Report 1949 OF PASSENGER SERVICE The operations of your Company for the year ended June 30, 1949, resulted in new highs in volume of operations, revenues, expenses and earnings. A substantial portion of the profits earned during the year can be attributed to the inauguration of service with Douglas DC-6 equipment on December 1, 1948. The superior service provided by the DC-6's is most attrac tive to the traveling public, and has removed the competitive equipment disadvantage under which we operated prior to their acquisition. During the early months of 1949, the Senate Committee on Interstate and Foreign Com merce undertook an investigation of all phases of the airline industry, including the various governmental agencies closely connected there with, with particular attention to the apparent ly increasing dependence of the carriers upon governmental support through mail pay. Hear ings were concluded in June, after receiving testimony from seventy-nine witnesses, includ ing airline officials, governmental department heads, and independent aviation consultants and experts. It is too soon to know what recom mendations will result from this Committee's comprehensive and timely investigation. Your President was invited to appear before this Committee. He testified at some length on the current problems faced by the industry and submitted statistical data in connection with his testimony. A portion of this data was a comparison of your Company's revenues and expenses expressed in cents per available ton mile for the years 1940 through 1949 inclusive. This comparison is reproduced for you on page 9 of this Report. In February, 1949, the Civil Aeronautics Board released a Statement of Policy outlining its program for the continued development of the nation's air transportation system on a sound basis. This aggressive approach is most encouraging and promises to restore financial and economic stability to an industry vitally important to our country. EARNINGS AND FINANCIAL Net profit after taxes was $639,440, equivalent to $1.28 per share, which permitted a dividend declaration of $.25 per share on June 27, 1949, payable July 15, 1949. Total revenue increased $2,408,876 over the preceding year, from $12,818,969 to $15,227,- 845. This revenue increase was accompanied by a $1,663,012 increase in operating expenses, from $12,618,944 to $14,281,956. The result ing operating profit of $945,889 represents 6.12% of total revenue, and the net income of $639,440 constitutes a return of 6.06% upon investment employed in air transportation. A major portion of the revenue increase was the increase in passenger revenue, which was attributable in part to the additional passenger miles flown but principally to the higher average return per passenger mile. Because of the gen eral industry fare increases in the fall of 1948 (accompanied by the restoration of the 10% discount on the return portion of round-trip tickets) and the extra service charges applicable to DC-6 travel, the average return per passen ger mile was 5.94^ for the current year as compared with 5.35^ for the preceding year. The current year is the first complete fiscal year reflecting the impact of the general salary and wage increase granted to employees in Octo ber, 1947. Another general increase approxi mating 8% was granted in March, 1949, not only to maintain our position in the industry but in recognition of the cost of living. The increase in salary and wage expense of $696,116 is, therefore, the largest single expense increase. Higher gasoline prices and a slight increase in the volume of operations account for $449,058 of the increase in operating expenses. Depre ciation expense increased $172,911, principally because of the addition of DC-6's to our fleet. Although your Company has retained its position as one of the most efficient in the in dustry, the cost of operating an available ton mile (a ton of salable capacity flown one mile) increased from 27.10^ for the previous fiscal year to 28.70^ for the current fiscal year. Much of this increase was caused by circumstances over which management had no control, but constant and unceasing attention is being di rected toward achieving an even more efficient and economical operation. To this end, a com mittee was established in the closing months OPERATING EXPENSES OPERATING REVENUES Salaries, Wages & Welfare $7,155,683 Gasoline & Oil $1,951,028 Maintenance & Repairs $ 950,432 Depreciation $1,185,866 Communications & Office Supplies 384,512 Passenger Expenses 419,449 Insurance 334,957 Taxes 423,558 Advertising 442,180 Rentals & Landing Fees . . .411,661 Travel Expenses 283,310 Outside Services 194,197 Miscellaneous 145,123 $14,281,956 Freight & Express $ 603,362 Mail $ 2,434,888 Passengers $12,135,731 .06 .05 .04 .03 of the year to review the operating practices and procedures of the Company, to investigate all items of expense, and to recommend any changes which would produce greater efficiency, better service to the public, or economies in operation. The present sliding scale basis for determina tion of mail pay produces a decrease in mail revenue as passenger revenue increases, and vice versa. This formula provides a very desirable buffer against serious losses in