BONANZA AIR LINES, INC. ANNUAL REPORT 1964 BONANZA AIR LINES, INC. BOARD OF DIRECTORS Edmund Converse President and Chairman of the Board of Directors. He has served as director and chief executive of Bonanza since the company was incorporated. Frank W. Beer Became a director of Bonanza Air Lines in February of 1951. He is the senior member of the law firm of Beer and Polley; director of Peoples State Bank, Mineola, Kansas; director of KOOL and KOLD radio, CBS affiliates; director of F. A. Gillespie and Sons Company, Tulsa, Oklahoma; director of Adams Hotel Company, Phoenix, Arizona. George L. Vargas One of the original incorporators of Bonanza, Mr. Vargas has served as a director since June of 1952. He is a senior partner in the law firm of Vargas, Dillon, Bartlett & Dixon; also a director of Johnson Service Co. of Milwaukee; director of Valley Bank of Nevada in Reno. Roger Converse Became a director of Bonanza Air Lines in May of 1955. He is a director of Island Farms, Inc. and Cave des Roys. His other interests include investments, public relations, and real estate. Chester M. Glass, Jr. Became a director of Bonanza Air Lines in January of 1959. Mr. Glass has been active in the investment banking business for 35 years. William D. Pabst Elected to the Bonanza Board of Directors in March of 1959. He is executive vice president and general manager of San Francisco-Oakland Television, Inc.; also president and director, St. Claire Finance Corporation. G. Robert Henry Elected to the Bonanza Board of Directors in March of 1959. He has been Executive Vice President of Bonanza since 1953 and associated with Bonanza top management since 1949. James D. Moyle Elected to the Bonanza Board of Directors in February of 1960. A Salt Lake City industrialist, Mr. Moyle is president and director, Superior Oil Company of Utah; president and director. Silver Lake Company; vice president and director. Ideal National Insurance Company, Industrial Uranium Company and Empire Capital Corporation. Robert O. Reynolds Became a director of Bonanza Air Lines in May of 1962. He is president of Golden West Broadcasters and Golden West Baseball Co., owners of the Los Angeles Angels baseball team; also president of Board of Trustees, the Webb School of California. He is a member of the advisory board of the Guaranty Bank; and vice president and director, Los Angeles Rams and Gene Autry Hotel Co. COMPANY OFFICERS EDMUND CONVERSE, President G. ROBERT HENRY Executive Vice President MYRON W. REYNOLDS Vice President, Operations ROBERT J. SHERER Vice President, Finance LARRY DECKER Vice President, Traffic and Sales JOHN D. LINDSAY Vice President, Advertising and Publicity DONALD R. NEILSON Vice President, Research and Development and Assistant Secretary RICHARD A. ROGERS Vice President, Industrial Relations ARTHUR M. TAYLOR, JR. Vice President, Legal and Secretary JACK ARANT Vice President Governmental Affairs NOLAND H. RYAN Vice President Community Affairs FRANK R. CHABOT, Treasurer THOMAS J. VAN BOGART Controller and Assistant Secretary WILLIAM C. BURT Assistant Secretary FINANCIAL AND OPERATING HXGHUGHJS / Calendar Years 1960-1964 Total operating revenue' Earnings before taxes' Net earnings' Net earnings per share ' ^ Gross annual payroll . g Revenue passenger miles per employee Available seat miles flown Revenue passenger miles flown . Passenger load factor Reflects adjustments related to retroactive subsidy determinations, 1964 1963 1962 1961 $14,085,367 $12,762,543 $10,945,839 $ 9,282,366 $ 1,280,166 $ 1,695,269 $ 1,222,980 $ 914,054 $ 677,166 $ 874,129 $ 711,144 $ 422,054 $ .65 $ .96 $ .78 $ .47 $ 5,541,456 $ 4,682,436 $ 4,024,365 $ 3,575,430 214,777 215,719 190,014 156,369 292,480,000 241,284,000 206,849,000 166,821,000 160,653,000 139,139,000 108,688,000 79,748,000 54.9% 57.7% 52.5% 47.8% -Based on average outstanding shares of stock. 1960 $ 8,178,132 $ 226,271 $ 107,871 $ .12 $ 3,196,299 129,120 159,789,000 63,527,000 39.8% 3 TO OUR STOCKHOLDERS: The year 1964 saw Bonanza enter into the second phase of its equipment modernization program with the completion of the companys second major equipment financing program. As pre- viously reported, approximately $11,000,000 is required to finance the three Douglas DC-9 fan/jet aircraft ordered during 1963. Funds were made available to the company in May of 1964 through term loan agreements aggregating approximately $6,500,000, and from a public offering of $4,500,000 of 514% convertible sub- ordinated debentures and common stock of the company. Douglas Aircraft Company reports that con- struction of the DC-9 is progressing ahead of schedule. The first aircraft came off the assembly line in early January 1965, one month ahead of schedule. First flight tests were conducted by