Northeast Airlines Annual Report 1962

NORTHEAST AIRLINES ANNUAL REPORT
TABLE OF CONTENTS
Page
Board of Directors and Officers 1
Northeast System Map 2
Letter from the President 3
Balance Sheet 6
Statement of Income and Expense 8
Statement of Deficit 8
Notes to Financial Statements 9
Opinion of Independent Public Accountants 10
Profit and Loss and Statistical Comparison
January through April - 1962 vs. 1963 11
Five-Year Statistical Record 12
BOARD OF DIRECTORS
ANNUAL REPORT
for year ending
December 31, 1962
JAMES W. AUSTIN
Chairman of the Board and President
DAVID A. STRETCH
Chairman of the Executive Committee
President, Atlas Corporation, New York
JACQUELINE COCHRAN
President, Jacqueline Cochran, Inc., New York
PAUL F. COLLINS
President, Fibremold, Inc., Woburn, Mass.
JAMES F. FITZGERALD
President, J. F. Fitzgerald Construction Co., Canton, Mass.
GEORGE E. GARDNER
Aviation Consultant, Lake Alfred, 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, Connecticut
OFFICERS
JAMES W. AUSTIN
Chairman of the Board and President
RICHARD E. FISHER
Vice President and Director -- Public Relations
THOMAS L. GRACE
Vice President -- Operations
HAMILTON HEARD (1)
Vice President -- Administration
REMBRANDT P. LANE, JR. (2)
Vice President -- Finance and Treasurer
EDMUND O. SCHROEDER
Vice President -- Technical Services
ALFRED S. WALKER
Vice President -- Ground Operations
HENRY E. FOLEY
Clerk
TRANSFER AGENT
Old Colony Trust Company
REGISTRAR
The First National Bank of Boston
AUDITORS
Lybrand, Ross Bros, and Montgomery
GENERAL COUNSEL
Foley, Hoag & Eliot
GENERAL OFFICES
Logan International Airport, Boston 28, Massachusetts
(1) Deceased January 28, 1963.
(2) Resigned effective May 31, 1963.
Page 1
MONTREAL
PRESQUE ISLE
BURLINGTON
/ERLEBANONWHITE RIVER
1ANGOR
BAR HARBOR
4 LAND
NEW YORK
PHILADELPHIA
BALTIMORE
WASHINGTON
JACKSONVILLE
IURG
CLEARWATER
D-FALL RIVER
NANTUCKET
4ARTHA S VINEYARD
Routes of
HORTHEAST
FORT LAUDERDALE
iMIAMl
Page 2
TO OUR SHAREHOLDERS:
OPERATING RESULTS
Operating revenues during 1962 were $51,390,561, a slight increase over
the $51,128,948 reported in 1961. Operating expenses were $57,746,284
compared with $59,374,079 in the previous year, a reduction of $1,627,795
or 2.7%. Provision for depreciation and amortization included in
operating expenses amounted to $4,249,958. Accordingly, the cash loss
from operations before interest expenses and other non-operating charges
was $2,105,765.
Northeast's aircraft flew 19,315,430 miles in revenue service consuming
86,829 total aircraft block-to-block hours. On the average, approximately
72 seats were available for sale on each mile flown. This is an aggregate
productive capacity of 1,381,954,000 available seat miles produced
during the year.
On the average, 38.1 passengers were carried on each mile flown, while
approximately 43.2 passengers were needed to cover operating expenses.
The percentage of capacity occupied (passenger load factor) was
53.23% compared with 50.23% in 1961.
FLORIDA SERVICE
In 1962 Northeast accounted for 22.8% of the total traffic flown over
its routes to Florida. This penetration level produced 449,218 Florida
passengers. In the markets Boston - Miami, Philadelphia - Miami, and
New York - Tampa, Northeast accounted for 37.2% of the total traffic
flown. A penetration of this magnitude in the major New York - Miami
market would have produced profitable operations for the entire Northeast
system. In the New York - Miami market, which accounts for approximately
55% of the total volume of traffic moving over the East Coast - Florida
route, Northeast's penetration was 18.6% and growing by the month.
Management believes that the Florida operation in its entirety generated
a profit in 1962 but not of sufficient magnitude to offset the losses
inherent in the Company's short haul services in New England and the
Middle Atlantic commuter markets. Future earnings are dependent
upon the Company's continued growth in the Florida market, and
more specifically on the New York - Miami segment.
