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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23642
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NORTHWEST AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4205287
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
2700 LONE OAK PARKWAY, EAGAN, MINNESOTA 55121
(Address of principal executive offices)
(612) 726-2111
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE THE NASDAQ NATIONAL MARKET
PREFERRED STOCK PURCHASE RIGHTS THE NASDAQ NATIONAL MARKET
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 26, 1999 was $1.6 billion.
As of February 26, 1999, there were 84,034,905 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information
from the registrant's Proxy Statement for its Annual Meeting of Stockholders to
be held on April 23, 1999.
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PART I
ITEM 1. BUSINESS
Northwest Airlines Corporation ("NWA Corp." and, together with its
subsidiaries, the "Company"), is the indirect parent corporation of Northwest
Airlines, Inc. ("Northwest"). Northwest operates the world's fourth largest
airline (as measured by 1997 revenue passenger miles ("RPMs")) and is engaged in
the business of transporting passengers and cargo. Northwest's business focuses
on the development of a global airline network through its strategic assets that
include:
- domestic hubs at Detroit, Minneapolis/St. Paul and Memphis;
- an extensive Pacific route system with hubs at Tokyo and Osaka;
- a trans-Atlantic alliance with KLM Royal Dutch Airlines ("KLM") that
operates through a hub in Amsterdam; and
- a global alliance with Continental Airlines, Inc. ("Continental").
OPERATIONS AND ROUTE NETWORK
Northwest operates substantial domestic and international route networks and
directly serves more than 150 cities in 21 countries in North America, Asia and
Europe. Northwest had more than 50.5 million enplanements and flew over 66.7
billion RPMs in 1998. Northwest began operations in 1926.
Northwest has expanded its network and provides greater service to its
customers through the use of domestic and international alliances and code-share
agreements with other airlines. Code-sharing is an agreement under which an
airline's flights can be marketed under the two-letter designator code of
another airline. By coordinating flight schedules, product development and
marketing, Northwest and its alliance partners, provide a global network to over
500 cities and 90 countries in the U.S., Canada, Asia, India, the South Pacific,
Mexico and the Caribbean, Europe, the Middle East, Africa and Latin America.
During 1998, Northwest and Continental entered into a thirteen-year global
strategic commercial alliance that connects the two carriers' networks and
includes extensive code-sharing, frequent flyer program reciprocity and other
cooperative activities. The airlines will continue operating their two networks,
which overlap on only seven routes, under separate identities. The combined
network will result in a domestic presence comparable to that of either United
Air Lines, Inc. or American Airlines, Inc. (based on 1998 ASMs), provide
Northwest access to Latin America and increase its Pacific presence.
In December 1998, Northwest and Continental began implementing their
alliance. Since then, they have initiated code-sharing to several points in Asia
and to many domestic cities. Northwest anticipates that it will add additional
code-sharing with Continental in 1999; however, further international
code-sharing is subject to certain regulatory approvals. Through increased
domestic and international connections, Northwest anticipates increasing its
market share and enhancing its revenue. Other joint activities anticipated to be
implemented include airport facility coordination, joint purchasing, certain
coordinated sales programs, and the inclusion of Continental in Northwest's
trans-Atlantic joint venture alliance with KLM. Through combined purchasing
power and increased efficiencies in airport operations, Northwest also
anticipates reducing its operating costs.
DOMESTIC SYSTEM
Northwest's domestic route system serves 46 states in the U.S., the District
of Columbia, Mexico, Canada and the Caribbean. Northwest operates its domestic
system through its hubs at Detroit, Minneapolis/St. Paul and Memphis. The hub
system gathers passengers from the hub and cities surrounding the hub and
provides more frequent local and connecting service than if each route were
served on a nonstop point-to-point basis. As part of its alliance with
Continental, Northwest's passengers will be able to connect
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through Continental's hubs in Newark, Houston and Cleveland to additional cities
not previously served by Northwest.
Northwest's hubs provide connections to feed traffic into its ten gateway
cities for international service. Northwest operates international flights from
its Detroit and Minneapolis/St. Paul hubs as well as from Anchorage, Boston,
Honolulu, Las Vegas, Los Angeles, New York, Philadelphia, San Francisco, Seattle
and Washington D.C. In addition, KLM operates flights to Amsterdam from Memphis,
Atlanta, Chicago and Houston.
Northwest has exclusive marketing agreements with two regional carriers:
Mesaba Aviation, Inc. ("Mesaba") and Express Airlines I, Inc. ("Express"), a
wholly-owned indirect subsidiary of NWA Corp. Under these agreements, these
regional carriers operate their flights under the Northwest "NW" code and are
identified as Northwest Airlink carriers. The primary purpose of these marketing
agreements is to provide more frequent service to small cities, which increases
connecting traffic at Northwest's hubs. Currently these carriers exclusively
serve 77 airports.
DETROIT. Northwest and Mesaba together serve over 130 cities from Detroit.
For the 12 months ended June 30, 1998, Northwest and Mesaba enplaned 66% of
originating passengers from this hub, while the next largest competitor enplaned
5%. Detroit, which is the sixth largest origination/destination hub in the U.S.,
is Northwest's largest international gateway from the continental U.S., offering
nonstop flights to 17 foreign cities, including 20 nonstop flights to Japan per
week.
MINNEAPOLIS/ST. PAUL. Northwest and Mesaba together serve over 140 cities
from Minneapolis/St. Paul. For the 12 months ended June 30, 1998, Northwest and
Mesaba enplaned 73% of originating passengers from this hub, while the next
largest competitor enplaned 5%. Minneapolis/St. Paul is the eleventh largest
origination/ destination hub in the U.S.
MEMPHIS. Northwest and Express serve over 80 cities from Memphis. For the
12 months ended June 30, 1998, Northwest enplaned approximately 56% of
originating jet passengers from this hub, while the next largest competitor
enplaned approximately 23%. Mesaba began serving this hub in March 1999 with
regional jet service.
Northwest has additional marketing agreements with Alaska Airlines, Horizon
Air, Trans States Airlines, Inc. and America West Airlines, Inc. for
code-sharing on some of these carriers' routes in the western U.S. The primary
purpose of the arrangements with these airlines is to provide increased
connections between Northwest's route network and their route networks to
generate increased traffic into Northwest's domestic system and international
gateways to the Pacific.
Northwest, together with Mesaba, currently operates service to seven cities
in Mexico, 12 cities in Canada and five cities in the Caribbean. Through its
alliance with Continental, Northwest will be able to provide substantial
connecting service to Mexico and Central America, as Continental is one of the
leading airlines providing service to the region, serving more destinations than
any other U.S. airline.
INTERNATIONAL SYSTEM
Northwest has a comprehensive route network to the Pacific, providing
extensive service to Japan and China, and also services destinations to Europe
and India. The Company has joint marketing alliances and code-share agreements
with other foreign carriers that allow it to expand its service and enter
additional markets with minimal capital outlay.
PACIFIC. Northwest has served the Pacific market since 1947 and has one of
the world's largest Pacific route networks, with over 470 weekly flights.
Northwest's Pacific operations are concentrated at its Tokyo hub. Northwest has
the largest slot portfolio of any non-Japanese airline at Tokyo's
slot-constrained Narita International Airport, with 316 weekly takeoff and
landing slots. Northwest uses its route certificate and slot portfolio to
operate a network linking eight U.S. gateways and ten Asian and Micronesian
destinations
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via Tokyo. Northwest has also developed a hub at Osaka's Kansai airport, where
it holds 108 takeoff and landing slots. Northwest currently operates 42 weekly
departures from Osaka, which includes service between four U.S. gateways and
three Asian destinations.
Northwest provides passenger service between various points in the U.S. and
Japan and operates flights between Japan and Korea, Taiwan, the Philippines,
Thailand, Singapore, Northern Mariana Islands,
and China, including Hong Kong. Northwest's Japan presence results from the 1952
U.S.-Japan bilateral aviation agreement, as amended, 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. Northwest and
United are the only U.S. passenger carriers that have "fifth freedom" rights
from Japan. On March 14, 1998, the U.S. and Japan expanded their aviation
agreement. Primary benefits of the new agreement for Northwest included
unlimited rights and frequencies to operate between any point in the U.S. and
Japan and the ability to code-share with Japanese carriers. The agreement
confirmed and expanded Northwest's "fifth freedom" rights and the U.S. received
assurances that Northwest will retain all its weekly takeoff and landing slots
at Tokyo and Osaka and will have access to new slots as they become available.
In 1998, the Company added nonstop service between Detroit and Nagoya, Las Vegas
and Tokyo, Anchorage and Tokyo, and Nagoya and Manila. In 1999, Northwest began
nonstop service between Kaohsiuing, Taiwan and Osaka and Kuala Lumpur, Malaysia
and Osaka.
Northwest continues to expand its Pacific presence through additional
alliances. Northwest is currently implementing an alliance with Japan Air
System, which has approximately 25% of Japan's domestic traffic. The alliance
includes coordinated flight connections, traffic servicing, and reciprocal
frequent flyer programs and is expected to include code-sharing and other
cooperative activities. Northwest also has code-sharing and marketing agreements
with Hawaiian Airlines and Pacific Island Aviation.
In October 1998, the Company began code-sharing with Air China as part of a
minimum four year alliance entered into in May 1998. The alliance connects the
two carriers' networks and also includes frequent flyer program reciprocity and
joint marketing. At the end of 1998, Northwest and Air China provided 17 flights
each week between the U.S. and China, including four Northwest nonstop flights
between Detroit and Beijing. This is the only regularly scheduled nonstop
service between the U.S. and China's capital operated by a U.S. carrier.
Northwest alliance partners, Alaska Airlines, America West Airlines and
Continental, have entered into alliance agreements with Air China; Northwest and
its partners collectively provide the most nonstop and one-stop service between
the U.S. and China.
On February 2, 1999, Northwest and Malaysia Airlines entered into a
Memorandum of Understanding ("MOU") designed to lead to an operational and
marketing alliance. The MOU provides for coordinated flight connections,
code-sharing, frequent flyer program reciprocity and other coordinated
activities.
ATLANTIC. Northwest provides passenger service from seven U.S. gateway
cities to Amsterdam, Paris, Frankfurt and London (Gatwick) with 70 weekly
nonstop flights. Northwest also provides service to Mumbai and Delhi, India from
Amsterdam. Daily nonstop service from Minneapolis/St. Paul to Oslo, Norway is
scheduled to begin on May 1, 1999 and from Minneapolis/St. Paul to Amsterdam in
April 1999. An additional seasonal daily nonstop flight from Detroit to
Amsterdam is planned to be added in June 1999.
Northwest and KLM operate their trans-Atlantic flights pursuant to a
commercial and operational joint venture alliance. Northwest and KLM have
expanded their trans-Atlantic presence by operating joint service between 13
U.S. cities and Amsterdam, KLM's hub airport. Code-sharing between Northwest and
KLM has been implemented on flights to 61 European, eight Middle Eastern, seven
African, three Asian and over 185 U.S. cities. The Northwest/KLM alliance
benefits from antitrust immunity that facilitates coordinated pricing,
scheduling, product development and marketing.
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In September 1997, Northwest and KLM expanded their alliance for a minimum
of 13 years and expanded their areas of cooperation to include services between
Europe and Canada, India and Mexico. In addition, the two companies plan to
increase the level of cooperation between their respective cargo divisions and
will explore extending their alliance to include additional partners and to
further develop strategies for joint marketing and product development. In
February 1998, a leading aviation trade magazine, AIR TRANSPORT WORLD, awarded
its "1997 Airline of the Year" honor to the Northwest/KLM alliance.
In November 1998, KLM and Alitalia entered into a strategic commercial
alliance and began code-sharing. KLM and Alitalia have stated that they expect
to develop a European multi-hub network based in Amsterdam, Rome and Milan.
Continental and Alitalia currently code-share between the U.S. and Italy and
Northwest anticipates that Alitalia will also join the Northwest/KLM
trans-Atlantic joint venture alliance, subject to regulatory approvals. If
consummated, the addition of Alitalia and Continental to the Northwest/KLM
trans-Atlantic joint venture alliance would create a combination comparable in
scale and scope to other global alliances, resulting in over a 15%
trans-Atlantic market share (based on 1998 ASMs) with service to 48 countries.
To further enhance Northwest's service in Europe, India, and Southeast Asia,
Northwest also has marketing agreements with Eurowings, Braathens, KLM uk, KLM
exel, Jet Airways Private Ltd., Kenya Airways, and Garuda Indonesia. KLM has
similar agreements with Air Engiadina of Switzerland and Regionale Air of
France, and Northwest expects to enter into similar agreements with these two
airlines. Northwest has a marketing agreement with Business Express Airlines for
code-sharing in the Boston area to feed its trans-Atlantic and domestic route
network.
In September 1992, the U.S. and the Netherlands entered into an "open-skies"
bilateral aviation treaty which authorizes the airlines of each country to
provide international air transportation between any U.S.-Netherlands city pair
and to operate connecting service to destinations in other countries. Based
primarily on the open-entry market created by this treaty and the limited
competitive overlap between route systems, Northwest and KLM petitioned the
Department of Transportation (the "DOT") for joint immunity from the U.S.
antitrust laws and, under conditions imposed by the DOT, were granted such
immunity in January 1993. Northwest and KLM re-submitted their alliance
agreement to the DOT in January 1998. The European Commission ("EC") has
commenced a review of all trans-Atlantic airline alliances, including
Northwest/KLM. The EC is considering imposing certain regulatory conditions that
may restrict the areas of permissible cooperation.
LATIN AMERICA. Through the Company's alliance with Continental, Northwest
will increase its Latin American presence. Continental flies to eight cities in
South America and offers additional connecting service through alliances with
foreign carriers. Northwest expects to implement code-sharing in Latin America
with Continental in 1999.
CARGO
Northwest, utilizing eight Boeing 747 freighter aircraft, is the world's
tenth largest cargo air carrier (based on 1997 freight ton miles). Northwest is
one of only two U.S. passenger airlines to operate a dedicated all-cargo
freighter fleet. Cargo accounts for 7% of the Company's operating revenues, and
the majority of its cargo revenues originate in or are destined for Asia.
Through its Tokyo and Anchorage cargo hubs, Northwest serves most major air
freight markets between the U.S. and the Pacific.
OTHER ACTIVITIES
MLT INC. MLT Inc. ("MLT") is among the largest vacation wholesale companies
in the U.S. In addition to its MLT Vacations charter program, MLT markets and
supports Northwest's WorldVacation packages and offers leisure fares to several
domestic and international destinations, primarily on Northwest.
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NORTHWEST AEROSPACE TRAINING CORPORATION. Northwest Aerospace Training
Corporation ("NATCO") provides training and aircraft simulation services to
pilots for Northwest, other airlines, governments and corporations. The NATCO
training facility is among the world's largest aircraft simulation facilities,
with 22 full-flight simulators and training devices. In 1998, 44% of NATCO's
revenues came from third parties. NATCO's customer base includes both domestic
and international airlines.
NORTHWEST PARS, INC. Northwest PARS, Inc. holds a 33.7% limited partnership
interest in WORLDSPAN, L.P. ("WORLDSPAN"). WORLDSPAN operates and markets a
computer reservations and passenger processing system ("CRS") for the travel
industry. Delta Air Lines, Inc. and Trans World Airlines, Inc. own 40% and 26.3%
of WORLDSPAN, respectively.
INDUSTRY CONDITIONS AND COMPETITION
The airline industry is both cyclical and seasonal in nature. Due to
seasonal fluctuations, the Company's operating results for any interim period
are not necessarily indicative of those for the entire year. The Company's
second and third quarter operating results have historically been more favorable
due to increased leisure travel on domestic and international routes during the
spring and summer months.
The airline industry is highly competitive. Airline profit levels are highly
sensitive to adverse changes in fuel costs, average fare levels and passenger
demand. Passenger demand and fare levels have historically been influenced by,
among other things, the general state of the economy, international events,
airline capacity and pricing actions taken by other airlines. For example, from
1990 to 1993, the weak U.S. economy, turbulent international events and
extensive price discounting by carriers resulted in unprecedented losses for
U.S. airlines, including Northwest. Since then, the U.S. economy has improved
and broadly available, deep price discounting has ceased.
Northwest's competitors include all the other major domestic airlines, as
well as foreign, national, regional and new entrant airlines, some of which have
more financial resources or lower cost structures than Northwest. Northwest uses
yield inventory management systems to vary the number of discount seats offered
on each flight in an effort to maximize revenues while remaining price
competitive with lower-cost carriers.
In recent years, the major U.S. airlines have formed marketing alliances
with other U.S. and foreign airlines. Such alliances generally provide for
code-sharing, frequent flyer program reciprocity, coordinated scheduling of
flights to permit convenient connections and other joint marketing activities.
Such arrangements permit an airline to market flights operated by other alliance
members as its own. This increases the destinations, connections and frequencies
offered by the airline, which provide an opportunity to increase traffic on that
airline's segment of flights connecting with alliance partners. Other major U.S.
airlines have alliances or planned alliances that may be more extensive than
Northwest's alliances. Northwest's ability to grow its route network by entering
into alliances depends upon the availability of suitable alliance candidates and
the ability of Northwest and its alliance partners to meet business objectives
and to perform their obligations under the alliance agreements.
Northwest has developed strategies that are designed to utilize the
Company's strategic assets to its competitive advantage. These strategies focus
on providing reliable, convenient and consistent air transportation. In
addition, the Company's frequent flyer program, targeted fare promotions and
customer service improvements are designed to maintain and improve its
competitive position.
WORLDSPAN COMPUTER RESERVATION SYSTEM
The large majority of travel agencies in the U.S. obtain their airline
travel information through access to a CRS. A CRS, which is typically owned or
operated by an airline or airlines, is used by travel agents to make airline,
hotel and car reservations and to issue airline tickets. Northwest's presence
through WORLDSPAN in the CRS market gives it a voice in the distribution of its
airline product. Based on the number of passenger segments sold and the number
of agency locations, WORLDSPAN ranks third in
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market share among travel agents in the U.S. WORLDSPAN is subject to CRS
regulations promulgated by the DOT and the European Economic Community.
MARKETING
Consistent with the experience of other carriers, approximately 80% of
ticket sales for travel on Northwest are sold by travel agents. Travel agents
generally receive commissions on sales of tickets. Airlines often pay additional
commissions in connection with special revenue programs.
Northwest introduced electronic ticketing for its entire U.S. and Canadian
route system in 1996. By the end of 1998, 52% of Northwest's North American
customers were using electronic tickets ("E-Tickets"). Northwest is continuing
to expand electronic ticketing and anticipates that in 1999 E-Tickets will be
available for travel from North America to all Northwest destinations worldwide.
Northwest became the first major airline to deploy compact self-service
kiosks to enhance its electronic ticketing services in 1997. These electronic
service centers enable E-Ticket customers to obtain boarding passes, make
current-day flight or seat changes, obtain WORLDPERKS Gold upgrades and, at some
locations, check their own bags. Electronic service centers are now available at
18 airports in North America, including Detroit, Minneapolis/St. Paul, Memphis,
Baltimore, Boston, Chicago O'Hare, Indianapolis, Kansas City, New York (La
Guardia), Los Angeles, Milwaukee, Newark, Philadelphia, Phoenix, San Francisco,
Seattle/Tacoma, Tampa and Washington D.C. (Ronald Reagan National).
Northwest offers CyberSaver fares through its web site on the World Wide Web
(www.nwa.com). These fares offer travelers the opportunity to realize deep
discounts for weekend travel on selected domestic routes. In 1998, Northwest
became the first airline to allow participants in the WORLDPERKS frequent flyer
program to redeem mileage awards online. In cooperation with KLM, the web site's
expanded booking capability now allows customers from the U.S., Canada, Japan,
the United Kingdom, Sweden, Norway, Denmark and Germany to arrange their travel
online. In 1998, the site was named "best airline web site" by the DOW JONES
BUSINESS DIRECTORY and by the Web Marketing Association.
In conjunction with the Northwest's global alliance with Continental,
Northwest and Continental Micronesia, Inc. ("CMI"), a wholly-owned subsidiary of
Continental operating in the South Pacific, plan to utilize coordinated sales
activities.
FREQUENT FLYER PROGRAM
Northwest operates a frequent flyer marketing program known as "WORLDPERKS"
under which mileage credits are earned by flying on Northwest or participating
airlines and by using the services of participating bank credit cards, hotels,
long-distance companies and car rental firms. Northwest sells mileage credits to
the other companies participating in the program. The program was designed to
retain and increase the business of frequent travelers by offering incentives
for their continued patronage.
The WORLDPERKS program is based on a mileage banking system (miles earned
are accumulated in an account for each member). Mileage credits can be redeemed
for free or upgraded travel on Northwest and other participating airlines or for
other travel industry awards. Additional features include the use of seasonal
awards based on peak/off-peak period travel and a three-tier award structure.
Concurrently with the commencement of its global alliance with Continental,
Northwest enhanced its WORLDPERKS program. Beginning in 1998, WORLDPERKS miles
do not expire, domestic award travel levels starting as low as 20,000 miles are
available nine months of the year and WORLDPERKS members are allowed to earn
WORLDPERKS miles on Northwest and its alliance partners, including Continental.
Northwest accounts for its frequent flyer obligation on the accrual basis
using the incremental cost method. Northwest includes food and beverage, fuel,
insurance, security, miscellaneous claims and WORLDPERKS service center expense
in its incremental cost calculation. The incremental costs do not include any
contribution to overhead or profit. Food, beverage and other costs are based on
average cost
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per passenger for the current twelve-month period. The incremental fuel unit
cost per passenger is based on engineering formulas that determine the average
fuel cost per pound carried. Average year-to-date fuel price and estimated
average weight of each added onboard passenger and luggage are factored into the
incremental cost computation and converted to a rate per passenger per award.