Douglas on February 25, and were reported to be extremely gratifying. The companys first DC-9 is expected to be delivered by February of 1966. We are, of course, looking forward to that time. In order to accomplish an orderly assimilation of the DC-9 into the companys operations every department in the company is busy with neces- sary preparations. Present plans call for a major expansion of the companys maintenance facili- ties, including a new hangar and shop facilities designed to accommodate the DC-9. Training programs for pilots and mechanics have already been developed. During 1964 net earnings before special items amounted to $677,166 or 65 ^ per average number of shares outstanding, as compared to $874,129 and 96^ per outstanding share during 1963. Earnings for 1964 were affected somewhat by an unrestricted low fare program instituted by a competitive carrier in the Las Vegas-Los Angeles market, although by mid-1964 effective remedial action was instituted by the company. A tern- porarily depressed Salt Lake City economy, resulting from major labor strikes, added to the problem. A 26% increase in service over the com- panys system in late 1963 resulted in increased costs; due to the normal lag in related traffic development these increases were not immedi- ately matched by additional revenues. As a result of these various factors the 12.6% increase in commercial revenue during 1964 was not re- fleeted in an improvement in net earnings. When viewed in the light of the companys previous year, an outstanding one I might add, the finan- cial results would seem to be less attractive. How- ever, when compared with the overall progress of the company, 1964 emerges as the third most prosperous year in the companys history, exceed- ing the accumulated earnings for the first 16 years of operation (1946-1961). Bonanza continues to rank among the leaders in the local service indus- try and again led that industry in passenger load factor in 1964. During November of 1964 the company suffered the loss of one of its F-27As in a tragic accident during a snowstorm near Las Vegas, Nevada. This was the first fatal accident in this companys 19 year history. The matter is presently under study by the Civil Aeronautics Board for their determination of probable cause. Late in 1964 the company negotiated with Fairchild Hiller Corporation for the purchase of two additional F-27As to be delivered early in 1965. One is a replacement aircraft and the second is needed to serve the additional traffic requirements on the companys system. In closing it is appropriate to say that in my judgment the government approval in 1964 to purchase the DC-9 fan/jet airliner, together with the successful completion of the necessary financ- ing program, constitute, in all likelihood, what will be looked upon as the most significant step forward in this companys entire history. Sincerely, PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS A NEW ERA G. ROBERT HENRY While Annual Reports are largely retrospective in nature there sometimes occurs in the life of a company a change so fundamentally affecting its future course that prospective treatment is required. Such is the nature of the companys decision to purchase the Douglas DC-9 fan/jet aircraft and the governments 1964 approval of that purchase. This is but a part of the com- panys long range program, but it is such a vital part that it warrants special consideration in this report. To place the DC-9 in its proper perspec- tive, however, requires a brief discussion of the nature of that long range program and the poli- cies and objectives that underlie it. It is to that purpose that this section will be devoted. Bonanza is dedicated to the principle that the inherent advantages of air transportation must be extended to an increasingly broader base of our national populace. Two things are absolutely essential to the achievement of this objective: Constant progress in the operat- ing efficiencies of the industry and constant improvement in the safety of air travel. Low cost, of course, permits low fares which are a basic requirement for the greatly broadened use of air transportation. Reliability of equipment and personnel provide the obvious key to air safety. The emergence of the jet aircraft has per- mitted miraculous progress in these critical areas of cost and reliability. Its full cost achievements are as yet beyond count. Its mating of man and advanced flight equipment technology is pro- ducing an incredible reliability factor. These are a part of the promise that the DC-9 holds for Bonanza. It will bring to the high density short-haul markets of Bonanza all of the bright prospects that the larger jets offer in the major long-haul markets of the domestic trunk