NORTHEAST AIRLINES ANNUAL REPORT
TABLE OF CONTENTS
Page
Board of Directors and Officers 1
Letter from the Chairman of the Board 2
Balance Sheet 6
Statement of Income and Expense and Deficit 8
Notes to Financial Statements 9
Opinion of Independent Public Accountants 10
Northeast System Map 11
The First National Bank of Boston Logan International Airport, Boston 28, Mass.
AUDITORS
Lybrand, Ross Bros, and Montgomery
BOARD OF DIRECTORS
ANNUAL REPORT
for year ending
December 31, 1963
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.
CHESTER C. DAVIS
Counsel, Hughes Tool Company
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
Vice President and Treasurer, Boston Edison Company
EUGENE L. VIDAL
Gene Vidal Designs and Processes, Avon, Ct.
OFFICERS
JAMES W. AUSTIN
Chairman of the Board and President
EDMUND O. SCHROEDER
Executive Vice President -- Operations
ARTHUR A. BRENNAN
Vice President -- Personnel
JOSEPH W. CANNON
Treasurer
F. M. COATES
Vice President -- Finance and Administration
RICHARD E. FISHER (1)
Vice President and Director -- Public Relations
THOMAS L. GRACE (1)
Vice President -- Operations
HAMILTON HEARD (2)
Vice President -- Administration
REMBRANDT P. LANE, JR. (1)
Vice President -- Finance and Treasurer
WHEATON W. MIES
Vice President -- Technical Services
M. WILLSON OFFUTT, III
Vice President -- Traffic and Sales
ALFRED S. WALKER
Vice President -- Ground Operations
H. F. ZIMMERMAN
Vice President -- Controller
HENRY E. FOLEY
Clerk
(1) Resigned (2) Deceased
Page 1
TO OUR SHAREHOLDERS:
The May 8, 1964 decision of the United State? Circuit Court of Appeals
setting aside the actions of the Civil Aeronautics Board refusing to
renew Northeast's authorization south of New York City has been most
encouraging, after the difficult setbacks suffered during 1963. The Court
found "vital flaws in the Board's decision" and commented adversely
on each of the factors which the majority of the Board had mentioned
in its denial of our Florida route renewal. The Court has directed
the CAB to take further proceedings not inconsistent with the Court's
opinion, and the CAB has stated that it will not petition for rehearing.
We have, in the light of the Court's decision, requested the CAB to make
Northeast's Florida authorization permanent on the basis of the existing
record or, at the least, to reopen the record before the CAB and to
reconsider its decision on the basis of current evidence.
Your management is convinced more than ever that the East Coast-Florida
route requires three air carriers and that Northeast's certification over
this route should be made permanent. The tremendous response in
support of our position which has arisen from every sector -- from our
passengers, employees, stockholders, suppliers, the communities we serve,
public officials and the public generally -- has been most enheartening.
Northeast is entitled to continue to operate over its route extension south of
New York pending final decision on its application, and we look
forward with confidence to a successful outcome.
Notwithstanding the difficult handicap of operating over the major
portion of the Company's', route system without a permanent certification --
a handicap which no other airline trunk carrier has ever been compelled
to assume -- Northeast began 1963 optimistically. During each of the
first four months of 1963, Northeast's operating revenues were more
than 5% higher than those of the corresponding month in 1962, resulting
in an operating profit in excess of $150,000 for the four months ended
April 30, 1963, which was a more than $1,000,000 improvement over the
$960,000 loss for the corresponding period in 1962. Even more significant,
however, was Northeast's increasing participation in the Florida traffic.
During this period, as compared with the same four months of 1962,
Northeast increased its share of the Boston-Miami traffic from 50%
to more than 61%, increased its share of the Philadelphia-Miami traffic
from less than 25% to over 39%, and increased its participation in the total
East Coast-Florida market from less than 17% to more than 23%.