periods of de creasing passenger revenue, but it also curtails the accumulation of reserves in periods of in creasing passenger revenues. Under this method of mail pay allocation, each $1,000 of passenger revenue increase, at our present level of opera tions, would effect a $550 reduction in mail pay, and thus result in a net combined passenger and mail revenue increase of only $450. The June 30, 1949, Balance Sheet reflects a healthy financial condition, with a net working capital of $2,558,623. Earnings retained for use in the business at the close of the year were $1,493,165, and the net book value of your Company's stock was $13.42 per share. The entire credit of $5,000,000 provided by the Loan Agreement of November 16, 1946, has been borrowed, the last borrowing there under having been effected on November 5, 1948. Repayments totaling $1,075,000 have been made, and the present balance of $3,925,- 000 is being repaid at the rate of $250,000 a quarter, which payments are being met out of allocations for depreciation. Complete details of your Company's opera tions during the year and its condition at the close of the year are shown in the accompanying Operating Statement, Balance Sheet, and State ment of Surplus. OPERATING EXPENSES & PROFIT PER PLANE MILE OPERATING EXPENSES & PROFIT PER TON MILE $1.00 .90 .80 TRAFFIC The number of revenue passengers carried in creased to 518,481 from the 493,608 carried the previous year, and revenue passenger miles flown increased from 188,292,876 to 201,711,- 436. Available seat miles operated increased slightly, and the passenger load factor increased from 53.92% to 55.84%. There was a very definite increase in the number of revenue passenger miles flown in the second half of the fiscal year over the number flown in the first half. This increase reflects the inauguration of DC-6 service. There were 110,139,884 passen ger miles flown during the last six months of the year as compared with 91,571,552 during the first six months. Expressed in load factors, the increase was from 52.32% for the first half of the year to 59.16% for the second half. Your Company's load factor of 65.83% for March, 1949, was the highest of all domestic airlines for that month. There has been no cessation in the efforts expended for the promotion and development of air freight. During the year, there was a 20% increase in air freight ton miles, from 1,397,023 to 1,676,304. The volume of air mail and air parcel post increased 9.56% from 850,329 ton miles to 931,658 ton miles. Coin cident with these increases there was an 11% decrease in air express, from 855,996 ton miles to 764,305 ton miles. Difficulties are still en countered in balancing the directional flow of air freight movements. The Civil Aeronautics Board has recently granted Certificates of Public Convenience and Necessity to four new carriers for all-cargo operations, one of which -- !, ffj _ SEAT AND PASSENGER MILES 4041 42 43 44 45 46 47 48 49 Shaded Areas: War Year Operations LOAD FACTOR 100 40 41 42 43 44 45 46 47 48 49 REVENUE MILES AND PASSENGERS will be directly competitive with your Com pany. Your Company, along with other carriers, felt that the air freight volume did not justify the entry of these new carriers into the air freight field. With the load factors which we have ex perienced there still remains a tremendous potential for earnings, and your management is exerting every effort to sell this available potential. For the first time, special summer excursion fares are in effect for travel between the Chicago-Cincinnad area and the Florida area, and between all cities on our system and the Caribbean area through the Miami and New Orleans gateways. Several airlines have recently inaugurated, on an experimental basis, "coach" air service, whereby transportation at less desirable hours and without some of the special services ordinarily rendered is offered at lower fares. The results achieved in this type of operation by other carriers are being very closely studied. Serious consideration is also being given to the inauguration of reduced fares for family travel. The Traffic and Sales Department was re organized during the year in the interests of more effective sales solicitation activities, more detailed schedule analysis, and increased effi ciency within the department. The advertising budget was increased substantially during the year in order to launch the DC-6 fleet and to maintain the aggressive and continuous cam paign necessitated by the need for increased sales and to meet competition. This increased budget made possible several innovations in airline advertising, as well as broader coverage in established media. Sales incentive contests are being continued, under which a monthly quota is established for each station and em ployee bonuses are paid upon attainment of quota. INTERCHANGE SERVICE and route applications Miami, Jacksonville, Atlanta, Birmingham, June, 1949, marked the completion of thirteen months of successful operation under the Delta- TWA interchange agreement, which provides through-plane service between the Detroit- Cincinnati portion of TWA's routes and the Cincinnati-Miami portion of Delta's routes. No operational difficulties were encountered, and 