J o o o o o a o o
~ /VO.RT~L-=:AS'T AIRLINES
ANNUAL REPORT, 1966 I YEAR OF THE YELLOWBIRDS
Our cover reproduces the dramatic illus-
tration which announced the advent of
Northeast's "Yellowbirds" in newspapers and
magazines throughout our service area. Tele-
vision and radio joined the chorus to make
this shining symbol of the "New Northeast"
the year's most publicized innovation in the
airline industry.
YEAR OF THE
OPERATING HIGHLIGHTS
The Civil Aeronautics Board announced
on M arch 2, 1967, that Northeast Airlines
was awarded a permanent certificate to
serve Florida from major New England
cities.
1966 marked the start of Northeast's
expansion program as four more Boeing
727 jets and seven FH-227 turbo-props
entered service. All DC-3's and four DC-6's
were phased out during the latter part
of the year.
The Y ellowbird advertising campaign
began in September of 1966 and created
a highly favorable reaction throughout the
Industry and with the traveling public.
The introduction of turbo-prop service
throughout New England resulted in a new
level of service to this area and was received
with enthusiasm by these communities.
The quality of service to passengers was
significantly improved with new quality
standards being established in all pas-
senger service areas.
Revenue Passenger Miles increased
40.5% over 1965 which represented a
sizable gain over the 30.8% increase in
Available Seat Miles.
During the 43-day Airline strike from
July 8 to August 21, 1966, Northeast was
able to demonstrate its greatly increased
ability, particularly on its North-South
run, as the only functioning trunk airline
between such major cities as New York,
Boston, Philadelphia and Miami - Fort
YELLOWBIRDS
Lauderdale. Considerable unusual revenue
was generated during this period.
A record 2,035,294 passengers were
carried which represents a 24.3% gain
over 1965.
FINANCIAL HIGHLIGHTS
Northeast earned a Net Profit in 1966 of
$127,402 on revenues of $62,271,610. This
compares to a net loss in 1965' of $471,074
on revenues of $48,209,449.
A breakdown of total revenue shows
that Passenger Revenue increased 35.2%
to $56,375,713 in 1966 from $41,708,467
in 1965. Other Revenue, excluding federal
subsidy, increased 28. 7% to $3,695,897
from $2,872,295 in 1965.
Subsidy payments reflected a decrease
of 39.4% to $2,200,000 in 1966 from
$3,628,687 in 1965. Yield per revenue
passenger mile decreased 3. 7% to 6.03
compared to 6.26 in 1965.
Total expenses decreased on a unit com-
parison basis during 1966. Cost per Avail-
able Seat Mile was 3.86 compared to
3.95 in 1965. Cost per Available Ton
Mile was 29. 9 against 31.1 in 1965.
During 1966 a financial program was
undertaken in Northeast's name for addi-
tional flight equipment and working capi-
tal for approximately $53,000,000. As of
this writing, approximately $44,000,000
have been committed and negotiations
are currently under way to secure the
remaining $9,000,000.
3
TO OUR
STOCKHOLDERS
4
George B . Storer
Chairman, Executive
Committee
It is with pleasure that I report to you for the
first time as President of Northeast Airlines.
In 1966, we continued to expand on the
solid base established by Storer Broadcasting
during 1965 and are continuing the efforts to
build Northeast into a strong trunkline carrier.
Financially, 1966 was the best year for
F. C. Wiser, Jr.
President
James W . Austin
Chairman of the Board
Northeast since it entered the Florida market.
The company earned a net profit of $127,000
corn pared to a $471,000 loss in 1965. Total
revenues increased 29.2% to $62,271,000while
expenses increased 27. 7% to $62,144,000.
The major factor underlying the revenue
increase was that we sold a larger percentage
of our seats than ever before. Revenue Pas-
senger Miles increased 40.5% to 935,435,000
compared to an increase in Available Seat
Miles of 30.8%. This produced a passenger
load factor of 58.4% or 4.1 points higher than
the 1965 load factor of 54. 3 % . We carried
2,035,294 revenue passengers during 1966,
24.3% more than 1965.
Despite these large traffic gains, a down-
ward effect on revenues was exerted by a
decline in yield of 3. 7% . Last year's yield was
6.03 per revenue passenger mile compared
to 6.26 in 1965, and represents a revenue
loss of $2,180,000.
Our financial performance was helped
by the forty-three day strike against the five
major airlines last summer. The strike benefits
were partially offset however by a $1,428,687
subsidy reduction for 1966 from 1965. Sub-
sidy payments were reflected at $2,200,000 in
1966 which is a decrease of 39.4% from the
$3,628,687 received in 1965.
