Northeast Airlines Annual Report 1959

NORTHEAST A/Rl/1/ES ANNUAL REPORT - 1959
NORTHEAST AIRLINES
ANNUAL REPORT
for year ending December 31,
1959
MONTREAL
PHILADELPHIA
WASHINGTON
~
~
~~
BOARD OF DIRECTORS
DAVID A. STRETCH
President
Atlas Corporation, New York
JAMES W. AUSTIN
President
Northeast Airlines, Inc'.
JACQUELINE COCHRAN
President
Jacqueline Cochran, Inc., New York
PAUL F. COLLINS
President
Fibremold, Inc., Woburn, Mass.
JAMES F. FITZGERALD
President
Fitzgerald Construction Company
Canton, Mass.
GEORGE E. GARDNER
Vice President
Atlas Corporation, New York
ALBERT C. MCMENIMEN
Financial Vice President
Boston Edison Company
EUGENE L. VIDAL
Gene Vidal Designs and Processes
Avon, Conn.
LAURENCE F. WHITTEMORE
Chairman of the Board of Directors
The Brown Company, Berlin, N. H.
DAVID A. STRETCH
Chairman of the Board
JAMES W. AUSTIN
President and General Manager
THOMAS L. GRACE
Vice President
Operations
HAMILTON HEARD
Vice President
Administration
R. P. LANE, JR.
Vice President
Finance and Treasurer
E. 0. SCHROEDER
Vice President
Technical Services
A. s. WALKER
Vice President
Ground Operations
TRANSFER AGENT
Old Colony Trust Company
REGISTRAR
The First National Bank of Boston
OFFICERS
GENERAL OFFICES: Logan International Airport, Boston 28, Massachusetts
HENRY E. FOLEY
Clerk of Corporation
J. S. DANIELS, JR.
Assistant Vice President
Advertising and Promotion
M. WILLSON OFFUTT III
Assistant Vice President
Sales
WHEATON W. MIES
Assistant Vice President
Production
H.F. ZIMMERMAN
Assistant Treasurer
CLARENCE I. PETERSON
Assistant Clerk
AUDITORS
Lybrand, Ross J3ros.
and Montgomery
GENERAL COUNSEL
Foley, Hoag & Eliot
/\IE
/\IE
TO THE SHAREHOLDERS OF NORTHEAST AIRLINES, INC.:
Your Airline made substantial progress during the past
year. In 1959, for the first time, Northeast carried over
1,000,000 passengers in a single year. The 1,239,309
passengers boarded in 1959 represent an increase of nearly
300,000 passengers over 1958. Over one billion seat miles
were produced for sale by Northeast in 1959, an increase
of nearly 20 % over 1958. Of these extra seat miles
produced, 65 % were sold, which constituted an overall
increase of 27.5 % in total passenger traffic generated.
This compares with the domestic trunk line industry's
growth of 15.1 % during 1959 and marks the third
consecutive year in which the traffic gains of Northeast
exceeded the industry average.
Passenger revenues during the year increased by 29.8 %
and the cost of producing the additional seat miles
generated raised operating expenses by 21.9 %. The cost of
producing each seat mile for sale in 1959 was 3.60 cents,
an increase of .06 cents, or 1.8 % over 1958. The domestic
trunk line industry's seat mile costs, on the other hand,
climbed to 3.75 cents, which represents an increase of
.24 cents or 6.8 % over 1958. The year 1959 was the first
in which your Company's unit cost structure was under
the trunk line average. Unit seat mile costs are one of the
recognized measures of the efficiency of airline operations.
Maintenance of such costs at or below the industry average
- notwithstanding the short-haul nature of a large part
of your Company's operations - will continue to be
a major objective of your management.
Significant growth was registered during the year in the
all-important Florida markets. Your Company enplaned
and deplaned 280,226 passengers at its Florida stations,
compared with 226,226 in 1958 and 97,108 in 1957.
Considerable progress was also made in the penetration
of the so-called commuter markets in the large
Northeastern cities served primarily with Viscount jet-prop
aircraft. Northeast's participation in these markets is
substantial and has continued to increase notwithstanding
intense competition from major airlines. In the Boston/
New York, New York/ Washington, Boston/ Washington
and Boston/ Philadelphia markets, the number of
passengers carried in 1959 was 115 % more than in 1958
and 413 % more than in 1957.