airlines. Great masses of the public will be bene- fitted by the course Bonanza is setting. We are still faced, of course, with the problem of subsidy a not unkindly word if viewed properly as a developmental tool to be employed in the creation and maintenance of a required but not self-sustaining public service. Generally speaking, though, subsidy should be considered transitory in nature, as it was in the case of the trunk airlines and the railroads. It should be used only as a means of sustaining a public service until it becomes possible to convert it into a self-sufficient enterprise. Bonanza now looks forward to that opportu- nity and prospect. Again the Douglas DC-9 fan/jet aircraft is a key factor. The DC-9, in and of itself, is expected to permit substantial reduc- tions in subsidy in the years ahead. Its antici- pated efficiency and reliability, and its expected generation of new traffic through its superior performance of a highly attractive public service are expected to reduce materially the companys need for subsidy support. To eliminate entirely that need, however, it is the conviction of the company that further improvements in route structure and operating authority are required. Such improvements can only be obtained by grant from the Civil Aero- nautics Board. While this generally involves the processing of a long, intricate and not always productive proceeding, it must be remembered that it is the responsibility of the CAB to foster and develop a sound national air transport system in accordance with the dictates of the public convenience and necessity! Bonanza is fully cognizant of the responsibil- ities of the Civil Aeronautics Board. Bonanza recognizes also that the company itself has a basic obligation to the CAB, the public and its own stockholders and employees. That obliga- tion is to continue to present to the CAB a full and intelligent opportunity for that agency to meet its assigned regulatory and developmental responsibilities, in so far as those responsibilities relate to the role and future of this company in the overall pattern of the nations air transport services. Guided by its deepest convictions respecting public service and managerial responsibility the company intends in the near future to present its program for subsidy elimination to the Civil Aeronautics Board. It will do so in the hope and expectation that the public convenience and necessity benefits to be derived from this pro- gram are sufficiently great and challenging to warrant the CABs full endorsement of priority consideration and ultimate approval. The criteria which this route program must embrace in order to meet the high standards deemed essential by this company are in sub- stance as follows; 1. The proposals must and will lead to improved public service in the area involved. 2. The proposals must and will greatly stimu- late the public use of air transportation in the markets affected. 3. The proposals, either separately or in combi- nation, must and will have no unduly adverse impact on the economic welfare of any exist- ing scheduled airline operating in the area involved. 4. The proposals must and will take full advan- tage of the extraordinary efficiencies and attractions of modern jet equipment such as the DC-9. 5. The new air service patterns to be developed must and will effectively and efficiently inte- grate into the companys existing services. 6. Except to the degree of economic self- sufficiency to be obtained, the proposals must not and will not present a significant departure from the character of the services currently being provided by the company. 7. The proposals must and will be designed to eliminate eventually the companys entire need for subsidy support from the Civil Aero- nautics Board. This is an attainable program. Concurrence in it by the Civil Aeronautics Board, however, is an obvious prerequisite to attainment. The company will soon present such a program and will vigorously urge its consideration and approval by the Civil Aeronautics Board. Perhaps a word of caution should be expressed with respect to a full understanding of the program. The program should not be misconstrued to suggest that Bonanza will not continue to provide and continue to improve its existing public services. Nor that Bonanza is not willing to provide any other public service that the Board should find required by the public convenience and necessity, even though such service requires subsidy support. Also it must be noted that there may be occa- sions when the company finds itself required to seek a subsidized new route authority that it deems required in the long run for the appro- priate establishment and preservation of a sound route structure, even though a subsidy require- ment