The combined effect of reduced subsidy,
lower yields, and higher wage rates in 1966
caused an adverse impact of $4,608,687.
During the strike our airline was called
upon to service an unprecedented demand.
Our employees met the challenge and per-
formed in an outstanding fashion and were
able to prevent a major transportation crisis
particularly in Florida. For this effort each
employee was issued two shares of Northeast
stock for their fine performance during
this period.
In any airline there are certain basic
elements which are the primary ingredients
for success. Our objectives for Northeast are
to acquire these basic elements and specific
steps were taken during 1966 towards achiev-
ing these goals.
The first and most important element is
to have a properly balanced route structure.
The lack of a route structure has been our
Company's greatest problem in the past. On
March 2, 1967, notification was received
from the Civil Aeronautics Board that North-
east Airlines was awarded a permanent cer-
tificate to serve Florida from the northeast.
This includes service to Miami, Fort Lauder-
dale, Tampa and Jacksonville from Boston,
Hartford, New York/ Newark, Philadelphia,
Baltimore and Washington. This decision
was a vital one for your Company, and posi-
tively establishes Northeast as a trunkline
carrier. With the attainment of this major
objective realized, full attention can now be
devoted to continuing the expansion of North-
east's route structure to further enhance our
financial stability and future profitability.
The new route applications Northeast is
currently engaged in are as follows:
1. Montreal-Miami, non-stop
2. Boston, New York, Philadelphia, and
Washington to Freeport and Nassau
in the Bahama Islands
3. Miami and Tampa to Los Angeles and
San Francisco with intermediate stops
4. Miami-London
Other route expansion studies are also
under way to further optimize Northeast's
route structure.
The second element needed is to have
competitive and efficient flight equipment.
During 1966 we acquired and put into service
four Boeing 727-100 aircraft and seven
Fairchild - Hiller turbo-prop aircraft. The
727's added to the two already in service
enabled us to increase our Florida frequencies
and to begin jet service in the Boston-
Washington market. The FH-227 fleet was
phased into our New England operation,
providing that area with the best air service
in its history. By early 1968 Northeast will
be completely turbine powered in all markets
with a fleet of 35 aircraft. These aircraft will
be brand new with attractive interiors and
will have our Y ellowbird exterior. In addi-
tion to ensuring increased customer appeal,
they will offer Northeast major unit cost
savings because of their greater efficiency.
The third important element is to have
adequate funds to meet current needs and
provide for future requirements. The acquisi-
tion by Storer Broadcasting in 1965 placed
Northeast on a solid financial foundation for
the first time in many years. During 1966, it
was determined that additional aircraft were
needed beyond the 29 already on order. In
order to acquire 6 more aircraft and secure
additional working capital, a financing pro-
gram in Northeast's name was undertaken
for approximately $53 million. To date,
$22 million in convertible subordinated
debentures were sold, commitments have
been secured from banks for $12 to $15 mil-
lion, subordinated commitments from air-
frame manufacturers for $4.8 million have
been obtained, and another $2.1 million
generated through the sale of DC-6B aircraft.
Negotiations are currently underway with
institutional lenders for the balance of the
program.
The fourth and very important element
is to provide high quality of service to our
passengers. During 1966 we made a major
effort in this area. New standards and con-
trols were established for a wide variety of
services so that we could measure the quality
of service being provided to the passenger and
take appropriate corrective action as neces-
sary. Employee courtesy with our customers
and employee appearance on the job have
been heavily emphasized.
The fifth essential element is to insure
that all potential customers are aware of the
improved service and that the airline's identi-
ty be established in the minds of the general
public. To achieve this step, an advertising
campaign unprecedented in Northeast's his-
tory was implemented to announce the "New
Northeast" to the world via the " Y ellowbird"
theme. It was started in September with a
full color double page ad in Time, Life,
Newsweek and Sports Illustrated. A heavy
schedule of radio commercials, one minute
color television commercials, plus full page
color newspaper ads were used in major
Northeast cities.
We have also added key personnel to our
sales staff throughout the Company to improve
our direct sales effort in the communities
we serve.
The sixth element vital to any airline is
high quality personnel. The large portion of
our employees are experienced members of
the Northeast team who have performed well
over the past several years. During 1966 our
management team was expanded to include
several key executives from other major
trunk carriers. These new people were inte-
grated into the existing executive group with
the result that ortheast now has a greatly
improved management unit. Special care has
also been taken in the additions of con-
tractual personnel with emphasis being
placed on the upgrading of selection standards
and training requirements.
