NORTHEAST AIRLINES Annual Report 1957 NORTHEAST AIRLINES, me BOARD OF DIRECTORS PAUL F. COLLINS, Chairman President, Fibremold, Inc., Medford, Mass. JACQUELINE COCHRAN President, Jacqueline Cochran, Inc., New York JAMES F. FITZGERALD President, Fitzgerald Construction Company, Canton, Mass. GEORGE E. GARDNER President and General Manager, Northeast Airlines, Inc. RADU IRIMESCU Asst, to the President, Atlas Corporation, New York ALBERT C. MCMENIMEN Financial Vice President, Boston Edison Company EUGENE L. VIDAL Gene Vidal Designs and Processes, Darien, Conn. LAURENCE F. WHITTEMORE Chairman of the Board of Directors, The Brown Company, Berlin, N. H. OFFICERS GEORGE E. GARDNER A. A. LANE .... D. W. H. MACKINNON HAMILTON HEARD R. H. KERR .... R. P. LANE, JR. ... HENRY E. FOLEY GERARD E. REED . J. F. MOLLOY, JR. WHEATON MIES . CLARENCE I. PETERSON H. E. BIXLER ANN WOOD . FRED M. KNIGHT President and General Manager Vice President -- Operations Vice President -- Engineering and Maintenance Vice President -- Administration and Finance Vice President -- Personnel T reasurer Clerk of Corporation Assistant Treasurer Assistant Vice President -- Administration and Finance Assistant Vice President -- Engineering and Maintenance Assistant Clerk Assistant to the President Special Assistant to the President Director of Public Relations New additions to management -- JAMES W. AUSTIN and NELSON B. FRY have joined the company to serve as President and Vice President--Traffic and Sales, respectively. Transfer Agent Registrar . Auditors General Counsel . OLD COLONY TRUST COMPANY THE FIRST NATIONAL BANK OF BOSTON LYBRAND, ROSS BROS, AND MONTGOMERY . FOLEY, HOAG & ELIOT Annual Meeting: Fourth Tuesday of March in Boston at 10 A.M. General Offices: Logan International Airport, Boston 28, Mass. Annual Report for 1957 To OUR SHAREHOLDERS, EMPLOYEES AND FRIENDS: The year 1957 was a transitional one in the 24-year history of Northeast Airlines for it encom passed an enormous expansion in the scope and character of our company's operations. The inauguration of service down the East Coast to Florida, the acquisition of 10 Douglas DC-6B aircraft, and the increase in the size and complexity of our entire organization has transformed North east from a small regional airline to a company capable of taking its place among the major air carriers of the country. It was hoped that the company's 1957 Florida operation would produce profits which would offset, at least in part, the company's traditional New Eng land losses. This hope, moreover, appeared justified on the basis of our promising operating results in the Florida market last summer. In September, how ever, as we approached completion of delivery of our DC-6B fleet, we became affected by the gen erally declining level of business. As the newest of the three carriers in the East Coast-Florida mar ket, we were at the greatest disadvantage. The low load factors which we experienced in our Florida operation the last four months of the year caused additional operating losses rather than profits to offset our New England deficits. At the same time, the company's subsidy was discontinued as of June 30, 1957 and whether it is to receive subsidy in the future is still to be determined. The operating loss before depreciation was $2,725,853. and after de preciation $4,218,558. Cost controls during the year were effective and we did not experience any of the runaway costs often associated with a swiftly growing business. We have been extremely fortunate in bringing Mr. James W. Austin into the top management of the company. Mr. Austin is one of the outstanding executives in the airline industry. At our annual stockholders' meeting, it is pro posed that Mr. Paul F. Collins, one of the com pany's founders and current Board Chairman, will become Chairman of the Advisory Committee, that Mr. Austin will become President of the company, and that I, as Chief Executive Officer, will assume the title of Chairman of the Board of Directors. Mr. Austin will greatly strengthen our manage ment, as will the personnel he brings with him into the Northeast organization. Northeast carried a total of 763,617 passengers in 1957. This represents an increase of 29 per cent for the entire system. On our historic New England routes alone the increase was 2.3 per cent. Civil Aeronautics Board statistics report airline passenger miles flown by the domestic trunk air lines at approximately 25 billion in 1957, moving the airlines ahead of both railroads and buslines in passenger-mile traffic for the first time. No leveling off is expected in this steady upward trend. Despite these impressive traffic figures, the in dustry's 1957 financial results were disappointing even where the inauguration of new routes was not involved. The domestic trunklines showed a