ANNUAL REPORT NORTHEAST AIRLINES 1949 a----'~,/,,&Alf- - - ,.'11/l I AIRLINES? NORTHEAST AIRLINES INC. 'Board of 'Directors JACQUELINE COCHRAN New York, N. Y. JAMES F. FITZGERALD Boston, Mass. GEORGE E. GARDNER Boston, Mass. GEORGE E. GARDNER. A. A. LANE HAMIL TON HEARD R. H. HERRNSTEIN HENRY E. FOLEY FOLEY, HOAG AND ELIOT LYBRAND, Ross BRos. & MONTGOMERY OLD COLONY TRUST COMPANY. PAUL F. COLLINS, Chairman EUGENE L. VIDAL New York, N. Y. Officers GRENVILLE L. HANCOCK Boston, Mass. RADU lRIMESCU New York, N. Y. ALBERT C. MCMENIMEN Boston, Mass. THE FIRST NATION AL BANK OF BOSTON President Vice President Treasurer and Ass't to the President . Assistant Treasurer Clerk of Corporation General Legal Counsel Auditors Transfer Agent Registrar General Offices, LOGAN AIRPORT, BOSTON 28, MASS. * N01RTHEAST AIR-LINES, INC. The President's Report to The Stockholders and Employees I. GENERAL * There is submitted herewith Northeast Airlines' Balance Sheet as of December 31, 1949 and Profit and Loss Statement for the year 1949 certified by the Company's auditors, Lybrand, Ross Bros. & Montgomery. A tabulation of comparative statistics is also submitted. You will note from this report that your Company's business in 1949 followed a trend which had become apparent at the end of 1948 and which was indicated in the Annual Report for that year. The Company shared in the airline industry's return to normalcy after the disappointing post-war period. The industry in general again resumed its growth which had existed through 1946 and established new records for passen, ger and cargo traffic in 1949. More stable operating conditions returned, permitting greater efficiency and improved earnings. As a result, your Company, participating in these more favorable conditions, increased its revenue over 1948 by 18.6% while expenses increased only 12.1 % so that a small operating profit of $65,235* was established as compared with an operating loss of $224,530 in the previous year-this in spite of the poor experience in December which was shared by the whole airline industry. II. REVIEW OF 1949 Financial The principal changes in the Balance Sheet this year are in the Property and Equipment and long, term debt items. On May 16, the Company received an initial advance of $1,579,000 from the Reconstruc- tion Finance Corporation to aid in paying for the Convair equipment program. On June 21, the first twelve principal installments of $32,000 each were repaid, followed by six and one-quarter installments on July 14. This reduced the principal owed to $995,000 and also interest costs were reduced substantially. No princi, pal installment is now due until May 16, 1951. On the December 31, 1948 Balance Sheet, there was an amount shown of $320,000 representing the final note due Atlas Corporation for financing the construction of the Company's Hangar at Logan Airport. This was later reduced to $316,000 and the Atlas Corporation agreed to convert the note inito common stock of Northeast Airlines. Approval of this conversion was obtained on July 7 at a special meeting of the Stockholders and on July 28 conversion was effected in to 109,913 shares of common stock at the then current market price of 2 per share. On the asset side of the Balance Sheet, the Reconstruction Finance Corporation loan is more than offset by the increase in Property and Equipment resulting from the Company's acquisition of five new Convair aircraft which are evaluated at the cost obtained under a purchase contract for an amount substantially less than the current replacement cost. Pursuant to the order of the Civil Aeronautics Board, dated March 18, 1949, the Company received in 1949 mail revenue of approximately $374,000 retroactively for previous years. Of this amount, some $238,000 has been applied, on a revenue mile basis, to 1948 and the balance, $136,000, to 1947. The order * After downward revision of net depreciation expense as indicated in footnote F to accompanying Financial Statements. * NO1 RTHEAST AIRLINES, INC. * also fixed a temporary mail rate of 45 per airplane mile calculated on a daily mileage basis of 13,000 miles after January 1, 1949. The Company's non-mail operating revenue also increased in 1949. Such revenue amounted to $4,228,065 in 1949, as compared with $3,374,488 in 1948. As mentioned above, the Company established an operating profit of -$65,235 for the year and a net profit of $25,523. In the Company's opinion, no provision for Federal Income taxes on this amount is deemed necessary . . After the first quarter, an operating profit was shown for every month through October, and losses were experienced in November and