North Central Airlines Annual Report 1970

NORTH CENTRAL AIRLINES
GENERAL OFFICES : 7500 Northliner Drive, Minneapolis, Minnesota 554 50
BOARD OF DIRECTORS
Hal N. Carr* Chairman
G. F. DeCoursin *
Chan Gurney
Samuel H. Maslon *
Jay Phillips
Joseph E. Rapkin
H. P. Skoglund
Bernard Sweet
Kenneth B. Willett
Morton B. Phillips
MANAGEMENT
Hal N. Carr
Bernard Sweet
John P. Dow ..
Leslie J. Keely
Daniel F. May ...... .
Chairman of the Board and
Chief Executive Officer
President
Vice President and Secretary
Vice President-Maintenance and
Engineering
Vice President and Treasurer
REGISTRARS AND
STOCK TRANSFER AGENTS
Northwestern National Bank of Minneapolis; Minneapolis, Minnesota
First National City Bank; New York, New York
NORTH CENTRAL AIRLINES
BOARD OF DIRECTORS
Seated, (left) Skoglun d,
DeCou rsin, Ca rr, Ma slon,
Gurney, J . Phillips.
Standing, Rapkin , Sweet,
Willett, M . Phillips.
David E. Moran
T. M. Needham
Arthur E. Schwandt
G. F. Wallis .
J. F. Nixon
Gowan J. Miller .
Charlotte G. Westberg .
Executive Committee
Vice President-Traffic and Sales
Vice President-Ground Operations
Vice President-Industrial Relations
Vice President-Flight Operations
Assistant Treasurer
Assistant Secretary
Assistant Secretary
March 5, 1971
TO OUR STOCKHOLDERS, EMPLOYEES, AND FRIENDS:
In 1970, North Central achieved its greatest year of traffic growth and earned the largest profit
in its history-$2,178,000, after an out-of-period charge of $617,000.
An all-time high in revenues of $91,952,000 was attained, 34 percent over 1969. Operating
expenses were $83,783,000, and interest, $4,899,000. Earnings before income taxes and
the special charge reached a record $3,246,000 and, with depreciation and amortization,
developed cash flow from operations of $10,025,000.
North Central carried 3,753,000 passengers in 1970, a 16 percent increase and the third
consecutive year the airline boarded more than three million passengers. Revenue passenger
miles rose to 806,165,000-32 percent over 1969. Cargo advanced 31 percent as 10,985,000
ton miles of air freight, express, and mail were flown, establishing a company record. These
gains were related to new long-haul routes, additional seat miles, and the curtailment of
service in some markets by another carrier, although traffic was reduced substantially by the
sluggish economy throughout the year and the air traffic controllers' work slowdown in the
spring.
The company continued to maintain an outstanding operating performance in 1970 as 99
percent of its 25,455,000 scheduled plane miles were flown. This is one of the highest
schedule completion records in the entire airline industry.
In June, the Civil Aeronautics Board awarded North Central the most important single route
extension in the company's history-nonstop service between Milwaukee and New York City.
This 738-mile segment is the airline's longest route, and operations were inaugurated in
September. Twin Cities-Omaha nonstops also began in September. New service to Ohio was
started in 1970 with nonstop flights between Milwaukee and Dayton, Cincinnati, and Columbus.
The airline's route system increased 1,020 miles to 9,900 miles during 1970.
Early in the year, North Central activated its new $8-million computerized reservations and
communications system, ESCORT, which provides high quality, expedited passenger reser-
vations service to the 90 cities the airline serves. Operating economies have already been
effected and will increase as the volume of business grows.
The company initiated two important environmental programs in 1970. North Central became
the first regional airline to operate a modified smokeless JT8D engine in scheduled service,
and over 75 percent of its jet engines have now been converted. The airline also adopted an
inflight sound abatement procedure designed to reduce noise levels of its DC-9 North liners
in noise-sensitive areas throughout the system.
In July, North Central took delivery of two more 100-passenger DC-9 fan jets, under its aircraft
acquisition program. The company's fleet now consists of 15 Douglas DC-9s and 34 Convair
580 prop-jets.
North Central enters 1971 with the best financial record in the regional airline industry. The
company anticipates significant growth in the year ahead from fare increases, the expected
upturn in the economy, and additional traffic on new long-haul routes. The continued support
of stockholders, passengers, and employees will enable North Central to meet the challenge
of the future.
HAL N. CARR
Chairman of the Board and
Chief Executive Officer
Sincerely,
BERNARD SWEET
President
2
ANNUAL REPORT 1970
FINANCIAL REVIEW
Record earnings of $2,177,615 were
achieved by North Central in 1970,
after an out-of-period accounting
adjustment of $617,000. Revenues
reached an all-time high of
$91,951,953, up 34 percent
compared with $68,427,923 in 1969.
The $23,524,030 gain is the largest
revenue increase of any year in the
company's history.
Traffic from new long-haul routes,
fare revisions, curtailment of service
by another carrier during part of the
year, aggressive marketing programs
with emphasis on charter and
group sales, and greater public
service revenues all contributed
to this substantial gain.
With operating expenses of
$83,782,845-23 percent over 1969
-the company realized a profit from
operations of $8,169,108, compared
with $392,889 in the previous year.
Depreciation and amortization
expense rose to $6,779,002 from
$5,605,500, due principally to the
depreciation of new computerized
reservations equipment. Interest
expense remained virtually constant
at $4,899,094.
