<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number 0-23642
NORTHWEST AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4205287
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 LONE OAK PARKWAY, EAGAN, MINNESOTA 55121
(Address of principal executive offices) (Zip Code)
(612) 726-2111
(Registrant's telephone number, including area code)
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
--- ---
At June 30, 1999, there were 84,294,611 shares of the registrant's Common Stock
outstanding.
<PAGE>
NORTHWEST AIRLINES CORPORATION
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Three months and six months ended June 30, 1999 and 1998. 3
Condensed Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998. 4
Condensed Consolidated Statements of Cash Flows - Six months
ended June 30, 1999 and 1998. 5
Notes to Condensed Consolidated Financial Statements 6
The Computations of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Fixed Charges and Preferred Stock Requirements, are
attached hereto and filed as Exhibits 12.1 and 12.2.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
- ---------
EXHIBIT INDEX 16
- -------------
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST AIRLINES CORPORATION
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(UNAUDITED, IN MILLIONS EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Passenger $ 2,222 $ 2,125 $ 4,105 $ 4,173
Cargo 168 161 322 329
Other 207 189 451 402
----------- ------------ ------------- ------------
2,597 2,475 4,878 4,904
OPERATING EXPENSES
Salaries, wages and benefits 834 853 1,651 1,620
Aircraft fuel and taxes 278 286 507 599
Commissions 192 184 363 372
Aircraft maintenance materials and repairs 135 183 313 367
Other rentals and landing fees 121 114 236 225
Depreciation and amortization 119 105 233 206
Aircraft rentals 85 87 169 173
Other 569 543 1,156 1,066
----------- ------------ ------------- ------------
2,333 2,355 4,628 4,628
----------- ------------ ------------- ------------
OPERATING INCOME 264 120 250 276
OTHER INCOME (EXPENSE)
Interest expense, net (92) (67) (184) (122)
Interest of mandatorily redeemable preferred
security holder (6) (5) (13) (11)
Investment income 7 16 17 32
Foreign currency gain 5 7 13 9
Other 20 10 67 12
----------- ------------ ------------- ------------
(66) (39) (100) (80)
----------- ------------ ------------- ------------
INCOME BEFORE INCOME TAXES 198 81 150 196
Income tax expense 78 32 59 76
----------- ------------ ------------- ------------
NET INCOME $ 120 $ 49 $ 91 $ 120
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
Earnings per common share:
BASIC $ 1.47 $ .56 $ 1.12 $ 1.29
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
DILUTED $ 1.29 $ .51 $ .98 $ 1.17
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
NORTHWEST AIRLINES CORPORATION
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
(UNAUDITED, IN MILLIONS) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 618 $ 480
Short-term investments 23 48
Accounts receivable, net 694 665
Flight equipment spare parts, net 392 387
Prepaid expenses and other 464 290
---------------- ----------------
2,191 1,870
PROPERTY AND EQUIPMENT
Flight equipment, net 4,961 4,683
Other property and equipment, net 931 976
---------------- ----------------
5,892 5,659
FLIGHT EQUIPMENT UNDER CAPITAL LEASES, NET 599 610
OTHER ASSETS
International routes, net 693 704
Investments in affiliated companies 709 676
Intangible pension assets 377 136
Other 741 626
---------------- ----------------
2,520 2,142
---------------- ----------------
$ 11,202 $ 10,281
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Air traffic liability $ 1,674 $ 1,107
Accounts payable and other liabilities 1,922 1,978
Current maturities of long-term debt and
capital lease obligations 387 377
---------------- ----------------
3,983 3,462
LONG-TERM DEBT 3,839 3,682
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 569 597
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 1,188 1,113
Pension and postretirement benefits 619 500
Other 481 579
---------------- ----------------
2,288 2,192
MANDATORILY REDEEMABLE PREFERRED SECURITY OF
SUBSIDIARY WHICH HOLDS SOLELY NON-RECOURSE
OBLIGATION OF COMPANY 527 564
REDEEMABLE PREFERRED STOCK 251 261
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 1 1
Additional paid-in capital 1,432 1,445
Accumulated deficit (558) (649)
Accumulated other comprehensive income (loss) 25 (68)
Treasury stock (1,155) (1,206)
---------------- ----------------
(255) (477)
---------------- ----------------
$ 11,202 $ 10,281
---------------- ----------------
---------------- ----------------
SEE ACCOMPANYING NOTES.