The number of estimated travel awards outstanding at December 31, 1998, 1997
and 1996 was approximately 6,147,000, 5,123,000 and 4,536,000 awards,
respectively (data for 1998 is based on an average of 22,500 miles per domestic
award instead of the previous 23,900 miles per award and an average of 45,500
miles per international award). Northwest estimated its recorded liability based
on 5,073,000, 4,198,000 and 3,642,000 of these awards, respectively. The
estimated liability excludes accounts that have never attained the lowest travel
award level and awards that are expected to be redeemed for upgrades or are not
expected to be redeemed at all, and includes an estimate for partially earned
awards on accounts that previously earned an award. The number of estimated
travel awards used for travel on Northwest during the years ended December 31,
1998, 1997 and 1996 was approximately 1,159,000, 1,111,000 and 1,025,000,
respectively. These awards represented an estimated 6.8%, 5.8% and 5.5% of
Northwest's total RPMs for each such year, respectively. Northwest believes
displacement of revenue passengers is minimal based on the low ratio of
WORLDPERKS award usage to revenue passenger miles, the Company's ability to
manage frequent flyer inventory through seat allocations and blackout dates, and
program incentives to travel during off-peak periods.
AIRCRAFT FUEL
Northwest's worldwide aircraft fuel requirements are met by approximately 50
different suppliers. Northwest has contracts with these suppliers, the terms of
which vary as to price, payment terms, quantities and duration. Northwest also
makes purchases of fuel based on price and availability. In order to provide a
measure of control over price and supply, Northwest trades and ships fuel and
maintains fuel storage facilities to support its flight operations. Petroleum
product prices, including jet fuel, are primarily driven by crude oil costs. The
market's alternate uses of crude oil to produce petroleum products other than
jet fuel (e.g., heating oil and gasoline) as well as the adequacy of refining
capacity and other supply constraints affect the price and availability of jet
fuel. Major changes in the price or availability of fuel could materially affect
the financial results of the Company.
The following table summarizes Northwest's fuel consumption and costs:
YEAR ENDED DECEMBER 31
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1998 1997 1996
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Gallons consumed (in millions)................................... 1,877 1,996 1,945
Total costs (in millions)(1)..................................... $ 1,006 $ 1,295 $ 1,307
Average cost per gallon (cents).................................. 53.60 64.86 67.21
Percentage of operating expenses................................. 10.9% 14.3% 14.8%
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(1) Excludes taxes and into-plane fees.
REGULATION
GENERAL. The Airline Deregulation Act of 1978, as amended, eliminated most
domestic economic regulation of passenger and freight transportation. Northwest
is subject to DOT regulations because it holds certificates of public
convenience and necessity as well as air carrier operating certificates.
Northwest's domestic route authority from the DOT permits it to engage in the
interstate and overseas transportation of passengers, freight and mail between
all points in the U.S. and it territories and possessions.
The DOT has jurisdiction over international route authorities, CRSs and
certain consumer protection matters, such as advertising, denied boarding
compensation and baggage liability. The Federal Aviation Administration (the
"FAA") regulates flight operations, including air space control, and aircraft
and
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security standards. The Department of Justice (the "DOJ") has jurisdiction over
airline competition matters, including mergers and acquisitions. Other federal
agencies have jurisdiction over postal operations, use of radio facilities by
aircraft and certain other aspects of Northwest's operations.
In April 1998, the DOT issued proposed competition guidelines that would
severely limit major carriers' ability to compete with new entrant carriers. In
addition, the DOJ is investigating competition at major hub airports and several
items of legislation have been introduced in Congress that would, if enacted:
(i) create new slots for redistribution to new entrants and smaller carriers,
(ii) provide financial assistance, in the form of guarantees and/or subsidized
loans, to smaller carriers for aircraft purchases and/or (iii) require major
carriers like Northwest to enter into interline agreements with smaller carriers
and authorize the DOT to investigate airline marketing practices that may
inhibit service to small and medium sized communities and impose regulations to
remedy any service problems so identified. The outcomes of the DOT guidelines,
the investigations and the proposed legislation are unknown. However, to the
extent that (i) restrictions are imposed upon Northwest's ability to respond to
competition, or (ii) competitors receive financial assistance or special
regulatory protections, Northwest's business may be adversely impacted.
Northwest operates its international routes under route certificates issued
by the DOT. Substantial portions of Northwest's Pacific route certificates are
permanent and do not require renewal by the DOT. Certain other international
route certificates are temporary and subject to periodic renewal by the DOT.
Northwest requests extensions of these certificates when and as appropriate. The
DOT typically renews temporary authorities on routes when the authorized carrier
is providing a reasonable level of service. With respect to foreign air
transportation, the DOT must approve agreements between air carriers, including
code-sharing agreements, and may grant antitrust immunity for those agreements.
Northwest's rights to operate to foreign countries, including Japan and
other countries in the Pacific and Europe, are governed by aviation agreements
between the U.S. and the respective foreign countries. Many aviation agreements
permit an unlimited number of carriers to operate between the U.S. and the
respective foreign country, while other aviation agreements limit the number of
carriers and flights on a given international route. From time to time, the U.S.
or its foreign country counterpart may seek to renegotiate or cancel an aviation
agreement. In the event an aviation agreement is amended or canceled, such a
change could adversely affect Northwest's ability to maintain and/or expand air
service to the foreign country.
Operations to and from foreign countries are subject to the applicable laws
and regulations of those countries. There are restrictions on the number and
timing of operations at certain international airports served by Northwest,
including Tokyo and Osaka. Additionally, slots for international flights are
subject to certain restrictions on use and transfer.
AIRPORT ACCESS. Four of the nation's airports, Chicago O'Hare, New York
(LaGuardia and Kennedy International) and Washington D.C. (Ronald Reagan
National), have been designated by the FAA as "high density traffic airports,"
and the number of take-offs and landings at such airports ("slots") have been
limited during certain peak demand time periods. Currently the FAA permits the
buying, selling, trading or leasing of these slots, subject to certain
restrictions.
LABOR. The Railway Labor Act ("RLA") governs the labor relations of
employers and employees engaged in the airline industry. Comprehensive
provisions are set forth in the RLA establishing the right of airline employees
to organize and bargain collectively along craft or class lines and imposing a
duty upon air carriers and their employees to exert every reasonable effort to
make and maintain collective bargaining agreements. The RLA contains detailed
procedures that must be exhausted before a lawful work stoppage may occur.
Pursuant to the RLA, Northwest has collective bargaining agreements with six
domestic unions representing 11 separate employee groups. For current status of
agreements, see "Item 1. Business--Employees." In addition, Northwest has
agreements with four unions representing its employees in countries throughout
Asia; such agreements are not subject to the RLA.
9
NOISE ABATEMENT. The Airport Noise and Capacity Act of 1990 ("ANCA")
requires the phase-out of Stage II aircraft operations (as defined in Part 36 of
the Federal Aviation Regulations) by December 31, 1999, subject to certain
exceptions. The FAA regulations, which implement the ANCA, require carriers to
modify or reduce the number of Stage II aircraft operated by 75% by the end of
1998 and 100% by the end of 1999. Alternatively, a carrier could satisfy these
compliance requirements by operating a fleet that is at least 75% Stage III by
the end of 1998 and 100% Stage III by the end of 1999. As of December 31, 1998,
Northwest operated 342 Stage III aircraft and 67 Stage II aircraft. Northwest is
currently in compliance and has plans in place to enable it to meet the 1999
year-end operational requirements.
The ANCA also recognizes the right of airport operators with special noise
problems to implement local noise abatement procedures as long as such
procedures do not interfere unreasonably with the interstate and foreign
commerce of the national air transportation system. The ANCA generally requires
FAA approval of local noise restrictions on Stage II aircraft and establishes a
regulatory notice and review process for local restrictions on Stage II aircraft
first proposed after October 1990. As a result of litigation and pressure from
airport area residents, airport operators have taken local actions over the
years to reduce aircraft noise. These actions include restrictions on nighttime
operations, restrictions on frequency of aircraft operations and various
operational procedures for noise abatement. While to date Northwest has
sufficient operational and scheduling flexibility to accomodate current local
noise restrictions, its operations could be adversely affected if
locally-imposed regulations become more restrictive or widespread.
The European Union is considering a proposed rule that would prohibit the
registration in Europe of aircraft with "hushkits" after April 1, 1999.
Northwest opposes such a rule as it could inhibit its operations in Europe as
well as reduce the Company's fleet strategy options in relation to older
aircraft, which are often retired and sold in Europe, Africa and Asia.
SAFETY. The FAA has jurisdiction over aircraft maintenance and operations,
including equipment, dispatch, communications, training, flight personnel and
other matters affecting air safety. To ensure compliance with its regulations,
the FAA requires all U.S. airlines to obtain operating, airworthiness and other
certificates, which are subject to suspension or revocation for cause.
The Company's aircraft require various levels of maintenance or "checks" and
periodically undergo complete overhauls. Maintenance efforts are monitored
closely by the FAA, with FAA representatives present at the Company's
maintenance facilities. The FAA has issued several Airworthiness Directives
("ADs") which mandate changes to an air carrier's maintenance program for older
aircraft. These ADs (which include structural modifications to certain aircraft)
were issued to ensure that the oldest portion of the nation's transport aircraft
fleet remains airworthy. The Company is currently, and expects to remain, in
compliance with all applicable requirements under the FAA-issued ADs.
A combination of FAA and Occupational Safety and Health Administration
regulations on both the federal and state levels apply to all of Northwest's
ground-based operations.
ENVIRONMENTAL. The Company is subject to regulation under various
environmental laws and regulations, which are administered by numerous state and
federal agencies, including the Clean Air Act, the Clean Water Act and
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"). In addition, many state and local governments have adopted
environmental laws and regulations to which the Company's operations are
subject.
The Massachusetts Department of Environmental Protection has identified a
number of contaminated sites at Boston's Logan Airport. Northwest has been
identified as a potentially responsible party under Massachusetts law.
Management believes that its liability for the cost of the remediation of the
Logan site, if any, will not have a material adverse effect on the Company's
financial statements when taken as a whole.
10
CIVIL RESERVE AIR FLEET PROGRAM. Northwest is a participant in the Civil
Reserve Air Fleet Program pursuant to which Northwest has agreed to make
available, during the period beginning October 1, 1998 and ending September 30,
1999, 33 747 aircraft, 38 DC10 aircraft, and nine 727 aircraft for use by the
U.S. military under certain stages of readiness related to national emergencies.
EMPLOYEES
As of December 31, 1998, the Company had approximately 50,600 full-time
equivalent employees of whom approximately 2,300 were foreign nationals working
primarily in Asia. Unions represent approximately 90% of the Company's
employees. Collective bargaining agreements provide standards for wages, hours
of work, working conditions, settlement of disputes and other matters. The major
agreements with domestic employees became amendable or will become amendable on
various dates as follows:
APPROXIMATE
NUMBER OF
FULL-TIME
EQUIVALENT
EMPLOYEES AMENDABLE
EMPLOYEE GROUP COVERED UNION DATE
- ---------------------------------- ------------- --------------------------------------------------- -----------
Pilots............................ 6,000 Air Line Pilots Association, International 9/13/02
Clerks and Agents................. 10,600 International Association of Machinists & Aerospace
Workers ("IAM") 2/25/03
Equipment Service Employees and
Stock Clerks.................... 7,000 IAM 2/25/03
Flight Attendants................. 9,600 International Brotherhood of Teamsters, Chauffeurs,
Warehousemen & Helpers of America 8/2/96
Mechanics and Related Employees... 9,400 IAM 10/03/96
As previously discussed, the above agreements are governed by the RLA.
Pursuant to the RLA, an agreement becomes amendable at the expiration of its
stated term, and continues in effect while the parties pursue agreement on a new
contract. In addition to the direct negotiation phase, the RLA also provides for
a period of mediation, potential arbitration of unresolved issues, and a 30-day
"cooling off" period before either party can resort to self help. See also "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for further discussion of
collective bargaining activities.
HOLDING COMPANY REORGANIZATION
In connection with the purchase of its interest in Continental, NWA Corp.
effected a holding company reorganization on November 20, 1998. As a result of
this reorganization, Northwest Airlines Holdings Corporation, which was formerly
known as Northwest Airlines Corporation and was at that time the publicly traded
holding company ("Old NWA Corp."), became a direct wholly-owned subsidiary of
the new holding company, NWA Corp. As a result, NWA Corp. is now the publicly
traded holding company, which owns directly Old NWA Corp. and indirectly the
holding and operating subsidiaries of Old NWA Corp. References in this Annual
Report to NWA Corp., Common Stock and Series C Preferred Stock for time periods
prior to November 20, 1998 refer to Old NWA Corp. and the Common Stock and
Series C Preferred Stock of Old NWA Corp., respectively. See Note A to the
Consolidated Financial Statements included within Item 8. Consolidated Financial
Statements and Supplementary Data.
FORWARD-LOOKING STATEMENTS
Certain of the statements made in this section and elsewhere in this report
are forward-looking and are based upon information available to the Company on
the date hereof. The Company through its
11
management may also from time to time make oral forward-looking statements. In
connection with the "safe harbor" provisions of the Private 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 factors that could significantly impact expected capacity,
load factors, revenues, expenses and cash flows include the airline pricing
environment, fuel costs, labor negotiations both at the Company and other
carriers, low-fare carrier expansion, capacity decisions of other carriers,
actions of the U.S. and foreign governments, foreign currency exchange rate
fluctuation, inflation, the general economic environment in the U.S. and other
regions of the world 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 exclusive. 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.
ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
The Company operated a fleet of 409 aircraft at December 31, 1998,
consisting of 330 narrow-body and 79 wide-body aircraft. The diversity of the
fleet accommodates both the Company's domestic hub-and-spoke system and its
international routes and enhances the Company's ability to match its aircraft to
its route network requirements more efficiently.
As of December 31, 1998, 296 aircraft were owned and 113 aircraft were
leased. The Company currently operates 63 (of which 35 are owned) Airbus A320
aircraft with an average age of 5.7 years. The Company's fleet of Boeing
aircraft includes 38 (of which 29 are owned) 727 aircraft with an average age of
19.6 years, 48 (of which 15 are owned) 757 aircraft with an average age of 9.3
years, 33 (of which 18 are owned) 747 aircraft with an average age of 16.7 years
and eight (of which five are owned) 747 freighters with an average age of 18.9
years. The Company's fleet of McDonnell Douglas aircraft includes 173 (of which
156 are owned) DC9 aircraft with an average age of 28.1 years, 38 (of which 30
are owned) DC10 aircraft with an average age of 24.4 years and eight (all of
which are owned) MD-80 aircraft with an average age of 16.5 years.
Although the DC9 and DC10 average aircraft age exceeds twenty years, these
aircraft have considerable remaining technological life, based upon the cycle
life (capacity for number of landings) expected by the manufacturer and other
factors. The Company also believes that these aircraft have economic value for
the Company given its route network and maintenance programs. The Company has
adopted programs to hushkit and modify the 173 DC9 aircraft. As of December 31,
1998, the Company hushkitted 130 of these aircraft and plans on completing the
remaining aircraft by December 31, 1999. As a result of these programs, the
Company estimates these aircraft could fly on average approximately 14
additional years beyond 1998 based upon the manufacturer's expected cycle life
for such aircraft and their projected annual utilization by Northwest. The
Company estimates that its DC10 aircraft fleet could fly on average at least 20
additional years beyond 1998 based upon the manufacturer's expected cycle life
for such aircraft and their projected annual utilization by Northwest.
12
For further information related to the Company's aircraft leases and
commitments see Notes E, K and N to Consolidated Financial Statements included
within Item 8. Consolidated Financial Statements and Supplementary Data.
OTHER PROPERTY AND EQUIPMENT
Northwest's primary offices are located at or near the Minneapolis/St. Paul
International Airport. The Company owns a 160-acre site east of the
Minneapolis/St. Paul International Airport containing the Company's corporate
offices. Additional owned buildings include reservation centers in Baltimore,
Detroit, Tampa and Chisholm, Minnesota; a data processing center in Eagan,
Minnesota; and several office buildings. The Company owns property in Tokyo,
including a 1.3-acre site in downtown Tokyo and a 33-acre land parcel, 512-room
hotel and flight kitchen located near Tokyo's Narita International Airport.
Northwest leases the majority of its airport facilities, support services
buildings and sales and reservations offices. Expiration dates on these leases
range from 1999 to 2027. The Company leases reservations centers in or near
Honolulu, Los Angeles, New York City and Seattle. Maintenance bases under
operating leases are located in Minneapolis/St. Paul, Atlanta, Georgia and
Duluth, Minnesota. The Company also operates approximately 50 city ticket
offices. In certain cases, the Company has constructed a facility on leased
land, which reverts to the lessor upon expiration of the lease. These facilities
include cargo buildings in Anchorage, Boston, Los Angeles, San Francisco and
Honolulu; support buildings at the Minneapolis/St. Paul International Airport; a
flight kitchen and line maintenance hangar in Seattle; and a 2-bay DC10 hangar
in Detroit that will be completed in 1999. Northwest opened a new international
departures facility in Detroit in September 1997 and is managing the design and
construction of a new $1.2 billion terminal in Detroit which will provide
Northwest with 74 gates compared to the 60 present gates. To improve service for
its cargo customers, Northwest is investing in a new facility at New York's John
F. Kennedy International Airport with scheduled completion in April 1999.
ITEM 3. LEGAL PROCEEDINGS
The Antitrust Division of the U.S. Department of Justice commenced a civil
antitrust action in the United States District Court for the Eastern District of
Michigan (Case No. 98-74611) against the Company and Continental Airlines, Inc.
("Continental") challenging the Company's acquisition of the beneficial
ownership of 8,661,224 shares of Continental Class A Common Stock. The Justice
Department's complaint seeks divestiture by the Company of the acquired
Continental stock or the imposition of additional terms and restrictions on the
Company with respect to the acquired Continental stock. The Company intends to
vigorously defend the lawsuit. The lawsuit did not challenge the alliance
between Northwest and Continental, although the Justice Department has indicated
that they will continue to monitor the alliance.
In January 1998, Northwest received a civil investigative demand ("CID")
from the Antitrust Division of the Department of Justice related to an antitrust
investigation to determine whether there are, have been or may be violations of
Sections 1 and 2 of the Sherman Act related to, among other things,
monopolization of hub markets. Northwest understands that this is part of a
larger Justice Department investigation of competitive practices in the airline
industry. The CID is a request for information in the course of a civil
antitrust investigation and does not constitute the institution of legal
proceedings. Northwest filed information with the Justice Department that it
believes to be responsive to the CID. In February 1999, Northwest received from
the Justice Department a request for additional information relating to the CID.
In addition, in the ordinary course of its business, the Company is party to
various other legal actions which the Company believes are incidental to the
operation of its business. The Company believes that the outcome of the
proceedings to which it is currently a party (including those described above)
will not have a material adverse effect on the Company's consolidated financial
statements taken as a whole.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of 1998.
MANAGEMENT
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, together with their ages and business
experience, are set forth below:
JOHN H. DASBURG, age 56, has served as President and Chief Executive Officer
and a director of NWA Corp. and Northwest since 1990. Mr. Dasburg joined
Northwest in November 1989 as Executive Vice President-Finance and
Administration and was appointed President and Chief Executive Officer in
November 1990. From 1987 to 1989, Mr. Dasburg served as President of Marriott's
Lodging Group and as an Executive Vice President of Marriott Corp. From 1980
through 1987, he held various senior executive positions at Marriott. Prior to
1980, he was a partner of KPMG Peat Marwick. Mr. Dasburg is on the board of
directors of KLM, Owens Corning, The St. Paul Companies, Inc. and the Mayo
Foundation.
RICHARD H. ANDERSON, age 43, was appointed Executive Vice President and
Chief Operating Officer of NWA Corp. and Northwest in December 1998. He was
Executive Vice President-Technical Operations and Airport Affairs from April
1998 to December 1998 and served as Senior Vice President-Technical Operations
and Airport Affairs from January 1997 to April 1998. From July 1994 to December
1996, he was Senior Vice President-Labor Relations, State Affairs and Law. He
joined Northwest in 1990 as Vice President-Deputy General Counsel. Prior to
joining Northwest, Mr. Anderson was Staff Vice President and Deputy General
Counsel of Continental. From 1989 to 1990, Mr. Anderson was Associate General
Counsel of Continental.
MICKEY FORET, age 53, rejoined Northwest in May 1998 as Special Projects
Officer and in September 1998 he was appointed Executive Vice President and
Chief Financial Officer of NWA Corp. and Northwest. He originally joined
Northwest as Senior Vice President-Planning and Finance in December 1992 and
from September 1993 to May 1996 served as Executive Vice President and Chief
Financial Officer. From June 1996 to September 1997, Mr. Foret served as
President and Chief Operating Officer of Atlas Air, Inc. From 1990-1992, Mr.
Foret was a consultant, primarily to aviation-related businesses. In 1992, Mr.
Foret also served as President and Chief Executive Officer of KLH Computers,
Inc. From 1974-1990, Mr. Foret held senior positions with Continental Airlines
Holdings, Inc. and its subsidiary and predecessor companies, including President
and Chief Operating Officer.
J. TIMOTHY GRIFFIN, age 47, was appointed Executive Vice President-Marketing
and Distribution of NWA Corp. and Northwest in January 1999. From June 1993 to
January 1999, he served as Senior Vice President-Market Planning and Systems.
Prior to joining Northwest in 1993, Mr. Griffin held senior positions with
Continental Airlines and American Airlines.
PHILIP C. HAAN, age 43, was appointed Executive Vice
President-International, Sales and Information Services of NWA Corp. and
Northwest in January 1999. From December 1995 to January 1999, he served as
Senior Vice President-International Services. Mr. Haan joined Northwest in April
1991 as Vice President-Revenue Management and served in a number of officer
positions. Prior to joining Northwest, he was with American Airlines and Ford
Motor Company.
DOUGLAS M. STEENLAND, age 47, was named Executive Vice President-General
Counsel and Alliances of NWA Corp. and Northwest in January 1999. Mr. Steenland
served as Executive Vice President-General Counsel and Secretary from June 1998
to January 1999 and as Senior Vice President-General Counsel and Secretary from
July 1994 to June 1998. He joined Northwest as Vice President-Deputy General
Counsel
14
and Secretary in July 1991. Prior to joining Northwest, Mr. Steenland was a
senior partner at the Washington, D.C. law firm of Verner, Liipfert, Bernhard,
McPherson and Hand.
RAYMOND J. VECCI, age 56, joined Northwest as Executive Vice
President-Customer Service of NWA Corp. and Northwest in July 1997 and in
January 1999 was also appointed President-Michigan Operations. From January 1997
to March 1997, he was Executive Vice President and Chief Operating Officer for
Carnival Airlines and President and Chief Executive Officer from March 1997 to
June 1997. He was Executive Vice President and Chief Operating Officer of Tower
Air from September 1996 to December 1996. From 1991 to 1995, Mr. Vecci was
Chairman, President and Chief Executive Officer of Alaska Air Group and Alaska
Airlines.
