<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 September 30, 1998
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 September 30, 1998, there were 81,262,937 shares of the registrant's Common
Stock outstanding.
<PAGE>
NORTHWEST AIRLINES CORPORATION
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - Three months
and nine months ended September 30, 1998 and 1997. 3
Condensed Consolidated Balance Sheets - September 30, 1998,
December 31, 1997 and September 30, 1997. 4
Condensed Consolidated Statements of Cash Flows - Nine months
ended September 30, 1998 and 1997. 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, 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 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
EXHIBIT INDEX 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST AIRLINES CORPORATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
(UNAUDITED, IN MILLIONS EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Passenger $ 1,609.5 $ 2,449.1 $ 5,782.7 $ 6,718.0
Cargo 117.8 200.5 446.6 567.1
Other 200.8 151.8 603.3 449.4
---------- ---------- ---------- ----------
1,928.1 2,801.4 6,832.6 7,734.5
OPERATING EXPENSES
Salaries, wages and benefits 809.1 756.3 2,428.6 2,258.8
Aircraft fuel and taxes 230.7 345.1 829.6 1,055.7
Commissions 154.8 236.1 527.2 657.5
Aircraft maintenance materials and repairs 179.4 146.5 546.2 466.8
Other rentals and landing fees 103.7 117.6 328.9 341.3
Depreciation and amortization 107.6 98.8 313.5 289.4
Aircraft rentals 87.1 93.4 259.7 269.3
Other 531.5 503.8 1,598.1 1,465.8
---------- ---------- ---------- ----------
2,203.9 2,297.6 6,831.8 6,804.6
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (275.8) 503.8 0.8 929.9
OTHER INCOME (EXPENSE)
Interest expense, net (95.1) (58.8) (217.2) (175.2)
Interest of mandatorily redeemable preferred
security holder (5.2) (6.3) (16.2) (18.3)
Investment income 31.0 16.8 63.3 46.7
Foreign currency gain (loss) (9.8) 11.0 (0.3) (3.9)
Other 3.1 6.4 13.5 20.7
---------- ---------- ---------- ----------
(76.0) (30.9) (156.9) (130.0)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (351.8) 472.9 (156.1) 799.9
Income tax expense (benefit) (128.0) 182.6 (51.9) 308.8
---------- ---------- ---------- ----------
NET INCOME (LOSS) (223.8) 290.3 (104.2) 491.1
Preferred stock requirements (0.2) (3.1) (0.6) (13.2)
---------- ---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (224.0) $ 287.2 $ (104.8) $ 477.9
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per common share:
BASIC $ (2.91) $ 2.80 $ (1.25) $ 4.69
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DILUTED $ (2.91) $ 2.53 $ (1.25) $ 4.22
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
NORTHWEST AIRLINES CORPORATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
(UNAUDITED, IN MILLIONS) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 503.5 $ 740.4 $ 1,072.3
Short-term investments 64.9 437.7 194.8
Accounts receivable, net 547.1 664.8 769.9
Flight equipment spare parts, net 408.2 376.1 345.7
Prepaid expenses and other 297.0 378.8 296.2
---------- ---------- ----------
1,820.7 2,597.8 2,678.9
PROPERTY AND EQUIPMENT
Flight equipment, net 4,573.1 3,951.1 3,866.6
Other property and equipment, net 887.1 876.6 903.4
---------- ---------- ----------
5,460.2 4,827.7 4,770.0
FLIGHT EQUIPMENT UNDER CAPITAL LEASES, NET 616.3 637.1 645.5
OTHER ASSETS
International routes, net 710.2 727.8 733.6
Investments in affiliated companies and other 760.7 545.8 528.2
---------- ---------- ----------
1,470.9 1,273.6 1,261.8
---------- ---------- ----------
$ 9,368.1 $ 9,336.2 $ 9,356.2
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Air traffic liability $ 1,306.6 $ 1,222.5 $ 1,266.2
Accounts payable and other liabilities 1,912.4 1,766.2 1,820.5
Current maturities of long-term debt and
capital lease obligations 254.3 283.3 218.1
---------- ---------- ----------
3,473.3 3,272.0 3,304.8
LONG-TERM DEBT 2,827.4 1,841.9 1,958.4
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 610.9 649.4 664.1
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 1,117.0 1,161.5 1,152.4
Pension and postretirement benefits 414.5 407.3 394.9
Other 612.1 674.1 659.2
---------- ---------- ----------
2,143.6 2,242.9 2,206.5
MANDATORILY REDEEMABLE PREFERRED SECURITY OF
SUBSIDIARY WHICH HOLDS SOLELY NON-RECOURSE
OBLIGATION OF COMPANY 459.6 486.3 524.7
REDEEMABLE STOCK
Preferred 262.7 306.2 324.4
Common -- 848.5 848.5
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 1.1 1.0 1.0
Additional paid-in capital 1,367.4 1,273.6 1,223.8
Accumulated deficit (467.1) (362.2) (467.3)
Accumulated other comprehensive income (99.2) (101.8) (111.1)
Treasury stock (1,211.6) (1,121.6) (1,121.6)
---------- ---------- ----------
(409.4) (311.0) (475.2)
---------- ---------- ----------
$ 9,368.1 $ 9,336.2 $ 9,356.2
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
NORTHWEST AIRLINES CORPORATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------
Nine months ended September 30
(UNAUDITED, IN MILLIONS) 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 356.2 $ 1,477.3
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (829.0) (501.7)
Net decrease in short-term investments 363.0 70.5
Other, net (9.7) (39.0)
---------- ----------
Net cash used in investing activities (475.7) (470.2)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 959.6 250.6
Payments of long-term debt and capital lease obligations (833.3) (321.1)
Repurchase of common and preferred stock (436.7) (524.4)
Proceeds from sale and leaseback transactions 219.2 126.0
Other, net (26.2) (25.3)
---------- ----------
Net cash used in financing activities (117.4) (494.2)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (236.9) 512.9
Cash and cash equivalents at beginning of period 740.4 559.4
---------- ----------
Cash and cash equivalents at end of period $ 503.5 $ 1,072.3
---------- ----------
---------- ----------
Cash and cash equivalents and unrestricted short-term
investments at end of period $ 538.7 $ 1,221.7
---------- ----------
---------- ----------
Available to be borrowed under credit facilities $ 1,838.8 $ 729.3
---------- ----------
---------- ----------
Noncash Transactions:
Manufacturer financing obtained in connection with
the acquisition of aircraft $ 318.0 $ 80.1
Notes issued for the repurchase of common stock 343.7 --
</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 ("NWA Corp." or the "Company") included herein have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain 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, 1997
contained in the Company's Annual Report on Form 10-K for 1997 (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 Company's accounting and reporting policies are summarized in Note A of
the Notes to Consolidated Financial Statements in the Annual Report.
3. 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 certain nondeductible expenses.
4. At September 30, 1998, maturities of long-term debt were $14.3 million in
1998, $308.9 million in 1999, $158.7 million in 2000, $290.5 million in
2001 and $197.1 million in 2002.