Unfortunately, the continued high participation in the growing long-haul
Florida market indicated by the Company's actual experience in the first
four months of 1963 failed to materialize during the balance of the year
which was marked by a series of nearly disastrous blows -- including
the unfavorable report of the CAB Examiner in the Florida route
proceedings in April, the demands for repossession of all of our Convair 880
jets and our Viscount turbo-jet fleet in May and June and the return of
such equipment during the succeeding months, the public announcement
of the vote of the majority of the CAB against continuing our Florida
certification in July, and the formal filing of the adverse decision in
August, each such event adding to the unfavorable publicity making it
nigh impossible for the Company to maintain its rightful position in
the market.
The Company was forced to curtail operations, particularly during the
latter months of the year, resulting in a total of approximately 1,280,000
available seat miles flown during the year and an average passenger load
factor of slightly less than 50%, as compared with approximately 1,382,000
available seat miles flown and a passenger load factor in excess of 53%
in 1962. The marked deterioration in Northeast's position during the latter
half of the year when the potential loss of its Florida authorization and
the repossession of the bulk of its aircraft fleet were being widely
publicized is demonstrated by the drop in its average passenger load factor
from approximately 56% during the first six months (a 5% improvement
over 1962) to approximately 43% for the balance of the year. In fact,
during the months of February and March, Northeast achieved the best
system load factor of all the nation's airlines. Northeast carried
approximately 350,000 Florida passengers, representing more than one-sixth
of the entire East Coast-Florida traffic. Although this was a decrease
from 1962, which was to be expected under the circumstances, we are
convinced that the traveling public wants and uses our service and that,
given a fair opportunity, Northeast can and will continue to serve a
public need in this market.
Total operating revenues for the year, excluding Federal subsidy, were
somewhat less than $43,000,000, or more than $8,000,000 less than
1962's record high of nearly $51,400,000, and the small but encouraging
operating profit for the first third of the year became an operating loss
of $8,642,736 at the end of the year.
In August 1963, Northeast petitioned the CAB for mail pay subsidy
payments based upon the historically unprofitable operation in New
England, and an order to this effect was adopted shortly thereafter, effective
from and after September 13, 1963. Northeast received the sum of
$987,528 as mail pay subsidy during 1963, but the full benefit of the
subsidy on an annual basis, which would be approximately $3,800,000,
has not yet been realized.
As a consequence of the CAB's investigation of the needs of various
smaller New England communities for scheduled certificated air service,
Northeast has been permitted to eliminate, or transfer to regional airports,
Page 3
its service at five low traffic density points in New England and to limit
service at two other such points to the summer vacation period. Northeast
and the New England Council have supported the CAB Examiner's
recommendations, pending before the full Board, which would, in the
public interest, permit similar actions at certain other stations.
During April, 1963, Northeast led the entire airline industry in its
operational performance. Later in the year, one of our aircraft mechanics
won the Federal Aviation Agency's Aviation Mechanic Safety Award,
becoming one of only seven men throughout the country to be so honored.
As part of our cost control programs, we centralized at Boston numerous
reservations facilities, enabling the Company to handle telephone reservations
from twenty-three cities, as far south as Washington, D. C. and as far north
as Portland, Maine. This new system eliminated the need for separate
reservations facilities at each of these points and at the same time has
resulted in twenty-four hours a day, seven days a week, coverage being
available to the public for the first time in all of these locations. The
improved service is at no additional cost to the public, and at the same
time produces substantial savings to the Company. We have also put into
effect World's Fair and other promotional fares and attractive schedules
which we believe will stimulate traffic.
Total operating expenses for the year were $52,557,540, nearly 10%
below 1962, due in part to the forced curtailment of the Company's
operations and in part to a close control of costs. In addition, your
management elected to charge as special expenses during 1963 certain
additional items aggregating $5,248,370, including certain expenses and
estimated losses incident to the redelivered jet and Viscount aircraft,
various pre-1963 deferred charges and a write-down of the Company's
piston aircraft in line with current market values.
Northeast presently owns and operates ten seventy-six passenger Douglas
DC-6B aircraft and six twenty-four passenger Douglas DC-3 aircraft.
It also leases and operates four ninety-nine passenger Convair 880
jet aircraft and five additional Douglas DC-6B aircraft and, from time
to time during the peak Florida season, has leased additional Convair 880
and Boeing 707 jet aircraft from Trans World Airlines, Inc. Your
management is presently reviewing the economic and operational
characteristics of various types of aircraft for use on the Company's
New England and Florida routes.