4
<PAGE>
NORTHWEST AIRLINES CORPORATION
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Six Months Ended June 30
(UNAUDITED, IN MILLIONS) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 790 $ 490
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (428) (550)
Net decrease in short-term investments 2 336
Other, net - (4)
------------- ------------
Net cash used in investing activities (426) (218)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 320 694
Payments of long-term debt and capital lease obligations (551) (575)
Payment of short-term note payable (102) -
Repurchase of common stock - (437)
Proceeds from sale and leaseback transactions 140 219
Other, net (33) (15)
------------- ------------
Net cash used in financing activities (226) (114)
INCREASE IN CASH AND CASH EQUIVALENTS 138 158
Cash and cash equivalents at beginning of period 480 740
------------- ------------
Cash and cash equivalents at end of period $ 618 $ 898
------------- ------------
------------- ------------
Cash and cash equivalents and unrestricted short-term
investments at end of period $ 618 $ 960
------------- ------------
------------- ------------
Available to be borrowed under credit facilities $ 1,153 $ 2,079
------------- ------------
------------- ------------
Noncash Transactions:
Manufacturer financing obtained in connection with
the acquisition of aircraft $ 470 $ 256
Notes issued for the repurchase of common stock - 344
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
NORTHWEST AIRLINES CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. The condensed consolidated financial statements of Northwest Airlines
Corporation (the "Company") included herein have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
The information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as permitted by such
rules and regulations. These financial statements and related notes
should be read in conjunction with the financial statements and notes
thereto included in the Company's audited consolidated financial
statements for the year ended December 31, 1998 contained in the
Company's Annual Report on Form 10-K for 1998. The Company's accounting
and reporting policies are summarized in Note A of the Notes to
Consolidated Financial Statements in the Annual Report.
In the opinion of management, the interim financial statements reflect
adjustments, consisting of normal recurring accruals, which are necessary
to present fairly the Company's financial position, results of operations
and cash flows for the periods indicated.
2. The income tax expense (benefit) is based on estimated annual effective
tax rates, which differ from the federal statutory rate of 35% primarily
due to state income taxes and nondeductible expenses.
3. At June 30, 1999, maturities of long-term debt were $178 million for the
remainder of 1999, $294 million in 2000, $176 million in 2001, $734
million in 2002 and $118 million in 2003.
At June 30, 1999, the Company had $1.15 billion available to be borrowed
under its revolving credit facilities along with $618 million of cash
and cash equivalents, which provided the Company with $1.77 billion of
available liquidity.
4. The Company is managed as one cohesive business unit, the revenues of
which 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 classify flights between the U.S. and foreign destinations into
regions, and thus, differ from the definition of foreign operations
under generally accepted accounting principles. The following table shows
the operating revenues for each region based on these DOT guidelines (in
millions):
<TABLE>
<CAPTION>
Three months ended Six months ended June
June 30 30
------------------------ ------------------------
1999 1998 1999 1998
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Domestic $1,778 $1,657 $3,385 $3,365
Pacific, principally Japan 540 550 1,016 1,095
Atlantic 279 268 477 444
---------- --------- ---------- ----------
Total operating revenues $2,597 $2,475 $4,878 $4,904
---------- --------- ---------- ----------
</TABLE>
6
<PAGE>
5. On July 1, 1999, Northwest exercised options for 18 additional Airbus
A319 aircraft and 12 additional A320 aircraft. As of June 30, 1999, the
Company had firm orders, including those mentioned above, for 125 new
aircraft including 13 Airbus A320 aircraft, 68 Airbus A319 aircraft, 25
Boeing 757-200 aircraft, 16 Airbus A330 aircraft and three Boeing 747-400
aircraft. Committed expenditures for these aircraft and related
equipment, including estimated amounts for contractual price escalations
and predelivery deposits, will be approximately $630 million for the
remainder of 1999, $300 million in 2000, $370 million in 2001, $930
million in 2002 and $1.01 billion in 2003. Financing has been arranged
for the Airbus A320 and A319 and Boeing 747-400 aircraft deliveries.
The Company also has firm orders for aircraft that will be operated by
and leased to Northwest Airlink regional carriers. As of June 30, 1999,
the Company had firm orders for eight Avro RJ85 aircraft and 54
Bombardier CRJ200 aircraft. Forty-two of the CRJ200 aircraft will be
operated by Express Airlines I. Committed expenditures for these
aircraft, including estimated amounts for contractual price escalations
and predelivery deposits, will be approximately $10 million for the
remainder of 1999, $340 million in 2000, $370 million in 2001, $180
million in 2002 and $140 million in 2003.