5. At September 30, 1998, the Company had $1.84 billion available to be
borrowed under revolving credit facilities along with $538.7 million of
cash, cash equivalents and unrestricted short-term investments which
provided the Company with $2.38 billion of available liquidity. The Company
has pledged various assets as collateral for its bank credit facilities,
principally aircraft and international route authorities, having an
aggregate book value of $2.20 billion. In October 1998, the Company
borrowed $835.0 million under its revolving credit facilities which
mature in December 2002. The Company has the right to make partial or
total prepayments at any time without penalty.
6. On May 1, 1998, NWA Corp. purchased from KLM Royal Dutch Airlines ("KLM")
the remaining 18,177,874 shares of NWA Corp. common stock which the Company
had previously agreed to repurchase 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 $206.0 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.
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
alliance to maintain certain antitrust immunity or Northwest Airlines,
Inc.'s ("Northwest") default under the alliance agreement), KLM will have
an option to buy back from NWA Corp. up to 13.3 million shares.
7. In June 1998, the Company amended its Regional Jet Services Agreement with
Mesaba Aviation, Inc. ("Mesaba") and agreed to lease 18 additional Avro
Regional Jet aircraft to Mesaba, for a total of 36 such aircraft. As part
of the amended agreement, the Company was granted an additional warrant to
purchase Mesaba Holdings, Inc. stock. If the Company were to exercise all
its warrants in Mesaba Holdings, Inc. stock when fully vested, its
ownership would increase from 28.5% to 40.9% as of September 30, 1998.
6
<PAGE>
8. The following table sets forth the computation of basic and diluted
earnings (loss) per common share (in millions, except share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) applicable to common
stockholders for basic
earnings (loss) per share $ (224.0) $ 287.2 $ (104.8) $ 477.9
Effect of dilutive securities:
Series C Preferred Stock -- .3 -- .8
-------------- -------------- ------------- ---------------
Net income (loss) applicable to common
stockholders after assumed
conversions for diluted
earnings (loss) per share $ (224.0) $ 287.5 $ (104.8) $ 478.7
-------------- -------------- ------------- ---------------
-------------- -------------- ------------- ---------------
DENOMINATOR:
Weighted-average shares outstanding
for basic earnings (loss) per share 77,094,027 102,427,509 83,641,542 101,927,493
Effect of dilutive securities:
Series C Preferred Stock -- 9,840,002 -- 10,238,273
Employee stock options -- 1,220,837 -- 1,321,713
Common stock repurchase obligation -- 80,914 -- 27,268
-------------- -------------- ------------- ---------------
Adjusted weighted-average shares and
assumed conversions for diluted
earnings (loss) per share 77,094,027 113,569,262 83,641,542 113,514,747
-------------- -------------- ------------- ---------------
-------------- -------------- ------------- ---------------
</TABLE>
For the three and nine months ended September 30, 1998, no incremental
shares related to dilutive securities were added to the denominator because
inclusion of such shares would be antidilutive.
9. Beginning in 1998, the Company is required to report comprehensive income
as required by Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income." SFAS 130 requires minimum pension
liability adjustments and foreign currency translation adjustments, which
prior to adoption were reported separately in common stockholders' equity,
to be included in "other comprehensive income." Comprehensive income (net
income plus other comprehensive income) was $(224.2) million and $292.5
million for the three months ended September 30, 1998 and 1997,
respectively, and $(101.6) million and $492.9 million for the nine months
ended September 30, 1998 and 1997, respectively.
10. On April 30, 1998, the Company amended its Second Amended and Restated
Certificate of Incorporation to combine and reclassify the existing
separate classes of voting and non-voting Class A and Class B Common Stock
into a single class of voting Common Stock.
11. On June 25, 1998, the Company amended its Stockholder Rights Plan to
increase the permitted beneficial ownership threshold for certain qualified
institutional investors to 25% of NWA Corp.'s outstanding common stock
(as defined in the Stockholder Rights Plan).
12. As of January 1, 1998, the Company adopted early the provisions of
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities", ("SOP 98-5"). SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. The adoption of SOP 98-5
did not have a material impact on the Company's financial position or
results of operations for the nine months ended September 30, 1998.
7
<PAGE>
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS 132"), "Employer's
Disclosures about Pensions and Other Postretirement Benefits." SFAS 132
revises disclosures about pension and other postretirement benefit plans,
but it does not change the measurement or recognition of those plans.
Because this statement only impacts how financial information is disclosed,
the adoption will have no impact to the Company's financial position or
results of operations.
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 plans to adopt SOP 98-1 on January
1, 1999. The Company does not anticipate that the adoption of SOP 98-1 will
have a material impact on the Company's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." The Company is required to
adopt the new standard no later than January 1, 2000, with early adoption
permitted. No restatement of previously issued financial statements is
permitted. SFAS 133 will require the Company to recognize all derivatives
as assets or liabilities on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. While
the Company is in the process of evaluating the accounting and reporting
implications and the timing of adoption of SFAS 133, it does not anticipate
any significant impact on its financial position or results of operations.
In general, the Company does not invest in or take positions on derivative
instruments other than for the purposes of hedging specific risk exposures.
Under the provisions of SFAS 133, the Company will be able to more properly
match the recognition of foreign currency hedging derivative instruments
with the timing of the underlying hedged foreign currency cash flows.
On July 23, 1998, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 97-14, "Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust". The Company
adopted the provisions of EITF 97-14 on September 30, 1998. The impact of
adopting EITF 97-14 was to record treasury stock of $157.3 million and a
deferred compensation liability of $103.6 million. The transition
differential (the difference between the historical cost of the shares
acquired by the "rabbi trust" and the fair value of the shares as of
September 30, 1998) was recorded in common stockholders' equity deficit,
net of tax. As required, the 4.1 million shares held by the "rabbi trust"
as of September 30, 1998 were treated as treasury stock and excluded from
the shares outstanding calculation for basic earnings per share.
8
<PAGE>
13. In accordance with Rule 1-02 (bb) of Regulation S-X, the following summary
data (in millions) is presented for Northwest, the principal indirect
operating subsidiary of the Company.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues $1,843.5 $2,714.1 $6,519.6 $7,471.3
Operating expenses 2,119.2 2,223.1 6,539.1 6,581.7
-------- -------- -------- --------
Operating income (loss) (275.7) 491.0 (19.5) 889.6
Other income (expense) (75.0) (42.0) (160.9) (167.6)
-------- -------- -------- --------
Income (loss) before income taxes (350.7) 449.0 (180.4) 722.0
Income tax expense (benefit) (127.2) 169.1 (58.9) 275.9
-------- -------- -------- --------
Net income (loss) (223.5) 279.9 (121.5) 446.1
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
September 30 December 31 September 30
1998 1997 1997
------------ ----------- ------------
<S> <C> <C> <C>
Current assets $1,611.4 $2,015.0 $2,130.6
Noncurrent assets 6,904.1 6,114.6 6,045.8
Current liabilities 3,603.6 3,164.7 3,153.3
Long-term debt and obligations under capital leases 3,114.6 2,016.9 2,123.1
Deferred credits and other liabilities 1,018.7 1,191.0 1,167.3
Mandatorily redeemable preferred security of subsidiary 459.6 486.3 524.7
</TABLE>
See also Note R to Consolidated Financial Statements in the Annual Report.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the quarter ended September 30, 1998, the Company reported a net loss of
$223.8 million and an operating loss of $275.8 million. Diluted loss per common
share was $2.91 compared with diluted earnings per common share of $2.53 in
1997.