CHRISTOPHER E. CLOUSER, age 47, has served as Senior Vice President-Human
Resources, Communications and Administration of NWA Corp. and Northwest since
September 1996. From July 1993 to September 1996, he served as Senior Vice
President-Communications, Advertising and Human Resources. He joined Northwest
in April 1991 as Senior Vice President-Corporate Communications and Advertising.
From 1988 to 1991, Mr. Clouser was Vice President-Corporate Relations and
Advertising for Bell Atlantic Corporation. He also served on the board of
directors of the Bell Telephone Company of Pennsylvania. Mr. Clouser has
previously held officer positions at Hallmark Cards, U.S. Sprint and United
Telecommunications, Inc.
RICHARD B. HIRST, age 54, has served as Senior Vice President-Corporate
Affairs of NWA Corp. and Northwest since July 1994. He joined Northwest as
Senior Vice President, General Counsel in 1990. From 1986 to 1990, Mr. Hirst
served as Vice President, General Counsel and Secretary at Continental.
ROLF S. ANDRESEN, age 63, has served as Vice President-Finance and Chief
Accounting Officer of NWA
Corp. and Northwest since June 1998 and served as Vice President-Finance and
Controller from July 1994 to April 1998. Prior to joining Northwest, Mr.
Andresen held the Chief Financial Officer position at Private Jet Corp. in 1994
and various officer positions, including Chief Financial Officer, at Pan
American World Airways from 1991 to 1993.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the Nasdaq National Market under
symbol NWAC. The table below shows the high and low sales prices for the
Company's common stock during 1998 and 1997:
1998 1997
-------------------- ---------------------
QUARTER HIGH LOW HIGH LOW
- --------------------------------------------------- --------- --------- ---------- ---------
1(st).............................................. 65 5/16 45 1/2 41 3/4 33 1/8
2(nd).............................................. 62 3/16 37 43 3/4 33 7/8
3(rd).............................................. 44 1/2 25 1/16 42 19/32 35 1/4
4(th).............................................. 27 5/8 18 5/8 49 1/8 40 1/2
As of February 26, 1999, there were 1,269 stockholders of record.
Since the acquisition in 1989 of NWA Corp.'s principal indirect subsidiary,
NWA Inc., which is the parent of Northwest, NWA Corp. has not declared or paid
any dividends on its common stock and does not currently intend to do so. Under
the provisions of certain of the Company's bank credit agreements, NWA Corp.'s
ability to pay dividends on or repurchase its common stock is restricted. Any
future determination to pay cash dividends will be at the discretion of the
Board of Directors, subject to applicable limitations under Delaware law, and
will be dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
15
ITEM 6: SELECTED FINANCIAL DATA
NORTHWEST AIRLINES CORPORATION
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------
1998(1) 1997 1996 1995 1994
--------- --------- --------- --------- ---------
STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER
SHARE DATA)
Operating revenues
Passenger.................................. $ 7,606.5 $ 8,822.1 $ 8,598.3 $ 7,762.0 $ 7,010.1
Cargo...................................... 633.5 789.4 745.8 751.2 755.8
Other...................................... 804.8 614.3 536.4 571.7 559.0
--------- --------- --------- --------- ---------
9,044.8 10,225.8 9,880.5 9,084.9 8,324.9
Operating expenses........................... 9,236.2 9,068.6 8,826.7 8,171.5 7,485.3
--------- --------- --------- --------- ---------
Operating income (loss)...................... (191.4) 1,157.2 1,053.8 913.4 839.6
OPERATING MARGIN............................. (2.1)% 11.3% 10.7% 10.1% 10.1%
Income (loss) before extraordinary item...... $ (285.5) $ 605.8 $ 536.1 $ 342.1 $ 295.5
Net income (loss)............................ $ (285.5) $ 596.5 $ 536.1 $ 392.0 $ 295.5
Earnings (loss) per common share:
BASIC.................................... $ (3.48) $ 5.89(2) $ 5.05(2) $ 3.11(2) $ 3.00
DILUTED.................................. $ (3.48) $ 5.29(2) $ 4.52(2) $ 2.90(2) $ 2.90
BALANCE SHEETS (IN MILLIONS)
Cash, cash equivalents and unrestricted
short-term investments..................... $ 480.0 $ 1,039.9 $ 752.1 $ 970.9 $ 968.3
Total assets................................. 10,280.8 9,336.2 8,511.7 8,412.3 8,070.1
Long-term debt, including current
maturities................................. 4,000.7 2,069.3 2,060.4 2,467.1 4,013.5
Long-term obligations under capital leases,
including current obligations.............. 654.9 705.3 772.2 841.2 890.3
Mandatorily redeemable preferred security of
subsidiary................................. 564.1 486.3 549.2 618.4 --
Redeemable stock............................. 260.7 1,154.7 602.6 945.5 795.0
Common stockholders' equity (deficit)(3)..... (476.7) (311.0) 92.9 (818.8) (1,370.7)
OPERATING STATISTICS(4)
Scheduled service:
Available seat miles (ASM) (millions)...... 91,310.7 96,963.6 93,913.7 87,472.0 85,015.6
Revenue passenger miles (millions)......... 66,738.3 72,031.3 68,639.1 62,515.2 57,873.2
Passenger load factor...................... 73.1% 74.3% 73.1% 71.5% 68.1%
Revenue passengers (millions).............. 50.5 54.7 52.7 49.3 45.5
Revenue yield per passenger mile........... 11.26 CENTS 12.11 CENTS 12.53 CENTS 12.42 CENTS 12.11 CENTS
Passenger revenue per scheduled ASM........ 8.23 CENTS 9.00 CENTS 9.16 CENTS 8.87 CENTS 8.25 CENTS
Operating revenue per total ASM(5)........... 9.12 CENTS 9.76 CENTS 9.85 CENTS 9.58 CENTS 8.93 CENTS
Operating expense per total ASM(5)........... 9.21 CENTS 8.63 CENTS 8.78 CENTS 8.66 CENTS 8.08 CENTS
Cargo ton miles (millions)................... 1,954.4 2,282.8 2,215.8 2,246.3 2,322.3
Cargo revenue per ton mile................... 32.4 CENTS 34.5 CENTS 33.7 CENTS 33.4 CENTS 32.5 CENTS
Fuel gallons consumed (millions)............. 1,877.1 1,996.3 1,945.1 1,846.2 1,792.8
Average fuel cost per gallon................. 53.60 CENTS 64.86 CENTS 67.21 CENTS 55.66 CENTS 56.23 CENTS
Number of operating aircraft at year end..... 409 405 399 380 361
Full-time equivalent employees at year end... 50,565 48,984 47,536 45,124 43,673
- ------------------------------
(1) 1998 was affected by labor-related disruptions which included work actions,
a 30-day cooling off period, an 18-day cessation of flight operations due to
the pilots' strike, a seven-day gradual resumption of flight operations and
a rebuilding of traffic demand.
(2) Excludes the effects of the 1997 extraordinary loss ($.10 per basic share
and $.08 per diluted share), the 1996 preferred stock transaction ($.75 per
basic share and $.68 per diluted share), the 1995 preferred stock
transaction ($.64 per basic share and $.58 per diluted share) and the 1995
extraordinary gain ($.55 per basic share and $.50 per diluted share).
(3) No dividends have been paid on common stock for any period presented.
(4) All statistics exclude Express Airlines I, Inc.
(5) Excludes the estimated revenues and expenses associated with the operation
of Northwest's fleet of eight 747 freighter aircraft and MLT Inc.
16
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Northwest Airlines Corporation ("NWA Corp." and, together with its
subsidiaries, the "Company") incurred a net loss of $285.5 million for the year
ended December 31, 1998, compared with net income of $596.5 in 1997. Loss per
share was $3.48 in 1998 compared with diluted earnings per share of $5.21 in
1997. An operating loss of $191.4 million was reported in 1998 compared to
operating income of $1.16 billion in 1997.
The year ended December 31, 1998 was affected by labor-related disruptions
which included the pilots' strike. Because of these events, year-over-year
comparisons are not a useful measure of the underlying operating and financial
performance of the Company. However, for continuity of reporting and as a
measure of the impact of the labor disruptions, the traditional comparisons are
presented herein. The Company estimates the cost of the labor disruptions in
lost revenue and incremental expenses to be approximately $1.04 billion on a
pre-tax basis for the year ended December 31, 1998.
Northwest Airlines, Inc. ("Northwest") is the principal indirect operating
subsidiary of NWA Corp., accounting for more than 95% of the Company's 1998
consolidated operating revenues and expenses. The Company's operating results
are significantly impacted by both general and industry economic environments.
Small fluctuations in revenue per available seat mile ("RASM") and cost per
available seat mile ("CASM") can have significant impacts on the Company's
profitability. The Company acquired Express Airlines I, Inc. ("Express") on
April 1, 1997; the operating results of Express are included in the consolidated
financial statements commencing on that date.
RESULTS OF OPERATIONS--1998 COMPARED TO 1997
OPERATING REVENUES. Operating revenues were $9.04 billion, a decrease of
$1.18 billion (11.5%). Operating revenue per total service available seat mile
("ASM") decreased 6.6%. System passenger revenue decreased $1.22 billion (13.8%)
primarily attributable to a decrease in scheduled service ASMs and a decrease in
passenger RASM due to the labor disruptions. The decrease in RASM was also a
result of a weaker Asian economic environment and weaker foreign currency
exchange rates. Passenger revenue included $93.6 million and $100.1 million of
Express revenues for the years ended December 31, 1998 and 1997, respectively.
The following analysis by market is based on information reported to the
U.S. Department of Transportation ("DOT") and excludes Express:
SYSTEM DOMESTIC PACIFIC ATLANTIC
--------- -------- -------- ------
1998
Passenger revenue (in millions)................ $ 7,512.9 $5,190.1 $1,619.9 $702.9
INCREASE/(DECREASE) FROM 1997:
Passenger revenue (in millions)................ $(1,209.1) $ (691.8) $ (573.1) $ 55.8
Percent...................................... (13.9)% (11.8)% (26.1)% 8.6%
Scheduled service ASMs (capacity).............. (5.8)% (6.3)% (12.1)% 22.2%
Passenger RASM................................. (8.6)% (5.8)% (15.9)% (11.1)%
Yield.......................................... (7.0)% (5.4)% (13.4)% (5.4)%
Passenger load factor.......................... (1.2) pts. (.3) pts. (2.2) pts. (5.1) pts.
Domestic passenger revenue was lower due to decreased capacity and yields
resulting from the labor disruptions.
Pacific passenger revenue decreased due to the labor disruptions, an
unfavorable general economic environment in the Pacific and weaker Asian
currencies, of which the largest impact was due to the
17
Japanese economy and yen. The average yen per U.S. dollar exchange rate for the
year ended December 31, 1998 and 1997 was 133 and 120, respectively, a weakening
of the yen of 10.8%. In response to the continued weak Asian economic
environment, lower demand and increased competition, the Company reduced
capacity in the region during 1998.
Atlantic passenger revenue increased due to an increase in capacity which
resulted primarily from new flying (including service to Mumbai and Delhi, India
from Amsterdam) and the initiation of Philadelphia-Amsterdam and
Seattle-Amsterdam service and increases in Minneapolis/St. Paul-Amsterdam and
Detroit-Amsterdam services, offset by a decrease in RASM as a result of the
labor disruptions.
Cargo revenue decreased $155.9 million (19.7%) due to 14.4% fewer cargo ton
miles and a 6.2% decrease in cargo revenue per ton mile due to the labor
disruptions, a weaker Asian economic environment and weaker Asian currency
exchange rates. Other revenue increased $190.5 million (31.0%) due to increased
revenue from KLM Royal Dutch Airlines ("KLM") joint venture alliance settlements
and MLT Inc.
OPERATING EXPENSES. Operating expenses increased $167.6 million (1.8%).
Operating capacity decreased 5.9% to 91.4 billion total service ASMs which
contributed to the 6.7% increase in operating expense per total service ASM.
Salaries, wages and benefits increased $236.7 million (7.8%) due primarily to an
increase in average full-time equivalent employees of 4.0%, retroactive
compensation related to collective bargaining agreements and the impact of
settled contracts. Aircraft fuel and taxes decreased $296.7 million (21.3%) due
to a 17.4% decrease in the average fuel price per gallon from 64.86 cents to
53.60 cents and a 6.0% decrease in fuel gallons consumed as a result of the
labor disruptions. Commissions decreased $163.3 million (19.1%) due to lower
revenues as a result of the labor disruptions, a lower effective commission rate
caused by a shift in revenue mix and changes to the Company's commission
structure which began in September 1997. Aircraft maintenance, materials and
repairs increased $140.6 million (22.7%) due to higher utilization of outside
suppliers as a result of increased scheduled overhauls and timing of check
cycles, and decreased employee productivity due to the labor disruptions. Other
expenses (the principal components of which include outside services, selling
and marketing expenses, passenger food, personnel, advertising and promotional
expenses, communication expenses and supplies) increased $239.4 million (12.2%),
due primarily to increased business for MLT Inc. claims, advertising and
promotions, as well as the accelerated retirement of seven of the Company's
oldest Boeing 747 aircraft resulting in a fleet disposition charge of $65.9
million recorded in the fourth quarter. See Note A to the Consolidated Financial
Statements for additional discussion of the fleet disposition charge.
OTHER INCOME AND EXPENSE. Interest expense--net increased $78.0 million
(33.3%) primarily due to additional borrowings to fund the Company's cash
requirements. This level of increase is expected to continue into 1999 due to
the higher level of borrowings. The foreign currency loss for the year ended
December 31, 1998 was primarily attributable to balance sheet remeasurement of
foreign currency-denominated assets and liabilities. Other, net increased
primarily due to the sale of an equity investment in GHI Limited.
RESULTS OF OPERATIONS--1997 COMPARED TO 1996
OPERATING REVENUES. Operating revenues were $10.23 billion, an improvement
of $345.3 million (3.5%). Operating revenue per total service ASM decreased .9%.
System passenger revenue increased $223.8 million (2.6%) due to an increase in
scheduled service ASMs and the inclusion of Express revenues of $100.1 million.
These increases were offset by a decrease in passenger RASM driven by
unfavorable foreign currency exchange rates and the reinstatement of federal
ticket taxes in March 1997.
18
The following analysis by market is based on information reported to the DOT
and excludes Express:
SYSTEM DOMESTIC PACIFIC ATLANTIC
-------- -------- -------- ------
1997
Passenger revenue (in millions)................ $8,722.0 $5,881.9 $2,193.0 $647.1
INCREASE/(DECREASE) FROM 1996:
Passenger revenue (in millions)................ $ 123.7 $ 165.5 $ (58.4) $ 16.6
Percent...................................... 1.4% 2.9% (2.6)% 2.6%
Scheduled service ASMs (capacity)................ 3.2% 2.2% 5.6% 1.7%
Passenger RASM................................... (1.7)% .7% (7.7)% .9%
Yield............................................ (3.4)% (2.0)% (7.4)% (1.4)%
Passenger load factor............................ 1.2pts. 1.8pts. (0.4) pts. 1.9pts.
Domestic passenger revenue increased as a result of an increase in capacity
and an increase in RASM. The Company increased frequencies to ten cities and
entered six new markets. The increase in RASM was due to an increase in
passenger load factor offset by a decrease in yield due to the reinstatement of
federal taxes on airline tickets and international departures. The Company
benefited from the absence of ticket taxes for two months in 1997 versus eight
months in 1996.
Pacific passenger revenue decreased due to a decrease in RASM which was
partially offset by an increase in capacity related to the initiation of
Minneapolis/St. Paul-Osaka service and additional trans-Pacific frequencies,
mainly for the Minneapolis/St. Paul-Tokyo service. The decrease in Pacific RASM
was primarily due to a decrease in yield, which was largely attributable to a
weaker Japanese yen. The average yen per U.S. dollar exchange rate for the year
ended December 31, 1997 and 1996 was 120 and 108, respectively, a weakening of
the yen of 11.2%. Atlantic passenger revenue increased due to an increase in
capacity and an increase in RASM.
Cargo revenue increased $43.6 million (5.8%) due to a 2.6% increase in cargo
revenue per ton mile and 3.0% more cargo ton miles primarily due to the
development of a more efficient freighter schedule. The increase in cargo
revenue per ton mile was primarily due to increased import sales driven by the
continued strength of the U.S. dollar versus Asian currencies. Other revenue
increased $77.9 million (14.5%) due to settlements under the joint venture
alliance with KLM and increased charter activity.
OPERATING EXPENSES. Operating expenses increased $241.9 million (2.7%)
compared to the 3.3% capacity increase to 97.1 billion total service ASMs.
Operating expense per total service ASM decreased for the first time in four
years from 8.78 cents per total service ASM to 8.63 cents, a decrease of 1.7%.
Salaries, wages and benefits increased $314.5 million (11.6%) due primarily to
the end of the Wage Savings Period as discussed under "Liquidity and Capital
Resources--LABOR AGREEMENTS" and an increase in average full-time equivalent
employees of 3.3%. The increase in full-time equivalent employees was
attributable to the increased flying of 3.3% and increased traffic of 3.7%.
Offsetting the increased salaries, wages and benefits expense was $49.2 million
in lower pension expense due to a higher pension discount rate applied in 1997
compared to 1996. Aircraft fuel and taxes decreased $3.1 million (.2%) due to a
3.5% decrease in the average fuel price per gallon from 67.21 cents to 64.86
cents offset by an increase of 2.6% in fuel gallons consumed. Commissions
decreased $13.2 million (1.5%) primarily due to increased domestic revenue where
effective commission rates are lower than those paid internationally and also
due to changes in the Company's commission structure beginning in September 1997
which reduced commissions paid from 10% to 8% on tickets purchased in the U.S.
or Canada for travel to destinations outside North America. Aircraft maintenance
materials and repairs increased $64.2 million (11.5%) due primarily to $19.1
million (3.4%) related to Express and an increased number of scheduled airframe
and engine overhauls in accordance with the Company's maintenance program. The
Company contracted for some of its additional maintenance work with outside
suppliers, resulting in labor costs that would normally be classified as
salaries and wages being included in maintenance materials and repairs expense.
Other
19
expenses increased $88.7 million (4.7%) due primarily to increased volume and
rates for outside services, selling and marketing fees and personnel expenses.
OTHER INCOME AND EXPENSE. Interest expense-net decreased $28.4 million
(10.8%) primarily due to the retirement of debt prior to scheduled maturity and
lower interest rates on debt. The foreign currency gain for the year ended
December 31, 1997 was primarily attributable to balance sheet remeasurement of
foreign currency-denominated assets and liabilities.
EXTRAORDINARY ITEM. The Company repurchased for $78.7 million certain NWA
Trust No. 2 aircraft notes in January 1998 pursuant to a tender offer. An
extraordinary loss of $9.3 million, net of tax, was recorded in 1997 as 99% of
the notes were tendered by December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of $480
million and borrowing capacity of $1.0 billion under its revolving credit
facilities, providing total available liquidity of $1.48 billion.
Cash flows from operating activities were $88.3 million for 1998, a decrease
of $1.52 billion compared with 1997 due primarily to the labor disruptions as
well as higher than normal sale proceeds of frequent flyer miles in 1997 of
$387.7 million. Cash flows from operating activities were $1.61 billion for 1997
and $1.37 billion for 1996. Net cash used in investing and financing activities
during 1998, 1997 and 1996 was $348.7 million, $1.43 billion and $1.66 billion,
respectively.
INVESTING ACTIVITIES. Investing activities in 1998 consisted primarily of
the purchase of 13 Airbus A320 aircraft, ten RJ85 aircraft, and three used DC10
aircraft, costs to commission aircraft before entering revenue service, engine
hushkitting, aircraft modifications, deposits on ordered aircraft and ground
equipment purchases. On November 20, 1998, NWA Corp. issued 2.6 million shares
of common stock and paid $399 million in cash to acquire the beneficial
ownership of 8.7 million shares of Class A Common Stock of Continental Airlines,
Inc. ("Continental"). The Company funded its investment in Continental with cash
from its general working capital. In a related transaction, Northwest and
Continental entered into a thirteen-year global strategic commercial alliance
that connects the two carriers' networks and includes extensive code-sharing,
frequent flyer program reciprocity and other cooperative activities.
Investing activities in 1997 consisted primarily of costs to commission
aircraft before entering revenue service, deposits on ordered aircraft, the
refurbishment of DC9 aircraft, engine hushkitting, ground equipment purchases,
the acquisition of Express, the purchase off lease of four aircraft and the
purchase of eight RJ85 aircraft, one DC10-30 aircraft and three DC9-30 aircraft.
Capital expenditures for 1996 pertained primarily to the acquisition of 13
Boeing 757 aircraft, seven DC9-30 aircraft, three DC10-30 aircraft and two
747-200 aircraft; the purchase off lease of 22 aircraft; and the refurbishment
of DC9 aircraft.
FINANCING ACTIVITIES. Financing activities in 1998 included the Company's
repurchase of its remaining Common Stock held by KLM, the issuance of $400
million of unsecured notes, the incurrence of $240 million of debt secured by
six Boeing 757 aircraft, the payment of debt and capital lease obligations, and
the sale and leaseback of 13 A320 aircraft and four RJ85 aircraft. During the
third quarter, in anticipation of potential labor disruptions, the Company
borrowed the $2.08 billion available under its credit facilities, and
subsequently repaid such borrowings. In October 1998, the Company borrowed $835
million to fund its cash requirements.
On May 1, 1998, NWA Corp. purchased from KLM the remaining 18.2 million
shares of NWA Corp. Common Stock which had been reclassified as redeemable
common stock. The Company had previously agreed to repurchase the shares over a
three-year period ending in September 2000. The purchase price of $780.4 million
was paid with a combination of $336.7 million of cash and three senior unsecured
7.88% notes with principal amounts of $206 million, $137.7 million and $100
million. The Company repaid the first note on September 29, 1998; the remaining
two notes are due on September 29, 1999 and 2000, respectively.
