Chicago and Southern Air Lines Annual Report 1947

CHICAGO AND LINES, INC.
YEAR ENDED DECEMBER 3 I, I 947
,,
1 9 4 7 THE STOCKHOLDERS
CHICAGO AND SOUTHERN AIR LINES, INC.
General Offiees Muniripal Airport MemJthis 2, Tennessee
~~~~
~~ TO SAN JUAN
~4
TO CARACAS
CHICAGO AND SOUTHERN AIR LINES, INC.
GENERAL OFFICES, Memphis Municipal Airport, Memphis 2, Tennessee
CORPORATE OFFICE, 100 West Tenth Street, Wilmington, Delaware
------------------------~ Wtl?'.->
DIRECTORS .
CARLETON PUTNAM
SIDNEY A. STEWART
JUNIUS H. COOPER
L. RAYMOND BILLETT
W. HARRY JOHNSON
OFFICERS
CARLETON PUTNAM, President
SIDNEY A. STEWART, Executive Vice President
JUNIUS H. CooPER, Vice President-Treasurer
R. S. MAURER, Secretary
T. F. HAMBLETON, Assistant Treasurer
R. S. SCRIVENER, Assistant Treasurer
E. MURRAY, Assistant Secretary
DIVISION MANAGERS
J. A. YouNG, Operatiom Manager
T. M. MILLER, General Traffic and Sales Manager
M. H. JONES, Engineering and Maintenance Manager
W. T. BEEBE, Personnel Manager
Transfer Agent
Mississippi Valley Trust Company, Broadway and Olive Street, St. Louis, Missouri
Co-Transfer Agent
Northern Trust Company, South LaSalle and West Monroe Streets, Chicago, Illinois
Registrar
Boatmen's National Bank, Broadway and Olive Street, St. Louis, Missouri
Co-Registrar
American National Bank and Trust Company of Chicago, Chicago, Illinois
[3
CARLETON PUTNAM
President
REPORT Of THE PRESIDENT
TO THE STOCKHOLDERS
DOMESTIC OPERATIONS
During 1947 your Company completed its return to a normal,
peacetime service pattern, concluding the expansion and reconversion
program which was begun on July 1, 1946. The many problems inci-
dent to placing in service our specially modernized fleet of DC-4 air-
planes were solved to the extent that for a recent thirty day test period
the service troubles per thousand hours for Chicago and Southern's
DC-4's were 70 per cent less than the average for all air lines and 45
per cent less than for any other operator. In the number of mechanical
flight interruptions, of which there were 264 industry-wide, Chicago
and Southern had the best record of all, having experienced no
mechanical flight interruptions for the 30 day period.*
*Composite Service 'Trouble Summary for DC-4 'Type Aircraft prepared monthly by the Douglas Aircraft
Company.
4]
The equally difficult responsibility of gauging schedules to relieve
the excessive congestion of wartime load factors and to restore the
seat-mile offering to a level compatible with public convenience, with-
out at the same time creating an over-supply, was likewise discharged.
Our domestic load factor for 1947 was 58.6% as compared with 50%
for 1941, the last prewar year. In no prewar year in the Company's
history has it ever been as high. A load factor in the 60-65% range is
considered the maximum consonant with the public interest in peace-
time, and your Company closely approached this range, although on a
much larger volume of business than that carried in 1941, revenue
passenger miles flown in 194 7 being nearly five times greater. For the
twelve years 1935 through 1946 our load factor averaged 14 percentage
points below the industry as a whole. For 1947 the discrepancy was
only 8 points.