Page 3
COMMUTER SERVICE
Your Company continued its well-established penetration of the high
density commuter markets between Boston, New York, Washington and
Philadelphia despite the debilitating effects of the air shuttle provided
by our chief competitor during 1962. In three of these markets,
Boston - New York, Boston - Washington, and Boston - Philadelphia,
Northeast showed an aggregate gain in passengers handled over the
previous year of 5.3% with a total volume in excess of 550,000 air
travelers carried. Nevertheless, your Company has lost commuter
passengers, particularly on the New York - Washington segment as a
result of excessive competitive service. In this market a virtually limitless
number of aircraft provide high frequency service at depressed fare levels.
Your management has consistently maintained that this service is
inherently uneconomic and has published equalizing fares only
because of competitive necessity.
NEW ENGLAND SERVICE
New England operations continued to sustain sizable losses due to the
low density, short haul nature of Northeast's route structure in this
region. During 1962 a total of 194,163 passengers was enplaned at
Northeast's twenty-seven New England cities (exclusive of Boston), a
decrease of 11% from 1961 and 27% from six years earlier.
The Initial Decision of a Civil Aeronautics Board Examiner has been
handed down in an investigation instituted to determine the needs of
various smaller New England communities for certificated air service.
The Examiner's Decision, which is substantially in accord with the
position taken by the New England Council and supported by Northeast,
would result in the transfer of service at eight of your Company's
low density New England stations to designated regional airports
already served by the Company; and in the permanent suspension, except
during the summer vacation season, of service at three other stations
presently being served. It is hoped that the Examiner's Decision will
be adopted by the Civil Aeronautics Board in the near future.
FLORIDA ROUTE CASE
A Civil Aeronautics Board decision in the all-important Florida Renewal
Case is expected during 1963. The growth of Northeast's Florida traffic
during the seven years of operation has been outstanding. From meager
beginnings of fewer than 90,000 Florida passengers carried during the
first year of Northeast's operations, traffic figures have climbed steadily,
with over 400,000 Florida passengers carried by Northeast during
1962, and forecasts for nearly one-half million passengers
to be carried during the current year.
Your management believes the record of Northeast's accomplishments
during this time justifies its being awarded a permanent certificate to
Florida. In the meantime, the Company continues to operate under
the inhibitions which the uncertainties of a temporary franchise
inevitably bring about.
Page 4
CONTROL CASE
On June 19, 1962 the Civil Aeronautics Board approved the acquisition,
from Atlas Corporation, of the controlling stock interest in Northeast
by Hughes Tool Company. The Board subsequently denied petitions
for reconsideration filed by two competitors. One of these competitors
later appealed the entire matter to the courts and at this writing
a decision has not yet been handed down.
Hughes Tool Company has agreed to "provide Northeast with funds to
support a program of advertising and sales promotion and to cover
Northeast's operating cash deficits." This commitment continues
unless and until Toolco concludes "that the rehabilitation of Northeast
is no longer practicable." In accordance with this undertaking, Toolco
made available to Northeast during 1962 the sum of $4,350,000 for
working capital support. It has alsd leased two Convair 880 aircraft to
the Company for use during the peak winter season affording a maximum
of eight jets for service in the Florida market.
FUTURE OUTLOOK
It seems appropriate to report briefly on the progress that has been
made in the first four months of 1963 compared with the same period
last year. Page eleven contains financial and statistical information
which we feel will provide an up-to-date evaluation of your
Company and show the results of our insistence on greater
efficiency and productivity.
After a slow start the current Florida season has been excellent.
Northeast's penetration of the important New York - Miami market
climbed from 15.5% in the first quarter of 1962 to 23.0% in the first
quarter of the current year. An increase of 11.3% in total Florida
passengers was recorded during the first quarter of 1963 over the same
period last year. Continued high participation levels on the long
haul routes should bring about substantial improvement in operating
results throughout the year.
Significant cost-cutting techniques have been instituted in 1963 and
a number of operational procedures have been changed in order to
deliver our product at the lowest possible cost while retaining the
highest possible standards of safety, dependability and service.
On behalf of the directors and management of Northeast Airlines,
I extend sincere thanks to you -- our stockholders, employees and
friends -- for your loyalty and understanding during the past year.
