Northeast Airlines Annual Report 1947

~nnual ~port
1947
NORTHEAST AIRLINES, INC.
"The Yankee Fleet"
NORTHEAST AIRLINES,
INC.
~oard of 'JJirectors
PAUL F. COLLINS, Chairman
RADU IRIMESCU . JAMES F. FITZGERALD
New York, N. Y. Boston, Mass.
j ACQ,UELINE COCHRAN
New York, N. Y.
GEORGE E. GARDNER
Boston, Mass.
GEORGE E. GARDNER
MILTON H. ANDERSON
R. H. HERRNSTEIN
HENRY E. FOLEY .
FOLEY, HOAG AND ELIOT
LYBRAND, Ross BRos. & MONTGOMERY
OLD COLONY TRUST COMPANY
THE FIRST NATIONAL BANK OF BOSTON
Officers
*
EUGENE L. VIDAL
New York, N. Y.
MILTON H. ANDERSON
Boston, Mass.
President
Vice President
Assistant Treasurer
Clerk of Corporation
General Legal Counsel
Auditors
Transfer Agent
Registrar
General Offices, LOGAN AIRPORT, BosTON 28, _
MASS.
To THE STOCKHOLDERS OF
NORTHEAST AIRLINES, INC.
The Board of Directors submits its Annual Report for the year ended December 31, 1947.
Financial
You will find, submitted with this report, a comparative profit and loss statement for the
calendar years 1946 and 1947, a balance sheet as of the close of the year 194 7 ( certified by the
Company's auditor, Lybrand, Ross Bros. & Montgomery), and an uncertified proforma balance
sheet as of December 31, 1947 reflecting the Company's sale in 1948 of 83,333 shares of Con-
vertible Preferred stock and the April 9, 1948 retroactive mail pay order of the Civil Aeronautics
Board.
While the 194 7 profit and loss statement indicates an operating loss of $1,285,038.23 and
a net loss of $1,380,832.45, these figures are, of necessity, preliminary in nature. Mail pay
accruals in the statement result from the temporary mail rate and represent only a portion of
the mail revenue which your Company expects ultimately to receive with respect to its 1947
operations. In fact, the Company has already received an additional $140,000 (not reflected in
the profit and loss statement) in mail pay for the first four months of 1947. The Company ex-
pects that its permanent rates with respect to this period will be substantially higher than the
temporary rates.
New Hangar, Service and Office Building
Your Company erected a modern fireproof hangar, service and office building 'during 194 7
at Logan Airport in Boston. This is the first permanent structure to have been erected pursuant
to present plans for the future development of this field. Occupancy took place about December
1, 1947. The new service and office portions of the building accommodate all of the general offices
of the Company (including administration and treasury, operations, traffic, sales, reservations
and engineering). The hangar facilities accommodate practically all maintenance functions ex-
cept engine overhaul. The new building was carried on the books at December 31, 194 7 in the
amount of approximately $655,000, and the final cost will be approximately $675,000.
Property and Equipment
During 194 7 flying equipment consisted of three D-C4 four-engine Douglas Skymasters
with 60 seats each, six DC-3A 24-passenger planes, and five DC-3C 29-passenger planes, all
with an adequate supply of spare engines, propellers, and accessories. This fleet of fourteen
planes was reduced to eleven by the sale of three 29-passenger DC-3C's early in 1948 for $95,000.
In August, 1947, the Company entered into an agreement with Consolidated Vultee Air-
craft Corporation relative to the purchase of five "Convair-Liner", 40-passenger, 300 m.p.h.
aircraft. The Company's agreement to purchase was made firm in 1948, and it is now anticipated
that the five new aircraft will be made available for service in early 1949.
Mail Pay
In last year's report to the stockholders, it was pointed out that the Civil Aeronautics Board,
by its March 18, 1947 order in the pending mail rate proceeding, had directed a substantial
increase in the temporary tentative mail rates for the period commencing May 1, 1945. This
order was subsequently amended on May 14, 1947 to avoid reductions in mail pay resulting from
changes in the amount of scheduled mileage designated by the Post Office Department for the
carriage of mail.