The quarter ended September 30, 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.
Because of these events, year-over-year comparisons are not 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. The Company
estimates the impact of the labor disruptions to be approximately $630
million on a pre-tax basis for the three months ended September 30, 1998. Due
to the recovery from the pilots' strike, the Company expects to report a net
loss for the fourth quarter of 1998 and for the full year ending December 31,
1998.
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 such results for an entire year due to
seasonal factors as well as competitive and general economic conditions.
Information with respect to the Company's operating statistics follows (1):
<TABLE>
<CAPTION>
Three months ended % Nine months ended %
September 30 Chg. September 30 Chg.
--------------------- ------ --------------------- -----
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Scheduled service:
Available seat miles (ASM) (millions) 20,136.9 25,782.2 (21.9) 67,730.9 73,062.0 (7.3)
Revenue passenger miles (millions) 15,097.1 20,028.0 (24.6) 50,250.2 54,762.5 (8.2)
Passenger load factor (percent) 75.0 77.7 (2.7) pts. 74.2 75.0 (0.8) pts.
Revenue passengers (thousands) 11,148 14,743 (24.4) 37,528 41,267 (9.1)
Revenue yield per passenger mile (cents) 10.52 12.05 (12.7) 11.37 12.13 (6.3)
Passenger revenue per scheduled ASM (cents) 7.89 9.36 (15.7) 8.43 9.10 (7.4)
Operating revenue per total ASM (cents) (2) 8.87 10.12 (12.4) 9.31 9.82 (5.2)
Operating expense per total ASM (cents) (2) 10.09 8.19 23.2 9.25 8.60 7.6
Cargo ton miles (millions) 387.6 594.4 (34.8) 1,378.6 1,640.8 (16.0)
Cargo revenue per ton mile (cents) 30.40 33.68 (9.7) 32.37 34.53 (6.3)
Fuel gallons consumed (millions) 411.5 530.8 (22.5) 1,389.0 1,497.0 (7.2)
Average fuel cost per gallon (cents) 51.66 60.08 (14.0) 54.82 65.58 (16.4)
Number of operating aircraft at end of period 413 402 2.7
Full-time equivalent employees at end of period 50,669 47,996 5.6
</TABLE>
(1) All statistics exclude Express Airlines I, Inc. ("Express"), a
wholly-owned Northwest Airlink regional carrier.
(2) Excludes the estimated revenues and expenses associated with the
operation of Northwest's fleet of eight 747 freighter aircraft and MLT Inc.
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Operating income decreased $779.6 million to an operating loss of $275.8
million. This decrease was primarily due to a decrease in passenger revenues of
$839.6 million due to the loss of revenue caused by the labor disruptions,
partially offset by $93.7 million in decreased expenses. Operating expenses
included an $83.7 million provision for retroactive compensation related to
labor agreements.
10
<PAGE>
OPERATING REVENUES. Operating revenues were $1.93 billion, a decrease of
$873.3 million (31.2%). System passenger revenues (which represented 83.5% of
total operating revenues) decreased 34.3%. The decrease was primarily
attributable to a 21.9% decrease in Northwest's scheduled service ASMs and a
15.7% decrease in Northwest's passenger revenue per scheduled ASM ("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 $20.5 million and $35.8 million of Express
revenues for the three months ended September 30, 1998 and 1997, respectively.
Domestic passenger revenue, excluding Express, decreased $479.1 million
(31.2%) to $1.06 billion due primarily to a 22.9% decrease in scheduled
service ASMs as a result of the labor disruptions. RASM decreased 10.7% as
business traffic moved to other carriers due to the labor disruptions. The
Company expects its scheduled ASMs for the fourth quarter to be flat compared
with the three months ended December 31, 1997.
Pacific passenger revenue decreased by $310.1 million (46.3%) to $360.5
million due to a 28.6% decrease in Pacific scheduled service ASMs primarily
due to the labor disruptions and a 24.7% decrease in Pacific RASM. The
decrease in Pacific RASM was due to a 18.7% decrease in yield and a 6 point
decrease in passenger load factor. The decrease in yield was attributable to
the labor disruptions and an unfavorable general economic environment in the
Pacific and weaker Asian currencies, of which the largest impact was due to
the Japanese economy and yen. The average yen per U.S. dollar exchange rate
for the three months ended September 30, 1998 and 1997 was 142 and 118,
respectively, a weakening of the yen of 20.3%. In response to the continued
weak economic environment and increased competition resulting from the
revised U.S.-Japan bilateral aviation agreement, the Company suspended from
its winter schedule Nagoya-Guam, Nagoya-Honolulu, Osaka-Minneapolis,
Osaka-Taipei and Hong Kong-Minneapolis service. The Company is adding service
between Osaka and Kuala Lumpur and Osaka and Kaohsiung, Taiwan beginning in
early 1999. The Company is assessing its fleet requirements following these
schedule changes and expects that the general economic environment in Asia
will continue to adversely impact its Pacific revenues.
Atlantic passenger revenue decreased $35.1 million (16.9%) to $172.8 million due
to a 24.0% decrease in Atlantic RASM as a result of the labor disruptions,
offset by a 9.4% increase in scheduled service ASMs which resulted primarily
from new flying (including service from Mumbai and Delhi, India to Amsterdam)
and the initiation of Philadelphia-Amsterdam and Seattle-Amsterdam service and
increases in Minneapolis/St. Paul-Amsterdam and Detroit-Amsterdam services. The
decrease in Atlantic RASM was due to a 16.8% decrease in yield and a 7.7 point
decrease in passenger load factor.
Cargo revenue decreased $82.7 million (41.2%) to $117.8 million due to 34.8%
fewer cargo ton miles and a 9.7% decrease in cargo revenue per ton mile,
primarily a result of the labor disruptions and from a weaker Asian economic
environment and weaker foreign currency exchange rates. The Asian economic
environment is expected to continue to adversely impact cargo revenue through
the remainder of 1998 and into 1999. Other revenues were $200.8 million, an
improvement of $49.0 million (32.3%). The improvement was largely due to
increased revenue from KLM joint venture alliance settlements and MLT Inc.
OPERATING EXPENSES. Operating expenses decreased $93.7 million (4.1%). Operating
capacity decreased 21.9% to 20.1 billion total service ASMs which contributed to
the 23.2% increase in operating expense per total service ASM. Salaries, wages
and benefits increased $52.8 million (7.0%) due primarily to an $83.7 million
provision for retroactive compensation and an increase in average full-time
equivalent employees of 5.4%, partially offset by savings from the furloughing
of employees during the pilots' strike.
Aircraft fuel and taxes decreased $114.4 million (33.1%) due to a 14.0% decrease
in average fuel cost per gallon and lower usage because of the labor
disruptions. Commissions decreased by $81.3 million (34.4%) 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 $32.9 million (22.5%) due to higher utilization of outside
suppliers as a result of increased scheduled overhauls and timing of check
cycles, and decreased employee productivity. Other expenses grew $27.7 million
(5.5%) largely due to higher volume of business for MLT Inc. and increased
passenger claims due to the labor disruptions.
