~~ OF NORTHEAST AIRLINES INC. FOR THE YEAR fJ45 --*--*--*--*--*--*--*--*-- ---*--*--*--*--*--*--*--*-- NORTHEAST AIRLINES, INC. FOR THE YEAR ENDED DECEMBER 31, 1945 NORTHEAST AIRLINES, INC. ~oard of "'Directors PAUL F. COLLINS, Chairman RA.nu lRIMEscu New York, N. Y. jACQ.UELINE COCHRAN New York, N. Y. H. LEROY SWIMM Boston, Mass. PAUL F. COLLINS . MILTON H. ANDERSON H. LEROY SWIMM RICHARD ELY ELY, BRADFORD, THOMPSON & BROWN LYBRAND, Ross BRos. & MONTGOMERY OLD COLONY TRUST COMPANY . THE FIRST NATIONAL BANK OF BOSTON JAMES F. FITZGERALD Boston, Mass. EUGENE L. VIDAL New York, N. Y. MILTON H. ANDERSON Boston, Mass. Officers * President and Chairman of Board Vice President and General Manager . Treasurer and Assistant Clerk of Corporation . Clerk of Corporation General Legal Counsel Auditors Transfer Agent Registrar General Offices, LOGAN INTERNATIONAL AIRPORT, EAST BosToN, MAss. Treasury and Accounting Offices, 1 STATE STREET, BosTON, MAss. To THE STOCKHOLDERS OF NORTHEAST AIRLINES, INC. The Board of Directors submits its Annual Report for the year ended December 31, 1945 including a Comparative Balance Sheet of the Company as at December 31, 1945 and 1944, and a statement of Profit and Loss and Deficit for the year ended December 31, 1945, together with the certificate of the Company's independent auditors, Lybrand, Ross Bros. & Montgomery. Financial Operations for the year 1945 resulted in a loss of $166,321. after provision of $213,079. for depreciation and amortization. The loss is attributed primarily to the nonrecurring expense inci- dental to the transition from military to commercial operation and expansion of commercial flying and routes; the reduction of fares on the Boston-New York operation from 5.5 to 4.4 per mile to meet competitive fares. The year 1945 was marked by the termination of our military contract and by broad expan- sion in our domestic flying operations. Percentagewise this expansion was greater than that of any other domestic carrier. Passenger miles flown increased from 12,848,222 in 1944 to 38,939,107 in 1945 and gross revenues other than from army contracts from $1,080,560. in 1944 to $2,417,753. in 1945. Army Contract At the end of 1944 there remained unsettled many controversial items relative to government reimbursement of indirect and overhead expenses incurred by the Company during its military operations. These items have been adjusted to the satisfaction of both the Army and the Company by new amendments to the war contract clarifying these differences of interpretation. These new amendments, the Company believes, will aid us in obtaining reimbursement of costs to which the Company believes it is entitled. A substantial reimbursement of costs has already been received. Operational services of the Company under the military contract were terminated as of April 15, 1945 and the contract was terminated March 2, 1946. The majority of the Company's per- sonnel and facilities previously employed for military operations were absorbed by the commercial operations, thus providing personnel and equipment at a time when it was difficult to obtain trained personnel or equipment. We quote the following excerpt from a letter under date of April 17, 1946 from the Assistant Secretary of War, as a fitting conclusion to our war activities: "The wholehearted cooperation rendered by Northeast Airlines, Inc., to the Army Air Forces is very gratifying. Early in 1942 Northeast Airlines inaugurated transport services which linked the American forces in Canada, Newfoundland, and ultimately Greenland and Ice- land, with the United States. In one instance it moved the contractor's personnel and sup- plies which were essential to the construction of an airport. Northeast flew a dangerous mission to Arctic Bay in the spring of 1943 in order to remove sick personnel from the weather station there. In the early days of the war it moved combat troops in Iceland in anticipation of an enemy raid. These servic_ es contributed materially to the success of the Army Air Forces in meeting the air transportation requirements of our Army, and your company has thus made a fine contribution to the defense of our country and victory over its enemies. "The Commanding General, Army Air Forces, joins me in extending to Northeast Airlines, Inc., and its employees our sincere gratitude and appreciation for the task performed during the war just ended." Property and Equipment On January 1, 1945 flying equipment consisted of three DC-3's, two of 21 passenger capacity and one of 24 passenger