Northeast Airlines Annual Report 1964

NORTHEAST AIRLINES
1964 ANNUAL REPORT
TABLE OF CONTENTS
Page
Northeast System Map 1
Board of Directors and Officers 2
Letter from President 3
Balance Sheet as at December 31, 1964 8
Statement of Income and Expense for the
Year Ended December 31, 1964 10
Notes to Financial Statements 11
Opinion of Independent Public Accountants 14
Five-Year Statistical Record 15
Comparative Balance Sheets
as at June 30, 1965 (Unaudited) 16
MONTREAL
PRESQUE ISLE-HOULTON
BURLINGTON
MONTPELIER-BARRE
HANOVER-LEBANON-WHITE RIVER JCT
KEENE 1
WORCESTER
SPRINGFIELD-HARTFORC
NEW YORK
PHILADELPHIA
BALTIMORE
WASHINGTON
JACKSONVILLE
ST. PETERSBURG
-CLEARWATER
BANGOR
BAR HARBOR
AUGUST A-W ATE R VILLE
ROCKLAND
PORTLAND
MANCH ESTER-CONCORD
NEW BEDFORD-FALL RIVER
HYANNIS
NANTUCKET
MARTHA'S VINEYARD
Routes of
HORTHEAST
FORT LAUDERDALE
MIAMI
Page 1
ANNUAL REPORT
for year ending
December 31,1964
BOARD OF DIRECTORS
James W. Austin
Chairman of the Board and President
David A. Stretch
Chairman of the Executive Committee
Jacqueline Cochran
Paul F. Collins
James F. Fitzgerald
George E. Gardner
Oswald L. Johnston*
Albert C. McMenimen
Eugene L. Vidal
OFFICERS
James W. Austin
Chairman of the Board and President
Edmund 0. Schroeder
Executive Vice President - Operations
Edwin W. Breed
Vice President - Traffic and Sales
Arthur A. Brennan
Vice President - Personnel
Joseph W. Cannon
Treasurer
F. M. Coates
Vice President - Finance and Administration
Roger J. Hoy
Vice President and Director-Operational Standards
Wheaton W. Mies
Vice President - Technical Services
William J. Murphy
Vice President - Customer Services
Bruce Stedman
Vice President - Planning and Budgets
Alfred S. Walker*
Vice President - Ground Operations
Henry E. Foley
Clerk *Resigned
Page 2
TO OUR SHAREHOLDERS:
The events of the past year will be of great interest to you.
There have been a great number of changes, featured by the
acquisition of majority control in Northeast Airlines by Storer
Broadcasting Company. Although the Storer purchase occurred
after the close of 1964, its deep significance to your company
receives special attention in this Report. The following is a
status report covering the year 1964:
I. OPERATING RESULTS
The year 1964 was a period of substantial progress for Northeast
Airlines, highlighted by the reduction of the net operating loss
to $987,000 compared with a loss of $8,643,000 in 1963. Total
operating revenues were $42,704,000, a slight decrease from the
$43,915,000 reported in 1963. Total operating expenses were
$43,691,000,a 20% improvement from the 1963 figure of $52,558,000.
In 1964, 14,290,000 revenue plane miles were flown and
I, 123,000,000 seat miles were made available for sale. The
system load factor (percentage of seats sold to seats offered)
was 52.6%, an increase of 2.7 points over the year 1963.
Northeast made available an average of 78 seats per trip, up from
76 in 1963. Each flight carried an average of forty-one
passengers, an increase of three passengers per flight over the
previous year.
The system jet operation declined slightly as a result of reducing
the number of aircraft from six to four and the elimination of
service to Tampa and Jacksonville. However, the jet performance
factor (per cent of miles flown to miles scheduled) improved from
92.4% in 1963 to 94.3% in 1964, and the jet load factor increased
from 51.7% to 55.1%. Northeast improved its jet utilization by
13.4% with the production of nine hours and eight minutes per
aircraft per day during 1964, an increase of one hour and five
minutes over 1963.
II. FUTURE OUTLOOK
It is our opinion that 1965 will be one of the best years in the
history of commercial aviation. Northeast is predicting marked
increases for 1965 and our experience so far tends to confirm
this opinion. During the first quarter of 1965, Northeast
attained an increase in system revenue passenger miles over the
same period in 1964. During 1964, the major segments of the East
Coast - Florida market increased by approximately 12% over 1963.
In 1965, all indications are that we can expect these markets to
continue their upward trend.