The company changed its method
of accounting for employee vacation
pay, on recommendation of the
Securities and Exchange Commission,
and a one-time charge of $617,000
against earnings resulted. Before
this out-of-period adjustment
and income taxes of $451,000, the
company showed a profit of
$3,245,615, compared with a
pre-tax loss of $4,335,283 in 1969-
an overall earnings improvement of
$7,580,898.
REVENUES
(MILLIONS OF DOLLARS)
$90 - - - - - - - - - - - - - - ,
$80 - - - - - - - - - - -
$60 - - - - - - - -
$50 - - - - - -
$30
1966 '67 '68 '69 '70
Earnings, depreciation, and
amortization provided cash flow
of $10,024,617, a substantial gain
over the $1,270,217 generated
in 1969.
The net profit of $2,177,615 was
a record high for the company and
was attained in a year when the
airline industry as a whole incurred
substantial losses.
North Central has achieved the best
financial record in the regional airline
industry by earning a profit in 16 out
of the last 17 years since present
management joined the company
in 1954. With revenue gains from
traffic on new routes and expected
passenger fare increases, the
company looks forward to 1971 as
another year of impressive growth.
TRAFFIC GROWTH AND OPERATING PERFORMANCE
In 1970, North Central set new
traffic records with 3,753,020
passengers carried-16 percent over
1969-and 806,164,805 passenger
miles flown, a 32 percent increase.
For three consecutive years, the
airline has boarded more than three
million passengers.
The air traffic controllers' slowdown,
as well as the sluggish economy,
greatly reduced North Central's 1970
traffic; however, gains were achieved
from new long-haul routes, curtailment
of service by another carrier, and
additional seat miles provided by
two more DC-9 fan jets.
A monthly high was reached in
August 1970 when 401,981
passengers were carried, for a 14
percent gain over the same month
in 1969. On November 29, a daily
record was set as 16,691 passengers
flew on the airline. To provide more
service for the traveling public in peak
traffic periods, North Central operated
3,484 extra sections of regular flights.
These carried 123,186 passengers,
and 910,378 miles were flown.
During the year, 36,697 passengers
flew on 322 charters to such points
as Las Vegas, Salt Lake City,
Tallahassee, San Antonio,
Philadelphia, St. Louis, Tampa,
Dallas, Houston, Oklahoma City,
New Orleans, and Nassau. In addition,
the 182 scenic flights operated in
North Central communities introduced
10,680 passengers to the speed and
convenience of jet-powered
Northliner service.
North Central flew 1,810,327,199
seat miles during 1970-17 percent
over 1969 and a r:,ew high. The
airline's fleet consists of 15
100-passenger DC-9 fan jets and
34 Convair 580 prop-jets.
Substantial cargo gains were also
made in 1970, with a record
92,399,219 pounds of air freight,
express, and mail carried. A total
of 10,984,825 cargo ton miles were
flown-up 31 percent compared
with 1969. Air freight ton miles
reached 6,863,077, for a tremendous
increase of 49 percent over the
previous year. Express rose 23
percent to 1,511,120 ton miles flown.
Since inaugurating service in 1948,
North Central has carried 26,091,612
passengers and flown 4,591,598,329
passenger miles.
North Central's operating performance
record for 1970 was one of the
highest in the entire airline industry
-with 99 percent of the company's
25,454,829 scheduled miles being
flown.
This excellent completion factor
was attained although the airline
has the shortest average stage length
of any carrier, operates in severe
winter weather for many months over
most of its system, and in 1970
handled the largest passenger and
cargo traffic in its history.
The achievement was even more
significant in view of the difficult and
restricted operating conditions
resulting from the air traffic
controllers' slowdown during the
Spring of 1970. The hourly flight
quotas which were imposed severely
limited operations at hub airports.
Again this year, a major factor in
the high level of performance was
the company's exacting maintenance.
In 1970, North Central scheduled
216,696 departures-yet only
one-tenth of one percent were
cancelled for maintenance reasons,
and less than one and one-half
percent were delayed by mechanicals.
The winterization program
"Operation Cold Front" also
contributed to the enviable operating
performance. Station and
maintenance personnel carried out
comprehensive preparations for
converting ground support equipment
to winter conditions and reviewed
cold weather operational techniques.
The airline's consistently impressive
operating record is a tribute to all
North Central employees and their
dedication to the task of providing
dependable scheduled airline service.
4
ROUTE DEVELOPMENT PROGRAM
The most important single route
extension in the company's
history was made in June 1970
when the Civil Aeronautics
Board awarded North Centra l
nonstop service between
Milwaukee and New York City.
This 738-mile segment is the
longest route ever granted
to the airline, and service was
inaugurated in September.
A major factor in the CAB
decision was North Centra l's
ability to estab lish Milwaukee
as a Midwest aviation gateway.
For the first time, Du luth/
Superior; Wausau, Stevens
Point, Wisconsin Rapids, and
Marshfield (all served by the
new Central Wisconsin Regional
Airport); and Green Bay/
Clintonville have the
convenience of single-plane
service to New York, bypassing
Chicago. Also, the Upper
Peninsu la of Michigan and
other North Central communities
receive connecti ng service
at Milwaukee's General
Mitchell Field.
Traffic volume on this new
route has been good, and extra
sections were operated in
November and December to
accommodate holiday travelers.
North Ce ntral inaugurated new
nonstop flights between
Milwaukee and Cincinnati,
Dayton, and Columbus in
March 1970, adding another
major marketing area to its
system. Many cities in
Minnesota, Wisconsin, and
Michigan now have convenient
si ngle-plane service to the
Ohio points.