6. The following table sets forth the computation of basic and diluted
earnings per common share (in millions, except share data):
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income $ 120 $ 49 $ 91 $ 120
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
DENOMINATOR:
Weighted-average shares outstanding
for basic earnings per share 81,128,535 86,955,059 80,590,657 92,339,897
Effect of dilutive securities:
Series C Preferred Stock 7,466,244 7,896,245 7,538,673 8,206,485
Shares held in non-qualified
rabbi trusts 3,072,215 -- 3,519,304 --
Employee stock options 481,324 934,004 397,281 1,255,750
------------- ------------- ------------- --------------
Adjusted weighted-average shares
and assumed conversions for
diluted earnings per share 92,148,318 95,785,308 92,045,915 101,802,132
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
In accordance with the Emerging Issues Task Force Issue No. 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts
Earned are Held in a Rabbi Trust," 2,659,765 shares held by the
Company's non-qualified rabbi trusts as of June 30, 1999 are treated
as treasury stock and excluded from the shares outstanding calculation
for basic earnings per share.
7. Comprehensive income (net income plus other comprehensive income) was
$196 million and $51 million for the three months ended June 30, 1999 and
1998, respectively, and $184 million and $123 million for the six months
ended June 30, 1999 and 1998, respectively. Other comprehensive income (a
component of stockholders' equity deficit which is not currently
recorded in the statement of operations) for the quarter ended June 30,
1999 includes an unrealized after-tax gain of $61 million resulting from
the valuation of priceline.com warrants.
7
<PAGE>
8. The following summary data is presented for Northwest Airlines, Inc., the
principal indirect operating subsidiary of the Company (in millions):
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues $ 2,480 $ 2,378 $ 4,609 $ 4,676
Operating expenses 2,229 2,266 4,383 4,420
------------ ------------ ----------- -----------
Operating income 251 112 226 256
Other income (expense) (81) (41) (129) (86)
------------ ------------ ------------ ------------
Income before income taxes 170 71 97 170
Income tax expense 65 29 41 68
----------- ----------- ------------ ------------
Net income $ 105 $ 42 $ 56 $ 102
------------ ------------ ------------ ------------
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
-------------- --------------
<S> <C> <C>
Current assets $ 2,008 $ 1,602
Noncurrent assets 7,816 7,242
Current liabilities 4,105 3,599
Long-term debt and obligations under capital leases 4,093 3,955
Deferred credits and other liabilities 1,028 1,001
Mandatorily redeemable preferred security of subsidiary 527 564
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the quarter ended June 30, 1999, the Company reported net income of $120
million and operating income of $264 million. Diluted earnings per common share
were $1.29 compared with $.51 in 1998. Results for the quarter ended June 30,
1999 included a net non-recurring after-tax credit of $17 million related
primarily to outside maintenance costs. Results for the quarter ended June 30,
1998 included a net non-recurring after-tax charge of $42 million for IAM
retroactive pay.
The quarter ended June 30, 1998 was affected by employee work actions related to
the Company's contract negotiations with its unions. Because of these events,
year-over-year comparisons may not be useful to measure 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.
Substantially all of the Company's results of operations are attributable to
Northwest Airlines, Inc. ("Northwest") and the following discussion pertains
primarily to Northwest. The Company's results of operations for interim periods
are not necessarily indicative of the results for an entire year due to seasonal
factors as well as competitive and general economic conditions. 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.
Information with respect to the Company's operating statistics follows (1):
<TABLE>
<CAPTION>
THREE MONTHS ENDED % SIX MONTHS ENDED %
JUNE 30 CHG. JUNE 30 CHG.
---------------------- ------- ------------------- -------
Scheduled service: 1999 1998 1999 1998
---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Available seat miles (ASM) (millions) 25,192 23,820 5.8 48,209 47,594 1.3
Revenue passenger miles (millions) 19,201 18,352 4.6 35,526 35,153 1.1
Passenger load factor (percent) 76.2 77.0 (0.8) pts. 73.7 73.9 (0.2) pts.