capacity. By the end of the year flying equipment comprised six DC-3's, five of which were 24 passenger planes, (including four converted in our own shops) and one 21 passenger plane with an adequate supply of spare engines, propellers, and accessories. This equip- ment increased available passenger capacity by 116%. During the fall of 1945 the Company constructed a complete engine overhaul shop in Hangar No. 3, capable of handling sixty engines each month. This new facility should materially reduce costs of engine overhaul previously done by outside agencies. * NORTHEAST AIRLINES, I N C * Reservation and space control facilities were greatly enlarged and improved both in Boston and New York. Traffic and administration offices were opened at 500 Fifth Avenue, New York, and Northeast, together with Northwest and Pennsylvania-Central Airlines, opened a most attractive airlines terminal opposite the Grand Central Station on 42nd Street, New York. Mail Pay The Company filed a rate petition with the Civil Aeronautics Board in May, 1945 asking for the determination of a proper rate of mail pay on the Boston-New York route, then known as Route No. 65. The Civil Aeronautics Board ordered that a system rate be set instead of a rate for the one route only, and issued its Tentative Findings on April 1, 1946. This report recom- mended a rate of 18.65 per airplane mile for the period from May 1 to October 31, 1945; the same base rate for the period November 1, 1945 through April 30, 1946; and a rate of 14.37 thereafter. Your company filed an answer accepting the rate beginning May 1, 1946 but pro- tested the rate offered for the previous periods, believing that this rate should have been approxi- mately 23 per mile. A hearing will be held before an Examiner for the Civil Aeronautics Board in the near future. Route Authorizations The Company's 1944 application for route consolidation resulted in a consolidation of Routes 27, 65 and 70 by the Civil Aeronautics Board's decision which became effective October 18, 1945 with the affixing of President Truman's signature. Route 27 is now composed of three segments, namely, New York and Newark to the terminal Caribou, Maine, via Waterbury, Worcester, Boston, Lawrence, Portland, and other intermediates; New York and Newark to the terminal Boston via New Bedford and four Cape points Provincetown, Hyannis, Martha's Vineyard and Nantucket; and Boston to Burlington, Vermont. Route No. 27-F covers the foreign segments of Burlington to Montreal, and Bangor to Moncton, New Brunswick. Alterations and extensions may be made by the Board to Route No. 27 without the President's signature since it is now only domestic in scope. Your company is now in a position to secure non-stop service privileges between any two points on the New York-Caribou segment. This permitted the recent inauguration of the important Portland-Lawrence-Worcester-Newark schedules, as well as a non-stop Portland- Newark schedule. Canada's scheduled air services recently came under the control of the Air Transport Board, a regulatory body somewhat similar to the Civil Aeronautics Board of the United States. Your company participated in a hearing before the Air Transport Board in Ottawa on March 11, 1946, and received proper license authorizations in that Board's decision of May 3, 1946. These licenses were issued in accordance with the terms of the United States-Canada Civil Air Agreement of February 19, 1945 and by virtue of the nomination of your company by the United States Government for operation over two of the routes specified in that Agreement. New Routes Continuing its policy of expansion and development of new air service, your company filed in 1945 application for an important extension of Route No. 27 from New York and Newark to Washington, D. C., via Philadelphia and Baltimore, together with authorization to serve Provi- dence, Rhode Island, Hartford, Connecticut and Springfield, Mass. This application was con- solidated with others in the so-called Middle Atlantic Area Case and lengthy hearings were con- cluded in March, 1946. The management believes a strong and logical case was presented by the Company during this proceeding. The Company's application for an extension to New Orleans has been amended to cover Philadelphia, Baltimore, Washington, D. C., Charlottesville, Lynchburg, Winston-Salem, Ashe- ville, Atlanta, and Montgomery as intermediates. Hearings on this application were held in June and are continuing at the present time before Examiners of the Civil Aeronautics