<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 March 31, 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 March 31, 1998, there were 98,516,006 shares of the registrant's Class A
Common Stock and 11,672 shares of the registrant's Class B 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 Income - Three
months ended March 31, 1998 and 1997. 3
Condensed Consolidated Balance Sheets - March 31, 1998,
December 31, 1997 and March 31, 1997. 4
Condensed Consolidated Statements of Cash Flows - Three
months ended March 31, 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 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
EXHIBIT INDEX 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST AIRLINES CORPORATION
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended March 31
(UNAUDITED, IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES
Passenger $ 2,047.5 $ 2,040.3
Cargo 167.7 170.7
Other 213.3 164.5
---------- ----------
2,428.5 2,375.5
OPERATING EXPENSES
Salaries, wages and benefits 766.6 732.5
Aircraft fuel and taxes 312.6 371.5
Commissions 188.4 206.1
Aircraft maintenance materials and repairs 184.0 154.2
Other rentals and landing fees 110.5 105.5
Depreciation and amortization 101.1 94.1
Aircraft rentals 86.3 84.3
Other 522.6 492.3
---------- ----------
2,272.1 2,240.5
OPERATING INCOME 156.4 135.0
OTHER INCOME (EXPENSE)
Interest expense, net (55.3) (57.3)
Interest of mandatorily redeemable preferred security holder (5.7) (6.1)
Investment income 16.1 12.1
Foreign currency gain 2.0 12.8
Other 1.5 8.1
---------- ----------
(41.4) (30.4)
---------- ----------
INCOME BEFORE INCOME TAXES 115.0 104.6
Income tax expense 44.0 40.0
---------- ----------
NET INCOME 71.0 64.6
Preferred stock requirements (0.2) (5.0)
---------- ----------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 70.8 $ 59.6
---------- ----------
---------- ----------
EARNINGS PER COMMON SHARE:
Basic $ .72 $ .59
---------- ----------
---------- ----------
Diluted $ .66 $ .53
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</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
NORTHWEST AIRLINES CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
March 31 December 31 March 31
(UNAUDITED, IN MILLIONS) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,034.2 $ 740.4 $ 971.3
Short-term investments 108.1 437.7 289.7
Accounts receivable, net 595.2 664.8 671.9
Flight equipment spare parts, net 387.3 376.1 281.4
Prepaid expenses and other 355.6 378.8 337.3
---------- ---------- ----------
2,480.4 2,597.8 2,551.6
PROPERTY AND EQUIPMENT
Flight equipment, net 4,109.8 3,951.1 3,660.9
Other property and equipment, net 874.1 876.6 887.9
---------- ---------- ----------
4,983.9 4,827.7 4,548.8
FLIGHT EQUIPMENT UNDER CAPITAL LEASES, NET 629.9 637.1 662.6
OTHER ASSETS
International routes, net 721.9 727.8 745.3
Investments in affiliated companies and other 714.4 545.8 469.6
---------- ---------- ----------
1,436.3 1,273.6 1,214.9
---------- ---------- ----------
$ 9,530.5 $ 9,336.2 $ 8,977.9
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Air traffic liability $ 1,278.1 $ 1,222.5 $ 1,138.2
Accounts payable and other liabilities 1,688.3 1,766.2 1,763.3
Current maturities of long-term debt and
capital lease obligations 127.7 283.3 315.2
---------- ---------- ----------
3,094.1 3,272.0 3,216.7
LONG-TERM DEBT 2,172.9 1,841.9 2,034.3
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 634.5 649.4 689.7
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 1,194.7 1,161.5 1,007.5
Pension and postretirement benefits 387.3 407.3 427.9
Other 651.0 674.1 330.0
---------- ---------- ----------
2,233.0 2,242.9 1,765.4
MANDATORILY REDEEMABLE PREFERRED SECURITY OF
SUBSIDIARY WHICH HOLDS SOLELY NON-RECOURSE
OBLIGATION OF COMPANY 473.5 486.3 507.8
REDEEMABLE STOCK
Preferred 274.6 306.2 598.4
Common 848.5 848.5 --
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 1.1 1.0 1.0
Additional paid-in capital 1,313.0 1,273.6 1,160.1
Accumulated deficit (291.5) (362.2) (885.6)
Accumulated other comprehensive income (100.8) (101.8) (109.9)
Treasury stock (1,122.4) (1,121.6) --
---------- ---------- ----------
(200.6) (311.0) 165.6
---------- ---------- ----------
$ 9,530.5 $ 9,336.2 $ 8,977.9
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
NORTHWEST AIRLINES CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended March 31
(UNAUDITED, IN MILLIONS) 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 113.2 $ 373.5
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (225.8) (125.2)
Net decrease (increase) in short-term investments 325.3 (27.2)
Other, net (29.0) (4.2)
---------- ----------
Net cash provided by (used in) investing activities 70.5 (156.6)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 399.1 250.6