New routes awarded to the
compa ny in 1970 increased
North Central's system by
1,020 miles.
The airli ne is awaiting a CAB
decision in the Atlanta-Detroit,
Cleveland, Cincinnati
Investigation, which would add
1,522 miles. The Board
Examiner has recommended
that the route be awarded
to another carrier. Also, the
North Central Route
Realignment Proceeding is still
pending. This application
proposes that a number of
segments be combined to
permit greater operating
flexibility. The company expects
CAB action on these two route
matters early in 1971.
The airline's route development
program includes applications
for 5,975 additional miles,
serving five cities in three new
states and the Canadian
Provinces of Manitoba and
Quebec.
North Central presently
serves 90 cities in 13 states
and Canada over a 9,900-mile
route system.
STATUS OF NORTH CENTRAL'S ROUTE DEVELOPMENT PROGRAM
1970 AWARDS:
Milwaukee-New York/Newark (738 miles)
Minneapolis/St. Paul-Omaha (282 miles)
AWAITING CAB DECISION:
Atlanta -Detroit, Cleveland, Cincinnati
Investigation (1,522 miles)
North Central Route Realignment
Proceeding-The Board's staff has
recommended combining a number of
segments to permit greater operating
flexibility.
AWAITING CAB EXAMINER'S DECISION:
Chicago-Baltimore Nonstop Service
Investigation (622 miles)
APPLICATIONS AWAITING HEARING:
Milwaukee-Denver nonstop (908 miles)
Columbus, Dayton, Cincinnati-Philadelphia
nonstops (1,389 miles)
Detroit-New York nonstop (501 miles)
Minneapolis/St. Paul-Kansas City
nonstop (404 miles)
Duluth/Superior-Winnipeg
nonstop (314 miles)
Detroit -Montreal, via Toronto (315 miles)
ENVIRONMENTAL PROGRAMS
North Central in 1970 instituted two
importa nt programs relating to the
environment- conversion of its jet
engi nes t o smoke-free status and
adoption of inflight sound abatement
proced ures for the DC-9 .
The ai rline wa s th e first regional
carrier t o operate a fa n jet aircraft
in sched uled service with the
"smokeless" JT8 D engine, making
North Centra l an environmental
pacesetter.
A special DC-9 demonstration flight
in April 1970 showed dramatically
th e effect of modifying one jet
engine. Basically, the retrofit permits
th e nine burner cans in each JT8D
engine to be cooled by air. The
actual burning of jet fuel takes place
in the burner cans, and prior to the
engine modification, the cans were
cooled by injecting extra fuel. This
excess, partially-burned fuel formed
the black trail of smoke -associated
with jet aircraft.
Over 75 percent of North Central's
jet engines have been refitted with
th e new low-smoke configuration.
The company expects to complete
this environmental project in March
1972, well ahead of the December
1972 industry deadline.
The airline also initiated a voluntary
program to reduce the noise levels
of North Central jet aircraft during
takeoff and landing.
In May 1970, the company conducted
test flights for the Metropolitan
Aircraft Sound Abatement Council
and the Twin Cities press at the
Minneapolis-St. Paul International
Airport utilizing the newly-developed
takeoff procedures. A decibelmeter
recorded an average reduction of
ten decibels in sound pressure level
energy. This reduced noise level
is sensed by the ear as being "half
as loud" as that associated with
former takeoff procedures. The
overall perceived improvement was
even greater, since the duration of
peak level noise was also reduced
significantly.
The company's inflight sound
abatement program is being
implemented in noise-sensitive areas
throughout the airline's system.
North Central mechanics are shown installing
one of the nine new burner cans required to
convert the JT8D fan jet engine to the low-
smoke configuration.
DC-9 Northliner demonstrates the substantial difference in
smoke pollution between a conventional engine, left, and the
engine on the right which has been modified with the air-
cooled burner cans.
5
JET-AGE FACILITIES
6
1. North Central's Chicago base is
a maintenance hub, with continuous
line checks being made by mechanics
around-the-clock on originating and
t erminating aircraft. The checks
include the review of pilot logbooks
and inspection of certain systems.
Over 110 North liner flights are
serviced daily at 0' Hare International
Airport. The intermediate checks
required every 45 flight hours on
Convair 580 aircraft are scheduled
at night.
2. The airline has a major
maintenance facility at Detroit
Metropolitan Airport. North Central
personnel perform daily line checks
on DC-9 and Convair 580 aircraft.
Overnight, the intermediate checks
are accomplished on the Convairs
and also the mid-period checks
at 200 flight hours.
3. Another important jet-age facility
is North Central's $2.5-million
boarding terminal at Milwaukee's
General Mitchell Field. The circular
south passenger concourse has eight
gates with upper-level boarding
which provides passenger
convenience and facilitates check-in
procedures, on-line transfers, and
ground operations. This addition
is the first phase in the airport's
master plan to develop Milwaukee
into a major Midwest aviation
gateway.
4. In March 1970, North Central
introduced ESCORT, its $8-million
Electronic System Combining
Operations, Reservations, and
Telecommunications. The I BM and
Sanders equipment is located in
the Computer Services Section
at the company's headquarters.
The system is designed to expedite
passenger reservations, message.
switching, and flight information
inquiries. ESCORT has the capability
of transmitting data to a single
computer system for common
retrieval by remote agent sets
installed at 160 locations over the
airline's 13-state system.