The statistics in the following table compare the two postwar
years with the two war years immediately preceding them and with
the last prewar year:
COMPARATIVE OPERATING STATISTICS
1947 1946 1945 1944 1941
Revenue plane
miles flown .............. 7,117,568 8,107,897 5,279,336 2,882,381 2,327,573
Available seat
miles flown .............. 192,132,278 196,289,556 109,596,160 59,653,713 46,812,882
Number of revenue
passengers .................. 283,319 350,296 197,541 104,906 62,125
Revenue passenger
miles .......................... 112,564,277 137,843,727 86,876,826 49,242,103 23,414,438
Load factor .................. 58.6% 70.2% 79.3% 82.6% 50.0%
Air mail ton miles 386,764 363,731 463,385 471 ,740 151,822
Air express and freight
ton miles .................. 1,050,473 592,431 370,774 230,522 54,024
It is interesting to note that while there was some recession from
the peak passenger traffic of 1946 when the wartime displacement of
persons throughout the country was in pro!=ess of adjustment, 1947
presents a startling development over the last preceding peacetime
year as well as over the last year of the war. Revenue passenger miles
were 4.8 times 1941, air mail ton miles 2.5 times, and air express and
freight ton miles 19.4 times.
It is believed that had it not been for the unfortunate series of
accidents on other air lines in the spring of 1947 even the passenger
mile volume of 1946 might have been sustained. Crashes appear to
affect a short-haul carrier more seriously than other air lines since the
relative disadvantage of train travel between the points it serves is not
as pronounced.
[5
During 1947 your Company completed its eleventh year without
an accident.
FOREIGN OPERATIONS
Since service over the New Orleans-Havana segment of our Carib-
bean system did not begin until November I, 1946, no adequate
statistical comparisons can be made with 1947. For 1947 the figures
were as follows:
Revenue plane miles flown....................................................... 473,256
Available seat miles flown ........................................................ 19,747,049
Number of revenue passengers................................................ 9,767
Revenue passenger miles ............................................................ 6,699,985
Load factor .................................................................................. 33.9%
Passengers per plane mile ....... : 14.1
Air mail ton miles........................................................................ 1,448
Air freight ton miles.................................................................. 65,984
Plans for extending operations beyond Havana to both Venezuela
and Puerto Rico are in suspension pending clarification of the rate
policies of the Civil Aeronautics Board. The legal situation remains as
outlined in my report of last year. We have had another informal con-
ference with the Board and, after further surveys, have succeeded in
reducing our mail pay need estimates somewhat below those previously
presented. What action the Board may take on these revised estimates
cannot be determined at this writing, but we are hopeful of being able
to extend our service, at least on the Caracas leg, in the near future.
EARNINGS
Civil Aeronautics Board procedures to determine your Company's
mail rate for both 1946 and 1947 are still incomplete, and consequently
it is impossible to ascertain its earnings position. The financial state-
ments at the end of this report must be read with this in mind. They
are based upon mail pay under temporary rate orders which were
issued for the sole purpose of assuring your Company's solvency pend-
ing the time required for study and determination of a permanent
rate. In your Management's judgment the Civil Aeronautics Act is
clear in its mandate to the Board to fix permanent rates which will
enable carriers "under honest, economical and efficient management,
to maintain and continue the development of air transportation ... "
(Sec. 406b) . When such a rate has been finally determined for Chicago
and Southern a supplementary financial statement will be sent you.
6]
Meanwhile it seems proper to advise you that the Report of the
President's Air Policy Commiss10n, dated January 1, 1948, contains the
following recommendations:
"The Government has had a policy of encouraging the development of an
air transport system in this country ever since 1918 ... The Congress
recognized that a strong air transport industry was necessary for national
defense, for American commerce and for the postal service, and accord-
ingly enacted the policy of governmental financial aid to the air lines ...
"Throughout the war the air lines were financially strengthened by military
contract work plus abnormally high load factors ... Although some air
line problems of l 947 may differ from those of the prewar period, the
over-all situation is the same: The revenue from passengers and cargo, plus
a revenue for the carriage of the mail roughly equal to the passenger
rate, will not support the operations of many of the companies. If they
are to continue in operation and start again up the ladder toward self-
sufficiency the Government will have to increase the mail rates ... There
is no need to change the law in this respet:t. It already is drawn to cover
exactly such a situation ...
"We consider that direct Government financial aid to commercial air lines
is fully justified on grounds of national security and economic welfare.*
We believe the air transport system of this country can, with such aid now,
become self-supporting in the future. We are convinced that any impartial
investigators of air transport would endorse the use of public funds to ob-
tain such a sound air transport system. This maans the continued granting
of subsidies to air lines for an additional period."