profit less than half of that earned in 1952, despite the fact they flew more than twice the number of pas senger miles. To alleviate this situation, the Civil Aeronautics Board, while still having under consideration the application of the airlines for a 15 per cent fare increase, has granted an emergency fare increase of 4 per cent plus $1 per fare. This long overdue in crease did not become effective until February 10 of this year and hence has no bearing on 1957 re sults. While this action is a step in the right direc tion, the industry must be allowed to charge a fare fully commensurate with the ever-increasing cost and improved quality of the service. Your management is confident that a successful future is ahead for our company. We have all the elements and implements for a profitable opera tion. We have a balanced route structure the major component of which has the greatest passenger den sity of any market in the world. We have an efficient and economical fleet of aircraft to provide the finest possible coach service on our highly competitive routes. Equally important, we now have, through months of expansion and reorganization, the ex perience and know-how in both management and personnel to meet the challenge confronting us. On behalf of the Directors and management of Northeast Airlines, we extend our thanks for the loyalty and understanding of our stockholders, em ployees and friends during the past year. Respectfully submitted, GEORGE E. GARDNER President March 3, 1958 Review of the Tear OPERATING RESULTS In the table of statistics at the end of this re port, many large increases over 1956 are shown. However, it must be remembered that these in creases were primarily the result of the change in character of the company and its expanded operation, and in order to analyze the financial results of the year properly, a comparison with what had been anticipated for revenues and ex penses is more significant than a comparison with the year preceding. Your company had a net operating loss of $4,218,558 in the fiscal year ended December 31, 1957. After interest of $210,380, less non operating income of $104,743, the net loss amounted to $4,324,195. The heavy losses were sustained largely be cause revenues failed, in the face of general business conditions of the last four months, to build up as rapidly as anticipated. Northeast actually offered the approximate number of seat miles that had been predicted a year ago and did so at less cost than had been envisoned. How ever, instead of producing passenger revenues during 1957 of $8 to $9 million and a load factor of about 60 per cent for our Florida segments, your company actually had passenger revenues for 1957 of only about $5 million and a load factor of slightly over 41 per cent on these new routes. The company demonstrated an ability to con trol costs during the expansion program, and its unit costs now compare favorably with the industry. The accompanying graphs of available seat mile costs for Northeast and for the industry illustrate this fact. Northeast made available some 518 million seat miles last year. This was two-and-a-half times as many as were available on Northeast routes in 1956. The total cost of turning out the 518 million seat miles was less than twice the expense incurred in the preceding year, even though our 1957 costs included introduction of new equipment, opening of new territory and what would normally be considered an excessive amount for advertising. Your management con- TOTAL OPERATING EXPENSE PER AVAILABLE SEAT MILE (TEN YEAR COMPARISON) CENTS 60 ^NC RTHE. ST 5.0 '"'E 0MES1 1C TRUNK Al RLINE 4.0 -- 3.0 2.0 1.0 19 48 19 9 19 so is: 1 19 52 19 53 19 )4 19 55 19 )6 19 57 TOTAL OPERATING EXPENSE PER AVAILABLE SEAT MILE (BY QUARTERS FOR 1956-1957) E CENTS \ 6.0 5.0 4.0 -- DOMES IC TRUN K_AIRUN :s_ AN- 3.0 1' Olr. Z1*1 1956 Q*r 3d Otr. 4H Olr I5' air 2TM 1957 Qlr 3d Qlr A" Olr sidered the 1957 advertising expenditure of al most one and a half million dollars (nearly $2 for every passenger carried) unavoidable in view of the need to establish Northeast as a Florida carrier in the public mind. Your company's available seat-mile cost (the cost of moving one potential passenger a dis tance of one mile, which is a recognized measure of the carrier's efficiency) was reduced on an annual basis from 5.26 cents in 1956 to 3.88 cents in 1957. More significantly, the cost for December 1957, the first month with our full fleet of Sunliners in operation, was 2.98 cents compared with 6.45 cents in December 1956. The load factor necessary for Northeast to cover its total operating expenses without bene fit of subsidy was reduced from 73.1 per cent in 1956 to 64.9 per cent in 1957. For the month of December, the net effect of generating sub stantially more product at considerably