North Central Airlines Annual Report 1975

ANNUAL. REPORT 19"75
NORTH CENTRAL AIRLINES
NORTH CENTRAL AIRLINES
7500 northliner drive, minneapoiis, minnesota
board of directors
Hal N. Carr*
Chairman of the Board and
Chief Executive Officer
North Central Airlines
G. F. DeCoursin*
President
April Company
(manufacturer and distributor
of seasoned food products)
Chan Gurney
Retired Member
Civil Aeronautics Board
John M. Lawrence III
Partner in law firm of
Lawrence, Thornton,
Payne & Watson
Samuel H. Maslon*
Partner in law firm of
Maslon, Kaplan, Edelman,
Borman, Brand & McNulty
Theodore R. Miles
President and
Chief Executive Officer
Stange Co.
(manufacturer and distributor
of food products)
Jay Phillips
Chairman of the Board
Ed. Phillips & Sons Co.
(wholesale beverage distributor)
Morton B. Phillips
Chairman of the Board
Westland Capital Corporation
(small business investment
corporation)
Joseph E. Rapkin
Partner in law firm of
Foley & Lardner
Henry M. Ross
President
Ross Industries, Inc.
(machinery manufacturer)
H. P. Skoglund
Chairman, Executive Committee
North American Life &
Casualty Company
Bernard Sweet*
President
North Central Airlines
Kenneth B. Willett*
Chairman of the Board
First Financial Savings and
Loan Assn, of Stevens Point
`Executive Committee
management
Hal N. Carr Chairman of the Board and
Chief Executive Officer
Bernard Sweet President
John P. Dow Vice President and Secretary
Robert L. Gren Vice President-Maintenance
and Engineering
George J. Karnas Vice President-Inflight Service
Daniel F. May Vice President-Finance
Gowan J. Miller Vice President-Industrial Relations
David E. Moran Vice President-Traffic and Sales
T. M. Needham Vice President-Ground Operations
J. F. Nixon Vice President and Treasurer
G. F. Wallis Vice President-Flight Operations
Charlotte G. Westberg... .Vice President-Staff Administration
Joseph W. Ettel Assistant Secretary
Raymond J. Rasenberger Assistant Secretary
Walter E. Nielsen Assistant Treasurer
Michael D. Meyer Controller
John W. Dregge Assistant to the Chairman
REGISTRARS AND STOCK
TRANSFER AGENTS:
First National City Bank
New York, New York
Northwestern National Bank
of Minneapolis
Minneapolis, Minnesota
STOCK TRADING:
Common stock and warrants
traded under symbol NCA
New York Stock Exchange
Midwest Stock Exchange
ANNUAL MEETING:
First Wednesday in April
(April 7, 1976)
Wausau, Wisconsin
AUDITORS:
Alexander Grant & Company
highlights
OPERATING REVENUES
OPERATING PROFIT
NET EARNINGS
NET EARNINGS PER SHARE
DIVIDENDS PER SHARE
WORKING CAPITAL FROM OPERATIONS
WORKING CAPITAL AT YEAR-END
RETAINED EARNINGS
STOCKHOLDERS' EQUITY
PASSENGERS
PASSENGER MILES
CARGO TON MILES
(For North Central Airlines' Form 10-K report to the Securities and
1975
$163,584,000
$ 7,221,000
$ 5,224,000
430
100
$ 12,868,000
$ 1,803,000
$ 31,039,000
$ 50,565,000
4,581,000
1,071,638,000
11,703,000
Exchange Commission, write
1974 Change
$151,490,000 8.0%
$ 17,994,000 (59.9)
$ 8,204,000 (36.3)
660 (34.8)
100 -
$ 18,784,000 (31.5)
$ 4,859,000 (62.9)
$ 27,044,000 14.8
$ 47,152,000 7.2
4,546,000 0.8
1,060,865,000 1.0
12,585,000 (7.0)
to the Secretary of the Company
about north centra!
North Central Airlines is a regional scheduled carrier linking
intermediate-sized cities with major metropolitan areas.
Its principal function is to provide safe, dependable air
transportation.
Incorporated as Wisconsin Central Airlines in 1944, the company
received its Federal operating certificate three years later.
Scheduled service was inaugurated on February 24, 1948. When
headquarters were moved to Minneapolis/St. Paul in 1952,
the name was changed to North Central Airlines. Traffic grew
steadily, setting a regional industry record by 1960 with
one million passengers, and then doubling every six years to
reach four million in 1972.
The company has operated profitably for 21 of the 22 years
under present management. Its fleet of 51 jet-powered aircraft
makes 600 departures a day over the 10,200-mile route system.
Efficient passenger handling includes computerized reservations
and automated ticketing.
Now in its twenty-ninth year, the airline serves 90 cities--in
13 states and two Canadian provinces--including Chicago,
Detroit, Cleveland, New York, Toronto, Milwaukee, Winnipeg,
Minneapolis/St. Paul, Omaha, Kansas City, and Denver.
North Central's 3,410 dedicated employees offer the traveling
public the highest type of regional airline service.
to our stockholders, employees and friends:
North Central Airlines earned $5,224,000 in 1975, and
set new company records by generating $163,584,000
in revenues and carrying 4,581,000 passengers.
These accomplishments are gratifying in view of the
challenges which faced the industry early in the year.
Passenger traffic was slow, and the price of fuel and
other goods and services was rising sharply. However,
with expenses tightly controlled, favorable results
were achieved as demand for seats increased.
The company has now operated profitably for 21
years since 1954 when present management was
brought in. This consistency of financial performance
is unequaled in the regional airline industry; North
Central has more retained earnings--$31,039,000
--than all the other regional carriers combined.
In view of the company's strong financial condition
and 1975 earnings, the Board of Directors declared the
fourth consecutive annual cash dividend. Stockholders
of record February 17, 1976, received 10 cents per share
of common stock.
Revenues for 1975 were up eight percent to $163,584,000
after reaching $151,490,000 in the previous year.
Operating expenses rose 17 percent to $156,363,000
from $133,496,000. The operating profit was $7,221,000,
down from $17,994,000 in 1974.
The acquisition of new equipment provided substantial
investment tax credits. These were used to recover 1974
Federal income taxes paid, and to reduce 1975 taxes
payable and deferred income taxes. This resulted in a
net income tax credit of $340,000 compared with a
$7,492,000 income tax expense in 1974. Net earnings
were $5,224,000, or $.43 per share. In 1974, company
earnings reached a record $8,204,000, or $.66 per share.
Profits, averaging $6,853,000 for the last four years,
kept North Central's retained earnings the highest
among the regional carriers. Stockholders' equity
advanced to $50,565,000, raising the book value to $4.18
per share. The company's long-term debt to equity
ratio of .91 to 1 still ranks with the best of the
nation's 20 scheduled airlines.
The 4,581,000 passengers carried and 1.1 billion
passenger miles flown were both one percent better
than the previous highs set a year earlier. The steady
recovery which started in July compensated for
Members of North Central's Board of Directors are (from left, seated) Joseph E. Rapkin, G. F. DeCoursin,
Hal N. Carr, Samuel H. Maslon, Jay Phillips, Morton B. Phillips, and (standing) John M. Lawrence III,
H. P. Skoglund, Henry M. Ross, Bernard Sweet, Kenneth B. Willett, Chan Gurney and Theodore R. Miles.
2
diminished traffic in the first six months. Cargo shipments
were up six percent, but a lighter average weight
caused ton miles to drop seven percent to 11,703,000.
North Central continued to excel in operating
performance. Consistent with its average over the last
18 years, the airline completed 99 percent of the
29,054,000 miles scheduled. Of its 223,000 scheduled
arrivals, 83 percent were on time. These levels of
reliability are considered outstanding in the industry.
Diligent pursuit of route expansion opportunities has
put the company in a favorable position to receive one or
more significant new nonstop segments. In February
1976, a Civil Aeronautics Board administrative law
judge selected North Central to operate between Detroit
and Boston. Later this year, the Board is expected to
issue a final decision. The airline first sought this
authority in 1972 and was granted an expedited hearing
in 1975.
Proceedings are well underway in the Chicago-
New Orleans and Midwest-Atlanta cases, and the
company has presented strong evidence to support
its applications. In the past year, North Central
filed for expedited hearings on its requests for
Minneapolis/St. Paul-Milwaukee-Memphis and
Milwaukee-Denver nonstop service. In February 1976,
the airline applied for two new nonstops to Dallas/
Ft. Worth from Omaha and Kansas City. All these routes
would substantially improve revenues and earnings.
