North Central Airlines Annual Report 1978

NORTH CENTRAL AIRLINES
board of directors
Hal N. Carr*
Chairman of the Board
North Central Airlines
Eric Bramley
Retired Editor
Aviation Daily
(aviation industry news service)
G. F. DeCoursin'
Chairman of the Board and
Chief Executive Officer
Media Graphics, Inc.
(creative graphic arts and
commercial photography)
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
St ange 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)
Bernard Sweet*
President and
Chief Executive Officer
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
Bernard Sweet President and Chief Executive Officer
J C Constantz Vice President-Federal Affairs
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 Wee 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 Staff Vice President
Joseph W. Ettel Assistant Secretary
Raymond J. Rasenberger Assistant Secretary
Ralph Strangis Assistant Secretary
Walter E. Nielsen Assistant Treasurer
Michael D. Meyer Controller
NORTH CENTRAL AIRLINES, INC.
"7500 NORTH LINER DRIVE MINNEAPOLIS, MINNESOTA 55A50
highlights
OPERATING REVENUES
OPERATING PROFIT
NET EARNINGS
NET EARNINGS PER SHARE AND EQUIVALENT SHARE
WORKING CAPITAL FROM OPERATIONS
RETAINED EARNINGS
STOCKHOLDERS'EQUITY
PASSENGERS
PASSENGER MILES
CARGO TON MILES
1978 1977 Change
$ 299,053,000 $ 229,123,000 30.5%
$ 35,103,000 $ 18,535,000 89.4
$ 22,164,000 $ 13,696,000 61.8
$1.70 $1.11 53.2
$ 42,269,000 $ 28,505,000 48.3
$ 69,148,000 $ 48,957,000 41.2
$ 89,612,000 $ 69,280,000 29.3
6,91 1,000 5,547,000 24.6
1, 925,450,000 1, 392,406,000 38.3
17,619,000 13,998,000 25.9
about north centra!
North Central Airlines, a scheduled carrier linking
intermediate-sized cities with major metropolitan areas,
has completed 31 years of service 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 24 years since 1954,
when present management was brought in. Its fleet of
59 jet-powered aircraft makes 725 departures a day
over a 22,400-mile route system. Computerized reservations
and ticketing provide efficient passenger handling.
The airline serves 103 cities--in 20 states and two Canadian
provinces-including Boston and New York; Miami,
Atlanta, Houston; Tucson, Denver; Winnipeg and Toronto. Major
hubs are Detroit, Milwaukee, Chicago and Minneapolis/St. Paul.
North Central's 4,500 dedicated employees offer the
traveling public the finest type of scheduled airline service.
ANNUAL MEETING: REGISTRARS & STOCK TRANSFER AGENTS: STOCK TRADING:
Wednesday, April 4, 1979
Wausau, Wisconsin
Citibank, N.A.
New York, New York 10043
Common stock and warrants
traded under symbol NCA
AUDITORS:
Alexander Grant & Company
Northwestern National Bank
Minneapolis, Minnesota 55480
New York Stock Exchange
Midwest Stock Exchange
Hal N. Carr
Bernard Sweet
to our stockholders,
employees and friends:
In every area, 1978 was the most outstanding year
in the history of North Central Airlines. Here are
the highlights:
Net earnings reached $22,164,000, an all-time record.
Earnings per share rose 53 percent to $1.70, and
this year's cash dividend was increased 25 percent.
Revenues soared to nearly $300 million-a new high.
Passenger miles jumped 38 percent to 1.9 billion.
System mileage doubled, as 17 long-haul nonstop
routes were added.
The proposed merger of North Central with
Southern Airways is nearing reality.
These achievements demonstrate two of the company's
most important assets: financial strength and
productive employees, who are able to meet challenges
and take advantage of opportunities.
The airline's growth in 1978 exceeded expectations.
Revenues hit $299,053,000, a 31 percent gain.
The net earnings of $22,164,000, or $1.70 per
share, were 62 percent over the $13.7 million,
or $1.11 per share, for 1977. This $8.5-million increase
in earnings was the largest ever attained. The
company has operated profitably for 24 years since
1954, when present management was brought in.
North Central remains a financial leader among
the regional carriers, ranking first with $69,148,000 in
retained earnings. Stockholders' equity was up
29 percent to $89,612,000, raising book value per
share to $7.25.
On the basis of the company's excellent 1978 profits,
the Board of Directors declared a cash dividend of $.20
per share to stockholders of record February 15, 1979.
North Central has paid annual cash dividends for
the past seven years.
A record 6,911,000 passengers were carried in 1978.
Passenger miles climbed to 1.9 billion, while cargo
ton miles totaled 17.6 million. To accommodate this
traffic growth, seven DC-9-50 jets were acquired.
The airline's 59-aircraft fleet is composed of 36 DC-9s
and 23 Convair 580s.
North Central added 13 new cities and 17 long-haul
nonstop routes to its system in 1978-expanding from
10,900 miles to 22,400 miles. Service was introduced
to Baltimore, Syracuse, Philadelphia, Atlanta,
Houston and Tucson, plus the Florida cities of Tampa/
St. Petersburg, Sarasota/Bradenton, West Palm Beach,
Fort Lauderdale and Miami. Minneapolis/St. Paul-
San Diego was also awarded by the Civil Aeronautics
Board, and flights could begin later this year. The airline
now serves 103 cities in 20 states and two Canadian
provinces.
Officials of North Central and Southern Airways
announced a proposed merger of the two companies in
July 1978. The formal agreement, reached in
September, was endorsed by directors and stockholders
of both airlines. Approval by the Civil Aeronautics
Board has been requested, and the Law Judge issued a
favorable initial decision in February 1979. Final
decisions are expected this Spring from the Board
and the President of the United States.
With the combination of North Central and Southern,
a dynamic new carrier--Republic Airlines--will emerge.
It can provide stronger competition, greatly
improved service,and fare savings to over
150 communities and 12 million passengers. As the
name implies, Republic will derive its strength from
its 7,500 people who will serve air travelers across the
nation and from Canada to the Caribbean.
North Central's own unprecedented growth and
earnings in 1978 are a tribute to the dedicated efforts
of the company's personnel. Their contributions,
and those of countless others who support the airline,
are gratefully acknowledged.
Prospects for the future are the brightest in
North Central's history. The new routes will be vigorously
developed, several additional awards are expected,
and more jets will be arriving. With further industry
growth in 1979 and the pending merger, the
company enthusiastically embarks on a new era.
Sincerely,
Hal N. Carr
Chairman of the Board
Bernard Sweet
President and
Chief Executive Officer
March 5, 1979
3
financial review
$151,530,000
Record net earnings of $22,164,000
were achieved by North Central in
1978. This surpasses by 62 percent
the previous mark of $13,696,000
in 1977. Revenues reached
$299,053,000 to set an all-time high.
In each of the past two years,
earnings have increased more than
60 percent. The company has
operated profitably for 24 years since
1954, when present management
was brought in. North Central has
retained earnings of $69,148,000
-largest among the regional airlines.
The $299 million in revenues
represents a 31 percent gain over the
$229,123,000 reported for 1977.
Operating expenses, including
depreciation and amortization of
$16,353,000, rose 25 percent to
$263,950,000 from the $210,588,000
a year earlier. Operating profit
jumped 89 percent to $35,103,000
from $18,535,000.
With the purchase of new aircraft
and equipment in 1977 and 1978,
investment tax credits of $12,720,000
were generated. These credits
offset all Federal, state and deferred
income taxes except $4,555,000 in
1978 and $1,004,000 in 1977.
The 1978 net earnings of $22,164,000,
or $1.70 per share and equivalent
share, compare with the $13.7 million,
$1.11 per share, the previous year.
Stockholders' equity increased
29 percent to a record $89,612,000.
Book value has risen to $7.25 per
share on 12,366,031 shares of common
stock outstanding, from $5.62 per
share in 1977.
The Board of Directors declared
an annual cash dividend in January
1979. Stockholders of record on
February 15 received $.20 per share,
up 25 percent from the $.16 per share
paid in 1978. North Central is the only
regional airline which has issued
a cash dividend in each of the past
seven years.
Operating expenses, 25 percent
ahead of 1977, reflect national
inflationary trends and extra costs
associated with expanded operations.
Wages, fringe benefits, and payroll
taxes were up 22 percent to
$115,227,000. Interest expense rose
to $11,783,000, because of higher
interest rates and debt incurred to
finance additional flight equipment.
A summary of the company's five-year
traffic and financial growth appears
on Page 27. Supplemental stockholder
information, including quarterly
statements, is carried on Page 24.
To accommodate traffic growth
and implement future route awards,
the company will add 11 DC-9-50
aircraft to its fleet by the Spring of 1980.
The first three 727-200 long-range
tri-jets will be received by June 1980.