20
The Company's Credit Agreement was amended in December 1997 to increase its
existing revolving credit facility from $500 million to $675 million and to
extend the availability period to December 2002. In addition, the facility added
a new $175 million 364-day unsecured revolving credit facility due in December
1998. In December 1998, $10.2 million of the $175 million 364-day revolver was
converted into a term loan due December 2002. The remaining $164.8 million was
renewed for another 364 days; however, to the extent this facility is not
renewed for an additional 364-day period, the Company may borrow up to the
entire non-renewed portion of the facility and all such borrowings mature in
December 2002. In May 1998, the Company provided certain collateral to secure
its previously unsecured term loan and revolving credit facilities under the
Credit Agreement.
In May 1998, the Company obtained a secured 364-day $1.0 billion additional
revolving credit facility. This revolving credit facility was renewed in
February 1999, which extended the expiration date from May 11, 1999 to February
8, 2000 and reduced the amount available from $1.0 billion to $750 million.
Interest is calculated at a floating rate based on the London Interbank Offered
Rate plus 2.25% with a .5% per annum commitment fee payable on the unused
portion of such revolving credit facility.
In February 1999, the Company completed an offering of $421.2 million of
pass through certificates to be used to finance, directly or through leveraged
lease arrangements, the acquisition of four new Boeing 747-400 aircraft
scheduled for delivery in 1999.
Financing activities in 1997 pertained primarily to NWA Corp.'s repurchases
of its Common Stock and Series A and B Preferred Stock, the issuance of $250
million of unsecured notes, the sale and leaseback of eight RJ85 aircraft and
the payment of debt and capital lease obligations. On September 29, 1997, the
Company repurchased 6.8 million shares of NWA Corp. Common Stock held by KLM for
$273.1 million. Concurrently, all of NWA Corp.'s Series A and B Preferred Stock
held by KLM and other holders was repurchased for $251.3 million. Both
repurchases were funded using existing cash resources.
Financing activities in 1996 pertained primarily to the sale and leaseback
of seven Boeing 757 aircraft and the payment of debt and capital lease
obligations, including prepayments of $180 million. In July 1996, NWA Corp.
acquired from KLM 3,691.2 shares of NWA Corp. Series A Preferred Stock and
2,962.8 shares of NWA Corp. Series B Preferred Stock in exchange for $379
million of unsecured promissory notes which were repaid in December 1996.
See Note D to the Consolidated Financial Statements for maturities of
long-term debt for the five years subsequent to December 31, 1998.
CAPITAL COMMITMENTS. The current aircraft delivery schedule provides for
the acquisition of 102 aircraft over the next eight years. See Notes K and N to
the Consolidated Financial Statements for additional discussion of aircraft
capital commitments. Other capital expenditures, including costs to commission
presently owned aircraft that have not yet entered revenue service, but
excluding those costs discussed below, are projected to be approximately $250
million in 1999, which the Company anticipates funding primarily with cash from
operations.
The Company has adopted programs to hushkit and modify 173 DC9 aircraft to
meet noise and aging aircraft requirements. As of December 31, 1998, the Company
hushkitted 130 of these aircraft and plans on completing the remaining aircraft
by December 31, 1999 for $68 million. The aging aircraft modifications are
expected to aggregate $147 million during the next three years for these
aircraft. Capital expenditures for engine hushkits and aging aircraft
modifications were $157 million in 1998. The Company has also elected to upgrade
aircraft systems and refurbish interiors for the 173 DC9 aircraft. Capital
expenditures associated with upgrading systems and interior refurbishment were
$31 million in 1998, which completed the interior refurbishment of the DC9
aircraft. Aircraft system upgrade costs are expected to aggregate $27 million
during the next three years.
The Company completed the interior refurbishment of three 747 aircraft and
five DC10 aircraft and plans to refurbish the interiors of 25 additional 747
aircraft and 21 additional DC10 aircraft. The program
21
to refurbish the interiors of the Company's international 747 and DC10 aircraft
is estimated to aggregate $67 million during the next three years. As of
December 31, 1998, the Company hushkitted 10 of its 29 Boeing 727-200 aircraft.
Remaining costs are estimated to aggregate approximately $13 million in 1999.
In February 1999, the Company entered into an agreement to purchase 54
Canadian Regional Jet aircraft, with options to purchase up to 70 additional
aircraft. The scheduled delivery for such aircraft is nine in 2000, 22 in 2001,
ten in 2002, eight in 2003 and five in 2004. Committed expenditures for these
aircraft, including estimated amounts for contractual price escalations and
predelivery deposits, will be approximately: $50 million in 1999, $175 million
in 2000, $400 million in 2001, $200 million in 2002, $150 million in 2003 and
$100 million in 2004. Financing has been arranged for the committed aircraft.
The Company has not yet selected the operator of these aircraft.
WORKING CAPITAL. The Company operates, like its competitors, with a working
capital deficit, which aggregated $1.59 billion at December 31, 1998. The
working capital deficit is primarily attributable to the $1.11 billion air
traffic liability for advance ticket sales
LABOR AGREEMENTS. The labor cost savings discussed in Note C to the
Consolidated Financial Statements improved the Company's 1993 to 1996 cash flow
from operating activities. The Company's 1993 agreements with the employee
unions provided that wage scales at the end of the Wage Savings Period snapback
to August 1, 1993 levels and snap-up pursuant to formulae based in part on wage
rates and wage rate increases at other large U.S. airlines. Consequently, at the
end of the Wage Savings Period, salaries and wages increased by approximately
$340 million on an annualized basis including $50 million for snap-ups. The
Company's labor contract with each of its unions became amendable as each labor
cost savings agreement ended in 1996. Contract negotiations began at that time
with the unions.
On August 28, 1998, Northwest ceased its flight operations as a result of a
strike by its pilots represented by Air Line Pilots Association, International
("ALPA"). The Northwest Master Executive Council ("Northwest MEC") of ALPA
announced the commencement of the strike as a result of the failure to reach
agreement with Northwest on the terms of a new collective bargaining agreement.
The strike followed the expiration of a 30-day "cooling off" period that began
July 30, 1998, when an impasse was declared by the National Mediation Board
("NMB"). The cessation of flight operations lasted 18 days. On September 13,
1998, a new four-year agreement was ratified. The agreement provides for lump
sum retroactive payments to pilots equal to 3.5% of salaries since October 31,
1996, wage increases of 3% annually through 2001, 2.5 million stock options to
be granted over a three year period, elimination of the "B pay scale" over three
years, enhanced vacation benefits and a profit sharing plan. The agreement also
permits implementation of the Continental alliance.
On October 28, 1998, the Company and its 15 meteorologists reached and
ratified an agreement on a new six-year contract. On October 30, 1998, the 260
members of the Aircraft Technical Support Association, the Company's fourth
largest union, ratified a new six-year agreement. On December 1, 1998, the 170
members of the Transport Workers Union ratified a new five-year contract. On
December 23, 1998, the Company and its 148 flight kitchen employees represented
by the International Association of Machinist and Aerospace Workers ("IAM")
signed a new four-year contract.
The Company and the IAM reached a tentative agreement in June 1998, which
was not ratified by the covered employees, who included mechanics and related
employees, clerks, agents, equipment service employees and stock clerks. In
November 1998, at a representation election, a majority of the mechanics and
related employees elected the Aircraft Mechanics Fraternal Association to be
their collective bargaining representative. The IAM is protesting the election
and certification of the vote is currently under review by the NMB. The
remaining ground employees continue to be represented by the IAM. On February
16, 1999, the IAM ratified a new four-year agreement. The agreement provides for
lump sum retroactive payments equal to 3.5% of salaries since October 2, 1996, a
14% wage increase over the duration of the contract and a 50% increase in
pension benefits. The Company estimates the increased
22
costs under the six ratified agreements will be approximately $145 million for
1999 based on current levels of employment.
The Company remains in direct negotiations with the International
Brotherhood of Teamsters ("IBT"), which represents its flight attendants.
Contract negotiations are being mediated by the NMB. Because the terms of new
labor agreements will be determined by collective bargaining, the Company cannot
predict the outcome of the negotiations at this time.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in the price of
fuel, foreign currency exchange rates and interest rates as discussed below. The
sensitivity analyses presented do not consider the effects that such adverse
changes may have on overall economic activity nor do they consider additional
actions management may take to mitigate its exposure to such changes. Actual
results may differ. See Note O to the Consolidated Financial Statements for
accounting policies and additional information.
AIRCRAFT FUEL. The Company's earnings are affected by changes in the price
and availability of aircraft fuel. In order to provide a measure of control over
price and supply, the Company trades and ships fuel and maintains fuel storage
facilities to support its flight operations. The Company also manages the price
risk of fuel costs primarily utilizing futures contracts traded on regulated
exchanges. Market risk is estimated as a hypothetical 10% increase in the
December 31, 1998 cost per gallon of fuel based on projected 1999 fuel usage
which would result in an increase to aircraft fuel expense of approximately $80
million in 1999, net of gains realized from fuel hedge instruments outstanding
at December 31, 1998, compared to an estimated $90 million at December 31, 1997.
As of December 31, 1998, the Company had hedged approximately 10% of its 1999
fuel requirements, including 40% of the first quarter, compared to 28% and 63%,
respectively, at December 31, 1997.
FOREIGN CURRENCY. The Company is exposed to the effect of foreign exchange
rate fluctuations on the U.S. dollar value of foreign currency-denominated
operating revenues and expenses. The Company's largest exposure comes from the
Japanese yen. From time to time, the Company uses financial instruments to hedge
its exposure to the Japanese yen. The result of a uniform 10% strengthening in
the value of the U.S. dollar from December 31, 1998 levels relative to each of
the currencies in which the Company's revenues and expenses are denominated
would result in a decrease in operating income of approximately $60 million for
the year ending December 31, 1999, net of gains realized from yen hedge
instruments outstanding at December 31, 1998, compared to an estimated $48
million decrease at December 31, 1997. This is due to the Company's foreign
currency-denominated revenues exceeding its foreign currency-denominated
expenses. The increase to other income due to the remeasurement of net foreign
currency-denominated liabilities and the increase to common stockholders' equity
deficit due to the translation of net yen-denominated liabilities resulting from
a 10% strengthening in the value of the U.S. dollar is not material for 1998 and
1997. This sensitivity analysis was prepared based upon projected foreign
currency-denominated revenues and expenses and foreign currency-denominated
assets and liabilities as of December 31, 1998 and 1997.
In 1998, the Company's yen-denominated revenues exceeded its yen-denominated
expenses by approximately 38 billion yen (approximately $286 million) and its
yen-denominated liabilities exceeded its yen-denominated assets by an average of
16.4 billion yen ($125 million). In general, each time the yen strengthens
(weakens), the Company's operating income is favorably (unfavorably) impacted
due to net yen-denominated revenue exceeding expenses and a nonoperating foreign
currency loss (gain) is recognized due to the remeasurement of net
yen-denominated liabilities. The Company's operating income was negatively
impacted by approximately $20 million due to the average yen being weaker in
1998 compared to 1997 and $70 million due to the average yen being weaker in
1997 compared to 1996. The yen to U.S. dollar exchange rate at December 31,
1998, 1997 and 1996 was 113 yen to $1, 131 yen to $1 and 116
23
yen to $1, respectively. There was no material impact on 1998 earnings
associated with the Japanese yen put options purchased to hedge its 1998 net
yen-denominated cash flows. As of December 31, 1998, the Company had entered
into forward contracts to hedge approximately 35% of its 1999 yen-denominated
ticket sales, which also represents approximately 95% of the Company's excess of
yen-denominated revenues over expenses.
INTEREST. The Company's earnings are also affected by changes in interest
rates due to the impact those changes have on its interest income from cash
equivalents and short-term investments and its interest expense from floating
rate debt instruments. The Company has mitigated this risk by limiting its
floating rate indebtedness to approximately 46% and 47% of long-term debt and
capital leases at December 31, 1998 and 1997, respectively. If long-term
interest rates average 10% more in 1999 than they did during 1998, the Company's
net interest expense would increase by approximately $14 million, compared to an
estimated $7 million for 1998 measured at December 31, 1997. If short-term
interest rates average 10% more in 1999 than they did during 1998, the Company's
interest income from cash equivalents and short-term investments would increase
by approximately $3 million compared to an estimated $7 million for 1998
measured at December 31, 1997. These amounts are determined by considering the
impact of the hypothetical interest rates on the Company's floating rate
indebtedness, cash equivalent and short-term investment balances at December 31,
1998.
Market risk for fixed-rate indebtedness is estimated as the potential
increase in fair value resulting from a hypothetical 10% decrease in interest
rates and amounts to approximately $50 million during 1999, compared to an
estimated $45 million for 1998 measured at December 31, 1997 for 1998. The fair
values of the Company's indebtedness were estimated using quoted market prices
or discounted future cash flows based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.
OTHER INFORMATION
INCOME TAXES. Sections 382 and 383 of the Internal Revenue Code of 1986, as
amended (the "Code"), and Treasury regulations limit the amounts of net
operating losses ("NOLs"), alternative minimum tax net operating losses
("AMTNOLs") and credits that can be used to offset taxable income (or used as a
credit) in any single tax year if the corporation experiences more than a 50%
ownership change, as defined therein, over a three-year testing period ending on
the testing date. See Note J to the Consolidated Financial Statements for
information regarding income taxes and NOLs, AMTNOLs and credits.
Management believes that an offering of outstanding common stock by existing
stockholders in November 1995 triggered an ownership change, but that no
ownership change occurred before that time. If such an ownership change did
occur as a result of the offering, management believes that, even as limited by
the Code, the Company would use the NOLs, AMTNOLs and credits significantly
earlier than their expiration, and the annual limitation would not adversely
impact the Company. However, if the Internal Revenue Service (the "IRS") were to
successfully assert that an ownership change had occurred on any date prior to
November 1995 (including August 1, 1993 when the Company entered into labor
agreements that provided stock for labor cost savings), the Company's ability to
use its NOLs, AMTNOLs and credits would be significantly impaired because the
value of NWA Corp's stock on certain prior testing dates was relatively low.
Such value would adversely affect the annual limitation.
YEAR 2000 READINESS. The Year 2000 issue is the result of computer programs
being written using two digits to identify the applicable year and not taking
into account the change in century that will occur in the year 2000. As a
result, such systems may fail completely or create erroneous results when the
year 2000 is defined by the system as "00." The Company uses a significant
number of information technology ("IT") and non-IT ("embedded operating
systems") systems that are essential to its operations. As a result, the Company
implemented a Year 2000 project to modify its computer systems to function
properly in 2000
24
and in the years after that. The Year 2000 project is being coordinated through
a senior-level task force that reports periodically to senior management and the
Board of Directors.
The Company is also reviewing the Year 2000 readiness of third parties with
whom the Company's systems interface and exchange data or upon whom the
Company's business depends and is coordinating efforts with these outside third
parties to minimize the extent to which its business will be vulnerable to such
third parties' failure to remediate their own Year 2000 issues. The Company's
business is also dependent upon U.S. and foreign governmental agencies and
certain governmental organizations or entities, which provide essential aviation
industry infrastructure, such as the Federal Aviation Administration ("FAA").
There can be no assurance that the systems of such third parties on which the
Company's business relies (including those of the FAA) will be modified on a
timely basis. As part of this review, the Company is actively involved in
airline industry Year 2000 review efforts led by the Air Transport Association
and the International Air Transport Association. The Company's business,
financial condition or results of operations could be materially adversely
affected by the failure of its systems or equipment to operate properly beyond
1999, or failure of those operated by other parties such as the air traffic
control and related systems of the FAA and international aviation and local
airport authorities.
The five phases of the Company's Year 2000 project used for identifying and
modifying the various programs and systems include inventory, assessment,
conversion, testing and implementation. The Company has completed all phases for
91% of its internal IT systems and anticipates completion of the remaining
systems in the first quarter of 1999. The Company is approximately 80% completed
with the assessment phase of the impact of Year 2000 on its non-IT systems and
third party relationships, which is expected to be completed in the second
quarter of 1999 with all phases anticipated to be completed in 1999. To some
extent, the Company's readiness in this area is dependent on the readiness of
third parties.
As a precautionary measure, the Company is also developing entity-wide
contingency plans designed to allow continued operation in the event of failure
of the Company's or third parties' systems. Contingency plans are expected to be
in place by the end of the second quarter of 1999 and are expected to be
executed as necessary.
The Company has spent $25 million of its initial estimated cost of $55
million, of which $15 million has been spent and expensed during 1998. The
Company now estimates that the total project costs will be somewhat less than
the estimated $55 million. The costs associated with the Year 2000 project are
being funded through cash from operations and are not expected to have a
material effect on the Company's business, financial condition or results from
operations. Maintenance or modification costs associated with making existing
computer systems Year 2000 compliant will be expensed as incurred. A majority of
the estimated total Year 2000 compliance cost has been funded by reallocating
existing resources rather than incurring incremental costs.
The costs of the Company's Year 2000 project and the date on which the
Company believes it will be completed are based on management's best estimates
and include assumptions regarding third party modification plans. However, in
particular due to the potential impact of third party modification plans, there
can be no assurance that these estimates will be achieved and actual results
could differ materially from those anticipated.
This section captioned "Year 2000 Readiness" is a "Year 2000 Readiness
Disclosure" as defined in section 3(9) of the "Year 2000 Information and
Readiness Disclosure Act," (Public Law 105-271), enacted in October 1998.
THE EURO. Effective January 1, 1999, certain European countries adopted a
common currency, the "euro." Full conversion to the euro is scheduled to be
completed by July 1, 2002. The Company has developed a plan to modify the
Company's operating systems to properly handle the euro through the full
conversion. Costs associated with the euro project were accounted for in
accordance with the existing
25
accounting policies and funded through cash from operations. Management does not
believe the implementation of this single currency plan will have a material
effect on the Company's business, financial condition or results from
operations.
U.S. TRANSPORTATION TAXES. The United States passenger ticket tax and other
transportation taxes, which were reinstated in the first quarter of 1997,
expired on September 30, 1997. The Taxpayer Relief Act enacted by Congress
revised transportation taxes and instituted new taxes for tickets for travel
from October 1, 1997 to December 31, 2007. Over a five-year period on a sliding
scale, the passenger ticket tax will be reduced from 10 percent to 7.5 percent
and a $3 per passenger segment fee will be phased in. The fee for international
arrivals and departures was increased from $6 per departure to $12 for each
arrival and departure. The departure tax on travel between the U.S. 48 states
and Alaska or Hawaii remained at $6. Additionally, a 7.5 percent tax was added
on the purchase of frequent flyer miles.
DETROIT MIDFIELD TERMINAL. In October 1996, the Company and Wayne County,
Michigan (the "County") entered into an agreement pursuant to which, subject to
the satisfaction of certain conditions set forth in the agreement, the Company
will manage and supervise the design and construction of a $1.08 billion
terminal at Detroit Metropolitan Wayne County Airport. The new terminal is
scheduled to be completed in 2001 and has been funded by the County's issuance
of airport revenue bonds payable primarily from future passenger facility
charges and federal and State of Michigan grants. The Company and the County
have entered into agreements pursuant to which the Company will lease space in
the new terminal for a term of 30 years from the date the terminal opens.
REGULATION. In April 1998, the DOT issued proposed competition guidelines,
which would severely limit major carriers' ability to compete with new entrant
carriers. In addition, the Department of Justice is investigating competition at
major hub airports. The outcomes of the DOT guidelines and the investigations
are unknown. However, to the extent that restrictions are imposed upon
Northwest's ability to respond to competition, Northwest's business may be
adversely impacted.
NEW ACCOUNTING STANDARDS. See Note A to the Consolidated Financial
Statements for recent accounting standards.
FORWARD-LOOKING STATEMENTS. Certain statements made throughout the
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 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.
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 factors that could significantly impact expected capacity,
load factors, revenues, expenses and cash flows include the airline pricing
environment, fuel costs, labor negotiations both at the Company and other
carriers, low-fare carrier expansion, capacity decisions of other carriers,
actions of the U.S. and foreign governments, foreign currency exchange rate
fluctuation, inflation, the general economic environment in the U.S. and other
regions of the world and other factors discussed herein.