Your Management does not believe that the stockholders, the pub-
lic, nor the Congress need have any concern over this situation. The air
transport industry has received less government aid, and has paid back
what aid it has had faster, than any other transportation medium in
history. Indeed the taxpayer has actually gained cash as a result of the
transaction since the income to the Post Office Department from the
sale of air mail stamps has substantially exceeded all payments to air
carriers, all added costs of the Post Office Department connected with
the air mail service, and all the air lines' share of maintaining the
federal airways. Under such circumstances one well may question the
use of the word "subsidy" in connection with government payments to
air carriers even though those payments exceed on a ton-mile basis
the rate charged for passengers and express.
It also seems pertinent to remind the stockholders that Chicago
and Southern's "break-even need" in mail pay, expressed in terms of
total service performed under the mandate of the Act, has decreased
from 23.9c a ton mile in 1941, the last preceding year of normal, peace-
time operation, to 15.3c in 1946 and 13.4c in 1947. Adjusted for the
* Italics ours.
[7
decline in the value of the dollar since 1941, these figures become 23.9c
for 1941, 11.6c for 1946, and 8.9c for 1947, a reduction of 63%.
It would seem sufficiently apparent that not only is the total
situation sound from an industry-wide standpoint but that the trend,
even in the case of a relatively small company like Chicago and
Southern, is surprisingly gratifying.
Turning now to the temporary and incomplete financial state-
ments submitted herein, the following summary table may serve as a
basis for comment:
Condensed Comparative Income Statement
Twelve months ended
Dec. 31, 1947 Dec. 31 , 1946
Revenue miles flown.................................................................... 7,590,824
Operating Revenue:
Passenger and excess baggage ............................................ $6,229,475
Mail............................................................................................ 1,385,052
Express and freight.............................................................. 354,952
Miscellaneous............................................................................ 71,825
Total operating revenues ............................................................ $8,041 ,304
Total operating expenses............................................................ 8,808,914
Net loss from operations .......................................................... $ 767,610
Other deductions (net) ................................................................ 32,255
Net loss before refund of Federal income taxes ................ $ 799,865
Refund of Federal income taxes for 1944 and 1945 ............... .
Net loss .......................................................................................... $ 799,865
Denotes red figures.
8,182,014
$6,761 ,046
1,212,786
222,667
24,147
$8,220,646
9,445,646
$1,225,000
17,891
$1,242,891
237,211
$1,005.,680
It will be seen that although operating revenues declined $179,342
between 1946 and 1947, costs were reduced by $636,732 with a con-
sequent $457,390 reduction in operating loss. Operating economies
have been progressive and continuous despite rapidly ris.ing costs. This
program has unfortunately required the temporary suspension of
various promotional and developmental efforts and re-equipment
plans, but it indicates the extent to which adaption to the emergency
rate situation has been possible. Seat-mile costs have been reduced from
5 cents for the last half of 1946 to 4.50 cents for the first half of 1947,
and to 3.85 cents for the last half of 1947. Expressed in terms of the
1946 dollar these figures become 5, 4.28, and 3.50 respectively, or a
total reduction of 30 per cent. Meanwhile, although revenue per seat
mile has also fallen, the net loss from operations has been reduced
from .92 cents to . 17 cents.
Another index of our retreHchment program 1s provided by the
8]
total number of our employees. In October, 1946, this figure was 2,174.
By January, 1948, it had declined to 1,373, a reduction of 801.
Certain comparative revenue and expense statistics for the last
prewar year, the last two war years, and the first two postwar years
follow:
Comparative Revenues and Expenses for five Years
CENTS PER PLANE M:ILE
1947 1946 1945
Revenue miles flown.......... 7,590,824 8,182,014 5,279,336
Operating Revenue:
Passenger and excess baggage 82.06 82.63 82 .. 91
Mail .................................... 18.25 14.82 5.25
Express and freight... ..... 4.68 2.72 3.21
Miscellaneous .................. .95 .30 .48
Total operating revenue .. 105.94 100.47 91.85
Total operating expense .. 116.05 115.44 86.43
--
Profit or loss .................... 10.11 14.97* 5.42
Denotes red figures.