Revenue passengers (thousands) 14,474 13,676 5.8 26,890 26,380 1.9
Revenue yield per passenger mile (cents) 11.44 11.45 (0.1) 11.41 11.73 (2.7)
Passenger revenue per scheduled ASM (cents) 8.72 8.82 (1.1) 8.41 8.66 (2.9)
Operating revenue per total ASM (cents) (2) 9.52 9.65 (1.3) 9.22 9.49 (2.8)
Operating expense per total ASM (cents) (2) 8.47 9.11 (7.0) 8.70 8.89 (2.1)
Cargo ton miles (millions) 559 490 14.1 1,056 991 6.6
Cargo revenue yield per ton mile (cents) 30.03 32.80 (8.4) 30.48 33.14 (8.0)
Fuel gallons consumed (millions) 514 490 4.9 983 977 0.6
Average fuel cost per gallon (cents) 49.35 53.33 (7.5) 46.75 56.15 (16.7)
Number of operating aircraft at end of period 417 415 0.5
Full-time equivalent employees at end of period 51,583 51,332 0.5
</TABLE>
(1) All statistics exclude Express Airlines I, Inc., a wholly-owned Northwest
Airlink regional carrier.
(2) Excludes the estimated revenues and expenses associated with the operation
of Northwest's fleet of 747 freighter aircraft and MLT Inc.
RESULTS OF OPERATIONS--THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Operating income increased 120% to $264 million in 1999. This increase was
primarily due to an increase in passenger revenues of $97 million and lower
aircraft maintenance materials and repairs of $48 million.
9
<PAGE>
OPERATING REVENUES. Operating revenues increased 4.9% ($122 million). System
passenger revenues (which represented 85.6% of total operating revenues)
increased 4.6%. The increase was primarily attributable to increased
scheduled service ASMs due to improved operational performance in 1999,
partially offset by a decrease in passenger revenue per scheduled ASM
("RASM"). Capacity was lower in 1998 due to scheduled service reductions and
higher than normal flight cancellations related to the labor disruptions
which the Company estimates negatively impacted passenger revenue by $105
million for the three months ended June 30, 1998. The decrease in RASM
resulted from less premium traffic and lower Atlantic yields caused by
industry-wide capacity growth. Passenger revenue included $25 million of
Express revenues for each of the three months ended June 30, 1999 and 1998.
The following analysis by market is based on information reported to the
Department of Transportation and excludes Express:
<TABLE>
<CAPTION>
SYSTEM DOMESTIC PACIFIC ATLANTIC
------ -------- ------- --------
<S> <C> <C> <C> <C>
1999
Passenger revenue (in millions) $2,197 $ 1,538 $ 430 $ 229
INCREASE/(DECREASE) FROM 1998:
Passenger revenue (in millions) $ 97 $ 101 $ (21) $ 17
Percent 4.6 % 7.1 % (4.8) % 7.6 %
Scheduled service ASMs (capacity) 5.8 % 10.9 % (7.6) % 17.1 %
Passenger RASM (1.1) % (3.4) % 3.0 % (8.0) %
Yield (0.1) % 0.6 % (0.9) % (9.3) %
Passenger load factor (0.8) pts. (3.0) pts. 3.1 pts. 1.2 pts.
</TABLE>
Domestic passenger revenue increased due to an increase in scheduled service
ASMs partially offset by lower RASM attributable to less premium traffic
industry-wide. The Company anticipates domestic yields will continue to improve.
Pacific passenger revenue was adversely affected by the continued unfavorable
general economic environment in the Pacific, of which, the largest impact was
due to the Japanese economy. In response to the weak economic environment, lower
demand and increased competition, the Company continues to reduce capacity,
which it began doing in 1998. Yields were slightly lower due to the reduction in
capacity, which was partially offset by a 13.2% strengthening of the yen. The
average yen per U.S. dollar exchange rates for the three months ended June 30,
1999 and 1998 were 121 and 137, respectively. In conjunction with the new
U.S.-China aviation agreement the Company was tentatively awarded by the DOT
four additional flights, with two more effective in April 2000.
Atlantic passenger revenue increased due to an increase in capacity which
resulted from new flying, including the initiation of Minneapolis/St. Paul-Oslo
service, and increases in Minneapolis/St. Paul-Amsterdam and Detroit-Amsterdam
service, offset by a decrease in RASM caused by overall industry-wide capacity
growth. Effective October 30, 1999 the Company will suspend its Minneapolis/St.
Paul-Oslo and Philadelphia-Amsterdam service.
Cargo revenue increased 4.3% ($7 million) due to 14.1% more cargo ton miles
offset by a 8.4% decrease in cargo revenue yield per ton mile due to the weaker
Asian economic environment. The Company acquired a ninth 747 freighter, which
is scheduled to begin revenue service in September 1999. Other revenue increased
9.5% ($18 million) due primarily to increased revenue from MLT Inc.