December. In December, the Board of Directors, with the approval of the Reconstruction Finance Corporation, declared a dividend of 50 per share on the preferred stock of the Company, paya9le December 29, 1949 to Stockholders of record December 23. This was in payment of thei two accumulations of 25 each due on April 1 and July 1, 1948, and left five quarterly dividends in arrears, which have now increased to seven quarterly dividends in arrears. There is a provision that if at any time eight quarterly dividends on the convertible preferred stock shall be in arrears, the holders thereof, voting separately as a class, shall be entitled to elect a majority of the Board of Directors at any meeting or meetings of Stockholders for the election of Directors until all dividends accrued on the convertible pref erred stock until its next dividend day shall have been paid. Therefore, it seemed expedient to retain voting control in the hands of the common stockholders. Operations During 1949 the Company provided the most dependable service in its history with 9 3. 5 4 % of scheduled mileage completed, as compared with the previous high of 87.86 % experienced in 1948. Contributory factors were excellent weather for New England and the installation of additional navigational aids. The Instrument Landing System at New Bedford was placed in operation during September, and Type H homing stations were installed by the Company at Lawrence and Lewiston Contrary to the practice of many of the airlines, your Company has not offered a coach service to the traveling public. In the opinion of the management, the distances involved in Northeast's territory are too short to stimulate traffic at the inconvenient hours required by the Civil Aeronautics Board for coach service. Furthermore, the high cost of serving the short-haul territory does not justify the sharp reduction in fares that is part of the coach service proposal. However, excursion rates were offered over several segments where load factors have been historically low in an attempt to stimulate traffic. It will be noted from the Table of Comparative Statistics at the end of this report that, although the load factor for the system as a whole remained approximately the same as during 1948, nevertheless sub- stantial increases were shown in passengers carried and passenger revenue as a result of increased mileage. Flight Equipment The Company began the year operating flying equipment consisting of three DC-4 four-engine Douglas Skymasters of 60 seats each, seven 24-seat DC-3's and one 29-seat DC-3. Conversion of the latter during the middle of the year provided a uniform DC-3 fleet, all with 24 seats. On April 24, three of the Company's new, fast 40-passenger Convair-liners were placed in service and the remaining two on May 27th. These five Convairs have found immediate public acceptance and have permitted your Company to compete in the Boston-New York market with equipment comparable to that of its competitiors. A lease arrangement was negotiated with Capital Airlines for two of the DC,4 aircraft for two months during the Fall on what appeared to have been satisfactory terms to Northeast. In December, National Airlines leased the same two aircraft on substantially the same terms and are still operating them. In * N O R T H E A S T A I R L I N E S , I N C . * addition, Capital Airlines has leased the third plane during the Spring season. All three of the planes will be returned to Northeast Airlines by June 1st and will be placed in scheduled service to help carry the heavy traffic through the summer months. Northeast Airlines experienced the first serious accident in its history on August 11 during the landing of an aircraft at Portland, Maine, but fortunately no passenger or crew member was injured. The aircraft was completely rnvered by insurance and a replacement Convair was purchased and placed in service during the Labor Day weekend. Management Changes At the annual stockholders meeting held on June 20th, Mr. Hamilton Heard, who joined the Company on December 10, 1948 as Assistant to the President, was elected Treasurer of the Company. Safety Record The Company continued in 1949 to maintain its perfect safety record of no passenger injury since the commencement of operations in 19 3 3. Routes and SerYices There were no changes in the Company's route structure during the year, although on November 1, 1949 service to Millinocket, Maine, which had been suspended in 1942, was reinstated. The Board also author, ized a one-year extension of the suspension of service between Bangor, Maine and Moncton, New Brunswick. Regulatory Proceedings On February 