1944
2,882,381
88.30
9.78
3.72
.43
102.23
94.71
- -
7.52
1941
2,327,573
46.41
26.27
1.44
.24
74.36
74.51
.15*
Translated into seat miles to compensate as far as possible for the
introduction of DC-4 equipment, this table reads:
CENTS PER SEAT MILE
1947 1946 1945
Available Seat Miles (000) .... 211,879 198,595 109,596
Operating Revenue:
Passenger and excess baggage 2 . .94
Mail.................................... .65
Miscellaneous.................... .21
Total operating revenue 3.80
Total operating expenses 4.16
Profit or loss.................... .36*
Denotes red figures.
3.40
.61
.12
4.13
4.76
.63*
3.99
.25
.18
4.42
4.16
.26
1944 1941
59,654 46,813
4.27 2.31
.47 1.31
.20 .08
-
4.94 3.70
4.57 3.71
-
.37 .01
It is obvious that, after the above adjustment for the larger type of
planes and the additional service rendered per plane mile, a mail rate
equivalent to the one received in 1941 would have afforded us a sub-
stantial profit in spite of sharp increases in costs, and the decline in
our break-even need is again apparent. Emphasis is placed upon this
point since the financial difficulties of the air lines have been attrib-
uted in uninformed quarters to many sources other than the real one,
and it is well to realize the simplicity of both the cause and cure of the
current situation.
A short comment may be appropriate regarding our New Orleans-
Havana route from an earnings standpoint. Segregated from the rest
of our system for accounting analysis, it shows a loss for 1947 of $41,417
based on its current temporary mail rate of 95 cents. This loss amounts
[9
SIDNEY A. STEWART
Executive Vice President
to 8.75 cents a plane mile and .21 cents a seat mile, comparea with
10.20 cents and .38 cents respectively for the domestic operation. Pas-
senger income was 94.56 cents a plane mile compared with 80.32 cents
domestically. Seat-mile costs were 4.84 cents against 4.09 cents do-
mestically.
OUTLOOK FOR 1 948
The financial destiny of your Company is for the moment very
nearly out of your Management's hands. Every economy consistent
with a safe operation and a proper 5tandard of service to the public
has been effected. In spite of the fact that there is only one air carrier
smaller than Chicago and Southern operating DC-4 equipment do-
mestically, your Company nevertheless has achieved a current level of
seat-mile costs not only far below this one, but substantially below the
average of the indmtry as a whole.
Our mail rate determinations will consequently be decisive. We
expect them. to be rendered in three parts. The first, which we believe
will cover present and future domestic operations, we hope will be
10]
JUNIUS H. COOPER
Vice President-Treasurer
issued in the form of a show cause order about April 15. The second
should cover the developmental years 1946 and 1947 domestically and
should be rendered by mid-summer. The third will encompass those
portions of our foreign routes which are in operation at the time the
decision is made and may not be earlier tfu.an 1949. Any significant
changes in Gur mail rate structure will be communicated to you as they
occur.
On November 4, 1947, your Company found it necessary, because
of the long delay in settling both its forward and retroactive mail rates,
to cancel its order for seven Martin 2-0-2's. However, this cloud has not
been without its silver lining as it has enabled us to take stock of the
total equipment situation and to observe the operation, both in service
and on test, of this and other airplanes. Your Management intends to
keep its fwture equipment arrangements fluid until it is satisfied of the
long-term suitability of the replacement it chooses for the DC-3. Mean-
while the DC-3 is continuing to render its cust.omary dependable
service aRd, teamed with our specially modernized DC-4, remains an
adequate stop-gap ship for a short-haul system.