Payment of long-term debt and capital lease obligations (321.1) (40.0)
Proceeds from sale and leaseback transactions 42.0 --
Other, net (9.9) (15.6)
---------- ----------
Net cash provided by financing activities 110.1 195.0
INCREASE IN CASH AND CASH EQUIVALENTS 293.8 411.9
Cash and cash equivalents at beginning of period 740.4 559.4
---------- ----------
Cash and cash equivalents at end of period $ 1,034.2 $ 971.3
---------- ----------
---------- ----------
Cash and cash equivalents and unrestricted short-term
investments at end of period $ 1,100.8 $ 1,185.9
---------- ----------
---------- ----------
Available to be borrowed under credit facilities $ 1,079.0 $ 727.5
---------- ----------
---------- ----------
</TABLE>
5
<PAGE>
NORTHWEST AIRLINES CORPORATION
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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 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 March 31, 1998, the Company had no borrowings outstanding under its
revolving credit facilities. In addition, the Company has the ability
under another facility to borrow up to $240 million using existing
aircraft as collateral. The $839 million available to be borrowed under
the revolving credit facilities along with the $240 million facility and
the $1.1 billion of cash, cash equivalents and unrestricted short-term
investments provided the Company with $2.2 billion of available
liquidity at March 31, 1998. Subsequently, on May 12, 1998, the Company
obtained a secured 364-day revolving credit facility under which, subject
to the satisfaction of certain conditions, the Company will be entitled to
borrow up to an additional $1.0 billion. In addition, the Company
provided certain collateral to secure its existing revolving credit
facilities. The Company has pledged various assets as collateral for its
revolving credit facilities, principally aircraft and international route
authorities having an aggregate book value of $2.1 billion.
Maturities of long-term debt subsequent to March 31, 1998 are $59.6
million in 1998, $51.9 million in 1999, $49.7 million in 2000, $203.7
million in 2001 and $189.8 million in 2002 (excluding the notes issued
in connection with the Company's common stock repurchase discussed in
note 5. below).
5. On May 1, 1998, NWA Corp. purchased from KLM Royal Dutch Airlines
("KLM") the remaining 18,177,874 shares of common stock which NWA Corp.
had 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 million.
The maturity of the notes is September 29, 1998, 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.
Effective on the date of the repurchase, earnings per share calculations
will not include the 18.2 million shares repurchased.
6. As of March 31, 1998, the Company had firm orders for 112 new aircraft
including 17 Airbus A320 aircraft, 50 Airbus A319 aircraft, 25 Boeing
757-200 aircraft, 16 Airbus A330 aircraft and four 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 $409.1 million in 1998,
$661.9 million in 1999, $412.4 million in 2000, $419.7 million in 2001
and $847.9 million in 2002. In addition, in April 1998, the Company
purchased three DC-10 aircraft.
6
<PAGE>
The Company also has on order 26 Avro Regional Jet aircraft with eight
scheduled for delivery in 1998, ten in 1999 and eight in 2000.
Committed expenditures for these aircraft, including contractual price
escalations, are approximately $550 million. The Company has agreed to
lease eight of the 26 aircraft to Mesaba Aviation, Inc. ("Mesaba") (in
addition to the ten currently leased to Mesaba) under its Regional Jet
Services Agreement. The Company intends to lease the remaining 18
aircraft to one or more regional commuter airline partners.
7. Beginning with first quarter 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 $72.0 million and $67.6 million for the
three months ended March 31, 1998 and 1997, respectively.
8. 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 March 31
1998 1997
----------- ---------
<S> <C> <C>
NUMERATOR:
Income applicable to common
stockholders for basic
earnings per share $ 70.8 $ 59.6
Effect of dilutive securities:
Series C Preferred Stock .2 .3
----------- ---------
Income applicable to common
stockholders after assumed
conversions for diluted
earnings per share $ 71.0 $ 59.9
----------- ---------
----------- ---------
DENOMINATOR:
Weighted-average shares outstanding
for basic earnings per share 97,784,562 101,394,340
Effect of dilutive securities:
Series C Preferred Stock 8,520,177 10,588,792
Employee stock options 1,581,071 1,377,498
----------- -----------
Adjusted weighted-average shares and
assumed conversions for diluted
earnings per share 107,885,810 113,360,630
----------- -----------
----------- -----------
</TABLE>
9. 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.