less unit cost was reflected when your company's break even load factor, without benefit of subsidy, dropped to 58 per cent, in contrast to 80 per cent for the same month the previous year. ADVERTISING AND PROMOTION Your management believes your company is offering East Coast travelers a superior coach service. This fact is becoming recognized and will attract load factors of profitable propor tions to Northeast. Toward this end, your company has recently strengthened and solidified its sales and adver tising staff. For the first time, Northeast has its own advertising department, as well as its own public relations department. On October 10, 1957, the company retained the services of both the J. Walter Thompson Company of New York, largest advertising agency in the world, and Dickie-Raymond, Inc. of Boston, sales pro motion specialists. EXPANSION OF FACILITIES On January 9, 1957, your company started, service between New York and Miami, and within the first year of operation carried its 100,000th Florida passenger. On June 27, our Philadelphia station was opened, and non-stop service to Miami was ini tiated from there five weeks later. On August 20, Tampa-New York service commenced, and on September 15, non-stop service from Wash ington to Miami was added. Philadelphia and Washington both received their first service to Tampa on October 1. Your company presently operates 26 daily coach flights to and from Florida. These pro vide service from Boston, New York, Philadel phia, and Washington to Tampa and Miami, including the following number of non-stop flights: between New York-Miami (12) ; New York-Tampa (4) ; Boston-Miami (2) ; Wash- ington-Tampa (2) ; Philadelphia-Miami (4) ; Washington-Miami (2). Sixteen of these flights operate in and out of Boston. With our extension into Florida, it became necessary to expand our downtown ticket facili ties in our major markets. As a result, we opened a total of 10 new offices, including four in New York City and one each in Philadelphia, Wash ington, Miami Beach, Miami, Tampa and St. Petersburg. FLIGHT EQUIPMENT During 1957, your company's fleet of aircraft was greatly expanded by the addition of 10 Douglas DC-6B Sunliners. These planes were delivered periodically from January 16 through October 15. They represent a total cost, includ ing spare parts and related ground equipment, of approximately $16,500,000. The 10 Sunliners were custom-built by Doug las Aircraft for Northeast's routes and have special features, including wide two-abreast seat ing in coach configuration. They also have 30 per cent more soundproofing than the standard version of the airplane, and carry dual-scope radar. They are presently being used on coach flights to and from Florida. Northeast started serving Miami, Philadelphia and Tampa in 1957. The company had hoped also to begin operations in Baltimore, Jackson ville and St. Petersburg-Clearwater. However, a delay in acquiring the five Bristol Britannia aircraft, originally scheduled for delivery in the fall of 1957, precluded any further expansion of service during the past year. Production delays made it impossible for the British manufacturer of the Britannia to ac- quire an American certificate of airworthiness and to deliver the planes in time for the 1957- 1958 winter season. Your management still thinks well of the turbo-prop Britannia, its passenger appeal and performance characteristics. These planes are ideally suited for first-class service in the Florida market and would complement our 10 Sunliners now operating in coach service. Accordingly, Northeast's present contract with Bristol Air craft Limited has been modified and extended to cover delivery of the planes in the fall of 1958. Among the terms agreed upon, the manufac turer has until May 1, 1958 to obtain an Ameri can certificate, and, if certification is completed prior to that time, your company has 60 days in which to arrange the necessary financing and secure the consent of its lending banks to the purchase. Your company meanwhile is continuing to evaluate additional equipment in order to main tain its place in the coming jet age. Members of the company's operations and engineering staffs are also keeping abreast of aircraft develop ments in the short-haul field, where there is a definite need for a more economical airplane than that currently in service. IMPROVED FACILITIES On April 4, 1957, Northeast installed an elec tronic reservations system, known as the "Mag- netronic Reservisor", which makes possible the speedy confirmation of reservations. Today, 13 of the company's cities are using this equipment and nearly 2i/ million inquiries have already been handled. Your management recognized that our old reservations system was inadequate to provide the fast, efficient service necessary to compete in