The Airline Deregulation Act of 1978
will affect the company's future
financial performance, although the
full impact cannot be assessed.
One provision of the Act allows the
airlines to unilaterally adjust fares
up five percent or down 50 percent.
This permits faster reaction to
cost increases and encourages
experimentation with lower fares.
North Central is in an excellent
position to take advantage of the
benefits of deregulation. Consistent
profitability for over two decades
has given the company ample resources
to develop new markets and generate
traffic on established routes. The
merger of North Central with Southern
Airways offers further opportunities
and many challenges. With continued
strict cost control and revenue growth,
the company expects to achieve
another successful year in 1979.
MAJOR FACTORS OF CHANGE IN REVENUES AND EXPENSES
The Variance Analysis table below
summarizes the major changes
in revenues and expenses which have
occurred in North Central's operation
over the past two years.
Traffic gains generated the $69.9-million
jump in revenues. Contributing
factors were the introduction of service
on 17 major nonstop routes,
promotional fares, a strike against
another carrier, and the addition
of seven DC-9-50 jets. Net passenger
revenues climbed $62 million, even
though lower rates on long-haul
flights and discount fares reduced the
average yield. Public service
revenues were reduced by $900,000
under the revised formula for
calculating the amount paid to the
company to serve small communities.
Cargo and other revenues were
$8.8 million higher-$6.1 million from
air freight, $3.4 million from charters
and a $700,000-decline in
miscellaneous activities.
Operating expenses were up
$53.3 million. Of that amount, labor
and employee benefits showed a
$20.8-million gain dueto higher wages,
insurance and pension costs, and
a 16 percent increase in personnel.
Aircraft fuel expenses escalated
$8.6 million with 15 percent greater
usage and the average price per
gallon up seven percent. Inflation,
expanded operations, and the cost of
starting new routes affected landing
fees, rent, parts, supplies and services.
Mutual Aid payments increased
by $5.6 million due to a strike against
another carrier.
Under other expenses (income), the
ain on disposition of equipment was
2.8 million less than in 1977. With
higher interest rates and more short
term investments, $1.1 million was
added to interest income. The change
in interest expense of $2.9 million
reflects the cost of financing new
equipment and rising interest rates.
Income taxes increased $3.5 million
because earnings exceeded the
investment tax credits available to
offset 1978 federal income taxes.
The combined effect of these factors
was the substantial improvement
in net earnings of $8.5 million.
VARIANCE ANALYSIS
Net Changes
1978-1977 1977-1976
MAJOR FACTORS OF CHANGE:
Operating revenues
Passenger miles
Passenger fares
Public service revenues
Cargo and other revenues
Net revenue changes
$63,100,000
(1,100,000)
(900,000)
8,800,000
69,900,000
$24,400,000
5,100,000
(200,000)
8,700,000
38,000,000
Operating expenses
Labor and employee benefits
Cost of aircraft fuel
Parts, supplies and services
Landing fees and rent
Passenger service and promotion ....
Mutual Aid payments
Other expenses
Depreciation
Net expense changes
Changes in operating profit .
20,800,000
8,600,000
3,600,000
2,000,000
6,800,000
5,600,000
4,100,000
1,800,000
53,300,000
16,600,000
14,300,000
7,700,000
2,800,000
1,400,000
3,400,000
(100,000)
1,700,000
3,000,000
34,200,000
3,800,000
Other expenses (income)
Gain on disposition of equipment
Interest income and other
Interest expense
Income taxes
Net other changes
(2,800,000)
1,100,000
2,900,000
3,500,000
8,100,000
2,500,000
(100,000)
2,200,000
(2,000,000)
(2,200,000)
Changes in net earnings .... $ 8,500,000 $ 6,000,000
5
north centra!/ southern merger
The proposed merger between
North Central and Southern Airways
will produce a strong, competitive
new airline.
At special meetings in February 1979,
stockholders of North Central and
Southern endorsed the merger. A final
decision by the Civil Aeronautics
Board, expected this Spring, must be
affirmed by the President because
international routes are involved.
In July 1978, officials of the two
companies had announced an
agreement in principle on the merger.
A formal agreement was reached
in September, and both Boards
of Directors approved the terms. CAB
hearings were held in November.
The U.S. Department of Justice,
Department of Transportation, and the
CAB Bureau of Pricing and Domestic
Aviation favored the merger, while
the CAB Bureau of Consumer
Protection expressed some opposition.
The Law Judge's initial decision,
issued in February, recommended
the merger.
North Central has always viewed
route expansion through merger as a
viable possibility, provided it is
consistent with the company's overall
management philosophy. As the
regional industry matured, it made
sense to seek a partner with the
potential for major nonstop routes
which could be fed by both systems.
After considerable research and
analysis, Southern proved to
be the most logical choice.
The two airlines do not compete
on a single route segment, but they
connect at 11 metropolitan areas.
The systems integrate well, providing
strong traffic demand to support
new flights and produce higher load
factors.
The proposed merger preserves
two regional networks which offer
essential air service to 12 million
passengers and over 150 cities.
North Central believes the combination
is an excellent opportunity for
greater growth and profitability.
Access to winter "sunshine" markets
will stimulate traffic in months
when business travel ebbs. The fleets
are highly compatible, and the
increased aircraft utilization will help
the new company continue serving
small communities and absorb
reductions in subsidy.
The merged carrier, much stronger
than either airline could be as a
separate entity, would rank tenth in
the industry in passenger boardings.
In the Midwest-Southeast markets,
a vigorous competitor will emerge.
The new airline will offer fare savings
of nearly $8 million and greatly
improve service to the traveling
public.
To denote corporate stability and the
proud heritage of both North Central
and Southern, the name "Republic
Airlines" was chosen for the new
company. It also reflects the
transcontinental image of the carrier
which would have routes from
New England to Southern California,
and from Canada to the Cayman
Islands in the Caribbean. Quite
significantly, the word Republic
describes an organization which
derives its strength from its people.
The combined airline will offer
employment to all personnel, with
salary at the same or improved levels
and comparable overall fringe
benefits. Future growth will create
new positions and provide greater
opportunities for advancement.
Management is proud of what
North Central has accomplished in
the past 31 years. The merger
with Southern is a catalyst that will
further enhance the company's record
of service and profitability that is
unsurpassed in the industry.
NORTH CENTRAL / SOUTHERN
North Central and Southern,
when merged as Republic Airlines,
will bring single-carrier service to
more than 150 cities.
traffic growth and performance
Traffic on North Central reached
record levels in 1978. More
than 6.9 million passengers were
carried 1.9 billion passenger miles,
and the airline flew 17.6 million
cargo ton miles. The increase
of 1.4 million passengers over the
previous year was by far the largest
in the company's history.
These achievements reflect the
introduction of service on 17 new
nonstop routes-including nine winter
"sunshine'' cities. Other contributing
factors were the addition of
seven DC-9-50 fan jets, a strike
against another carrier, and
discounted fares which attracted
thousands of new air travelers.
The passenger boardings of
6,911,130 showed a 25 percent
increase-well ahead of the 18 percent
average gain for the scheduled airline
industry. The 714,105 passengers
in August and 29,741 on December 22
also set records. Passenger miles
soared 38 percent to 1.9 billion
from 1.4 billion in 1977, pushing the
passenger load factor to a new
high of 56.9 percent.
Complementing its scheduled
service, Nbrth Central flew
178,728 passengers on charter flights
during 1978-a jump of 64 percent,
compared with 108,802 a year earlier.
The charters went to 38 states and
14 destinations outside the U.S.,
including Nassau, Freeport, Montego
Bay, Mazatlan, Yellowknife and
Montreal. During peak travel
periods, 1,163 extra sections of
scheduled flights accommodated
73,000 passengers.
For the first time, North Central
handled over 100 million pounds of
cargo in a single year. The 17.6 million
cargo ton miles--including freight,
express and mail-were 26 percent
ahead of 1977. The number of air
freight shipments increased
13 percent to 663,000.
The company's popular "VIP"
small package service, now in its
eighth year, experienced 48 percent
growth in 1978. More than 78,000 VIP
parcels were carried by the airline.
This expedited handling, which
can include pickup and delivery, has
proven valuable for shippers of
medical supplies, documents, news
films, electronic data processing
equipment and machine parts.
North Central maintained its
outstanding record of service reliability
by completing 99 percent of the
34.5 million scheduled miles--
although the airline experiences more
adverse weather for a longer time
than any other U.S. carrier. The
company's progressive maintenance
program again demonstrated its
value. Of the 232,000 departures,
only two-tenths of one percent were
cancelled for maintenance reasons,
and 1.6 percent were delayed by
mechanicals.
The company continues to rank
among industry leaders in operating
performance. This achievement
results from total team effort-by flight
crews, station and maintenance
personnel, flight control people and
passenger service employees.
Everyone involved in the day-to-day
operation can be proud of the
company's excellent record.
