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. 18 ]