On December 17, 1959, Northeast inaugurated its jet
service between New York and Miami with the Boeing 707
Intercontinental jet. This jet, which is leased from TWA
but operated by your airline, will seat 138 passengers.
For the first four months of service, the load factor
(percentage of available seats sold) on the daily round trip
has averaged better than 80 %. This is the equivalent of
111 passengers each mile the aircraft flew during that
period. The performance factor (percentage of scheduled
trips completed) was 100 %. Management believes that
these high performance and load factors demonstrate
the ability of your airline to compete effectively.
On January 30 of this year, Northeast set a speed record
from Miami to New York. The Boeing Intercontinental 707
made the run in one hour and forty-five minutes with 152
people aboard, including eight crew members and
six infants. It is believed that the. 152 people aboard this
record-making flight were the greatest number to be
carried at one time in commercial transport service.
Your Company's DC-6B aircraft, providing coach service
to Florida with two abreast seating, represents in your
management's opinion the best bargain in the coach
market. On the average, however, the load factors achieved
on the Florida coaches have not been sufficient to enable
the Florida service as a whole or the airline as a whole to
operate profitably. Despite the substantial increase in the
number of Florida passengers during 1959 (24 % higher
than 1958), revenues from the Florida coach service were
only slightly higher than the previous year, thus reflecting
the effect of the low coach fares which prevailed in the
Florida market from April to December of 1959. These low
fares (initiated by other carriers and reluctantly adopted
by Northeast), required very high load factors merely to
recover costs. On the basis of these results it is questionable
whether the additional traffic generated by the low fares
compensated for the diversion of passengers who might
otherwise have traveled at regular fares.
Your Company's cash loss from operations in 1959,
before providing for depreciation and amortization,
was $1,723,461. This compares with $3,194,141 in 1958
(after adjustment to a comparable subsidy-free basis),
or an improvement of about one and a half million dollars
over the preceding year. The net operating loss in 1959,
after depreciation and amortization, was $5,707,915 as
compared with $6,133,387 (before subsidy) in 1958.
The Corporation's net loss, after interest and all other
charges, amounted in 1959 to $7,061,984. The year 1959
was the first in the Company's history in which it was
completely without subsidy support from the Government,
Northeast having been placed on a service (or non-subsidy)
mail pay rate effective January 1, 1959.
In 1959 the average passenger ticket was $23.88 which was
about the same as the preceding year. The expense of
carrying each passenger was reduced from $31.89 to $29.98,
a reduction of almost $2 per passenger. At the cost and
fare levels prevailing during 1959, your Company needed
about 19 % more passenger revenue - to cover its
operating expenses - than it actually obtained. The
number of passengers carried by Northeast in 1959 would
have been sufficient to cover operating expenses had the
average price per ticket been about $6.00 greater. In 1959
your Company received 5.7 cents on the average for each
passenger mile sold, which is nearly 10 % less than the
average return per passenger mile received by the airline
ten years ago. In part, this reflects the change in the nature
of the airline's operations brought about by the coach
service to Florida. It also emphasizes, in the opinion of
your management, the need for higher fares in the industry
as a whole. On April 29, the Civil Aeroriautics Board
announced the adoption of new rate-making standards for
use in determining the level of airline fares. The amount
of the actual fare increases that may be permitted under
the new standards has not yet been decided and,
accordingly, it is not possible to estimate the effect
of this action on your Company's operations.
It is apparent that any fare increase emanating from the
Board's recent action will not alone insure profitable .
operations. Future success depends in large part upon
the acquisition by Northeast of a sufficient number of
competitive jet aircraft for use on its long haul routes along
the East Coast to Florida. To this end, your management
is negotiating final arrangements for the acquisition and
financing of Northeast's own jet fleet of six Convair 880
aircraft. These negotiations are progressing well and
management believes that satisfactory arrangements will be
concluded soon.
The Convair 880 will be the fastest jet in airline service
and has the operating flexibility which should enable your
Company to perform most efficiently on its present route
structure. Even with only a moderate increase in your
Company's participation in the Florida market over
present levels and at the existing fare structure, these
jets should produce substantial profits for Northeast.
Additional funds will probably be required in connection
with placing these jets in service. Although your Company
has no specific proposal at the present time, financing
plans under general consideration include public offerings
to stockholders and others, private placements or exchange
of debt for stock.
During April of 1960 your Company had a small net
operating profit, this being the first net operating profit
earned in the month of April in the Company's history.