5. ESCORT's 380 sets, which
resemble television screens with
attached typewriter keyboards, are
linked with the computers by 18,500
miles of telephone lines. Each set
produces a visual display of all
passenger record information with in
three seconds of the agent's inquiry.
6. The company's $15-million
headquarters, located at the
Minneapolis-St. Paul International
Airport, is one of the most modern
facilities in the airline industry and
combines North Central's corporate
and operational functions into one
massive complex. The general office
and main operations base is designed
to utilize advanced maintenance
programs and provide efficient
administrative offices. The main
building includes the Computer
Services Section; the Training
Center, featuring cabin and cockpit
procedure trainers, aircraft systems
mockups, and navigational trainers;
and an adjoining Flight Kitchen
where North liner inflight meals are
prepared. The six-story three-bay
hangar can house nine DC-9 fan jet
aircraft at one time or 15 Convair
580 prop-jets, besides the specialized
overhaul maintenance shops.
7. North Central is one of the few
regional airlines to operate its own
jet engine evaluation facility. This
$900,000 concrete and steel engine
test cell enables maintenance
personnel to monitor engine
performance after repair or overhaul
has been completed . The cell consists
of one area for testing the JT8D
engines which power the DC-9 fan
jet, a second area for the Allison
501 prop-jet engines used on the
Convair 580, and a Control Room .
The JT8D engine can be run up to
top speed at maximum thrust under
soundproofed conditions, and
performance is measured by
electronic means. The Allison engine
is tested under simulated flight
loads, with a dynamometer replacing
the propeller. The Control Room is
common to both units and contains
the highly scientific instruments
needed for the complete evaluation
and certification of the engines.
During 1970, use of this test cell
by North Central mechanics saved
the company $350,000 in
maintenance costs.
THE FUTURE
North Central enters its 24th year
of scheduled operation with new
long-haul routes, increased
facilities, a computerized passenger
reservations system, and an
expanded fleet of all jet-powered
aircraft. These improvements will
enable the company to take the fullest
advantage of the opportunities for
further growth and development
in the future. In addition, intensified
sales efforts, anticipated fare
increases, and the expected upturn
in the economy should make 1971
another record year for the airline.
7
ROUTE OF THE NORTHLINERS
SAULT STE MARIE
Newest North Central Cities
New York Dayton Columbus
NEW YORK
NEWARK
PHILADELPHIA
WASHINGTON
BALTIMORE

PRESENT ROUTES
PROPOSED ROUTES
Cincinnati
NORTH CENTRAL AIRLINES, INC.
ASSETS
10
CURRENT ASSETS
Cash ..
Accounts receivable
United States Government
Traffic .
Other .
Flight equipment parts, at average cost (less reserves of
$293,454 and $260,152 in 1970 and 1969, respectively) .
Maintenance and operating supplies . .
Prepaid expenses and sundry deposits (note A)
Total current assets
PROPERTY AND EQUIPMENT-AT COST (note 8)
Flight equipment
Ground equipment
Improvements to leased property
Furniture and office equipment
Less accumulated depreciation (note C)
DEFERRED CHARGES
Unamortized development and preoperating costs (note D)
Unamortized discount and expense on debt (note B)
Rentals and other
The accompanying notes to financial statements are an integral part of this statement.
1970
$ 2,260,098
2,692,965
8,812,819
1,108,283
12,614,067
2,283,398
657,136
6,791,030
24,605,729
72,998,698
4,052,481
3,810,524
8,763,171
89,624,874
16,586,469
73,038,405
3,901,572
440,732
1,409,710
5,752,014
$103,396,148
1969
$ 1,382,932
1,112,204
5,896,338
929,433
7,937,975
2,212,636
666,251
5,126,936
17,326,730
71 ,774,524
4,090,219
3,116,950
747,538
79,729,231
10,875,534
68,853,697
3,830,379
189,997
1,084,329
5,104,705
$91,285,132
Comparative Balance Sheet-December 31, 1870 and 1868
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings
Current maturities of long-term debt (note 8)
Accounts payable
Tickets outstanding
Ta xes withheld or collected as agents
Accrued liabilities
Salaries and wages
Vacation pay (note E)
Payroll and property taxes
Other .
Total current liabilities
LONG-TERM DEBT -less current maturities (note 8) . .. .... .
DEFERRED CREDITS
Income taxes (note F)
Warrant obligation (note 8) .
COMMITMENTS (notes G and H) . . . . . .
STOCKHOLDERS' EQUITY (notes B, I and J)
Common stock-authorized, 16,000,000 shares of $.20 par value;
issued and outstanding, 10,463,087 and 10,462,824 shares, 1970 and
1969, respectively
Paid-in capital .
Retained earnings
$
1970
3,284,312
11,966,726
10,711,219
521,041
1,354,998
1,565,502
1,470,954
590,554
1,508,678
32,973,984
51,399,949
987,000
212,000
1,199,000
2,092,617
10,228,834
12,321,451
5,501,764
17,823,215
$103,396,148
1969
$ 690,000
6,086,920
10,136,122
265,933
979,181
2,097,219
40,954
361,033
1,272,765
21,930,127
53,719,506
2,092,565
10,218,785
12,311,350
3,324,149
15,635,499
$91,285,132
11
12
NORTH CENTRAL AIRLINES, INC.
COMPARATIVE STATEMENT OF EARNINGS
Years ended December 31, 1970 and 1969
OPERATING REVENUE
Passenger ..
Freight and express
Public service revenue .
Mail ......... .