Six new Douglas DC-9-50 fan jets will join North
Central's fleet in 1976. Three of the 125-passenger jets
are being inaugurated into service on April 25. These
larger jets offer greater passenger comfort and
convenience, as well as increased productivity by
reducing seat-mile costs. The other three will be
in operation later in the year.
The new Series 50 aircraft and the two 100-passenger
DC-9-30 jets purchased in 1975 will make five Convair
580 prop-jets surplus. The company has already
contracted to sell these Convairs.
Several airport facilities were improved for passengers
and shippers during 1975. Seven terminals and two
air freight buildings were newly constructed or
extensively renovated.
In October, the company's new $1.8-million digital
flight simulator became operational. Permitting the most
realistic pilot training possible, the equipment employs
a six-axis motion system synchronized with electronic
visual equipment. The simulator saves both fuel and
aircraft time, and is also a potential source of revenue
because other carriers are interested in renting it.
New night charter rates and the recently introduced
"Explorer's Fare" have brought down the cost of air
travel on North Central. Altogether, the airline offers
seven different ways to fly for less than the standard fare,
and this should help attract new business.
The company's Affirmative Action and Equal
Opportunity Employment programs have increased
minority employment, put more men and women in jobs
previously stereotyped for one sex, and brought
several women into management positions. Concern
for the environment is reflected in the company's
unending efforts to reduce aircraft noise levels and
conserve natural resources.
The airline anticipates further growth while sharing
the prosperity this nation has developed in its first 200
years. With the continuing support of stockholders,
employees and the passengers North Central serves,
the company looks forward to another profitable
year in 1976.
Sincerely,
Hal N. Carr
Chairman of the Board and
Chief Executive Officer
Bernard Sweet
President
March 8, 1976
financial review
Net earnings of $5,224,000 were
attained by North Central in 1975 as
revenues reached a record
$163,584,000. These results were
achieved in a difficult year that
ended unfavorably for many carriers.
With the $5.2 million in earnings,
1975 became the 21st profitable year
for North Central since 1954.
This consistently successful financial
performance--the best among
regional airlines--was recently cited
in an award from Air Transport
World, an industry publication.
Revenues, which have increased in
each of the 28 years since operations
began, gained eight percent from
$151,490,000 in 1974. Operating
expenses, including depreciation and
amortization of $8,172,000, climbed
17 percent to $156,363,000, compared
with $133,496,000 in the previous
year.
Operating profit was $7,221,000,
down from the $17,994,000 in 1974.
Other expenses, primarily interest,
increased to $2,337,000 from
$2,298,000. After an income tax credit
of $340,000, compared with tax
expense of $7,492,000 in 1974, the
net earnings of $5,224,000 ($.43
per share) were realized. This is a
drop of 36 percent from the
$8,204,000 ($.66 per share) earned
a year earlier.
The Variance Analysis table at the
right summarizes the major factors of
change in revenues and expenses
from 1973 through 1975. (Further data
on the company's operations for
the last five years is provided on
Page 19.)
The $12,100,000 growth in operating
revenues for 1975 was primarily
from fare adjustments. However,
changes in fares were not adequate
to compensate for inflationary
pressures that continued the upward
spiral of expenses. All tariffs must
be approved by the Civil Aeronautics
Board, and this procedure has a
built-in "regulatory lag" because
justification for fare increases
is based on past experience rather
than anticipated costs. This effect
was particularly critical in 1975 when
expenses rose rapidly throughout
the year while traffic lagged during
the first half.
North Central's total expenses
increased $22,900,000 in 1975 to
$156,400,000 accelerated by jet
fuel costs which soared a staggering
62 percent to $24,000,000 from
$14,800,000--after already climbing
54 percent in 1974 from $9,600,000.
Although total expenses were up 17
percent, costs in all categories
other than fuel rose 12 percent.
Labor and employee benefits, com
prising 45 percent of the company's
operating expenses, were up
$7.7 million or 12 percent, while the
number of employees was only
1.5 percent higher. Inflation con
tinued to boost the price of parts,
supplies, landing fees, food and other
goods and services. Several strikes
against other carriers in 1975 added
$800,000 in Mutual Aid payments
compared with the prior year.
At year end, advance payments
on new aircraft orders were $6,200,000
greater than at December 31, 1974,
thereby reducing funds available for
investment. This was the primary
cause for the $700,000 decline in
interest income. Interest expense
also dropped $700,000 in 1975 due to
lower interest rates and capital
ization of interest on the advance
payments for equipment.
The purchase of two DC-9-30 jets,
a DC-9 flight simulator, other capital
expenditures and the establishment
of an employee stock ownership plan
made $2,742,000 in investment tax
credits available. Of this sum,
$918,000 was carried back to recover
1974 Federal income taxes paid,
$811,000 was applied against 1975
Federal income taxes payable,
and $1,013,000 was used to reduce
deferred income taxes. These tax
credits and the decline in taxable
earnings caused income taxes
to drop $7.8 million.
The company continued to generate
substantial working capital from
operations. The $12,868,000 in 1975
and $18,784,000 in 1974 produced
a two-year total of $31,652,000. This
excellent flow of funds has enabled
the airline to continue the expansion
of its jet fleet and still maintain
one of the most favorable long-term
debt to equity ratios in the
industry--.91 to 1.
Considering the company's strong
financial condition and its 1975
earnings, the Board of Directors
declared an annual cash dividend for
the fourth consecutive year. Ten
cents per share was paid March 1,
1976, to stockholders of record
February 17.
During the last two years, the
company repurchased 364,800 of its
own shares at a total cost of $999,000.
These shares, acquired on the
open market at well below book
value, have effectively increased
the worth of outstanding stock.
Stockholders' equity has reached
a record $50,565,000 or $4.18
per share.
VARIANCE ANALYSIS
Net Changes
NET EARNINGS 1975-1974 1974-1973
1975
1974
$ 5,200,000
8,200,000 $ 8,200,000
1973
Change in net earnings .... $(3,000,000)
6,400,000
$ 1,800,000
MAJOR FACTORS OF CHANGE:
Operating revenues
Passenger miles , $ 1,400,000 $ 7,400,000
Passenger fares 10,300,000 12,300,000
Public service revenues 100,000 2,500,000
Cargo and other revenues 300,000 1,300,000
Net revenue changes 12,100,000 23,500,000
Operating expenses
Labor and employee benefits 7,700,000 7,100,000
Cost of aircraft fuel 9,200,000 5,200,000
Parts, supplies and services 1,700,000 3,500,000
Landing fees and rent 800,000 700,000
Passenger service and promotion . . . 600,000 900,000
Mutual Aid payments 800,000 (200,000)
Other expenses 1,900,000 (400,000)
Depreciation 200,000 700,000
Net expense changes 22,900,000 17,500,000
Change in operating profit . . (10,800,000) 6,000,000
Nonoperating income and expense
Interest income and other (700,000) 500,000
Interest expense (700,000) --
Income taxes (7,800,000) 4,700,000
Net nonoperating changes (7,800,000) 4,200,000
Change in net earnings . . .. $(3,000,000) $ 1,800,000
4
North Central common stock
is traded on the New York Stock
Exchange and the Midwest Stock
Exchange. High-low quotations from
the first to fourth quarters were
3%-2%, 3V4-25/8, 3-2V2
, 25/8-21/4 in
1975 and 4-2%, 3%-23/4,
3-2Ve in 1974.
The airline's $31,039,000 in retained
earnings, highest among the nine
regional carriers, has reduced the
borrowing needs for the purchase
of the six DC-9 Series 50 fan jets to be
delivered in 1976. A major portion
of the financing for the new 125-
passenger jets has been arranged,
and the balance is in the process
of being finalized. The company has a
contract to sell five Convair 580
prop-jets as they become surplus
and an option on three more
DC-9-50s for delivery in 1977.
Operating from a position of financial
strength, the company can fully
capitalize on opportunities for future
growth. Strict cost control policies,
that have proven successful in the
past, will be continued, and North
Central expects to realize a profit
again in 1976.
The airline industry magazine Air Transport World presented its 1975
Financial Management Award "To North Central Airlines for its consistent
record of profit in airline management over the past two and one-half
decades under the leadership of its pioneer chairman and chief executive
officer, Hal N. Carr. North Central in 1975 registered its 21st profit in
the last 22 years to achieve the most outstanding financial record among
U.S. local airlines.''
traffic growth and performance
The 4,580,521 passengers carried in
1975 set an all-time company record,
and over a billion passenger miles
were flown for the fourth consecutive
year. North Central again achieved
an outstanding operating performance
by completing 99 percent of its
scheduled miles.