Page 3
Northeast is presently evaluating new equipment to determine the
most suitable aircraft to serve our long-haul Florida routes.
Also, under consideration are various short-haul jets and turbo
props for use on our New England and Commuter Routes.
Northeast feels that continued efforts to reduce expenses,coupled
with the present trend in market growth, will allow the Company
to make significant progress in 1965.
III. FLORIDA SERVICE
Many advances were made in 1964 despite the October 1963 decision
of the Civil Aeronautics Board refusing to renew Northeast's
operating rights .
For the 1964-1965 winter season, we again negotiated with Trans
World Airlines for the lease of jet aircraft. We were successful
in obtaining the use of two Convair 880 jet aircraft daily. During
the 1963-1964 season, we obtained one large Boeing 707 on weekends
and one Convair 880 four days a week. The four jet airplanes
leased from Hughes Tool Company, plus the two from Trans World,
permitted Northeast to offer a variety of schedules throughout
the Florida winter season.
The uncertainty of the future and resultant unfavorable publicity
associated with the Civil Aeronautics Board decision had an
adverse effect upon traffic, particularly during the first six
months of the year; however, passenger totals increased to
1,404,487 in 1964 compared with 1,358,801 in 1963.
The Florida market began to show signs of more rapid growth than
had been experienced during past years. This growth, combined
with intensive sales and advertising, programs, resulted in a
strong last quarter. December 1964 registered increases over
December 1963 with Northeast traffic between Boston and Miami/
Fort Lauderdale up 35.8% and New York to Miami/Fort Lauderdale
up 19.4%.
In order to stimulate the Florida markets and to continue
competition with other resort areas, Northeast proposed to the
Civil Aeronautics Board that it be allowed to reduce fares on
low traffic generating days of the week for non-affinity groups
of twenty-five persons or more. These rates were approved and an
effective advertising policy produced a much higher percentage of
this type of business for Northeast than for its competitors.
The success of the off-season group rate convinced Northeast that
the basic concept was sound and, with modifications to cope with
seasonal changes in demand, we continued the fare throughout the
winter of 1964--1965. Similar fares will be in effect during the
summer of 1965.
Charter flights, many of which were performed for large nationally-
known corporation, contributed in excess of one quarter million
dollars in revenue during 1964.
Page 4
IV. CARGO
Cargo volume for 1964 was up 3.5% with first class mail and air
freight showing the greatest gains. With less available cargo
capacity than in 1963, 1964 recorded a $1,731,697 revenue return,
the highest in the Company's history.
V. COMMUTER MARKETS
The superiority of Northeast's high frequency service in the
commuter markets of Boston to New York, Boston to Philadelphia,
and Boston to Washington continued to attract customers in ever-
increasing numbers.
Boston to New York grew 29.1% over the previous year. Some
stimulation in this market came from the New York World's Fair
and will continue into 1965.
In the Boston to Washington market. Northeast carried 48.4% of
all traffic in spite of stepped-up service by our two chief
competitors. December 1964 showed extraordinary gains in these
markets with Boston to New York up 66.4%, Boston to Washington up
19.8%, and Boston to Philadelphia up 25%, all over December 1963.
VI. NEW ENGLAND MARKETS
Improved load factors, consolidation of some service into newly
designated regional airports, plus subsidy, helped to reduce
New England losses .
After a Civil Aeronautics Board investigation of New England air
service. Northeast Airlines was directed to consolidate its
service at Houlton, Maine, with a regional airport at Presque Isle.
Short distances between cities resulted in the consolidation of
Waterville, Maine, with Augusta, and Concord, New Hampshire with'
Manchester. The Augusta consolidation was followed by the
announcement of plans for the improvement of facilities at the
Augusta Airport. Service at Pittsfield and Fitchburg,Massachusetts,
was terminated under the Civil Aeronautics Board's "Use it or
Lose it" program.
The summer of 1964 was one of the best in Northeast's thirty-one
year history. Northeast can look forward to an even more
successful summer in 1965 with an expanded schedule to most
New England communities.
VII. FLORIDA ROUTE CASE
In consequence of the events of the past year, Northeast Airlines
is about to begin anew the prosecution of its application before
the Civil Aeronautics Board for permanent operating authority
south of New York.
On May 8, 1964, the United States Court of Appeals for the First
Circuit remanded the proceedings to the CAB. The Board handed
down a new opinion on December 1, 1964, which, as did the Board's
two prior decisions, denied Northeast's applicatipn.