This report would not be complete if we did not acknowledge the
extensive assistance and continued support of our majority stockholder,
Hughes Tool Company. In December, 1962, Hughes Tool Company
leased two Convair 880 jet aircraft to Northeast for use during the peak
winter season in the Florida market. This lease was later extended and
increased to four aircraft when Northeast's other jets were required to be
returned to the original lessors in the summer of 1963. The rental of the
Tool Company aircraft has been fixed at amounts equal to or less than
the rentals previously paid by Northeast for the jet equipment so returned,
but pending CAB approval of the leasing arrangements with the Tool
Company, such rentals have been accrued but not paid by Northeast.
In July, 1963, Hughes Tool Company expressed its willingness to cancel
and discharge notes of Northeast in the principal amount of $16,251,745
Page 4
which evidenced cash loans made to Northeast by Atlas Corporation and
which had been acquired from Atlas by the Tool Company. These notes
were, in fact, cancelled and discharged early in January, 1964. During
1963, Hughes Tool Company also stated that it was willing to exchange
notes of Northeast in the principal amount of $9,500,000, which evidenced
cash loans made to Northeast by the Tool Company, for shares of
Northeast common stock at the rate of $3,625 per share. An application
for CAB approval of such exchange has been filed and is pending before
the Board. During the year, Northeast's bank loan, guaranteed by
Hughes Tool Company, was increased by $1,000,000 to $5,000,000, and
this loan has since been paid by the Tool Company. In addition, Hughes
Tool Company made available to Northeast during 1963 sums aggregating
approximately $4,000,000 for working capital support. At the Company's
stockkholders' meeting in November, representatives of the Hughes Tool
Company were elected to the Northeast Board of Directors, and a CAB
Order of Approval has been adopted under the Federal Aviation Act.
On behalf of the Company, I extend our sincere thanks to the Hughes
Tool Company for its support and encouragement.
Many obstacles have been placed in our path with the obvious intention
of eliminating Northeast as an effective trunk carrier. We do not consider
this report, however, to be the rostrum from which to charge those
responsible for these attempts or for their tactics. Suffice it to say, we are
confident that we shall ultimately prevail because we are convinced that
the public interest requires Northeast's survival on our routes south of
New York. Our continually improving operations prior to the Board's
action in 1963 demonstrate that we can succeed, and the widespread public
support of our cause assures that we will. On behalf of your management,
I wish to express our sincere appreciation to you, our shareholders, as
well as to our employees and many other friends, for your support and
loyalty. I sincerely hope that you will patronize Northeast's services
whenever and wherever possible and that you will urge your friends
to do so. You will be welcome on Northeast Airlines.
RESPECTFULLY SUBMITTED,
James W. Austin
CHAIRMAN OF THE BOARD
AND PRESIDENT
Page 5
NORTHEAST AIRLINES, INC- BALANCE SHEET /Is at December 31, 1963
ASSETS LIABILITIES
CURRENT ASSETS:
Cash $ 823,441
Accounts receivable 3,744,616
Flight equipment expendable parts,
substantially at cost (note D) 2,223,423
Prepaid expenses 271,486
Miscellaneous supplies, at cost 359,735
CURRENT LIABILITIES:
Debt instalments, including past due amounts:
4 44% notes payable to banks
under credit agreement (note D)
6% trade obligations (note C)
Collections as agent
Trade accounts payable
Accrued compensation, vacation pay and pension costs
Provision for sick leave '
Unearned passenger revenue
Provision for estimated liabilities:
jet flight equipment leases and equipment trust agreement
(note A)
TOTAL CURRENT ASSETS 7,422,701
Property and equipment, at cost:
Flight equipment and related spare
parts (note D) $19,789,341
Ground property and equipment . . . . 5,191,789
Nonoperating property and equipment 777,804
25,758,934
Less allowances for depreciation,
amortization and maintenance ... 19,697,784 6,061,150
Other assets 284,177
$13,768,028
Current liabilities (noteC),
excluding amounts due Hughes Tool Company
6% trade obligations, due principally in 1965 (note C)
Debt due Hughes Tool Company (note B) :
Instalment obligations for spare parts,
$422,312 due currently, balance due 1965 to 1968 .