21, 1949 the Civil Aeronautics Board amended its earlier order instituting a compre, hensive survey .of Northeast Airlines' routes and the relationship of those routes to the over-all domestic air transportation problem. This procedure is still pending but hearings have not to this point been held. The Company, as well as other domestic air carriers, has participated throughout the hearings con, ducted by the Board in its investigation of National Airlines, Inc., and the Company has taken the position that the consolidation of that carrier's routes between New York and Miami and between Miami and Havana with this Company's routes would be in the public interest. This proceeding also is still pending. The Board has extended to October 23, 1950 the date by which Atlas Corporation is directed to dispose by sale or otherwise of its holdings of the Company's stock in excess of 3 % of the outstanding shares of each class. During the hearings on the Additional Service in 'N,ew England States case in 1949, your Company took the position that, being the regional air carrier, it would perform such New England services as the Board should deem appropriate. The Company also petitioned the Board to abandon service which had not been inaugurated at Islip and Riverhead on Long Island. In .its . recent decision on this case, the Board granted the abandonment of Islip and Riverhead; certificated Northeast Airlines to serve Laconia, Whitefield, North Conway and Berlin, New Hampshire, and Bar Harbor, Maine during the summer month~. Thei airpo1'1ts at Whitefield and North Conway are presently unsuitable for operations, but current indica, tions are that conditions will justify service this summer to Laconia, Berlin, Bar Harbor, and New London. The Board also granted the Company's application to include Concord, and Manchester, New H ampshire, a.:: intermediate points on Segment 1 as well as on Segment 3 of route 27, thereby autho.rizing the Company to provide direct service between southern New Hampshire and New York. * NORTHEAST AIRLINES, INC. * III OUTLOOK FOR 1950 In last year's report your management stated that it looked to the future with confidence. During the past year this confidence was to some extent confirmed as your company achieved a small operating profit. More stable operating conditions, permitting greater efficiency and improved earnings, returned to the airline industry in general, and your company participated in the bendits. Nevertheless, your com- pany was also faced with the problems and related costs normally incident to the inauguration of opera- tions with a new type of aircraft. Your management has been encouraged, however, by the immediate public acecptance of your company's introduction of Convair aircraft as well as its continued recognition and support of the essential transportation services furnished by your company. Your management is continuing to make every effort to obtain greater efficiency and dependa:bility in operations while reducing expenses to a minimum. During the coming summer, your Company, together with the other airlines serving Boston, expects to move into the new Terminal Building at Logan International Airport which will provide greater comfort and convenience to our customers in the future. Furthermore, plans are under way for much faster ground transportation beitween LaGuardia Airport (as well as the other New York Port Authority Airports) and New York City, by the erection of two new bus and airline Terminal Buildings adjacent to the tunnels which will feed into new super highways. The demand for air transportation to the numerous summer resorts in the New England area has increased steadily. Your Company - has always been conscious of its responsibility as the New England regional air carrier and is making every effort to plan its schedules and operations so as to provide the finest possible summer service this year. To this end, as much advance maintenance and overhaul work has been accomplished as possible to insure the minimum amount of time for such work during the heavy season. Although the airline industry has ordinarily presented a uni~ed front whenever confronted with attacks from the outside, there has been developing recently a serious difference between the large airlines and their smaller competitors over the question of separation of mail pay from that portion which has been characterized as "'subsidy payments.,, The railroad industry is, of course, in favor of such separation in the hope that public opinion can persuade Congress to reduce Governmental support to the industry through the medium of mail pay. It is