our new markets. The new system which affords greater speed and efficiency was selected after careful study and planning. The company's communication volume in creased substantially during the year, and on October 22, 1957, a new teletypewriter system, commonly referred to as SCATS (Sequentially Coded Automatic Transmitter Start System), was installed. The SCATS system provides for the semi-automatic delivery of messages from one station to another with a minimum of man ual operations. Your company has entered into an agreement with The Commonwealth of Massachusetts pro viding for the erection of a $21,4 million hangar and office building adjacent to the existing hangar at Logan International Airport, Boston. The hangar floor has been designed to accom modate two aircraft of the largest anticipated transport size. The offices, shops, and storerooms will connect with the present office building on all floors and will accommodate the functions now carried on in other Boston locations where we are presently paying rent. They will be de signed to provide a maximum of efficiency with reasonable comfort. The cost of the building will be paid for by Northeast in equal annual instalments over a 25-year period, with interest on the unpaid balance at the same rate paid by the State. Your company is proceeding with plans to construct a hangar on the land which we are leasing at the Miami International Airport, and it is expected that the necessary financing and related rental contract will be consummated in 1958. The construction of this facility will make it possible for four-engine equipment to be maintained in Miami. In this connection, we have already instituted our DC-6B inspection program at that station. Your company expects to be the first occupant in the new multimillion dollar passenger terminal on the 20th Street side of the Miami International Airport, and it is contemplated that we will move into our new location on or about May 1, 1958. Northeast moved into New York Interna tional Airport (Idlewild) on December 15, 1957 with one trip daily to Miami. On January 15, 1958, all New York-Florida flights were shifted from LaGuardia to Idlewild. The com pletion of the new International Arrival Build ing and Wings for the overseas carriers at Idle- wild made available the space necessary to ac commodate all of our DC-6B operation in New York. Your company is negotiating an agreement with Northwest Airlines and Braniff Interna tional Airways, providing for the construction of a passenger terminal facility at Idlewild. The Port of New York Authority is requiring domes tic carriers to provide their own individual ter minal facilities at Idlewild after the old central terminal has been abandoned, and our ability to join two large carriers in this important project would result in substantially reducing the ex pense that might otherwise be involved. The joint terminal will cost approximately $5 million and should be completed in the spring of 1960. Your company would occupy 40 per cent of the available space and would pay for its propor tionate share under the terms of a 25-year lease. For many years the passenger and operating facilities at LaGuardia Airport have been over crowded. The New York Port Authority re cently decided to rehabilitate this important airport. The reconstruction program will add substantially to passenger handling space, and will increase NEA's aircraft gate positions from one to four. Runways will be strengthened and will permit the handling of aircraft up to 175,000 pounds gross take-off weight. FINANCIAL CONDITION The balance sheet, as of December 31, 1957, shows that from an original loan of $11 million which your company arranged in 1955 with a banking syndicate headed by The Chase Man hattan Bank, there is a balance of $10,503,000 outstanding. This loan was negotiated to finance the major portion of the DC-6B program. It is to be repaid in 20 approximately equal quarterly instalments, commencing March 31, 1958. In addition to this borrowing, the balance sheet also reflects a note for $2 million covering an advance by Atlas Corporation in October 1957. This note is subordinated to the payment of principal on the company's bank loan. As soon as the financial climate improves, it is the intention of your company to refund this note by an offering of securities to existing stockholders. Your company's year-end balance sheet showed cash of $3,410,190 which is the equivalent of approximately 45 days' operating expenses, and an equity position of $9,565,054, which includes the total of net worth and subordinated debt. REGULATORY PROCEEDINGS During the fall and winter of 1957, hearings were held before a Civil Aeronautics Board Ex aminer in the so-called Northeastern States Area Investigation Case. Your company is an active