OPERATING EXPENSES. Operating expenses decreased 0.9% ($22 million). Operating
capacity increased 5.8% to 25.2 billion total service ASMs which contributed to
the 7.0% decrease in operating expense per total service ASM. Salaries, wages
and benefits decreased 2.2% ($19 million) primarily due to the 1998 provision
for IAM retroactive pay of $67 million partially offset by wage and benefit
increases from settled contracts with collective bargaining units.
10
<PAGE>
Aircraft fuel and taxes decreased 2.8% ($8 million) due primarily to a 7.5%
decrease in average fuel cost per gallon (net of hedging transactions)
partially offset by 4.9% more fuel gallons consumed. The average fuel cost
per gallon has increased 13.8% from January 1999. Commissions increased by
4.3% ($8 million) primarily due to higher revenues. Aircraft maintenance
materials and repairs decreased 26.2% ($48 million) due to fewer engine and
airframe overhauls and a $34 million non-recurring credit related to lower
than anticipated costs associated with outside aircraft maintenance.
Depreciation and amortization increased 13.3% ($14 million) due to additional
owned aircraft and aircraft modifications. Other expenses grew 4.8% ($26
million) largely due to higher volume of business for MLT Inc. and increased
outside services.
OTHER INCOME AND EXPENSE. Interest expense-net increased 37.3% ($25 million) due
to additional borrowing to fund the Company's cash requirements and aircraft
financing. The foreign currency gains for the three months ended June 30, 1999
and 1998 were attributable to balance sheet remeasurement of foreign
currency-denominated assets and liabilities.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Operating income decreased 9.4% ($26 million) to $250 million in 1999. Lower
operating revenues of $26 million and increased salaries, wages and benefits of
$31 million were offset by a $92 million decrease in aircraft fuel and a $54
million decrease in aircraft maintenance and materials.
OPERATING REVENUES. Operating revenues decreased 0.5% ($26 million). System
passenger revenues (which represented 84.2% of total operating revenues)
decreased 1.6% ($68 million), primarily attributable to a decrease in passenger
RASM. The decrease in RASM resulted from the residual effects of the 1998
disruptions on premium traffic in 1999 and lower Atlantic yields caused by
industry-wide capacity growth. Passenger revenue included $51 million of Express
revenues for each of the six months ended June 30, 1999 and 1998.
The following analysis by market is based on information reported to the DOT and
excludes Express:
<TABLE>
<CAPTION>
SYSTEM DOMESTIC PACIFIC ATLANTIC
------ -------- ------- --------
<S> <C> <C> <C> <C>
1999
Passenger revenue (in millions) $ 4,054 $ 2,864 $ 805 $ 385
INCREASE/(DECREASE) FROM 1998:
Passenger revenue (in millions) $ (68) $ (14) $ (90) $ 36
Percent (1.7) % (0.5) % (10.1) % 10.3 %
Scheduled service ASMs (capacity) 1.3 % 4.5 % (11.4) % 23.4 %
Passenger RASM (2.9) % (4.8) % 1.5 % (10.5) %
Yield (2.7) % (2.9) % (2.4) % (8.5) %
Passenger load factor (0.2) pts. (1.3) pts. 3.1 pts. (2.0) pts.
</TABLE>
Domestic passenger revenue decreased due to lower yields and passenger load
factor attributable to less premium traffic industry-wide. Capacity increased
as a result of improved operational performance which was partially offset by
a decrease in the first quarter capacity caused by severe winter weather.
Pacific passenger revenue was adversely affected by the continued unfavorable
general economic environment in the Pacific, of which, the largest impact was
due to the Japanese economy. In response to the continued weak Asian economic
environment, lower demand and increased competition, the Company continues to
reduce capacity, which it began doing in 1998. Yields were slightly lower due to
the reduction in capacity, which was partially offset by an 11.8% strengthening
of the yen. The average yen per U.S. dollar exchange rates for the six months
ended June 30, 1999 and 1998 were 119 and 133, respectively.
11
<PAGE>
Atlantic passenger revenue increased due to an increase in capacity which
resulted from new flying, including the initiation of Philadelphia-Amsterdam,
Seattle-Amsterdam and Minneapolis/St. Paul-Oslo service and increases in
Minneapolis/St. Paul-Amsterdam and Detroit-Amsterdam service, offset by a
decrease in RASM caused by overall industry-wide capacity growth.
Cargo revenue decreased 2.1% ($7 million) primarily due to lower mail volume.
Other revenue increased 12.2% ($49 million) due primarily to increased
revenue from MLT Inc.