regrettable, therefore, that the large airlines, believing they are immune from a reduction in mail pay because of their low cents-per-mile payments, are on the side of the railroads. The majority of the airlines, therefore, including Northeast, have been attempting as a unit to correct the erroneous impression on the minds of the public regarding the so-called "'subsidy.,, These airlines heartily endorse legislation which provides for a complete, thorough and objective study to determine whether or not segregation is feasible and how, if it may be accomplished at all, it may be done equitably. However, it is our considered opinion that mail pay was provided for under the Civil Aeronautics Act of 1938 as a vehicle to get the air transportation, system of the United States established, and that the so-called subsidy that the airlines were to receive over and above the service rendered for carrying the mail was for the purpose of establishing an airline system that would have in being a pool of aircraft, personnel and know- how avaliable for the national defense. The reason for the Congress adopting this method was because of the sincere belief that this was the cheapest method by which to provide a necessary defense facility. I wish to express appreciation on behalf of the management for the splendid efforts and loyalty of our employees in establishing 1949 as a year of profitable operation, and I also wish to thank our stockholders for their continued support. For the Board of Directors GEORGE E. GARDNER, President. DISTRIBUTION OF THE 1949 NEA DOLLAR THE REVENUE DOLLAR ~ PASSNGER REVENUE 68.87c 2.52c 1.61c / PROFIT 0,43c. THE EXPENSE DOLLAR SALARIES 8. WAGES 43.82c / INSURANCE 3 .35c GAS & OIL ,,,,,,,. II.I5c DEPRECIATION .-- 13.74c PARTS 8. MATERIALS 6.66c "RE.NTALS TAXES 4 .81c 2 .I4c CURRENT ASSETS: Cash in banks Receivables : Airlines and agents United States Post Office Department Other receivables Total receivables Miscellaneous supplies (at average cost) Total current assets PROPERTY AND EQUIPMENT, AT COST: ASSETS Flight equipment, of which approximately $3,980,000 was pledged at December 31, 1949 against long-term debt (note B) Hangar and service building on leased land . Flight equipment spare parts Ground and shop equipment . Improvements to rented properties Construction in progress Non operating property Less allowance for depreciation and amortization Total property and equipment Deposits on purchase of flight equipment . Receivable under stock purchase contract due on or before May 24, 1951 (note C) Unexpired insurance Other prepaid expenses and deferred charges NORTHEAST AIRLINES, INC. 'Balance Sheets A!!, at December 31, 1949 and 1948 1949 1948 $1,189,511 $ 998,669 172,514 122,486 154,147 223,791 83,026 77,741 409,687 424,018 80,960 56,312 1,680,158 1,478,999 4,284,902 2,285,070 649,058 658,686 620,797 475,432 492,546 426,613 84,926 113,892 17,071 26,465 35,781 8,225 6,185,081 3,994,383 2,858,341 2,132,011 1 3,326,740 1,862,372 ! 153,900 26,875 31,875 170,872 28,819 89,198 29,520 $5,293,843 $3,585,485 LIABILITIES CURRENT LIABILITIES: 1949 Accounts payable- vendors and others (including in 1949 $1200,000 balance on aircraft purchases) . $498,010 Accrued salaries and wages . Taxes withheld and other payroll deductions, not yet remitted Accrued social security and other taxes . Unearned transportation revenue_ . Total current liabilities . Long-term debt: 4 % note payable to Reconstruction Finance Corporation (note B) 4 % note payable to Atlas Corporation . Reserve for self-insurance (workmen's compensation) Reserve for aircraft overhaul (note D) Stock purchase contract (see contra) . Contingencies (note G) . CAPITAL CONVERTIBLE PREFERRED STOCK of no par value (note E): Authorized 8 5 ,000 shares Issued and outstanding: 1949, 80,019 shares; 1948, 80,312 shares COMMON STOCK, par value $1.00 per share: Authorized 2,000,000 shares (note C) Issued and outstanding-fully paid: 1949, 631,321 shares; 1948, 519,624 shares. Issued under stock purchase contract-part paid: 51,964 19,299 20,853 36,450 626,576 995,000 16,270 117,444 26,875' 1,600,380 631,321 10,000 shares at 50 cents per share paid thereon ( unpaid balance under contract, $26,875' shown above) 5,000 CAPITAL SURPLUS, per accompanying statement DEFICIT since July 1, 1940, per accompanying statement Total capital 1,724,269 (449,292) . 