RESPECTFULLY SUBMITTED,
James W. Austin
CHAIRMAN OF THE BOARD
AND PRESIDENT
NORTHEAST AIRLINES, INC. BALANCE SHEET As at December 31, 1962
ASSETS LIABILITIES
CURRENT ASSETS:
Cash $ 373,582
Accounts receivable 4,472,954
Flight equipment expendable parts, at cost (note B) . 2,617,557
Prepaid insurance and other expenses ...... 177,939
Miscellaneous supplies, at average cost 407,430
TOTAL CURRENT ASSETS 8,049,462
It
Special deposits and other assets 185,299 |
Equipment and property, at cost:
Flight equipment and related spare parts (note B) . . 32,842,667
Ground property and equipment 4,946,271
37,788,938
Less allowances for depreciation, amortization
and aircraft maintenance 21,356,061
16,432,877
Jet flight equipment, ground equipment and
facilities under long-term leases (note C)
Deferred charges, less amortization:
Jet aircraft integration program 1,765,250
Route renewal, terminal development and other .... 1,051,860
$27,484,748
CURRENT LIABILITIES:
6% note payable to bank (guaranteed by Hughes Tool Company)
Debt instalments due within one year (note A) :
434% notes payable to banks
under credit agreement (note B)
Equipment trust certificates
Obligations for past due rentals of
jet flight equipment
Obligations for spare parts
6% trade obligations
Collections as agent
Trade accounts payable
Accrued compensation,
vacation pay and pension costs
Provision for sick leave (note H)
Unearned passenger revenue
CURRENT LIABILITIES (see below and note A) .
Debt due after one year (subject to accelerated payment -- note A) :
Equipment trust certificates, 5j4%-7%,
due 1964 to 1967 (note B) 5,284,760
Obligations for past due rentals of
jet flight equipment,
due 1964 to 1971 3,013,147
Instalment obligations for spare parts,
7%, due 1964 to 1968 863,433
6% trade obligations,
due 1964 10 1967 (note E) 5,416,583
Long-term lease commitments (note C)
Subordinated debt due Hughes Tool Company (note D) :
6/2
% notes payable due 1964 to 1967
5j4% notes payable
Other (non-interest bearing)
CAPITAL
Amounts paid in on common stock,
par value $1.00 per share:
Authorized -- 6,500,000 shares (notes D and F)
Issued and outstanding -- 1,783,688 shares ....
Deficit
The accompanying notes are an integral part of this balance sheet.
$ 4,000,000
714,664
1,763,083
392,760
207,729
2,714,887
1,967,566
2,540,073
2,163,725
1,405,412
1,116,695
18,986,594
14,577,923
9,500.000
16.251,745
1,014,639
11,085,223
(43,931,376)
$27,484,748
Page 6 Page 7
NORTHEAST AIRLINES, INC.
STATEMENT OF INCOME AND EXPENSE
For the Year Ended December 31, 1962
OPERATING REVENUES (note G):
Passengers $48,082,078
Express, freight and baggage 1,974,069
Air mail 698,709
Other 635,705
TOTAL OPERATING REVENUES 51,390,561
OPERATING EXPENSES :
Flying operations 18,603,048
Maintenance and repairs . . . 13,458,667
Aircraft and traffic servicing 9,421,654
Reservations, sales, advertising and publicity .... 6,403,136
Depreciation and amortization 4,249,958
Passenger service 3,773,663
General and administrative 1,836,158
TOTAL OPERATING EXPENSES (note H) . . . 57,746,284
OPERATING LOSS 6,355,723
NON-OPERATING CHARGES:
Interest expense (note D) 1,057,357
Other 827,335
NET LOSS FOR YEAR $ 8,240,415
STATEMENT OF DEFICIT
For the Year Ended December 31, 1962
Deficit at beginning of year $34,481,514
Provision for sick leave which relates to
prior periods (note H) 1,209,447
Net loss for year 8,240,415
Deficit at end of year $43,931,376
The accompanying notes are an integral part of these statements.
Page 8
NORTHEAST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS
A DEFAULTS ON DEBT AND LEASE
OBLIGATIONS :
In January, 1962, holders of the 4%%
notes payable, the equipment trust certi-
hcates, and tne instalment obligations tor
spare parts, and the lessors ol jet flight
equipment, agreed to defer unpaid prin
cipal, interest and lease instalments which
had become due between June 1, 1961
and January 31, 1962. By agreements
and arrangements made later in 1962
further relief was provided for payments
due on equipment trust certificates and
lease payments on jet flight equipment.