participant in that case. In this proceed ing, the C. A. B. is reviewing the need of local- type services by scheduled airlines in the North eastern portion of the country, including the entire area served by your company's systems north of Washington, D. C. Among other matters, the Board will consider in that proceed ing many pending applications, by airlines and local interests for new services of this type, as well as the possibility of requiring airlines to serve points not now being served by them. Your company is taking the position that it must not, and should not be forced to serve additional points at which these services are not required by the public interest and could not be rendered on an economically sound basis. Formal hearings in the Gnral Passenger Fare Investigation were initiated in November 1957. In this case, the domestic trunkline indus try is attempting to convince the Civil Aero nautics Board that increased fares are necessary if the traveling public rather than the govern ment is going to provide the money to keep the industry healthy and able to expand into the jet age. A fare increase is warranted, and the entire industry's future depends to a large ex tent on favorable action by the Civil Aero nautics Board. SUBSIDY On February 7, 1957 the Civil Aeronautics Board instituted a proceeding, reopening your company's air mail pay rate, to determine the amount of air mail compensation to be paid to the company from and after that date. The company continued until June 30, 1957 to re ceive mail pay at the subsidy rate previously in effect, and since that date it has received mail pay only at the service rate and has received no subsidy payment. The total amount received by the company from and after February 7, 1957 is, however, subject to adjustment upon final determination by the Board in the pending proceeding of the company's "need" under the Civil Aeronautics Act. The net effect was that in 1957 the company's subsidy payments actually received from the Government amounted to $955,000, as compared to $1,611,000 in the preceding year, or a de crease of $656,000. If NE A had operated only in the short-haul New England territory, a much larger subsidy would have been justified. PERSONNEL Your company's growth during 1957 increased personnel from 1167 in December 1956 to 2156 this year. Total wages and salaries paid during 1957 amounted to $8,760,411 as compared to $5,404,014 in 1956. Our pilots increased from 158 to 249. Maintenance personnel rose from 354 to 584, and the Customer Service group showed the largest numerical increase, from 282 to 605. Eighteen per cent of our employees have been with the company for more than ten years, which gave us an experienced group upon which to build. There are six labor unions representing 91 per cent of all employees and agreements were negotiated with three of these unions during the year. At the close of the year, 81.5 per cent of the Northeast employees were participating in the company's group insurance benefit plan. During the year, $75,877 was paid out in benefits for all classes of coverage under this plan. As of Feb. 1, 1958, a new plan has been offered the em- TOTAL PERSONNEL ployees to give them more extensive protection against hospital and surgical costs, as well as medical coverage not available under the present plan. Northeast's pension plan, to which the com pany is the sole contributor, covers all employees after they have been employed for one year and have reached 25 years of age. In 1957, the com pany accrued $59,871 for past service and $175,799 for current service costs. The value of cash and securities held by the trustee on Decem ber 31, 1957 for this Pension Plan amounted to $707,631.18. The pilots also have a contributory retirement plan of their own supplementing the company's program. As of December 31, 1957, the fund amounted to $202,638.40. During the year, there were additions and changes in executive personnel, as well as throughout the organization. All reflected the company's growth in size and character. First of the changes in corporate officers came in June when the Board of Directors established the new office of Vice President -- Administra tion and Finance to which they elected Mr. Hamilton Heard, former Treasurer of the com pany. Mr. Rembrandt P. Lane, Jr., formerly Comptroller, was elected Treasurer. Mr. Lane, a native of Washington, D. C., came with the company last spring as Comptroller. He was formerly Assistant Treasurer of The Chase Man hattan Bank. In December, the Board of Directors further expanded the executive organization. As a re sult, it is proposed that Mr. Collins will become Chairman of the Advisory Committee. It is pro- posed dial Mr. Gardner, who has served 10 years as President, assume the duties of Chairman of the Board