Boardings from October through
December were the best in company
history for each of those months,
and the airline finished the year with
one percent more passengers than
the 4,546,209 of 1974. A new single
day mark of 19,600 passengers was
established on December 19.
Passenger miles, also one percent
ahead, reached 1,071,638,330,
compared with 1,060,865,304 in the
previous year.
Extra flights accommodated nearly
73,000 travelers. The 677 extra
sections of scheduled trips, added at
peak demand periods, were used by
22,538 persons, while 404 charters
took 50,307 passengers to such points
as Nassau and Freeport in the
Bahamas, Montreal and Calgary in
Canada, Washington, D. C., and cities
in 37 states. A North Central DC-9
or Convair 580 can be chartered to
fly to any airport certificated for the
aircraft in the continental United
States or nearby areas.
The volume of air freight handled
during 1975 rose six percent to
448,449 pieces--up from the 422,060
the year before. Because the average
weight had declined and express
service was discontinued in
November, total cargo ton miles in
1975 dropped seven percent to
11,703,151 from 12,584,535. Mail
accounted for 3,294,983 ton miles, a
nine percent gain over the 3,030,090
for 1974.
Consistently an industry leader in
operating performance, North Central
has averaged 99 percent completion
of its scheduled miles over the last
18 years. Considering the severe
weather conditions--including the
"Blizzard of the Century" which
virtually halted all flights for several
days in January 1975--this high level
of dependability is outstanding. In
1975, the airline flew 99 percent of the
29,053,723 scheduled miles, and
83 percent of its 223,140 scheduled
arrivals were on time.
Reliable maintenance of equipment
and effective flight control were
important factors contributing to this
high performance. The company's
perennial operating excellence has
been achieved through its progressive
and comprehensive maintenance
programs. These are implemented by
true professionals like Joseph
Orenic, the third North Central
employee in the last four years to be
named regional Mechanic of the
Year by the Federal Aviation
Administration. In 1975, less than
two-tenths of one percent of the
scheduled departures were cancelled
for maintenance reasons, and 1.3
percent were delayed by mechanicals.
When operations are disrupted for
any reason--weather, field conditions,
air traffic control or mechanicals--
many North Central employees are
involved in adjusting the operation
to provide maximum service over the
system. Flight control personnel,
with input from pilots, passenger
agents and station people, are adept
at re-routing passengers and available
aircraft to accommodate the
greatest number of travelers.
As North Central continues to grow,
the complexities of providing safe,
dependable scheduled air
transportation become greater.
Again in 1975, the company's 3,410
employees proved their ability to
meet these challenges.
Typical winter winds
swirl snow around
passengers in
Michigan's Upper
Peninsula. The airline
has averaged 99
percent completion of
its scheduled miles
over the last 18 years,
despite adverse
weather for many
months each year.
The interiors of North Central's new DC-9 Series 50 fan lets feature
the wide-body look, with many passenger conveniences and an attractive
decor. The flight attendants are Quint in Y ear by and Meleia Jordan.
6
new facilities and services
North Central's new $1.8-million
DC-9 digital flight simulator, located
at the airline's headquarters, became
fully operational in October. The
six-axis motion system, combined
with electronic visual equipment,
provides the most realistic flight
training possible.
Formerly, pilots in a simulator could
only experience three movements:
pitch, roll and vertical control. North
Central's equipment, built by CAE
Electronics and approved by the
Federal Aviation Administration
(FAA), also duplicates acceleration
and deceleration, yaw, and lateral
motion. The illusion of actual flight is
further enhanced by a McDonnell
Douglas VITAL II unit which uses
computer-generated lights to produce
detailed night pictures of selected
airports on the company's system.
Besides the many routine maneuvers
possible, training in emergency
procedures can be accomplished
more effectively than in the air. The
FAA allows pilots to take their six
months' proficiency checks in the
simulator.
Crews will "fly" over 700 hours a
year in this equipment. If a regular jet
were used, the aircraft would be out
of scheduled service for 117 days
and burn approximately 612,000
gallons of fuel. Besides saving fuel
and aircraft time, the simulator can
produce revenues. Time can be
sold to other carriers when North
Central pilot training is not scheduled.
Extensive improvements in ground
facilities were completed in 1975. A
new, larger terminal recently opened
in Marquette, and an international
flight-arrival building was added at
Duluth/Superior. Jet bridges for
second-level boarding highlighted the
expansion and complete renovation
of the Rochester terminal.
Passenger comfort and operational
efficiency were enhanced through
enlarged and remodeled terminals at
Grand Forks, Fairmont, Cincinnati
and Columbus. Sault Ste. Marie's new
terminal will be opened soon. New
air freight facilities were dedicated at
Omaha and Madison in 1975.
Air-truck shipping service was
extended in 1975 to Manitowoc-
Milwaukee and to the Nibbing/
Chisholm and Duluth/Superior-Twin
Cities route. This year, Grand
Rapids-Lansing-Detroit will be added.
Several other changes were made
to benefit passengers. On all aircraft,
no-smoking sections were increased
to comprise 50 percent of the seats.
Regulations were amended to allow
small pets to travel in the cabin.
Two DC-9-30 fan jets were added
in the Summer of 1975. This year,
North Central will take delivery of
six new DC-9 Series 50 jets. Three of
these 125-passenger aircraft start
scheduled service on April 25, 1976,
with 36 departures daily from 19
cities. The next three arrive this fall,
allowing more cities to be served
with DC-9-50s.
North Central's $1.8-million DC-9 digital flight simulator permits realistic
pilot training while saving fuel and aircraft time. It combines a six-axis
motion system with electronic visual equipment.
The addition of larger jets permits
the company to reduce the operating
cost per seat mile while substantially
upgrading other service by replacing
Convair 580 prop-jets with DC-9-30s.
Therefore, five Convairs will become
surplus this year, and the company
has already contracted to sell them.
Interiors of the larger jets will feature
the wide-body look and a completely
new decor. More leg room, enclosed
overhead luggage compartments, and
fold-down center seats are among
the major comfort and convenience
attractions.
To bring down its air fares, North
Central announced new low rates for
night charter flights and introduced
the "Explorer's Fare" which permits
savings of 20-30 percent on
domestic round-trip travel. North
Central offers seven different ways to
fly for less than the standard fare.
Potential passengers and travel
agents in 180 off-line cities, including
70 added in 1975, now have toll-free
telephone access to reservations and
flight information.
SCEPTRE, an innovative computer
system for corporate information,
became operational in November
after two years of development
by North Central. Unlike ESCORT, the
airline's computerized system for
reservations, flight information and
telecommunications, SCEPTRE is
designed to use corporate data as its
base. Its initial application relates
to the hundreds of thousands of
aircraft parts required to maintain
the company's fleet, as well as the
aircraft themselves. While parts
and aircraft are a major concern of
maintenance/engineering and
stores/inventory control, other
sections--such as purchasing,
accounting, and flight control--also
need this myriad of detailed
information.
SCEPTRE can "instantly" produce
real-time facts on scheduled and
unscheduled maintenance in process
and forecast, work already completed,
aircraft flying times, component times,
pilot reports on aircraft, and parts
changes. Such information,
continuously updated, is available
on TV-type receivers or hard-copy
printers at 150 company locations
throughout the system. Using
SCEPTRE's corporate data base,
administrative functions can also
be accomplished.
Each year, North Central moves
further ahead in its unending quest
for greater efficiency in order to
provide the best possible service for
its passengers and shippers.
social action programs
Gains are being realized in utilization
of human talents through North
Central's Affirmative Action plan and
its Equal Opportunity Employment
program. For 1975, the number of
minorities increased 14 percent over
the previous year. Several women
have been promoted to new
management positions, and more
men and women are working in jobs
previously stereotyped for one sex.
Because of the company's varied
and widespread operation, six
separate Affirmative Action programs
are being implemented: four for the
cities with a large number of
employees, another for stations with
less than 50 people, and a sixth for
flight crews. The Federal Aviation
Administration (FAA) has approved
all plans and periodically reviews
them for compliance.