10. 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 condition or results of operations.
7
<PAGE>
11. In accordance with Rule 1-02 (bb) of Regulation S-X, the following
summary data (in millions) is presented for Northwest Airlines, Inc.,
the principal indirect operating subsidiary of the Company.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended
March 31
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating revenues $ 2,298.5 $ 2,290.4
Operating expenses 2,153.8 2,167.8
---------- ----------
Operating income 144.7 122.6
Other income (expense) (44.7) (43.8)
---------- ----------
Income before income taxes 100.0 78.8
Income tax expense 39.7 32.0
---------- ----------
Net income $ 60.3 $ 46.8
---------- ----------
---------- ----------
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
March 31 December 31 March 31
1998 1997 1997
--------- ----------- ---------
<S> <C> <C> <C>
Current assets $ 2,286.6 $ 2,015.0 $ 2,038.1
Noncurrent assets 6,430.5 6,114.6 5,830.8
Current liabilities 3,207.8 3,164.7 3,141.2
Long-term debt and obligations under capital leases 2,475.6 2,016.9 2,208.0
Deferred credits and other liabilities 1,144.3 1,191.0 879.8
Mandatorily redeemable preferred security of subsidiary 473.5 486.3 507.8
</TABLE>
See also Note R to Consolidated Financial Statements in the Annual Report.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the quarter ended March 31, 1998, the Company reported net income of
$71.0 million and operating income of $156.4 million. Diluted earnings per
common share were $.66 compared with $.53 in 1997, a 24.5% improvement.
Cash, cash equivalents and unrestricted short-term investments were $1.1
billion at March 31, 1998. Additionally, at March 31, 1998, the Company had
available $839.0 million in borrowing capacity under its revolving credit
facilities and the ability under another facility to borrow up to $240
million, providing total available liquidity of $2.18 billion.
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 %
March 31 CHG.
--------------------- ----
1998 1997
-------- --------
<S> <C> <C> <C>
Scheduled service:
Available seat miles (ASM) (millions) 23,774.4 23,054.8 3.1
Revenue passenger miles (millions) 16,801.2 16,592.4 1.3
Passenger load factor (percent) 70.7 72.0 (1.3)pts.
Revenue passengers (thousands) 12,704 12,661 0.3
Revenue yield per passenger mile (cents) 12.03 12.30 (2.2)
Passenger revenue per scheduled ASM (cents) 8.50 8.85 (4.0)
Operating revenue per total ASM (cents) (2) 9.34 9.57 (2.4)
Operating expense per total ASM (cents) (2) 8.67 9.01 (3.8)
Cargo ton miles (millions) 500.7 492.7 1.6
Cargo revenue per ton mile (cents) 33.47 34.65 (3.4)
Fuel gallons consumed (millions) 487.0 471.5 3.3
Average fuel cost per gallon (cents) 58.99 74.00 (20.3)
Number of operating aircraft at end of period 408 401 1.7
Full-time equivalent employees at end of period 49,948 47,577 5.0
</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 MARCH 31, 1998 AND 1997
Operating income increased $21.4 million to $156.4 million. The favorable
impacts of a $53.0 million increase in operating revenues and a $58.9 million
decrease in aircraft fuel were largely offset by increased salaries, wages
and benefits of $34.1 million, aircraft maintenance of $29.8 million and a
2.7% increase in other operating expense categories.
OPERATING REVENUES. Operating revenues were $2.43 billion, an improvement of
$53.0 million (2.2%). System passenger revenues (which represented 84.3% of
total operating revenues) were basically unchanged. Increases due to a 3.1%
increase in scheduled service ASMs and the inclusion of Express revenues of
$25.5 million were offset by a 4.0% decrease in Northwest's passenger revenue
per scheduled ASM ("RASM"). The decrease in passenger RASM was driven by
weaker Asian markets, the reinstatement of federal ticket taxes in March 1997
and weaker foreign currency exchange rates.
9
<PAGE>
Domestic passenger revenue, excluding Express, increased $19.1 million (1.3%)
to $1.44 billion due primarily to a 2.0% increase in scheduled service ASMs.
