NORTHEAST AIRLINES ANNUAL REPORT-1960
NORTHEAST AIRLINES
ANNUAL REPORT for year ending December 31,1960
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
Aviation Consultant, Miami, Florida
OSWALD L. JOHNSTON
Partner, Simpson, Thacher & Bartlett, New York
ALBERT C. MCMENIMEN
Financial Vice President, Boston Edison Company
EUGENE L. VIDAL
Gene Vidal Designs and Processes, Avon, Conn.
TRANSFER AGENT
Old Colony Trust Company
REGISTRAR
The First National Bank of Boston
GENERAL OFFICES
Logan International Airport, Boston 28, Massachusetts
AUDITORS
Lybrand, Ross Bros, and Montgomery
GENERAL COUNSEL
Foley, Hoag & Eliot
OFFICERS
DAVID A. STRETCH
Chairman of the Board
JAMES W. AUSTIN
President
THOMAS L. GRACE
Vice President -- Operations
HAMILTON HEARD
Vice President -- Administration
REMBRANDT P. LANE, JR.
Vice President -- Finance and Treasurer
EDMUND O. SCHROEDER
Vice President -- Technical Services
ALFRED S. WALKER
Vice President -- Ground Operations
HENRY E. FOLEY
Clerk
J. V. AUSKELIS
Assistant Vice President -- Quality Control
F. C. BARKER
Assistant Vice President -- Operations
A. A. BRENNAN
Assistant Vice President -- Personnel
J. S. DANIELS
Assistant Vice President -- Advertising and Promotion
M. M. DE GROFF
Assistant Vice President -- Traffic
W. W. MIES
Assistant Vice President -- Production
M. W. OFFUTT III
Assistant Vice President -- General Sales Manager
J. O. URQUHART
Assistant Vice President -- Passenger Service
H. F. ZIMMERMAN
Assistant Vice President -- Finance and Controller
C. I. PETERSON
Assistant Clerk
MS
PRESIDENT'S LETTER
The year 1960 was a difficult one for the domestic airline
industry and Northeast was no exception. While the
net operating loss sustained in 1960 approximated the
1959 level, nonetheless it was a year of considerable
accomplishment. New records were established in both
numbers of passengers carried and total revenues.
Northeast became one of the dominant carriers in the
high density commuter markets between Boston,
New York, Philadelphia and Washington and, in addition,
gained greater prestige and prominence in the Florida
market. Simultaneously, traffic in New England was
responsive to the improved schedules which were offered
with modern, four-engine aircraft.
Unquestionably, the highlight of the year was the delivery
of Northeast's first Convair 880 Jet -- the world's fastest
commercial airliner. Delivery of these aircraft -- originally
planned to commence in the summer of 1960 -- was
delayed for reasons beyond your company's control until
almost the end of the year. A large part of 1960 was
devoted to training and preparing for the inauguration of
service which began on December 15, 1960. This initial
schedule was subsequently augmented to the point that
Northeast is today offering more jet seats to Florida
markets than any other carrier. Your company is, in fact,
the only carrier offering jet service between New York and
Fort Lauderdale, as well as between Baltimore/Washington
(Friendship Airport) and Miami. On April 30, 1961
Northeast will be the first carrier to offer
jet service to Jacksonville.
Delivery of the six Convair 880 Jets places Northeast for
the first time in a position to offer service on its long haul
routes with truly competitive equipment.
The Board of Directors of Trans World Airlines, Inc.
(which was recently reconstituted) has advised Northeast
that additional time would be required to consider the
terms of the proposed merger between the two carriers.
Although Northeast did not formally extend the period of
time for acceptance of the offer of merger previously
made, Northeast's Management expressed the belief to
TWA that a merger would be in the interest of both
carriers and has indicated a willingness to
resume merger discussions.
Northeast has filed formal application with the Civil
Aeronautics Board asking that its temporary authority to
serve points south of New York be made permanent.
The five year certificate which was awarded to Northeast
expires on November 27, 1961. The temporary certificate
has imposed a severe handicap on the ability of Northeast
to obtain adequate financing for necessary working capital
and competitive equipment. Your Management believes
that despite this handicap Northeast has clearly
demonstrated its ability to provide effective competitive
service and that such application should be granted.
It is my sincere hope that you will continue to patronize
Northeast whenever possible, and that you will
recommend our services to your friends and business
associates. Your Management is deeply grateful for the
understanding and loyal support evidenced by you, the
stockholders, the employees of Northeast, our passengers
and the communities we are privileged to serve.
RESPECTFULLY SUBMITTED
a,.