and continue as Chief Executive Officer. Succeeding Mr. Gardner as President, in accordance with the proposed reorganization plan, will be Mr. Austin who, during the past 12 years, has gained industry-wide recognition as one of the foremost sales executives in the transportation field. Mr. Austin was Vice Presi dent-Traffic and Sales and also a member of the Board of Directors of Capital Airlines, prior to joining NEA. Among his important contri butions to the airline industry was the intro duction of air coach service in the late 40's. He also successfully introduced the first turbo-prop aircraft in domestic passenger service. Accompanying Mr. Austin to NEA was his associate of the past 11 years, Mr. Nelson B. Fry, who has been elected Vice President -- Traf fic and Sales to fill a vacancy left by the resigna tion of Mr. Robert L. Turner. Mr. Fry, like Mr. Austin, is held in highest esteem by his asso ciates in the airline industry, in which he has been active since 1935. A native of Philadelphia, he is a former president of the Air Traffic Con ference of America. OUTLOOK FOR 1958 The year 1958, which will be marked by our 25th anniversary, should see the culmination of the first step in our expansion program which is designed eventually to bring to fruition all the benefits anticipated when we sought extension of our routes to Florida. According to our best estimates, if we are able to carry to and from Florida only two-thirds the number of passen gers normally carried on our New England sys tem, we will generate profits sufficient to offset the large losses imposed by the New England short-haul segment. One of our goals for 1958, then, is to carry some 400,000 Florida passengers. We started the year 1958 by carrying 8784 Florida passengers during the first seven days. Unfortunately, the daily average of 1254 de creased during the remainder of January, which in part was attributable to the customary drop off in the Florida traffic but mostly to the fact that Florida had the coldest January on record. The recently-granted passenger fare increase should improve the financial picture by adding, in the case of NEA, better than seven per cent to our 1958 passenger revenues, if we assume no decrease in the traffic due to the higher fares. The year 1958 will be marked by airport im provement programs in the New England area. Key summer resort areas, such as Nantucket, Martha's Vineyard, and Hyannis, and also Lewiston-Auburn, anticipate completion of run way extensions and/or new terminal buildings some time during the year. Our new equipment plans are primarily de pendent on two factors: (1) Our ability to attract the load factors necessary to attain profit able operations and thereby arrange the neces sary equipment financing, and (2) the success of the Britannia certification program. Your management fully recognizes that there are still many problems ahead, ft is confident that these problems will be overcome and that Northeast will develop into a strong, self- sufficient, and profitable airline. NORTHEAST AIRLINES, INC. Balance Sheet As at December 31, 1957 and December 31, 1956 ASSETS 1957 1956* Current assets: Cash in banks $ 3,410,190 $ 4,656,407 Subscriptions to common stock 3,520,004 Receivables: U. S. Government 246,999 501,650 Airline traffic 1,315,088 626,370 Federal income tax refund 193,082 Other 419,810 201,249 Flight equipment expendable parts, at cost less allowance for obsolescence: 1957, $515,558; 1956, $527,406 943,176 384,075 Prepaid insurance and other expenses 259,502 131,730 Miscellaneous supplies (at average cost) 137,549 166,495 Total current assets 6,732,314 10,381,062 Property and equipment, at cost: Flight equipment and related spare parts (note B) 19,150,561 4,487,177 Hangar and service building on leased land 702,963 702,963 Ground and shop equipment 1,559,741 783,359 Improvements to rented properties 310,650 184,063 Warehouse and land 83,657 83,657 Construction in progress 186,493 61,953 Nonoperating property 13,575 330,140 22,007,640 6,633,312 Less allowances for depreciation, amortization and aircraft maintenance 5,634,192 4,469,392 Property and equipment less allowances 16,373,448 2,163,920 Advance payments and costs on purchase of flight equipment (note C) . 456,501 3,359,517 Investments in airline service organizations 39,219 37,315 Receivable from officer under stock purchase contract 26,875 26,875 Deferred charges: Route extension and development 217,893 214,612 Aircraft and station preoperating and training costs 664,866 106,326 Other 133,465 18,487 $24,644,581 $16,308,114 LIABILITIES 1957 1956* Current liabilities: Instalments due within one year on 4% notes payable $ 2,200,000 Accounts payable -- general 2,203,483 $ 764,346 Airline traffic accounts payable 478,531 319,611 Collections and withholdings as agent 353,567 166,846 Accrued salaries and wages 655,815 315,968 Accrued social security and other taxes . . . . . . 