Non-scheduled service and other
Total operating revenue
OPERATING EXPENSES
Flying operations .
Maintenance
Passenger service
Aircraft and traffic servicing
Promotion and sales . . . .
General and administrative
Depreciation and amortization (note C)
Total operating expenses
Operating profit
0TH ER EXPENSE (INCOME)
Interest expense-net of interest capitalized (note K)
Other-net .
Total other expense . .
Earnings (loss) before income taxes and cumulative
effect of a change in accounting for vacation pay
INCOME TAXES (note F)
Deferred .
Current credit
Total income taxes
Earnings (loss) before cumulative effect of a change
in accounting for vacation pay . . . . . . . . . . .
EFFECT OF ACCOUNTING CHANGE
Cumulative effect on prior years due to change in accounting for vacation pay
less applicable income tax credits of $618,000 (note E) .......... '.
NET EARNINGS (LOSS)
EARNINGS (LOSS) PER SHARE (note L)
Earnings (loss) before cumulative effect of a change in
accounting for vacation pay . . . . . . . . . . . . .
Cumulative effect on prior years due to change in accounting
for vacation pay (note E) . . . . . . . . . . . . . . . . . .
NET EARNINGS (LOSS) PER SHARE .
The accompanying notes to financial statements are an integral part of this statement.
1970 1969
$76,954,521 $57,073,369
5,700,315 4,153,106
5,131,306 4,016,386
1,475,073 1,501,786
2,690,738 1,683,276
91,951,953 68,427,923
24,869,382 20,960,004
14,254,728 10,687,242
4,770,272 3,849,181
21,068,686 17,421,674
7,326,275 5,966,402
4,714,500 3,545,031
6,779,002 5,605,500
83,782,845 68,035,034
8,169,108 392,889
4,899,094 4,829,814
24,399 (101,642)
4,923,493 4,728,172
3,245,615 (4,335,283)
890,000 (1,956,888)
(439,000)
451,000 (1,956,888)
2,794,615 (2,378,395)
(617,000)
$ 2,177,615 $ (2,378,395)
$ .27 $(.26)
(.06)
$ .21 $(.26)
COMPARATIVE STATEMENTS OF RETAINED EARNINGS AND PAID-IN CAPITAL
Years ended December 31, 1970 and 1969
RETAINED EARNINGS (note 8)
Retained earnings at beginning of year
Net earnings (loss) for the year
Retained earnings at end of year . .
PAID-IN CAPITAL
Paid -in capital at beginning of year
Excess of proceeds over par value of common stock issued
upon conversion of debentures (note 8) .....
1970
$ 3,324,149
2,177,615
$ 5,501,764
$10,218,785
1,948
1969
$ 5,702,544
(2,378,395)
$ 3,324,149
$ 527,239
8,287
Excess of proceeds over par value of common stock sold under option
Excess of net proceeds over par value of common stock sold as
242,427
a result of a public offering .. 8,101 9,440,832
Paid-in capital at end of year $10,228,834 $10,218,785
The accompanying notes to financial statements are an integral part of these statements.
AUDITORS' REPORT
Stockholders and Directors
North Central Airlines, Inc.
We have examined the balance sheet of North Central
Airlines, Inc., (a Wisconsin corporation) as of
December 31, 1970, and the related statements of
earnings, retained earnings and paid-in capital for the
year then ended. Our examination was made in
accordance with generally accepted auditing standards
and accordingly included such tests of the accounting
records and such other auditing procedures as we
considered necessary in the circumstances. We made
a similar examination for the preceding year.
TEN-YEAR EARNINGS SUMMARY
OPERATING REVENUES 1970 1969 1968 1967
Passenger . . . .. . .. .. ............ $76,954,521 $57,073,369 $44,628,769 $33,482,371
Public service revenue . 5, 131,306 4,016,386 4,667,639 5,249,563
Other ............. 9,866,126 7,338,168 5,929,518 4,118,543
91,951,953 68,427,923 55,225,926 42,850,477
OPERATING EXPENSES
Direct expenses ......... . 33,374,994 31,647,246 25,525,000 19,811,886
Indirect expenses ........... ... 43,628,849 30,782,288 24,318,200 19,523,811
Depreciation and amortization . . 6,779,002 5,605,500 4,356,893 2,626,251
83,782,845 68,035,034 54,200,093 41,961,948
OPERATING PROFIT . 8,169,108 392,889 1,025,833 888,529
Non-operating income and
(expenses), net. . .. . ............. . (4,893,149) (4,677,092) (3,008,205) (628,731)
EARNINGS (loss) before taxes .... . 3,275,959 (4,284,203) (1,982,372) ~
Income taxes .. . . . . .
. . . . . . . . ~ (1,934,888) (869,000) (336,010)
EARNINGS (loss) before gain (loss)
on disposition of equipment .. .. . . 2,824,959 (2,349,315) (1,113,372) 595,808
Gain (Loss) on disposition of
equipment, less income taxes .. (30,344) (29,080) 1,183,588 924,316
Prior years' adjustment due
to change in accounting ...... (617,000)
NET EARNINGS (LOSS) ... ... . .. ..... $ 2,177,615 $ (2,378,395) $ 70,216 $ 1,520,124
In our opinion, the accompanying balance sheet
and statements of earnings, retained earnings
and paid-in capital present fairly the financial position
of North Central Airlines, Inc., at December 31,
1970, and the results of its operations for the year
then ended, in conformity with generally accepted
accounting principles applied on a basis consistent with
that of the preceding year, except for the change
in accounting for vacation pay discussed in
note E, with which we concur.