PRESIDENT
REVIEW OF THE YEAR
REVENUES AND TRAFFIC
Operating revenues for 1960 were $37,930,921 compared
with $31,450,234 in 1959, an increase of 20.6%.
Revenues by sources compared with previous years were:
1960 1959 1958 1957
Passenger $35,366,220 $29,595,435 $22,803,445 $13,964,475
Revenue
Mail 568,964 469,097 393,892 239,480
Freight and 1,156,097 750,290 582,500 398,484
Express
Excess 414,468 386,650 363,491 193,092
Baggage
Other 425,172 248,763 209,011 143,368
Northeast carried 1,437,723 passengers in 1960, an in
crease of nearly 200,000 over the preceding year. Traffic
in terms of passenger miles sold amounted to 565,030,520
compared with 519,122,839 in 1959. The increase of 8.8%
was more than twice the proportionate gain recorded by
the industry as a whole, although your Company's com
petitive position in its long haul markets undoubtedly
suffered from its lack of pure jet capacity.
SPECIAL CHARGE
In recognition of the changed circumstances resulting
from the introduction of 880 Jet service, Northeast
elected at year-end to make a substantial reduction in
deferred charges, which otherwise could properly have
been amortized over a period of years in the future. A
substantial portion of expenditures made in prior years
in training flight crews and maintenance personnel for
DC-6B, Viscount and 707 Jet equipment programs was
written off in 1960. In addition, adjustments were made
to engine and airframe overhaul reserves. This treatment
by eliminating distortion in the income account should
have a beneficial effect on operating results in future
years. The total of these special charges was approxi
mately $3,700,000, of which $2,834,896 appears as a
special item in the financial statements, the balance of
about $865,000 having been charged against 1960
income.
EXPENSES AND OPERATING RESULTS
Operating expenses, including the above $865,000 charge
attributable to the current year, increased by 18.3% to
$43,959,690. This substantial rise in expenses reflects the
cost of leasing and operating a daily round trip service
between New York and Miami performed with 707 Jet
equipment, contractual wage settlements reached with
four labor unions during the year, and the general infla
tionary trend of materials, supplies and services. The
shorter haul character of the Company's propeller fleet
in 1960 also entailed some recognized inefficiencies in
relation to cost per unit of capacity produced.
Expenses in 1960 also reflect charges incident to the ac
quisition and integration of the 880 Jet fleet, although
the aircraft were not placed in service in time to have a
significant effect on the year's revenues.
Your Management had anticipated that without addi
tional Jet equipment in 1960, the Company's competitive
position in its long haul markets would deteriorate to
such an extent that operating losses would be suffered well
in excess of the 1959 level. Actually, the operating loss
sustained in 1960, including the $865,000 charge already
referred to, approximated the previous year.
The 1960 net loss of $7,979,259 includes depreciation and
amortization charges of $3,915,244 and interest expense
of $809,936 on indebtedness to Atlas Corporation, which
interest was not paid. Accordingly, the net cash loss for
the year was $3,254,079.
FLORIDA SERVICE
During most of 1960, service to Florida (except for the
daily 707 Jet round-trip) was limited to DC-6B type
piston aircraft in competition with jet and turbo-prop
aircraft. Notwithstanding this fact, the number of pas
sengers carried by Northeast to Florida points in 1960 was
slightly higher than the previous year. It is believed that
the total East Coast-Florida market declined by about
7% from the 1959 level principally as a result of the
general economic recession. Thus it appears that North
east's participation in the market actually increased
despite an obvious equipment disadvantage and a con
traction in the over-all market. The growth of your
Company's Florida service is shown as follows:
Passengers Carried
Year by Northeast
1957 97,113
1958 226,226
1959 280,226
1960 281,854
Current indications are that in 1961 Northeast will carry
over 400,000 passengers to and from Florida points.
The daily round-trip between New York and Miami per
formed by the leased 707 airplane was eminently success
ful from the standpoint of both passenger acceptance and
operational ability. An average of more than ninety
passengers per trip was carried throughout the year (over
68,000 passengers in the aggregate) and more than 99%
of our schedules were performed.
COMMUTER SERVICE
Participation in the heavily competitive, high density
commuter markets of Boston-New York, New York-
Washington, Boston-Washington, and Boston-Phila-
delphia continued to grow. This service was provided
largely by the jet prop Viscount fleet which operated at a
load factor of just under 65 %. It is believed that North
east's penetration of these highly competitive markets
demonstrates your Company's ability to compete with
the larger carriers, given the proper equipment. An over
all increase of 42% was registered over the number of
passengers carried in 1959 on these segments, and
Northeast is now one of the dominant airlines in these
important travel markets.