7
Seven DC-9-50s were added in 1978. The above
jets are lined up at Detroit Metropolitan Airport,
where North Central has 69 daily departures.
new facilities and services
Seven new DC-9-50 fan jets joined
North Central's fleet in 1978, enabling
the airline to add 11,500 route miles
and 17 major long-haul nonstops
to its system. DC-9 jets accounted for
83 percent of the 3.4 billion seat miles
flown during the year.
The company's 59-aircraft fleet
consists of 36 DC-9s and 23 Convair
580 prop jets. Three additional
DC-9-50s are to be delivered by
June 1979, and another four later
in the year. Four more DC-9-50 jets
will be received in the first quarter
of 1980.
North Central has also ordered
three 164-passenger Boeing 727-200
aircraft for use on long-haul routes.
The extended range of the Boeing
tri-jet, plus its capabilities over water
and at high-altitude airports, will
provide greater operating flexibility.
The 727-200 with Pratt & Whitney
engines integrates well with the
DC-9-50. Also, many parts and
accessories are common to both.
Delivery of the three 727s will
be made in the Spring of 1980.
A Si-million Collins automatic call
distributor system has been installed at
the airline's Minneapolis Reservations
Center, improving service in
states west of Lake Michigan. The
new equipment permits telephone
calls to be processed faster and more
economically. Reservations agents
handle over 16,000 phone calls
daily at this center.
North Central's unique weather radar,
with a six-color digital picture display,
is a first in the airline industry.
Now in operation at the company's
Central Flight Control office, the
system is linked directly with the
National Weather Service radar
network. It shows current data on the
location, magnitude and intensity
of potentially dangerous thunderstorms
in a 250-mile radius. With this
information, pilots can detect and
avoid turbulent air to insure safe,
comfortable flights.
Flight Superintendent Harry Amundson
and Captain Paul Dietz consult the
airline's new six-color weather radar
TV-display to help plan a smooth flight.
The company now has a $4-million Model 3033
computer, IBM's newest and largest. Computer
Services personnel Julie McAlister and Joe
Ginter are at the control console, and Trudy Peper
is in the background.
8
In December 1978, a $4-million
IBM central processing unit was added
to the Computer Services Department
to accommodate the increased
amount of data and applications for
North Central's ESCORT and
SCEPTRE systems. The Model 3033,
IBM's newest and largest, marks
the beginning of a comprehensive
plan to upgrade all data
communications and processing
equipment.
A SCEPTRE innovation, accomplished
during 1978, is the computerized
Engineering Control Program which
enables the airline to monitor
modifications on all aircraft and parts.
Maintenance personnel always
have a current and complete history
of each serialized part on every
aircraft in the entire fleet. These
records can be retrieved through the
350 receiving units at all stations
and maintenance bases.
New ESCORT programs improved
preparation of the flight-related
information required for each aircraft
departure. "Weight Tab,'' for
example, gives both crews and down
line stations the number of on-board
passengers, type and amount of
cargo, loading configuration, amount
of fuel on board, and other weight
and balance data. These essential
computations are presented in
an efficient, accurate and uniform
manner.
To expedite ticketing and passenger
fare quote, computer programs were
changed to permit processing of
longer itineraries. Passenger service
and reservations agents can
compute fares or prepare complicated
tickets in a fraction of the time
formerly required. For 1978, some
85 percent of the tickets issued
by North Central were computer-
produced.
Major construction is underway at
the Minneapolis-St. Paul International
Airport. The Green Concourse of
the terminal is being extended
to accommodate North Central's
operation. When the $5.8-million
building plan is finished, the company
will occupy ten passenger boarding
gates-twice the number now
used. New station and flight service
facilities are being included.
Other airport expansion and
renovation projects were completed
at Cleveland, South Bend and Thunder
Bay, while those at Devils Lake
and Kalamazoo/Battle Creek will be
finished in 1979. At Sault Ste. Marie,
which is now being served through
the new Chippewa International
Airport, jet operations were introduced.
Terminal buildings have been
constructed at Huron and Nibbing/
Chisholm; another is being built
at International Falls. In Rhinelander,
terminal dedication ceremonies are
planned for March 1979. Runway and
taxiway improvements were made
at Rhinelander, Escanaba, Brainerd
and Worthington.
Baggage areas have been expanded
in Cleveland, Grand Rapids, South
Bend, Milwaukee, and Bismarck/
Mandan. Carry-on baggage X-ray
units speed up passenger security
clearance at Rochester and Flint.
A new 1,100-square-foot loading
dock serves LaCrosse airfreight
customers, and plans are underway
to construct a major air freight
building at Detroit.
Each year, North Central seeks
new ways to provide better, more
efficient service to its customers.
Through imaginative planning and
development, the airline will maintain
its high standards in the years ahead.
Dramatic lighting
and pleasing colors
are featured in the
company's new design
for passenger
boarding areas.
social action and environmental programs
North Central continues to expand its
programs relating to the environment
and to personnel.
In accordance with the company's
Affirmative Action policies, jobs are
open to all qualified applicants.
Women are employed as mechanics,
sales personnel and pilots; while
men serve as reservationists, flight
attendants and clerks. Ten women
were added to management positions.
North Central now has 19 percent
more minority employees and
30 percent more women than it had
in 1977. Total employment rose
16 percent.
Applicants are recruited primarily
in communities served by the airline.
Industrial Relations staff members
visit schools and universities to secure
top candidates. Career counselors
frequently come to North Central
seeking information on employment
opportunities and position
requirements.
The airline's Management
Development program is in its
third year. Some 330 people have
already completed this training.
The objectives are more effective
communications and better leadership
through a series of seminars,
lectures and workshops. The company
also has special orientation sessions
for new supervisors.
Conservation of natural resources,
with emphasis on improved fuel
management, is one of North Central s
most important concerns. In 1978,
by using the DC-9 digital flight
simulator in pilot training, the airline
conserved 3.8 million gallons of
aviation fuel-enough to operate two
jets in scheduled service for324 days.
Continued refinement of flight
procedures, aircraft loading, and
fuel planning techniques have
substantially reduced fuel
requirements. This attention to
conservation was particularly
significant when the company sought
and was granted extra fuel to provide
service to new cities.
The airline's DC-9-30 aircraft
are experiencing better engine
performance as a result of maintenance
programs initiated in 1978. By
upgrading components in the engine
gas path, air flow has been
improved to produce more thrust.
Also, a new cleaning device for
engine fuel nozzles removes carbon
accumulation so spray patterns
can be maintained. Both of these
changes help to keep jet engines
fine-tuned for maximum thrust
with lower fuel consumption.
At the Twin Cities Main Operations
Base, a recycling tank collects
and filters solvents for cleaning aircraft
parts. By reusing these petroleum-
based fluids indefinitely, the company
can cut its need by about 4,000gallons
yearly, saving over $5,000.
Five stations now have permanent
aircraft deicing systems. This
equipment combines hot water with
glycol, permitting quick removal of
snow and ice with lesser amounts of
costly deicing fluids. The systems
are in operation at Grand Rapids,
Detroit, Traverse City, Sault Ste. Marie
and Marquette. Installation is
underway at Minneapolis/St. Paul.
Over 210,000 pounds of used paper
were salvaged for recycling during
1978. In five years, the airline's
"Waste Not" program has reclaimed
833,000 pounds of paper. To produce
this amount, about 7,000 trees
would be needed.
North Central has worked hard
to earn its reputation as a concerned
and responsive corporate citizen.
The company has demonstrated
leadership by continually seeking
new ways to develop the talents of its
people and conserve vital natural
resources, while maintaining high
operational standards.
Vastly improved deicing
systems are in service at the
airline's major cold-weather
stations. Snow and ice are
quickly removed from aircraft,
with minimum use of precious
petroleum-based fluids.
10
Captain Chet Drag and
First Officer Sandra
Eisenmenger complete the
``receiving airplane checklist"
for their DC-9.
route development
North Central added 17 long-haul
routes during 1978, and more than
doubled its total mileage. The
year was the greatest period
of expansion in the company's history.
From a 10,900-mile system of
90 cities and 14 states, North Central's
route network has grown to 22,400 miles,
103 cities and 20 states.
For more than two decades, the
aggressive route development program
has been an important factor in
the company's growth. Many
applications have been pending
before the Civil Aeronautics Board.
Several awaited final decisions,
and the CAB took action favorable to
North Central in four of those
proceedings.
The company was granted permanent
authority from Bismarck/Mandan to
Chicago, via Fargo/Moorhead and
Minneapolis/St. Paul. Two daily
round-trip flights were inaugurated
on May 8, and a third was added
by the end of the month.
New Detroit-Baltimore nonstops
started August 1. Three round
trips daily provide many cities
in Wisconsin and Michigan with
their first single-carrier and single
plane service to Baltimore Washington
International Airport.