The seventh and final element is to have
adequate management information to estab-
lish control of the important variables in the
Company operations. A Corporate Plan for
1967 setting specific goals for each area of
responsibility was completed and a Corporate
Budget for 1967 was set up to improve cost
control in all areas. A Five Year Plan has
also been completed and will be revised
annually.
It is vital that our management goals be
known to all employees if we are to succeed.
To insure that this occurs, a special effort
has been made to improve internal communi-
cations throughout the Company. During
1966, a President's briefing was given to all
Company personnel at every major Northeast
facility throughout the system. Early in 1967
a Management Review Meeting was held in
Boston attended by 240 management person-
nel to review 1966 progress and to communi-
cate 1967 problems and goals. Although many
of the systems and procedures implemented
need further refinement, Northeast is acquir-
ing management tools comparable with any
Sl:lccessful airline.
As you can see by the foregoing discussion,
Northeast has made significant progress in
1966. The job ahead is still a major one and
the goals we have set will require major
effort on the part of all Northeast employees.
The major test of our long term success will
be our ability to demonstrate to the traveling
public, the Civil Aeronautics Board, and the
financial community that Northeast can
deliver air transportation service comparable
to any other trunk carrier and can do this at
a profit. A good part of the success in this
long range objective will be dependent on
our route structure.
The future of the air transportation indus-
try is promising and its outstanding growth
rate should continue. It is our intention that
Northeast participate in this growth and we
have made this our main objective. With the
continued support of the Storer Broadcasting
Company and the planned programs cur-
rently underway, I can only be optimistic
about Northeast Airlines' future.
In closing, I would like to express my
thanks to all Company Stockholders, Officers,
Directors, and Employees for their support
during, 1966.
Sincerely,
F,c .. w,~
President
President Wiser hosts group of New England E xecutives at preview of Yellowbird inauguration.
From left: Crocker Snow, Director, Massachusetts Aeronautics Commission; F. C. Jil iser,
Northeast Airlines President; Horace B. Wetherell, Director, Connecticut Department of
Aeronautics; Roger ]. Crowley, Jr., Director, New Hampshire Aeronautics Commission;
Edward F. Knapp, Commissioner, Vermont Aeronautics Board; Scott K . Higgins, Director,
Maine Aeronautics Commission; M elvin Peach, Executive Director of the New England
Council; and Albert R. Tavani, Administrator, Rhode Island Division of Aeronautics.
5
6
Everything's New
at the "New N_
ortheast"
,Northeast Airlines Building is one of the
newest and finest in downtown Miami.
Yellowbird model adds decorative touch
to ticket counter and waiting area at
LaGuardia Airport, New York.
The Northeast Airlines renaissance is readily
visible on the ground as well as in the air.
New ticket offices at airport and down-
town locations reflect the Company's desire
to establish its image as a rising major airline
while maintaining a sense of personalized
service. A contemporary decor which facili-
tates efficient handling of large numbers of
passengers in a comfortable atmosphere is
being developed to meet the specific require-
ments of each location.
New regional sales offices in Boston and
Miami have been rendered in traditional
colonial elegance. Cherry wood paneling,
wall-to-wall carpeting, and eighteenth cen-
tury Georgian furniture lend a relaxing but
dignified air to these facilities. A new regional
sales office will open in Montreal just prior
to the opening of Expo 67 in April, 1967.
Second level loading through jetways
which shield passengers from the elements
have been added at Miami and ew Y ark's
Kennedy International Airport. Second level
hold rooms withjetways will appear at Logan
International Airport, Boston, as new termi-
nal is completed.
ortheast Airlines will occupy an entirely
new main terminal area in Boston in the
spring of 196 7. The facility will boast ex-
panded ticketing positions, office space for
supervisory personnel, a lounge for first class
passengers and one of the best baggage
handling arrangements on the company's
routes.
In 1966 Northeast leased 9,242 square
feet in a new building in Andover, Mass.,
and equipped the facility as an electronic
data processing center. It houses the most
advanced computer equipment available in
Rich, wood-paneled interiors
of Northeast's new Boston
sales offices reflect the
New England tradition of
Colonial elegance and
gracious living.
a contemporary atmosphere that reflects the
functional needs of a data processing operation.
In addition, a program to refurbish all
airport and city facilities is under way.
Northeast Concourse at John F. Kennedy Airport,
New York, is newly decorated.
Northeast's General Offices occupy this impressive
building at 239 Prestott St. in the Logan
International Airport complex.