[ 11
NEW ROUTE AWARDS
During 1947 the Civil Aeronautics Board acted favorably on
three of your Company's new route proposals. It granted the Com-
pany's application to operate direct non-stop flights between Little
Rock and St. Louis subject to the restriction that through-flights serv-
ing both Chicago and Houston, must also serve Memphis. Flights over
this cut-off were inaugurated on July 1, 1947. The Board also granted
the Company's application to operate a new route between Evansville
and Chicago via Terre Haute. Evansville-Chicago service was in-
. augurated on ~eptember 15, 1947, and service to the intermediate
point Terre Haute was begun on November 1, 1947. In addition, the
Board made permanent the Company's temporary authority to serve
El Dorado, Arkansas, and also authorized the Company to serve Hot
Springs, Arkansas, as an intermediate point between Little Rock and
El Dorado. Service to Hot Springs was inaugurated on January 9, 1948,
with direct schedules to Chicago over the Little Rock cut-off.
NEW ROUTE APPLICATIONS
The status of our applications for new routes now pending before
the Civil Aeronautics Board is as follows:
Application Granted-Reconsideration Pe0
nding
KANSAS CITY-MEMPHIS-fl.ORIDA CASE
In this proceeding a route was awarded to your Company between Memphis
and Kansas 'City via Springfield, Missouri. On petition of various parties, the
Board reopened the case to receive additional evidence and to determine
whether, on the basis of such evidence, the route should be awarded to an-
other applicant. The Company is vigorously defending the original award, both
on procedural grounds and on the merits.
Application Denied-Reconsideration Pending
MISSISSIPPI VALLEY CASE
In this proceeding various applications proposed by the Company were denied.
A petition asking rehearing and reconsideration of the proposed New Orleans-
Houston service has been filed with the Board, but no action has been taken
upon this petition at this date.
Hearing Concluded-Awaiting Examiner's Report
fOREIGN ROUTE AMENDMENT
This is an application proposing elimination of Camaguey, Cuba, from the
- route certificate and the addition of Kingston, Jamaica, on the Havana, Cuba-
San Juan, Puerto Rico segment of the route.
12]
t
REMOVAL OF CHICAGO-HOUSTON RESTRICTION
As outlined in the preceding section, all flights serving both Chicago and
Houston must also serve Memphis. The Company seeks removal of this restric-
tion in order that through-plane Chicago-Houston service may be operated
over the "Little Rock Cut-Off" routing.
Awaiting Pre-Hearing Conference
MONROE-ALEXANDRIA CASE
This application seeks the addition of Monroe and Alexandria, Louisiana, as
additional intermediate points between Memphis and Houston on Route 8.
NEW ORLEANS-HOUSTON-WEST COAST PROCEEDING
This application seeks a route from New Orleans, via Baton Rouge, Louisiana;
Beaumont-Port Arthur, Houston, Austin, San Antonio, Del Rio, Pecos and El
Paso, Texas; Nogales, Tucson, and Phoenix, Arizona; and (a) beyond Phoenix
to Los Angeles, California via El Centro, San Diego, San Bernardino and Long
Beach, California; and (b) beyond Phoenix to San Francisco, California, via
Prescott, Arizona, Boulder City, and Los Vegas, Nevada; Bakersfield, Fresno,
Stockton and Oakland, California.
HOUSTON-DALLAS-FORT WORTH PROCEEDING
This application seeks a route between Houston and Dallas-Fort Worth.
FOREIGN ROUTE AMENDMENTS
These consist of an application to serve Chicago as a co-terminal with New
Orleans and Houston and an application proposing service to Maracaibo as an
intermediate point between Curacao and Caracas, as well as extension of the
San Juan and Caracas segments to Port of Spain, Trinidad.
While all of the above-listed applications are active, no assurance
can be given as to which, if any, will be granted.
ANNUAL MEETING
The annual meeting of stockholders will be held at the Com-
pany's General Office at the Municipal Airport, Memphis, Tennessee,
at 2 p.m. on Tuesday, May 4, 1948, for the purpose of electing a
Board of Dire~tors for the ensuing year and transacting such other
business as may come before it. Notice of this meeting is enclosed
herewith and it is hoped that you will be able to be present.
Respectfully submitted,
~CZ~
By order of the Board of Directors
March I, 1948.
[ 13
President
CHICAGO AND SOUTHERN AIR LINES, INC.