On September 5, two other important
nonstop routes were inaugurated-
Detroit-Atlanta and Cincinnati-
Philadelphia. With the airline's four
daily round trips between Detroit
and Atlanta, eight Michigan
communities and Milwaukee have
single-plane service. The Cincinnati-
Philadelphia route received two
round trips, originating and terminating
at Milwaukee or points beyond. This
provides ten Midwest cities with
single-plane Philadelphia service,
and 14 other communities with
convenient single-carrier connections.
Regulatory Reform
Following several years of
consideration, Congress approved
the Airline Deregulation Act of 1978,
and it was signed into law by
President Carter on October 24.
This legislation opens all dormant
routes to competition, simplifies route
entry, permits fare flexibility, and
sets conditions for dissolution of the
CAB. The law also assures
continuation of air service to
smaller cities.
Under the "dormant authority"
section of the law, a carrier may seek
-and must receive-any domestic
route for which another airline
(continued)
Southern belles welcome
passengers on North Central's
inaugural flight to Atlanta
from Detroit.
11
route development
(continued)
has been certificated and is not
operating. North Central applied
for, and was awarded, 12 new
segments. In December, nonstop
round-trip flights were inaugurated
on these routes:
Denver-Tucson
Minneapolis/St. Paul-Detroit
Chicago-West Palm Beach
Detroit-West Palm Beach
Detroit-Fort Lauderdale
Detroit-Sarasota/Bradenton
Detroit-Houston
Detroit-Syracuse
Boston-Syracuse
Milwaukee-Philadelphia
Milwaukee-Tampa/St. Petersburg
Milwaukee-Miami
The company also received approval
for Minneapolis/St. Paul-San Diego
nonstops, and that service will start
as soon as San Diego environmental
and regulatory agencies permit.
Until December, North Central
had virtually no vacation or weekend
"sunshine" markets to promote
during the winter months when travel
declines. With the addition of seven
popular Florida cities, Houston
and Tucson, the airline has
tremendous new potential for
substantial year-round vacation
traffic to on-line communities.
Expansion in 1979
The Airline Deregulation Act allows
every carrier to automatically
enter one market each year in 1979,
1980 and 1981. At the same time, one
route may be "protected" yearly
from competition by other airlines.
Accordingly, in January North Central
requested the Chicago-Houston
market for automatic entry, and
protected its Twin Cities-Denverroute.
Another recent development affecting
North Central was the discontinuance
of Twin Cities nonstops to New York
LaGuardia and Washington National by
one of the two incumbent carriers.
North Central filed for exemption
authority to take over the two routes.
The Board has not acted on this yet.
In the deregulated environment,
certain operating restrictions are no
longer applicable. The CAB has
stated that requests may be
made for gradual removal of those
restrictions. North Central
responded by asking for approval
of single-plane service from Denver
to Madison, Chicago and Detroit;
nonstops on Denver-Milwaukee and
Twin Cities-Madison routes; and
turnaround flights between
Minneapolis/St. Paul and Chicago.
The airline still has a number
of cases pending before the CAB.
Decisions could be reached this year
on Minneapolis/St. Paul to Phoenix
and to Las Vegas, Twin Cities-
Dallas/Fort Worth/Houston, Milwaukee-
Toronto, Detroit-Montreal and
service to the Caribbean.
For many years, North Central
vigorously worked on route expansion.
Through the company's efforts
and provisions of the Deregulation
Act, the airline can now pursue
system growth opportunities to the
full extent of its resources.
North Central's ticket counter is easily identified in the new terminal at
Baltimore Washington International Airport. The company inaugurated
Detroit-Baltimore service in August 1978.
12
Tropical beaches and warm sunshine
attract thousands of passengers
to North Central's new Florida cities --
Tampa/St. Petersburg, Sarasota/
Bradenton, West Palm Beach, Fort
Lauderdale and Miami.
the future
An exciting new era has begun.
North Central has received
long-sought routes to destinations
which attract winter vacationers,
and the merger with Southern Airways
opens new vistas.
Continuing as North Central,
or combined as Republic Airlines,
the company will develop
existing routes and enter new
markets. With the expanded route
structure, passenger demand should
become more constant, rather than
fluctuating by seasons. This permits
greater utilization of aircraft,
higher productivity from employees,
and a broader base for fixed costs.
Collectively, these factors should
enhance profits.
In the current regulatory environment,
the airline can add at least one new
route each year. With the guaranteed
annual selection-plus routes
from conventional hearings, removal
of restrictions, or dormant authority-
orderly growth can be accomplished.
Thefinancial strengthof North Central
enables it to be a viable competitor
in lucrative markets. Success will
be achieved by adhering to the
company's fundamental objective
of providing safe, dependable
airline service.
The name North Central may fade
into history, but the typeof people who
built its reputation will still be the
key to the airline's future. Their loyalty
and dedicated service assure further
progress in the years ahead.
13
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balance sheets
ASSETS
December 31
1978 1977
CURRENT ASSETS
Cash and short-term investments (note B) $ 21,652,000
Accounts receivable, less allowances 30,331,000
Flight equipment parts and supplies (notes A and B) 6,817,000
Prepaid expenses and other (note A) 8,609,000
67,409,000
PROPERTY AND EQUIPMENT-at cost (notes A, B, C and D)
Flight equipment 237,171,000
Ground property and equipment 35,061,000
Improvements to leased property 7,256,000
279,488,000
Less accumulated depreciation and amortization 73,960,000
205,528,000
Advance payments on equipment 24,976,000
230,504,000
DEFERRED CHARGES AND OTHER ASSETS
Unamortized development costs (note A) 2,912,000
Rentals and other (notes A and C) 2,158,000
5,070,000
$302,983,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (note B) $ 15,828,000
Short-term notes payable (note B) 4,000,000
Accounts payable 15,074,000
Interline payables and tickets outstanding (note A) 17,484,000
Accrued compensation and other expenses 18,583,000
Income taxes (notes A and I) 1,022,000
71,991,000
LONG-TERM OBLIGATIONS
Long-term debt --less current maturities (note B) 133,350,000
Deferred income taxes (notes A and I) 7,668,000
Other 362,000
141,380,000
COMMITMENTS (notes C, D and L)
STOCKHOLDERS' EQUITY (notes B, E and L)
Common stock- authorized 16,000,000 shares of $.20 par value ... 2,500,000
Additional paid-in capital 18,344,000
Retained earnings 69,148,000
Treasury stock --at cost (380,000)
89,612,000
$302,983,000
$ 12,243,000
25,696,000
6,233,000
7,570,000
51,742,000
185,307,000
30,914,000
6,052,000
222,273,000
75,835,000
146,438,000
12,413,000
158,851,000
1,876,000
1,982,000
3,858,000
$214,451,000
$ 20,410,000
9,241,000
12,198,000
14,036,000
441,000
56,326,000
83,635,000
4,816,000
394,000
88,845,000
2,493,000
18,210,000
48,957,000
(380,000)
69,280,000
$214,451,000
The accompanying notes are an integral part of these statements.
AIRLINES, INC
statements of earnings
OPERATING REVENUES
Passenger (note A)
Freight and express
Public service revenues (note F)
Mail (notes A and G)
Non-scheduled service and other
OPERATING EXPENSES
Flying operations
Maintenance
Aircraft and traffic servicing
Passenger service
Reservations, advertising and sales ..
General and administrative
Other transport-related expenses
Depreciation and amortization (note A)
Mutual Aid payments
Operating profit
OTHER EXPENSES (INCOME)
Interest expense
Less interest capitalized (note A)
Interest income and other --net
(Gain) loss on disposition of equipment
Earnings before income taxes
INCOME TAXES (notes A and I)
Current
Deferred
NET EARNINGS
NET EARNINGS PER SHARE AND
EQUIVALENT SHARE (note J) ..