The Board, on April 9, 1948 fixed the Company's mail pay for the _
two years-ending April
30, 1947 at $2,107,578, which, after deducting sums previously received, resulted in a net additional
payment in April, 1948, of $546,803. This total payment is equivalent to 29.36 cents per
revenue plane mile.
The Company received temporary mail pay for the eight-month period ending December
31, 1947 at an average rate of approximately 16.7 cents per revenue plane mile. The final
rate for this period and beyond is yet to be determined by the Board. The operating loss for the
period, May 1, 1947 to December 31, 1947, amounted to $700,559.59.
* NORTHEAST AIRLINES, INC. *
Convertible Pref erred Stock
In 1947, the management concluded that a refinancing of certain secured notes of the Com-
pany was desirable and a meeting of stockholders was called to .act upon the matter of the creation
and issue of a new class of stock; namely, Convertible Preferred stock. On January 26, 1948,
such new class of stock was authorized by the stockholders, and 83,333 shares were offered to
stockholders for subscription at $20.00 a share. All the shares offered have been purchased,
and the Company has received an aggregate payment therefor of $1,666,660. This amount
has been applied to the payment of $1,447,005 principal amount of secured notes, leaving only
$400,000 principal amount still outstanding, and to the payment in full of interest on all out-
standing secured notes through March 10, 1948. The balance of the proceeds of the shares
sold has been applied to, or reserved for, expenses related to the issue, estimated at $24,500,
and working capital of approximately $133,700.
Routes and Services
The Company continues to operate over Routes No. 27 and No. 27-F. During the year
there have been no changes in our certificated routes, and the only change in the service pattern
has been that since April, 1947, all service into the New York area has been routed into La Guardia
Airport. Prior to that time the New York area had also been served through Newark.
Application for service between Boston and Bermuda was heard during 1947, but your
Company withdrew its application in May, 1948, following the issuance of a report by an Exam-
iner for the Civil Aeronautics Board recommending that Pan American Airways be awarded
the route. The Board denied your Company's applications for service between New York and
Washington and between New York and New Orleans. No action has been taken on applica-
tions for service to Chicago and to Quebec.
Route Pattern Planning
Your Company is presently certificated to serve 48 stations and has found it possible to main-
tain service at 24 stations during 194 7. The average distance between stations at which oper-
ations were conducted was 69 miles. The average miles between certificated points would b~
38 miles. The service required by these stations makes Northeast Airlines neither a feeder line
nor a trunk line. Following the negotiations which commenced in 1947, your Company, in May,
1948, entered into a route pattern agreement with E. W. Wiggins Airways, Inc., certificated as
a New England feeder air carrier, whereby Wiggins joined with your Company in applying to
the Board for approval of a transfer of the so-called local or feeder-type portions of Northeast's
domestic operations to Wiggins and the sale of certain station assets and other items for an aggre-
gate purchase price of $60,000.
It is believed that consummation of this agreement will substantially :strengthen Northeast,
by simplifying its route pattern and enabling it to devote its efforts exclusively to the rendering
of improved trunkline-type services in New England. Such services can be performed with
modern flying equipment, and would provide more frequent as well as faster air service for the
New England area. The route segments over which Northeast would rende~ this improved
regional trunkline service would be:
Boston- New York
Boston-Burlington- Montreal
Boston- Portland- Bangor
Worcester- New York
Providence- New York
New Bedford- Fall River- New York
Bangor- Portland- Manchester- Worcester-New York
and, in addition, during the summer months:
New York- Cape Cod and Island points
Boston- Cape Cod and Island points
* NORTHEAST AIRLINES, INC. *
Civil Aeronautics Board Order on Atlas Corporation
As a result of changed relationships between the Atlas Corporation and Consolidated Vultee
Aircraft Corporation, the Board instituted an investigation relative to Atlas control of Northeast
within the meaning of the Civil Aeronautics Act. To expedite action, Northeast joined Atlas in
a petition which resulted in an order dated April 23, 1948 directing Atlas to dispose by sale or
otherwise within eighteen months of its holdings of Northeast stock in excess of 3% of outstanding
shares of each class. As of April 1, 1948, Atlas owned approximately 20% of the Common and
93% of the Convertible Preferred stock.
