 830,675 752,728 55,269 65,757 52,254 83,768 16,250 23,211 36,054 45,907 (3,949) (4,016) (9,010) (6,567) (198) (10,773) (10,005) (16,791) (1,463) (889) (2,721) (2,298) 10,640 7,533 14,318 20,251 44,629 58,224 37,936 63,517 12,637 18,232 11,787 21,119 31,992 39,992 26,149 42,398 3,020 17,980 3,020 20,827 - 62,175 - 62,175 $ 35,012 $120,147 $ 29,169 $125,400 $.66 $1.07 $.57 $1.11 .06 2.19 .07 2.27 $.72 $3.26 $.64 $3.38 $.66 $ .90 $.56 $ .96 .06 1.78 .06 1.86 $.72 $2.68 $.62 $2.82 (in thousands, except rates) Three Months Ended June 30 1986 1985 Passengers Revenue passenger miles. . Available seat miles Passenger load factor Yield Cargo ton miles 5,049 3,207,198 5,326,615 60.2% 13.49C 26,998 4,661 2,847,717 4,619,802 61.6% 14.86C 29,182 Six Months Ended June 30 1986 1985 Passengers Revenue passenger miles. . Available seat miles Passenger load factor Yield Cargo ton miles 9,514 6,086,015 10,191,990 59.7% 13.47C 53,354 8,301 5,008,227 8,654,706 57.9% 15.40C 60,749 Highlights of the quarter: Distributing $6.9 million in 1985 profit-sharing checks to Republic employees. Adding three more Boeing 757s to Republic's fleet. Enhancing passenger comfort through installation of new seats on all 64 of Republic's DC-9-30 aircraft. Inaugurating service at Moline, Ill., Peoria, Ill., and Allentown/Bethlehem/Easton, Pa. Commencing nonstop flights from Memphis to San Diego, John F. Kennedy International Airport in New York, Orange County/Santa Ana/Anaheim and Grand Rapids; from Minneapolis/St. Paul to Sacramento and Rapid City; and from Detroit to Louisville. Celebrating the first anniversary of Republic Express regional airline feeder service at the Detroit and Memphis hubs. Opening a 24,000-square-foot flight kitchen in Detroit. Earning an American Marketing Association award for Republic's "Perks" advertising campaign. Accepting national airline sponsor status for "Hands Across America," the fund-raising campaign for the nation's homeless. Improving passenger service by accepting advance seat assignment and advance boarding passes prepared by travel agencies. Republic AIrUnes 7500 AIRLINE DRIVE MINNEAPOLIS, MINNESOTA 55450