11
<PAGE>
OTHER INCOME AND EXPENSE. Interest expense-net increased $36.3 million (61.7%)
primarily due to borrowings under its revolving credit facilities. See
"Liquidity and Capital Resources". The foreign currency loss for the three
months ended September 30, 1998 was attributable to balance sheet remeasurement
of foreign currency-denominated assets and liabilities. The foreign currency
gain for the three months ended September 30, 1997 was attributable to gains
related to Japanese yen forward exchange and collar option contracts and balance
sheet remeasurement of foreign currency-denominated assets and liabilities.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Company recorded a net loss of $104.2 million for the nine months ended
September 30, 1998, a decrease of $595.3 million from 1997. Diluted loss per
common share was $1.25 for the nine months ended September 30, 1998, compared
with diluted earnings per common share of $4.22 in 1997. The net loss was
caused primarily by the labor disruptions.
Operating income decreased $929.1 million (99.9%) to $.8 million. The
decrease was primarily due to lower passenger revenues caused by the labor
disruptions, provisions for retroactive compensation back to the date
collective bargaining agreements became amendable, and increased other
operating expenses and aircraft maintenance, all of which were partially
offset by increased other revenue and decreased aircraft fuel and commissions.
OPERATING REVENUES. Operating revenues were $6.83 billion, a decrease of
$901.9 million (11.7%). System passenger revenues (which represented 84.6% of
total operating revenues) decreased $935.3 million (13.9%). The decrease was
attributable to a 7.3% decrease in scheduled service ASMs and a 7.4% decrease
in Northwest's RASM. Passenger revenue included $71.1 million and $72.7
million of Express revenues for the nine months ended September 30, 1998 and
1997, respectively.
Domestic passenger revenue, excluding Express, decreased $518.1 million
(11.6%) to $3.93 billion due largely to an 8.7% decrease in scheduled service
ASMs resulting from higher than normal flight cancellations and a reduction
in scheduled capacity, because of the labor disruptions. A 0.5 point increase
in passenger load factor partially offset a decrease in yield which was held
down due to the reinstatement of federal taxes on airline tickets and
international departures and loss of higher yield business traffic during the
period of labor disruptions, resulting in a 3.1% decrease in RASM.
Pacific passenger revenue decreased by $443.7 million (26.1%) to $1.26 billion
due to a 16.9% decrease in Pacific RASM. The decrease in Pacific RASM was
primarily due to a 13.8% decrease in yield and a 2.8 point decrease in passenger
load factor. The decrease in yield was attributable to the labor disruptions and
an unfavorable general economic environment in the Pacific and weaker Asian
currencies, of which the largest impact was due to the Japanese economy and yen.
The average yen per U.S. dollar exchange rate for the nine months ended
September 30, 1998 and 1997 was 135 and 120, respectively, a weakening of the
yen of 12.5%. Atlantic passenger revenue increased $28.1 million (5.7%) to
$522.1 million primarily due to a 18.3% increase in scheduled service ASMs from
new flying, which was partially offset by fewer ASMs from the labor disruptions.
Cargo revenue decreased $120.5 million (21.2%) to $446.6 million due to 16.0%
fewer cargo ton miles and a 6.3% decrease in cargo revenue per ton mile
attributable to the labor disruptions, a weaker Asian economic environment and
weaker foreign currency exchange rates. Other revenues were $603.3 million, an
improvement of $153.9 million (34.2%). The improvement was largely due to
increased revenue from KLM joint venture alliance settlements and MLT Inc.
OPERATING EXPENSES. Operating expenses increased $27.2 million (0.4%). Operating
capacity decreased 7.3% to 67.8 billion total service ASMs with operating
expense per total service ASM increasing 7.6%. Salaries, wages and benefits
increased $169.8 million (7.5%) due primarily to a $150.8 million provision for
retroactive compensation related to labor agreements and an increase in average
full-time equivalent employees of 6.6%. The increase in full-time equivalent
employees was due to more mechanics resulting from increased check cycles and an
increase in reservation agents due to the Company's alliance activities with KLM
that resulted in Northwest taking over KLM's North America sales and marketing
functions beginning in April 1998. Aircraft fuel and taxes decreased $226.1
million (21.4%) due to a 16.4%
12
<PAGE>
decrease in average fuel cost per gallon and a 7.2% decrease in fuel
consumption. Commissions decreased by $130.3 million (19.8%) due to lower
revenues as a result of the labor disruptions and 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 $79.4 million (17.0%) due primarily to
increased scheduled overhauls, timing of check cycles and increased
utilization of outside suppliers. The Company continues to contract for
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. The Company anticipates these increases to
continue at the same rate for the remainder of 1998. Other expenses grew
$132.3 million (9.0%) largely due to higher volume of business for MLT Inc.,
increased claims by passengers from flight disruptions, outside services,
advertising and supplies.
OTHER INCOME AND EXPENSE. The foreign currency loss for the nine months ended
September 30, 1998 was primarily attributable to balance sheet remeasurement of
foreign currency-denominated assets and liabilities. The foreign currency loss
for the nine months ended September 30, 1997 was attributable to charges related
to Japanese yen forward exchange and collar option contracts and balance sheet
remeasurement of foreign currency-denominated assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of $503.5
million, unrestricted short-term investments of $35.2 million, and borrowing
capacity of $1.84 billion under its revolving credit facilities, providing
total available liquidity of $2.38 billion. During the third quarter, the
Company borrowed all amounts available under its credit facilities, and
subsequently repaid all amounts except $240 million. In October 1998, the
Company borrowed $835 million against these facilities, which mature in
December 2002.
Net cash provided by operating activities for the nine months ended September
30, 1998 was $356.2 million, a $1.12 billion decrease compared with the nine
months ended September 30, 1997 due primarily to the labor disruptions.
Investing activities in 1998 consisted primarily of the purchase of nine
Airbus A320 aircraft, eight RJ85 aircraft, and three used DC-10 aircraft, the
purchase off lease of five DC9-50 aircraft, costs to commission aircraft
before entering revenue service, engine hushkitting, aircraft modifications
and aircraft deposits. Investing activities in 1997 consisted primarily of
costs to commission aircraft before entering revenue service, aircraft
deposits, DC9-50 interior refurbishment, the purchase of six RJ85 aircraft,
engine hushkitting, ground equipment purchases and the acquisition of
Express. Financing activities for the nine months ended September 30, 1998
consisted primarily of the issuance of $200 million of 7.625% unsecured notes
due 2005 and $200 million of 7.875% unsecured notes due 2008, the financing
of six Boeing 757 aircraft for $240 million due in installments from 2008
though 2016, the payment of debt and capital lease obligations, the
repurchase of common stock and the sale and leaseback of three A320 aircraft
and four RJ85 aircraft. Financing activities in 1997, in addition to the
repurchase of the Company's common and preferred stock, included the issuance
of $150 million of 8.375% notes due 2004 and $100 million of 8.70% notes due
2007, the sale and leaseback of six RJ85 aircraft and the payment of debt and
capital lease obligations.