3,511,678 $5,293,843 The accompanying notes are an integral part of the above balance sheets 1948 $ 174,864 52,208 11,901 19,930 30,685' 289,588 320,000 29,030 82,420 31,875 1,606,240 519,624 1,515,227 (808,519) 2,832,572 $3,585' ,485 * N ORTHEAST' AIRLINES, INC. Statements of Profit and Loss For the Year Ended December 31, 1949 For the Year Ended December 31, 1948 Restated as Explained in Note A OPERA TING REVENUE: Passengers . Air mail ( note A) Express, freight and excess baggage Other, net . Total operating revenue OPERATING EXPENSES: Conducting transportation Maintenance and repairs (note D) Provision for depreciation and amortization (note F) Traffic and advertising . General and administrative Taxes other than income taxes Total operating expenses Operating profit (loss) . DEDUCTIONS: Interest expense Net loss from sales and retirements of property and equipment Other charges, net Total deductions Net profit (loss) for year (note A) 1949 . $3,992,450 1,565,437 146,186 89,429 5,793,502 2,526,048 1,226,473 796,735 723,689 330,956 124,366 5,728,267 65,235 36,525 2,632 555 39,712 $ 25,523 * 1948 Restated $3,241,912 1,510,208 120,020 12,556 4,884,696 2,122,676 1,319,008 579,370 610,144 367,488 110,540 5,109,226 (224,530) 29,665 37,418 1,827 68,910 ($ 293,440) The accompanying notes are an integral part of the above statements of profit and loss. * NORTHEAST AIRL.INE.S, INC. Statement of Deficit Since July 1, 1940 For the Year Ended December 31, 1949 (See note A) BALANCE at beginning of year as previously reported . RETROACTIVE INCREASE in air mail revenue received in 1949 under order of the Civil Aeronautics Board dated March 18, 1949, applicable, on a revenue mile basis, to the years ended Decem, ber 31 1947 1948 . NET profit for the year ACCUMULATED loss since July 1, 1940 . DIVIDEND paid in cash on convertible preferred stock-50c per share BALANCE at end of year $135,904 237,810 Statement of Capital Surplus For the Year Ended December 31, 1949 BALANCE at beginning of year . EXCESS of long,term debt ($316,000) payable to Atlas Corpora, tion over par value plus issue expenses of 109,913 shares of common stock issued in full payment thereof . ExcEss of amount paid in on 293 shares of convertible preferred stock surrendered for conversion over par value of 1,783 shares of common stock issued in exchange therefor . BALANCE at end of year $373,714 25,523 * $808,519 399,237 409,282 40,010 $449,292 $1,515,227 204,966 4,076 $1,724,269 * NORTHEAST AIRLINES, INC. * Notes to Financial Statements A-EFFECT OF RETROACTIVE INCREASE IN AIR MAIL REVENUE: During 1949 the company received retroactive increase in air mail revenue with respect to the 20-month period from May 1, 1947 to December 31, 1948, under order of Civil Aeronautics Board dated March 18, 1949, aggregating $373,714 as set forth in the accompanying statement of deficit. For purposes of comparison, air mail revenue in the accompanying 1948 statement of profit and loss has been restated to include the portion of this additional revenue applicable to that year. Air mail revenue included in the accompanying financial statements is subject to such increase or decrease as may result from order of Civil Aeronautics Board fixing final mail rates for the period subsequent to April 30, 1947. B--NOTE PAYABLE TO RECONSTRUCTION FINANCE CORPORATION AND PROPERTY PLEDGED: The unpaid principal balance on note to Reconstruction Finance Corporation at December 31, 1949 was $995,000, payable in monthly instalments aggregating $248,000 in 1951, $384,000 in 1952 and $363,000 in 1953, with provision for accelerated principal payments contingent on earnings as defined for 1950 and subsequent years. The note is secured by instruments of mortgage on the company's flight equip- ment aggregating, at cost, approximately $3,980,000. The loan agreement contains various provisions which restrict company action. Among the restrictions is a provision that, without prior approval of said agency, dividends shall not be declared on the stock of the company until said loan has been paid in full. The mortgage on the company's hangar and service building, the leases of the site thereof and all fixtures attached to and constituting part of the real estate was discharged in 1949 when the note to Atlas Corporation was paid by issuance of common stock. C-CoMMON STOCK RESERVED FOR SALE To EMPLOYEES AND OFFICERS: On November 24, 1947 stockholders voted to reserve 100,000 shares of authorized and unissued com- mon stock for sale to full time employees, including officers, at a price, payable in instalments, not less than the market value thereof on the date of purchase contract. As at December 31, 1949, no such sales had been made other than the 10,000 shares sold to the president of the company under contract dated November 24, 1947 at the then market price of $31,875. D-RESERVE FOR AIRCRAFT OVERHAUL: The company charges certain major periodic overhaul costs against