Authentic "scrimshaw" decorations, based on early N ew
England whalebone carvings, lend an authentic touch
to Yellowbird interiors.
Striking passenger
lounge, above, and ticket
counter, below, at
Kennedy Airport.
Youthful guest gets
lift during Yellow-
bird inspection tour.
7
8
Yellowbirds - symbols of
the "New Northeast" ...
Boeing 727 in flight gives meaning to
Northeast's catchy, Calypso-inspired
commercials: "Yellowbird so new, let me
fly with you, Yellowbird take me, please!"
Supplemental use of yellow color on ground
equipment adds to overall impact.
Whether on the ground or in flight, there is
no mistaking the arrival or departure of a
Yellowbird. The brightly colored new jets
are establishing the identity of the "New
ortheast" throughout ew England and
along the entire Atlantic seaboard.
And this " ew ortheast" consists of more
than j ust new paint and new airplanes. It em-
braces all areas affecting the quality of service
to the passenger. New standards have been
established both in the air and on the ground,
as reflected in the pictures on these pages.
During 1966, the new Yellowbird fleet
began to take shape with delivery of the first
Boeing and Fairchild-Hiller aircraft. Deliver-
ies will continue throughout 1967, and by
early 1968 thirty-five Yellowbirds are sched-
uled to be in service: eight B727-lO0's (six
owned by Storer Leasing and two by North-
east) ; six B727-200's (all owned by Storer
MONTREAL
WORCESTJ R
S PR IN GF I E L D -H ~ R J.' ORD
PHILADELPHIA
BALTIMORE
WASHINGTON
JACKSONVILLE
ST. PETERSBURG
-CLEARWATER
FO RT
LA U D ERDALE
MIAMI
PRESQUE
Douglas DC-9 Yellowbirds,
on order in 1966, were
delayed in delivery till early
1967.
Leasing) ; fourteen DC-9-30's (ten owned by
Storer Leasing and four by ortheast); and
seven FH-227's (all owned by l ortheast) .
When the complete Yellowbird fleet is in
service, the 727's will basically be used in the
Florida markets, the DC-9's will be used in the
Commuter markets and some ew England
cities, and the FH-227's will be used through-
out the ew England route structure.
During 1967 Northeast is scheduled to
resume service between Washington and
Miami/ Fort Lauderdale as well as service
from ew York and Boston to Tampa and
Jacksonville.
Interiors of the Yellowbirds are decorated
with warm ew England colors. Scrimshaw
reproductions, which are carvings done on
whalebone by 19th century New England
whalers, are mounted on interior bulkheads
and further add to the ew England flavor.
As Fairchild-Hiller FH-227 Yellowbirds
brought j et age to all New England,
Boston reservations office expanded to
carry increased load.
Lights burn late during "tourist season"
in Northeast's ticket office in downtown
Miami.
9
10
As Northeast phases out
its piston -engine planes,
the last of its D C-3' s
receives a final salute
for a Job well done.
5-YEAR COMPARISON
Total revenue passengers carried in
1966 exceeded two million for the first
time in Northeast's history and the
figure of 2,035,000 showed an improve-
ment of 24.3% over the 1,637,000
passengers carried in 1965.
The larger aircraft in the new fleet
helped to produce 30% more available
seat miles, or 1,603,155,000 against
1,226,165,000 last year. Northeast's
load factor was 58.35% , compared with
54.32% in 1965 while the average
number of passengers per mile was a
record high of 4 7 .86 against an average
load of 42.64 in the prior year.
Revenue passenger miles increased
by 40% during the year to a total of
% Increase
1966 vs. 1965
+35.17%
- 9.31%
+29.17%
+24.27%
+23.27%
+30.75%
+40.46%
+12.24%
+32.84%
+39.98%
3.76%
2.28%
+30.17%
+31.44%
935,435,000, up from 665,996,000 in the
previous year. Passenger revenue in-
creased $14,667,246 or 35.2% , while
total other revenue decreased $605,085
or 9.3% . The decrease in other revenue
was due to a reflected decline pf
$1,428,687 in government subsidy to
$2,200,000 for the year; however, total
revenue reached $62,271,610, an im-
provement of 29.2% .
Total salaries and wages paid to
Northeast employees rose 30.2% to
$24,428,640 resulting from a similar in-
crease of 31 .4% in the number of person-
nel. Costs per available seat mile were
lowered by 2.3% from 3.95 in 1965 to
3.86, and cost per ton mile by 3.8% .