Domestic RASM decreased slightly due to a .9 point decrease in passenger load
factor offset by a slight increase in yield which was held down due to the
reinstatement of federal taxes on airline tickets and international
departures. See also "Other Information - U.S. TRANSPORTATION TAX." Since
early April, the Company has experienced higher than normal flight
cancellations and delays resulting from recent employee work actions in
response to the status of the Company's contract negotiations with its
unions. See also "Other Information - LABOR AGREEMENTS." If the current rate
of cancellations and delays continue, the Company believes that 1998
passenger revenues will be adversely impacted.
Pacific passenger revenue decreased by $64.2 million (12.6%) to $443.5
million due to a 14.2% decrease in Pacific RASM which was offset by a 1.9%
increase in scheduled service ASMs related to additional trans-Pacific
frequencies. The decrease in Pacific passenger RASM was due to a 10.5%
decrease in yield and a 3.2 point decrease in passenger load factor. The
decrease in yield was attributable to 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 March 31, 1998 and 1997 was
129 and 119, respectively, a weakening of the yen of 8.4%. Atlantic
passenger revenue increased $26.8 million (24.4%) to $137.0 million due to a
19.1% increase in scheduled service ASMs which resulted primarily from new
flying (including service from Mumbai and Delhi, India to Amsterdam) and a
4.4% increase in passenger RASM which was largely yield related.
Other revenues were $213.3 million, an improvement of $48.8 million (29.7%).
The improvement was largely due to increased revenue from KLM joint venture
alliance settlements and MLT Inc.
OPERATING EXPENSES. Operating expenses increased $31.6 million (1.4%).
While operating capacity increased 3.0% to 23.8 billion total service ASMs,
operating expense per total service ASM decreased 3.8%. Salaries, wages and
benefits expense increased $34.1 million (4.7%) due primarily to an increase
in average full-time equivalent employees of 4.2%. The increase in average
full-time equivalent employees was attributable to increased flying of 3.0%.
Aircraft fuel and taxes decreased $58.9 million (15.9%) due to a 20.3%
decrease in average fuel cost per gallon. Commission expense decreased by
$17.7 million (8.6%) due primarily to 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 $29.8 million (19.3%) due to $5.6 million (3.6%) related to
Express (which was not a wholly-owned subsidiary in the first quarter of
1997) and increased scheduled overhauls and timing of check cycles. Landing
fees increased $5.3 million (10.8%) due to one-time credits received in 1997.
Other expenses grew $30.3 million (6.2%) largely due to increased selling and
marketing fees, outside services, personnel expenses and MLT Inc.
OTHER INCOME AND EXPENSE. The foreign currency gains for the three months
ended March 31, 1998 and 1997 were primarily attributable to balance sheet
remeasurement of foreign currency-denominated assets and liabilities.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents of $1.03
billion, unrestricted short-term investments of $66.5 million and borrowing
capacity of $839.0 million under its revolving credit facilities and the
ability under another facility to borrow up to $240 million using existing
aircraft as collateral, providing total available liquidity of $2.18 billion.
In addition, on May 12, 1998, the Company obtained the ability to borrow an
additional $1.0 billion under a secured 364-day revolving credit facility.
Assuming the new $1.0 billion secured credit facility had been available as of
March 31, 1998, total available liquidity would have been $3.18 billion.
Net cash provided by operating activities for the three months ended March
31, 1998 was $113.2 million, a $260.3 million decrease compared with the
three months ended March 31, 1997 due primarily to the timing of pension
contributions. Investing activities in the first quarter of 1998 consisted
primarily of costs to commission aircraft that have not yet entered revenue
service, the purchase of two RJ85 aircraft and three Airbus A320 aircraft,
aircraft deposits and engine hushkitting. Investing activities in 1997
pertained primarily to costs to commission aircraft that have not yet entered
revenue service, engine hushkitting and DC9-50 interior refurbishment.
Financing activities for the three months ended March 31, 1998 consisted
primarily of the issuance of $200 million of 7.625% unsecured notes due 2005
and $200 million of 7.125% unsecured notes due 2008 and the payment of debt
and capital lease obligations. Financing activities for the three months
ended March 31, 1997 consisted primarily of the issuance of $250 million of
unsecured notes.
In 1998, NWA Corp. entered into agreements to acquire the beneficial
ownership of 9,514,868 shares of Class A Common Stock of Continental
Airlines, Inc. ("Continental"). These shares represent 15.4% of
Continental's common stock and 50.4% of its fully diluted voting power.