The development of these markets in terms of passengers
carried is set forth in the following table:
Passengers Carried
by Northeast
1960 1959 1958 1957
Boston-New York 268,210 164,954 91,885 64,222
Boston-Philadelphia 85,754 82,513 52,418 10,049
Boston-Washington 128,832 107,379 40,691 12,609
New York-Washington 163,961 99,083 25,820 1,624
Total 646,757 453,929 210,814 88,504
During the first three months of 1961, Northeast regis
tered a gain of 48% in terms of passengers carried in
these markets over the comparable period of the prior
year.
NEW ENGLAND SERVICE
New England service continued to show an over-all loss,
although some segments in the region are operating
profitably. Some of the short haul, low-density routes in
cluded in this operation are no longer suitable even for
DC-3 equipment, which is becoming more difficult and
uneconomic to operate as time passes.
Five DC-3's were sold in January of 1961, and DC-6B
equipment has been withdrawn from Florida for use in
New England on a year round basis. Northeast is now
offering modern, pressurized, four-engine service to
Portland, Bangor, and Presque Isle, Maine; Manchester
A!=
and Lebanon, New Hampshire; and Worcester and New
Bedford, Massachusetts. This pattern will be augmented
by DC-6B flights into the Cape and Island cities next
summer.
Your Management is earnestly and sincerely striving to
elicit support in New England communities for the so-
called area airport concept. It is believed that the public
prefers superior service from the standpoints of both
equipment and schedule frequency from a smaller number
of airports rather than limited DC-3 type service from a
greater number of stations contiguously located.
880 ACQUISITION
During 1960 considerable time and money was expended
in training and preparation for inauguration of Convair
880 Jet service, which commenced December 15, 1960
with daily round trips from Boston and Philadelphia to
Miami. This service was expanded thereafter as additional
aircraft became available, but full scale operation with six
880 Jets (11 round-trips) did not commence until March
1, 1961.
The 880 Jets place Northeast for the first time in a posi
tion to compete effectively over its long haul routes.
Northeast presently operates more jet flights and provides
more jet seats to Florida points than any other carrier.
It is the only carrier offering jet service to Fort Lauderdale
and to Florida points from Baltimore-Washington
(Friendship Airport). Jet service to Jacksonville will com
mence April 30, 1961, and Northeast will then be the only
carrier serving all the Florida cities on its system with jet
aircraft. Public acceptance of the Convair 880's has been
gratifying. Load factors on the 880 flights -- despite the
late introduction of service -- have averaged about 65%
since inception.
The effect of the full jet schedule is reflected in the number
of passengers carried during March, which increased 50%
over last year. Passenger miles to and from Florida points
showed a gain of approximately 70% over the same
month a year ago.
FLORIDA ROUTE CERTIFICATE
In September 1956, the Civil Aeronautics Board deter
mined that the public convenience and necessity required
three carrier service between the Northeast and Florida,
and selected Northeast Airlines to provide this additional
service. The Board recognized that extension of North
east's operations to Florida would effect a substantial
change in the character of its operations and for that
reason granted to Northeast a temporary five year certifi
cate rather than permanent authority to serve the Florida
market. Your Management believes that the airline has
clearly demonstrated its ability to provide effective com
petitive service and, accordingly, recently filed with the
Civil Aeronautics Board a formal application requesting
that its temporary authority to serve points south of
New York be made permanent.
FUTURE OUTLOOK
Start-up costs inherent in the jet program, without a com
mensurate gain in productivity, resulted in a loss in
January 1961. However, Northeast achieved modest net
operating profits in both February and March and has
operated profitably through April to the date of this
report. With the increased productivity resulting from the
full six plane jet schedule, it is expected that the load
factor necessary to achieve profitable operations will be
lower than in the past.
The East Coast-Florida route is still the World's largest
air transport market. It is obvious that if Northeast could
attain the participation in Florida traffic of the magnitude
of its existing share of the Middle Atlantic commuter
market, the Company would become highly successful.
LYBRAND, ROSS BROS. MONTGOMERY
ACCOUNTANTS AND AUDITORS NEW YORK DETROIT BIRMINGHAM
PHILADELPHIA CLEVELAND DALLAS
CHICAGO CINCINNATI HOUSTON
BOSTON ROCKFORD TULSA
BALTIMORE ST. LOUIS SAN FRANCISC*
WASHINGTON LOUISVILLE LOS ANGELES
PITTSBURGH HARTFORD SEATTLE
PHOENIX PORTLAND
COOPERS L 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, i960 and the related
statement of 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 procedures 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> i960 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.