Board. The Board denied the Company's application for North Atlantic Routes, ' on the basis that only the largest carriers were sufficiently strong to weather the formative period and the intense foreign competition. * NORTHEAST AIRLINES, I N C * No action has been taken by the Board as yet to arrange a hearing on your Company's appli- cations for Boston-Bermuda route nor to provide a new opportunity to hear its New York to Pitts- burgh and Chicago application. New Routes Awarded In a recent decision in the so-called New England Case, the Civil Aeronautics Board author- ized your company to provide service on a number of new routes, and designated ~uch cities as Providence, Hartford, Springfield, New London, New Haven, Bridgeport, and many others, as stops on these routes. Service will be instituted as soon as additional equipment and adequate airport facilities become available. Northeast Airlines will then serve every large community in New England. Merger After a thorough study your company entered into an agreement to merge with Pennsylvania- Central Airlines. Terms were 2 shares of Northeast for 1 share of Pennsylvania-Central. Stock- holders of both companies have approved the merger. The case was presented before an examiner of the Civil Aeronautics Board in April and Public Counsel rendered a favorable report. We are awaiting the Examiner's Report which should be forthcoming in the near future. After oral argument before the Board a final decision should be handed down sometime this Fall. Outlook for 1946 Your company has every hope that its increase, percentagewise, over the previous year in passenger miles flown and gross revenues will again exceed that of any other domestic carrier. The first five months of 1946 showed an increase in revenue passenger miles flown of 221 % over 1945. Further increase should be achieved with the operation of three 4-engine 60-passenger planes flying non-stop between Boston and New York and three additional 30-passenger DC-3's augmenting schedules on other divisions. The opening of three large productive areas, namely, the Worcester-Fitchburg-Leominster, the Lawrence-Haverhill-Lowell, and the New Bedford-Fall River areas, all with excellent air- ports, provide service for an additional million New Englanders heretofore without air service or adequate ground transportation. The Cape Cod and Island service was inaugurated on June 20th and should receive excellent seasonal patronage. Our proposed construction of a large hangar and central operating base on the newly con- structed Logan International Airport, heretofore impossible, should reduce operating costs and increase overall efficiency. Although rapid expansion has produced some irregularities of service, there has been no let- down in observance of rules for safety of flight. Your management believes that within two years, perfection of new flying techniques and installation and utilization of aids presently becoming available will provide greatly increased regularity of service without compromise with safety. Conclusion The immediate acceptance by the public of our Boston-New York service despite the severest competition in the industry has been a source of inspiration to your management and any improve- ments made by your company during this past year should be credited in great part to the loyalty and ever increasing diligence of our personnel. The directors and management express their appreciation of the interest and support of our stockholders, and for the cooperation of our employees. We look forward to further improvements in our service which will merit the continuing goodwill of the public. Boston, Massachusetts June 29, 1946 For the Board of Directors, PAUL F. COLLINS, President. ASSETS CURRENT ASSETS: Cash in banks Receivables, billed or accrued: Airlines and agents . United States Post OffiGe Department United States Army Air Forces-under operational con- tracts (note A) less $86,709 reserve for adjustments at December 31, 1945 and 1944 Note receivable from sale of hangar due June 1, 1946 Other receivables, less reserve . Total receivables Inventories (at average cost or less): Aviation fuels and oil Replacement parts and supplies Total inventories Total current assets . Note Receivable from Sale of Hangar, due in 1947 Claim for Refund of 1942 Federal Income Taxes Based on Carry-Back of 1943 Loss PROPERTY AND EQUIPMENT, AT CosT: Improvements to real estate not owned-operating property Flight equipment-passenger, mail and express service (of which $675,000 was pledged against