Systemwide, minorities hold 268
positions in the company, or eight
percent. For 1975, 33 percent of
the 170 persons hired for permanent
jobs were minorities. Openings are
filled from minority applicants
when qualified people are available
or required skills can be readily
learned.
In the company's seven departments,
women comprise 33 percent of the
management staff in one, 25 percent
in another, and 15 percent in a
third. The traditionally-male rosters
of pilots, station agents, custodians
and skycaps all list women. Among
flight attendants, a profession that
was all-male before becoming
all-female, 13 of North Central's 39
graduates in 1975 were men.
North Central is also active in
programs for conserving natural
resources. Through the airline's
recycling plan, employees "saved"
nearly 3,000 trees in 1975 by
collecting used office paper rather
than discarding it.
In flight crew training, the new DC-9
simulator conserves 612,000 gallons
of aviation fuel annually. In addition,
2.4 million gallons are saved yearly
with the special flight procedures
instituted by North Central two years
ago. To further reduce the use of
petroleum-based products, aircraft
are deiced with hot water or a
diluted glycol solution.
Keenly aware of its responsibility
to the community, North Central is
continuously exploring ways to reduce
aircraft noise levels. New landing
approach procedures, adopted by the
airline industry, use low-power,
low-drag techniques to produce
quieter, more efficient operations.
Further improvements will be
achieved with an additional DC-9
flap setting now in the final phases of
certification by the FAA. Modified
takeoff procedures have been
in effect for some time. All engine
cowlings on new aircraft include
special acoustical material which
absorbs sound.
Demonstrating genuine concern for
the well-being of its personnel, the
airline instituted a comprehensive
chemical dependency program
with the active cooperation of
unions representing North Central
employees. The cost of treatment
for the disease is covered by
company-paid medical insurance.
An extensive educational process
indoctrinated 300 management people
with background information and
trained over 100 first-line supervisors
to recognize symptoms and assist
employees in securing professional
counseling. Response has been
very positive, and encouraging results
have already been accomplished.
The General Office at Minneapolis/
St. Paul is now certified for use by
handicapped persons. Special park
ing is provided, and modifications to
doors and rest rooms have been made.
North Central is striving to be a
responsible corporate citizen in every
area of its operation.
Custodians Mary Zierhut, Herb Thompson (center) Station Agent Peggy Bolton, working in a position
and Norm Marcell carry some of the 348,000 pounds of previously sought only by men, unloads luggage
office paper saved by company employees for recycling. alongside Agent Callan Richter.
8
route development
Boston, New Orleans, and Atlanta
would be added to North Central's
system if the Civil Aeronautics Board
(CAB) acts favorably on company
route applications now under
consideration.
Early in 1975, the airline asked
for and was granted expedited
hearings on its requests to provide
Detroit-Boston and Chicago-New
Orleans nonstop service. In July, the
Midwest-Atlanta case was initiated
by the CAB.
DETROIT-BOSTON NONSTOP
In this case, a CAB administrative
law judge issued an initial decision
selecting North Central. The case
has now gone to the Board for a final
decision later in 1976.
North Central is proposing eight
flights daily between Boston and
Detroit with new 125-passenger
DC-9-50 fan jets and 100-passenger
DC-9-30 jets. Each flight would
originate or terminate beyond Detroit.
Milwaukee, South Bend, Kalamazoo/
Battle Creek, Grand Rapids, Lansing,
Flint, and Saginaw/Bay City/Midland
would have single-plane service to
Boston. Twenty-six other cities,
principally in Wisconsin and Michigan,
would receive convenient, same-
carrier connecting service.
The Detroit-Boston market is the
largest in the nation with nonstop
flights offered by only one airline. The
CAB judge estimated that North
Central would carry 164,000
passengers the first year and realize
an operating profit of $3.2 million
on the 632-mile route. He also stated
that "the award will significantly
strengthen the route system of this
vigorous small carrier.''
CHICAGO-NEW ORLEANS NONSTOP
Proceedings are well underway,
and a decision should come in 1976.
This extension would generate
almost $9 million in operating
revenues the first year, with an
estimated $2.2-million operating
the future
North Central starts the Bicentennial
year with passenger boardings
already climbing to new highs.
Anticipating continued growth in
1976, the company looks forward to
good earnings as revenues increase
with a stronger national economy,
even though inflation boosts
expenses.
Advance bookings are well ahead
of last year. Business travel is
normally stimulated by improvements
in the economy, and vacationers
are expected to capitalize on
liberalized charter regulations and
new excursion fares on scheduled
flights. The new DC-9 Series 50 fan
profit. Of the projected passenger
traffic, 40 percent would originate
or terminate on the airline's flights
serving 25 cities in Michigan,
Wisconsin, Minnesota and North
Dakota.
The company plans three Chicago-
New Orleans round trips daily with
DC-9s. The 837-mile route is nearly
100 miles longer than any segment
now flown by the airline.
MIDWEST-ATLANTA
CAB hearings are starting this March.
North Central is asking for Detroit-
Atlanta and Cincinnati-Atlanta
nonstops. The two routes, totaling
968 miles, would generate
$20 million in operating revenues and
$5.8 million of operating profit.
MINNEAPOLIS/ST. PAUL-MEMPHIS,
MILWAUKEE-MEMPHIS NONSTOPS
In March 1975, North Central
proposed the first direct service
between Minneapolis/St. Paul and
Memphis, a 699-mile route. The
application was filed concurrently
with requests by the airport
commissions of those cities and the
State of Minnesota.
Initially, flights would stop at
Milwaukee and go nonstop the 556
miles to Memphis. As traffic increases,
the Twin Cities-Memphis nonstops
would be operated. Benefiting a
potential 71,000 passengers the first
year, North Central would realize
a $1-million operating profit.
MILWAUKEE-DENVER NONSTOP
North Central renewed its request
to the CAB for expedited action.
The 902-mile segment was first sought
in 1968. Traffic estimates show
76,000 passengers for the first year
and a $1.6-million operating profit.
OMAHA-DALLAS/FT. WORTH,
KANSAS CITY-DALLAS/FT.WORTH NONSTOPS
In February 1976, the company
applied for two new nonstops to
Dallas/Ft. Worth from Omaha and
Kansas City. (1,043 miles) By adding
these segments, single-carrier service
jets will enhance North Central's
position in competitive markets.
Freight volume is moving higher, and
the U. S. Postal Service states that
more mail will go by air.
Expenses are reasonably predictable.
Jet fuel prices have largely stabilized
after tripling since 1973. Labor
costs, although rising, can be fairly
well calculated because four union
contracts extend through 1976,
and the airline expects to reach
agreement with the other two unions.
Major route awards would have a
significant impact on 1976 results.
Detroit-Boston, Chicago-New
would be provided through Kansas
City or Omaha from 19 cities in Iowa,
Nebraska, Minnesota and the
Dakotas. North Central asked that its
request be consolidated with the
Additional Dallas/Ft. Worth-Kansas
City Nonstop Service Case now set
for hearing by the Board.
MILWAUKEE-PHILADELPHIA NONSTOP
New nonstop service has been
proposed providing single-plane
service for 10 Minnesota and
Wisconsin communities. Although
two other carriers are certificated,
only one nonstop is available in
each direction. (690 miles)
MICHIGAN PO INTS-DETRO IT-NEW YORK
This proposed authority would enable
North Central to provide new,
single-plane service through Detroit
to New York City from ten Michigan
cities. (501 miles)
COLUMBUS, DAYTON, CINCINNATI-
PHILADELPHIA NONSTOPS
The CAB has set down the Ohio/
Indiana Points Nonstop Service
Investigation for hearing.
The company's request to serve
Philadelphia from Columbus, Dayton,
and Cincinnati has been consolidated
into this case. (1,389 miles)
TWIN CITIES-KANSAS CITY NONSTOP
This application would permit North
Central to operate nonstop flights
in addition to the present two-stop
service. (394 miles)
DETROIT-MONTREAL, VIA TORONTO
This authority was requested under
an amendment to the 1966 Bilateral
Air Transport Agreement between
the United States and Canada. North
Central could also offer single-plane
service from Minneapolis/St. Paul
and Milwaukee to Montreal. The
amendment authorizes Detroit-
Montreal flights by a U.S. carrier after
1978. (315 miles)
SUMMARY
These cases would add 8,926 miles
and eight new cities to North Central's
route system.
Orleans, Detroit-Atlanta and
Cincinnati-Atlanta are possible new
nonstop segments. Each would add
substantial revenues and profits if
approval were granted early enough
in 1976 for the airline to start service
and establish itself in the market.