26
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1998 and 1997, 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,
1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
January 18, 1999
27
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
DECEMBER 31
---------------------
1998 1997
---------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................................... $ 480.0 $ 740.4
Short-term investments.................................................................. 47.9 437.7
Accounts receivable, less allowance (1998--$23.5; 1997--$21.2).......................... 664.7 664.8
Flight equipment spare parts, less allowance (1998--$158.8; 1997--$148.9)............... 386.6 376.1
Deferred income taxes................................................................... 114.3 84.8
Prepaid expenses and other.............................................................. 176.6 294.0
---------- ---------
1,870.1 2,597.8
PROPERTY AND EQUIPMENT
Flight equipment........................................................................ 6,168.4 5,246.7
Less accumulated depreciation........................................................... 1,485.8 1,295.6
---------- ---------
4,682.6 3,951.1
Other property and equipment............................................................ 1,654.5 1,489.0
Less accumulated depreciation........................................................... 678.6 612.4
---------- ---------
975.9 876.6
---------- ---------
5,658.5 4,827.7
FLIGHT EQUIPMENT UNDER CAPITAL LEASES
Flight equipment........................................................................ 873.3 907.1
Less accumulated amortization........................................................... 263.3 270.0
---------- ---------
610.0 637.1
OTHER ASSETS
Investments in affiliated companies..................................................... 675.9 185.9
International routes, less accumulated amortization (1998--$263.4;
1997--$239.9)......................................................................... 704.3 727.8
Other................................................................................... 762.0 359.9
---------- ---------
2,142.2 1,273.6
---------- ---------
$ 10,280.8 $ 9,336.2
---------- ---------
---------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
28
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
DECEMBER 31
----------------------
1998 1997
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Air traffic liability.................................................................. $ 1,107.2 $ 1,222.5
Accounts payable....................................................................... 682.6 504.9
Accrued compensation and benefits...................................................... 504.2 376.5
Accrued aircraft rent.................................................................. 207.7 207.5
Accrued commissions.................................................................... 150.3 183.9
Other accrued liabilities.............................................................. 424.0 439.7
Current maturities of long-term debt................................................... 319.2 227.4
Current obligations under capital leases............................................... 57.6 55.9
Short-term borrowings.................................................................. 8.9 53.7
---------- ----------
3,461.7 3,272.0
LONG-TERM DEBT........................................................................... 3,681.5 1,841.9
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES............................................... 597.3 649.4
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.................................................................. 1,112.7 1,161.5
Long-term pension and postretirement health care benefits.............................. 500.1 407.3
Other.................................................................................. 579.4 674.1
---------- ----------
2,192.2 2,242.9
MANDATORILY REDEEMABLE PREFERRED SECURITY OF SUBSIDIARY WHICH HOLDS SOLELY NON-RECOURSE
OBLIGATION OF COMPANY--NOTE F
(Redemption value 1998--$631.8; 1997--$551.0).......................................... 564.1 486.3
REDEEMABLE STOCK
Preferred, liquidation value (1998--$263.7; 1997--$311.3).............................. 260.7 306.2
Common................................................................................. -- 848.5
---------- ----------
260.7 1,154.7
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; shares authorized--315,000,000; shares issued and
outstanding (1998--108,953,764; 1997--103,780,875)................................... 1.1 1.0
Additional paid-in capital............................................................. 1,444.6 1,273.6
Accumulated deficit.................................................................... (648.5) (362.2)
Accumulated other comprehensive loss................................................... (68.1) (101.8)
Treasury stock (1998--28,978,351; 1997--6,800,000 shares repurchased and 18,177,874
shares to be repurchased)............................................................ (1,205.8) (1,121.6)
---------- ----------
(476.7) (311.0)
---------- ----------
$ 10,280.8 $ 9,336.2
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
29
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
OPERATING REVENUES
Passenger....................................................................... $ 7,606.5 $ 8,822.1 $ 8,598.3
Cargo........................................................................... 633.5 789.4 745.8
Other........................................................................... 804.8 614.3 536.4
--------- --------- ---------
9,044.8 10,225.8 9,880.5
OPERATING EXPENSES
Salaries, wages and benefits.................................................... 3,260.6 3,023.9 2,709.4
Stock-based employee compensation............................................... -- -- 242.8
Aircraft fuel and taxes......................................................... 1,097.1 1,393.8 1,396.9
Commissions..................................................................... 691.9 855.2 868.4
Aircraft maintenance materials and repairs...................................... 761.0 620.4 556.2
Other rentals and landing fees.................................................. 450.4 456.7 454.0
Depreciation and amortization................................................... 427.0 396.0 377.7
Aircraft rentals................................................................ 345.1 358.9 346.3
Other........................................................................... 2,203.1 1,963.7 1,875.0
--------- --------- ---------
9,236.2 9,068.6 8,826.7
--------- --------- ---------
OPERATING INCOME (LOSS)........................................................... (191.4) 1,157.2 1,053.8
OTHER INCOME (EXPENSE)
Interest expense................................................................ (328.9) (244.7) (269.8)
Interest capitalized............................................................ 16.8 10.6 7.3
Interest of mandatorily redeemable preferred security holder.................... (22.5) (24.3) (27.2)
Investment income............................................................... 79.3 68.0 71.2
Foreign currency gain (loss).................................................... (21.5) 1.8 19.1
Other, net...................................................................... 38.2 16.0 18.0
--------- --------- ---------
(238.6) (172.6) (181.4)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.......................... (430.0) 984.6 872.4
Income tax expense (benefit).................................................... (144.5) 378.8 336.3
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM........................................... (285.5) 605.8 536.1
Loss on extinguishment of debt, net of taxes.................................... -- (9.3) --
--------- --------- ---------
NET INCOME (LOSS)................................................................. (285.5) 596.5 536.1
Preferred stock requirements.................................................... (0.8) (13.5) (37.5)
Preferred stock transaction..................................................... -- -- 74.5
--------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS............................... $ (286.3) $ 583.0 $ 573.1
--------- --------- ---------
--------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE:
BASIC
Before effects of extraordinary item and preferred stock transaction.......... $ (3.48) $ 5.89 $ 5.05
Loss on extinguishment of debt................................................ -- (0.10) --
Preferred stock transaction................................................... -- -- .75
--------- --------- ---------
Earnings (loss) per common share.............................................. $ (3.48) $ 5.79 $ 5.80
--------- --------- ---------
--------- --------- ---------
DILUTED
Before effects of extraordinary item and preferred stock transaction.......... $ (3.48) $ 5.29 $ 4.52
Loss on extinguishment of debt................................................ -- (0.08) --
Preferred stock transaction................................................... -- -- .68
--------- --------- ---------
Earnings (loss) per common share.............................................. $ (3.48) $ 5.21 $ 5.20
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
30
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................. $ (285.5) $ 596.5 $ 536.1
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................... 427.0 396.0 377.7
Income tax expense (benefit)................................................ (144.5) 378.8 336.3
Net refunds (payments) of income taxes...................................... 7.9 (114.3) (256.6)
Pension and other postretirement benefit contributions (in excess of ) less
than expense.............................................................. (26.2) (125.8) 14.7
Stock-based employee compensation........................................... -- -- 242.8
Sale proceeds of frequent flyer miles in excess of (less than) revenue...... (78.0) 387.7 31.3
Other, net.................................................................. 68.4 (1.8) (40.2)
Changes in certain assets and liabilities:
Decrease in accounts receivable........................................... 44.3 39.5 18.6
Decrease (increase) in flight equipment spare parts....................... (46.2) (136.7) 12.2
Decrease (increase) in prepaid expenses and other......................... 91.4 (13.3) (6.6)
Increase (decrease) in air traffic liability.............................. (140.4) 108.1 91.0
Increase (decrease) in accounts payable and other liabilities............. 84.2 82.3 (60.7)
Increase in accrued compensation and benefits............................. 85.9 10.3 75.7
--------- --------- ---------
Net cash provided by operating activities............................... 88.3 1,607.3 1,372.3
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................................................... (1,067.6) (724.3) (1,205.3)
Purchases of short-term investments........................................... (256.8) (632.0) (501.2)
Proceeds from maturities of short-term investments............................ 640.9 469.3 511.2
Investments in affiliated companies........................................... (414.6) (36.7) --
Other, net.................................................................... (15.0) 37.8 (46.6)
--------- --------- ---------
Net cash used in investing activities................................... (1,113.1) (885.9) (1,241.9)
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common and preferred stock...................................... (436.7) (524.4) --
Payment of long-term debt..................................................... (1,731.8) (346.8) (487.2)
Payment of capital lease obligations.......................................... (618.5) (61.0) (63.2)
Payment of short-term notes payable........................................... -- -- (379.2)
Proceeds from long-term debt.................................................. 2,909.6 250.6 184.8
Proceeds from sale and leaseback transactions................................. 669.0 168.0 350.0
Other, net.................................................................... (27.2) (26.8) (27.1)
--------- --------- ---------
Net cash provided by (used in) financing activities..................... 764.4 (540.4) (421.9)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (260.4) 181.0 (291.5)
Cash and cash equivalents at beginning of period................................ 740.4 559.4 850.9
--------- --------- ---------
Cash and cash equivalents at end of period...................................... $ 480.0 $ 740.4 $ 559.4
--------- --------- ---------
--------- --------- ---------
Cash and cash equivalents and unrestricted short-term investments at end of
period........................................................................ $ 480.0 $ 1,039.9 $ 752.1
--------- --------- ---------
--------- --------- ---------
Available to be borrowed under credit facilities................................ $ 1,003.7 $ 1,079.2 $ 726.8
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
31
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(IN MILLIONS)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
-------------- PAID-IN ACCUMULATED INCOME TREASURY
SHARES AMOUNT CAPITAL DEFICIT (LOSS) STOCK TOTAL
------ ------ ---------- ----------- ------- --------- ---------
BALANCE JANUARY 1, 1996...................... 91.3 $0.9 $ 968.4 $(1,517.8) $(270.3) $ -- $ (818.8)
Net income................................... 536.1 536.1
Other comprehensive income................... 157.4 157.4
---------
Comprehensive income, net of tax........... 693.5
Acquisition of preferred stock............... 74.5 74.5
Shares earned by employees including shares
issued to employee benefit plans........... 4.8 137.5 137.5
Accrued cumulative dividends on Series A and
B Preferred Stock.......................... (36.6) (36.6)
Accretion of Series C Preferred Stock........ (0.9) (0.9)
Tax benefit related to stock issued to
employees.................................. 7.0 7.0
Series C Preferred Stock converted to Common
Stock...................................... 1.0 32.0 32.0
Other........................................ 0.5 0.1 5.1 (0.5) 4.7
------ ------ ---------- ----------- ------- --------- ---------
BALANCE DECEMBER 31, 1996.................... 97.6 1.0 1,150.0 (945.2) (112.9 ) -- 92.9
Net income................................... 596.5 596.5
Other comprehensive income................... 11.1 11.1
---------
Comprehensive income, net of tax........... 607.6
Repurchase of Common Stock................... 7.0 (273.1) (266.1)
Common Stock committed to be repurchased..... 21.9 (848.5) (826.6)
Shares issued to employee benefit plans...... 3.5 --
Accrued cumulative dividends on Series A and
B Preferred Stock.......................... (14.4) (14.4)
Accretion of Series C Preferred Stock........ (1.1) (1.1)
Tax benefit related to stock issued to
employees.................................. 29.1 29.1
Series C Preferred Stock converted to Common
Stock...................................... 1.8 57.7 57.7
Other........................................ 0.9 7.9 2.0 9.9
------ ------ ---------- ----------- ------- --------- ---------
BALANCE DECEMBER 31, 1997.................... 103.8 1.0 1,273.6 (362.2) (101.8 ) (1,121.6) (311.0)
Net loss..................................... (285.5) (285.5)
Other comprehensive income................... 33.7 33.7
---------
Comprehensive loss, net of tax............. (251.8)
Common Stock carrying value over repurchase
price...................................... 68.1 68.1
Shares issued to purchase an interest in
Continental Airlines, Inc.................. 2.6 0.1 65.4 65.5
Accretion of Series C Preferred Stock........ (0.8) (0.8)
Tax benefit related to stock issued to
employees.................................. 12.0 12.0
Series C Preferred Stock converted to Common
Stock...................................... 1.4 46.3 46.3
Common Stock held in rabbi trusts............ 31.5 (151.5) (120.0)
Other........................................ 1.2 15.8 (0.8) 15.0
------ ------ ---------- ----------- ------- --------- ---------
BALANCE DECEMBER 31, 1998.................... 109.0 $1.1 $1,444.6 $ (648.5) $(68.1 ) $(1,205.8) $ (476.7)
------ ------ ---------- ----------- ------- --------- ---------
------ ------ ---------- ----------- ------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
32
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--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 subsidiaries (collectively, the "Company"). All
significant intercompany transactions have been eliminated. Investments in 20%
to 50% owned companies and Continental Airlines, Inc. ("Continental") are
accounted for by the equity method. Other investments are accounted for by the
cost method.
On November 20, 1998, NWA Corp. effected a holding company reorganization.
As a result, Northwest Airlines Holdings Corporation (formerly known as
Northwest Airlines Corporation and prior to the reorganization the publicly
traded holding company, "Old NWA Corp.") became a direct wholly-owned subsidiary
of NWA Corp. NWA Corp. is now the publicly traded holding company. Pursuant to
the reorganization, each share of Common Stock and Series C Preferred Stock of
Old NWA Corp. was converted into one share of Common Stock and Series C
Preferred Stock, respectively, of NWA Corp. with the same rights and privileges
as such shares of Old NWA Corp. References to NWA Corp., Common Stock and Series
C Preferred Stock for time periods prior to November 20, 1998 refer to Old NWA
Corp. and the Common Stock and Series C Preferred Stock of Old NWA Corp.,
respectively.
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
BUSINESS: Northwest's operations comprise more than 95% of the Company's
consolidated operating revenues and expenses. Northwest is a major air carrier
engaged principally in the commercial transportation of passengers and cargo,
directly serving more than 150 cities in 21 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 hubs at
Tokyo and Osaka, a trans-Atlantic alliance with KLM Royal Dutch Airlines ("KLM")
that operates through a hub in Amsterdam and a global alliance with Continental.
The year ended December 31, 1998 was affected by labor-related disruptions
which included work actions, a 30-day cooling off period, an 18-day cessation of
flight operations due to the pilots' strike during the third quarter, a
seven-day gradual resumption of flight operations and a rebuilding of traffic
demand.
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 the estimated useful lives
of the assets. Commencing with the acquisition of the parent of Northwest in
1989, estimated useful lives 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.
AIRFRAME AND ENGINE MAINTENANCE: Routine maintenance and airframe and
engine overhauls are charged to expense as incurred. Modifications that enhance
the operating performance or extend the
33
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
useful lives of airframes or engines are capitalized and amortized over the
remaining estimated useful life of the asset.
INTERNATIONAL ROUTES: International routes are amortized on a straight-line
basis, generally over 40 years. International operating route authorities and
alliances are regulated by governmental policy and bilateral agreements between
nations. Changes in such policies or agreements could impact Northwest.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company evaluates impairment of
long-lived assets in compliance with Statement of Financial Accounting Standards
("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 that
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 1998, the Company accelerated the retirement of its seven oldest Boeing
747 aircraft and recorded a fleet disposition charge of $65.9 million in other
operating expenses. These retirements are earlier than scheduled as a result of
decreased demand in the Pacific, the timing of major overhauls and the
opportunity to accelerate the delivery of certain new Boeing 747-400 aircraft in
partial replacement of the retired aircraft. The Company considered recent
transactions involving sales of similar aircraft and market trends in aircraft
dispositions to reduce the aircraft net book value to reflect the fair market
value of these assets. The fleet disposition charge included a $13.5 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 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 $137.3 million, $109.8 million and $120.4 million
in 1998, 1997 and 1996, 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 only 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 F) and other
assets and liabilities of certain properties located outside of the United
States whose cash flows are primarily in the local functional currency are
translated at current exchange rates, with translation gains and losses recorded
directly to common stockholders' equity deficit.
34
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
NEW ACCOUNTING STANDARDS: In March 1998, Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed for or Obtained for
Internal Use" ("SOP 98-1") was issued. SOP 98-1 defines the type of costs that
should be capitalized versus expensed as incurred. The Company adopted SOP 98-1
on January 1, 1999, which did not have a material impact on the Company's
financial condition or results of operations.
NOTE B--EARNINGS (LOSS) PER SHARE DATA
The following table sets forth the computation of basic and diluted earnings
(loss) per common share (in millions, except share data):
YEAR ENDED DECEMBER 31
------------------------------------------
1998 1997 1996
------------ ------------- -------------
Numerator:
Income (loss) before extraordinary item............................ $ (285.5) $ 605.8 $ 536.1
Preferred stock requirements..................................... (0.8) (13.5) (37.5)
Preferred stock transaction...................................... -- -- 74.5
------------ ------------- -------------
Income (loss) applicable to common stockholders for basic earnings
(loss) per share................................................. $ (286.3) $ 592.3 $ 573.1
Effect of dilutive securities: Series C Preferred Stock............ -- 1.1 0.9
------------ ------------- -------------
Income (loss) applicable to common stockholders after assumed
conversions for diluted earnings per share....................... $ (286.3) $ 593.4 $ 574.0
------------ ------------- -------------
------------ ------------- -------------
Denominator:
Weighted-average shares outstanding for basic earnings (loss) per
share............................................................ 82,341,741 100,616,605 98,731,917
Effect of dilutive securities:
Series C Preferred Stock......................................... -- 9,981,547 10,216,939
Employee stock options........................................... -- 1,319,177 1,482,406
Common stock repurchase obligation............................... -- 280,253 --
------------ ------------- -------------
Adjusted weighted-average shares outstanding and assumed
conversions for diluted earnings (loss) per share................ 82,341,741 112,197,582 110,431,262
------------ ------------- -------------
------------ ------------- -------------
For additional disclosures regarding the outstanding Series C Preferred
Stock, the employee stock options and the limited KLM option, see Notes C, G and
H.
35
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--LABOR AGREEMENTS AND SERIES C PREFERRED STOCK
In 1993, the Company entered into labor agreements which provided for wage
and other compensation savings (the "Actual Savings") by domestic employees,
including management, and other cost reductions which aggregated $897 million
over 36 to 39 month periods (depending on the labor group) (collectively, the
"Wage Savings period") which ended between August and November 1996. As part of
the 1993 labor agreements, 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 $.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.
Information with respect to the shares issued to trusts for the benefit of
employees is as follows (in millions):
SERIES C PREFERRED STOCK
----------------------------------
SHARES SHARES FINANCIAL
TO BE SHARES HELD BY STATEMENT
ISSUED EARNED TRUSTS AMOUNT
------ ---- ------- ---------
Balance January 1, 1996........................ 4.1 6.9 4.4 $288.6
Shares earned by employees................... -- 2.2 -- 105.3
Shares issued to trusts...................... (2.6) -- 2.6 --
Series C Preferred Stock converted to Common
Stock...................................... -- -- (.8) (32.0)
Withdrawals from trusts...................... -- -- -- --
Accretion and other.......................... .2 -- -- .9
------ ---- ------- ---------
Balance December 31, 1996...................... 1.7 9.1 6.2 362.8
Shares issued to trusts...................... (1.7) -- 1.7 --
Series C Preferred Stock converted to Common
Stock...................................... -- -- (1.3) (57.7)
Withdrawals from trusts...................... -- -- -- --
Accretion.................................... -- -- -- 1.1
------ ---- ------- ---------
Balance December 31, 1997...................... -- 9.1 6.6 306.2
Series C Preferred Stock converted to Common
Stock...................................... -- -- (1.0) (46.3)
Withdrawals from trusts...................... -- -- -- --
Accretion.................................... -- -- -- .8
------ ---- ------- ---------
Balance December 31, 1998...................... -- 9.1 5.6 $260.7
------ ---- ------- ---------
------ ---- ------- ---------
COMMON STOCK
-------------------------------------
SHARES SHARES FINANCIAL
TO BE SHARES HELD BY STATEMENT
ISSUED EARNED TRUSTS AMOUNT
------ ------ ------- ---------
Balance January 1, 1996........................ 8.6 13.3 7.7 $409.8
Shares earned by employees................... -- 4.2 -- 137.5
Shares issued to trusts...................... (4.8) -- 4.8 --
Series C Preferred Stock converted to Common
Stock...................................... -- -- 1.0 32.0
Withdrawals from trusts...................... -- -- (2.3) --
Accretion and other.......................... (.3) -- -- --
------ ------ ------- ---------
Balance December 31, 1996...................... 3.5 17.5 11.2 579.3
Shares issued to trusts...................... (3.5) -- 3.5 --
Series C Preferred Stock converted to Common
Stock...................................... -- -- 1.8 57.7
Withdrawals from trusts...................... -- -- (4.2) --
Accretion.................................... -- -- -- --
------ ------ ------- ---------
Balance December 31, 1997...................... -- 17.5 12.3 637.0
Series C Preferred Stock converted to Common
Stock...................................... -- -- 1.4 46.3
Withdrawals from trusts...................... -- -- (3.4) --
Accretion.................................... -- -- -- --
------ ------ ------- ---------
Balance December 31, 1998...................... -- 17.5 10.3 $683.3
------ ------ ------- ---------
------ ------ ------- ---------
NWA Corp. has authorized 25,000,000 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, 1998, 3.5 million shares of Series C Preferred Stock
have been converted into Common Stock and the remaining 5.6 million shares
outstanding are convertible into 7.7 million shares of Common Stock.
All the outstanding shares of Series C Preferred Stock are required to be
redeemed in 2003 for a pro rata share of Actual Savings ($263.7 million as of
December 31, 1998). NWA Corp. has the option to
36
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--LABOR AGREEMENTS AND SERIES C PREFERRED STOCK (CONTINUED)
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 Stock. If NWA Corp. fails to redeem the Series C Preferred
Stock, dividends will accrue at the higher of (i) 12% or (ii) the highest
penalty rate on any then outstanding series 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
ten years commencing August 1993 to the ultimate redemption amount. Prior to
2003, NWA Corp. at its option may redeem in whole or in part the Series C
Preferred Stock at its liquidation value.
The Company recognized stock-based compensation expense for each year based
on the values at the measurement date of the Series C Preferred Stock and the
Common Stock earned by employees. The final measurement dates for 1996 coincided
with the end of the Wage Savings period for each of the labor groups.
The Company was required to adopt the provisions of the Emerging Issues Task
Force ("EITF") Issue No. 97-14, "Accounting for Deferred 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 established as part of the 1993
labor agreements. The 4.0 million shares of Common Stock as of December 31, 1998
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 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 the qualified
trusts or diversification, increases or decreases in the deferred compensation
liability will be recognized in earnings to the extent that 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 trust as
trading and recorded them at fair market value.
Approximately 90% of the Company's employees are members of collective
bargaining units. In 1998, the Company signed new agreements with five
collective bargaining groups, including the pilot group. The durations of the
new agreements range from four to six years. In November 1998, at a
representation election, a majority of the mechanics and related employees
elected the Aircraft Mechanics Fraternal Association to be their
collective-bargaining representative. The International Association of
Machinists and Aerospace Workers ("IAM") is protesting the election and
certification of the vote is currently under review. The remaining ground
employees continue to be represented by the IAM. In 1999, the IAM ratified a new
four-year tentative agreement for the remaining ground employees. The Company is
presently in mediated negotiations with the union representing its flight
attendants, but cannot predict the ultimate outcome of the negotiations.
37
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt consisted of the following (in millions, with interest rates
as of December 31, 1998):
DECEMBER 31
--------------------
1998 1997
--------- ---------
Revolving credit facilities due 2002, 7.6% (a)......................... $ 824.8 $ --
Unsecured notes due 2004 through 2008, 8.0% weighted average rate
(b).................................................................. 648.9 249.7
Equipment pledge notes due through 2013, 7.1% weighted average rate.... 482.5 248.4
Aircraft notes due through 2016, 6.0% weighted average rate (c)........ 362.2 --
Secured notes due through 2009, 6.5% weighted average rate (d)......... 348.9 348.9
NWA Trust No. 2 aircraft notes due through 2012, 9.8% weighted average
rate (e)............................................................. 258.3 330.9
Secured notes due through 2016, 6.1% (f)............................... 240.0 --
Unsecured notes due 1999 and 2000, 7.9% (g)............................ 237.7 --
Sale-leaseback financing obligations due through 2020, 9.9% imputed
rate (h)............................................................. 223.0 223.0
NWA Trust No. 1 aircraft notes due through 2006, 8.6% weighted average
rate (i)............................................................. 195.1 208.7
Term loans due through 2002, 7.6% weighted average rate (a)............ 160.2 150.0
Term certificates paid in 1998 (j)..................................... -- 135.0
Senior unsecured floating rate note paid in 1998....................... -- 76.0
Other.................................................................. 19.1 98.7
--------- ---------
Total long-term debt................................................... 4,000.7 2,069.3
Less current maturities.............................................. 319.2 227.4
--------- ---------
$ 3,681.5 $ 1,841.9
--------- ---------
--------- ---------
(a) The Company's Credit Agreement was amended in December 1997 to increase its
existing revolving credit facility from $500 million to $675 million and to
extend the availability period to December 2002. In addition, the facility
added a new $175 million, 364-day unsecured revolving credit facility due in
December 1998. In October 1998, the Company borrowed the available $835
million under its Credit Agreement. Interest is calculated at floating rates
based on the London Interbank Offered Rate ("LIBOR") plus 2%. In December
1998, $10.2 million of the $175 million, 364-day revolver was converted into
a term loan due December 2002. The remaining $164.8 million was renewed for
another 364 days; however, to the extent this facility is not renewed for an
additional 364-day period, the Company may borrow up to the entire
non-renewed portion of the facility and all such borrowings mature in
December 2002.