Special Report to the Board
During 194 7 the Board entered an order providing for an investigation of the apparent
increasing dependence of your Company on government assistance in the form of mail pay. An
exhaustive report was submitted to the Board in August, 1947, and a group from the Board's
staff spent several days in Boston with Company officials during September, 1947. No further
action has been announced by the Board in this matter.
Management Changes
On November 24, 1947, your Company entered into an employment contract with Mr.
George E. Gardner to serve as President and General Manager and to purchase 10,000 shares
of Common stock. Mr. Gardner has served in his new capacity since that date, and Mr. Paul
F. Collins has continued as Chairman of the Board.
General L. W. Miller was elected Treasurer in May, 1947, to succeed Mr. H. L. Swimm,
resigned. On January 26, 1948, General Miller resigned to accept a position with another
company. Mr. R.H. Herrnstein, who has been employed by your Company in various capacities
since July, 1941, was elected Assistant Treasurer on January 8, 1948, and he has served as chief
financial officer since General Miller's resignation.
Conclusion
The past year has been one of disappointment to the entire air transportation industry in
which your Company shared. Reduced demand for passenger service decreased revenue while
costs continued to mount. Reductions in the number of employees failed to offset sharp increases
in wage and salary levels, and fare increases failed to offset steadily increasing costs of materials
and supplies.
The major uncertainties of 194 7 have been eliminated. These uncertainties arose in part
from pendency of the PCA merger and its later abandonment and in part from unusual problems
adversely affecting the regularity of DC-4 operations, including temporary withdrawal of the
airplanes from service during a heavy traffic period.
Management believes that general improvement of your Company's position can and will
be achieved in the future, through the simplification of the Company's route pattern, the intro-
duction into service, in early 1949, of Convair-type airplanes, and further progress toward all-
weather flying. The latter, toward which substantial progress is expected in the near future,
is without doubt the most important goal for which the airlines are striving, and your Company
has been, and will continue to be, keenly interested in every development in the field. Your
Company was the first airline fully equipped with aircraft installations, as well as a complete
pilot training program, to use the I. L. S. (Instrument Landing System) at Boston and New
York, and use of this system has already improved the regularity of its operations. Further
aids to all-weather flying are confidently expected, and will be adopted by your Company as
soon as they are perfected.
The Company has continued to maintain its perfect safety record of no passenger injury
since the commencement of operations in 1933.
Boston, Massachusetts
May 28, 1948
For the Board of Directors,
GEORGE E. GARDNER, President.
CURRENT ASSETS:
Cash in banks .
Receivables:
Airlines and agents
ASSETS
United States Post Office Department (note A)
Other receivables
Total receivables
Miscellaneous supplies (at average cost)
Total current assets
PROPERTY AND EQUIPMENT, AT CosT:
Flight equipment, of which approximately $2,000,000 was
pledged at December 31, 1947 against notes payable (note F)
Hangar and service building on leased land, pledged against
notes payable
Flight equipment spare parts
Ground and shop equipment
Improvements to real estate not owned
Construction in progress .
Land (nonoperating property)
Less reserves for depreciation and amortization
Total property and equipment.
Stock purchase contract (due from officer on or before May 24,
1 9 51) ( note B)
Unexpired insurance and other prepaid expenses and deferred
charges .
Expenses in connection with issuance of preferred stock
Franchise and route extension costs, less amortization
$
N O R T H EA 5 T A I R L I N E S, I N C .