ASSETS
1947
CURRENT ASSETS:
Cash ............................................................................................................... $1,463,058
United States Government securities, at cost... .. .
Receivables from-
Air lines, customers, agencies, etc. ....................... .
United States Government.. ....................................... .
Claims for refund of prior years Federal
income taxes ............................................................................. .
Materials and supplies, at average cost... ................. .
532,188
242,802
29,912
207,582
1946
$ 711,161
1,168,974
592,628
1,069,912
236,547
153,963
Total current assets ............................................................ $2,475,542 $3,933,185
OTHER ASSETS AND DEFERRED CHARGES:
Advance payments on flight equipment... ............... $ $ 189,698
172,940
38,075
Prepayments ......................................................................................... .
Miscellaneous
229,511
46,880
$ 276,391 $ 400,713
BALANCE SHEETS-DECEMBER 31, 1947 AND 1946
LIABILITIES
1947
CURRENT LIABILITIES:
Notes payable to banks, 2, % (Note 3) ............ $ 500,000
Accounts payable........................................................................... 492,889
Traffic balances and deposits payable......................... 398,004
Other current and accrued liabilities........................ 36,245
Total current liabilities ............................................ $1,427,138
NOTES PAYABLE TO BANKS,
1946
$ 500,000
1,046,124
432,833
92,870
$2,071,827
2,%, due after one year (Note 3) .............................. $ 560,000 $1,160,000
UNEARNED TRANSPORTATION REVENUE$ 94,694 $ 145,283
OPERATING PROPERTY AND EQUIPMENT: CAPITAL STOCK AND SURPLUS:
Flight equipment ............... , .............................................................. $4,138,655 $4,049,691
Other property and equipment.......................................... 954,159 774,93,5
Work in progress.............................................................................. 356,821 215,934
$5,449,635 $5,040,560
Less-Reserves for depreciation (Note 2) ............... 2,807,842 1,877,589
$2,641,793 $3,162,971
FRANCHISES AND GOOD_
WILL.. ........................................ $ $
$5,393,727 $7,496,870
The accompanying notes consti-tute
14]
Capital stock - authorized 650,000 shares,
without nominal or par value; issued and
outstanding 509,326 shares ............................................... $4,893,645 $4,831,102
Stock purchase warrants......................................................... 8,000
Earned s u r p I us (deficit*) since May
23, 1938 (Note 1) .................................................................. 1,581,750* 719,342*
$3,311,895 $4,119,760
$5,393,727 $7,496,870
Denotes red figures.
an integral part of these statements
r 15
-+5'. ~ '
CHICAGO AND SOUTHERN AIR LINES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1947 AND 1946
1947 1946
OPERA TING REVENUES:
Passenger and excess baggage (Note 5) ........................ $6,229,475
Mail (Note 1) ........................................................................ 1,385,052
Express and freight............................................................ 354,952
Miscellaneous (net).............................................................. 71,825
Total operating revenues ............................ $8,041,304
OPERA TING EXPENSES:
Flying and ground operations ........................................... .
Maintenance ............................................................................. .
Traffic, sales and advertising ....... ~ ................ , .................. .
General and administrative ............................................... .
Depreciation (Note 2) ......................................................... .
$3,245,888
2,031,170
1,774,908
785,430
971,518
$6,761,046
1,212,786
222,667
24,147
$8,220,646
$3,293,897
1,891,885
2,391,035
981,887
886,942
Total operating expenses .............................. $8,808,914 $9,445,646
Net loss* from operations .......................... $ 767,610* $1,225,000*
OTHER DEDUCTIONS (NET) 32,255 17,891
Net loss* before refund of
Federal income taxes ............................ $ 799,865* $1,242,891""
REFUND OF FEDERAL INCOME TAXES for 1944 and
1945 resulting from carry-back of 1946 loss in accord
ance with provisions of the Internal Revenue Code... 237,211
Net loss* (Note 1) $ 799,865* $1,005,6804
Denotes red figures.