1966 1965 1964
$56,375,713 $41,708,467 $36,819,403
5,895,897 6,500,982 5,884,572
$62,271,610 $48,209,449 $42,703,975
2,035,294 1,637,863 1,404,487
19,546,134 15,856,856 14,290,315
1,603,155 1,226,165 1,122,880
58.35% 54.32% 52.61 %
935,435 665,996 590,800
47.86 42.64 41.34
206,632,468 155,544,052 142,770,650
96,634,219 69,034,617 61,193,858
29.93 31.10 30.60
3.86 3.95 3.89
$24,428,640 $18,766,007 $16,282,843
3,077 2,341 2,062
These statistics have been calculated in accordance with
the Civil Aeronautics Board System of Codes and Accounts.
1963 1962
$39,888,763 $48,082,078
4,026,042 3,308,483
$43,914,805 $51,390,561
1,358,801 1,551,059
16,948,778 19,315,430
1,279,613 1,381,954
49.91% 53.23%
638,682 735,561
37.68 38.08
160,835,808 172,088,705
66,754,323 76,716,209
32.68 33.55
4.11 4.18
$18,196,945 $20,898,641
2,025 2,700
OFFICERS
FOR WOOD -c. WISER, JR., President
GEORGE B. STORER, Chairman, Executive Committee
JAMES W. AUSTIN, Chairman of the Board
EDMUND 0. SCHROEDER, Senior Vice President- Operations
JAMES 0. LEET, Senior Vice President-Marketing and Customer Services
EDWIN W. BREED, Vice President-Sales
AR THUR A. BRENNAN, Vice President-Industrial Relations
G. WARD HOBBS, Vice President-Customer Services
ROGER J. HOY, Vice President-Operational Standards
WHEATON W. MIES, Vice President-Technical Services
ARNO W. MUELLER, Vice President-Finance
STUART W. PATTON, Vice President-Law
JOSEPH W. CANNON, Treasurer
ARTHUR E. FAIRBANKS, Vice President-New England Region
EDWARD E. SWOFFORD, Vice President-Mid-Atlantic Region
EDWIN H. BISHOP, Vice President- Southern Region
HENRY E. FOLEY, Clerk
DIRECTORS
JAMES W. AUSTIN, Chairman of the Board
JACQUELINE COCHRAN
LEONARD DALSEMER
A. D. DAVIS
JAMES F. FITZGERALD
ROBERT C. HILL
CURTIS HUTCHINS
STANTON P. KETTLER
BILL MICHAELS
STUART W. PATTON
HARRY M. STEVENS, II
GEORGE B. STORER, Chairman, Executive Committee
GEORGE B. STORER, JR.
DAVID A. STRETCH
FRANCIS W. SULLIVAN
EUGENE L. VIDAL
FOR WOOD C. WISER, JR., President
EXECUTIVE COMMITTEE
GEORGE B. STORER, Chairman
FORWOOD C. WISER, JR.
STUART W. PATTON
JAMES W. AUSTIN
As of January 1, 1967
LYBRAND. Ross BRos. c_. MONTGOMERY
CERTI Fl ED PUBLIC ACCOUNT ANTS
Northeast Airlines, Inc.
Boston, Massachusetts
C OOPE RS C., LYBRAND
We have examined the balance sheet of North-
east Airlines, Inc. as at December 31, 1966 and the
related statements of income and expense, retained
earnings and paid-in surplus 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. We
previously examined and reported upon the finan-
cial statements of the company for the year ended
December 31, 1965.
In our opinion, the above referred to financial
statements present fairly the financial position of
Northeast Airlines, Inc. at December 31, 1966 and
1965, the resu Its of its operations for the years then
ended and the restatement of interest expense for
1965 as described in note E, in conformity with
generally accepted accounting principles applied
on a consistent basis.
Boston, Massachusetts
February 18, 1967
11
12
ASSETS
1966
Current assets:
Cash ......... ........ ... . . ... ... .... .... ... . ........ . .... . ... . $ 1,172,002
Certificates of deposit . . . . ... ................................... . .
ote receivable .... . ..... .. ..... . .......... . . .. . ........ ... .... .
Accounts receivable . . . ... .. .......................... .
Flight equipment expendable parts, substantially at cost .
Prepaid expenses .......... .. . . .. .. . . .. . ... ..................... .
Miscellaneous supplies, at cost ... ... ............ . ............. . ... .
Total current assets ........ .. ....... . ..... ...... .. . . .. .. .
Deposits under equipment program (note A) . .. . ... .. . ....... . . .. .. . . .