On May 1, 1998, NWA Corp. purchased from KLM the remaining 18.2 million
shares of NWA Corp. common stock which the Company had previously agreed to
repurchase 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 notes due over three years for the remainder. The
cash was funded from the Company's general working capital. The Company
repaid the first note on September 29, 1998; the remaining two notes are due
on September 29, 1999 and 2000, respectively.
13
<PAGE>
OTHER INFORMATION
LABOR AGREEMENTS. On August 28, 1998, Northwest ceased its flying operations
as a result of a strike by its pilots represented by the 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 its 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, the Northwest MEC ratified
a new four-year agreement. The agreement provides for lump sum retroactive
payments to pilots equal to 3.5% of salaries since October 31, 1996, wage
raises of 3% annually through 2001, 2.5 million of stock options to be
granted over the life of the agreement, elimination of the "B pay scale" over
three years and a profit sharing plan. In addition, Northwest Airlink
partners are permitted to operate regional jets subject to certain
limitations. The Company anticipates the new agreement will raise its 1999
operating expenses by approximately $80 million based on current levels of
employment.
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. Both of these
agreements are consistent with the terms of the tentative agreement reached
with the International Association of Machinists and Aerospace Workers
("IAM") discussed below.
The Company's labor contracts with its remaining domestic employee unions
became amendable in late 1996 and contract negotiations with each union
commenced at that time. See "Business - EMPLOYEES" in the Annual Report on
Form 10-K for the specific amendable dates. Under the Railway Labor Act
("RLA"), the amendable agreement continues in effect while the parties
negotiate a new contract. The Company remains in direct negotiations with the
International Brotherhood of Teamsters ("IBT"), its flight attendants' union.
The IBT has requested and received mediation from the NMB.
The Company and the IAM reached a tentative agreement in June 1998, which was
not ratified by the covered employees, who include mechanics and related
employees, clerks, agents, equipment service employees and stock clerks. On
July 23, 1998, the Aircraft Mechanics Fraternal Association ("AMFA") filed an
application with the NMB seeking recognition as the collective-bargaining
representative for Northwest's mechanics and related employees who are
currently covered by the IAM. On August 13, 1998, the NMB advised the Company
that the NMB was authorizing a mail ballot election to determine whether the
IAM or AMFA should be the collective bargaining representative for the
Company's mechanics and related employees. The AMFA vote is presently in
process and ballots will be counted on November 20, 1998.
In addition to direct negotiation, 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. The self-help
remedies include, but are not limited to, a strike by the members of the
labor union and the imposition of proposed contract amendments and hiring of
replacement workers by the Company. Because the terms of new labor agreements
will be determined by collective bargaining, the Company cannot predict the
outcome of the remaining negotiations at this time.
14
<PAGE>
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 recent periods, the yen has weakened as the yen to U.S. dollar exchange
rate has changed from 120 yen to $1 at September 30, 1997 to 131 yen to $1 at
December 31, 1997 to 137 yen to $1 at September 30, 1998. At September 30, 1998,
the Company had $116.8 million (16 billion yen) in yen put options outstanding
to hedge its entire remaining 1998 anticipated yen-denominated net cash inflows.
On October 7, 1998 the Company entered into $405.8 million (47.5 billion yen) in
forward exchange contracts to hedge a portion of its 1999 forecasted
yen-denominated ticket sales. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note P to Consolidated Financial
Statements in the Annual Report contain additional discussion on risk management
and financial instruments.
AIRCRAFT FUEL. In the ordinary course of business, the Company manages the
price risk of fuel primarily utilizing futures contracts traded on regulated
exchanges. Gains or losses on hedge contracts are deferred until the related
fuel inventory is expensed. As of September 30, 1998, the Company had hedged
approximately 51% of its remaining 1998 fuel requirements and 23% of its fuel
requirements for the first quarter of 1999.
REGULATION. In April 1998, the Department of Transportation ("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.
YEAR 2000. The Company has spent $9.4 million for the nine months ended
September 30, 1998, for a total of $19.4 million of the total estimated cost
of $55 million to ensure that the Company's computer systems will function
properly in the year 2000 and thereafter. The five phases used for
identifying and modifying the various programs and systems include inventory,
assessment, conversion, testing and implementation. The Company has completed
all phases for 70% of its internal computer systems and anticipates
completion of the remaining systems in the first quarter of 1999 with all
phases anticipated to be completed in 1999. The Company is in the assessment
phase of the impact of Year 2000 on its embedded operating systems and third
party relationships, which is expected to be completed in the first quarter
of 1999. The Company continues to work closely with the governmental
organizations and entities which provide essential aviation industry
infrastructure and is monitoring their progress together with other airlines.
Company-wide contingency plans are expected to be in place by the end of the
first quarter of 1999 and are expected to be executed, as necessary,
throughout the 1999. Management's Discussion and Analysis of Financial
Condition in the Annual Report contains additional information about this
issue.
AIR CHINA ALLIANCE. On October 27, 1998, the Company began code-sharing with
Air China as part of a four year commercial cooperation alliance entered into
in May 1998. The alliance connects the two carriers' networks and also
includes frequent flyer program reciprocity and joint marketing. In addition,
three Northwest alliance partners (Alaska Airlines, America West Airlines and
Continental Airlines, Inc.) have also entered into alliance agreements with
Air China.
THE EURO. Effective January 1, 1999, certain European countries will adopt 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 ensure that the
Company's operating systems will properly handle the euro. Costs associated with
the euro project will be expensed as incurred and are being funded through cash
from operations. The project is estimated to be completed in 1998. Management
does not believe that the implementation of this single currency plan will have
a material effect on the Company's business, financial condition or results from
operations.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, "Legal Proceedings" included in the Annual Report.
On October 23, 1998, 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 contemplated acquisition of
the beneficial ownership of 9,514,868 shares of Continental Class A Common
Stock. The Justice Department did not seek a preliminary injunction or other
interim relief to prevent the Company from consummating the proposed
acquisition. The complaint seeks divestiture by the Company of the
Continental stock to be acquired or the imposition of additional terms and
restrictions on the Company with respect to the Continental stock to be
acquired. The Company intends to vigorously defend the lawsuit and move forward
with the consummation of the equity transaction. The lawsuit did not challenge
the alliance between Northwest and Continental.
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:
10.1 Executive Severance Agreement
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 dated September 1, 1998.
16
<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: November 13, 1998 By: /s/ Rolf S. Andresen
----------------------------
Rolf S. Andresen
Vice President - Finance and
Chief Accounting Officer
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1 Executive Severance Agreement.
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>
17
<PAGE>
Exhibit 10.1
September 3, 1998
Mr. James A. Lawrence
c/o Northwest Airlines, Inc.
5101 Northwest Drive
St. Paul, MN 55111
Dear Jim:
As we have discussed, you have stated your intention to resign from
Northwest Airlines, Inc. (the "Company") and its affiliates. The purpose of
this letter is to describe the various agreements that have been reached
between you and the Company regarding your resignation and to further
describe our respective obligations thereafter.