would attach thereto in the developmental stages of that route segment. It is the company policy, however, to seek to establish a sound route structure in which the stronger components will permit our own under- writing and support of the weaker markets required to be served in the public interest. In summary it is the unequivocal conviction of the company that the Douglas DC-9 aircraft will soon permit your company a flight from the present economic and public service plateau SALES AND ADVERTISING LARRY DECKER The companys advertising and traffic pro- motion efforts were employed with considerable diversity during 1964. Numerous additions and improvements in customer service were directed to all segments of the system. Each of these efforts received substantial advertising support. The DC-9 purchase and associated activities in preparation for its delivery were the subject of an appreciable amount of Bonanza publicity during the year. Additionally, preparations are being made to support the many activities which will accompany the companys entrance into the pure jet field. These promotion and publicity programs will commence in 1965, and continue on through 1966 when the DC-9 becomes part of the companys fleet. In line with the companys continuing sales program designed to expand the companys sales effort to its maximum efficiency, and as a result of increased traffic potential over the past several years, sales areas covered by district sales personnel were expanded during 1964 into Idaho, Montana, northern California, Texas and New Mexico. The several vigorous advertising programs normally pursued through newspaper, outdoor and radio media were supplemented by special VEGAS Edmund Converse, Bonanza President, is shown speaking at a press luncheon in Tokyo in November, 1964. This meeting was part of the festivities that attended the opening of the companys new sales office in the world-famed Imperial Hotel. 6 7 JOHN D. LINDSAY impact programs directed toward new services and potential new traffic. BonanzaLand and the Visit U.S.A. programs both continue to attract large numbers of for- eign visitors to the area served by Bonanza, and the companys effort along these lines was fur- ther strengthened with the opening of a sales and information office in Tokyo, Japan. The Orient is expected to be a major source of addi- tional traffic in the future. The new BonanzaLand film completed its second year of circulation, and in November of 1964 this outstanding film won the Golden Eagle award of the Council for International Non-theatrical Events (CINE). The award was presented at ceremonies at Washington, D. C. In the fall of 1964 Bonanza embarked on another effort to improve passenger service by introducing cocktail service aboard selected flights throughout the system. The service has proved to be very successful. Additionally, the fifth hostess exchange pro- gram has been finalized and the company will during 1965 exchange a hostess with Alitalia. This program has been very beneficial to the company. (^12 Jefc-props daily LAo V cbAo 13 . EVERY FUGHT! NO RESTRICTIONS! You will fly DC-9 fan-jets on Bonanza Air Lines BONANZA AIR UNES Eli \ NEW ON BONANZA AIRLINES NONSTOP IDS ANGELES NEW AnrCRNOON NONSTOP GETS YOU THERE IN JUST S4 MINUTESf 8 ROUTE DEVELOPMENT DONALD R. NEILSON The companys continuing efforts to maintain its position among the leaders in the local service industry require a continuing analysis of the companys route structure, service needs of the communities we serve, and the methods of pro- viding for these needs through an efficient and economic operation. The task of sound route development in the ever expanding southwest has as its goal a twofold purpose: a constantly improving public service and the ultimate elimi- nation of the companys reliance on federal subsidy. These goals require the closest possible coordination of research, community relations and governmental activities. During 1964 with these goals in mind the company filed two significant route applications, a Las Vegas-Grand Canyon nonstop application and a Santa Ana/Laguna Beach-Las Vegas nonstop application. The first proceeding is designed to link Las Vegas and Grand Canyon with direct air service, thus tying together these two major tourist areas. Additionally this kind of service will provide a much needed convenience to the traveling public throughout the Los Angeles-Las Vegas-Grand Canyon-Phoenix area. JACK ARANT Bonanzas certification for the Las Vegas-Grand Canyon route has been recommended by the Bureau of Economic Regulation of the Civil Aeronautics Board. The Santa Ana application was filed in the conviction that this authority was necessary to serve the growing public need NOLAND H. RYAN 9 tNTERNi '