note payable at Decem- 31, 1945) Ground and shop equipment N onoperating property: Hangar on ]and not owned Flight and radio equipment Land . Less reserves for depreciation and amortization Property and equipment less reserves DEPOSITS: Escrow deposit under lease agreements ($13,800 received in 1946, balance to become available in 1948 or prior) . For purchase of franchise and land from Mayflower Airlines, Inc. acquired in January, 1945 Total deposits PREPAID EXPENSES AND DEFERRED CHARGES: Unexpired insurance Prepaid rentals Work orders in progress Other deferred charges and prepayments . Total prepaid expenses and deferred charges Franchise acquired from Mayflower Airlines, Inc. NORTHEAST AIRLINES, INC. Comparative 'Balance Sheet As at December 31, 1945 and 1944 December 31 I l LIABILITIES CURRENT LIABILITIES: 1945 $ 185,572.05 199,920.92 164,105.30 459,788.80 20,000.00 62,637.75 906,452.77 2,896.34 262,023.37 264,919.71 1,356,944.53 30,000.00 30,856.71 113,014.30 1,128,413.01 221,756.25 35,769.92 8,300.00 1,507,253.48 360,563.84 1,146,689.64 50,000.00 50,000.00 22,967.17 12,914.65 5,286.08 10,852.63 52,020.53 9,200.00 $2,675,71 L41 1944 $ 648,988.54 21,757.28 40,873.84 687,668.37 38,503.65 788,803.14 2,214.83 98,345.10 100,559.93 1,538,351.61 30,856.71 53,414.48 546,037.89 123,202.72 120,211.05 15,451.69 858,317.83 266,483.62 591,834.21 50,000.00 17,500.00 67,500.00 15,258.43 13,016.65 1,910.09 5,176.15 35,361.32 $2,263,903.85 Note payable to bank with chattel mortgage on aircraft and equipment-instalments payable in 1946 Accounts payable-vend.ors and others Accrued salaries and wages Income and social security taxes withheld Accrued taxes Unearned transportation revenue Other current liabilities Total current liabilities Note payable to bank with chattel mortgage on aircraft and equipment-instalments payable in 1947 Reserve for aircraft overhaul . Reserve for taxation contingencies Contingent liabilities-refer to note B to financial statements . CAPITAL COMMON STOCK, par value $1.00 per share, authorized 2,000,000 shares, issued and outstanding 500,000 shares . CAPITAL SURPLUS (premium on common stock) . DEFICIT IN EARNED SURPLUS (since July 1, 1940) The accompanying notes are an integral part of this statement. $ December 31 1945 180,000.00 486,557.53 36,827.17 21,403.77 13,227.19 61,672.54 14,777.49 814,465.69 120,000.00 19,612.73 20,000.00 500,000.00 1,498,547.52 (296,914.53) 1944 $ 330,411.30 15,447.19 8,278.31 15,006.09 6,807.16 375,950.05 20,000.00 500,000.00 1,498,547.52 (130,593.72) $2,675,711.41 $2,263,903.85 * NORTHEAST AIRLINES, I N C Statement of Profit and Loss and 7Jeficit..J For Year Ended December 31, 1945 OPERATING REVENUE: Passengers Air mail . Operations under Army Air Force contract (note A) Other Total operating revenue OPERATING EXPENSES: $1,945,443.76 431,992.76 293,727.26 40,316.76 Conducting transportation and flying operations 1,259,628.47 Maintenance and repairs (including maintenance of govern- ment owned equipment) . 753,000.58 Provision for depreciation and amortization (note C) 203,078.57 Traffic and advertising . 366,137.02 General and administrative 285,805.34 Taxes other than income taxes 58,503.74 * $2,711,480.54 Total operating expenses 2,926,153.72 Operating loss . 214,673.18 NET GAINS from sales and retirements of property and equip- ment . DEDUCTIONS FROM INCOME: Extension and development cost . Expenses of nonoperating property including $10,000.00 amortization of hangar on land not owned Interest expense Other deductions Loss for the year DEFICIT IN Earned Surplus at Beginning of Year DEFICIT IN Earned Surplus at End of Year . 8,526.32 15,138.36 812.43 684.13 The accompanying notes are an integral part of this statement. 73,513.61 141,159.57 25,161.24 166,320.81 130,593.72 $ 296,914.53 * NORTHEAST AIRLINES, I N C * 7\[ptes to Financial Statements A - The amounts receivable and the revenue under operational contracts with the United States Army Air Forces are subject to possible adjustments which may result from governmental audit of costs chargeable under the contracts. The company has made provisions in a reserve for such adjustments in an amount which the. company believes, based on con- tract amendments agreed upon in 1946, will prove adequate. Operational services under the Army Air Forces contract were terminated April 15, 1945 and the contract was terminated March 2, 1946. B - The Commonwealth of Massachusetts has submitted charges of $24,575 for landing fees at the East Boston Airport for the period December 1, 1941 to