Page 5
The Company petitioned the CAB to reconsider its decision
maintaining that the Board had ignored important constitutional
safeguards of a fair hearing. This petition was denied on
March 5, 1965.
The Company promptly returned to the Court of Appeals for the
First Circuit and filed a special motion requesting the Court to
direct the Board to hold further hearings and/or consider
additional evidence.
This motion was granted on April 13, 1965.
On April 26, 1965, the CAB announced that it would not appeal the
decision of the Court, but would rescind its outstanding orders
and decisions in the matter and, in effect, reopen the case for
a complete rehearing.
A prehearing conference in the reopened proceeding was held on
July 8, 1965. Hearings may be held before a Board Examiner later
this year.
Northeast Airlines remains firmly convinced that the public
convenience and necessity require renewal, on a permanent basis,
of its authority to serve the routes south of New York.
VIII. TRANSFER OF CONTROL FROM HUGHES TOOL COMPANY TO
STORER BROADCASTING COMPANY
On October 7, 1964, Hughes Tool Company transferred all of its
interests in Northeast Airlines to Louis J. Hector, as trustee.
The Tool Company's interests consisted of 973,226 shares of
Northeast Common Stock (approximately 55% of all of the then
outstanding stock) and approximately $24,000,000 principal amount
of indebtedness including past advances and certain unpaid flight
equipment rentals and charges. The trust indenture stated that
its purpose was to provide for the disposition of the trust
property on the best terms available and in a manner consistent
with the interests of Northeast and the public.
In an order dated March 23, 1965, the Civil Aeronautics Board
denied the Tool Company's request for a declaration that,
following the transfer to the trustee and the resignation from
the Northeast board of directors of the five persons who were
associated with the Tool Company, it no longer controlled
Northeast within the meaning of Section 408 of the Federal
Aviation Act.
On May 29, 1965, the trustee entered into an agreement with
Storer Broadcasting Company for the purchase of all of the Tool
Company's interests in Northeast held by the trustee, subject to
various conditions including the acquisition by Storer on terms
satisfactory to it of the claims against Northeast held by
certain major creditors .
The sale and acquisition of claims were consummated on
July 30, 1965, and Storer Broadcasting Company became the holder
of 973,226 shares of Northeast Common Stock and more than
Page 6
$38,000,000 of claims against the airline. Northeast issued an
additional 4,488,345 shares of Common Stock to Storer in exchange
for the cancellation and discharge of all of these claims and a
cash payment to Northeast of $7,000,000.
With the completion of this transaction, Storer Broadcasting
Company now holds approximately 87% of the Common Stock of
Northeast. As a consequence of the settlement of the several
claims against the airline. Northeast has eliminated a
substantial interest obligation and now has a positive net
worth in excess of $9,000,000. A copy of Northeast's unaudited
balance sheet as at June 30, 1965, with a pro forma restatement
reflecting the Storer transaction as if consummated on that date,
is included at the end of this report.
Respectfully submitted
Jjames W. Austin
'Chairman of the Board
and President
Page 7
NORTHEAST AIRLINES, INC.
ASSETS
Current assets:
Cash
Accounts receivable
Flight equipment expendable parts,
substantially at cost (note D)
Prepaid expenses
Miscellaneous supplies, at cost
Total current assets
Property and equipment, at cost:
Flight equipment and related
spare parts (note D)
Ground property and equipment
Nonoperating property and equipment
Less allowances for depreciation,
amortization and maintenance
Other assets
- BALANCE SHEET - As at December 31, 1964
LIABILITIES
$ 884,026
3,940,701
1,740,332
263,236
334,332
7,162,627
Current liabilities:
Debt instalments, including past due amounts:
4 3/4% notes payable to bank under credit
agreement (note D)
6% trade obligations (note C)
Collections as agent
Trade accounts payable
Accrued compensation, including retroactive pay
Provision for sick leave, vacation pay and
pension costs
Unearned passenger revenue
Provision for estimated liabilities under
terminated flight equipment leases and
purchase agreements (note A)
$ 208,169
6,242,263
1,407,618
2,368,009
740,895
3,948,202
1,007,186
7,778,618
Current liabilities (note A), excluding
amounts due Hughes Tool Company(or Trustee) 23,700,960
$19,473,067
5,358,774
689,882
25,521,723
19,891,152 5,630,571
J
254,913
$13,048,111
Debt due Hughes Tool Company (or Trustee, note B):
Jet rentals and overhaul liability
(since September 30, 1964) 456,136
Held by Trustee for Hughes Tool Company 24,233,463
Long-term lease commitments (note E)
CAPITAL
Common stock, par value $1.00 per share:
Authorized - 6,500,000 shares (notes B and F)
Issued - 1,783,688 shares, including 23,000
treasury shares (note F) 1,783,688
Paid-in surplus (note B) 25,553,280
Deficit, per accompanying statement (note A) (62,679,416)
$13,048,111
The accompanying notes are an integral part of this balance sheet.