a reserve provided by charges to maintenance expense. Provisions for aircraft overhaul reserve charged to maintenance expense amounted to $65,787 in 1949 and $80,411 in 1948. The costs of aircraft overhaul charged against the reserve were $30,763 in 1949 and $30,644 in 1948. E-CONVERTIBLE PREFERRED STOCK ISSUED IN 1948: Cumulative dividends on convertible preferred stock are in arrears $120,029 at December 31, 1949. All or any part of the convertible preferred stock may be called for redemption at any time at $22.00 per share plus dividends accrued thereon to the redemption date. In case of any liquidation, whether voluntary or involuntary, the convertible preferred stock shall be entitled to receive $20.00 per share plus dividends accrued thereon to the day of payment. Under the provisions of the convertible preferred stock, the company shall not declare any dividend or redeem or retire any shares of stock or make any distribution to stockholders if immediately there- after the net worth of the company would be less than $20.00 for each share of convertible preferred stock immediately thereafter outstanding. * NO1 RTHEAST AIRLINE,S, INC. * Notes to Financial Statements (Continued) As at December 31, 1949, the conversion rate of the convertible preferred stock, which was adjusted in July, 1949 in accordance with the provisions thereof, is 5' shares of common stock for each share of convertible preferred stock surrended for conversion. F-DEPRECIATION OF FLIGHT EQUIPMENT: During the first nine months of the year, depreciation rates on DC-3 flight equipment and flight equip- ment spare parts were based on the supposition that this equipment would be fully depreciated on December 31, 1949. It became obvious, however, that these aircraft would continue in operation beyond that date and cornsequently on October 1, 1949 the depreciation rates were revised to a basis of an estimated service life extended to December. 31, 19 5' 1. There was no reduction in depreciation charged out during the first three quarters of the year, but for the last three months the new schedule resulted in depreciatron expense of approximately $77,000 less than the amount which would have been charged on the old basis. G-C ONTINGENCIES: The company's federal income tax returns for years subsequent to 1945' are subject to examination. The management believes that any liability for federal income and Massachusetts corporation excise taxes which may result from such ex:amination should not be material in amount. The Civil Aeronautics Board has directed investigation of the routes and operations of the company, including a comprehensive survey through public hearings of whether the public interest would be furthered by merger, by sale of routes or properties or by agreements with other air carriers. AUDITORS' REPORT NORTHEAST AIRLINES, INC., Boston, Massachusetts. We have examined the balance sheet of Northeast Airlines, Inc. as at December 31, 1949 and the related statements of profit and loss, of deficit and of capital surplus for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circum, stances. In our opinion, the accompanying :financial statements present fairly the :financial position of Northeast Airlines, Inc. at December 31, 1949, and the results of its operations for the year then ended, in conformity with generally accepted accounting principles applied, except as to changes in depreciation rates described in note F, on a basis consistent with that of the preceding year. Boston, Massachusetts March 31, 195'0 LYBRAND, Ross BRos. & MONTGOMERY , COMPARATIVE STATISTICS 1942 1943 1944 1945 1946 1947 1948 1949 Revenue Miles Flown .......... 750,278 727,713 1,023,737 2,287,366 4,177,375 3,947,030 3,386,881 4,021,226 Completion of Scheduled Miles .................................. 79.45% 79.10% 83.87% 83.61 % 82.46% 83.81 % 87.86% 93.54% Passenger Reven1Ue .............. $309,875 $533,963 $742,978 $1,945,444 $4,256,115 $3,468,913 $3,241,912 $3,992,450 Revenue Passengers Carried 26,446 36,263 53,766 175,608 417,095 325,172 272,292 324,963 Revenue Passenger Miles .... 5,383,171 9,090,063 12,848,222 38,939,107 83,848,737 62,143,281 5'2,091,160 61,957,458 System Load Factor .............. 35.94% 59.52 % 59.14% 74.47% 65.76% 51.24% 48.02% 48.36% Passenger Revenue Per Plane Mile ........................ $.4129 .7338 .7420 .8505 1.0189 .8789 .9572 .9928 Revenue Per Passenger Mile $.0576 .0587 .0578 .0500 .0507 .0558 .0622 .0644 f1:t. the Friendly Yankee Fleet NEW YORK BOSTON NEW ENGLAND MONTREAL ANNtS .. A"lUCM. . VINE.YA NORTHEAST AIRLINES 11The Yankee Fleetu GENERAL OFFICES: LOGAN AIRPORT BOSTON 28, MASSACHUSETTS