Accrued jet flight equipment rentals, currently due . .
6% demand notes
6/2% notes, due 1964 to 1967
Other (noninterest bearing)
CAPITAL
Common stock, par value $1.00 per share:
Authorized -- 6,500,000 shares (notes B and F)
Issued and outstanding -- 1,783,688 shares
Paid-in surplus (note I)
Deficit, per accompanying statement (note A)
The accompanying notes are an integral part of this balance sheet.
$ 358,774
4,599,531
1,523,315
3,035,571
2,410,716
1,286,546
912,629
7,812,805
21,939,887
2,426,508
1,113,840
2,057,198
7,429,394
9,500,000
1,196,639
1,783,688
25,553,280
(59,232,406)
$13,768,028
Page 6 Page 7
NORTHEAST AIRLINES
, INC.
STATEMENT OF INCOME AND EXPENSE AND DEFICIT
For the Year Ended December 31, 1963
OPERATING REVENUES (note G):
Passengers $39,888,763
Express, freight and baggage 1,623,775
Air mail 423,041
Public service (subsidy) [effective September 13, 1963] 987,528
Other, net 991,697
TOTAL OPERATING REVENUES 43,914,804
OPERATING EXPENSES :
Flying operations 16,558,190
Maintenance and repairs 12,240,735
Aircraft and traffic servicing 9,043,366
Reservations, sales, advertising and publicity 6,127,257
Depreciation and amortization 3,847,889
Passenger service 2,962,300
General and administrative 1,777,803
TOTAL OPERATING EXPENSES 52,557,540
OPERATING LOSS 8,642,736
NONOPERATING CHARGES :
Interest expense (note B) 1,301,959
Other, net 107,965
NET LOSS BEFORE EXTRAORDINARY CHARGES 10,052,660
EXTRAORDINARY CHARGES (note H) 5,248,370
NET LOSS FOR THE YEAR 15,301,030
DEFICIT AT BEGINNING OF YEAR 43,931,376
DEFICIT AT END OF YEAR (note A) $59,232,406
The accompanying notes are an integral part of this statement.
Page 8
NORTHEAST AIRLINES, INC. --
NOTES TO FINANCIAL STATEMENTS
A JET FLIGHT EQUIPMENT LEASES AND
EQUIPMENT TRUST AGREEMENT:
In 1963 the leases of six Convair jet
aircraft and thirty-four related engines
were terminated due to defaults in rental
payments, and the equipment was re
turned to the lessors.
Also in 1963, Vickers Viscount aircraft
and related Rolls-Royce engines which
had been acquired in 1958 and 1959
were repossessed by the trustee under a
related equipment trust agreement due
to defaults in required payments, and
proceeds of resale of the equipment has
been applied to reduce the indebtedness.
The provision for liabilities shown in the
accompanying balance sheet under the
foregoing flight equipment leases and
equipment trust agreement and the re
lated loss included in extraordinary
charges in the accompanying statement
of income and expense and deficit (note
H) are estimated amounts. The final
liability with respect to these items is
subject to the outcome of negotiations
presently being conducted with the lessors
and the trustee.
B DEBT DUE HUGHES TOOL COMPANY:
The 6% and 6/2% notes and certain of
the noninterest bearing debt due Hughes
Tool Company (majority stockholder of
Northeast Airlines, Inc.) are subject to
certain prior rights of the 4 94% notes
payable, the 6% trade notes payable and
of the trustee under the equipment trust
agreement.
Under certain conditions, the principal
amount of the 6/2% notes may be ex
changed for common stock of Northeast
Airlines, Inc. at the rate of one share for
each $3,625 of such indebtedness. North
east Airlines, Inc. has applied to the Civil
Aeronautics Board for permission to make
such exchange.
Hughes Tool Company waived all interest
for 1963 on the 6/2% notes and on the
5/2% notes of $16,251,745 which were
canceled in January, 1964. The cancella
tion of the 5/2% notes has been reflected
in the accompanying balance sheet as at
December 31, 1963 as paid-in surplus.