Consideration is expected to consist of $367.2 million in cash and 4.2
million shares of newly issued common stock. The cash is expected to be
funded from the Company's general working capital. The transaction is
expected to close by the end of 1998. For additional information regarding
the formation of a new holding company and the related corporate
restructuring, the Governance Agreement with Continental and the operating
alliance, see Note S to the Consolidated Financial Statements in the Annual
Report.
On May 1, 1998, NWA Corp. purchased from KLM the remaining 18.2 million
shares of common stock which NWA Corp. had 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.
OTHER INFORMATION
LABOR AGREEMENTS. The labor cost savings which improved the Company's 1993
to 1996 cash flow from operating activities ended in 1996. The Company's
agreements with the employee unions provided that wage scales at the end of
the Wage Savings Period snapback to August 1, 1993 levels and snap-up
pursuant to formulae based in part on wage rates and wage rate increases at
other large U.S. airlines. Consequently, at the end of the Wage Savings
Period, salaries and wages increased by approximately $340 million on an
annualized basis including $50 million for snap-ups. Management's Discussion
and Analysis of Financial Condition and Results of Operations and Note C to
Consolidated Financial Statements in the Annual Report contain additional
discussion of the labor cost savings agreements, stock issued to employees
and the related accounting treatment.
The Company's labor contract with each of its unions became amendable as each
labor cost savings agreement ended. Consequently, future labor wage rates
and costs are subject to collective bargaining. Because the terms of new
labor agreements will be determined by collective bargaining, the Company
cannot predict the outcome of negotiations at this time.
11
<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 124 yen to $1 at March 31, 1997 to 131
yen to $1 at December 31, 1997 to 133 yen to $1 at March 31, 1998. From time
to time the Company uses options and forward contracts to hedge its
anticipated yen-denominated net cash flows. At March 31, 1998, the Company
had $416.5 million (55.4 billion yen) in yen put options outstanding to hedge
approximately 90% of its remaining 1998 anticipated yen-denominated net cash
inflows. 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 March 31, 1998, the Company had hedged
approximately 32% of its remaining 1998 fuel requirements.
U.S. TRANSPORTATION TAX. The United States 10% passenger ticket tax
applicable to domestic travel, the 6.25% domestic cargo waybill tax and the
$6 per passenger international departure tax expired on December 31, 1996 and
were reinstated for tickets sold from March 7, 1997 to September 30, 1997.
The Company estimates that the reinstatement of the transportation taxes had
approximately a $70 million adverse impact on passenger revenues for the
quarter ended March 31, 1998.
The Taxpayer Relief Act enacted by Congress revised transportation taxes and
instituted new taxes for tickets for travel from October 1, 1997 to December
31, 2007. The legislation included a reduction in the domestic passenger
ticket tax to 7.5% over three years (the rate decreased to 9% on October 1,
1997) with certain rural airports subject to a 7.5% tax throughout the life
of the bill. The $6 international departure tax increased to $12 and a new
$12 international arrival tax was imposed (both began for tickets sold on or
after August 13, 1997 for travel commencing on or after October 1, 1997).
The departure tax on travel between the U.S. 48 states and Alaska or Hawaii
remained at $6. A new segment fee applicable to domestic travel began at $1
for the period from October 1, 1997 to September 30, 1998 and will gradually
increase to $3 for the calendar year 2002. Rural airports are exempt from
this segment fee, but travel between the U.S. 48 states and Alaska or Hawaii
is subject to this new tax. Both the international departure and arrival
taxes and the segment fee will be indexed each year to the consumer price
index. In addition, a 7.5% tax on the sale of frequent flyer miles was
included in the legislation. The impact of the changes is expected to
increase annualized U.S. transportation taxes collected by Northwest from
current levels by approximately $50 million resulting in an undetermined
dilution of future passenger revenue.
AIR CHINA ALLIANCE. On May 12, 1998, the Company entered into a four year
commercial cooperation alliance with Air China. The alliance will connect the
two carriers' networks and will include code-sharing, frequent flyer program
reciprocity and joint marketing. In addition, three Northwest alliance
partners (Alaska Airlines, America West Airlines and Continental) have also
entered into alliance agreements with Air China.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1.
Reference is made to Item 3, "Legal Proceedings" included in the Annual Report.