1. You are resigning from all your positions with the Company and its
affiliates, including but not limited to your positions as Executive Vice
President and Chief Financial Officer of the Company, effective on the date
hereof (the "Effective Date"), but you shall remain an employee (without any
obligation to render any services) of the Company, and receive your currently
applicable base salary and employee benefits, through October 14, 1998 (the
"Termination Date").
2. The Company shall pay you, as soon as practicable after the
Termination Date, all accrued and unpaid base salary and any bonus, to the
extent provided by Subsection (a)(i) through (iii) of the description of your
termination benefits contained in the letter from Doug Steenland to you dated
October 14, 1996 (the "Steenland Letter").
3. The Company agrees to pay you, on the sixteenth day following the
date hereof, a lump sum cash amount of $1,920,000.
4. For the period commencing on the Termination Date and ending on the
first anniversary thereof the Company agrees to:
a. continue to provide you, your spouse and your eligible children
with Company health insurance; your eligibility for COBRA benefits shall
commence on such first anniversary; PROVIDED, HOWEVER, that your health
insurance coverage shall cease if you obtain new employment; and
b. continue to provide you, your spouse and dependent children with
officer level - F1 boarding priority.
5. You shall be entitled to rights under Northwest's Executive Life
Insurance Plan (as described in Section 7 of the letter from Christopher E.
Clouser to you dated October 14, 1996 (the "Clouser Letter")), subject to the
terms and conditions thereof. The Company agrees to promptly assign to you
all rights and interest therein and thereunder.
<PAGE>
2
6. The Company agrees to pay you any payments or other rights or
benefits you may be otherwise entitled to receive pursuant to the terms of
any retirement, pension or other employee benefit or compensation plan (the
"Employee Plans") maintained by the Company at the time or times provided
therein. For purposes of the Employee Plans, as well as for purposes of the
noncompete provisions of the Steenland Letter, you shall be treated as
terminated by the Company other than for Cause.
7. As to the non-qualified stock options granted to you and referred to
in Sections 3 and 4 of the Clouser Letter, the parties agree as follows:
a. as to the option for 500,000 shares, 40% or 200,000 have vested
on or before the Termination Date, and you shall have a one (1) year
period from the Termination Date to exercise such vested options (this
clause is intended to, and shall, modify Section 3.2(d) of your 500,000
option Non-Qualified Stock Option Agreement dated October 14, 1996); and
b. as to the option for 94,118 shares, 100% have vested on or
before the Termination Date, and you shall have a two (2) year period
from the Termination Date to exercise such vested options.
8. If you move from your current primary residence to a location more
than 50 miles therefrom, prior to the second anniversary of the Termination
Date, the Company agrees to (i) reimburse you for your reasonable moving
and relocation costs (comparable to those under Section 9 of the Clouser
Letter) and (ii) pay you the actual amount of any loss, if any, on the sale
of such residence prior to such second anniversary. For purposes of this
Agreement, "loss" shall mean the excess of (i) your purchase price for such
primary residence plus $350,000 over (ii) the selling price of the residence.
9. Notwithstanding the provisions of the Clouser Letter, commencing on
the Termination Date, you shall be entitled to dispose of the Purchased
Common Stock (as defined in the Clouser Letter). You agree, however, that you
must continue to pay, pursuant to Section 4(b) and, if applicable, Section
4(c) of the Clouser Letter, $9,167 (or if applicable, your appropriate
pro-rata share thereof) on the last day of each month for so long as the
Stock Option Grant (as defined in the Clouser Letter) remains unexercised.
10. You and the Company agree to abide to the following terms and
conditions for a two year period commencing on the Termination Date:
a. You will not directly or indirectly make any disparaging
statement, or release any information, or encourage others to make
any statement or release any information that is designed to
embarrass or criticize the Company, its affiliates, associates,
directors or shareholders, or its personnel policies and practices
to any of the Company's customers, competitors, employees, former
employees, or the press or other media in any country; PROVIDED that
it will not be a violation of this paragraph 10(a) for you to make
truthful statements when required to do so by a court of law, by
any governmental agency having supervisory authority over the business
of the
<PAGE>
3
Company or by any administrative or legislative body (including a
committee thereof) with the jurisdiction to order you to divulge,
disclose or make accessible such information. Similarly, the Company,
for itself and its affiliates and subsidiaries, agrees during such period
not to, directly or indirectly, make any disparaging statement, or
release any information, or encourage any others to make any statement
or release any information that is designed to embarrass or criticize you
or your performance of your duties and responsibilities while employed
with the Company.
b. You will not engage in any contact with the media with respect
to the Company, its affiliates, their employees, their shareholders or
their directors without the prior written consent of the Company,
except that the parties agree that the Company shall promptly issue the
attached press release.
11. You shall not be required to mitigate the amount of any payment
provided under this Agreement by seeking other employment or otherwise, and
no such payment shall be offset or reduced as a result of your obtaining new
employment.
12. All payments due under this Agreement shall be subject to
withholding taxes and any other applicable deductions as required by law and
may be reduced accordingly.
13. You and the Company agree that this Agreement shall be binding upon
and inure to the benefit of your heirs and representatives and the assigns
and successors of the Company, but neither this Agreement nor any rights or
obligations hereunder shall be assignable or otherwise subject to
hypothecation by you (except by will or by operation of the laws of intestate
succession) or by the Company, except that the Company may assign this
Agreement to any successor (whether by merger, purchase or otherwise) to all
or substantially all of the stock, assets or businesses of the Company and,
in such event, the Company shall require such successor to assume expressly
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had
taken place.
14. This Agreement shall contain the entire understanding between you
and the Company with respect to your employment and supersedes in all
respects any prior or other agreement or understanding between you and the
Company or any affiliate with respect to your employment.
15. You agree to execute a release substantially in the form attached
hereto as a condition to the receipt of any payment hereunder; the Company
agrees to execute such release as indicated thereon.
16. This Agreement will be construed and interpreted in accordance with
the laws of the State of Minnesota without regard to rules pertaining to
conflict of laws.
17. This Agreement may be executed in counterparts.
<PAGE>
4
18. Through December 31, 1998, the Company shall provide you with an
appropriate off-site office and a secretary (such secretary shall continue as
an employee of the Company during such period and shall continue to receive
his or her salary and benefits).
19. The Company shall continue to provide to you all indemnity and
related rights you presently have under the Company's and its Parent's
charter, by-laws, agreements or insurance; all such rights shall continue
after the Termination Date.
20. This Agreement may be executed in counterparts, each of which may
be deemed an original, but all of which together may be construed as one and
the same original.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
NORTHWEST AIRLINES, INC.