Year ended December 31
1978 1977
$248,596,000
19,744,000
12,196,000
3,983,000
14,534,000
299,053,000
84,047,000
32,171,000
61,137,000
19,505,000
29,377,000
14,552,000
1,163,000
16,353,000
5,645,000
263,950,000
35,103,000
11,783,000
1,917,000
9,866,000
(1,532,000)
50,000
8,384,000
26,719,000
1,677,000
2,878,000
4,555,000
$ 22,164,000
$1.70
$186,641,000
13,680,000
13,079,000
4,932,000
10,791,000
229,123,000
68,348,000
29,337,000
50,978,000
14,605,000
20,999,000
10,801,000
930,000
14,590,000
210,588,000
18,535,000
7,781,000
832,000
6,949,000
(409,000)
(2,705,000)
3,835,000
14,700,000
745,000
259,000
1,004,000
$ 13,696,000
$1.11
The accompanying notes are an integral part of these statements.
statements of changes in financial position
Year ended
SOURCES AND APPLICATIONS OF WORKING CAPITAL 1978
SOURCES
From operations
Net earnings $ 22,164,000
Charges to earnings not using working capital
Depreciation and amortization 16,353,000
Deferred income taxes 2,852,000
Other 900,000
Working capital provided from operations 42,269,000
Net book value of equipment dispositions 4,395,000
Increase in long-term debt 66,726,000
Reduction of rentals and other 275,000
113,665,000
APPLICATIONS
Additions to property and equipment 92,490,000
Reduction of long-term debt 17,011,000
Payment of cash dividend 1,973,000
Additions to deferred charges 2,189,000
113,663,000
INCREASE (DECREASE) IN WORKING CAPITAL 2,000
Working capital (deficit) at beginning of year (4,584,000)
Working capital (deficit) at end of year $ (4,582,000)
NET CHANGE IN WORKING CAPITAL ELEMENTS
Increase in current assets
Cash and short-term investments $ 9,409,000
Accounts receivable 4,635,000
Flight equipment parts and supplies 584,000
Prepaid expenses and other 1,039,000
Net change in current assets 15,667,000
Increase (decrease) in current liabilities
Current maturities of long-term debt and short-term notes (582,000)
Accounts payable 5,833,000
Interline payables and tickets outstanding 5,286,000
Accrued compensation and other expenses 4,547,000
Income taxes 581,000
Net change in current liabilities 15,665,000
INCREASE (DECREASE) IN WORKING CAPITAL $ 2,000
The accompanying notes are an integral part of these statements.
December 31
1977
$13,696,000
14,590,000
111,000
108,000
28,505,000
3,003,000
24,978,000
578,000
57,064,000
39,100,000
21,410,000
1,479,000
1,239,000
63,228,000
(6,164,000)
4,580,000
$ (4,584,000)
$ 3,209,000
6,651,000
733,000
295,000
10,888,000
10,128,000
1,416,000
2,159,000
3,186,000
163,000
17,052,000
$ (6,164,000)
18
statements of changes in stockholders' equity
Years ended December 31,1978 and 1977
Common Stock
Additional
Paid-In
Retained
Earnings
Treasury Stock
Shares Shares
Issued Amount Capital (note B) Held Amount
Balance at January 1, 1977 12,462,752 $2,493,000 $18,056,000 $36,740,000 285,034 $804,000
Cash dividend (note E) - -
- (1,479,000) - -
Disposition of treasury stock .. - - 154,000 - (150,440) (424,000)
Net earnings for the year 1977 -
- -
13,696,000 - -
Balance at December 31, 1977 .... 12,462,752 2,493,000 18,210,000 48,957,000 134,594 380,000
Cash dividend (note E) - - -
(1,973,000) - -
Exercise of stock options 28,300 5,000 83,000 - - -
Conversion of warrants 9,573 2,000 51,000 - - -
Net earnings for the year 1978 - - -
22,164,000 - -
Balance at December 31, 1978 .... 12,500,625 $2,500,000 $18,344,000 $69,148,000 134,594 $380,000
The accompanying notes are an integral part of these statements.
auditors ' report
Alexander Grant
& COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
INTERNATIONAL FIRM
ALEXANDER GRANT TANSLEY WITT
Stockholders and Board of Directors
North Central Airlines, Inc.
We have examined the balance sheets of North Central Airlines, Inc. (a Wisconsin
corporation) as of December 31, 1978 and 1977, and the related statements of earn
ings, changes in stockholders' equity and changes in financial position for the years
then ended. Our examinations were made in accordance with generally accepted au
diting 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 finan
cial position of North Central Airlines, Inc., at December 31, 1978 and 1977, and the re
sults of its operations and changes in its financial position for the years then ended, in
conformity with generally accepted accounting principles applied on a consistent basis.
Minneapolis, Minnesota
February 22, 1979
19
notes to financial statements
December 31,1978 and 1977
Note A-Summary of Significant Accounting Policies-
The company, as a regional airline providing scheduled
service for passengers, mail and property, 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
followed by the company are:
Flight Equipment Parts and Supplies: These are priced at
average cost. An allowance for obsolescence ($1,067,000
in 1978 and $999,000 in 1977) is provided for repairable parts
by allocating their cost over the life of the related aircraft.
Prepaid Expenses-Engine Overhaul: The company re
classifies to a current prepaid expense the estimated portion
of the purchase price of flight equipment attributable to its
overhaul expected to be consumed within the next twelve
months ($5,695,000 in 1978 and $4,530,000 in 1977). Actual
overhaul costs are charged to expense as incurred.
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 out
standing. Capitalization of interest ceases when projects
become operational. The capitalized interest is amortized
over the useful lives of the related assets for financial re
porting purposes. If capitalized interest had been expensed
as incurred for financial reporting purposes, net earnings
would have been reduced by approximately $1,357,000 in
1978 and $565,000 in 1977. For income tax reporting pur
poses, interest is expensed as incurred.
Capitalized Leases: The company accounts for leased
property in accordance with Financial Accounting Standards
Board Statement No. 13. Accordingly, for financial reporting
purposes, certain leases are treated as capital leases while
others are treated as operating leases (note C).
Depreciation: Depreciation is provided in amounts sufficient
to relate the cost of depreciable assets to operations over
their estimated service lives on a straight line basis forfinan-
cial and tax reporting purposes. Flight equipment is being
depreciated to estimated residual values (15% of cost):
Convair 580 based principally on a common retirement date
of December 1983 and DC-9 based on 15 year lives.
Deferred Charges: Expenditures for route development are
deferred and amortized overthe life of temporary certificates,
or five years for permanent certificates. Major computer soft
ware 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 sub
stantially all of its employees, and funds its current expense
of normal costs and amortization of prior service costs over
40 years. Pension funding is determined underthe unit credit
and aggregate frozen liability methods (note H).
Income Taxes: The company uses the flow-through method
of accounting for investment tax credit which reduces income
tax expense when the related liability is reduced. Investment
credits not applied on tax returns are offset against deferred
income taxes to the extent they are applicable to deferred
taxes becoming payable in the carry-over periods. The com
pany recognizes deferred income taxes resulting from dif-
ferences in financial and income tax reporting (note I).
Note B-Long-term Debt- Long-term debt at December 31
consists of the following:
1978 1977
Quarterly installment
notes (a)
Quarterly installment
$ 73,335,000 $ 64,000,000
notes (b)
Quarterly installment
23,372,000 25,434,000
notes (c) 5,298,000
Due banks and
insurance
companies (d) 96,707,000 94,732,000
Equipment Trust
Certificates (e) 45,000,000 -
Lease obligation (f) 1,818,000 2,772,000
Lease obligation (g) 2,029,000
Lease obligation (h)
Subordinated convertible

_
1,309,000
debentures (i) 690,000
Sundry 5,653,000 2,513,000
Total long-term debt 149,178,000 104,045,000
Less current
maturities (j) 15,828,000 20,410,000
$133,350,000 $ 83,635,000
(a) Payable in quarterly installments of $2,521,000 during
1979, $2,914,000 from February 1980 through May 1984
and $2,400,000 in August and November 1984, plus interest
at 1/4% above the banks' prime rate through October 1981,
1/2% above the banks' prime rate thereafter to maturity; effec
tive interest rate at December 31,1978 was principally 12%
(8V4% at December31,1977). Includes $6,000,000 borrowed
in December 1978 of an additional $10,000,000 commitment
which is to be incorporated into the credit agreement.
(b) Payable in quarterly installments of approximately
$1,062,000 through October 1986, including interest at 8%%
on the major portion of this debt; interest on the balance
of the debt at %% above the bank's prime interest rate; effec
tive rate at December 31,1978 was 111/4% (81/2% at December
31, 1977). The notes are guaranteed by the Department of
Transportation as to 90% of the unpaid principal and 100%
of the unpaid interest.
(c) Fully paid in October 1978, interest at 7%.
(d) These notes, due banks and insurance companies, are
collateralized by substantially all flight equipment and spare
parts owned by the company. Among the loan covenants are
restrictions on dividend payments, capital expenditures,
lease obligations, investments, guarantees, additional bor
rowings and requirements related to minimum working cap
ital and net worth. The company has a commitment to retire
20
259,511 warrants at $1.50 per warrant within 30 days after
the expiration date of October 31, 1979 for any of these war
rants not then exercised. These warrants were issued to loan
holders in consideration of deferring certain debt repay
ments (note E). The obligations are being accrued as addi
tional interest expense through 1979.
The company was required to maintain average compen
sating balances of approximately $5,946,000 and $3,400,000
during 1978 and 1977, respectively, related to borrowing
arrangements. The two major arrangements require the pay
ment of interest at 1A% over prime rate on the average com
pensating balance shortfalls. At December 31, 1978 and 1977
the required compensating balances (adjusted for float) were
approximately $6,203,000 and $3,700,000, respectively.