Page 8 Page 9
NORTHEAST AIRLINES, INC.
STATEMENT OF INCOME AND EXPENSE AND DEFICIT
For the Year Ended December 31, 1964
Operating revenues (note G):
Passengers
Express, freight and baggage
Air mail
Public service (subsidy)
Other, net
$36,819,403
1,489,314
416,084
3,435,942
543,232
Total operating revenues 42,703,975
Operating expenses:
Flying operations (note E)
Maintenance and repairs
Aircraft and traffic servicing
Reservations, sales, advertising
and publicity
Depreciation and amortization (note D)
Passenger service
General and administrative
14,152,297
10,696,610
8,485,034
5,327,640
679,698
2,719,270
1,630,880
Total operating expenses 43,691,429
Operating loss 987,454
Nonoperating charges:
Interest expense
Other, net
1,717,354
171,7 02
Net loss before extraordinary charges 2,876,510
Extraordinary charges:
Writedown of surplus spare parts
Retroactive pay and related 1963 accruals
300,000
270,500
Net loss for the year 3,447,010
Deficit at beginning of year 59,232,406
Deficit at end of year (note A) $62,679,416
The accompanying notes are an integral
part of this statement.
Page 10
NORTHEAST AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS
A - Provision for estimated liabilities:
In 1963, due to defaults in required payments, leases of
certain Convair jet aircraft and engines were terminated,
and Vickers Viscount aircraft and engines were repossessed
by the trustee under a related equipment trust agreement.
The Vickers Viscount aircraft and related Rolls-Royce
equipment were resold in 1963 under the provisions of
the equipment trust agreement and the proceeds applied
to reduce the indebtedness. The provision for estimated
liabilities under terminated flight equipment leases and
purchase agreements in the accompanying balance sheet is
approximately $5,000,000 less than amounts claimed at
December 31, 1964 by the lessors and the trustee under
the equipment trust agreement, but disputed by the company.
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:
Under a trust indenture dated October 6, 1964, Hughes Tool
Company assigned to a Trustee all rights under obligations
due from Northeast Airlines,Inc. as at September 30, 1964,
together with 973,226 shares (majority control) of common
stock of Northeast Airlines, Inc. Obligations held by the
Trustee at December 31, 1964, including accrued interest
were as follows:
Instalment obligations for spare parts,
$526,512 due currently, balance due
1966 to 1968
6% demand notes
6 1/2% notes, $6,000,000 due currently,
balance due 1966 and 1967
Other, noninterest bearing, due on demand
$ 1,166,539
8,231,638
9,500,000
5,335,286
$24,233,463
The 6% and 6 1/2% notes and approximately $1,600,000 of
the non-interest bearing obligations, are subject to
certain prior rights of the 4 3/4% notes payable, the
6% trade notes payable, and the Trustee under the
equipment trust agreement (note A). The 6 1/2% notes may
be exchanged for common stock of Northeast Airlines, Inc.
at the rate of one share for each $3.625 of principal
amount of the notes. In 1963, Northeast Airlines, Inc.
applied to the Civil Aeronautics Board for permission to
make such exchange.
Page 11
B - Debt due Hughes Tool Company (continued)
Previously, in January 1964, Hughes Tool Company canceled
5 1/2% notes of $16,251,745 due from Northeast Airlines,Inc.
This cancellation was reflected as paid-in surplus in the
balance sheet of Northeast Airlines, Inc. as at
December 31, 1963.
C - Trade obligations :
In 1962, certain suppliers and trade creditors agreed to
defer payment of accounts payable to them as at June 30,1962
principally on the basis of thirty-six monthly payments
commencing January 31, 1963 with 6% interest. At
December 31, 1964, the company was not in default on these
monthly payments, except for payments to seven major
creditors in amounts aggregating $4,052,028 for principal
and interest due in 1963 and 1964.
D - Flight equipment and spare parts :
The company-owned DC-6B and DC-3 aircraft were depreciated
to their estimated residual value in previous years.