/s/ Douglas M. Steenland
---------------------------
By:
Title:
/s/ James A. Lawrence
---------------------------
James A. Lawrence
3 Sept. 98
<PAGE>
GENERAL RELEASE
WHEREAS, Mr. James A. Lawrence ("Executive") has been employed by
Northwest Airlines, Inc. ("Northwest"); and
WHEREAS, Executive's employment with Northwest has terminated; and
WHEREAS, Executive and Northwest have reached a full and final
compromise and settlement of all matters, disputes, causes of action, claims,
contentions and differences between them and Northwest's divisions, merged
entities and affiliates, subsidiaries, parents, branches, predecessors,
successors, assigns, officers, directors, trustees, employees, agents,
stockholders, administrators, representatives, attorneys, insurers or
fiduciaries, past, present or future (the "Releases Parties"), including but
not limited to any and all claims arising from or derivative of
Executive's employment with Northwest and his termination from employment
with Northwest;
WHEREAS, in return for Northwest performing its obligations as provided
for herein and as set forth in the two letter agreements by and between
Northwest and Executive dated as of October 14, 1996 and the two Option
Agreements defined below and the settlement letter agreement between the
Executive and Northwest dated the date hereof (collectively, the
"Agreement"), Executive will execute and comply fully with the terms of this
General Release (the "Release");
WHEREAS, Executive (i) understands that in executing the Release he is,
INTER ALIA, giving up rights and claims under the Age Discrimination in
Employment Act of 1967, as amended, 29 U.S.C. Section 621 ET SEQ. ("ADEA"),
and (ii) has been given a period of not less than twenty-one (21) days within
which to consider this Release;
<PAGE>
2
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, Executive and Northwest agree and covenant as follows:
1. By entering into this Release, the Released Parties do not admit,
and each specifically denies any liability, wrongdoing or violation of any
law, statute, regulations, agreement or policy.
2. Executive's employment with Northwest shall terminate effective
October 14, 1998.
3. In consideration of the obligations of Executive as set forth in
this Release and the settlement letter agreement dated the date hereof, and
in full settlement and final satisfaction of any and all claims, contractual
or otherwise, which Executive had, has or may have against Northwest or the
Release Parties with respect to his employment, termination from employment
with Northwest, or otherwise arising on or prior to the date of execution of
this Release, Northwest shall pay to Executive the payments and benefits to
which Executive is entitled under the Agreement upon termination of
Executive's employment. This Release shall not pertain to any claim alleging
that Northwest has failed to comply with any obligations created by the
Release or that Northwest has failed to pay to Executive the payments and
benefits to which Executive is entitled under the Agreement upon termination
of Executive's employment.
4. (a) Executive, for and in consideration of the payments as set forth
in the Agreement and for other good and valuable consideration, hereby
releases and forever discharges, and by this release does release and forever
discharge, the Released Parties of and from all debts, obligations, promises,
covenants, collective bargaining obligations, agreements, contracts,
endorsements, bonds, controversies, suits or causes of action known or
unknown,
<PAGE>
3
suspected or unsuspected, of every kind and nature whatsoever, which may
heretofore have existed or which may now exist, including but not limited to
those arising under the ADEA, Title VII of the Civil Rights Act of 1964, as
amended, 42 U.S.C. Section 2000e ET SEQ., the Employee Retirement Income
Security Act of 1974, as amended, 29 U.S.C. Section 1001 ET SEQ., the
Americans With Disabilities Act, as amended, 42 U.S.C. Section 12101 ET SEQ.,
the Reconstruction Era Civil Rights Act, as amended, 42 U.S.C. Section 1981
ET SEQ., the Rehabilitation Act of 1973, as amended, 29 U.S.C. Section 701 ET
SEQ., the Family and Medical Leave Act of 1992, 29 U.S.C. Section 2601 ET
SEQ., the Minnesota Human Rights Act, Minn. Stat. Section 363.01 ET SEQ., and
any and all state or local laws regarding employment discrimination and/or
federal, state or local laws of any type or description regarding employment
as well as any claim for breach of contract, wrongful discharge, breach of
any express or implied promise, misrepresentation, fraud, retaliation,
violation of public policy, infliction of emotional distress, defamation,
promissory estoppel, invasion of privacy or any other theory or claim,
whether legal or equitable, including but not limited to any claims arising
from or derivative of Executive's employment with Northwest and Executive's
termination of employment with Northwest or otherwise. Executive acknowledges
that he has not been discriminated against on the basis of age, sex,
handicap, race, ethnicity, religion or any other protected class status.
(b) This Release shall not affect any present or future
indemnification obligations that Northwest and the Released Parties may have
to Executive pursuant to any charter, by-law, agreement or policy of
insurance. The Company agrees to continue to provide all such existing
indemnification rights and insurance coverage to and for the Executive to the
maximum extent permitted by law.
<PAGE>
4
(c) Pursuant to the two Non-Qualified Stock Option Agreements between
Executive and Northwest Airlines Corporation each dated October 14, 1996 (the
"Option Agreements"), Executive has a vested right to acquire 294,118 shares
of the Class A Common Stock of Northwest (the "Vested Options"). This Release
shall not affect Executive's rights under the Option Agreements with respect
to such Vested Options or to any shares of stock previously purchased
pursuant to such Vested Options, which rights shall continue to be governed
by the Option Agreements, as amended by the settlement letter agreement dated
the date hereof.
5. Executive covenants and agrees not to sue nor authorize any other
party, either governmental or otherwise, to file any grievances, arbitration
or commence any other proceeding, administrative or judicial, against the
Released Parties in any court of law or equity, or before any administrative
agency, with respect to any matter relating to this Agreement or to matters
occurring during Executive's employment with Northwest.
6. The Released Parties and Executive understand and agree that the
terms of this Release and the Agreement are confidential.
7. Executive agrees not to make any untruthful or disparaging
statements, written or oral, about Northwest, the Released Parties or
Northwest's personnel policies and practices to any of Northwest's customers,
competitors, suppliers, employees, former employees, or the press or other
media. Except as herein contemplated, Executive also agrees that he will not
voluntarily participate in any proceeding of any kind brought against the
Released Parties relating to this Agreement or to matters occurring during
Executive's employment with Northwest.
<PAGE>
5
8. (a) The parties agree that this Release should not be construed in
accordance with the laws of the State of Minnesota, exclusive of Minnesota
choice of law provisions.
(b) The parties agree that any and all further legal proceedings
between Executive and the Released Parties, whether arising under statute,
constitutions, contract, common law or otherwise, including the issue of
arbitrability, will be submitted for resolution exclusively pursuant to
arbitration under the rules of the American Arbitration Association and that
such arbitration will take place in Minneapolis, Minnesota. The parties
hereby waive their right to a trial of any and all claims arising out of this
Release or breach of this Release.
(c) Should any provision of this Release be found to be in violation
of any law, or ineffective or barred for any reason whatsoever, the remainder
of this Release shall be in full force and effect to the maximum extent
permitted by law.
9. Northwest and Executive agree to execute such other documents and to
take such other actions as maybe reasonably necessary to further the purposes
of this Release.
10. (a) Executive acknowledges and agrees that, in deciding to execute
this Release, he has had the opportunity to consult with legal, financial and
other personal advisors of his own choosing as he deems appropriate, in
assessing whether to execute this Release and that he has consulted legal
counsel. Executive represents and acknowledges that no representations,
statement, promise, inducement, threat or suggestion has been made by
Northwest or the released Parties to influence him to sign this Release
except such statements as are expressly set forth herein. Executive agrees
that he has been given a minimum of twenty-one (21) days within which to
consider the terms and effects of this Release insofar as
<PAGE>
6
it relates to settlement and release of potential claims under the ADEA, and
to consult with, and to ask any questions that he may have of anyone,
including legal counsel and other personal advisors of his own choosing, and
that he has executed this Release voluntarily and with full understanding of
its terms and effects.