613alance Sheet
As at December 31, 1947
and
Pro Forma Balance Sheet Giving Effect, as of December 31, 1947, to Certain 1948
Transactions Explained in Note F
Pro Forma
December 31, (not certified)
1947 (note F)
294,759.85 $ 452,457.61 *
121,221.01 121,221.01
152,784.03 692,784.03 *
121,240.12 121,240.12
395,245.16 935,245.16
82,132.60 82,132.60
772,137.61 1,469,835.37
2,430,030.12 2,430,030.12
649,008.69 649,008.69
430,076.06 430,076.06
409,879.09
IJ
ll
LIABILITIES
CURRENT LIABILITIES:
Notes payable held by Atlas Corporation and subsidiary
Accounts payable-vendors and others
Accrued salaries and wages
Taxes withheld and other payroll deductions, not yet remitted
Accrued social security and other taxes
Interest accrued on notes payable
Unearned transportaton revenue
Reserve for self insurance (workmen's compensation)
Total current liabilities .
Reserve for aircraft overhaul (note C)
Stock purchase contract (for 10,000 shares of authorized, unissued
common stock) ( note B) .
Contingent liabilities (note D)
December 31,
1947
$1,847,005.00
615,540.08
80,946.12
23,739.92
21,010.36
49,683.95
32,549.76
11,963.54
2,682,438.73
32,653.19
31,875.00
409,879.09
133,065.71 133,065.71
CAP IT AL STOCK AND SURPLUS
22,910.73 22,910.73
8,300.00 8,300.00
4,083,270.40 4,083,270.40
1,723,952.33 1,723,952.33
2,359,318.07 2,359,318.07
31,875.00 31,875.00
86,685.60 86,685.60
10,118.71 *
23,340.00 23,340.00
$3,283,474.99 $3,971,054.04
I
I
CONVERTIBLE PREFERRED STOCK, no par value:
85,000 shares authorized in 1948
83,333 shares issued in 1948
COMMON STOCK, par value $1.00 per share:
2,000,000 shares authorized (note B)
500,000 shares issued and outstanding
CAPITAL SuRPLUS (premium on common stock)
DEFICIT IN EARNED SURPLUS (since July 1, 1940) (note A).
Total capital stock and surplus
500,000.00
1,498,547.52
(1,462,039.45)
536,508.07
$3,283,474.99
*Items adjusted in pro forma balance sheet to reflect 1948 transactions explained in note F. The accompanying notes are an integral part of the above balance sheets.
Pro Forma
(not certified)
(note F)
$ 400,000.00*
615,540.08
80,946.12
23,739.92
21,010.36
*
32,549.76
11,963.54
1,185,749.78
32,653.19
31,875.00
1,666,660.00*
500 000.00
1,498,547.52
(944,431.45) *
2,720,776.07
$3,971,054.04
* NORTHEAST AIRLINES, INC. *
Comparative Statement of Profit and o(oss
rear Ended December 31
1947 1946
OPERATING REVENUE:
Passengers $3,468,912.82 $4,256,115.72
Air mail-based on temporary rates determined retroactively
for 1946 by Civil Aeronautics Board order dated March 18,
194 7 and in effect for 194 7 (note A) .
Express and freight .
Other
Total operating revenue .
OPERATING EXPENSES:
Conducting transportation
Maintenance and repairs (note C)
Provision for depreciation and amortization
Traffic and advertising
General and administrative
Taxes other than income taxes
Total operating expenses.
Operating loss
INTEREST EXPENSE
NET Loss or (gain) from sales and retirements of property and
equipment
OTHER CHARGES or (income), net
PROVISION for possible federal income tax (restored to earned
surplus in 194 7)
Net loss for the year
670,422.70 923,535.50-
93,454.36 71,299.90
30,525.53 13,564.75
4,263,315.41 5,264,515.87
2,088,061.43 2,210,591.61
1,302,329.08 1,304,886.57
851,422.95 643,187.68
730,544.38 642,582.39
464,474.27 423,560.23
111,521.53 107,272.38
5,548,353.64 5,332,080.86
1,285,038.23 67,564.99
52,588.93 31,191.00
29,203.99 (75,696.96)
14,001.30 (4,112.80)
25,000.00
$1,380,832.45 $ 43,946.23
The accompanying notes A, C and E are an integral part of the foregoing comparative statement
of profit and loss.