14,223 passengers received an improved service by the elimination of the necessity for a change of planes at Cincinnati. On November 1, 1948, your Company and American Airlines, Inc., entered into an equipment interchange agreement to provide through-plane service between the principal routes of Delta east of Dallas-Fort Worth and the routes of American to the West Coast and connecting thirteen key cities. The Civil Aero nautics Board formally approved this agree ment on September 1, 1949, on a temporary basis and immediate steps were taken to inau gurate the new service on September 25, 1949. Cities involved in the interchange include New Orleans, Dallas, Fort Worth, El Paso, Tuc son, Phoenix, San Diego, Los Angeles, Oakland and San Francisco. This interchange operation will be a very valuable adjunct to the Nation's air transportation sys tem, providing the only through-plane coast-to- coast service over the southern section of the country. Permanent approval of this agreement is one of the issues in the Southern Service to the West route case, in which several carriers are seeking a new southern transcontinental route. Because of the parallel competition to much of our route mileage that an award to any other carrier would create, your Company itself is requesting a route from Dallas/Fort Worth to Los Angeles and from New Orleans to Los Angeles via Houston and San Antonio. In our opinion, through-plane service from the Southeast to California can best be provided through the American-Delta equipment interchange agree ment which has been approved by the C.A.B. Hearings have also been conducted on an equipment interchange agreement executed be- Legend DELTA'S PRESENT ROUTES PRESENT INTERCHANGES DELTA'S PROPOSED ROUTES PROPOSED EQUIPMENT INTERCHANGE r $ 2,751,859 125,000 ( 120,275 / 2,925,000 DEFERRED CREDITS AND RESERVES -- Unearned transportation revenue ($184,118), etc CAPITAL STOCK AND SURPLUS: Common stock, $3.00 par value -- Authorized 1,000,000 shares Issued and outstanding 500,000 shares Capital surplus (principally net premium on sale of common stock) -- No change during year Earned surplus (of which $500,000 under the terms of the bank loan agreement is not available for the payment of dividends) 241,915 $1,500,000 3,717,329 v/ 6,710,494 1,493,165 $12,629,268 Notes: CONTINGENT LIABILITIES On March 17, 1949, the Collector of Internal Revenue issued assessments aggregating $99,501.32 against the Company claiming this amount as interest on excess profits taxes which would have been payable for the fiscal years 1944 and 1945 if the liability for such excess profits taxes had not been liquidated by the carry-back of unused excess profits credit and net operating loss for the fiscal years 1946 and 1947, respectively. The Company is protesting these assessments and in August 1949, in order to have the assessments held in suspense by the Collector, deposited $100,000 principal amount of U. S. Government bonds in escrow pending the settlement of the disputed assessments. PURCHASE COMMITMENTS The Company has made a purchase commitment to Douglas Aircraft Company of approximately $728,000 for one DC-6 airplane, excluding engines, scheduled for delivery in December 1949. STATEMENT OF INCOME for the year ended June 30, 1949 OPERATING REVENUES: Passenger Mail Express Freight Excess Baggage Other Revenue, Net OPERATING EXPENSES: Flying Operations $3,970,314 ) Direct Maintenance -- Flight Equipment 1,582,853 > Depreciation -- Flight Equipment 1,002,312 ) Ground Operations Ground and Indirect Maintenance . Passenger Service Traffic and Sales Advertising and Publicity General and Administrative Depreciation -- Ground Equipment Net Income from Operations, before Income Taxes OTHER INCOME (EXPENSE): Profit on Sale of Property and Equipment Net Profit of Dusting Division Interest Expense Other Expense -- Net $11,987,246 \ 2,434,888 I 244,859 \ 358,503 ( 148,485 1 53,864 / $15,227,845 $ 6,555,479 2,325,963 954,012 1,025,314 1,655,170 529,592 1,052,872 183,554 14,281,956 $ 945,889 $ 193,672 9,255 (87,468) (52,908) 62,551 Net Income, before Income Taxes $ 1,008,440 PROVISION FOR FEDERAL ($336,000) AND STATE INCOME TAXES 369,000 Net Income for Year $ 639,440 STATEMENT OF EARNED SURPLUS for the year ended June 30, 1949 Balance June 30, 1948 $ 978,725 \ n Net Income for Year Ended June 30, 1949 $ 639,440 f ' ' Dividend (Cash) on Common Stock (25^ per share) 125,000 $ 1,493,165 Balance June 30, 1949 (Restricted as Indicated on Balance Sheet) C. E. Faulk, Chairman M. S. Biedenharn Richard W. Courts R. W. Freeman Edward H. Gerry L. B. Judd C. H. McHenry Winship Nunnally Travis Oliver Laigh C. Parker Richard J. Reynolds D. Y. Smith C. E. Woolman C. E. Woolman President and General Manager Laigh C. Parker Vice President of Traffic and Sales Charles H. Dolson Vice President of Operations M. S. Biedenharn Vice President Travis Oliver Treasurer C. H. McHenry Secretary L. B. Judd Comptroller Catherine FitzGerald Assistant Treasurer General Offices: Delta Air Lines Building Municipal Airport, Atlanta, Georgia Transfer Agent: Citizens & Southern National Bank Atlanta, Georgia Trust Company of Georgia Atlanta, Georgia D E L T A AIR LINES INC General Offices: Municipal Airport ATLANTA, Georgia