The outlook for the company is
brighter now than a year ago.
Anticipated revenue gains and high
employee productivity, coupled
with stringent cost control, should
make 1976 another profitable year.
North Central fully expects to
maintain its leadership in financial
performance among the regional
airlines.
WINNIPEG
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OMAHA
COLUMBUS
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KANSAS CITY
INClUNATI
PRESENT ROUTES
PROPOSED ROUTES
IEMPHIS
ATLANTA
DALLAS
FT. WORTH
NEW ORLEANS
NORTH
balance sheet
ASSETS
CURRENT ASSETS
Cash (note B)
Short-term investments -- at cost, which approximates market
Accounts receivable, less allowances
Flight equipment parts and supplies (notes A and B)
Prepaid expenses and other (note A)
PROPERTY AND EQUIPMENT - at cost (notes A, B and E)
Flight equipment
Ground property and equipment
Improvements to leased property
Less accumulated depreciation
Advance payments on equipment
DEFERRED CHARGES AND OTHER ASSETS
Unamortized development and preoperating costs (note A) ..
Rentals and other (notes A, C and D)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (note B)
Trade accounts payable
Interline payables and tickets outstanding (note A)
Accrued compensation and other expenses .. /
Income taxes (notes A and J)
LONG-TERM OBLIGATIONS
Long-term debt -- less current maturities (note B)
Deferred income taxes (notes A and J)
Warrant obligation (note B)
COMMITMENTS (notes D and E)
STOCKHOLDERS' EQUITY (notes B, F and G)
Common stock -- authorized 16,000,000 shares of $.20 par value ...
Additional paid-in capital
Retained earnings
Less treasury stock -- at cost
The accompanying notes are an integral part of this statement.
CENTRAL AIRLINES, INC.
statement of earnings
December 31 Years ended December 31
1975 1974 1975 1974
$ 3,555,000 $ 5,055,000
9,750,000
OPERATING REVENUES
Passenger (note A) $135,664,000 $124,007,000
19,277,000 14,764,000 Freight and express 8,531,000 8,158,000
4,791,000 4,023,000 Public service revenues (note H) 12,225,000 12,126,000
7,610,000 5,030,000 Mail 1,996,000 2,041,000
35,233,000 38,622,000 Non-scheduled service and other 5,168,000 5,158,000
104,192,000 92,452,000 163,584,000 151,490,000
17,648,000
5,145,000
9,741,000
3,677,000
OPERATING EXPENSES
Flying operations 50,342,000 38,077,000
126,985,000 105,870,000 Maintenance 24,330,000 20,983,000
44,005,000 36,962,000
Aircraft and traffic servicing 38,481,000 34,923,000
82,980,000 68,908,000 Passenger service 9,873,000 9,158,000
11,154,000 4,984,000
Promotion and sales 14,933,000 13,912,000
94,134,000 73,892,000
General and administrative 8,322,000 7,179,000
1,473,000 1,600,000 Other transport-related expenses 1,910,000 1,247,000
3,303,000 4,582,000 Depreciation and amortization (note A) 8,172,000 8,017,000
4,776,000 6,182,000 156,363,000 ^ 133,496,000
$134,143,000 $118,696,000
Operating profit 7,221,000 17,994,000
$ 7,581,000 $ 8,400,000
OTHER EXPENSES (INCOME)
Interest expense 3,611,000 3,868,000
5,472,000 6,588,000
Less interest capitalized (note A) 757,000 341,000
9,370,000
10,754,000
8,190,000
8,153,000 2,854,000 3,527,000
253,000 2,432,000 Interest income and other -- net (517,000) (1,229,000)
33,430,000 33,763,000 2,337,000 2,298,000
45,909,000

32,633,000 Earnings before income taxes 4,884,000 15,696,000
3,939,000
300,000
50,148,000
4,867,000
281,000
37,781,000
INCOME TAXES (notes A and J)
Current 172,000 5,348,000
2,493,000 2,493,000
Deferred (512,000)
(340,000)
2,144,000
7,492,000
18,032,000 18,032,000 NET EARNINGS $ 5,224,000 $ 8,204,000
31,039,000
(999,000)
27,044,000
(417,000) NET EARNINGS PER SHARE (note K) $ .43 $ .66
50,565,000
$134,143,000
47,152,000
$118,696,000
The accompanying notes are an integral part of this statement.
12 13
statement of changes in financial position
Years ended December 31
SOURCES AND APPLICATIONS OF WORKING CAPITAL
1975 1974
SOURCES
From operations
Net earnings $ 5,224,000 $ 8,204,000
Charges (credits) to earnings not using (providing) working capital
Depreciation and amortization 8,172,000 8,017,000
Deferred income taxes (928,000) 2,363,000
Other 400,000 200,000
Working capital provided from operations 12,868,000 18,784,000
Proceeds in excess of gain from property and equipment dispositions .... 51,000 1,061,000
Increase in long-term debt 34,531,000 --
Reduction of rentals and other assets 1,138,000 --
48,588,000 19,845,000
APPLICATIONS
Additions to property and equipment 28,051,000 5,881,000
Additions to deferred charges 527,000 2,557,000
Reduction of long-term debt 21,255,000 9,539,000
Purchase of treasury stock 582,000 417,000
Payment of cash dividend 1,229,000 1,246,000
51,644,000 19,640,000
INCREASE (DECREASE) IN WORKING CAPITAL (3,056,000) 205,000
Working capital at beginning of year 4,859,000 4,654,000
Working capital at end of year $ 1,803,000 $ 4,859,000
NET CHANGE IN WORKING CAPITAL ELEMENTS
Increase (decrease) in current assets
Cash and certificates of deposit $ (1,500,000) $ 1,597,000
Short-term investments (9,750,000) 763,000
Accounts receivable 4,513,000 854,000
Flight equipment parts and supplies 768,000 692,000
Prepaid expenses and other 2,580,000 552,000
Net change in current assets (3,389,000) 4,458,000
Increase (decrease) in current liabilities
Current maturities of long-term debt (819,000) 303,000
Trade and interline payables and tickets outstanding 64,000 1,075,000
Accrued compensation and other expenses 2,601,000 759,000
Income taxes (2,179,000) 2,116,000
Net change in current liabilities (333,000) 4,253,000
INCREASE (DECREASE) IN WORKING CAPITAL $ (3,056,000) $ 205,000
statement of changes in stockholders' equity
Years ended December 31,1975 and 1974
Common Stock
Additional Retained
Treasury Stock
Shares Paid-In Earnings Shares
Issued Amount Capital (note B) Held Amount
Balance at January 1,1974
Cash dividend (note G)
Purchase of treasury stock
Net earnings for the year
12,462,752 $2,493,000 $18,032,000 $20,086,000
(1,246,000)
8,204,000
150,900
$
417,000
Balance at December 31, 1974 ....
Cash dividend (note G)
Purchase of treasury stock
Net earnings for the year
12,462,752 2,493,000 18,032,000 27,044,000
(1,229,000)
5,224,000
150.900
213.900
417,000
582,000
Balance at December 31, 1975 .... 12,462,752 $2,493,000 $18,032,000 $31,039,000 364,800 $999,000
The accompanying notes are an integral part of these statements.
14
notes to financial statements
December 31,1975 and 1974
Note A-Summary of Significant Accounting Policies-The company
is regulated by the Civil Aeronautics Board (CAB) and uses the
Uniform System of Accounts and Reports for Certified Air Carriers
as required by the CAB. The significant policies consistently fol
lowed by the company are:
Flight Equipment Parts and Supplies: These are priced at average
cost. An allowance for obsolescence ($675,000 in 1975 and $551,000
in 1974) is provided for repairable parts by allocating their cost
over the life of the related aircraft.
Prepaid Expenses -- Engine Overhaul: Engine overhaul costs are
charged to expense as incurred except for those overhaul costs in
cluded in the purchase price of flight equipment. The company
reclassifies to a current prepaid expense the cost of those over
hauls estimated to be consumable within the next twelve months
by reducing costs included in flight equipment ($3,010,000 in 1975
and $2,175,000 in 1974).
Capitalized Interest: To properly reflect their total cost, major
additions to flight equipment, ground facilities and expenditures
for deferred charges include capitalized interest based on the
weighted average interest rate of debt outstanding. Capitalization
of interest ceases when projects become operational. The capital
ized interest is amortized over the useful lives of the related assets
for financial reporting purposes, but charged to current period
expense for income tax reporting purposes. If capitalized interest
had been expensed as incurred for financial reporting purposes, net
earnings would have been reduced by approximately $317,000 in
1975 and $118,000 in 1974.