(e) In 1978 the company issued $45,000,000 of 9% Equip
ment Trust Certificates. The certificates require semi-annual
sinking fund payments of $750,000 in 1979 and 1980,
$2,250,000 in 1981 and 1982, $1,575,000 from 1983 through
1992 and $1,500,000 at maturity in May 1993, plus interest
at 9%. The company may make semi-annual optional sinking
fund payments beginning in May 1983 up to $1,575,000 and
may pay off the remaining balance in full on or after May 1,
1988 at a premium.
(f) Lease obligation payable in monthly installments of
$99,000 including interest at 10% through July 1980 (note C).
(g) Lease obligation payable in monthly installments of
$102,000 including interest at 61/4% through September 1979
(note C).
(h) Lease obligation payable representing the present value
of the guaranteed residual values to be paid at the expiration
of the lease terms (note C).
(i) Fully paid in June 1978, interest at 5V2%.
(j) Current maturities of all long-term debt due in each of the
next five years following December 31, 1978 are as follows:
1979 $15,828,000
1980 17,522,000
1981 20,013,000
1982 20,035,000
1983 19,160,000
At December 31, 1978, $4,000,000 was outstanding under
short-term lines of credit with several banks at principally
their prime lending rate (12%) and an additional $4,000,000
was available at the banks' prime rate. The maximum borrow
ing at the end of any calendar month was $5,000,000 and
the approximate average loan balance and weighted aver
age interest rate computed using the days outstanding
method was $1,700,000 and 9%, respectively.
Note C--Lessee Leasing--The following is a description and
financial summary of the company's lessee leasing activities:
Operating Leases: The company has lease commitments
for various airport facilities based upon usage and landings,
subject to adjustment depending upon the needs of the air
port operating authority. The annual lease commitments are
not determinable due to the usage and adjustment factors.
The company leases its main operating base facilities and
various hangars from municipal authorities for varying terms
with renewal options.
The leases for five DC-9-30 aircraft are related to the pre
vailing prime interest rate. The actual rent expense exceeded
the minimum shown below by $311,000 in 1978 and $87,000
in 1977.
At December 31, 1978, the company's minimum rental com
mitments, including rental prepayment requirements, under
non-cancellable operating leases with initial or remaining
terms of more than one year are as follows (in thousands):
Period Facilities
DC-9-30
Aircraft Total
1979 $ 2,582 $2,088 $ 4,670
1980 2,497 2,088 4,585
1981 2,497 1,467 3,964
1982 2,497 490 2,987
1983 2,497 - 2,497
1984-2007 32,305 - 32,305
$44,875 $6,133 $51,008
Total rent expense, including landing fees, was $16,236,000
in 1978 and $14,186,000 in 1977.
Capitalized Leases: The company currently leases various
ground property and equipment. At December 31, 1977 the
company also leased nine CV-580S and certain ground
property and equipment which were purchased during 1978.
The following is an analysis of leased property under capital
leases included in property and equipment at December 31 :
1978 1977
Ground property and equipment ..
Flight equipment
$4,701,000 $12,449,000
11,250,000
Less accumulated amortization .. .
4,701,000
1,375,000
23,699,000
16,437,000
$3,326,000 $ 7,262,000
Minimum lease payments under capital leases and the
present value of the net minimum lease payments are as
follows:
Ground
Property
and
Equipment
1979 $1,189,000
1980 792,000
Total minimum lease payments 1,981,000
Less amount representing interest 163,000
Present value of net minimum lease payments $1,818,000
Note D-Commitments-The company has purchase com
mitments on seven new DC-9-50 aircraft on which it has ad-
21
notes to financial statements
December 31,1978 and 1977 (continued)
vanced $16,185,000 and capitalized interest of $693,000. An
additional $50,539,000 will be expended by the company in
fulfilling these commitments prior to delivery in 1979. The
company has arranged leveraged lease financing for the
three aircraft to be delivered in the second quarter of 1979.
The company has advanced $4,227,000 and capitalized
interest of $39,000 on a purchase commitment for three
Boeing 727-200 aircraft to be delivered in 1980 and options
on four additional aircraft to be delivered in 1980 and 1981
which contain options to cancel prior to July 1979. If the
options to cancel are not exercised, an additional $99,848,000
will be expended prior to delivery.
In November 1978 the company assumed Southern Airways,'
Inc. (note L) purchase agreement for four new DC-9-50
aircraft for delivery in 1980 and options for two additional
aircraft to be delivered in 1980 which can be cancelled prior
to July 1979. The company reimbursed Southern $3,078,000
including capitalized interest of $262,000. If the options to
cancel are not exercised, an additional $56,051,000 will be
expended prior to delivery.
In January 1979 the company signed a letter of intent to
purchase four new DC-9-80 aircraft and obtained options
on four additional aircraft. The letter includes provisions
for cancellation of the order. The company has advanced
$700,000 and capitalized interest of $7,000 and, if the order
is not canceled, will expend an additional $103,889,000
prior to delivery in 1981.
Note E--Common Stock-At December 31, 1978, 61,250
shares of unissued common stock are reserved for officers
and key employees, under a qualified plan adopted in 1965.
An additional 197,900 shares are reserved under a plan
adopted in 1975.
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 con
nection with the shares issued under the stock option plan.
All options granted expire five years after date of granting.
There were 68,900 shares under the 1975 plan available for
granting at December 31, 1978.
The following tables summarize information relating to the
options outstanding:
Option Price and Fair Market Value at Date of Grant
Year
Granted
Per
Share
December 31,1978
Shares Amount
December 31,1977
Shares Amount
1973 $4.25 - $ 7,500 $ 31,875
1974 3.375 8,000 27,000 8,525 28,772
1974 2.75 53,250 146,438 71,425 196,419
61,250 173,438 87,450 257,066
1975 2.50 92,900 232,250 95,000 237,500
1976 3.875 36,100 139,888 36,100 139,888
129,000 372,138 131,100 377,388
190,250 $545,576 218,550 $634,454
Fair Market Value at Date Exercisable
Year
Exercisable
Per
Share
December 31,1978
Shares Amount
December 31,1977
Shares Amount
1973 $4.25 - $ 7,500 $ 31,875
1974 3.375 8,000 27,000 8,525 28,772
1974 2.75 20,375 56,031 26,425 72,669
1975 3.00 30,750 92,250 42,500 127,500
1977 4.25 2,125 9,031 2,500 10,625
61,250 184,312 87,450 271,441
1975 2.50 90,400 226,000 92,500 231,250
1976 3.875 35,125 136,110 35,125 136,110
1977 4.25 3,475 14,769 3,475 14,769
129,000 376,879 131,100 382,129
190,250 $561,191 218,550 $653,570
The following table summarizes information relating to
options exercised during 1978 (no options were exercised
during 1977):
Option Price and Fair Market Value at Date Exercised
Option Price Fair Market Value
Year
Granted Shares
Per
Share Amount
Per
Share Amount
1973 7,500 $4.25 $31,875 $7.125-$8.625 $ 59,374
1974 525 3.375 1,772 7.00 3,675
1974 18,175 2.75 49,981 7.125- 8.125 134,697
26,200 83,628 197,746
1975 2,100 2.50 5,250 7.00 - 7.625 14,888
28,300 $88,878 $212,634
At December31,1978 and 1977, there were outstanding war
rants to purchase 2,639,488 and 2,649,061 shares of com
mon stock, respectively. These warrants resulted from public
offerings prior to 1973 and from financial transactions as
discussed in note B(d). All warrants enable the holder to
purchase common stock at $5.50 per share and must be
exercised by October 31, 1979.
During January 1979, the Board of Directors declared a $.20
per share dividend payable March 1, 1979 to shareholders of
record on February 15, 1979. The company paid cash
dividends of $.16 and $.12 per share to its shareholders
during the first quarter of 1978 and 1977, respectively.
Note F-Public Service Revenues-As a regional carrier,
the company receives public service revenues for serving
small and intermediate size communities which do not gen
erate 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. Public service
revenues for the period January 1, 1978 through June 30,
1978 were computed and paid under the provisions of Class
Rate VIII, which had been in effect since July 1, 1976. The
CAB has proposed Class Rate IX to become effective July 1,
1978, however, a joint objection to some of the provisions
of this rate has been filed by the regional airlines, and at
22
this time no final rule making has been issued by the Board.
Estimates of revenues due under the new rate were based
upon figures proposed by the CAB as they affect North
Central. Class Rate IX and subsequent rates were affected
by the Airline Deregulation Act of 1978 with respect to the
offsetting of certain revenues not relating to subsidy-eligible
services. Effective October 24, 1978, non-related revenues
may not be offset against a carrier's need on the eligible
portion of its system.