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:
<TABLE>
<S> <C>
3.1 Certificate of Amendment to Amended and Restated Certificate
of Incorporation of NWA Corp. (filed as Exhibit 2.5 to NWA
Corp.'s Form 8A/A dated April 30, 1998 (the "Form 8A/A") and
incorporated herein by reference).
3.2 Amended and Restated Bylaws of NWA Corp. (filed as Exhibit
2.6 to the Form 8A/A and incorporated herein by reference).
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Requirements.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
Form 8-K dated January 25, 1998.
Form 8-K dated February 19, 1998.
Form 8-K dated March 2, 1998.
13
<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: May 15, 1998 By: /s/ Rolf S. Andresen
--------------------------------
Rolf S. Andresen
Vice President-Finance &
Chief Accounting Officer
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Certificate of Amendment to Amended and Restated Certificate
of Incorporation of NWA Corp. (filed as Exhibit 2.5 to NWA
Corp.'s Form 8A/A dated April 30, 1998 (the "Form 8A/A") and
incorporated herein by reference).
3.2 Amended and Restated Bylaws of NWA Corp. (filed as Exhibit
2.6 to the Form 8A/A and incorporated herein by reference).
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Requirements.
27.1 Financial Data Schedule.
</TABLE>
15
<PAGE>
EXHIBIT 12.1
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three months ended
March 31
------------------
1998 1997
------- -------
<S> <C> <C>
EARNINGS:
Income before income taxes $ 115.0 $ 104.6
Less: Income from less than 50% owned investees 0.8 6.9
Add:
Rent expense representative of interest (1) 47.4 46.9
Interest expense net of capitalized interest 53.0 56.0
Interest of mandatorily redeemable preferred security holder 5.7 6.1
Amortization of debt discount and expense 2.3 1.3
Amortization of interest capitalized 0.8 0.7
------- -------
ADJUSTED EARNINGS $ 223.4 $ 208.7
------- -------
------- -------
FIXED CHARGES:
Rent expense representative of interest (1) $ 47.4 $ 46.9
Interest expense net of capitalized interest 53.0 56.0
Interest of mandatorily redeemable preferred security holder 5.7 6.1
Amortization of debt discount and expense 2.3 1.3
Capitalized interest 3.0 2.4
------- -------
FIXED CHARGES $ 111.4 $ 112.7
------- -------
------- -------
RATIO OF EARNINGS TO FIXED CHARGES 2.01 1.85
------- -------
------- -------
</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
March 31
-------------------
1998 1997
------ ------
<S> <C> <C>
EARNINGS:
Income before income taxes $115.0 $104.6
Less: Income from less than 50% owned investees 0.8 6.9
Add:
Rent expense representative of interest (1) 47.4 46.9
Interest expense net of capitalized interest 53.0 56.0
Interest of mandatorily redeemable preferred security holder 5.7 6.1
Amortization of debt discount and expense 2.3 1.3
Amortization of interest capitalized 0.8 0.7
------ ------
ADJUSTED EARNINGS $223.4 $208.7
------ ------
------ ------
FIXED CHARGES AND PREFERRED STOCK REQUIREMENTS:
Rent expense representative of interest (1) $ 47.4 $ 46.9
Interest expense net of capitalized interest 53.0 56.0
Interest of mandatorily redeemable preferred security holder 5.7 6.1
Preferred stock requirements 0.3 8.1
Amortization of debt discount and expense 2.3 1.3
Capitalized interest 3.0 2.4
------ ------
FIXED CHARGES AND PREFERRED STOCK REQUIREMENTS $111.7 $120.8
------ ------
------ ------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK REQUIREMENTS 2.00 1.73
------ ------
------ ------
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,034
<SECURITIES> 108
<RECEIVABLES> 595
<ALLOWANCES> 20
<INVENTORY> 387
<CURRENT-ASSETS> 2,480
<PP&E> 7,051
<DEPRECIATION> 1,983
<TOTAL-ASSETS> 9,531
<CURRENT-LIABILITIES> 3,094
<BONDS> 0
275
0
<COMMON> 849
<OTHER-SE> (201)
<TOTAL-LIABILITY-AND-EQUITY> 9,531
<SALES> 2,429
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<CGS> 0
<TOTAL-COSTS> 2,272
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<INCOME-PRETAX> 115
<INCOME-TAX> 44
<INCOME-CONTINUING> 71
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71
<EPS-PRIMARY> .72
<EPS-DILUTED> .66
</TABLE>