OPERATING EXPENSES. Operating expenses remained flat at $4.63 billion. Operating
capacity increased 1.3% to 48.3 billion total service ASMs which contributed to
the 2.1% decrease in operating expense per total service ASM. Salaries, wages
and benefits increased 1.9% ($31 million) due to wage and benefit increases from
settled contracts with collective bargaining units and a 2.0% increase in
average full-time equivalent employees, partially offset by the 1998 provision
for IAM retroactive pay of $67 million.
Aircraft fuel and taxes decreased 15.4% ($92 million) due primarily to a 16.7%
decrease in average fuel cost per gallon (net of hedging transactions). Aircraft
maintenance materials and repairs decreased 14.7% ($54 million) due to fewer
engine and airframe overhauls and a $34 million non-recurring credit related to
lower than anticipated costs associated with outside aircraft maintenance.
Depreciation and amortization increased 13.1% ($27 million) due to additional
owned aircraft and aircraft modifications. Other expenses grew 8.4% ($90
million) largely due to higher volume of business for MLT Inc., increased claims
and supplies as a result of severe winter weather and increased outside
services.
OTHER INCOME AND EXPENSE. Interest expense-net increased 50.8% ($62 million) due
to additional borrowings to fund the Company's cash requirements and aircraft
financing. The foreign currency gains for the six months ended June 30, 1999 and
1998 were primarily attributable to balance sheet remeasurement of foreign
currency-denominated assets and liabilities. Other income increased $55 million
primarily due to a $28 million gain from the sale of a portion of the Company's
investment in EQUANT N.V. and increased earnings from equity investments.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents of $618 million and
borrowing capacity of $1.15 billion under its revolving credit facilities,
providing total available liquidity of $1.77 billion.
Net cash provided by operating activities for the six months ended June 30,
1999 was $790 million, a $300 million increase compared with the six months
ended June 30, 1998 due primarily to the timing of pension contributions,
higher than normal sale proceeds of frequent flyer miles in excess of revenue
in 1999 and an increase in working capital. Investing activities in 1999
consisted primarily of the purchase of six Airbus A320 aircraft and ten AVRO
RJ85 aircraft, the purchase off lease of four DC9-50 aircraft, costs to
commission aircraft before entering revenue service, engine hushkitting,
aircraft modifications and aircraft deposits. Financing activities for the
six months ended June 30, 1999 consisted primarily of the issuance of $200
million of 8.52% unsecured notes due 2004, a $400 million repayment of its
revolving credit facility and the payment of debt and capital lease
obligations.
During the six months ended June 30, 1999, the Company completed an offering
of $421 million of pass-through certificates to finance the acquisition of
four new Boeing 747-400 aircraft scheduled for delivery through 1999, and
$555 million of pass-through certificates to finance the acquisition of seven
new Airbus A320 aircraft and fourteen new Airbus A319 aircraft scheduled for
delivery through February 2000. The cash proceeds from the pass-through
certificates were deposited with an escrow agent and enable the Company to
finance (through either leveraged leases or secured debt financing) the
acquisition of these aircraft. The Company plans to arrange leveraged leases
for these aircraft under which the aircraft are sold and leased back to
Northwest and the pass-through certificates would not be direct obligations
of the Company or Northwest.
On July 1, 1999, Northwest exercised options for 18 additional Airbus A319
aircraft and 12 additional A320 aircraft. The delivery schedule for these
aircraft is 14 in 2002, 15 in 2003 and one in 2004. Financing has been arranged
for these aircraft, which will replace Boeing 727 aircraft scheduled to be
retired from the fleet.
12
<PAGE>
As of June 30, 1999 committed expenditures for all firm aircraft orders and
related equipment, including those mentioned above, and including estimated
amounts for contractual price excalations and predelivery deposits, will be
approximately $630 million for the remainder of 1999, $300 million in 2000,
$370 million in 2001, $930 million in 2002, $1.01 billion in 2003 and $2.98
billion from 2004 to 2006, for aircraft operated by Northwest.
OTHER INFORMATION
LABOR AGREEMENTS. In June 1999, the Company and the International Brotherhood
of Teamsters, which represents its flight attendants, reached a new five-year
tentative agreement. The agreement, which is subject to ratification by the
flight attendants, provides for lump sum retroactive payments equal to 3.5%
of salaries since August 2, 1996, increased wages and pension benefits, and
various work rule modifications. The results of the ratification vote will
not be available until late August 1999.