Alexander Grant & Company
Minneapolis, Minnesota
February 16, 1971
1966 1965 1964 1963 1962 1961
$30,261,479 $23,720,203 $20,002,281 $18,064,524 $16,750,086 $15,681,163
5,767,888 7,199,418 7,274,370 7,644,080 8,286,733 7,613,159
3,583,304 2,971,410 2,438,126 2,168,100 1,833,426 1,546,429
39,61 2,671 33,891,031 29,714,777 27,876,704 26,870,245 24,840,751
17,980,535 15,356,876 13,666,142 13,076,180 12,858,386 12,394,337
17,062,543 13,970,237 12,303,601 11,812,690 11,561,629 10,741,476
2,253,361 1,997,488 1,71 2,800 1,541,857 1,183,464 1,072,902
37,296,439 31,324,601 27,682,543 26,430,727 25,603,479 24,208,715
2,316,232 2,566,430 2,032,234 1,445,977 1,266,766 632,036
(464,974) (442,894) (348,305) (428,423) (335,014) (269,483)
1,851,258 2,123,536 1,683,929 1,017,554 931,752 362,553
~ 1,006,520 873,304 ~ ~ ~
1,130,611 1,117,016 810,625 503,057 439,940 204,300
24,000 21,736 33,939 18,656
$ 1,154,611 $ 1,138,752 844,564 521,713 439,940 $ 204,300
13
14
NOTES TD FINANCIAL STATEMENTS
December 31, 1970 and 1969
NOTE A-ENGINE OVERHAUL-Prepaid overhaul expenses, totaling
$3,504,000 and $3,522,000, are included in prepaid expen ses as of
December 31, 1970 and 1969, respectively.
NOTE B-LONG-TERM DEBT-Long-term debt at December 31, 1970
consists of:
Terms Total Long-term Current
Quarterly installment notes
due from January, 1971
through April, 1973; interest
at % above prime rate (a) .. $17,626,697 $ 8,813 ,349 $ 8 ,813,348
7% quarterly installment
notes due from July, 1973
through October, 1978 .
Total due banks and insurance
companies (b) . . ..........
9 % note of which $1,229,000
is due in 1971 plus monthly
installments from January,
1971 through June, 1974(c) .
11% note due in monthly
installments through
December, 1971 plus one
payment due in January,
1972 (c) . . ... .
7% subordinated notes due
in semiannual installments
from September, 1971 through
March , 1976 (d) ... .
5 % subordinated convertible
debentures due in 1978 (e) . .
Sundry ........ . ...... .
35 ,253 ,393 35,253 ,393
- - - - -
52 ,880,090 44,066,742 8 ,813 ,348
5,880,520 3,475,950 2,404,570
831 ,142 402,146 428,996
3 ,000,000 2 ,700,000 300,000
742 ,500 742,500
32,423 12,611 19,812
$63,366,675 $51,399,949 $11 ,966,726
(a) Includes payments of $2 ,937,783 due in 1970 but deferred by the
lenders until October, 1971; the interest rate on the payments deferred
was increased % per annum .
(b) The total $52,880,090 loan is collateralized by substantially all flight
equipment owned by the company. Two equipment manufacturers
partially guarantee these loans. Included in the provisions of the loan
agreement are certain restrictions on dividend payments, capital ex-
penditures, additional borrowings, and requirements related to mini-
mum working capital and net worth.
Stock purchase warrants were issued to all loan participants during
1970 to induce deferral of payments due in 1970 as discussed in (a)
above. The warrant holders may purchase 259,511 shares of common
stock for $5.50 a share through October 31, 1979. The company has a
commitment to retire, at $1.50 per warrant, all warrants not sold or
exercised by November 30, 1979. The value of these warrants at the
date of grant, $212,000, is recognized in the financial statements as
deferred warrant obligation; unamortized discount and expense on
debt has been charged for this amount and is being amortized over the
term of the debt.
(c) These loans are collateralized by computer equipment and display
terminals.
(d) Stock purchase warrants attached enable the holders to purchase a
total of 200,000 common shares for $5.50 a share through October 31
1979. ~n~morti~ed disc_
ount and expense on debt has been charged
and paId-In capital credited for $50,000 representing the value of the
warrants issued . This amount is being amortized over the term of the
loan.
(e) Convertible into common shares at $7.59 a share through June 1,
1971 and $9.50 a share thereafter to maturity. During the year, $2,000
of debentures were converted into 263 shares of common stock.
NOTE C-DE~RECl~TION-For financial reporting purposes, the com-
pany depreciates fixed assets on the straight-line method based on
estimated useful lives ranging from seven to fifteen years for flight
equipment and three to ten years _ fo_
r other equipment and property.
Prior to 1968 accelerated deprecIatIon methods for flight equipment
were used to determine income ta xes; the company subsequently
changed to the straight-liPle method. As of December 31 1970 accumu-
lated depreciation deducted for income taxes exceed~d financial de-
preciation by $5,080,000 (note F).
NOTED-DEVELOPMENT AND PREOPERATING COSTS-Expenditures
for route development costs are deferred and amortized over the life of
the temporary ~ertificates or five years for permanent certificates. Air-
craft preoperating costs are amortized over approximately eight years.