Capitalized Leases: The company capitalizes, for both financial re
porting and tax purposes, leased facilities where the terms of the
lease result in the creation of a material equity in the property
accruing to the company.
Depreciation: Depreciation is provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their esti
mated service lives on a straight line basis for financial and tax
reporting purposes. Flight equipment is being depreciated to
residual values (15% of cost): Convair 580 based on a common re
tirement date of June 1979 and DC-9-30 based on 15-year lives.
Deferred Charges: Expenditures for route development are deferred
and amortized over the life of temporary certificates, or from five
to eight years for permanent certificates. Major computer software
development is deferred and amortized over a five-year period.
Certain of these expenditures are expensed when incurred for tax
reporting purposes.
Passenger Revenues: Passenger revenue is recognized when the
transportation service is provided. Unused ticket sales are included
as a current liability.
Pension Costs: The company has pension plans for substantially
all of its employees, and funds its current expense of normal costs
and amortization of prior service costs over periods ranging from
25 to 30 years. Asset appreciation or depreciation is applied to the
unfunded prior service cost. Pension funding is determined pri
marily by using the unit credit method (note I).
Income Taxes: The company uses the flow-through method of ac
counting for investment tax credit which reduces income tax ex
pense when the related liability is reduced. The company recognizes
deferred income taxes resulting from differences in financial and
income tax reporting (note J).
Note B -- Long-Term Debt - Long-term debt at December 31 con
sists of the following:
1975 1974
Quarterly installment notes (a)
Quarterly installment notes (b)
Semi-annual installment notes (c)
....$19,014,000
... 28,700,000
$25,566,000
13,800,000
Total due banks and insurance
companies (d)
Lease obligation (e)
Subordinated convertible debentures (f) ...
Semi-annual subordinated notes (g)
Sundry
.... 47,714,000
,... 4,418,000
690,000
.... 300,000
.... 368,000
39,366,000
690,000
900,000
77,000
Total long-term debt
Less current maturities (h)
.... 53,490,000
.... 7,581,000
41,033,000
8,400,000
$45,909,000 $32,633,000
ta) Payable in quarterly installments of $1,358,000 plus interest
during January and April and $1,811,000 plus interest during July
and October through October 1978; interest at 7%.
(b) The company signed a credit agreement in April 1975 with two
banks for $35,000,000. At December 31, 1975 the company had
borrowed $28,700,000 under the agreement payable in quarterly
installments of $1,435,000 plus interest from July 1977 through
April 1982; interest varies from lA% to Vz% above the banks' prime
rate; effective rate at December 31, 1975 was 71/2%.
(c) Prepaid in May 1975; effective interest rate at December 31,
1974 was 10i/2
%-ll%.
(d) Total due banks and insurance companies is collateralized by
substantially all flight equipment and spare aircraft parts owned
by the company. Two equipment manufacturers partially guarantee
these loans. Included in the loan agreement provisions are restric
tions on dividend payments, capital expenditures, additional borrow
ings and requirements related to minimum working capital and net
worth. The company has a commitment to retire 259,511 warrants
at $1.50 per warrant within 30 days after the expiration date of
October 31, 1979 for any of these warrants not then exercised.
These warrants were issued to loan holders in consideration of
deferring certain debt repayments (note G). The obligation is being
accrued as additional interest expense through 1979.
The company maintains cash balances in connection with the
amounts due banks and for general operating purposes. From Jan
uary 1, 1974 through April 15, 1975 the compensating balances
maintained by the company averaged approximately $2,000,000. In
April 1975 the company entered into a new arrangement which
required them to maintain average compensating balances of
$3,300,000 (adjusted for float) and required the payment of interest
at V2% over prime rate on the average compensating balance short
falls. Interest paid on shortfalls was approximately $100,000 during
1975. At December 31, 1975 and 1974 the required compensating
balances (adjusted for float) were approximately $3,500,000 and
$2,000,000, respectively.
(e) Lease obligation payable in monthly installments of $99,000 in
cluding interest at 10% through July 1980.
(f) Convertible into common shares at $8.55 a share to maturity,
June 1, 1978; interest payable each June and December at 51/2%.
(g) Payable in semi-annual installments of $300,000 plus interest
at 7% through March 1976. Stock purchase warrants issued in con
nection with this debt enable the holders to purchase a total of
200,000 common shares (note G).
(h) Current maturities of all long-term debt due in each of the next
five years following December 31, 1975 are as follows:
1976 $ 7,581,000
1977 10,215,000
1978 13,785,000
1979 6,794,000
1980 6,503,000
$44,878,000
At December 31, 1975 $3,000,000 of unused lines of credit were
available for short-term borrowing from several banks at their prime
lending rate.
15
notes to financial statements
December 31, 1975 and 1974 (continued)
Note C--Lessor Leasing Activities-lnvestments in leased equipment
accounted for under the finance method, including residual values,
totaled $1,338,000 and $1,255,000 at December 31, 1975 and 1974,
respectively.
In 1975 the company leased equipment which they capitalized at a
cost of approximately $4,700,000 (note B[e]). This equipment was
subleased and rentals accounted for under the operating method.
Note D - Lease Obligations - Total rent expense, including landing
fees, was $13,642,000 in 1975 and $12,876,000 in 1974, including
rentals under "financing leases" (as defined by the Securities and
Exchange Commission) of $6,421,000 in 1975; $6,375,000 in 1974.
The company has lease commitments for various airport facilities
based upon usage and landings, subject to adjustment depending
upon the needs of the airport operating authority. These leases ex
pire over varying periods, and future annual lease commitments are
not determinable due to the usage and adjustment factors.
At December 31,1975, the company's minimum rental commitments,
including rental prepayment requirements, under non-cancellable
leases with initial or remaining terms of more than one year are
as follows (in thousands of dollars):
DC-9-30 CV-580 Computer
Period Aircraft Aircraft Equipment Facilities Other Total
1976 $2,088 $441 $1,637 $1,634 $283 $ 6,083
1977 2,088 _ 1,569 1,634 215 5,506
1978 2,088 -- 1,398 1,634 48 5,168
1979 2,088 -- 1,023 1,634 28 4,773
1980 2,088 -- -- 1,634 28 3,750
1981-1985 1,957 _ -- 8,170 -- 10,127
1986-1990 -- -- -- 8,034 _ 8,034
1991-1995 -- --
_ 7,395 -- 7,395
1996-2000 - - - 2,285 - 2,285
Because DC-9-30 leases are related to the prevailing prime interest
rate, the actual rent expense exceeded the minimum by $344,000
in 1975 and $600,000 in 1974. Nearly all leases contain renewal or
extension options which are to be negotiated within specified pe
riods prior to the expiration of the leases.
The present value of the noncapitalized financing leases and the
related interest rates at December 31 are (in thousands of dollars):
Interest
Rate 1975 1974
Five DC-9-30 aircraft 61/2% $10,113 $11,520
Nine CV-580 aircraft 53/4
% 434 2,344
Computer equipment 8V2% 4.220 5,050
Facilities 41/2% 15,942 16,436
Other 63/4% 467 724
$31,176 $36,074
The impact on net earnings by capitalization of such leases would
have been immaterial. The company, regulated by the CAB, is un
able to determine what impact the above capitalization might have
on the rate base and any consequent rate adjustments.
Note E -- Commitments-- At December 31, 1975, the company has
purchase commitments on six new DC-9-50 aircraft for which it has
advanced $10,475,000 and capitalized interest of $401,000. An addi
tional $36,286,000 will be expended by the company in fulfilling
these commitments. Three of the aircraft will be delivered in the
second quarter and three in the fourth quarter of 1976. The total
purchase price of $46,761,000 could be adjusted upwards based
upon an agreement which allows for changes in specifications.
The company has applied for additional financing in the form of
government guaranteed notes.
Subsequent to year end, the company entered into a contract for
the sale of five CV-580 aircraft. The aircraft are scheduled for
delivery in 1976 (2) and 1977 (3). The total selling price is $3,975,000,
which approximates the company's book value.
The company has advanced $75,000 on a purchase commitment,
which contains an option to cancel prior to September 1976, for
three additional DC-9-50 aircraft. If the option to cancel is not
exercised, an additional $23,602,000 would be expended prior to
delivery of the three aircraft in the fourth quarter of 1977.