In November 1998, the mechanics and related employees authorized the Aircraft
Mechanics Fraternal Association ("AMFA") to be their collective-bargaining
representative. The National Mediation Board certified the results of the
representative election in June 1999. Contract negotiations are expected to
commence with AMFA as soon as AMFA organizational matters are resolved.
Because the terms of a new labor agreement will be determined by collective
bargaining, the Company cannot predict the outcome of the negotiations at
this time.
ALLIANCES. In May 1999, the Company, KLM Royal Dutch Airlines and Alitalia
announced that Alitalia will join the Northwest/KLM trans-Atlantic joint
venture. As part of this operating alliance, the three airlines have jointly
applied to the DOT for immunity from the U.S. antitrust laws. Northwest also
signed with Japan Air System (JAS) an alliance agreement for code-share
service on JAS' service from Osaka to Fukuoka and Okinawa. The two carriers
plan to expand code-share service to other domestic and international routes.
Effective June 2, 1999, Northwest and Big Sky Airlines implemented a
code-sharing agreement.
FOREIGN CURRENCY. The Company is exposed to the effect of foreign currency
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 recent periods, the yen to U.S.
dollar exchange rate has changed from 139 yen to $1 at June 30, 1998 to 113
yen to $1 at December 31, 1998 to 121 yen to $1 at June 30, 1999. From time
to time the Company uses financial instruments to hedge its exposure to the
Japanese yen. At June 30, 1999, the Company recorded $4 million of unrealized
gains in accumulated other comprehensive income associated with the forward
contracts purchased to hedge a portion of its 1999 yen-denominated ticket
sales. Hedging gains or losses are recorded in passenger revenue when
transportation is provided. These forward contracts currently hedge
approximately 33% of the Company's anticipated yen-denominated ticket sales
for the next 12 months.
AIRCRAFT FUEL. In the ordinary course of business, the Company manages the
price risk of fuel primarily by utilizing futures contracts traded on
regulated exchanges. At June 30, 1999, the Company recorded $12 million of
unrealized gains in accumulated other comprehensive income as a result of the
fuel futures contracts, which if realized, will be recorded as a reduction to
fuel expense when the related fuel inventory is utilized throughout 1999.
Presently, the Company has hedged approximately 16% of its estimated fuel
requirements for the next twelve months.
YEAR 2000 READINESS. The Company implemented a Year 2000 project in January
1996 to modify its computer systems to function properly in 2000 and 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 spent $33 million of its initial
estimated cost of $55 million. The Company now estimates that the total
project costs will be less than the originally estimated $55 million.
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 approximately 98% of its internal information technology ("IT") systems
and anticipates completion of the remaining systems in the third quarter of
1999. These systems perform such functions as ticketing, passenger check-in,
aircraft weight and balance, flight operations and baggage and cargo
processing. The Company has completed the assessment
13
<PAGE>
phase of the impact of Year 2000 on its critical non-IT systems and third
party relationships. The Company expects completion of the conversion phase
of its critical non-IT systems and third party relationships in the third
quarter of 1999, with completion of testing and implementation in the fourth
quarter of 1999. The Company's aircraft manufacturers have determined that
there are no Year 2000 flight safety issues within Northwest's aircraft fleet.
The Company is 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 the third parties, on
which the Company's business relies, 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. While the Company does not currently
expect any significant modifications of its operations in response to the
Year 2000 issue, the Company could be required to suspend or restrict flights
to certain locations.
As a precautionary measure, the Company is also developing entity-wide
contingency plans designed to reduce the impact on continued operations in the
event of failure of the Company's or third parties' systems. Domestic
contingency plans are complete for critical business processes, with expected
completion of all international and remaining domestic contingency plans in the
third quarter of 1999. The contingency plans are designed to mitigate risk
associated with potential Year 2000 failure and will be executed as necessary.
However, the nature and interdependencies of Year 2000 issues prevent the
Company from implementing contingency plans which address all eventualities,
some of which could materially affect operations or other business functions. In
general, the contingency plans describe the resources and procedures required to
implement alternative actions in the event of a Year 2000 failure. Also, because
of the complexity of the Year 2000 issue and the ongoing analyses primarily
related to third parties' readiness, the Company will continue to modify and
update its contingency plans during the remainder of 1999.
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.
FORWARD-LOOKING STATEMENTS. Some 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 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.
14
<PAGE>
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is provided under the captions "Foreign
Currency" and "Aircraft Fuel" under "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations." Also see "Market
Risk Sensitive Instruments and Positions" in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for 1998.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, "Legal Proceedings" included in the Annual Report.