NOTE E-CHANGE IN ACCOUNTING FOR VACATION PAY-In 1970 the
compa~y ~dopted the ~ccount_
inj5 method of accruing vacation pay as
the obl1gat1on for v1:1catIon pay Is incurred . Previously, vacation pay was
expensed when paid. The effect of the change in 1970 was to increase
th e accrued vacation pay liability $1,430,000 at December 31, 1970;
this chan ge al so reduced 1970 net earn ings by $715 ,000 (after incom e
ta x credits of $715,000 [note Fl), of which $617,000 is th e cumulative
result from 1948 throu gh 1969, includin g $100,000 ($.01 per share)
which is attributable to 1969.
NOTE F-INCOME TAXES-Deferred income ta x expen se for 1970
($890,000) recognizes utilization of a financial reportin g loss carryover
of $150,000 and applicable investment tax credit carryovers. The cur-
rent income ta x credit of $439,000 is due the company as an adjust-
ment under claim of ri ght provisions of the Federal income ta x laws
relating to adjustments of Public Service Revenue in prior years .
The deferred income ta x credit of $987,000 includes th e current
year's provision and $97,000 of ta xes relating to the increa se in 1970
of the vacation pay accrual recognized but not deductible until paid for
tax reporting.
At December 31, 1970 the company ha s $3 ,700,000 of net operating
loss carryovers available as a reduction against future taxable income
arising out of timing differences in reportin g depreciation and certain
deferred expenses for financial and ta x reportin g purposes (note C).
Earned but unused investment credit available for re duction of future
years income taxes for financial and income tax purposes are $4, 624,000
and $5,447,000, respectively. The unused investment credit available
to reduce future income ta xes payable expires in: 1974-$1,528,000,
1975-$2,545,000, 1976-$803,000 and 1977-$571,000 subject to
the additional three-year carryover provision of the 1969 Tax Reform Act.
NOTE G-PENSION PLANS-The company has noncontributory pension
plans covering substantially all of its employees. Pension s, based on
length of service and average salary, are provided for retirement of
pilots at age 60 and all other employees at age 65. The plans covering
pilots are fully funded for pa st service cost, while the company pays the
normal cost and interest only on the past service cost of the other plan s.
The cost to the company in 1970 was $1,685,000 and $1,075,000 in 1969.
The company has funded in excess of the vested benefits for all plans
in the net amount of approximately $246,000.
NOTE H-COMMITMENTS-Approximate minimum annual lease com -
mitments exist for:
(1) Office and operational facilities at the Minneapolis-
St. Paul International Airport through 1996.... .$1,000,000
(2) Terminal and other facilities (including landing fees) .
(3) Nine Convair 580 aircraft for seven to eight years . . .
(4) Five DC-9 aircraft(cancellable on six months' notice) .
(5) Other equipment ............. .
3,460,000
1,760,000
2 ,460,000
370,000
$9,050,000
NOTE I-COMMON STOCK-A total of 250,000 shares of unissued
common stock was reserved for officers and key employees under a
qualified plan in 1965. During 1970 an additional 100,000 shares were
reserved by an amendment to the plan . Options granted in 1965 for
105,000 shares expired during 1970. Option s granted expire five years
after date of grant. Those outstanding, and dates granted , at December
31, 1970 are: 1967-5,000 shares at $6.81; 1968- 5,000 shares at
$5.60; 1969-20,000 shares at $4.125; 1970-50,000 shares at $4.125
and 115,000 shares at $3.25. Option s for 115,000 shares were exercised
in prior years and options for 40,000 shares are available for granting
in future years.
At December 31, 1970 there were outstanding, from a prior year's
public offering, warrants to purchase 1,200,000 shares of common
stock at $5.50 a share. These warrants expire October 31, 1979.
NOTE J-SHAREHOLDER DISCLOSURE OF OWNERSHIP-The Civil
Aeronautics Board requires that any person who owns as of December
31 of any year or who acquires ownership, either beneficially or as
trustee, of more than 5%, in the aggregate, of the company's common
s_
tock as of December 31, 1970 or within ten days after acqui sition must
file a report with t_
he_ board containing information required by 245.13
of The Federal Av1at1on Act unless the person ha s previou sly filed such
a report. Any shareholder who believes that he may be required to file
such a report may obtain further information by writing to the Director
Bureau of Operating Rights, Civil Aeronautics Board , Washington :
D. C. 20428.
":1OTE . K-CAPITALIZED INTEREST-The company recognizes the
f1naric1ng costs associate~ with acquisition of operating property and
equI_pm~nt and pre(!pe!atin_
g and development expen ditures by capi-
tal1z1ng interest. Capitalized interest reduced interest expense $156 000
in 1970 and $458,000 in 1969. '
NOTE L-EARNING~ (LOSS) PER SHARE-Earnings (loss) per share is
based upon the ""'.eIghted average number of shares outstandin g for
the year. Conversion of debentures into common stock exercise of
stock options and exercise of warrants to purcha se sto~k would not
result in material dilution of the net earnings per share for the years
ended December 31, 1970 and 1969.
FIVE YEARS OF RECORD PROGRESS
PASSENGERS
MILLIONS
3.6
3.2
2.8
2.4
1.6
1966 '67 '68 '69 '70
90
80
70
60
50
40
CARGO
MI L LION S
[POUNDS)
1966 '67 '68 '69 '70
HIGHLIGHTS OF GROWTH
Every year since North Central
began scheduled operations
in 1948, new passenger records
have been established . In 1970,
the airline carried 3,753,020
passengers-representing
an impressive annual growth
of 16 percent and 510,201
passengers over the previous
year. Compared with the 1966
boardings of 2,056,209, the
passenger increase for the
five-year period was a dramatic
83 percent.