Purchase commitments for various other equipment total $1,520,000,
for which $203,000 has been advanced.
Under provisions of the Mutual Aid Agreement, the company would
pay struck carriers who are a party to this agreement. The com
pany would receive such payments in the event of a strike by its
employees.
Note F - Stockholder Disclosure of Ownership - The company is
required by 245.16 of the Civil Aeronautics Board Economic Regu-
nations to include in its annual report to stockholders the following
notice:
(1) Any person who either owns, as of December 31, of the year
preceding issuance of such annual report, or subsequently ac
quires, beneficially or as trustee, more than 5 percent, in the
aggregate, of any class of the capital stock or capital of the air
carrier, shall file with the Board a report containing the infor
mation required by 245.12, on or before April 1, as to the
capital stock or capital owned as of December 31, of the pre
ceding year, and in the case of stock subsequently acquired, a
report under 245.13, within 10 days after such acquisition or
ownership;
(2) any bank or broker covered by (1), to the extent that it holds
shares as trustee on the last day of any quarter of a calendar
year, shall file with the Board, within 30 days after the end of
the quarter, a report in accordance with the provisions of
245.14; and
(3) any person required to report under this subpart who grants a
security interest in more than 5 percent of any class of the
capital stock or capital of the air carrier shall within 30 days
after granting such security interest file with the Board a report
containing the information required in 245.15. The notice shall
also state that any stockholder 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 Aero
nautics Board, Washington, D. C. 20428.
Note G --Common Stock --At December 31, 1975, 123,550 shares
of unissued common stock are reserved for officers and key em
ployees, under a qualified plan adopted in 1965. An additional
200,000 shares were reserved under a plan adopted by the Board
of Directors in September 1975 which is subject to shareholder
approval. When options are exercised, the excess of the option price
over par value of the shares is credited to additional paid-in capital.
The company makes no charges to income in connection with the
shares issued under the stock option plan.
,, x
. ,, , , Option Price and Fair Market Value at Date of Grant
Options Outstanding --
Year
Granted
Year
Exercisable
Per
Share
December 31, 1975
Shares Amount
December 31,1974
Shares Amount
1970 1970 $3.25 -- $ 95,000 $308,750
1971 1971 3.1875 36,100 115,069 36,100 115,069
1973 1973 4.25 7,500 31,875 7,500 31,875
1974 1974 3.375 8,525 28,772 8,525 28,772
1974 1974 2.75 23,925 65,794 23,925 65,794
1974 1975 2.75 45,000 123,750 45,000 123,750
1974 1977 2.75 2,500 6,875 2,500 6,875
123,550 372,135 218,550 680,885
1975 1979 2.50 95,000 237,500 -- --
218,550 $609,635 218,550 $680,885
All options granted expire five years after date of granting. There
were 105,000 shares under the 1975 plan available for granting at
December 31, 1975.
At December 31, 1975 and 1974 there were outstanding warrants
to purchase 2,649,061 shares of common stock. These warrants
resulted from public offerings prior to 1973 and from financial
transactions as discussed in note B(d) and (g). All warrants enable
the holder to purchase common stock at $5.50 per share and must
be exercised by October 31, 1979.
16
During January 1976, the Board of Directors declared a $.10 per
share dividend payable on March 1, 1976 to shareholders of record
on February 17, 1976. The company also paid cash dividends of
$.10 per share to its shareholders during the first quarter of 1975
and 1974.
Note H -- Public Service Revenues -- As a local service carrier, the
company receives public service revenues for serving small and
intermediate size communities which do not generate sufficient
traffic to fully support profitable air service. The amount of such
payments is determined by the CAB on the basis of its evaluation of
the amount of revenue needed to meet operating expenses and
provide a reasonable return on investment with respect to eligible
routes. The amount so determined is reduced by a portion of the
company's earnings on routes not eligible for public service reve
nue, when these earnings exceed the prescribed maximum return
on investment as set by the CAB. The CAB adopted Class Rate VII
effective as of July 1, 1973. It provides for semiannual review of
the company's public service revenue rate and has no specified
expiration date.
Note I --Pension Costs --Total pension expense was $4,489,000
for 1975 and $4,150,000 for 1974. At January 1, 1975, the latest
actuarial valuation date, the actuarially computed value of vested
benefits for all plans exceeded the total market value of fund assets
by approximately $943,000. Changes in funding methods for cer
tain of the plans did not have a material effect on pension expense
for 1975. Market value declines and improvements in benefits are
the major reasons for the excess of vested benefits over the market
value of fund assets.
The Pension Reform Act of 1974 is not expected to have a sig
nificant future effect on the amount of the company's pension ex
pense, funding or unfunded vested benefits.
Note J -- Income Taxes -- Income tax expense for the years ended
December 31 consists of the following:
Current income taxes ---
Federal $1,675,000 $7,214,000
Investment tax credit used in current year (811,000) (2,798,000)
Investment tax credit carried back to
prior year (918,000)
(54,000) 4,416,000
State and local 226,000 932,000
172,000 5,348,000
Deferred income taxes
Federal 418,000 190,000
Investment tax credit (1,013,000) 1,933,000
(595,000) 2,123,000
State and local 83,000 21,000
(512,000) 2,144,000
$ (340,000) $7,492,000
auditors ' report
Income taxes of $(340,000) in 1975 and $7,492,000 in 1974 (effective
rates of (7.0%) and 47.7% respectively) are less than those ex
pected to result by application of the federal income tax rate of
48% to income before taxes. For the years ended December 31, the
reasons for these differences are: 1975 1974
Computed "expected" tax expense
Increase (decrease) in income taxes
... $2,344,000 $7,534,000
Investment tax credit utilized
State and local income taxes net of
... (2,742,000) (865,000)
federal income tax benefit 161,000 496,000
Other ... (103,000) 327,000
$ (340,000) $7,492,000
Deferred income taxes arise from timing differences between finan
cial and tax reporting. The tax effects of these differences follow:
Increase (decrease) in deferred income 1975 1974
tax expense
Capitalized interest ... $ 403,000 $ 181,000
Lessor leasing activities 311,000 61,000
Depreciation 136,000 98,000
Pension ... (306,000) --
Training and development ... (147,000) (248,000)
Investment tax credit ... (1,013,000) 1,933,000
Other 104,000 119,000
$ (512,000) $2,144,000
Investment tax credits of $1,013,000 were recognized during 1975
as an offset against deferred income taxes for financial reporting
purposes, but are carried forward for federal tax reporting purposes
and will expire in 1982.
During the fourth quarter of 1975 the company generated more
investment tax credits than were anticipated earlier in the year.
Part of the additional credits were generated by establishing an
employee stock ownership plan. The company received an addi
tional investment tax credit of approximately $250,000 by con
tributing the same amount to the plan.
The Internal Revenue Service has examined and cleared the com
pany's federal tax returns through December 31, 1974.
Note K -- Net Earnings Per Share - Net earnings per share is based
on the weighted average number of shares outstanding for the year
(12,212,427 in 1975 and 12,431,869 in 1974). Conversion of de
bentures into common stock, exercise of stock options and warrants
to purchase stock would not result in material dilution of net earn
ings per share for the years ended December 31,1975 and 1974.
Note L -- Reclassifications - Certain of the 1974 figures have been
reclassified where appropriate to conform with the financial state
ment presentation used in 1975.
Alexander Grant MIDWEST PLAZA BUILDING, MINNEAPOLIS, MN 55402
AMERICAN NATIONAL BANK BLDG., ST. PAUL, MN 55101
& COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
INTERNATIONAL FIRM
ALEXANDER GRANT TANSLEY WITT
Stockholders and Board of Directors
North Central Airlines, Inc.
We have examined the balance sheet of North Central
Airlines, Inc. (a Wisconsin corporation) as of December 31,1975
and 1974, and the related statements of earnings, changes in
stockholders' equity and changes in financial position for the
years 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.
In our opinion, the financial statements referred to above
present fairly the financial position of North Central Airlines,
Inc., at December 31,1975 and 1974, and the results of its opera
tions and changes in its financial position for the years then
. ended, in conformity with generally accepted accounting prin
ciples applied on a consistent basis.