Statement of 'Deficit in earned Surplus
(Since July 1, 1940)
For the Year Ended December 31, 194 7
BALANCE at Beginning of Year
NET Loss for the Year (note A)
UNREQ.UIRED PRIOR YEAR PROVISION for possible federal income tax.
BALANCE at End of Year
$ 106,207.00
1,380,832.45
1,487,039.45
25,000.00
$1,462,039.45
* NORTHEAST AIRLINES, INC. *
'N.,otes to Financial Sta:tements
A-EFFECT OF RETROACTIVE INCREASES IN AIR MAIL REVENUES:
The financial statements of the company as at December 31, 1946 gave effect to a retroactive increase
in air mail revenue based on a temporary rate fixed by the Civil Aeronautics Board by its order
dated March 18, 1947. The applicable portion of that increase included in air mail revenue in
the profit and loss statement for 1946 is $472,212.
No effect has been given in the accompanying comparative statement of profit and loss nor in the
accompanying balance sheet as at December 31, 1947 to the retroactive increase in air mail revenue
to result from order of the Civil Aeronautics Board dated February 26, 1948. Such retroactive addi-
tional revenue is applicable only to the twenty-four month period ended April 30, 1947 and amounts
to approximately $540,000 of which approximately $140,000 is allocable, on a total revenue mile
basis, to the four months ended April 30, 1947.
B-COMMON STOCK RESERVED FOR SALE TO EMPLOYEES AND OFFICERS:
On November 24, 1947 stockholders voted to reserve for sale to full time employees and to officers of
the company 100,000 shares of authorized and unissued common stock, at a price, payable in instal-
ments, not less than the market value thereof on the date of purchase contract. On that date the
president of the company entered into a contract to purchase 10,000 of the shares so reserved at the
then market price, $31,875, payable on or before the expiration of three and one-half years.
c--RESERVE FoR AIRCRAFT OVERHAUL:
Beginning with 1946, in accordance with election permitted by the Uniform System of Accounts for
Air Carriers, the company has charged certain major periodic overhaul costs against a reserve pro-
vided by charges to maintenance expense. Provisions for aircraft overhaul reserve charged to
maintenance expense in 1947 amounted to $70,917 and the costs of aircraft overhaul charged against
the reserve during 1947 totaled $39,274.
D-CONTINGENT LIABILITIES AND COMMITMENTS:
The Commonwealth of Massachusetts has submitted charges of $27,000 and interest for landing fees
at Logan International Airport, East Boston for the period December 1, 1941 to February 28, 1946.
The company disclaims this liability and has made no provision therefor in the accompanying
financial statements. Landing fees for periods subsequent to February 28, 1946 have been paid
or accrued.
The accompanying financial statements do not reflect a possible liability, amounting to $17,332.57,
subject to legal dispute as the result of insurance policy cancellations.
The company has deposited $25,000 in connection with proposed purchase of flight equipment at
a base cost of $1,575,000. '
E-EXPENSES DURING CONSTRUCTION, $21,676 including $9,616 interest, have been charged to hangar
construction and are not included in the 194 7 expenses.
F-PRo FoRMA BALANCE SHEET (not certified):
The proforma balance sheet gives effect, as of December 31, 1947, (a) to issue for cash in 1948 of 83,333
shares of convertible preferred stock and application of the proceeds and (b) to a retroactive adjust-
ment of air mail revenue ordered in 1948, as explained below.
Effective January 26, 1948, a new class of stock was authorized consisting of 85,000 shares-0f convertible
preferred stock of no par value. Such convertible preferred stock is entitled to cumulative dividends
at the rate of $1.00 per share per annum and on liquidation of the company to a payment of $20
per share plus dividends accrued and unpaid prior to any payment upon junior stock. The stock
is callable upon 30 days' notice at the redemption price of $22 per share plus dividends accrued
and unpaid. Of this convertible preferred stock 83,333 shares were subsequently offered for sub-
scription at $20.00 per share, upon the exercise of subscription rights and contingent stock purchase
warrants issued to common stockholders. All of said 83,333 shares have since been issued, of which
76,959 shares were issued to Atlas Corporation, owner of 100,000 shares of common stock at December
31, 1947, and 6,374 shares were issued to other common stockholders.