Property and equipment, at cost (note A):
Flight equipment and related spare parts .. .. ....... .. .... ......... .
Ground property and equipment . . . . . . . . . . . . . . .. . ............. .
Operating property and equipment .. .. . .. .. . . . ... .. . . .. . ..... .
Less allowances for depreciation, amortization and maintenance . . . ... .
Operating property and equipment less allowances .. . ...... . .. . . .
Nonoperating property and equipment, net .......... . .. ... ... ..... .
Property and equipment less allowances .. . ..... ... ..... . .. .... .
Leased flight equipment (notes A and C)
Deferred charges and other assets:
Jet aircraft integration costs (note A) . ...... . ... .... .. ... ......... . .
Route renewal costs . . . . . . . . . .... ..... . . . . .. . .. . ......... . .. . ... .
Bond issuance expense . . . . . . ...... . . .. ..... .. . . ................. .
Other .. .. .. ...... . ........................ ..... ... .. . ... .... . .
6,033,840
3,000,000
6,166,259
2,646,972
1,007,153
423,824
20,450,050
3,549,653
27,156,462
6,725,392
33,881,854
16,470,647
17,411,207
303,561
17,714,768
2,357,288
325,431
725,485
467,306
$45,589,981
The accompanying notes are an integral
part of this balance sheet.
1965
$ 3,669,935
1,750,053
4,408,717
1,9 17,523
818,371
384,258
12,948,857
750,000
19,431,547
5,596,276
25,027,823
20,021,614
5,006,209
88,150
5,094,359
493,018
83,933
65,724
$19,435,891
BALANCE SHEET
NORTHEAST AIRLINES - December 31, 1966 and 1965
LIABILITIES
1966
Current liabilities:
Trade accounts payable ........... .. .. ... . ...................... . $ 4,377,676
Accrued salaries ............... .. .. .... ... .. ............. .. .... . .
Accrued pension costs .. .. . .. ... . ........ . ... . ... ..... ... . .. . . ... .
Accrued vacation pay . .. .. . .. ......... .... ........ ........ . ... .. .
Unearned passenger revenue ... ..... . ...... ...... ... .. . .... . .. ... .
Leased aircraft overhaul liability .. . ....... . .. ...... . . .... . .. ..... .
Collections as agent . . . ..... ... .. .. .. . . ... ............ .... . .
Total current liabilities ..... . ... . ... ..... ... .. . . . . .
Notes payable (note A) . . .................................... .
Estimated employee termination liability . . . . .... .......... . . ... .
577,953
596,801
1,213,784
2,035,604
957,978
2,154,958
11,914,754
1,200,000
560,249
Convertible subordinated debentures, 6%, due August 1, 1986 (note B) . 22,000,000
Commitments and contingencies (notes A and C)
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share
Authorized 7,500,000 shares (notes B and D)
Issued 6,364,783 shares and 6,329,983 shares including
1,004 and 7,500 treasury shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,364,783
Paid-in surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,422,793
Retained earnings (since January 1, 1966), (note B) ... .......... ..... .. . 127,402
$45,589,981
$
1965
3,054,231
396,134
500,000
886,489
1,558,522
1,464,934
1,678,046
9,538,356
423,693
6,329,983
3,143,859
$19,435,891
13
14
STATEMENT OF INCOME AND EXPENSE
Years Ended December 31, 1966 and 1965
1966
Operating revenues:
Passengers .. ............ .. . . ........ .. .. .. . ... ..... .. ........... . ... $56,375,713
Express, freight and baggage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,901,883
Air mail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762,971
Federal subsidy (note C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200,000
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,031,043
Total operating revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,271,610
Operating expenses:
Flying operations, including direct maintenance of flight equipment ...... . .
Other maintenance and repairs .................. . .................... .
Aircraft and traffic servicing . . ............ . .......................... .
Reservation, sales, advertising, and publicity ...... .... .. ............... .
Depreciation and amortization ........ .. ...... ........ ............. . . .
Passenger service ....... ... .. . ..... .... .......... ........ ... . ....... .
General and administrative .......................................... .
Total operating expenses . .. ..... ..... ........... ...... ... ... .
Operating profit (loss) .......... . ...................... .. ... .
Nonoperating charges:
Interest expense ................................ .. ...... .... ... . .... .
Other, net ... .. .. ...... ..... .... ..... .. ........ ... . ..... . ...... . ... .
et profit (loss) ..................... . ...... . . . ............ . .
Interest applicable to debt discharged in 1965 (note E) .................. .