Due dates and defaults shown in the bal
ance sheet and notes are based on these
agreements and arrangements.
At December 31, 1962 the company was
in default on instalments due in 1962 of
$536,000 on the 4%% notes payable to
banks under credit agreement and of
$47,000 on obligations for spare parts.
The company is also in default under
provisions of certain of its notes payable
and lease agreements which relate to
maintenance of minimum amounts of
working capital and net worth. The com
pany has made some but not all of the
payments falling due between January 1,
1963 and April 30, 1963 on its equip
ment and trade obligations and its leases.
Because of these defaults the holders of
the equipment obligations and certain
trade obligations have the right to accel
erate the due dates of their debt and the
lessors of flight equipment have the right
to terminate their leases. As of April 30,
1963 no such action has been taken, and
the company is negotiating for extensions
of time to pay past due amounts.
B 4%% NOTES PAYABLE AND EQUIP
MENT TRUST CERTIFICATES:
The 4%% notes payable to banks under
credit agreement are secured by a mort
gage on company-owned flight equipment
and related spare parts, subject to prior
rights of the trustee under equipment
trust certificates in Vickers Viscount air
craft and Rolls-Royce engines and to
prior rights of the vendor under instal
ment obligations for spare parts.
Equipment trust certificates are secured
by title to Vickers Viscount aircraft and
Rolls-Royce engines and by a second
mortgage on certain of the company's
other flight equipment and related spare
parts.
C LONG-TERM LEASE COMMITMENTS:
In 1960, the company leased six Convair
jet aircraft and thirty-four engines (in
cluding ten spares) for a period of seven
years from dates of delivery in December,
i960 and January, 1961. Rental pay
ments were based on the value ($27,167,-
470) of the equipment as established by
the leases, plus 7% interest.
In 1962 the engine lease was amended to
extend the lease period to December 31,
1970, and options to terminate the lease,
purchase the equipment and renew the
lease were eliminated.
In 1962, by informal arrangements, the
annual rental payments under the air
craft lease were recalculated on the basis
of an extended lease term and a payment
schedule extended to December 31, 1971
without an option to terminate the lease.
Under the new payment schedules, air
craft and engine rentals will aggregate
$3,714,000 in each of the years 1963
through 1970 and $2,824,000 in 1971.
Costs of taxes, insurance, maintenance
and repairs are to be borne by the com
pany.
Annual rentals under long-term leases for
hangar, terminal and reservations facili
ties will approximate $1,500,000 in 1963.
In addition to the annual rentals, certain
of the leases obligate the company to pay
maintenance and operating costs.
D SUBORDINATED DEBT:
The debt due Hughes Tool Company is
subject to certain prior rights of the 4%%
notes payable, the equipment trust certi
ficates and the 6% trade notes payable.
Under certain circumstances the princi
pal amount of the 6^% and 5J
% notes
may be satisfied or discharged by issue or
sale of common stock of Northeast Air
lines, Inc.
Hughes Tool Company has agreed to
waive all interest on its notes for the
years 1962 and 1963. Atlas Corporation,
the prior holder of the 5>% notes, had
previously agreed to waive interest on
these notes for the year 1962.
E TRADE OBLIGATIONS :
Certain suppliers and other trade credi
tors have agreed to defer payment of
accounts payable to them as at June 30,
1962 principally on the basis of 36 mon
thly payments commencing January 31.
1963, with 6% interest.
F EMPLOYEE STOCK OPTION PLAN:
At December 31, 1962, 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%
Page 9
of the fair market value of the stock on
the dates granted. At December 31, 1962
options to purchase 26,000 shares were
outstanding, of which 21,000 shares were
exercisable at prices aggregating $89,250,
and 5,000 shares will become exercisable
in 1963 at prices aggregating $21,250.
G FLORIDA ROUTE RENEWAL :
The company has applied to the Civil
Aeronautics Board for permanent author
ization to operate its route south of New
York City and, accordingly, under the
law, pending final disposition of the ap
plication, is permitted to serve the route
beyond the November 27, 1961 expiry of
its original five-year authorization. In
1962 the route generated a major portion
of the company's revenue.