The 4 3/4% notes payable to banks under credit agreement
(under which payments are in default) are secured by a
mortage 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 and flight equipment rentals:
Annual rentals for 1965 under long-term leases for hangar,
terminal, and reservations facilities will approximate
$1,400,000. In addition to the annual rentals, certain
of the leases obligate the company to pay maintenance and
operating costs.
Rentals under short-term leases of jet and DC-6B flight
equipment, aggregating $3,620,954 in 1964, are included
in flying operations expense in the accompanying financial
statements.
F - Employee Stock Option Plan:
At December 31, 1964, 100,000 shares of authorized and
unissued common stock were reserved under the company's
Qualified Stock Option Plan for key employees adopted
in 1964. At December 31, 1964, options were outstanding,
exercisable in 1965, to purchase 96,250 shares at $4.125
(not less than fair market value on dates granted),
aggregating $397,031.
Page 12
F - Employee Stock Option Plan (continued)
Also, at December 31, 1964, options to purchase the
company's stock were outstanding as follows:
1. Options for 4,500 shares, presently exercisable, at
$4.25 per share (not less than 85% of fair market
value on date granted), aggregating $19,125, which
had been granted under a prior Restricted Stock
Option Plan for key employees.
2. Options for 23,000 shares at $4.375 per share (not less
than fair market value on date granted), aggregating
$100,625, exercisable in 1965, which had been granted
to key employees of Northeast Airlines, Inc. by Hughes
Tool Company in October, 1964 prior to establishment
of the trust indenture referred to in note B. Also
prior to establishment of the trust indenture, Hughes
Tool Company assigned to the company the 23,000 shares
of stock covered by the options, and the company
assumed the option obligations.
G - Florida Route Renewal:
The company continues to serve its route south of New York
City pending final determination of its application for
permanent authorization. On April 13, 1965, the United
States Court of Appeals for the First Circuit remanded
the case to the Civil Aeronautics Board and ordered it
to receive certain further evidence which the Company
sought to present. The Board subsequently rescinded
its prior adverse decisions and announced that it would
reconsider the whole matter. A petition has been filed
by two competing air carriers seeking review by the
United States Supreme Court.
Page 13
LYBRAND. ROSS BROS, fl MONTGOMERY
ACCOUNTANTS AND AUDITORS
Northeast Airlines, Inc.
Boston, Massachusetts
We have examined the balance sheet of Northeast Airlines
Inc. as at December 31* 1964 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 state
ments, the accompanying statements present fairly the financial
position of Northeast Airlines, Inc. at December 31* 1964 and
the results of its operations for the year then ended, in con
formity with generally accepted accounting principles applied
on a basis consistent with that of the preceding year.
Boston, Massachusetts
May 27, 1965
Page 14
Page 15
NORTHEAST AIRLINES, INC.
FIVE YEAR STATISTICAL RECORD
1964 1963 1962 1961 1960
Passenger Revenue
Other Revenue
$36,819,403
5,884,572
$39,888,763
4,026.042
$48,082,078
3,308,483
$48,012,195
3,116,753
$35,366,220
2,564,701
Total Revenue $42,703,975 $43,914,805 $51,390,561 $51,128,948 $37,930,921
Revenue Passengers Carried 1,404,487 1,358,801 1,551,059 1,644,581 1,437,723
Revenue Plane Miles 14,290,315 16,948,778 19,315,430 21,273,364 18,405,778
Available Seat Miles (000) 1,122,880 1,279,613 1,381,954 1,495,026 1,096,762
Load Factor 52.61% 49.91% 53.23% 50.23% 51.52%
Revenue Passenger Miles (000) 590,800 638,682 735,561 750,955 565,030
Average Passengers per Mile 41.34 37 .68 38.08 35.30 30.73
Available Ton Miles 142,770,650 160,835,808 172,088,705 186,100,260 130,988,374
Revenue Ton Miles 61,193,858 66,754,323 76,716,209 77,921,116 58,908,520
Operating Cost per Available Ton Mile 30.60<? 32.68d 33.55 d 31.90d 33.56d
Operating Cost per Available Seat Mile 3.89d 4.lid 4.18d 3.99d 4.Old
Total Wages and Salaries $16,282,843 $18,196,945 $20,898,641 $21,297,576 $17,552,745
Number of Personnel 2,062 2,025 2,700 2,918 2,612
NORTHEAST
AIRLINES
LOGAN INTERNATIONAL AIRPORT
BOSTON, MASS. 02128