Note G --Mail Revenue-In December 1977 the CAB issued
an order establishing new temporary mail rates in connec
tion with its Domestic Service Mail Rates Investigation. As
a result of this order the company recognized $2,733,000
of additional revenue in 1977. Approximately $1,932,000 of
this retroactive amount applies to the period March 28, 1973
through December 31, 1976. In November 1978 the final
rates were established with no adjustment in revenue for
the company.
Note H-Pension Costs-Total pension expense was $7,703,000
for 1978 and $6,346,000 for 1977. At January 1, 1978, the
latest actuarial valuation date, the total market value of fund
assets exceeded the actuarially computed value of vested
benefits by $2,691,000 for all plans.
Note l-lncome Taxes-lncome tax expense for the years
ended December 31 consists of the following:
1978 1977
Current income taxes
Federal
Investment tax credit used
$11,747,000 $6,065,000
in current year (11,412,000) (6,065,000)
335,000 -
State and local 1,342,000 745,000
1,677,000 745,000
Deferred income taxes
Federal 1,008,000 1,046,000
Investment tax credit 1,795,000 (898,000)
2,803,000 148,000
State and local 75,000 111,000
2,878,000 259,000
$ 4,555,000 $1,004,000
Income taxes of $4,555,000 in 1978 and $1,004, 000 in 1977
(effective rates of 17.0% and 6.8% respectively) are less
than those expected to result by application of the federal
income tax rate of 48% to income before taxes. The reasons
for these differences are:
1978 1977
Computed "expected" tax expense .. .
Increase (decrease) in income taxes
$12,825,000 $7,056,000
Investment tax credit utilized
State and local income taxes net of
(9,617,000) (6,963,000)
federal income tax benefit 1,417,000 856,000
Other (70,000) 55,000
$ 4,555,000 $1,004,000
Deferred income taxes arise from timing differences between
financial and tax reporting. The tax effects of these differ
ences follow:
Increase (decrease) in deferred
income tax expense
Capitalized interest
Investment tax credit
Other
1978 1977
$ 821,000 $ 328,000
1,795,000 (898,000)
262,000 829,000
$ 2,878,000 $ 259,000
For federal income tax reporting purposes, investment tax
credits of $932,000 are available to offset future income
taxes payable through 1985. This amount has been recog
nized for financial reporting purposes as an offset to de
ferred income taxes payable through December 31, 1978.
Under the Revenue Act of 1978 and existing law, a special
provision allows the company to offset its Federal tax liability
by the following approximate percentages (subject to the
availability of sufficient investment tax credits): 1977 and
1978-100%; 1979-90%; 1980 and 1981-80%; 1982 (and
later years) -90%.
The Internal Revenue Service has examined and cleared the
company's federal tax returns through December 31, 1977.
Note J-Net Earnings Per Share-Net earnings per share
for 1978 is based on the weighted average numberof common
and common equivalent shares outstanding (13,027,063).
Common equivalent shares result from the assumed ex
ercise of stock options and warrants using the "treasury
stock" method.
Net earnings per share for 1977 is based on the weighted
averagenumberof shares outstanding for the year (12,328,158).
Conversion of debentures into common stock, exercise of
stock options and warrants to purchase stock would not
result in material dilution of net earnings per share for the
year ended December 31, 1977.
For the years 1978 and 1977 fully diluted earnings per share
are the same as primary earnings per share.
Note K-Selected Financial Data (unaudited)-The un
audited quarterly results of operations for each of the four
quarters ended in 1978 and 1977 and the unaudited asset
replacement cost information are presented on page 24 of
this annual report and are incorporated by reference into
this note.
Note L--Proposed Merger-On September 5, 1978, the
company and Southern Airways, Inc. executed an Agree
ment and Plan of Merger containing the definitive terms and
conditions of the merger of Southern with and into the com
pany. The Merger Agreement provides a formula which
results in the conversion of one share of Southern common
stock, exchanged on the effective date of the merger, for
2.1 shares of the company's stock. On February 9, 1979,
a Civil Aeronautics Board Law Judge issued an initial de
cision favoring the merger. Consummation of the merger is
subject to the approval of lenders, the CAB and the President
of the United States.
23
supplemental stockholder information
Quarterly Statements of Earnings
(unaudited-in thousands of dollars)
1978 1977
Three Months Ended Three Months Ended
December 31 September30 June 30 March 31 December 31 September30 June 30 March 31
OPERATING REVENUES
Passenger $64,005 $72,370 $64,667 $47,554 $48,319 $51,970 $45,926 $40,426
Public service revenues 2,533 2,870 3,398 3,395 3,358 3,356 3,231 3,134
Other 9,777 8,860 9,153 10,471 10,250 6,607 6,302 6,244
76,315 84,100 77,218 61,420 61,927 61,933 55,459 49,804
OPERATING EXPENSES
Flying operations and maintenance . 30,677 29,499 28,652 27,390 25,752 25,432 23,684 22,817
Other operating expenses 32,818 35,491 35,734 27,336 26,733 25,424 23,825 22,331
Depreciation and amortization 4,587 4,079 3,800 3,887 3,838 3,832 3,595 3,325
68,082 69,069 68,186 58,613 56,323 54,688 51,104 48,473
OPERATING PROFIT 8,233 15,031 9,032 2,807 5,604 7,245 4,355 1,331
OTHER EXPENSES (INCOME)-net .... 2,337 2,357 1,698 1,992 1,986 1,721 1,401 (1,273)
EARNINGS BEFORE INCOME TAXES . . . 5,896 12,674 7,334 815 3,618 5,524 2,954 2,604
Income taxes 1,773 2,308 419 55 297 337 189 181
NET EARNINGS $ 4,123 $10,366 $ 6,915 $ 760 $ 3,321 $ 5,187 $ 2,765 $ 2,423
NET EARNINGS PER SHARE
Primary $.31 $.77 $.54 $.06 $.27 $.42 $.22 $.20
Fully diluted $.31 $.76 $.53 $.06 $727 M2 3722
DIVIDENDS PER SHARE - - - $.16 - - - $.12
STOCKHOLDER'S DISCLOSURE OF OWNERSHIP FORM 10-K REPORT
The company is required by 245.16 of the Civil Aeronautics
Board Economic Regulations 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 sub
sequently acquires, beneficially or as trustee, more than 5
percent, in the aggregate, of any class of the capital stock
or capital of the aircarrier, shall file with the Board a report
containing the information required by 245.12, on or be
fore April 1, as to the capital stock or capital owned as of
December 31, of the preceding 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
afterthe 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 re
quired 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 Pricing and Domestic Aviation,
Civil Aeronautics Board, Washington, D.C. 20428.
LABOR AGREEMENTS
Among the agreements the airline has with six labor unions,
three are amendable in 1979 and three in 1980. The company
expects to reach equitable agreements with these unions.
For the Form 10-K report to the Securities and Exchange
Commission, write to Mr. John P. Dow, Secretary, North Cen
tral Airlines, 7500 Northliner Drive, Minneapolis, MN 55450.
STOCK MARKET QUOTATIONS
The following tabulation sets forth the price range for the
company's common stock which is traded on the New York
Stock Exchange and the Midwest Stock Exchange.
1978 1977
High Low High Low
1st Quarter 5% 4% 4V8 3%
2nd Quarter 7% 5% AVi 35/8
3rd Quarter 11 % 62 3/4 4V2 3%
4th Quarter 10 6 5 3%
ASSET REPLACEMENT COST (unaudited)
Replacing productive capacity of the airline with assets hav
ing equivalent capacity has generally required greatercapital
investment than was required to purchase the assets being
replaced. The additional capital investment principally re
flects the cumulative impact of inflation during the relatively
long lives of the assets (10 to 15 years in the case of flight
equipment).
The company's annual report on Form 10-K contains (1)
additional quantitative information with respect to the esti
mated replacement cost of flight equipment parts and
supplies and of property and equipment on December 31,
1978 and 1977, and (2) the related estimated effect of such
replacement costs on depreciation expense.
24
Robert Neumeierand Suzanne Wheelerreview the company's
stockholder relations program. Each new stockholder
receives a personal message of welcome as a part owner
of the airline. The letter summarizes the company's
performance in the past year and encourages comments
or suggestions. Enclosed are the current financial report and
flight schedule, along with a card for requesting future
schedules and the inflight Northliner Magazine.
IVcnK utt'Al .AinitWJ. ln{ 1978
NICHOLSON
AWARD
N#Mo<WJAssociation
^^NAic ^ Club*
ST 1977 ANNUAL REPORT
EORTHE
INDIVIDUAL INVESTOR
NORTH CENTRAL
AIRLINES. INC.
The 1977 North Central Annual Report
earned awards from Financial World
magazine and the National Association
of Investment Cubs.
25
PASSENGER MILES
(BILLIONS)
A giant Saguaro cactus reaches skyward to
capture the last rays of an Arizona sunset.