In May 1998, the Company obtained a secured 364-day, $1.0 billion additional
revolving credit facility. In addition, the Company provided certain
collateral to secure its previously unsecured term loan and revolving credit
facilities under the Credit Agreement described above. Commitment fees are
payable by the Company on the unused portion of all of its revolving credit
facilities at a rate per annum equal
38
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--LONG-TERM DEBT AND SHORT-TERM BORROWINGS (CONTINUED)
to .375% and are not considered material. At December 31, 1998, $1.0 billion
remained available to be borrowed in the aggregate under both revolving
credit facilities.
$150 million of the floating rate term loans is payable in three equal
installments beginning in 2001 with final maturity in 2002.
(b) 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.
Interest on the notes is payable semi-annually.
(c) During 1998 the Company secured long-term debt financing on 13 Airbus A320
aircraft delivered during the year. Interest on the notes is payable
semi-annually. The Company combined these debt financings with
fully-defeased German cross border transactions.
(d) In April 1996, the Company restructured floating rate notes with certain
manufacturers. Principal repayments are due semi-annually beginning 2001.
(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). A
limited partnership, of which Northwest is the limited partner and Norbus,
Inc. (an affiliate of Airbus Industrie A.I.E.) 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
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.
In December 1997, the Company initiated a tender offer for the repurchase of
the 13.875% Class D Subordinated Aircraft Notes. The offer expired on
December 30, 1997 with 99% of the notes tendered. On January 2, 1998, the
notes were repurchased for $78.7 million. Consequently, a loss of $9.3
million, net of $5.4 million in income taxes, was recorded as an
extraordinary item in 1997.
(f) In August 1998, the Company borrowed $240 million under an existing credit
facility. The floating rate notes are secured by six Boeing 757 aircraft and
principal payments are due semi-annually beginning in 2008.
(g) On May 1, 1998, in conjunction with its repurchase of Common Stock from KLM,
the Company issued three senior unsecured 7.88% notes with principal amounts
of $206.0 million, $137.7 million and $100.0 million. The Company repaid the
first note on September 29, 1998; the remaining two notes are due on
September 29, 1999 and 2000, respectively. See Note G.
(h) 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 which 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
39
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--LONG-TERM DEBT AND SHORT-TERM BORROWINGS (CONTINUED)
Minnesota and other government agencies. In December 1997, the Company
prepaid $39 million of these obligations.
(i) In March 1994, Northwest consummated a financing transaction in which six
Boeing 747-200 and four Boeing 757-200 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.
(j) In March 1994, Northwest agreed to sell certain receivables on an ongoing
basis to Northwest Capital Funding Corp. ("NCF"), pursuant to a receivable
financing program (the "Receivable Program"). NCF, an indirect subsidiary of
the Company, issued through a master trust floating rate Term Certificates.
The Receivable Program provided for the early retirement of the related Term
Certificates upon the occurrence of certain events, one of which occurred on
January 25, 1998. Accordingly, the Company paid these certificates in full
in 1998.
Maturities of long-term debt for the five years subsequent to December 31,
1998 are as follows (in millions):
1999............................................................................... $ 319.2
2000............................................................................... 168.0
2001............................................................................... 148.0
2002............................................................................... 1,046.3
2003............................................................................... 107.9
The debt and lease agreements of the Company contain certain restrictive
covenants, including limitations on indebtedness, equity redemptions and the
declaration of dividends, as well as requirements to maintain certain financial
ratios, including collateral coverage ratios. At December 31, 1998, the Company
was in compliance with the covenants of all of its debt and lease agreements.
Various assets, principally aircraft and international route authorities, having
an aggregate book value of $5.1 billion at December 31, 1998, were pledged under
various loan agreements.
Cash payments of interest, net of capitalized interest, aggregated $277.4
million in 1998, $231.3 million in 1997 and $263.3 million in 1996.
The weighted average interest rates on short-term borrowings outstanding at
December 31 were 5.99%, 6.24% and 5.69% for 1998, 1997 and 1996, respectively.
NOTE E--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 2027. Portions of certain facilities are subleased under
noncancelable operating leases expiring in various years through 2020.
40
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E--LEASES (CONTINUED)
At December 31, 1998, the Company leased 113 of the 409 aircraft it
operates. Of these, 25 were capital leases and 88 were operating leases.
Expiration dates range from 1999 to 2009 for aircraft under capital leases, and
from 1999 to 2019 for aircraft under operating leases. The Company's aircraft
leases can generally be renewed for terms ranging from one to five years at
rates based on the aircraft's fair market value at the end of the lease term.
Ninety-one of the 113 aircraft lease agreements provide the Company with
purchase options at the end of the lease terms which approximate fair market
value.
Rental expense for all operating leases consisted of (in millions):
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Gross rental expense................................................................. $ 629.8 $ 627.1 $ 596.5
Sublease rental income............................................................... (86.8) (79.5) (62.2)
--------- --------- ---------
Net rental expense................................................................... $ 543.0 $ 547.6 $ 534.3
--------- --------- ---------
--------- --------- ---------
At December 31, 1998, future minimum lease payments under capital leases and
noncancelable operating leases with initial or remaining terms of more than one
year were as follows (in millions):
CAPITAL OPERATING
LEASES LEASES
--------- -----------
1999..................................................................... $ 103.6 $ 495.8
2000..................................................................... 102.9 484.5
2001..................................................................... 103.9 472.8
2002..................................................................... 278.6 476.2
2003..................................................................... 84.5 456.7
Thereafter............................................................... 223.1 4,442.3
--------- -----------
896.6 6,828.3
Less sublease rental income.............................................. (472.6)
-----------
Total minimum operating lease payments................................... $ 6,355.7
-----------
-----------
Less amounts representing interest....................................... 241.7
---------
Present value of future minimum capital lease payments................... 654.9
Less current obligations under capital leases............................ 57.6
---------
Long-term obligations under capital leases............................... $ 597.3
---------
---------
NOTE F--MANDATORILY REDEEMABLE PREFERRED SECURITY OF SUBSIDIARY WHICH HOLDS
SOLELY NON-RECOURSE OBLIGATION OF COMPANY
In October 1995, the Company completed a restructuring of its
yen-denominated non-recourse obligation secured by land and 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
41
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--MANDATORILY REDEEMABLE PREFERRED SECURITY OF SUBSIDIARY WHICH HOLDS
SOLELY NON-RECOURSE OBLIGATION OF COMPANY (CONTINUED)
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
"Mandatorily Redeemable Preferred Security of Subsidiary Which Holds Solely
Non-Recourse Obligation of Company." NWA Corp. has guaranteed the obligation of
the Subsidiary to distribute payments 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 rate of interest varies from period to period and is capped at 6%. The
obligation is non-recourse to the Company. The Company has the ability
(exercisable at any time after September 30, 2001) to transfer the property in
full satisfaction of all Company obligations related to the financing.
The carrying value is being accreted over 12 years from October 1995 to the
ultimate maturity value of 71.4 billion yen ($631.8 million based on the
December 31, 1998 exchange rate). Such accretion is included as a component of
"Interest of mandatorily redeemable preferred security holder" in the
Consolidated Statements of Operations.
NOTE G--REDEEMABLE STOCK
In July 1996, NWA Corp. acquired from KLM 3,691.2 shares of Series A
Preferred Stock and 2,962.8 shares of Series B Preferred Stock in exchange for
two unsecured promissory notes aggregating $379 million, both of which were
repaid December 1996. These transactions resulted in an increase to net income
applicable to common stockholders of $74.5 million.
On September 29, 1997, NWA Corp. entered into an agreement with KLM to
repurchase for $1.12 billion over three years the 25 million shares of NWA Corp.
Common Stock held by KLM. On that date, 6.8 million shares were repurchased for
$273.1 million. Concurrently with that purchase, all of KLM's existing
governance rights under various stockholder and other agreements were canceled,
and NWA Corp. and KLM entered into a customary standstill agreement. The
remaining 18.2 million shares of Common Stock to be repurchased were
reclassified to redeemable common stock from common stockholders' equity deficit
on that date. In addition, on the same day, NWA Corp. repurchased from KLM and
others all of the Series A and B Preferred Stock outstanding for $251.3 million
in cash.
On May 1, 1998, NWA Corp. purchased from KLM the remaining 18.2 million
shares of Common Stock which the Company had previously agreed to repurchase
over the three-year period. The purchase price of $780.4 million was paid with a
combination of $336.7 million cash and three senior unsecured 7.88% notes. The
$68.1 million excess of the financial statement carrying value of the redeemable
Common Stock over the repurchase price was transferred to common stockholders'
equity deficit on the same date. As of May 1, 1998, earnings (loss) per share
calculations do not include the 18.2 million shares repurchased. In certain
limited circumstances (e.g., the failure of the Northwest/KLM alliance to
maintain certain antitrust immunity or Northwest's default under the alliance
agreement), KLM will have an option to buy back from NWA Corp. up to 13.3
million shares of Common Stock.
42
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--STOCK OPTIONS AND STOCKHOLDER RIGHTS PLAN
On April 30, 1998, NWA Corp. amended its Second Amended and Restated
Certificate of Incorporation to combine and reclassify the existing separate
classes of voting Class A and non-voting Class B Common Stock into a single
class of Common Stock.
STOCK OPTION PLANS: NWA Corp. has stock option plans for officers and key
employees. 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 that options are
granted with an exercise price less than the market price on the date of the
grant, compensation expense is recognized over the vesting period of the grant.
Following is a summary of stock option activity (in thousands, except per
share amounts):
1998 1997 1996
------------------------ -------------------------- ------------------------
WEIGHTED-AVG WEIGHTED-AVG WEIGHTED-AVG
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------------- ----------- ------------- --------- -------------
Outstanding at beginning of year.......... 5,204 $ 27.09 4,774 $ 20.11 3,509 $ 10.56
Granted................................... 509 43.35 1,454 39.26 1,836 35.04
Forfeited................................. (485) 33.36 (154) 36.24 (118) 15.55
Exercised................................. (1,169) 13.08 (870) 7.49 (453) 7.92
--------- ----- ---------
Outstanding at end of year................ 4,059 32.41 5,204 27.09 4,774 20.11
Exercisable at end of year................ 1,910 24.35 1,894 15.55 1,907 9.16
Reserved for issuance..................... 7,948 7,948 7,948
Available for future grants............... 163 187 1,487
AT DECEMBER 31, 1998:
OPTIONS OUTSTANDING
------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ------------------------------
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
----------- ---------------- ----------------- ----------- -----------------
$4.740 to $27.375......................... 1,072 5.7 years $ 14.30 966 $ 13.04
31.875 to 39.875.......................... 2,102 8.2 35.78 800 34.57
40.000 to 64.406.......................... 885 8.8 46.34 144 43.39
The weighted-average fair value of options granted during 1998, 1997 and
1996 is $17.65, $16.50 and $14.89 per option, respectively. The fair value of
each option grant is estimated as of the date of grant using the Black-Scholes
single option-pricing model assuming a weighted average risk-free interest rate
of 5.5%, 6.1% and 6.4% for 1998, 1997 and 1996, 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 ("ALPA"), NWA Corp.
established the 1998 Pilots Stock Option Plan ("the Pilot Plan"). The Pilot Plan
has reserved for issuance 2.5 million shares of Common Stock. Options under the
Pilot Plan will be granted over a three-year period. The initial option grant
was for 1.0 million shares of Common Stock with an exercise price of $27.875 per
share. These options became exercisable on
43
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--STOCK OPTIONS AND STOCKHOLDER RIGHTS PLAN (CONTINUED)
November 1, 1998. The weighted average fair value of the options granted under
the Pilot Plan is $10.84. The fair value of each option grant is estimated as of
the date of grant using the Black-Scholes single option pricing model assuming a
weighted average risk-free interest rate of 4.7%, an expected life of six years
and volatility of 30%. On each of the next three anniversaries of the initial
grant date, an additional 500,000 options will be granted with an exercise price
equal to the closing market price of the Common Stock on the applicable grant
date.
Assuming the Company had accounted for its employee stock options using the
fair value method (instead of the intrinsic value method), the 1998 net loss
would have increased to $300 million, bringing the loss per share to $3.65 in
1998. The pro forma effect of SFAS 123 is immaterial to the Company's 1997 and
1996 net income and earnings per share. In addition, because the fair value
method was applied only to options granted subsequent to December 31, 1994, its
pro forma effect will not be fully reflected until 1999.
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 (as defined in the Rights Plan)) 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.
44
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table sets forth information with respect to accumulated other
comprehensive income (loss) (in millions):
FOREIGN DEFERRED MINIMUM ACCUMULATED
CURRENCY LOSS ON PENSION OTHER
TRANSLATION HEDGING LIABILITY COMPREHENSIVE
ADJUSTMENT ACTIVITIES ADJUSTMENT INCOME (LOSS)
----------- ----------- ----------- --------------
Balance at January 1, 1996................................... $ (39.3) $ -- $ (231.0) $ (270.3)
Before tax amount.......................................... (.1) -- 250.6 250.5
Tax effect................................................. -- -- (93.1) (93.1)
----------- ----------- ----------- -------
Net-of-tax amount.......................................... (.1) -- 157.5 157.4
Balance at December 31, 1996................................. (39.4) -- (73.5) (112.9)
Before tax amount.......................................... 9.2 -- 8.6 17.8
Tax effect................................................. (3.4) -- (3.3) (6.7)
----------- ----------- ----------- -------
Net-of-tax amount.......................................... 5.8 -- 5.3 11.1
Balance at December 31, 1997................................. (33.6) -- (68.2) (101.8)
Before tax amount.......................................... (10.9) (33.0) 97.5 53.6
Tax effect................................................. 4.0 12.1 (36.0) (19.9)
----------- ----------- ----------- -------
Net-of-tax amount.......................................... (6.9) (20.9) 61.5 33.7
Balance at December 31, 1998................................. $ (40.5) $ (20.9) $ (6.7) $ (68.1)
----------- ----------- ----------- -------
----------- ----------- ----------- -------
NOTE J--INCOME TAXES
Income tax expense (benefit) consisted of the following (in millions):
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Current:
Federal....................................................... $ (45.0) $ 108.5 $ 175.0
Foreign....................................................... 3.4 3.7 4.1
State......................................................... 1.0 10.9 22.3
--------- --------- ---------
(40.6) 123.1 201.4
Deferred:
Federal....................................................... (89.7) 236.8 112.1
Foreign....................................................... (3.4) -- 16.6
State......................................................... (10.8) 18.9 6.2
--------- --------- ---------
(103.9) 255.7 134.9
--------- --------- ---------
Total income tax expense (benefit).............................. $ (144.5) $ 378.8 $ 336.3
--------- --------- ---------
--------- --------- ---------
45
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--INCOME TAXES (CONTINUED)
Reconciliation of the statutory rate to the Company's income tax expense
(benefit) is as follows (in millions):
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Statutory rate applied to income before income taxes and
extraordinary item............................................ $ (150.5) $ 344.6 $ 305.3
Add (deduct):
State income tax (benefit) net of federal benefit............. (6.5) 19.2 18.5
Adjustment to valuation allowance and other income tax
accruals.................................................... 6.4 5.8 6.2
Other......................................................... 6.1 9.2 6.3
--------- --------- ---------
Total income tax expense (benefit).............................. $ (144.5) $ 378.8 $ 336.3
--------- --------- ---------
--------- --------- ---------
The net deferred tax liabilities listed below include a current net deferred
tax asset of $114.3 million and $84.8 million and a long-term net deferred tax
liability of $1.11 billion and $1.16 billion as of December 31, 1998 and 1997,
respectively.
Significant components of the Company's net deferred tax liability were as
follows (in millions):
DECEMBER 31
--------------------
1998 1997
--------- ---------
Deferred tax liabilities:
Financial accounting basis of assets in excess of tax basis.......... $ 1,489.4 $ 1,452.0
Expenses other than depreciation accelerated for tax purposes........ 313.0 309.4
Other................................................................ 15.9 12.4
--------- ---------
Total deferred tax liabilities..................................... 1,818.3 1,773.8
Deferred tax assets:
Pension and postretirement benefits.................................. 84.7 128.3
Expenses accelerated for financial reporting purposes................ 547.9 409.3
Leases capitalized for financial reporting purposes.................. 80.4 105.1
Alternative minimum tax credit carryforwards......................... 103.2 54.4
Other tax credit carryforwards....................................... 3.7 --
--------- ---------
Total deferred tax assets.......................................... 819.9 697.1
--------- ---------
Net deferred tax liability............................................. $ 998.4 $ 1,076.7
--------- ---------
--------- ---------
During 1996, the Company utilized all of its regular net operating loss
carryforwards ("NOLs"). For tax purposes, the Company utilized NOLs of
approximately $121.8 million, $684.4 million and $394.4 million in 1996, 1995
and 1994, respectively, and alternative minimum tax net operating loss
carryforwards ("AMTNOLs") of $105.1 million and $446.7 million in 1995 and 1994,
respectively. The Company has alternative minimum tax credits of approximately
$103.2 million available for carryforward to future years' tax returns. The
alternative minimum tax credit has an unlimited carryforward period. In 1996,
the Company utilized its remaining foreign tax credit carryforward available for
regular tax purposes. In 1995, the Company utilized its remaining AMTNOL
carryforward, as well as its remaining investment tax credit
46
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--INCOME TAXES (CONTINUED)
carryforward and its remaining foreign tax credit carryforward available for
alternative minimum tax purposes. During 1998, the Company generated $3.4
million of foreign tax credit for both regular and alternative minimum tax
purposes and $.3 million of general business credit. These credits are available
for carryforward at December 31, 1998.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the
"Code"), and Treasury regulations limit the amounts of NOLs, AMTNOLs and credits
that can be used to offset taxable income (or used as a credit) in any single
tax year if the corporation has more than a 50% ownership change (as defined in
the Code) over a three-year testing period ending on the testing date. The
annual limitation on the amount of such NOLs, AMTNOLs and credits is calculated
in part based on the value of NWA Corp.'s stock. Management believes that an
offering of outstanding Common Stock by existing stockholders in November 1995
triggered an ownership change, but that no ownership change occurred before that
time. If such an ownership change did occur as a result of the offering,
management believes that, even as limited by the Code, the Company would use the
NOLs, AMTNOLs and credits significantly earlier than their expiration and the
annual limitations would not adversely impact the Company. However, if the IRS
were to successfully assert that an ownership change had occurred on any date
prior to November 1995, (including August 1, 1993 when the Company entered into
labor agreements that provided stock for labor cost savings), the Company's
ability to use its NOLs, AMTNOLs and credits would be significantly impaired
because the value of NWA Corp.'s stock on certain prior testing dates was
relatively low. Such value would adversely affect the annual limitation
described above.
NOTE K--COMMITMENTS
The Company's firm aircraft orders for 102 new aircraft as of December 31,
1998, adjusted to reflect a January 1999 revised delivery schedule, includes
seven Airbus A320 aircraft in 1999, 50 Airbus A319 aircraft (ten per year
beginning in 1999), 25 Boeing 757-200 aircraft from 2004 through 2006, 16 Airbus
A330 aircraft (eight each in 2004 and 2005) and four Boeing 747-400 aircraft in
1999. Committed expenditures for these aircraft and related equipment, including
estimated amounts for contractual price escalations and predelivery deposits,
will be approximately: $963 million in 1999, $290 million in 2000, $363 million
in 2001, $498 million in 2002, $466 million in 2003 and $3.01 billion from 2004
to 2006.
The Company has substitution rights with respect to the Airbus A330 aircraft
and has the option to purchase four Boeing 747-400 aircraft in 2002. The Company
also has options to purchase 50 additional Airbus A319 and/or A320 aircraft for
delivery from 2000 through 2004 and 50 roll-over options which replace the
initial 50 options and would be assigned delivery slots commencing in December
2004 as the initial 50 options are exercised.
Consistent with prior practice, the Company intends to finance its aircraft
deliveries through a combination of internally generated funds, debt and lease
financing. Financing has been arranged for the committed Airbus A320 and A319
aircraft deliveries and is available for use at the option of the Company. The
Company plans on financing its four Boeing 747-400 aircraft to be delivered in
1999 with enhanced equipment trust certificates.
NOTE L--LITIGATION
The Company is involved in a variety of legal actions relating to antitrust,
contract, trade practice, environmental and other legal matters relating to the
Company's business. While the Company is unable to predict the ultimate outcome
of these legal actions, it is the opinion of management that the disposition of
47
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L--LITIGATION (CONTINUED)
these matters will not have a material adverse effect on the Company's
Consolidated Financial Statements taken as a whole.
NOTE M--PENSION AND OTHER POSTRETIREMENT HEALTH CARE BENEFITS
The Company has several noncontributory pension plans covering substantially
all of its employees. The benefits for these plans are based primarily on years
of service and/or employee compensation. It is the Company's policy to annually
fund at least the minimum contribution as required by the Employee Retirement
Income Security Act of 1974. In 1998, 1997 and 1996, the Company made
contributions of $150 million, $133 million and $85 million, respectively, in
excess of its minimum requirement.