H CHANGES IN ACCOUNTING:
In 1962 the company changed its method
of accounting for costs of major over
hauls of leased engines from the reserve
method to an actual expenditure basis.
The effect of the change was to reduce
maintenance costs and net loss for the
year by approximately $1,000,000.
In 1961 the company provided for costs
of sick leave on a cash basis and in 1962
adopted the accrual basis with a resulting
increase in costs and net loss for the year
of approximately $200,000 and an in
crease in deficit applicable to prior years
of approximately $1,200,000.
The net effect of the two changes was to
reduce the net loss for the year by ap
proximately $800,000.
LYBRAND, ROSS BROS. EL MONTGOMERY
ACCOUNTANTS AND AUDITORS
COOPERS C. LYBRAND
Northeast Airlines, Inc.
Boston, Massachusetts
We have examined the balance sheet of Northeast
Airlines, Inc. as at December 31, 1962 and the related
statements of income and expense and of 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 circum
stances.
In our opinion, the accompanying statements
present fairly the financial position of Northeast Airlines,
Inc. at December 31, 1962 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, except for the changes, in which we
concur, in accounting methods described in note H to the
financial statements.
Boston, Massachusetts
April 30, 1963
Page 10
NORTHEAST AIRLINESf
INC.
PROFIT AND LOSS AND STATISTICAL COMPARISON
Period: January 1 through April 30, 1962 vs 1963*
PROFIT AND Loss 1963 1962
REVENUE:
Passenger . . . $18,697,154 $17,575,098
Other . . . 1,401,784 1,160,656
TOTAL REVENUE . . . . . . $20,098,938 $18,735,754
EXPENSE:
Direct Operating Expense $10,700,614 $10,437,378
Indirect Operating Expense .... 9,236,713 9,258,000
TOTAL OPERATING EXPENSE . . $19,937,327 $19,695,378
Net Operating Profit or (Loss) $ 161,611 ($ 959,624)
Non-Operating Charges 465,228 309,803
Net Profit or (Loss) ($ 303,617) ($ 1,269,427)
STATISTICAL
Scheduled Plane Miles 7,078,943 7,717,061
Performance Factor 93.57% 91.64%
Revenue Plane Miles 6,623,882 7,071,776
Available Seat Miles (000) 509,500 516,620
Passenger Load Factor 58.15% 52.57%
Revenue Passenger Miles (000) 296,271 271,563
Convair 880 Passenger Load Factor .... 64.02% 56.65%
Viscount Passenger Load Factor 61.23% 54.85%
*The above statement is unaudited. The source of these data is the Form 41
Reports which are filed with the Civil Aeronautics Board, except
April, 1963 which is estimated.
Page 11
FIVE YEAR STATISTICAL RECORD
19 6 2 19 6 1 19 6 0 19 5 9 195 8
Revenue Miles Flown 19,315,430 21,273,364 18,405,778 18,634,712 15,079,659
Passenger Revenue $48,082,078 $48,012,195 $35,366,220 $29,595,435 $22,803,445
Other Revenue 3,308,483 3,116,753 2,564,701 1,854,799 3,935,151*
Total Revenue $51,390,561 $51,128,948 $37,930,921 $31,450,234 $26,738,596
Revenue Passengers Carried 1,551,059 1,644,581 1,437,723 1,239,309 955,955
Available Seat Miles 1,381,954,000 1,495,026,000 1,096,762,501 1,031,545,734 860,689,541
Average Passengers per Mile 38.08 35.30 30.73 27.88 27.05
Passenger Load Factor 53.23% 50.23% 51.52% 50.32% 47.30%
Revenue Passenger Miles 735,561,000 750,955,000 565,030,520 519,122,839 407,116,418
Available Ton Miles 172,088,705 186,100,260 130,988,374 128,251,103 106,722,236
Revenue Ton Miles 76,716,209 77,921,116 58,908,520 52,880,795 41,890,682
Operating cost per Available Seat Mile 4.18* 3.99* 4.01* 3.60* 3.54*
Operating cost per Available Ton Mile 33.55* 31.90* 33.56* 30.83* 28.57*
Wages and Salaries $20,898,641 $21,297,576 $17,552,745 $15,463,760 $12,664,019
Number of Personnel 2,700 2,918 2,612 2,553 2,411
^Includes $2,386,257 of Federal Subsidy.
Page 12
NORTHEAST AIRLINES
Logan International Airport Boston, Massachusetts