26,346,276
5,499,458
11,669,158
8,979,832
923,772
5,400,979
3,023,407
61,842,882
428,728
599,850
(298,524)
127,402
- - - - -
et profit (loss) (as restated in 1965, see note E) ................ $ 127,402
STATEMENT OF RETAINED EARNINGS
Balance at beginning of year ............................ .. .. . .. ..... ..... .
Net profit (loss) per statement of income and expense ..... ... . .... ..... . . .. .. $ 127,402
Adjustments to effect a quasi-reorganization as at December 31, 1965:
Reduction of deficit applicable to revaluation of certain assets and
liability accounts .. ......... . .. ............ ... ... .. . ... .... ... .. . . . . .
Application of remaining deficit against paid-in surplus .. .. ....... . .. . ... . ____ _
Balance at end of year . .......... . . . .. ... ........ . . . . .. . ........ .. . . . ... . $ 127,402
STATEMENT OF PAID-IN SURPLUS
Balance at beginning of year . .... .. ... ... . . .... .. . . .. . . ..... .. .. . .. . .... .. $ 3,143,859
Amounts applicable to 35,800 and 73,450 shares of common stock issued
under employee stock option plans (note D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,375
Fair market value of 5,496 shares of treasury stock distributed to
employees as bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,209
Amoui:it applicable t? ~,000 shares of common stock sold to an officer
with resale restnct10ns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,350
Excess of cash proceeds and aggregate indebtedness discharged in transactions
at July 30, 1965 (note E) over par value and issue expenses of 4,488,345
shares of common stock issued in conjunction therewith ................. . .
Application hereto of deficit at December 31, 1965, to effect a
quasi-reorganization . .... . ... .. ..... .. ... . ....... .. .. .... . ....... .. . .
- - - --
Balance at end of year ... ... . ... .. . ... . . ...... ... ......... ......... . .. ... $ 3,422,793
The accompanying notes are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS
A - Equipment Program:
Northeast has entered into an agreement with Storer
Leasing Corporation (a subsidiary of Storer Broadcasting
Company, majority owner of Northeast's common stock)
to lease six Boeing Model 727 aircraft (all of which were
in service at December 31, 1966), six Boeing Model
727-200 aircraft and ten Douglas Model DC-9-30 air-
craft and related spare parts for a thirteen-year period
from dates of delivery of the respective equipment a t lease
rentals which approximated $2,000,000 in 1966 and
are expected to approximate $4,800,000 in 1967 and
$9,600,000 annually thereafter. In addition to such
rentals, Northeast is obligated for various opera ting costs,
including insurance and main tenance.
Northeast also has contracts to purchase two Boeing
Model 727 and four Douglas M odel DC-9-30 aircraft
and related spare parts a t an approximate cost of
$25,000,000. At December 31, 1966 approximately
$3,500,000 had been deposited by Northeast with Boeing
and Douglas under these contracts. T he balance of the
purchase price will be financed, in part, by the aircraft
manufacturers and in part through borrowings from
banks and institutional lenders for which Northeast has
commitments ofup to $ 15,000,000 at December 31, 1966.
In 1966, Northeast purchased and placed in service
seven Fairchild Model FH-227 turboprop aircraft. Fair-
child has agreed to purchase from Northeast four Douglas
Model DC-6B aircraft for $300,000 each a nd to apply the
proceeds to Northeast's 5% notes payable of $1,200,000
outstanding at December 31 1966.
Training and other aircraft integration costs incurred
in conjunction with the present equipment program are
being amortized over a ten-year period . M ajor overhaul
costs of jet aircraft and engines leased and to be leased
from Storer Leasing Corporation are being capitalized
when in urred and amortized over the allowable hours
until the next overhaul. The liability for leased aircraft
overhaul in the accompanying balance sheet rela tes to
other lease agreements under which Northeast is respon-
si ble to 1 ssors at the end of the lease for the portion of
overhaul life it has used.
B - Convertible Subordinated Debentures:
T he 6% convertible subordinated debentures due
August I , 1986 are convertible into common stock after
August I , 1967 at $25 per share, and 880,000 shares of
common stock are reserved for such conversion. T he
debentures are redeemable in whole or in part on and
after August I , 1968 at 105 % during the year begin-
ning August I , 1968 and at decreasing prices thereafter.
Northeast is required to provide $ 1, 100,000 annually
from 1976 to 1985 for sinking fund redemptions. T he
debentures impose certain restrictions on cash dividends
and stock repurchases, but these are less restrictive than
those provided under a Storer loan agreemen t, which
are noted below.