The Company sponsors various contributory and noncontributory medical,
dental and life insurance benefit plans covering certain eligible retirees and
their dependents. The expected future cost of providing such postretirement
benefits is accrued over the service life of active employees. Retired employees
are not offered Company-paid medical and dental benefits after age 64, with the
exception of certain employees who retired prior to 1987 and receive lifetime
Company-paid medical and dental benefits. Prior to age 65, the retiree share of
the cost of medical and dental coverage is based on a combination of years of
service and age at retirement. Medical and dental benefit plans are unfunded and
costs are paid as incurred. The pilot group is provided Company-paid life
insurance coverage in amounts which decrease based on age at retirement and age
at time of death.
The following is a reconciliation of the beginning and ending balances of
the benefit obligation and the fair value of plan assets (in millions):
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year............................ $ 4,251.3 $ 3,699.0 $ 347.1 $ 313.6
Service cost....................................................... 132.7 113.2 12.4 10.3
Interest cost...................................................... 309.6 286.4 25.0 23.8
Amendments......................................................... 180.2 (.6) 6.1 --
Actuarial gain..................................................... 316.9 308.1 4.8 14.6
Foreign exchange gain (loss)....................................... 7.0 (11.6) -- --
Benefits paid...................................................... (176.4) (143.2) (18.8) (15.2)
--------- --------- --------- ---------
Benefit obligation at end of year.................................. 5,021.3 4,251.3 376.6 347.1
--------- --------- --------- ---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year..................... 3,758.1 3,008.7 5.3 5.1
Actual return on plan assets....................................... 608.2 623.6 .3 .4
Employer contributions............................................. 184.9 269.4 18.7 15.0
Benefits paid and other............................................ (176.6) (143.6) (18.8) (15.2)
--------- --------- --------- ---------
Fair value of plan assets at end of year........................... 4,374.6 3,758.1 5.5 5.3
--------- --------- --------- ---------
Funded status........................................................ (646.7) (493.2) (371.1) (341.8)
Unrecognized net actuarial loss...................................... 363.7 324.7 86.9 85.0
Unrecognized prior service cost...................................... 337.5 181.9 6.2 --
--------- --------- --------- ---------
Net amount recognized................................................ $ 54.5 $ 13.4 $ (278.0) $ (256.8)
--------- --------- --------- ---------
--------- --------- --------- ---------
48
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amounts recognized in the Consolidated Balance Sheets as of December 31 were
as follows (in millions):
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Prepaid benefit cost................................................... $ 195.4 $ 125.4 $ -- $ --
Accrued benefit liability.............................................. (287.4) (256.6) (278.0) (256.8)
Intangible asset....................................................... 135.9 36.4 -- --
Accumulated other comprehensive income................................. 10.6 108.2 -- --
--------- --------- --------- ---------
Net amount recognized.................................................. $ 54.5 $ 13.4 $ (278.0) $ (256.8)
--------- --------- --------- ---------
--------- --------- --------- ---------
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $451.4 million, $271.8 million and $2.7 million,
respectively, as of December 31, 1998 and $1.28 billion, $1.19 billion and $1.03
billion, respectively, as of December 31, 1997.
Weighted-average assumptions for pension and other benefits as of December
31 were as follows:
1998 1997 1996
--------- --------- ---------
Discount rate....................................................... 6.9% 7.1% 7.6%
Rate of future compensation increase................................ 3.9% 3.5% 3.5%
Expected long-term return on plan assets............................ 10.5% 10.5% 10.5%
For measurement purposes, a 6% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually to 4.5 percent for 2002 and remain at that level
thereafter.
The net periodic cost of defined benefit plans included the following (in
millions):
PENSION BENEFITS OTHER BENEFITS
------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
Service cost............................................... $ 132.7 $ 113.2 $ 115.7 $ 12.4 $ 10.3 $ 10.3
Interest cost.............................................. 309.6 286.4 267.2 25.0 23.8 22.1
Expected return on plan assets............................. (356.5) (301.2) (256.8) (.4) (.4) (.4)
Amortization of prior service cost......................... 20.2 20.3 20.2 -- -- --
Recognized net actuarial loss.............................. 25.7 17.2 38.8 2.9 2.1 3.2
Other events............................................... 4.7 2.2 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net periodic benefit cost.................................. $ 136.4 $ 138.1 $ 185.1 $ 39.9 $ 35.8 $ 35.2
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Assumed health care cost trend rates have a significant impact on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects (in
millions):
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
--------------- ---------------
Effect on total of service and interest cost components........ $ 5.8 $ (4.9)
Effect on accumulated postretirement benefit obligations....... 48.8 (41.5)
49
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N--RELATED PARTY TRANSACTIONS
On November 20, 1998, the Company issued 2.6 million shares of Common Stock
and paid $399 million in cash to acquire the beneficial ownership of 8.7 million
shares of Class A Common Stock of Continental. These shares represent 13.5% of
Continental's outstanding common stock and, together with additional Continental
shares for which the Company holds a limited voting proxy, 50.3% of its fully
diluted voting power as of December 31, 1998.
In connection with the Company's investment in Continental and Northwest's
alliance with Continental, the Company entered into agreements with Continental
which contain certain restrictions on the Company's ability to vote shares of
Continental common stock, to acquire additional shares of Continental common
stock and to affect the composition and conduct of Continental's Board of
Directors for a ten-year period. Due to the restrictions in these agreements,
the Company will account for its investment under the equity method. The Company
will recognize its interest in Continental's earnings on a one-quarter lag. The
difference between the cost of the Company's investment and the proportionate
share of the underlying equity of Continental of $312 million will be amortized
over 40 years.
In a related transaction, Northwest and Continental entered into a 13-year
global strategic commercial alliance that connects the two carriers' networks
and includes extensive code-sharing, frequent flyer program reciprocity and
other cooperative activities. The two airlines have no plans to merge their
operations and will retain separate boards, management and headquarters. In
December 1998, Northwest and Continental began implementing their alliance.
Since then they have initiated code-sharing (the joint designation of flights
under the Northwest "NW" code and the Continental "CO" code) to several points
in Asia and to many domestic cities. Northwest anticipates that it will add
additional code-sharing with Continental in 1999; however, further international
code-sharing is subject to certain regulatory approvals. Other joint activities
anticipated to be implemented include airport facility coordination, joint
purchasing and certain coordinated sales programs.
The Company has an investment in WORLDSPAN, an affiliate that provides
computer reservations services, which it accounts for using the equity method.
The Company recorded expenses for certain reservation system services provided
by this affiliate of $83.0 million, $78.6 million and $77.1 million in 1998,
1997 and 1996, respectively.
The Company owns 28.5% of the common stock of Mesaba Holdings, Inc., the
holding company of Mesaba Aviation, Inc. ("Mesaba"), which operates as a
Northwest Airlink. The Company also has warrants in Mesaba Holdings, Inc. stock
and if the Company were to exercise all its warrants when fully vested, its
ownership would increase to 40.9% as of December 31, 1998.
Northwest and Mesaba signed a ten-year Airline Services Agreement ("ASA")
effective July 1, 1997 under which Northwest determines Mesaba's commuter
aircraft scheduling and fleet composition. As of December 31, 1998, the Company
has leased 48 Saab 340 aircraft which are in turn subleased to Mesaba. The lease
agreements provide the Company with renewal options ranging from one to five
years and purchase options at the end of the lease or renewal term which
approximate fair market value.
In addition, as of December 31, 1998, the Company has leased or subleased 18
Avro Regional Jet aircraft to Mesaba under a Regional Jet Services Agreement
consummated in October 1996. The Company has agreed to lease 18 additional Avro
Regional Jet aircraft to Mesaba, with ten scheduled for delivery in 1999 and
eight in 2000. Committed expenditures for these aircraft, including contractual
price escalations, are approximately $225 million in 1999 and $175 million in
2000.
50
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N--RELATED PARTY TRANSACTIONS (CONTINUED)
On April 1, 1997, the Company, purchased all of the outstanding stock of
Express Airlines I, Inc. and an affiliate ("Express") and their operating
results are included in the Company's consolidated financial statements
commencing on that date. Express is a regional carrier that provides passenger
traffic to Northwest at Memphis.
NOTE O--RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Effective October 1, 1998, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires the Company to
recognize all derivatives on the balance sheet at fair value. The Company uses
derivatives as cash flow hedges to manage the price risk of fuel and its
exposure to foreign currency fluctuations. SFAS No. 133 requires that for cash
flow hedges, which hedge the exposure to variable cash flows of a forecasted
transaction, the effective portion of the derivative's gain or loss be initially
reported as a component of other comprehensive income in the equity section of
the balance sheet and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective portion of the
derivative's gain or loss is reported in earnings immediately. The cumulative
effect of adoption was immaterial.
RISK MANAGEMENT: The Company uses derivative financial instruments to
manage specific risks and does not hold or issue them for trading purposes. The
notional amounts of financial instruments summarized below did not represent
amounts exchanged between parties and, therefore, are not a measure of the
Company's exposure resulting from its use of derivatives.
FOREIGN CURRENCY: The Company is exposed to the effect of foreign exchange
rate fluctuations on the U.S. dollar value of foreign currency-denominated
operating revenues and expenses. The Company's largest exposure comes from the
Japanese yen. In 1998, the Company's yen-denominated revenues exceeded its
yen-denominated expenses by approximately 38 billion yen. From time to time, the
Company uses forward contracts, collars or put options to hedge a portion of its
anticipated yen-denominated ticket sales. The changes in market value of such
instruments have historically been highly effective at offsetting exchange rate
fluctuations in yen-denominated ticket sales.
At December 31, 1998, the Company recorded $15.0 million of unrealized
losses in accumulated other comprehensive loss as a result of forward contracts
to sell 47.5 billion yen ($405.8 million) at an average forward rate of 117 with
various settlement dates through November 1999. Hedging gains or losses are
recorded in passenger revenue when transportation is provided. These forward
contracts hedge approximately 35% of the Company's anticipated 1999
yen-denominated ticket sales, which also represents approximately 95% of the
Company's excess of yen-denominated revenues over expenses.
Counterparties to these financial instruments expose the Company to credit
loss in the event of nonperformance, but the Company does not expect any of the
counterparties to fail to meet their obligations. The amount of such credit
exposure is generally the unrealized gains, if any, in such contracts. To manage
credit risks, the Company selects counterparties based on credit ratings, limits
exposure to a single counterparty and monitors the market position with each
counterparty. It is the Company's policy to participate in foreign currency
hedging transactions with a maximum span of 12 months.
FUEL: The Company is exposed to the effect of changes in the price and
availability of aircraft fuel. In order to provide a measure of control over
price and supply, the Company trades and ships fuel and maintains fuel storage
facilities to support its flight operations. To further manage the price risk of
fuel
51
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--RISK MANAGEMENT AND FINANCIAL INSTRUMENTS (CONTINUED)
costs, the Company primarily utilizes futures contracts traded on regulated
exchanges. The changes in market value of such contracts have historically been
highly effective at offsetting fuel price fluctuations. It is the Company's
policy to participate in hedging transactions with a maximum span of 12 months.
At December 31, 1998, the Company recorded $5.9 million of unrealized losses
in accumulated other comprehensive loss as a result of the fuel futures
contracts, which if realized, will be recorded in fuel expense when the related
fuel inventory is utilized throughout 1999. As of December 31, 1998, the Company
had hedged approximately 10% of its 1999 fuel requirements, including 40% for
the first quarter.
FAIR VALUES OF FINANCIAL INSTRUMENTS: The financial statement carrying
values equal the fair values of the Company's cash and cash equivalents and
short-term investments. As of December 31, these amounts were (in millions):
CASH AND CASH SHORT-TERM INVESTMENTS
EQUIVALENTS
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Held-to-maturity debt securities:
Commercial paper................................................. $ 320.4 $ 372.4 $ 19.5 $ 176.3
Other............................................................ 109.1 281.1 22.8 122.1
Available-for-sale debt securities................................. 27.3 68.8 5.6 139.3
Cash............................................................... 23.2 18.1 -- --
----------- ----------- ----- -----------
$ 480.0 $ 740.4 $ 47.9 $ 437.7
----------- ----------- ----- -----------
----------- ----------- ----- -----------
The financial statement carrying values and estimated fair values of the
Company's financial instruments, including current maturities, as of December 31
were (in millions):
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
Long-Term Debt..................................................... $ 4,000.7 $ 4,074.2 $ 2,069.3 $ 2,239.7
Mandatorily Redeemable Preferred Security of Subsidiary............ 564.1 519.6 486.3 434.1
Series C Preferred Stock........................................... 260.7 196.0 306.2 432.9
Redeemable Common Stock............................................ -- -- 848.5 767.7
The Company considers all unrestricted investments with a remaining maturity
of three months or less on their acquisition date to be cash equivalents. The
Company classifies investments with a remaining maturity of more than three
months on their acquisition date that are expected to be sold or called by the
issuer within the next year, and those temporarily restricted, as short-term
investments. Purchases of short-term investments classified as
available-for-sale securities during 1997 were $63.1 million and proceeds from
sales of such securities during 1998 and 1997 were $139.3 and $74.5 million,
respectively. At December 31, 1998 and 1997, short-term investments included
$47.9 and $138.2 million, respectively, of temporarily restricted investments.
The temporarily restricted investments were pledged as collateral under various
agreements.
The fair values of the Company's long-term debt were estimated using quoted
market prices, where available. For long-term debt, Preferred Security and
redeemable common stock not actively traded, fair
52
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--RISK MANAGEMENT AND FINANCIAL INSTRUMENTS (CONTINUED)
values were estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of securities.
The fair value of the Series C Preferred Stock shares is based on the assumed
conversion to Common Stock and valuing such shares at the closing quoted market
price for Common Stock.
NOTE P--SEGMENT INFORMATION
The Company is managed as one cohesive business unit, of which revenues are
derived primarily from the commercial transportation of passengers and cargo.
Geographic operating revenues are based on allocation guidelines provided by the
U.S. Department of Transportation, which classifies flights between the U.S. and
foreign destinations into regions, and thus, differs from the definition of
foreign operations under generally accepted accounting principles. The following
table shows the operating revenues for each region (in millions):
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
--------- ---------- ---------
Domestic.................................................. $ 6,093.0 $ 6,793.0 $ 6,492.7
Pacific, principally Japan................................ 2,015.7 2,670.9 2,699.1
Atlantic.................................................. 936.1 761.9 688.7
--------- ---------- ---------
Total operating revenues.................................. $ 9,044.8 $ 10,225.8 $ 9,880.5
--------- ---------- ---------
--------- ---------- ---------
53
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q--QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly results of operations for the years ended December 31,
1998 and 1997, are summarized below (in millions, except per share amounts):
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
1998:
Operating revenues................................................. $ 2,428.5 $ 2,476.0 $ 1,928.1 $ 2,212.2
Operating income (loss)............................................ 156.4 120.2 (275.8) (192.2)
Net income (loss).................................................. $ 71.0 $ 48.6 $ (223.8) $ (181.3)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings (loss) per common share............................. $ .72 $ .56 $ (2.91) $ (2.31)
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings (loss) per common share........................... $ .66 $ .51 $ (2.91) $ (2.31)
--------- --------- --------- ---------
--------- --------- --------- ---------
1997:
Operating revenues................................................. $ 2,375.5 $ 2,557.6 $ 2,801.4 $ 2,491.3
Operating income................................................... 135.0 291.1 503.8 227.3
Income before extraordinary item................................... 64.6 136.2 290.3 114.7
Net loss on extinguishment of debt................................. -- -- -- (9.3)
Net income......................................................... $ 64.6 $ 136.2 $ 290.3 $ 105.4
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings per common share:
Before effect of extraordinary item.............................. $ .59 $ 1.29 $ 2.80 $ 1.18
Net loss on extinguishment of debt............................... -- -- -- (.09)
--------- --------- --------- ---------
Earnings per common share........................................ $ .59 $ 1.29 $ 2.80 $ 1.09
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings per common share:
Before effect of extraordinary item.............................. $ .53 $ 1.16 $ 2.53 $ 1.06
Net loss on extinguishment of debt............................... -- -- -- (.09)
--------- --------- --------- ---------
Earnings per common share........................................ $ .53 $ 1.16 $ 2.53 $ .97
--------- --------- --------- ---------
--------- --------- --------- ---------
The sum of the quarterly earnings per share amounts does not equal the
annual amount reported since per share amounts are computed independently for
each quarter and for the full year based on respective weighted average common
shares outstanding and other dilutive potential common shares.
54
NORTHWEST AIRLINES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE R--CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF NORTHWEST AIRLINES, INC.
Northwest Airlines Holdings Corporation and its wholly-owned subsidiary,
Wings Acquisition Corp., were formed and incorporated by a group of investors in
order to acquire all of the outstanding stock of NWA Inc. (the "Acquisition"),
the parent company of Northwest Airlines, Inc. In 1989, Wings Acquisition Corp.
was merged with and into NWA Inc., with NWA Inc. being the surviving entity. The
Acquisition was recorded using the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair market value at the date of
Acquisition, determined primarily by independent appraisals.
After reflecting these values in the financial statements of Northwest,
condensed financial information of Northwest consists of the following (in
millions):
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Operating revenues............................................................. $ 8,642.7 $ 9,882.9 $ 9,651.3
Operating expenses............................................................. 8,862.2 8,773.9 8,641.7
--------- --------- ---------
Operating income (loss)........................................................ (219.5) 1,109.0 1,009.6
Other income (expense)......................................................... (239.4) (212.9) (183.6)
--------- --------- ---------
Income (loss) before income taxes and extraordinary item....................... (458.9) 896.1 826.0
Income tax expense (benefit)................................................... (159.3) 342.6 308.8
--------- --------- ---------
Income (loss) before extraordinary item........................................ (299.6) 553.5 517.2
Loss on extinguishment of debt................................................. -- (9.3) --
--------- --------- ---------
Net income (loss).............................................................. $ (299.6) $ 544.2 $ 517.2
--------- --------- ---------
--------- --------- ---------
CONDENSED CONSOLIDATED BALANCE SHEET DATA
DECEMBER 31
--------------------
1998 1997
--------- ---------
Current assets............................................................................. $ 1,601.9 $ 2,015.0
Noncurrent assets.......................................................................... 7,242.4 6,114.6
Current liabilities........................................................................ 3,598.8 3,164.7
Long-term debt and obligations under capital leases........................................ 3,955.2 2,016.9
Deferred credits and other liabilities..................................................... 1,001.2 1,191.0
Mandatorily redeemable preferred security of subsidiary.................................... 564.1 486.3
55
ITEM 7A. QUALITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is set forth under "Market Risk Sensitive
Instruments and Positions" in "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations," and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth under the heading
"Election of Directors-Information Concerning Director-Nominees" to be included
in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders
filed with the Commission, and is incorporated herein by reference. The
information regarding executive officers is included in Part I of this report
under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth under the headings
"Election of Directors-- Compensation of Directors", "Election of
Directors--Compensation Committee Interlocks and Insider Participation" and
"Executive Compensation" to be included in the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders filed with the Commission, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth under the heading
"Beneficial Ownership of Securities" to be included in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders filed with the Commission,
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth under the headings
"Election of Directors-- Compensation Committee Interlocks and Insider
Participation" and "Election of Directors--Related Party Transactions" to be
included in the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders filed with the Commission, and is incorporated herein by reference.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
The following is an index of the financial statements, schedule and exhibits
included in this Report.
(A) 1. FINANCIAL STATEMENTS:
PAGE
-----
Consolidated Balance Sheets--December 31, 1998 and December 31, 1997............................. 28
Consolidated Statements of Operations--For the years ended December 31, 1998, 1997 and 1996...... 30
Consolidated Statements of Cash Flows--For the years ended December 31, 1998, 1997 and 1996...... 31
Consolidated Statements of Common Stockholders' Equity (Deficit)--For the years ended December
31, 1998, 1997 and 1996........................................................................ 32
Notes to Consolidated Financial Statements....................................................... 33
2. FINANCIAL STATEMENT SCHEDULE:
Schedule II--Valuation and Qualifying Accounts--For the years ended December 31, 1998, 1997 and
1996........................................................................................... S-1
Schedules not included have been omitted because they are not applicable or
because the required information is included in the consolidated financial
statements of notes thereto.
3. EXHIBITS
The following is an index of the exhibits included in this Report or
incorporated herein by reference.
2.1 Amended and Restated Agreement and Plan of Merger among Northwest
Airlines Corporation, Northwest Airlines Holdings Corporation, and
Newbridge Merger Corporation, dated as of October 30, 1998.
3.1 Restated Certificate of Incorporation of Northwest Airlines
Corporation (filed as Exhibit 4.1 to the Registration Statement on
Form S-3, File No. 333-69655 (the "S-3"), and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of Northwest Airlines Corporation (filed
as Exhibit 4.2 to the S-3 and incorporated herein by reference).
3.3 Restated Certificate of Incorporation of Northwest Airlines, Inc.
(filed as Exhibit 3.3 to Northwest's Registration Statement on Form
S-3, File No. 33-74772 (the "Debt S-3"), and incorporated herein by
reference).
3.4 Bylaws of Northwest Airlines, Inc. (filed as Exhibit 3.4 to the Debt
S-3 and incorporated herein by reference).
4.1 Certificate of Designation of Series C Preferred Stock of Northwest
Airlines Corporation (included in Exhibit 3.1).
4.2 Certificate of Designation of Series D Junior Participating Preferred
Stock of Northwest Airlines Corporation (included in Exhibit 3.1).
4.3 Rights Agreement dated as of November 20, 1998 between Northwest
Airlines Corporation and Norwest Bank Minnesota, N.A., as Rights Agent
(filed as Exhibit 1 to NWA Corp.'s Form 8-A filed November 20, 1998
and incorporated herein by reference).
57
4.4 The registrant hereby agrees to furnish to the Commission, upon
request, copies of certain instruments defining the rights of holders
of long-term debt of the kind described in Item 601 (b) (4) of
Regulation S-K.
9.1 Northwest Airlines/Air Partners Voting Trust Agreement among
Continental Airlines, Inc., Northwest Airlines Corporation, Newbridge
Parent Corporation, Air Partners, L.P. and Wilmington Trust Company,
dated November 20, 1998 (filed as Exhibit 2.4 of NWA Corp.'s Current
Report on Form 8-K dated November 20, 1998 and incorporated herein by
reference).