43,886 24,287 Other accrued liabilities 84,796 61,900 Unearned transportation revenue 685,507 200,869 Total current liabilities 6,705,585 1,853,827 4% notes payable under bank credit agreement (note B) 5i/% subordinated note payable to affiliated company 8,303,000 2,000,000 2,470,000 Reserve for uninsured losses (workmen's compensation) 44,067 68,163 Stock purchase contract (see contra) 26,875 26,875 Commitments (notes C and F) CAPITAL Common stock, par value $1.00 per share: Authorized -- 3,000,000 shares in 1957 (note D) Issued and outstanding -- fully paid, 1,773,688 shares Issued under stock purchase contract -- part paid: 1,773,688 1,773,688 10,000 shares at 50 cents per share paid thereon (unpaid balance under contract, $26,875 shown above) 5,000 5,000 Paid-in surplus 9,279,660 9,279,660 Earned surplus (deficit) (note B) (3,493,294) 830,901 Total capital 7,565,054 11,889,249 $24,644,581 $16,308,114 Certain reclassifications have been made in the 1956 figures above for comparison with the 1957 figures (note A). The accompanying notes are an integral part of the above balance sheet. NORTHEAST AIRUNES, me. Statement of Profit and Loss and Earned Surplus {Deficit) For the Years Ended December 31, 1957 and 1956 1957 Operating revenues: Passengers $13,964,475 Air mail, including amounts designated as federal subsidy (note G) . . . 1,194,726 Express, freight and excess baggage 591,576 Other, net 143,368 Total operating revenues 15,894,145 Operating expenses*: Flying operations 5,708,154 Maintenance and repairs 3,550,407 Provisions for depreciation and amortization 1,492,705 Aircraft and traffic servicing 3,854,963 'i Reservations and sales 1,737,966) Passenger service 1,195,024 Advertising and publicity 1,483,765 General and administrative 1,089,719 Total operating expenses 20,112,703 Operating loss 4,218,558 Nonoperating charges: Interest on notes payable (note B) 210,380 Credit from insurance settlement on aircraft (82,170) Other charges (credits), net (22,573) Loss before federal income tax 4,324,195 Provision for refund of federal income tax Net loss for year 4,324,195 Earned surplus at beginning of year 830,901 Earned surplus (deficit) at end of year (note B) ($ 3,493,294) 1956 $ 8,138,375 1,724,466 341,778 95,552 10,300,171 3,113,430 2,276,623 639,469 3,082,773 631,003 310,490 674,783 10,728,571 428,400 19,170 447,570 148,030 299,540 1,130,441 $ 830,901 Operating expenses for 1956 have been reclassified for comparison with 1957 (note A). The accompanying notes are an integral part of the above statement. NORTHEAST AIRLINES, INC. Notes to Financial Statements Note A -- Uniform System of Accounts: The accompanying financial statements are pre pared generally in accordance with the Uniform System of Accounts for Air Carriers prescribed by the Civil Aeronautics Board. Revisions of the sys tem, effective in 1957, did not have a material effect on the net loss for 1957; the statements for 1956 have been reclassified for comparison. Note B -- Bank Credit Agreement: The notes payable to banks under a credit agree ment dated September 30, 1955 are secured by a mortgage on the company's flight equipment and related spare parts. Instalments due in 1958 are included among current liabilities in the 1957 balance sheet. The balance is payable in quarterly instalments ending not later than December 31, 1962. However, at December 31, 1957 the company was in default under provisions of the credit agree ment requiring the maintenance of minimum amounts of net worth and of working capital and as a result the banks may accelerate the due dates. In addition, the credit agreement restricts the amount of cash dividends or other payments on the company's common stock to a portion of net income accrued subsequent to December 31, 1954. Interest and commitment fee on these notes, less estimated federal income tax benefit, totaling $173,235 at the time the new Douglas Model DC-6B aircraft were placed in service, has been capitalized as additional cost of the equipment. This treatment does not accord with the provisions of the Uniform System of Accounts for Air Car riers, but the company has applied for approval thereof by the Civil Aeronautics Board. Note C -- Commitment for Purchase of Flight Equipment: The company has agreed, if the aircraft are made suitable for commercial use in this country and subject to arrangements for satisfactory financing including the consent of present creditor banks (note B), to purchase for delivery in 1958 five Bristol Britannia Model 305 aircraft at a cost, to gether with related equipment and spare parts, of approximately $17,500,000. Of the advance pay ments and other costs for the Britannia aircraft aggregating $456,501 at December 31, 1957, $375,000 may be recovered if the agreement should be ter minated. Note D -- Employee Stock Option and Stock Pur chase Plans: At December 31, 1957, 75,000 shares of authorized and unissued common stock are reserved under the company's stock option plan for key employees. Op tions are granted at prices not less than 85% of the fair market value of the stock on the dates granted. Options are outstanding at December 31, 1957, exercisable after various dates in 1958, to purchase 62,000 of these shares at various prices aggregating $459,500. In addition to the foregoing plan 90,000 shares of authorized and unissued common stock are re served at December 31, 1957 for sale to employees at a price, payable in instalments, not less than fair market value thereof at the date of purchase contract. Note E -- Retirement Plans: Provisions under the company's retirement plans for employees aggregating $285,904 have been charged to operating expenses for 1957. The amount unfunded under the plans at December 31, 1957 was approximately $400,000. Note F -- Long-Term Leases: In January, 1957, the company leased an electronic reservations control system at an annual rate of rental ranging from approximately $100,000 during 1957 to approximately $170,000 after completion of the system late in 1958. The lease will expire in 1966. The company has subleased part of the capacity of the system at an annual rate of rental ranging from $6,000 initially to approximately $34,000 in 1958. The company has agreed to lease a new hangar, to be constructed at Logan International Airport, Boston, for occupancy in 1960, for 25 years from that date at an initial annual rental of approxi mately $180,000. Note G -- Air Mail Revenues: Effective February 7, 1957, the Civil Aeronautics Board reopened for adjustment the company's mail pay rates, including the portion designated as sub sidy. Subsidy payments were continued through June 30, 1957. Mail subsidy payments received by the company totaled $1,611,000 for the year 1956 and $955,000 for the six months ended June 30, 1957. The proceeding of the Board remains open, so that the mail rates in effect between February 7 and June 30, 1957 may be increased or decreased, and the non-subsidy rates in effect since July 1, 1957 may be revised to include subsidy payments. LYBRAND, ROSS BROS. G. MONTGOMERY ACCOUNTANTS AND AUDITORS BIRMINGHAM DALLAS HOUSTON TULSA SAN FRANCISCO LOS ANOELES SEATTLE COOPERS LYBRAND IN AREAS OF THE WORLD OUTSIDE THE UNITED STATES Northeast Airlines, Inc. Boston, Massachusetts We have examined the balance sheet of Northeast Airlines, Inc. as at December 31* 1957 and the related statement of profit and loss and earned surplus (deficit) for the year then ended. Our examination was made in accord ance 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 statements present fairly the financial position of Northeast Airlines, Inc. at December 31> 1957 and the results of its operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. NEW YORK DETROIT PHILADELPHIA CLEVELAND CHICAGO CINCINNATI BOSTON ROCKFORD BALTIMORE ST. LOUIS WASHINGTON LOUISVILLE PITTSBURGH Boston, Massachusetts February 24* 1958 NORTHEAST AIRLINES, INC Record of Progress 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 Revenue Miles Flown 10,776,864 6,626,106 6,590,634 6,316,944 5,689,854 4,729,487 4,743,281 4,235,126 4,021,226 3,386,881 Passenger Revenue $13,964,475 $8,138,375 $7,938,798 $7,118,264 $6,227,406 $5,570,124 $5,535,763 $4,440,034 $3,992,450 $3,241,912 Revenue Passengers Carried 763,617 592,967 582,478 523,489 463,712 427,685 454,738 372,497 324,963 272,292 Revenue Passenger Miles 245,181,670 119,252,967 116,450,932 104,226,881 91,398,933 83,675,411 87,507,199 70,468,046 61,957,458 52,091,160 Available Seat Miles 517,729,726 203,843,785 196,635,380 186,418,896 165,220,028 144,157,775 143,677,282 135,975,864 128,126,621 108,468,454 Available Ton Miles 62,115,828 20,661,007 19,767,663 18,863,626 16,314,266 15,081,189 14,439,859 13,741,435 12,948,699 10,808,073 Revenue Ton Miles 25,080,345 11,576,066 11,346,893 10,158,041 8,947,089 8,270,369 8,602,344 7,099,518 6,085,947 5,085,103 Operating Cost per Available Seat Mile 3.880 5.260 5.070 4.980 4.920 5.130 4.860 4.590 4.470 4.710 Operating Cost per Available Ton Mile 32.430 51.930 50.450 49.110 49.830 49.020 48.320 45.410 44.230 47.270 Wages and Salaries $8,760,411 $5,404,014 $4,950,000 $4,586,846 $4,032,735 $3,473,776 $3,163,697 $2,750,700 $2,574,010 $2,465,557 Number of Personnel 2,155 1,167 1,016 971 885 802 764 711 673 651 Net Book Value of Property and Equipment $16,373,448 $2,163,920 $2,648,980 $3,207,584 $2,105,191 $2,403,180 $2,496,476 $2,742,635 $3,326,740 $1,862,372 PRESQUE ISLE IEBANON/WHITE RIVER JCT./i HANOVER lA , PRINTED IN U.S.A. UNDERWOOD PRESS