December 31, 1945. The company disclaims any liability and has made no provision therefor in the accompanying financial statements. C - Beginning with the month of September, 1945 depreciation provisions on four Douglas DC 3 aircraft were at a rate based on an estimated three-year life instead of the estimated five-year life used from January 1, 1944 to that date, with the result that depreciation expense for 1945 was approximately $33,000 greater than it would have been had the rate based on a five-year life been used throughout the year. D - The company has made arrangements for purchase in 1946 from Pennsylvania-Central Airlines Corporation on a conditional sales basis of 3 DC 4 type planes and 3 DC 3 type planes and spare equipment at an estimated aggregate cost of $1,200,000. * NOR f f H EAST AIRLINES, I N C J.uditors' 'lv!port.., NoRTHEAST AIRLINES, lNc., Boston, Massachusetts. We have examined the accompanying comparative balance sheet of North- east Airlines, Inc. as at December 31, 1945 and 1944 and statement of profit and loss and deficit for the year ended December 31, 1945, have reviewed the sys- tem of internal control and the accounting procedures of the company and, without making a detailed audit of the transactions, have examined or tested accounting records of the company and other supporting evidence, by methods and to the extent we deemed appropriate. It was not practicable to obtain from government agencies confirmation of the amounts owed to the company under the government contracts referred to in note A to the financial statements. In other respects our examination was made in accordance with generally accepted auditing standards applicable in the circumstances and included all procedures which we considered necessary. As indicated in note A to the financial statements the amounts receivable and the revenue under certain government contracts are subject to possible adjustments which may result from governmental audits of costs chargeable under contracts. Subject to the foregoing explanation, said financial statements, in our opinion, present fairly the position of Northeast Airlines, Inc. at December 31, 1945 and 1944 and the results of its operations for the year ended December 31, 1945 in conformity with generally accepted accounting principles applied, except as to changes in depreciation rates described in note C, on a basis con- sistent with that of the preceding year. Boston, Massachusetts May 22, 1946 LYBRAND, Ross BRos. & MONTGOMERY * * NORTHEAST AIRLINES, I N C * Comparative Statistics 1st 5 Mos. 1940 1941 1942 1943 1944 1945 1946 Revenue Miles Flown 887,625 1,268,257 750,278 727,713 1,023,737 2,287,366 1,270,842 Completion of Sched- uled Miles ......... 84.43% 84.04% 79.45% 79.10% 83.87% 83.61 % 82.88% Passenger Revenue .... $226,684 $378,569 $309,813 $533,972 $759,623 $1,945,444 $1,207,125 Revenue Passengers Carried ............ 27,623 42,546 26,446 36,263 53,766 175,608 119,612 Revenue Passenger Miles .............. 4,112,273 7,074,920 5,383,171 9,090,063 12,848,222 38,939,107 24,410,366 System Load Factor ... 46.38% 38.39% 35.94% 59.52% 59.14% 74.47% 75.33% Passenger Revenue Per Plane Mile ......... $.2554 .2985 .4129 .7338 .7420 .8505 .9498 Revenue Per Passenger Mile .............. $.0503 .0535 .0576 .0587 .0591 .0500 .0495 MONTREAL ,o OTTAWA ANO llll 1111 TO QUIIIC _.mlN CANADA AND SAOVINAY PRESQUE ISLE <~~-~- . :;,-~_-:;. -/ . ...--- The Wings of New England, now operates 4-engine 4-mile-a-minute non-stop daily service ... Boston- New York one hour . in deluxe 60-passenger Douglas Skymasters. With the addition of these comfortable ultra-modern airliners and more DC-3's, Northeast's new and more frequent service connecting metropolitan New York and Boston with New England, Montreal and the Maritime Provinces includes: BOSTON - NEW YORK . frequent daily non - stop round-trip flights - 65 minutes flying time! More seats today with NEA. New daily flights from New York (Newark) to Worcester~ Lawrence and the vacation centers of New England and the Maritime Provinces. ',< w_,1ae.A61 Noll I AIRLINE!i? New daily flights connecting Boston and New York (Newark) ~ith New Bedford, Nantucket, Martha's Vineyard and Hyannis. Boston Ticket Offices HOTEL STATLER COPLEY PLAZA Call EASt Boston 4100 Treasury OfRces New York Ticket Office AIRLINES TERMINAL ANNE>l Call BOwling Green 9-17 40 1 Stole Street, loston 9 "DO MORE IN LESS TIME" Gn~rol Offices Logan Airport, Boston 28 New Yori Office 500 fifth Avenue --*--*--*--*--*--*--*--*--- ---*--*--*--*--*--*--*--*--