Boston, Massachusetts
March 30^ 1961
MS
NORTHEAST AIRLINES, INC. BALANCE SHEET As at December 31, 1960
ASSETS
CURRENT ASSETS:
Cash $ 1,250,075
Restricted bank deposits (note A) 760,000
Accounts receivable 4,112,641
Flight equipment expendable parts, at cost
(notes A and B) 2,920,425
Prepaid insurance and other expenses 1,897,316
Miscellaneous supplies, at average cost 313,999
TOTAL CURRENT ASSETS 11,254,456
Special deposits and othet assets 206,423
Equipment and property, at cost:
Flight equipment and related spare parts
(notes A and B) 33,300,458
Ground property and equipment 4,238,088
37,538,546
Less allowances for depreciation, amortization
and aircraft maintenance 14,827,957
22,710,589
Jet aircraft, ground equipment and facilities
under long-term leases (note C)
Deferred charges less amortization:
Jet aircraft integration program 1,698,232
Route extension, terminal development and other 440,283
$36,309,983
LIABILITIES
CURRENT LIABILITIES:
5% note payable to bank, due May, 1961 $ 2,000,000
Debt due within one year:
4%% notes payable, including amounts subject to
prepayment (note A) 2,820,000
Equipment trust certificates 1,830,827
Instalment obligations for spare parts 79,370
Collections as agent and trade accounts payable 9,151,039
Accrued compensation, vacation pay and pension costs 2,141,159
Unearned passenger revenue 865,425
TOTAL CURRENT LIABILITIES 18,887,820
Debt due after one year:
4%% notes payable in 1962 under bank credit
agreement (note A) 703,000
Equipment trust certificates (note B) 7,540,853
Instalment obligations for spare parts, due 1962 to 1967 880,412
Long-term lease commitments and contingent liabilities (note C)
Subordinated debt (note D):
6Vi% notes payable to Hughes Tool Company, due 1962
to 1964 6,500,000
5l/i% notes payable to Atlas Corporation, and $212,497
accrued interest 15,751,745
CAPITAL
Amounts paid in on common stock, par value $1.00 per share:
Authorized -- 6,500,000 shares (note E)
Issued and outstanding -- fully paid, 1,783,688 shares 11,085,223
Deficit (25,039,070)
$36,309,983
The accompanying notes are an integral part of this balance sheet.
NORTHEAST AIRLINES, INC., STATEMENT OF LOSS AND DEFICIT
For the Year Ended December 31,1960
OPERATING REVENUES:
Passengers $35,366,220
Express, freight and baggage 1,570,565
Air mail 568,964
Other 425,172
TOTAL OPERATING REVENUES 37,930,921
OPERATING EXPENSES:
Flying operations 13,606,935
Maintenance and repairs 8,411,795
Aircraft and traffic servicing 7,701,792
Reservations, sales, advertising and publicity 5,269,518
Depreciation and amortization 3,915,244
Passenger service 3,372,549
General and administrative 1,681,857
TOTAL OPERATING EXPENSES 43,959,690
OPERATING LOSS 6,028,769
NONOPERATING CHARGES:
Interest expense 1,848,775
Other 101,715
NET LOSS FOR YEAR 7,979 259
Special charges for balance of preoperating
and training costs not related to jet aircraft
integration program, $1,890,195, and for
increased provisions for accrued maintenance
applicable to prior years, $944,701 2,834,896
NET Loss AND SPECIAL CHARGES 10,814,155
Deficit at beginning of year 14,224,915
Deficit at end of year $25,039,070
The accompanying notes are an integral part of this statement.
NORTHEAST AIRLINES, INC. -- NOTES TO FINANCIAL STATEMENTS
A -- BANK CREDIT AGREEMENT:
The notes payable to banks under credit agree
ment are secured by a mortgage on company-
owned flight equipment and related spare parts,
subject to prior rights of the trustee under
equipment trust certificates in Vickers Viscount
aircraft and Rolls Royce engines (note B) and
to the prior rights of the vendor under spare
parts instalment obligations. The company is in
default under the provision of the credit agree
ment which requires 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 re
quires with certain exceptions that proceeds
from the disposition of mortgaged property be
applied to prepayment of the last instalments of
the notes and $760,000 has been deposited for
this purpose.