North Central inaugurated Denver-Tucson
service in December 1978.
five-year summary
EARNINGS
OPERATING REVENUES 1978 1977 1976 1975 1974
Passenger $248,596,000 $186,641,000 $157,159,000 $135,664,000 $124,007,000
Public service revenues 12,196,000 13,079,000 13,296,000 12,225,000 12,126,000
Other 38,261,000 29,403,000 20,693,000 15,735,000 15,397,000
299,053,000 229,123,000 191,148,000 163,624,000 151,530,000
OPERATING EXPENSES
Flying operations and maintenance 116,218,000 97,685,000 83,291,000 73,358,000 57,544,000
Other operating expenses 131,379,000 98,313,000 81,533,000 72,402,000 65,304,000
Depreciation and amortization 16,353,000 14,590,000 11,635,000 10,131,000 9,975,000
263,950,000 210,588,000 176,459,000 155,891,000 132,823,000
OPERATING PROFIT 35,103,000 18,535,000 14,689,000 7,733,000 18,707,000
OTHER EXPENSES (INCOME)
Interest expense 11,783,000 7,781,000 5,503,000 4,084,000 4,515,000
Capitalized interest (1,917,000) (832,000) (843,000) (757,000) (341,000)
Interest income and other-net (1,532,000) (409,000) (501,000) (540,000) (1,213,000)
(Gain) loss on disposition of equipment .... 50,000 (2,705,000) (189,000) 23,000 (16,000)
8,384,000 3,835,000 3,970,000 2,810,000 2,945,000
EARNINGS BEFORE INCOME TAXES 26,719,000 14,700,000 10,719,000 4,923,000 15,762,000
Income taxes 4,555,000 1,004,000 3,040,000 (328,000) 7,512,000
NET EARNINGS $ 22,164,000 $ 13,696,000 $ 7,679,000 $ 5,251,000 $ 8,250,000
NET EARNINGS PER SHARE
AND EQUIVALENT SHARE $1.70 $1.11 $.63 $.43 $.67
DIVIDENDS PER SHARE $ .16 $ .12 $.10 $.10 $.10
BALANCE SHEET ITEMS
Current assets $ 67,409,000 $ 51,742,000 $ 40,854,000 $ 34,178,000 $ 38,758,000
Working capital from operations $ 42,269,000 $ 28,505,000 $ 21,217,000 $ 14,854,000 $ 20,788,000
Property and equipment-net $230,504,000 $158,851,000 $137,410,000 $101,563,000 $ 83,279,000
Total long-term debt $133,350,000 $ 83,635,000 $ 80,067,000 $ 50,124,000 $ 38,194,000
Retained earnings $ 69,148,000 $ 48,957,000 $ 36,740,000 $ 30,259,000 $ 26,236,000
Stockholders' equity $ 89,612,000 $ 69,280,000 $ 56,485,000 $ 49,785,000 $ 46,344,000
Shares outstanding 12,366,000 12,328,000 12,178,000 12,098,000 12,312,000
Book value per share $7.25 $5.62 $4.64 $4.12 $3.76
STATISTICS
Passengers 6,911,000 5,547,000 4,969,000 4,581,000 4,546,000
Passenger miles (000) 1,925,000 1,392,000 1,179,000 1,072,000 1,061,000
Available seat miles (000) 3,385,000 2,861,000 2,444,000 2,235,000 2,151,000
Passenger load factor 56.9% 48.7% 48.2% 48.0% 49.3%
Cargo ton miles 17,619,000 13,998,000 13,052,000 11,703,000 12,585,000
Revenue plane miles 36,874,000 33,343,000 30,810,000 29,748,000 29,055,000
Number of employees 4,460 3,850 3,600 3,410 3,360
27
communications
North Central's advertising and
promotion activity highlighted the vast
number of new routes inaugurated
in 1978.
A combination of television and
radio commercials, colorful newspaper
and magazine ads, outdoor displays,
and sales materials informed and
attracted the public to 13 new North
Central cities. Each campaign was
designed to promote the airline's image
of quality service, while pointing
out special passenger benefits.
Comprehensive advertising was
also devoted to the company's "Super
Saver" fare (savings up to 40 percent
of standard fare) which played an
important role in the remarkable traffic
and revenue growth in 1978. The
"Summer Sun Times" promotion
increased vacation travel to Denver,
New York City, Toronto, New England
and the Canadian Wilderness. Ads
in Sunday newspaper travel sections
and The Wall Street Journal were
reinforced by radio commercials at
peak rush-hour traffic periods.
An "I Love New York" campaign
premiered in Milwaukee during
October. Members from the cast
of "Grease," popular Broadway
musical, performed show numbers for
400 travel agents and corporate
travel people. The airline is offering
16 theater package tours to
complement its New York service.
ATLANTA
NONSTOP
(Open on animation of
Atlanta nonstop.)
"Sample a hearty country-style
breakfast on our morning nonstop
to Atlanta.
Information about the proposed
North Central/Southern merger was
summarized in two booklets used
by officials of both carriers in visits
with business and civic leaders.
The literature pointed out the merger
benefits to North Central and
Southern cities, to investors,
and employees.
The National Association of
Investment Clubs presented North
Central with the 1978 Nicholson
Award for producing the industry's
best 1977 Annual Report. For the sixth
consecutive year, Financial World
magazine recognized the excellence
of the company's Annual Report
with a Merit Award.
"Travel Unraveled," a unique 56-page
booklet produced by North Central,
informs passengers on all facets
of air transportation-reservations,
baggage service, and tips on
traveling with youngsters, pets and
sports equipment.
Northliner Magazine, the popular
inflight periodical, went monthly
in January 1979. Now in its eleventh
year, the magazine provides
North Central passengers with
stimulating articles about people,
places and events, plus a feature
on the company.
Some 46 news releases were
issued during 1978, disseminating
information on monthly traffic and
ANNCR: "Do you feel that a
flight to Atlanta is just a
plane ride?
`Or perhaps a delicious London
broil dinner in the evening. . .with
complimentary wine.
financial results. Special stories,
receptions and press conferences
promoted North Central and its
new routes. Each quarter, corporate
officers held meetings with business
writers and financial analysts.
"The Northliner" newspaper keeps
the 4,500 employees up-to-date about
the company, their fellow workers
and industry matters. It has been a
consistent award winner among
airline employee publications.
The company sales staff made
27,000 personal calls on travel
agencies and businesses
with frequent air travelers. Also,
North Central employees participated
in 1,700 civic, industry and special
interest functions as guest speakers
or members.
The airline's general office and
main operations base in Minneapolis/
St. Paul attracts thousands of
visitors. Over 6,700 persons, many
of them students, were given
guided tours of the facilities in 1978.
Public events held in the employee
cafeteria provided 12,000 additional
guests with a look at company
headquarters.
North Central continues to benefit
from the efforts and support
of countless friends and boosters
throughout its system. These
endeavors are a valuable contribution
to the airline's progress.
"Then relax on North Central!
You'll be greeted by real people
with warm smiles.
"You'll like our style ... on all four
nonstops to Atlanta."
SINGERS: "Fly North Central
28
North Central Flight Attendants Carole Darin, Charlene McCarty, Faye Beilke
and Martine Anderson were featured in TV commercials promoting the airline's
new service to Atlanta, Philadelphia and Baltimore.
Return from Philadelphia on our early
afternoon nonstop and enjoy a great
snack.. .anything from a
hearty sandwich to a
crab hors d'oeuvre tray or
garden-fresh chefs salad
.. .all complemented by
delicious French pastry.
Try something new
to Philadelphia.. .the
warm, personal service
of North Central Airlines.
NEW!
PHILADELPHIA
NONSTOPS
Or return in the morning and sit
down to a fantastic Country-Style
Breakfast... steak and eggs, hash
browns, pastry and more.
You 'll also enjoy a brunch
snack on our morning
nonstop from here to
Philadelphia.
Relax in roomy 2-3 seating
with plenty of leg room.
" Everything is single class service-
the best for everyone, so nobody
flies second class.
Ask how to save
up to 40% on round-trip
airfare with our Super
Saver Fare. But hurry,
because seating is limited.
40%
` OFF
FLY NORTH CENTRAL STYLE
NONSTOP TO PHILADELPHIA
Lv Cincinnati Ar Philadelphia
10:50 a.m. 12:09 p.m.
7:40 p.m. 8:59 p.m.
Lv Philadelphia Ar Cincinnati
7:00 a.m. 8:32 a.m.
1:10 p.m. 2:42 p.m.
North Central is located in Terminal C Call yOUf travel agent Or 513-621-3264.
at the Philadelphia International Airport.
NORTH CENTRAL AIRLINES
GOOD PEOPLE MAKE OUR AIRLINE GREAT
NORTH CENTRAL AIRLINES, INC.
7500 NORTHLINER DRIVE MINNEAPOLIS, MINNESOTA 55-450