C TRADE OBLIGATIONS:
In 1962, certain suppliers and trade
creditors agreed to defer payment of ac
counts payable to them as at June 30,
1962, principally on the basis of thirty-
six monthly payments commencing Janu
ary 31, 1963, with 6% interest. At De
cember 31, 1963, the company was in
default on monthly payments aggregating
$2,222,500 for principal and interest due
in 1963 on certain of these trade obliga
tions; as a result, these holders have the
right to accelerate the due dates of their
obligations.
D MORTGAGES ON FLIGHT EQUIPMENT
AND SPARE PARTS:
The 494% notes payable to banks under
credit agreement (under which payments
are in default) are secured by a mortgage
on company-owned flight equipment and
related spare parts.
The trustee under the equipment trust
agreement (see note A) holds a second
mortgage on certain of the company's
flight equipment and spare parts.
E LONG-TERM LEASE COMMITMENTS:
Annual rentals under long-term leases for
hangar, terminal and reservations facili
ties will approximate $1,300,000 in 1964.
In addition to the annual rentals, certain
of the leases obligate the company to pay
maintenance and operating costs.
F EMPLOYEE STOCK OPTION PLAN:
At December 31, 1963, 100,000 shares of
authorized and unissued common stock
were reserved under the company's stock
option plan for key employees. Options
have been granted at prices not less than
85% of the fair market value of the stock
on the dates granted. At December 31,
1963 options to purchase 19,000 shares
were outstanding which were exercisable
at prices aggregating $80,750.
G FLORIDA ROUTE RENEWAL:
In October, 1963 the Civil Aeronautics
Board denied the company's application
for permanent authorization to operate its
route south of New York City and or
dered the company to terminate this por
tion of its operations. The company ap
pealed this decision, and on May 8, 1964
the Circuit Court of Appeals in Boston
set aside the Board's order and, while
retaining jurisdiction, remanded the case
to the Civil Aeronautics Board for further
proceedings. The company continues to
serve the route pending final determina
tion of the matter.
Page 9
H -- EXTRAORDINARY CHARGES :
Extraordinary charges shown in the ac
companying statement of income and ex
pense and deficit consist of the following
items:
I -- PAID-IN SURPLUS :
Paid-in surplus as at December 31, 1963
consists of $9,301,535 excess of amount
paid in on common stock prior to 1963
over related par value, and $16,251,745
arising from the cancellation by Hughes
Tool Company in January, 1964 of 5/2%
notes payable.
Estimated losses from ter
mination of jet flight equip
ment leases and repossession
of flight equipment under
trust agreement, including
writeoff of unamortized bal
ances of training and pre
operating costs (see note A) $3,200,866
Writeoff of certain other
deferred charges incurred
prior to 1963 407,996
Adjustment of estimated
residual value of piston
flight equipment 1,639,508
$5,248,370
LYBRAND, ROSS BROS. MONTGOMERY
ACCOUNTANTS AND AUDITORS
COOPERS tx LYBRAND
IN AREAS OF THE WORLD
Northeast Airlines, Inc.
Boston, Massachusetts
We have examined the balance sheet of Northeast
Airlines, Inc. as at December 31, 1963 and the related statement
of income and expense 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, subject to the final determination
of certain liabilities described in note A to the financial
statements, the accompanying statements present fairly the
financial position of Northeast Airlines, Inc. at December 31,
1963 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
May 29, 1964
&4L
Page 10
MONTREAL
PRESQUE ISLE-HOULTON
BURLINGTON
MONTPELIER-BARRE
HANOVER-LEBANON-WHITE RIVER JC'
KEENE I
WORCESTER
SPRING FI ELO-HARTFO
NEW YORK
PHILADELPHIA
BALTIMORE
WASHINGTON
JACKSONVILLE
ST. PETERSBURG
-CLEARWATER
BANGOR
BAR HARBOR
AUOUSTA-WATERVILLE
ROCKLAND
PORTLAND
MANCHESTER-CONCORD
NEW BEDFORO-FALL RIVER
HYANNIS
NANTUCKET
MARTHA'S VINEYARD
Routes of
NORTHEAST
FORT LAUDERDALE
MIAMI
Page 11
NORTHEAST AIRLINES
Logan International Airport Boston, Massachusetts