Substantial air cargo gains,
including air freight, express,
and mail, were also achieved
in 1970. The airline flew
92,399,219 pounds of cargo
-an all-time high-12 percent
more than in 1969 and
77 percent over 1966.
North Central provided
1,810,327,199 available seat
miles on its route system
in 1970, up 17 percent compared
with 1969. Since 1966, seat
miles have risen 146 percent
as a result of new route awards
and the addition of larger
jet aircraft.
In this five-year period , the
company initiated its jet
program and completed the
SEAT MILES
BILLIONS
1.8
1.6
1.4
1.2
1.0
1966 '67 '68 '69 '70
transition to an all jet-powered
fleet. Convair aircraft were
converted to turboprops, and
pure jet service was inaugurated
in 1967 with 100-passenger
Douglas DC-9s. Under the
company's flight equipment
program, two more fan jets
were acquired in July 1970,
bringing the Northliner fleet
to 49 aircraft, consisting of 15
DC-9s and 34 Convair 580
prop-jets.
With additional seat miles
available and traffic increases
anticipated on new long-haul
routes, 1971 should be another
year of notable growth .
15
16
ADVERTISING AND PROMOTION
The introduction of North Central's
New York service was the company's
most important promotional effort
in 1970. A comprehensive advertising
program was developed to acquaint
passengers, travel agents, interline
representatives, and the press with
North Central's entry into New York
and its new "Custom Jet Service."
Full-page newspaper advertisements,
four-color magazine ads, and
television commercials focused
national and local attention on the
specialized service, emphasizing the
airline's two-three seating and its
deluxe inflight hot meals and
beverages at coach fares. Color
brochures describing Custom Jet
Service were widely distributed in all
major marketing areas. The
company's entire sales staff
participated in a "blitz" of New York
City and Milwaukee accounts, making
1,200 special calls to promote the
new route.
Travel agents learned of North
Central's Custom Jet Service firsthand
at company-sponsored breakfast
meetings throughout the Midwest.
They were served the same type
meals as passengers receive aboard
morning flights on the New York route.
During 1970, North Central used over
115 television and radio stations and
60 newspapers to publicize its
service. Outdoor billboards in 20
major cities supplemented the
advertising program.
Highlighting the New York promotion,
North Central operated a special
pre-inaugural flight for media
representatives tram Wisconsin and
Minnesota. As part of the September
inaugural of the Milwaukee-New York
route, welcoming ceremonies were
held in New York City, and a reception
was hosted by North Central at
Milwaukee for business and civic
leaders from New York and Wisconsin,
travel agents, and members
of the press.
Localized advertising of North
Central as "New York's newest
airline" took a more direct approach
in the Wisconsin, Upper Michigan
and Minnesota communities
receiving single-plane service. These
ads featured the airline's prime time
schedules for the particular city, the
reservations phone number, and the
food and beverages available with
single-class service.
A concentrated advertising and
promotion campaign in March 1970
heralded North Central's new
Milwaukee-Ohio service to Dayton,
Columbus, and Cincinnati. Intensive
sales efforts produced over 1,100
North Central Airlinf
sec
Central Wh,consin
from the air!
personal calls in the three Ohio cities
and Milwaukee. Following the
inaugural flights, government
officials and members of the business
community from these metropolitan
areas attended a North Central
reception at Milwaukee.
Advertising and direct mail, along
with personal sales calls, introduced
the airline's new Twin Cities-Omaha
nonstop flights which began in
September.
The story of North Central's progress
was advertised in communities which
opened new airport facilities in 1970.
Among these were Sioux Falls, South
Dakota, and Milwaukee, Green Bay,
Clintonville, Wausau, Stevens Point,
Wisconsin Rapids, and Marshfield,
Wisconsin.
Ads geared to the Colorado ski areas
suggested travel via North Central 's
nonstop flights between Minneapolis/
St. Paul and Denver. A colorful ski
display was created for use at sports
shows to draw attention to the
airline's service. In addition, the
company developed a familiarization
program for travel agents, which
included a special tour of Colorado
resort facilities.
The company's sales staff made
22,750 personal sales calls on
commercial, travel agency, and
I
71 ,;
,~'>J"'r'",
I .
/Js~~:~,.
Winter
Escape
Flights
interline accounts during 1970.
Also, North Central publicized its
service to thousands of people
in the Midwest by conducting 180
sce nic flights on DC-9 jets and
Convair 580 prop-jets.
Keeping the traveling and shipping
public up-to-date on North Central's
service is an important part of the
public relations program . Over 160
group tours, speeches, and television/
radio appearances were made to
promote North Central and its new
routes. News media throughout the
airli ne's 13-state area received 40
press releases, while 200,000 copies
of The North liner, the company
newspaper, were distributed to
employees and passengers. In
October, a new passenger-oriented
inflight publication, the Northliner
Magazine, was introduced. The
four-color quarterly magazine
features articles about travel, sports,
business, and human interest in the
cities the airline serves and carries
full-page advertisements on
North Central.
New York and Milwaukee business and civic leaders, travel agents,
and interline representatives visit with North Central directors and
personnel at the inaugural reception promoting the airline's
Milwaukee-New York route.
Sherm Booen , well-known Midwest aviation commentator, has
publicized the company and its service for many years on his weekly
television program," World of Aviation ."
This huge, chalet-type transportable display, featuring North
Central's jet service to Denver, travels over the company's system
to winter sports shows.