(b) Executive has been informed of the right to rescind this release
as far as it extends to potential claims under Minn. Stat. Ch. 363
(prohibiting discrimination in employment) by written notice to the Company
within 15 calendar days following the execution of this Release. Executive
has also been informed of his right to revoke this Release as far as it
extends to potential claims under the Age Discrimination in Employment Act,
29 U.S.C. Section 621 ET SEQ., by informing the Company of his intent to
revoke this Release within seven calendar days following the execution of
this Release. To be effective, notice of rescission or revocation must be in
writing and must be delivered either by hand or by mail to Douglas Steenland,
Sr. Vice President, General Counsel and Secretary, Northwest Airlines, Inc.,
Department A1180, 5101 Northwest Drive, St. Paul, Minnesota, 55111-3034,
within the 15-day period. If a notice of rescission or revocation is
delivered by mail, it must be: (i) postmarked with the 15 or 7 day period,
respectively, (ii) properly addressed to Mr. Steenland as set forth above,
and (iii) sent by certified mail return receipt requested. This Release shall
not become effective or enforceable until the 15 or 7 day periods described
above have expired. No payment shall be due, owing or paid by Northwest
unless and until this Release becomes effective.
11. This Release may not be changed or modified, except by a written
instrument signed by Executive and Northwest.
<PAGE>
7
/s/ James A. Lawrence
------------------------------
(Employee's Name)
Address 4915 E. Lake Harriet Ave.
Minneapolis, MN 55409
Date 3 Sept. 98
STATE OF MINNESOTA )
)ss
COUNTY OF DAKOTA )
On Sept. 3, 1998, between me personally came James A. Lawrence to me
known and known to me to be the individual described in, and who executed,
the foregoing General Release, and duly acknowledged to me that he executed
the same
DEBORAH J. KELLY /s/ Deborah J. Kelly
NOTARY PUBLIC-MINNESOTA --------------------------------
DAKOTA COUNTY Notary Public
My Comm. Expires Jan 31, 2000
NORTHWEST AIRLINES, INC.
By /s/ Douglas M. Steenland
------------------------------
Address
Date
<PAGE>
EXHIBIT 12.1
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
EARNINGS:
Income (loss) before income taxes $(351.8) $ 472.9 $(156.1) $ 799.9
Less: Income from less than 50%
owned investees 2.3 4.0 8.5 17.8
Add:
Rent expense representative of interest (1) 48.4 50.5 144.6 147.8
Interest expense net of capitalized interest 90.5 57.5 206.8 171.2
Interest of mandatorily redeemable
preferred security holder 5.2 6.3 16.2 18.3
Amortization of debt discount and expense 4.7 1.4 10.5 4.0
Amortization of interest capitalized 0.8 0.7 2.5 2.2
-------- -------- -------- ----------
ADJUSTED EARNINGS (LOSS) $(204.5) $ 585.3 $ 216.0 $ 1,125.6
-------- -------- -------- ----------
-------- -------- -------- ----------
FIXED CHARGES:
Rent expense representative of interest (1) $ 48.4 $ 50.5 $ 144.6 $ 147.8
Interest expense net of capitalized interest 90.5 57.5 206.8 171.2
Interest of mandatorily redeemable
preferred security holder 5.2 6.3 16.2 18.3
Amortization of debt discount 4.7 1.4 10.5 4.0
Capitalized interest 4.5 2.4 11.6 7.8
-------- -------- -------- ----------
FIXED CHARGES $ 153.3 $ 118.1 $ 389.7 $ 349.1
-------- -------- -------- ----------
-------- -------- -------- ----------
RATIO OF EARNINGS TO FIXED CHARGES (2) 4.96 (2) 3.22
-------- -------- -------- ----------
-------- -------- -------- ----------
</TABLE>
(1) Calculated as one-third of rentals, which is considered representative of
the interest factor.
(2) Earnings were inadequate to cover fixed charges by $357.8 million and
$173.7 million for the three and nine months ended September 30, 1998,
respectively.
<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 Nine months ended
September 30 September 30
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
EARNINGS:
Income (loss) before income taxes $(351.8) $ 472.9 $(156.1) $ 799.9
Less: Income from less than 50%
owned investees 2.3 4.0 8.5 17.8
Add:
Rent expense representative of interest (1) 48.4 50.5 144.6 147.8
Interest expense net of capitalized interest 90.5 57.5 206.8 171.2
Interest of mandatorily redeemable
preferred security holder 5.2 6.3 16.2 18.3
Amortization of debt discount and expense 4.7 1.4 10.5 4.0
Amortization of interest capitalized 0.8 0.7 2.5 2.2
-------- -------- -------- ----------
ADJUSTED EARNINGS (LOSS) $(204.5) $ 585.3 $ 216.0 $ 1,125.6
-------- -------- -------- ----------
-------- -------- -------- ----------
FIXED CHARGES AND PREFERRED STOCK REQUIREMENTS:
Rent expense representative of interest (1) $ 48.4 $ 50.5 $ 144.6 $ 147.8
Interest expense net of capitalized interest 90.5 57.5 206.8 171.2
Interest of mandatorily redeemable
preferred security holder 5.2 6.3 16.2 18.3
Preferred stock requirements 0.2 5.0 0.9 21.5
Amortization of debt discount 4.7 1.4 10.5 4.0
Capitalized interest 4.5 2.4 11.6 7.8
-------- -------- -------- ----------
FIXED CHARGES AND PREFERRED
STOCK REQUIREMENTS $ 153.5 $ 123.1 $ 390.6 $ 370.6
-------- -------- -------- ----------
-------- -------- -------- ----------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK REQUIREMENTS (2) 4.75 (2) 3.04
-------- -------- -------- ----------
-------- -------- -------- ----------
</TABLE>
(1) Calculated as one-third of rentals, which is considered representative of
the interest factor.
(2) Earnings were inadequate to cover fixed charges and preferred stock
requirements by $358.0 million and $174.6 million for the three and nine
months ended September 30, 1998, respectively.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 504
<SECURITIES> 65
<RECEIVABLES> 547
<ALLOWANCES> 25
<INVENTORY> 408
<CURRENT-ASSETS> 1,821
<PP&E> 7,589
<DEPRECIATION> 2,129
<TOTAL-ASSETS> 9,368
<CURRENT-LIABILITIES> 3,473
<BONDS> 0
263
0
<COMMON> 0
<OTHER-SE> (409)
<TOTAL-LIABILITY-AND-EQUITY> 9,368
<SALES> 1,928
<TOTAL-REVENUES> 1,928
<CGS> 0
<TOTAL-COSTS> 2,204
<OTHER-EXPENSES> 76
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 100
<INCOME-PRETAX> (352)
<INCOME-TAX> (128)
<INCOME-CONTINUING> (224)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (224)
<EPS-PRIMARY> (2.91)
<EPS-DILUTED> (2.91)
</TABLE>