Your management appreciates the hard work and
cooperation of its many employees during this period of
transition. In the years ahead the loyalty and enthusiasm
of our employees will continue to be a valuable asset.
The growing public acceptance of the services of
Northeast Airlines augurs well for the,future.
RESPECTFULLY SUBMITTED
CHAIRMAN OF THE BOARD
L u . ~
PRESIDENT AND GENERAL MANAGER
/\j
ASSETS
CURRENT ASSETS:
Cash
Restricted bank deposits (note B)
Accounts receivable .
Flight equipment expendable parts, at cost
less allowance for obsolescence
Prepaid insurance and other expenses .
Miscellaneous supplies, at average cost
TOT AL CURRENT ASSETS
Special deposits and other assets
Property and equipment, at cost:
Flight equipment and related spare parts
(notes B and C) .
Ground property and equipment
Less allowances for depreciation, amortization
and aircraft maintenance
Deferred charges less amortization:
Route extension and development
Aircraft and station preoperating and
training costs .
Other
NORTHEAST AIRLINES, INC. BALANCE SHEET As at December 31, 1959
f
$ 684,832
1,260,000
3,335,008
1,740,120
1,037,279
204,796
$ 8,262,035
183,181
31,328,884
3,673,156
$35,002,040
10,384,397
$24,617,643
106,626
2,277,227
122,148
$35,568,860
{
LIABILITIES
CURRENT LIABILITIES:
4% notes due within one year, including amounts subject
to prepayment (note B)
Equipment trust certificates due within one year (note C)
Collections as agent and trade accounts payable .
Accrued compensation and vacation pay
Accrued pension costs (note E)
Unearned transportation revenue
TOTAL CURRENT LIABILITIES
4% notes payable under bank credit agreement (note B)
Equipment trust certificates (note C) .
Commitments and contingent liabilities (note F)
5% subordinated notes payable to affiliated company
CAPITAL
Common stock, par value $1.00 per share:
Authorized - 3,000,000 shares (note D);
Issued and outstanding - fully paid, 1,783,688 shares
Paid-in surplus
Deficit
The accompanying notes are an integral part of this balance sheet.
$ 3,340,000
1,735,879
6,565,699
891,213
719,570
879,702
$14,132,063
2,763,000
9,371,680
12,441,809
1,783,688
9,301,535
(14,224,915)
$35,568,860
/\IE
NORTHEAST AIRLINES, INC., STATEMENT OF PROFIT AND LOSS AND DEFICIT
For the Year Ended December 31, 1959
OPERATING REVENUES:
Passengers
Air mail
Express, freight and baggage
Other
TOTAL OPERATING REVENUES
OPERA TING EXPENSES:
Flying operations
Maintenance and repairs
Depreciation and amortization .
Aircraft anq traffic servicing
Reservations, sales, advertising and publicity
Passenger service .
General and administrative .
TOTAL OPERATING EXPENSES .
OPERATING Loss
NONOPERATING CHARGES:
Interest expense
Gain on sale of flight equipment and
other property
Other charges
NET Loss
Deficit at beginning of year
Deficit at end of year .
The accompanying notes are an integral part of this statement.
$29,595,435
469,097
1,136,939
248,763
$31,450,234
$10,427,125
6,705,181
3,984,454
6,999,002
4,845,114
2,664,002
1,533,271
$37,158,149
$ 5,707,915
1,464,434
(252,111)
141,746
$ 7,061,984
7,162,931
$14,224,915
LYBRAND, Ross BRos. r,__, MoNTGOMERY
ACCOUNTANTS AND AUDITORS
Northeast Airlines, Inc.
Boston, Massachusetts
NEW YORK DETROIT l!IIRMINGHAM
PHILADELPHIA CLEVELAND DALLAS
CHICAGO CINCINNATI HOUSTON
l!IOSTON ROCKFORD TULSA
l!IALTIMORE ST. LOUIS SAN FRANCISCO
WASHINGTON LOUISVILLE LOS ANGELES
PITTSl!IURGH HARTF"ORO SEATTLE
COOPERS U. LYBRAND
IN AREAS OF THE WORLD
OUTSIDE THE UNITED STATES
We have examined the balance sheet of Northeast
Airlines, Inc. as at December 31, 1959 and the related
statement of profit and loss and deficit 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 pro-
cedures as we considered necessary in the circumstances.