In addition, in the ordinary course of its business, the Company is party to
various 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 will not have a material adverse effect on the
Company's consolidated financial statements taken as a whole.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Requirements.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K:
Form 8-K filed on April 19, 1999.
15
<PAGE>
SIGNATURE
- ---------
Pursuant to the requirements 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.
Northwest Airlines Corporation
Dated: August 10, 1999 By: /s/ Rolf S. Andresen
------------------------------
Rolf S. Andresen
Vice President-Finance and
Chief Accounting Officer
EXHIBIT INDEX
- -------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Requirements.
27.1 Financial Data Schedule.
</TABLE>
16
<PAGE>
EXHIBIT 12.1
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Earnings:
Income before income taxes $ 198 $ 81 $ 150 $ 196
Less: Income from less than 50%
owned investees 18 5 35 6
Add:
Rent expense representative of interest (1) 49 49 97 96
Interest expense net of capitalized interest 88 63 177 116
Interest of mandatorily redeemable
preferred security holder 6 5 13 11
Amortization of debt discount and expense 4 4 7 6
Amortization of interest capitalized 1 1 2 2
----------- ------------ ------------ -------------
ADJUSTED EARNINGS $ 328 $ 198 $ 411 $ 421
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
FIXED CHARGES:
Rent expense representative of interest (1) $ 49 $ 49 $ 97 $ 96
Interest expense net of capitalized interest 88 63 177 116
Interest of mandatorily redeemable
preferred security holder 6 5 13 11
Amortization of debt discount 4 4 7 6
Capitalized interest 4 4 8 7
----------- ------------ ------------ -------------
FIXED CHARGES $ 151 $ 125 $ 302 $ 236
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
RATIO OF EARNINGS TO FIXED CHARGES 2.17 1.58 1.36 1.78
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
</TABLE>
(1) Calculated as one-third of rentals, which is considered representative of
the interest factor.
<PAGE>
Exhibit 12.2
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK REQUIREMENTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- ------------------------------
1999 1998 1999 1998
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Earnings:
Income before income taxes $ 198 $ 81 $ 150 $ 196
Less: Income from less than 50%
owned investees 18 5 35 6
Add:
Rent expense representative of interest (1) 49 49 97 96
Interest expense net of capitalized interest 88 63 177 116
Interest of mandatorily redeemable
preferred security holder 6 5 13 11
Amortization of debt discount and expense 4 4 7 6
Amortization of interest capitalized 1 1 2 2
----------- ------------ ------------ --------------
ADJUSTED EARNINGS $ 328 $ 198 $ 411 $ 421
----------- ------------ ------------ --------------
----------- ------------ ------------ --------------
FIXED CHARGES AND PREFERRED STOCK REQUIREMENTS:
Rent expense representative of interest (1) $ 49 $ 49 $ 97 $ 96
Interest expense net of capitalized interest 88 63 177 116
Interest of mandatorily redeemable
preferred security holder 6 5 13 11
Preferred stock requirements - - 1 1
Amortization of debt discount 4 4 7 6
Capitalized interest 4 4 8 7
----------- ------------ ------------ --------------
FIXED CHARGES AND PREFERRED
STOCK REQUIREMENTS $ 151 $ 125 $ 303 $ 237
----------- ------------ ------------ --------------
----------- ------------ ------------ --------------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK REQUIREMENTS 2.17 1.58 1.36 1.78
----------- ------------ ------------ --------------
----------- ------------ ------------ --------------
</TABLE>
(1) Calculated as one-third of rentals, which is considered representative of
the interest factor.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 618
<SECURITIES> 23
<RECEIVABLES> 694
<ALLOWANCES> 24
<INVENTORY> 392
<CURRENT-ASSETS> 2,191
<PP&E> 8,214
<DEPRECIATION> 2,322
<TOTAL-ASSETS> 11,202
<CURRENT-LIABILITIES> 3,983
<BONDS> 0
251
0
<COMMON> 0
<OTHER-SE> (255)
<TOTAL-LIABILITY-AND-EQUITY> 11,202
<SALES> 4,878
<TOTAL-REVENUES> 4,878
<CGS> 0
<TOTAL-COSTS> 4,628
<OTHER-EXPENSES> 100
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 150
<INCOME-TAX> 59
<INCOME-CONTINUING> 91
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91
<EPS-BASIC> 1.12
<EPS-DILUTED> .98
</TABLE>