STATEMENT OF SURPLUS
YEAR ENDED DECEMBER 31, 1947
EARNED SURPLUS (DEFICIT*) SINCE MAY 23, 1938
BALANCE DECEMBER 31, 1946 (Deficit"") ....................... .
Add-
Net loss* for the year ended December 31, 1947 ............ $ 799,865*
Transfer from capital stock account of expenses
incident to sale of I 70,000 shares in 1946, in
accordance with accounting requirement of
Civil Aeronautics Board............................................... 62,543*
BALANCE DECEMBER 31, 1947 (Deficit*) (Note 1) ....
Denotes red figures
$ 719,342
862,408
$1,581,750*
The accompanying notes constitute an integral part of these statements.
16]
CHICAGO AND SOUTHERN AIR LINES, INC.
NOTES TO FINA NC/AL STATEMENTS
1. Domestic and international mail revenue from the United States Government
for the year 1947 has been based on temporary rates fixed in mail rate orders
(effective June 1, 1946 for domestic and November l, 1946 for international)
issued by the Civil Aeronautics Board. These temporary rates serve only as an
interim basis of payment until such time as final rates are determined. The
final rates will be retroactively effective at least to the beginning of the tem-
porary rates and may be either higher or lower, although the management does
not anticipate that they will be lower.
2. The Company operates a fleet of 12 DC-3 and 4 DC-4 aircraft (with a 5th
DC-4 in final stages of conversion for commercial use). Four of the DC-3 air-
craft (costing $504,000) were fully depreciated to estimated residual value
prior to December 31, 1946 and the remaining eight DG-3 aircraft (costing
$829,000) became so depreciated at June 30, 1947. In view of the continuing
operation of these aircraft it is contemplated that the estimated residual values
(aggregating $104,000 at December 31, 1947) may be further depreciated in 1948.
3. Notes payable to banks are secured by chattel mortgage on aircraft. The chattel
mortgage provides that so long as any of the indebtedness secured thereby shall
remain unpaid the Company, among other things (a) will not declare or pay
any dividends, other than stock dividends, except out of net profits earned
subsequent to February 15, 1946, and (b) will maintain a minimum working
capital of $500,000 (computed on the basis of excluding from current liabilities
any indebtedness to the bank secured by the chattel mortgage) .
4. Stock p~rchase warrants have been granted to two officers, entitling one to
acquire 10,000 shares of capital stock, and the other to acquire 5,000 shares of
capital stock, at a price of $10 per share prior to 1956. The market quotations
of the capital stock at the date of fixing the price of the warrants were less
than $10.
5. Passenger fares were increased 10%, effective April 1, 1947, and a further
10%, effective December 12, 1947.
6. Expenses for the year 1946 have been reclassified to reflect certain rev1S1ons
made necessary by 1947 changes in the Civil Aeronautics Board Uniform System
of Accounts.
[17
ARTHUR ANDERSEN & CO.
ACCOUNTANTS AND AUDITORS
506 OLIVE STREET
ST. LOUIS 1
TO THE BOARD OF DIRECTORS OF
CHICAGO AND SOUTHERN AIR LINES, INC.:
We have examined the balance sheet of CHICAGO AND SOUTHERN AIR
LINES, INC. (a Delaware corporation) as of December 31, 1947, and the state-
ments of income and surplus for the fiscal year then ended, have reviewed the
system of internal control and the accounting procedures of the Company and,
without making a detailed audit of the transactions, have examined or tested
accounting records of the Company and other supporting evidence, by methods
and to the extent we deemed appropriate. Our examination was made in accord-
ance with generally accepted auditing standards applicable in the circumstances and
included all procedures which we considered necessary.
Subject to the determination of a final mail rate as set forth in Note 1 to the
financial statements, in our opinion, the accompanying balance sheet and related
statements of income and surplus present fairly the position of Chicago and
Southern Air Lines, Inc., at December 31, 1947 and the results of its operations
for the year ended that date, and are in conformity with generally accepted ac-
counting principles applied on a basis consistent with that of the preceding year.
St. Louis, Missouri
February 20, 1948.
ARTHUR ANDERSEN & CO.
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