So long as certain indebtedness (with maturities ex-
tending to 1975) is outstanding under a loan agreement
between Storer Broadcasting Compa ny and certain banks
in conjunction with fi nancing the acquisi tion of jet flight
equipment for lease to Northeast, the broadcasting
company has warranted that, without prior consent of
the banks, Northeast will not pay dividends in ex ess of
25% of net earnings from J anuary I , 1966 to December
31, 1968 and 50% of net earnings thereafter.
C - Commitments and Contingencies:
R entals under long-term leases in effec t a t De ember 31,
1966 for hangar, terminal and reserva tions facilities
approximate $ 1,600,000 on an annual basis. In addition
to the annual rentals, certain of the leases obligate
Northeast to pay maintenance and operating costs.
Rentals under short-term leases of flight equipment
(including aircraft rented for the peak winter season)
aggregating $3,300,000 for the twelve months ended
December 31, 1966, are induded in flying operations
expense in the accompanying financial sta tements. In
addition to such rentals, Northeast is obligated for various
operating costs, including insurance and maintenance.
See note A with respect to a long-term lease of jet flight
equipment and agreements to purchase additional jet
flight equipment.
The Civil Aeronautics Board reopened for reconsidera-
tion as of J anuary I , 1966 the federal subsidy rate for
Northeast's historically unprofitable operation in New
England and in December, 1966 ordered a temporary
annual subsidy rate of $2,200,000 beginning January I,
1966 which may be more or less than any final subsidy
rate to be determined for this period.
T he annual current service cost of Northeast's non-
contributory trusteed retirement plan for employees and
supplementary contributory retirement plan for pilots
was $844,000 in 1966. U nfunded past service costs of the
noncontributory retirement plan, excluding amounts
accrued in the accompanying balance sheet, approximate
$1,200,000.
D - Employee Stock Option Plan:
At December 3 1, 1966, 11 5,500 shares of authorized and
unissued common swck were reserved under Northeast's
Q ualified Stock O ption Plan for key employees adopted
in 1964 under which options are granted at prices not
less than fair market va1ue on dates granted . At December
31, 1966, options were outstanding and exercisable to
purchase 9,250 shares at $4.125, 2,500 shares at $18.50,
15,000 shares t $18.6875 and 12,500 shares at $32.875
aggregating $775,656 and options were outstanding,
exercisable in 1967, to purchase 22,500 shares at $20. 1875
aggregating $454,2 19.
Also, at December 3 1, 1966 options were outstanding
and exercisable for key employees to purchase 1,000
shares of treasury stock at $4.375 per share (fair market
value on date granted), aggregating $4,375.
During 1966 options were exercised for 29,800 shares at
$4. 125 per share and 6,000 treasury shares at $4.375 per
share, aggregating $ 149, I 75, of which $29,800 was
credited to capital stock and $ 119,375 was credited to
paid-in surplus.
E - Restatement of 1965 Interest Expense:
O n July 30, 1965, Storer Broadcasting Company acquired
from a trustee for Hughes Tool Company 973,226 shares
of common stock (majority control) of Northeast and
claims against Northeast in the amount of $24 124 170
and acquired from certain other major credito~s cl'aim~
against Northeast in the amount of $ I 3,635,960 as
recorded on Northeast's books as at July 30, 1965.
On this same da te, Northeast issued to Storer 4 488 345
shares of its common stock in consideration of a ~ay~ ent
to Northeast of $7,000,000 in cash and in exchange for,
and in full satisfaction a nd release of, the debts mentioned
above aggrega ting $37,760, 130.
. Net loss for 1965 in the accompa nying sta tement of
mcome a nd ex pense has been resta ted in order to present
results of operations on a basis whi h gives recognition
to Northeast's present capitaliza tion and which, there-
fore, excludes interest expense a ppli able to debt dis-
charged as a result of the above transactions.
~
/VDRTHEAST
15
/VORT~E'AS'T
[] D O O O O O O O O O O O O O O O O O D @ G @ 0 0 O
NORTHEAST AIRLINES, INC.
LOGAN INTERNATIONAL AIRPORT
BOSTON, MASS. 02128
1
REGISTRARS-The First National Bank of Boston, Boston, Mass.
The Chase Manhattan Bank, New York, N. Y.
TRANSFER AGENTS-Old Colony Trust Company, Boston, Mass.
The Chase Manhattan Bank, New York, N. Y.
GENERAL COUNSEL-Foley, Hoag & Eliot, Boston, Mass.