10.1 Investment Agreement among Northwest Airlines Corporation, Newbridge
Parent Corporation, Air Partners, L.P., the Partners of Air Partners,
L.P. signatory thereto, Bonderman Family Limited Partnership, 1992
Air, Inc. and Air Saipan, Inc., dated as of January 25, 1998 (without
exhibits and schedules) (filed as Exhibit 2.1 to NWA Corp.'s Current
Report on Form 8-K dated January 25, 1998 and incorporated herein by
reference).
10.2 Amendment No. 1 to the Investment Agreement among Northwest Airlines
Corporation, Newbridge Parent Corporation, Air Partners, L.P., the
Partners of Air Partners, L.P. signatory thereto, Bonderman Family
Limited Partnership, Air Saipan, Inc. and 1992 Air, Inc., dated as of
February 27, 1998 (filed as Exhibit 2.3 to NWA Corp.'s Current Report
on Form 8-K dated March 2, 1998 and incorporated herein by reference).
10.3 Amendment No. 2 to the Investment Agreement among Northwest Airlines
Corporation, Newbridge Parent Corporation, Air Partners, L.P., the
Partners of Air Partners, L.P. signatory thereto, 1998 CAI Partners,
L.P., Bonderman Family Limited Partnership, 1992 Air, Inc. and Air
Saipan, Inc., dated as of November 20, 1998 (filed as Exhibit 2.3 to
NWA Corp.'s Current Report on Form 8-K dated November 20, 1998 and
incorporated herein by reference).
10.4 Governance Agreement among Northwest Airlines Corporation, Newbridge
Parent Corporation and Continental Airlines, Inc., dated as of January
25, 1998 (filed as Exhibit 2.2 to NWA Corp.'s Current Report on Form
8-K dated January 25, 1998 and incorporated herein by reference).
10.5 First Amendment to the Governance Agreement, among Continental
Airlines, Inc., Northwest Airlines Corporation and Newbridge Parent
Corporation, dated as of March 2, 1998 (filed as Exhibit 2.2 to NWA
Corp.'s Current Report on Form 8-K dated March 2, 1998 and
incorporated herein by reference).
10.6 Second Amendment to the Governance Agreement among Continental
Airlines, Inc., Northwest Airlines Corporation and Newbridge Parent
Corporation, dated as of November 20, 1998 (filed as Exhibit 2.1 to
NWA Corp.'s Current Report on Form 8-K dated November 20, 1998 and
incorporated herein by reference).
10.7 Supplemental Agreement, among Continental Airlines, Inc., Northwest
Airlines Corporation and Newbridge Parent Corporation, dated as of
November 20, 1998 (filed as Exhibit 2.2 to NWA Corp.'s Current Report
on Form 8-K dated November 20, 1998 and incorporated herein by
reference).
10.8 Standstill Agreement between Northwest Airlines Corporation and David
Bonderman, Bonderman Family Limited Partnership, Lectair Partners, Eli
Broad, Donald Strum, 1992 Air GP and 1992 Air, Inc. (collectively the
"Holders"), dated as of November 20, 1998.
10.9 Registration Rights Agreement among Northwest Airlines Corporation,
the Holders and 1992 Air, Inc., as the representative of the Holders,
dated November 20, 1998.
10.10 Assignment Agreement, among Northwest Airlines Corporation, Newbridge
Parent Corporation, Air Partners, L.P., the Partners of Air Partners,
L.P. signatory thereto, Bonderman Family Limited Partnership, Air
Saipan, Inc., 1992 Air, Inc. and Coulco, Inc., dated as of February
27, 1998.
58
10.11 Second Amended and Restated Investor Stockholders' Agreement dated as
of December 23, 1993 among NWA Corp. and the Original Investors named
therein ("Second Amended and Restated Stockholders' Agreement") (filed
as Exhibit 4.9 to the Registration Statement on Form S-1, File No.
33-74210 (the "S-1"), and incorporated herein by reference).
10.12 Supplement dated as of December 23, 1993 to Second Amended and
Restated Stockholders' Agreement (filed as Exhibit 4.11 to NWA Corp.'s
Annual Report on Form 10-K for the year ended December 31, 1994 (the
"10-K") and incorporated herein by reference).
10.13 Amendment dated as of December 14, 1994 to Second Amended and Restated
Stockholders' Agreement (filed as Exhibit 4.13 to the 10-K and
incorporated herein by reference).
10.14 Amendment dated as of January 6, 1995 to Second Amended and Restated
Stockholders' Agreement (filed as Exhibit 4.14 to the 10-K and
incorporated herein by reference).
10.15 Amendment dated as of January 25, 1995 to Second Amended and Restated
Stockholders' Agreement (filed as Exhibit 4.15 to the 10-K and
incorporated herein by reference).
10.16 Amendment dated as of October 23, 1995 to the Second Amended and
Restated Stockholders' Agreement (filed as Exhibit 4.11 to the
Registration Statement on Form S-3, File No. 33-98494, and
incorporated herein by reference).
10.17 Amendment to Second Amended and Restated Investor Stockholders'
Agreement dated September 29, 1997 (filed as Exhibit 10.7 to NWA
Corp.'s Quarterly Report on Form 10-Q for the quarter ended September
30, 1997 and incorporated herein by reference).
10.18 Acknowledgment of Northwest Airlines Corporation regarding assumption
of obligations as successor under the Second Amended and Restated
Investor Stockholders' Agreement, dated November 20, 1998.
10.19 Amended and Restated Standstill Agreement between Koninklijke
Luchtvaart Maatschappij N.V. and Northwest Airlines Corporation, dated
May 1, 1998 (filed as Exhibit 10.2 of NWA Corp.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 and incorporated herein
by reference).
10.20 Common Stock Repurchase Agreement between Northwest Airlines
Corporation and Koninklijke Luchtvaart Maatschappij N.V., dated
September 29, 1997 (filed as Exhibit 10.2 to NWA Corp.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997 and
incorporated herein by reference).
10.21 Accelerated Common Stock Repurchase Agreement between Northwest
Airlines Corporation and Koninklijke Luchtraart Maatschappij N.V.,
dated as of May 1, 1998 (filed as Exhibit 10.1 to NWA Corp.'s
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and
incorporated herein by reference).
10.22 Stockholders' Agreement, dated as of September 9, 1994, among NWA
Corp., the Original Investors named therein and the Unions named
therein (the "Stockholders' Agreement") (filed as Exhibit 4.13 to the
Registration Statement on Form S-4, File No. 33-87250, and
incorporated herein by reference).
10.23 Amendment dated as of October 3, 1994 to Stockholders' Agreement
(filed as Exhibit 4.12 to the 10-K and incorporated herein by
reference).
10.24 Amendment dated as of December 14, 1994 to the Stockholders' Agreement
(filed as Exhibit 4.22 to the 10-K and incorporated herein by
reference).
10.25 Amendment dated as of January 25, 1995 to the Stockholders' Agreement
(filed as Exhibit 4.23 to the 10-K and incorporated herein by
reference).
59
10.26 Amendment dated as of November 1, 1995 to the Stockholders' Agreement
(filed as Exhibit 4.12 to the Registration Statement on Form S-3, File
No. 33-98494, and incorporated herein by reference).
10.27 First Amended and Restated Common Stock Registration Rights Agreement
among NWA Corp., the holders of the Series C Preferred Stock and the
Original Investors named therein (filed as Exhibit 4.18 to the 10-K
and incorporated herein by reference).
10.28 Acknowledgement of Northwest Airlines Corporation regarding assumption
of obligations as successor under the First Amended and Restated
Common Stock Registration Rights Agreement, dated November 20, 1998.
10.29 Registration Participation Agreement dated as of October 20, 1995
among the Unions named therein, holders of Series C Preferred Stock
and NWA Corp. (filed as Exhibit 10.14 to NWA Corp.'s Annual Report on
Form 10-K for the year ended December 31, 1995 and incorporated herein
by reference).
10.30 Special Facilities Lease between Charter County of Wayne, Michigan and
Republic Airlines, Inc. dated December 1, 1985 and Guarantee by and
between Northwest (as successor to Republic) and Manufacturers
National Bank of Detroit (filed as Exhibit 10.6 to the S-1 and
incorporated herein by reference).
10.31 Indenture of Lease Agreement dated October 5, 1961 and related
amendments, between the Board of County Road Commissioner of the
County of Wayne, Michigan and Northwest, as successor to North Central
Airlines, Inc. (filed as Exhibit 10.7 to the S-1 and incorporated
herein by reference).
10.32 Amendatory Agreement between The Charter County of Wayne, Michigan and
Northwest dated as of October 8, 1996 (filed as Exhibit 10.1 to NWA
Corp's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996 (the "10-Q") and incorporated herein by reference).
10.33 First Amended and Restated Airport Agreement between The Charter
County of Wayne, Michigan and Northwest dated as of October 10, 1996
(filed as Exhibit 10.2 to the 10-Q and incorporated herein by
reference).
10.34 First Amendment to First Amended and Restated Airport Agreement
between The Charter County of Wayne, Michigan and Northwest, dated as
of June 26, 1998.
10.35 Second Amended and Restated Airport Agreement between The Charter
County of Wayne, Michigan and Northwest dated as of October 10, 1996
(filed as Exhibit 10.3 to the 10-Q incorporated herein by reference).
10.36 First Amendment to Second Amended and Restated Airport Agreement
between The Charter County of Wayne, Michigan and Northwest, dated as
of September 1997.
10.37 Second Amendment to Second Amended and Restated Airport Agreement
between The Charter County of Wayne, Michigan and Northwest, dated as
of June 26, 1998.
10.38 Airport Terminal Building Lease for Minneapolis-St. Paul International
Airport dated as of June 18, 1964 and related amendments entered into
by and between The Minneapolis-St. Paul Metropolitan Airports
Commission and Northwest, as successor to Northwest Orient Airlines,
Inc. (filed as Exhibit 10.8 to the S-1 and incorporated herein by
reference).
10.39 Master Financing Agreement dated as of March 29, 1992 among Northwest
Airlines Corporation, Northwest Airlines, Inc. and the State of
Minnesota (filed as Exhibit 10.9 to the S-1 and incorporated herein by
reference).
60
10.40 Equity Letter Agreement dated as of August 1, 1993 between Northwest
Airlines, Inc. and The Air Line Pilots Association International
(filed as Exhibit 10.13 to the S-1 and incorporated herein by
reference).
10.41 Equity Letter Agreement dated as of August 1, 1993 between Northwest
Airlines, Inc. and The International Association of Machinists and
Aerospace Workers (filed as Exhibit 10.14 to the S-1 and incorporated
herein by reference).
10.42 Equity Letter Agreement dated as of August 1, 1993 between Northwest
Airlines, Inc. and The International Brotherhood of Teamsters (filed
as Exhibit 10.15 to the S-1 and incorporated herein by reference).
10.43 Equity Letter Agreement dated as of August 1, 1993 between Northwest
Airlines, Inc. and The Transport Workers Union of America (filed as
Exhibit 10.16 to the S-1 and incorporated herein by reference).
10.44 Equity Letter Agreement dated as of August 1, 1993 between Northwest
Airlines, Inc. and the Airline Technical Support Association (filed as
Exhibit 10.17 to the S-1 and incorporated herein by reference).
10.45 Equity Letter Agreement dated as of August 1, 1993 between Northwest
Airlines, Inc. and The Northwest Airlines Meteorologists Association
(filed as Exhibit 10.18 to the S-1 and incorporated herein by
reference).
10.46 Amendment dated as of December 14, 1994 to the Equity Letter
Agreements listed as Exhibits 10.26 through 10.31 (filed as Exhibit
10.19 to the 10-K and incorporated herein by reference).
10.47 Credit Agreement among Northwest Airlines Corporation, NWA Inc.,
Northwest Airlines, Inc. and various lending institutions named
therein dated as of December 15, 1995, as amended and restated as of
October 16, 1996 and as further amended and restated as of December
29, 1997 (filed as Exhibit 10.3 to NWA Corp.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 and incorporated herein
by reference).
10.48 First Amendment to Credit Agreement among Northwest Airlines
Corporation, NWA Inc., Northwest Airlines, Inc. and various lending
institutions named therein dated as of January 23, 1998 (filed as
Exhibit 10.4 to NWA Corp.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference).
10.49 Temporary Amendment to Credit Agreement among Northwest Airlines
Corporation, NWA Inc., Northwest Airlines, Inc. and various lending
institutions named therein dated as of May 12, 1998 (filed as Exhibit
10.5 to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 and incorporated herein by reference).
10.50 Amendment and Consent to First Credit Agreement among Northwest
Airlines Corporation, Northwest Airlines Holdings Corporation, NWA
Inc., Northwest Airlines, Inc. and various lending institutions named
therein dated as of November 12, 1998.
10.51 Amendment to Credit Agreement among Northwest Airlines Corporation,
Northwest Airlines Holdings Corporation, NWA Inc., Northwest Airlines,
Inc. and various lending institutions named therein dated as of
January 27, 1999.
10.52 Aircraft Mortgage and Security Agreement between Northwest Airlines,
Inc. and Bankers Trust Company, as Collateral Agent, dated as of May
12, 1998 (filed as Exhibit 10.6 to NWA Corp.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 and incorporated herein
by reference).
10.53 First Amendment to First Aircraft Mortgage and Security Agreement
between Northwest Airlines, Inc. and Bankers Trust Company, as
Collateral Agent, dated as of November 12, 1998.
61
10.54 Slot Security Agreement between Northwest Airlines, Inc. and Bankers
Trust Company, as Collateral Agent, dated as of May 12, 1998 (filed as
Exhibit 10.7 to NWA Corp.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference).
10.55 First Amendment to Slot Security Agreement between Northwest Airlines,
Inc. and Bankers Trust Company, as Collateral Agent, dated as of
November 12, 1998.
10.56 Credit Agreement among Northwest Airlines Corporation, Northwest
Airlines Holdings Corporation, NWA Inc., Northwest Airlines, Inc. and
various lending institutions named therein dated as of May 12, 1998
and as amended and restated as of February 9, 1999.
10.57 Route Security Agreement between Northwest Airlines, Inc. and the
Chase Manhattan Bank, as Collateral Agent dated as May 12, 1998 (filed
as Exhibit 10.11 to NWA Corp.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference).
10.58 Purchase Agreement No. 1630 between Northwest Airlines, Inc. and The
Boeing Company ("Boeing") dated December 1, 1989 and related letter
agreements relating to the purchase of 747-400 aircraft (filed as
Exhibit 10.34 to the S-1 and incorporated herein by reference).
10.59 Supplemental Agreement No. 4 to Purchase Agreement No. 1630, dated as
of February 3, 1995, and related letter agreements between Boeing and
Northwest Airlines, Inc. (filed as Exhibit 10.34 to the 10-K and
incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
10.60 Purchase Agreement No. 1631 between Northwest Airlines, Inc. and
Boeing and related letter agreements relating to the acquisition of
757 aircraft (filed as Exhibit 10.35 to the S-1 and incorporated
herein by reference).
10.61 Supplemental Agreement No. 4 to Purchase Agreement No. 1631, dated as
of February 3, 1995, and related letter agreements between Boeing and
Northwest Airlines, Inc. (filed as Exhibit 10.36 to the 10-K and
incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
10.62 Supplemental Agreement No. 5 to Purchase Agreement No. 1631, dated as
of February 17, 1995, and related letter agreements between Boeing and
Northwest Airlines, Inc. (filed as Exhibit 10.37 to the 10-K and
incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
10.63 Airbus A330 Purchase Agreement dated February 10, 1989 and related
letter agreements between AVSA, S.A.R.L. and Northwest Aircraft Inc.
(filed as Exhibit 10.36 to the S-1 and incorporated herein by
reference).
10.64 Amendment No. 5 to A330 Purchase Agreement among AVSA, S.A.R.L. and
Northwest Aircraft Inc. (filed as Exhibit 10.4 to the 10-Q and
incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
10.65 A319-100 Purchase Agreement dated as of September 19, 1997 between
AVSA, S.A.R.L. and Northwest Airlines, Inc. (filed as Exhibit 10.1 to
NWA Corp.'s Form 10-Q for the quarter ended September 30, 1997 and
incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
*10.66 Employment Agreement with Richard H. Anderson dated as of September 1,
1996.
*10.67 Employment Agreement with Douglas M. Steenland dated as of September
1, 1996 (filed as Exhibit 10.54 to NWA Corp.'s Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein by
reference).
62
*10.68 Key Employee Annual Cash Incentive Program (filed as Exhibit 10.42 to
the S-1 and incorporated herein by reference).
*10.69 Northwest Officers Excess Benefit Plan (filed as Exhibit 10.43 to the
S-1 and incorporated herein by reference).
*10.70 1990 Stock Option Plan for Key Employees of the Company (filed as
Exhibit 10.44 to the S-1 and incorporated herein by reference).
*10.71 1994 Northwest Airlines Corporation Stock Incentive Plan, as amended
(filed as Exhibit 10.5 to the 10-Q and incorporated herein by
reference).
*10.72 1996 Northwest Airlines Corporation Retention and Long-Term Incentive
Compensation Plan (filed as Exhibit 10.53 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference).
*10.73 Amendment No. 1 to 1996 Northwest Airlines Corporation Retention and
Long-Term Incentive Compensation Plan (filed as Exhibit 10.62 to NWA
Corp's Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by reference) .
*10.74 Amendment No. 2 to 1996 Northwest Airlines Corporation Retention and
Long-Term Incentive Compensation Plan.
*10.75 Unit Award Agreement with John H. Dasburg dated as of January 26, 1996
(filed as Exhibit 10.54 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference).
*10.76 Northwest Airlines, Inc. Supplemental Executive Retirement Plan (1995
Statement) (filed as Exhibit 10.61 to NWA Corp.'s Annual Report on
Form 10-K for the year ended December 31, 1996 and incorporated herein
by reference).
*10.77 Letter agreements dated December 20, 1996 and March 14, 1996 with John
H. Dasburg with respect to participation in the Northwest Airlines,
Inc. Supplemental Executive Retirement Program (filed as Exhibit 10.62
to NWA Corp.'s Annual Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by reference).
*10.78 Form of Non-Qualified Stock Option Agreement and Form of Amendment
thereto for executive officers under the 1994 NWA Corp. Stock
Incentive Plan, as amended (filed as Exhibit 10.63 to NWA Corp.'s
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Requirements.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December 31, 1998.
27.2 Financial Data Schedules for the year ended December 31, 1997 and the
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997.
27.3 Financial Data Schedules for the quarters ended March 31, 1998, June
30, 1998 and September 30, 1998.
- ------------------------
* Compensatory plans in which the directors and executive officers of NWA
Corp. participate.
(B) REPORTS ON FORM 8-K:
Form 8-K dated November 20 , 1998--Closing of the acquisition of
Continental Class A Common Stock
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 25th day of March,
1999.
NORTHWEST AIRLINES CORPORATION
By /s/ ROLF S. ANDRESEN
-----------------------------------------
Rolf S. Andresen
VICE PRESIDENT-FINANCE & CHIEF ACCOUNTING
OFFICER (PRINCIPAL ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 25th day of March, 1999 by the following
persons on behalf of the registrant and in the capacities indicated.
/s/ JOHN H. DASBURG /s/ MARVIN L. GRISWOLD
- ----------------------------------- -----------------------------------
John H. Dasburg Marvin L. Griswold
PRESIDENT, CHIEF EXECUTIVE OFFICER & DIRECTOR
DIRECTOR (PRINCIPAL EXECUTIVE
OFFICER)
/s/ MICKEY P. FORET
- ----------------------------------- -----------------------------------
Mickey P. Foret Dennis F. Hightower
EXECUTIVE VICE PRESIDENT & CHIEF DIRECTOR
FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER)
/s/ ROLF S. ANDRESEN /s/ GEORGE J. KOURPIAS
- ----------------------------------- -----------------------------------
Rolf S. Andresen George J. Kourpias
VICE PRESIDENT-FINANCE & CHIEF DIRECTOR
ACCOUNTING OFFICER (PRINCIPAL
ACCOUNTING OFFICER)
/s/ GARY L. WILSON /s/ FREDERIC V. MALEK
- ----------------------------------- -----------------------------------
Gary L. Wilson Frederic V. Malek
CHAIRMAN OF THE BOARD DIRECTOR
/s/ RICHARD C. BLUM /s/ WALTER F. MONDALE
- ----------------------------------- -----------------------------------
Richard C. Blum Walter F. Mondale
DIRECTOR DIRECTOR
/s/ ELAINE L. CHAO /s/ V.A. RAVINDRAN
- ----------------------------------- -----------------------------------
Elaine L. Chao V.A. Ravindran
DIRECTOR DIRECTOR
/s/ ALFRED A. CHECCHI /s/ MICHAEL G. RISTOW
- ----------------------------------- -----------------------------------
Alfred A. Checchi Michael G. Ristow
DIRECTOR DIRECTOR
/s/ DORIS KEARNS GOODWIN /s/ LEO M. VAN WIJK
- ----------------------------------- -----------------------------------
Doris Kearns Goodwin Leo M. van Wijk
DIRECTOR DIRECTOR
64
NORTHWEST AIRLINES CORPORATION
SCHEDULE II--VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------- ----------- ---------------------------- ------------- -----------
ADDITIONS
----------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES --DESCRIBE --DESCRIBE PERIOD
- ---------------------------------------------------- ----------- ------------- ------------- ------------- -----------
YEAR ENDED DECEMBER 31, 1998
Allowances deducted from asset accounts:
Allowance for doubtful accounts................. $ 21.2 $ 12.1 $ -- $ 9.8(1) $ 23.5
Accumulated allowance for depreciation of flight
equipment spare parts......................... 148.9 36.8 4.1(2) 31.0(3) 158.8
YEAR ENDED DECEMBER 31, 1997
Allowances deducted from asset accounts:
Allowance for doubtful accounts................. 19.7 11.6 -- 10.1(1) 21.2
Accumulated allowance for depreciation of flight
equipment spare parts......................... 127.3 26.1 5.0(2) 9.5(3) 148.9
YEAR ENDED DECEMBER 31, 1996
Allowances deducted from asset accounts:
Allowance for doubtful accounts................. 21.5 6.1 -- 7.9(1) 19.7
Accumulated allowance for depreciation of flight
equipment spare parts......................... 111.8 21.9 2.7(2) 9.1(3) 127.3
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(1) Uncollectible accounts written off, net of recoveries
(2) Interaccount transfers
(3) Dispositions and write-offs
S-1