B -- EQUIPMENT TRUST CERTIFICATES:
Equipment trust certificates are secured by tjtle
to ten Vickers Viscount aircraft and related
Rolls Royce engines and by a second mortage
on certain of its other flight equipment and
related spare parts. The principal and interest
of the trust certificates are payable at the rate
of $190,200 per month until September, 1963
and thereafter in declining amounts until the
final payment in January, 1966.
C -- LONG-TERM LEASE COMMITMENTS AND
CONTINGENT LIABILITIES:
The company has leased six Convair jet air
craft and thirty-four engines (including ten
spares) for a period of seven years from dates of
delivery. By December 31, 1960, the company
had received four of the planes and related
engines and in January, 1961 received the re
maining aircraft and engines. Rental payments
are based on the value of the equipment as
established by the leases ($27,167,470), plus
interest. Payments will amount to $4,267,752 in
1961; $5,105,985 in 1962; $5,383,649 in 1963;
$5,396,309 in 1964; $5,038,569 in 1965;
$5,003,949 in 1966; and $4,288,696 in 1967.
The costs of taxes, insurance, maintenance and
repairs also are to be borne by the company.
Under certain conditions the company can
terminate the leases on or after December 31,
1964. The company also has the option to pur
chase the equipment or to renew the leases.
The company is presently paying annual rentals
which will approximate $700,000 in 1961 under
other long-term leases for hangar, terminal and
reservation facilities and for ground equipment,
and is committed to pay additional annual
rentals aggregating $600,000 for terminal
facilities when ready for occupancy.
Under certain conditions the company is
obligated to make payments for accumulated
sick leave to employees upon termination of
their employment. It is the practice of the com
pany to charge the payments to expense in the
year when paid. Based on services to December
31, 1960, the accumulated amount of sick leave
which would be payable upon termination of
employment amounted to approximately
$950,000.
D -- SUBORDINATED DEBT:
The notes payable to Hughes Tool Company
and to Atlas Corporation are subject to certain
prior rights of the 4%% notes payable under
bank credit agreement and of the equipment
trust certificates. The notes payable to Atlas
Corporation under certain circumstances are
subject to the rights of Hughes Tool Company.
Under certain circumstances the principal
amount of the indebtedness may be satisfied
or discharged by issue or sale of common stock
of Northeast Airlines, Inc.
Hughes Tool Company has agreed to lend
Northeast up to $9,500,000. At December 31,
1960 Northeast had borrowed $6,500,000
(including $1,000,000 received January 4, 1961)
and had applied for the $3,000,000 remainder,
of which $2,000,000 by agreement is to be
applied to the 5% note payable to bank.
E -- EMPLOYEE STOCK OPTION PLAN:
At December 31, 1960, 100,000 shares of
authorized and unissued 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, 1960 options to purchase 70,000
shares were outstanding with options as to
35,000 shares presently exercisable at various
prices aggregating $280,000 and with options
as to 35,000 shares becoming exercisable in
1962 at prices which as amended on January 5,
1961 aggregate $148,750. On January 5, 1961,
the company granted options to purchase an
additional 21,500 shares, exercisable beginning
in 1962 at prices aggregating $91,375.
5 YEAR STATISTICAL
RECORD OF PROGRESS
1960
Revenue Miles Flown 18,405,778
Passenger Revenue $35,366,220
Revenue Passengers Carried 1,437,723
Available Seat Miles 1,096,762,501
Passenger Load Factor 51.52%
Revenue Passenger Miles 565,030,520
Available Ton Miles 130,988,374
Revenue Ton Miles 58,908,520
Operating Cost Per Available Seat Mile. . 4.01^
Operating Cost Per Available Ton Mile. . 33.56^
Wages and Salaries $17,552,745
Number of Personnel 2,612
1959 1958 1957 1956
18,634,712 15,079,659 10,776,864 6,626,106
$29,595,435 $22,803,445 $13,964,475 $ 8,138,375
1,239,309 955,955 763,617 592,967
1,031,545,734 860,689,541 517,729,726 203,843,785
50.32% 47.30% 47.36% 58.50%
519,122,839 407,116,418 245,181,670 119,252,967
120,512,961 106,722,236 62,115,828 20,661,006
52,875,577 41,890,682 25,080,345 11,576,066
3.60^ 3.54?* 3.88?* 5.26?*
30.83?* 28.57?* 32.43?* 51.93?*
$15,463,760 $12,664,019 $ 8,760,411 $ 5,404,014
2,553 2,411 2,155 1,167
MONTREAL
OVER 27 YEARS OF SCHEDULED AIRLINE SERVICE
NORTHEAST
AIRLINES
LITHO IN U.S.A.