* NORTHEAST AIRLINES, INC.
Notes to Financial Statements (Continued)
F-PRo FoRMA BALANCE SHEET (Not certified)--(continued):
*
The proceeds from the issue of convertible preferred stock, $1,644,268 after deducting issue expenses
estimated at $22,392, have been applied as follows: (a) to payment of $1,447,005 principal amount
of notes payable, leaving $400,000 principal amount of such notes held by Atlas Corporation, (b) to
payment of interest on notes payable ($49,683.95 at December 31, 1947) and (c) to increase working
capital. The $400,000 notes, due but not paid on March 31, 1948, are secured by an instrument
of mortgage on the company's hangar and service building, on the leases of the site thereof and on
fixtures, machinery 1).nd equipment located in the building or on the premises. Other mortgages
and liens on the company's property and equipment have been discharged on payment of the notes
payable aggregating $1,447,005.
An order of the Civil Aeronautics Board, dated February 26, 1948, provides for a retroactive adjust-
ment of air mail revenue to be received from the United States Post Office Department in the amount
of approximately $540,000 for the two years ended April 30, 1947 over and above the amount accrued
at the temporary rates theretofore in effect. Retroactive effect to this order has been given, as of
December 31, 1947, in the accompanying pro forma balance sheet by adding $540,000 to the amount
receivable from United States Post Office Department and by reducing the deficit in earned surplus
a like amount. The Board's order is not applicable to the period commencing May 1, 1947, for
which period the temporary rates are still in effect.
NORTHEAST AIRLINES, INC.,
Boston, Massachusetts.
r..Auditors' ~port
We have examined the accompanying balance sheet of Northeast Airlines,
Inc. as at December 31, 1947 and the statements of profit and loss and of deficit
in earned surplus for the year then ended, have reviewed the system 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. Our examination was made in accordance with
generally accepted auditing standards and included all procedures which we
considered necessary in the circumstances.
In our opinion, the accompanying financial statements present fairly the
position of Northeast Airlines, Inc. at December 31, 1947 and the results of
its operations for the year then ended, in conformity with generally accepted
accounting principles applied on a basis consistent ( except with respect to
the effect of retroactive increases in air mail revenue as indicated in note A to
the financial statements) with that of the preceding year.
LYBRAND, Ross BRos. & MoNTGOMERY
Boston, Massachusetts
April 13, 1948
* NORTHEAST AIRLINES, INC. *
Comparative Statistics
1941 1942 1943 1944 1945 1946 1947.
Revenue Miles Flown .. 1,268,257 750,278 727,713 1,023,737 2,287,366 4,177,375 3,947,030
Completion of Sched-
uled Miles .. .... .. . 84.04% 79.45% 79.10% 83.87% 83.61 % 82.46% 83.81%
Passenger Revenue ... . . $378,569 $309,813 $533,972 $759,623 $1,945,444 $4,256,115 $3,468,913
Revenue Passengers
Carried . ... .. . ... . . 42,546 26,446 36,263 53,766 175,608 417,095 325,172
Revenue Passenger
Miles . ............ . 7,074,920 5,383,171 9,090,063 12,848,222 38,939,107 83,848,737 62,143,281
System Load Factor . . . 38.39% 35.94% 59.52% 59.14% 74.47% 65.76% 51.24%
Passenger Revenue Per
Plane Mile .. . . .... . .2985 .4129 .7338 .7420 .8505 1.0189 .8789
Revenue Per Passenger
Mile ...... .... . . . . . .0535 .0576 .0587 .0591 .0500 . .0507 .0558
Fly the Friendly Yankee Fleet
-"Fast, friendly, punctual service flavored with typical New England hospitality"
... That's our pledge for '48 to our customers. Those are bywords to every
employee of the friendly Yankee Fleet . . .
You travel in style and comfort amidst pleasant surroundings when you
fly Northeast.
NORTHEAST AIRLINES
"The Yankee Fleet"
GENERAL OFFICES: LOGAN AIRPORT
BOSTON 28, MASSACHUSETTS