Minneapolis, Minnesota
February 12, 1976
17
five-year summary
EARNINGS
OPERATING REVENUES 1975 1974 1973 1972
Passenger $135,664,000 $124,007,000 $104,279,000 $ 99,260,000
Public service revenues 12,225,000 12,126,000 9,631,000 9,090,000
Other 15,695,000 15,357,000 14,073,000 12,903,000
163,584,000 151,490,000 127,983,000 121,253,000
OPERATING EXPENSES
Flying operations and maintenance 74,672,000 59,060,000 48,480,000 46,732,000
Other operating expenses 73,519,000 66,419,000 60,152,000 55,176,000
Depreciation and amortization 8,172,000 8,017,000 7,350,000 6,990,000
156,363,000 133,496,000 115,982,000 108,898,000
OPERATING PROFIT 7,221,000 17,994,000 12,001,000 12,355,000
OTHER EXPENSES (INCOME)
Interest expense 3,611,000 3,868,000 3,623,000 3,229,000
Capitalized interest (757,000) (341,000) (142,000) (14,000)
Interest income and other--net (517,000) (1,229,000) (690,000) (256,000)
2,337,000 2,298,000 2,791,000 2,959,000
EARNINGS BEFORE TAXES 4,884,000 15,696,000 9,210,000 9,396,000
Income taxes (340,000) 7,492,000 2,763,000 2,903,000
EARNINGS BEFORE EXTRAORDINARY GAIN. 5,224,000 8,204,000 6,447,000 6,493,000
Extraordinary gain on disposition of
equipment (net of income taxes) -- -- -- 1,043,000
NET EARNINGS $ 5,224,000 $ 8,204,000 $ 6,447,000 $ 7,536,000
NET EARNINGS PER SHARE $.43 $.66 $.52 $.60
DIVIDENDS PER SHARE $.10 $.10 $.05 --
BALANCE SHEET ITEMS
Current assets $ 35,233,000 $ 38,622,000 $ 34,164,000 $ 33,806,000
Working capital from operations $ 12,868,000 $ 18,784,000 $ 14,176,000 $ 14,263,000
Working capital at year-end $ 1,803,000 $ 4,859,000 $ 4,654,000 $ 5,439,000
Property and equipment--net $ 94,134,000 $ 73,892,000 $ 76,324,000 $ 59,143,000
Total long-term debt $ 45,909,000 $ 32,633,000 $ 42,172,000 $ 36,327,000
Retained earnings $ 31,039,000 $ 27,044,000 $ 20,086,000 $ 14,262,000
Stockholders' equity $ 50,565,000 $ 47,152,000 $ 40,611,000 $ 34,787,000
Shares outstanding
Book value per share
12,098,000
$4.18
12,312,000
$3.83
12,463,000
$3.26
12,463,000
$2.79
STATISTICS
Passengers 4,581,000 4,546,000 4,263,000 4,319,000
Passenger miles (000) 1,072,000 1,061,000 1,012,000 1,029,000
Available seat miles (000) 2,235,000 2,151,000 2,139,000 2,048,000
Passenger load factor 48.0% 49.3% 47.3% 50.3%
Cargo ton miles 11,703,000 12,585,000 13,394,000 12,181,000
Revenue plane miles 29,748,000 29,055,000 29,422,000 29,200,000
Number of employees 3,410 3,360 3,250 3,120
1971
$ 83,821,000
6,885,000
10,905,000
101,611,000
43,360,000
45,196,000
7,240,000
95,796,000
5,815,000
4,252,000
(23,000)
(183,000)
4,046,000
1,769,000
544,000
1,225,000
$ 1,225,000
$.11
$ 25,725,000
$ 9,204,000
$ 3,900,000
$ 62,891,000
$ 43,407,000
$ 6,726,000
$ 27,192,000
12,446,000
$2.18
3,793,000
866,000
1,961,000
44.2%
9,473,000
28,204,000
3,020
19
communications
"Ski Tips" was the theme of a
comprehensive advertising campaign
designed to stimulate air travel to
Denver and other major ski areas on
North Central's system. This
highly-successful program was
launched with radio, television,
billboard, newspaper and magazine
advertising in appropriate markets.
A full-color brochure detailed the
79 different "packages" available to
Colorado skiers. A Travel Agent's
Guide contained complete reference
material on air fares, car rental,
ski facilities, and accommodations.
Ad coupons offered a free copy
(Volume Four) in the company's
series of "Ski Tips" booklets.
An eight-minute movie called "Ski
Tips" was part of the audio-visual
presentation made to travel agents
and other interested groups by
company sales managers. Believed to
be the only instructional film in
general circulation, "Ski Tips" was
viewed by 315,000 persons during
475 group showings and telecasts
booked in a four-month period.
To point out the benefits of joint
fares, "Stop Driving Yourself"
headlines appeared in newspaper ads
carried in most of the intermediate
and smaller cities on the company's
system. Through reader involvement,
the ad mathematically showed
actual dollar savings realized by
passengers who board North Central
locally, compared with driving to
hub airports for flights on other
airlines.
New toll-free telephone service to
North Central was announced through
newspaper ads in 70 off-line cities.
Improved schedules were promoted
in major markets. Excursion fares
for Milwaukee-New York and Duluth/
Superior-Minneapolis/St. Paul
received special attention. Air freight
ads appeared in national trade
magazines.
"Operation Contact" was instituted
in June 1975 to increase personal
calls made by the company's station
managers on potential and present
air freight customers. The managers
point out the advantages of shipping
by air and the special attention
North Central offers. The program
has reached 2,800 prospects in
just seven months.
For the third consecutive year,
North Central's Annual Report was
selected for an award in its industry
class by Financial World magazine.
The report, principally a stockholder
communication, is supplemented
by quarterly statements summarizing
financial performance and interim
developments.
Throughout the year, 50 general
and special news releases to various
media outlets related the airline's
traffic results, financial data, and
other significant events that occurred.
Station personnel made nearly
2,200 weather and "spot" reports.
A greater awareness of North Central
in the financial community was
achieved through presentations to
security analysts in New York and
Kansas City by company officers.
Sales personnel conducted extensive
field activity. Their 24,200 personal
calls on major industrial accounts
and 3,000 travel agencies produced
closer working relationships.
Company personnel took part in
1,350 civic, industry and special
interest meetings or events.
Again this year, North Central
hosted thousands of visitors at its
headquarters in Minneapolis/St. Paul.
Over 15,300 were given a glimpse
of the overall facility while attending
functions in the employee cafeteria,
and--in most cases--an introduction
to meals prepared by the airline's
flight kitchen. The Northliner Museum
attracted 1,300 persons. Another
5,000 took scheduled tours of the
General Office and Main Operations
Base.
The Northliner Magazine and
Northliner Gifts catalog, both carried
aboard the aircraft, tell about the
company and promote corporate
identity. Each issue of the magazine
reaches over a million readers. Many
of the gifts offered for sale carry the
North Central logo and name.
Internal communications are carried
by the monthly Northliner newspaper,
periodic memos to all employees,
and bulletin board announcements.
Stations are given advance notice
of advertising campaigns breaking in
their areas. Company officers have
informal meetings with employees at
each station at least once a year.
Support by many persons outside
the airline was again in evidence this
year. North Centra! always derives
substantial benefit from the
generous efforts of others, and their
contributions are gratefully
acknowledged.
North Central's DC-3 "728", the "World's
High-Time Aircraft", has settled into
retirement--but not obscurity. On May 28,
1975, it landed for the last time at
Dearborn, Michigan, with 84,875 hours of
flying time in its log book. Scores of
cameras recorded the event.
The 36-year-old plane, known as "728"
after the last three digits in its serial number,
was donated by the company to the Henry
Ford Museum in Dearborn. Retaining the
North Central colors, it is on permanent
display as part of a collection of the ten
most significant piston-powered aircraft
of all times. Over 2,000,000 people visit the
Museum annually.
This DC-3 gained international prominence
when it was officially retired from scheduled
service in 1965 after having flown an
incredible 83,032 hours and 52 minutes--
more time aloft than any other aircraft in
the history of aviation. North Central added
1,843 hours by using the plane for
promotional and public relations flights.
The company is still identified with 728's
fame through the Museum exposure and a
brochure telling about the aircraft's lore.
20
NORTH
CENTRAL
AIRLINES
VOLUME 4
aeni
or rc*MM
CENTRAL
AIRLINES
NORTH CENTRAL AIRLINES
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talks about North Central,
'professional airline.
North Central to Denver For mv
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NORTH CENTRAL. AIRLINES, INC.
7500 NORTHLINER DRIVE
MINNEAPOLIS, MINNESOTA 55ASO