In our opinion, the accompanying statements present
fairly the financial position of Northeast Airlines, Inc. at
December 31, 1959 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.
~~~~~nf,
M~~6~chusetts ~
1
{L IL~
-
/\IE
NOTES TO FINANCIAL STATEMENTS
A - UNIFORM SYSTEM OF ACCOUNTS:
The accompanying financial statements are prepared gener~lly
in accordance with the Uniform System of Accounts for Air Car-
riers prescribed by the Civil Aeronautics Board.
B -BANK CREDIT AGREEMENT:
The notes payable to banks under credit agreement are se-
cured by a mortgage on the company's flight equipment and re-
lated spare parts, subject to prior rights of the trustee under equip~
ment trust certificates in Vickers Viscount aircraft and Rolls Royce
engines (note C). The notes are payable in quarterly instalments
ending not later than December 31, 1962. The company has main-
tained its principal and interest payments, but it is in default under
certain other provisions of the credit agreement, including the
maintenance of minimum amounts of working capital, and as a
result the banks have the right to accelerate the due dates. The
credit agreement also requires with certain exceptions that pro-
ceeds from the disposition of mortgaged property be applied to
prepayment of the last instalments of the notes and $1,260,000
has been deposited for this purpose.
C - EQUIPMENT TRUST CERTIFICATES:
Equipment trust certificates are secured by legal title to ten
Vickers Viscount aircraft and related Rolls Royce engines and by
a second mortgage on the company's other flight equipment and
related spare parts. The principal and interest of the trust certifi-
cates are payable at the rate of $190,200 per month until September,
1963 and thereafter in declining amounts until the final payment
in February, 1966.
D - EMPLOYEE STOCK OPTION AND
STOCK PURCHASE PLANS:
At December 31, 1959, 75,000 shares of authorized and unis-
sued common stock were reserved under the company's stock
option plan for key employees. Options are granted at prices not
less than 85% of the fair market value of the stock on the dates
granted. At December 31, 1959 options to purchase all 75,000
shares were outstanding with options as to 62,000 shares presently
exercisable at various prices aggregating $459,500 and options as
to 13,000 shares becoming exercisable in 1960 at various prices
aggregating $94,250.
E - RETIREMENT PLANS:
Provisions under the company's retirement plans for em-
ployees aggregating $582,828 have been charged to operating ex-
penses for 1959. The amount unfunded under the plans at Decem-
ber 31, 1959 was approximately $360,000.
F - COMMITMENTS AND CONTINGENT LIABILITIES:
The company is committed to pay annual rentals approximat-
ing $950,000 under long-term leases for hangar, terminal and
reservation facilities presently in use or to be occupied soon.
Under certain circumstances the company is obligated to make
additional payments to employees upon termination of employ-
ment; these amounts are charged to expense when paid.
5 YEAR STATISTICAL
RECORD OF PROGRESS
Revenue Miles Flown
Passenger Revenue
Revenue Passengers Carried
Available Seat Miles
Passenger Load Factor
Revenue Passenger Miles
Available Ton Miles
Revenue Ton Miles .
Operating Cost Per Available Seat Mile
Operating Cost Per Available Ton Mile
Wages and Salaries .
Number of Personnel
Net Book Value of Property and Equipment
1959 1958
18,634,712 15,079,659
$29,595,435 $22,803,445
1,239,309 955,955
. 1,031,545,734 860,689,541
50.32% 47.30%
519,122,839 407,116,418
120,512,961 106,722,236
52,875,577 41,890,682
3.60 3.54
30.83 28.57
$15,463,760 $12,664,019
2,553 2,411
$24,617,643 $25,311,614
1957 1956 1955
10,776,864 6,626,106 6,590,634
$13,964,475 $ 8,138,375 $ 7,938,798
763,617 592,967 582,478
517,729,726 203,843,785 196,635,380
47.36% 58.50% 59.22%
245,181,670 119,252,967 116,450,932
62,115,828 20,661,006 19,767,663
25,080,345 11,576,066 11,346,893
3.88 5.26 5.07
32.43 51.93 50.45
$ 8,760,411 $ 5,404,014 $ 4,950,000
2,155 1,167 1,016
$16,373,448 $ 2,163,920 $ 2,648,980
OVER 26 YEARS OF SCHEDULED AIRLINE SERVICE
1111/THEAST
AIRLINES