Northwest Airlines Annual Report 1938

J\j O R -r J-J
~v E S -r J\ J R L J J 1 ~
j
J J t C ~

YEAR ENDED
I
JUNE 30, 1938
I
Ii
N O R T H W E S T AIRLINES,
TO THE STOCIIBOLDERS OF NORTHWEST ArnLrnES, INC,:
I .1:J C.
Saint Paul , Minn.
September 19, 1938.
Attached is the Annual Statement of your company for the fiscal
year ended June 30, 1938, The loss shown comes after two years
of profitable operation. Factors leading to this result include:
(1) The loss of an airplane, together with crew and passengers ,
through an accident on January 10, 1938. (2) Mechanical troubles
with flyinr; equipment. (3) Relative decrease in passenger
revenues.
On January 10, 1938, shortly after we entered upon what promised
to be an unusually satisfactory winter season, one of our Lockheed
M
odel 14-H 11 Sky Zephyrs 11 crashed near Bozeman, Montana., with the
resulting death of the passengers and crew, and the complete des-
truction of the airplane. Investigation led to the belief that
the crash was the direct result of faulty design of the tail
surfaces, a belief which caused the Federal Department of Commerce
to ground all ships of this typo, pending a correction of the fault
in all tail asscmblios.
The effect of this .accident upon us was of the most serious magni-
tude. This accident was the first one in the history of this com-
pany and its predecessors since its founding in 1926 which resulted
in the death of passengers. The ship was one of our new fleet of
ships, and tho accident resulted in -widespread lack of confidence
in this type of airplane. With the temporary grounding of this
type ship it became necessary for us to curtail our operations and
to continue in business for a period only with our Electras .
The accident just discussed came shortly after we started the reg-
ular use of Sky Zephyrs on our line. This was a new type of air-
plane and in actual use a considorable number of operating and
maintenance difficulties were encountered, which resulted in ex-
cessive inspection or replacement costs. The correction of these
faults took a considerable amount of our own money, in addition to
the expense borne by the ma.nufactur0r, and what was more important,
kept the ships out of service while being worked on at our ovm shop~
and at the manufacturerts plant. During all this time the expense
of depreciation and obsolescence of this equipment continued even
though no benefit was being derived from tho uso of tho planes .
Both as a result of our own accident., and the loss of use of a large
portion of our fleet, together with the effect felt from winter
crashes on other lines, and a general falling off in pass enger
travel throughout the country., we were unable to bring our passenger
revenue for the year above the previous year (passenger revenue was
actually 98% of the previous year), although we flew 30% more miles
than the previous year, with a resulting increase in expenses .






In July 1937 we received from the Post Office Department authority
to fly a third mail schedule between the Twin Cities and Seattle,
which increased our mail pay approximately $265,000c We also re-
ceived authority to fly mail between Yakima, Washington and Portland,
Oregon, which mail pay will amount to approximately $27,000 per year.
The Portland extension should eventually be a very valuable addition
to our service as Portland is a natural tributary to our territory
in passenger travel.
The Department of Commerce regulations and the necessity of our im-
proving our maintenance and servicing organization over our entire
route required the addition of a large number of employees. On
July 1., 1937 we had 339 employees - on January 1, 1938 we had 369,
and on July 1st, 519 - an increase of 150 employees in the first
six months of 1938 . There are also automatic increases in payroll
such as pilots ' seniority pay, and by agreement 1~ith the Air Ll.ne
liechanics' Association that involve additions to our payroll that
cannot be avoided.
On June 23 , 1938, President Roosevelt signed a new Civil Aeronautics
Act, creating the Civil Aeronautics Authority, consisting of five
members,~~ Administrator and three on the Safety Board . The body
will devote its entire attention to American Civil Aviation , 1rhich
should be an important improvement over the formerly divided re-
sponsibility.
The industry is fortunate in that an excellent Authority has been
appointed by the President, and its control over rates, competitive
services , competitive equipment and other vital policies should re-
sult in sound development of the Air Transport Industry.
Sincerely yours ,
Croil Hunter ,
President
ASSETS
CURRENT
Cash :
Demand de~osits
For deposit
Agents working funds
Accounts receivable:
$ 50,569. 49
11 , 080.99 $ 67 , 650. 48
1 ., 92 7. 2 7 $
Due from U. S. and
Canadian Governments:
Mail revenue
Tickets, etc .
$160,26L32
7, 043 . 46 $
Ticket accounts :
Other airlines and
agencies
Scrip accounts
Sundry
$ 76 ., 819 . 83
3 ,357 . 85
66 . 65
Gasoline tax refund claims
Other current accounts
Less reserve for doubtful
accounts, adjustments , etc .
Inventories - at lower of cost
or market :
$
Repair parts , supplies , etc . $
Gas oline, oil, grease , etc.
OTHER ASSETS
Recoverable property loss - fully insured
Crash insurance fund
Accounts receivable from:
Employees
Officers
Others
Sundry securities and deposits
PROPERTY, PLANT AUD EQUIPMENT - at cost
to the Company or its predecessors less
depreciation and amortization
167 , 304 . 78
80, 244 . 33
16 , 681.20
7, 968. 81
272 I
199 .12
2 , 500.00
40 , 590.62
8,370. 79
$
land
Airplanes and engines
Buildings and other equipment
$
$1.,242 ,388.69
(including $176,605 . 58 repre-
senting the cost of buildings
situated on leased ground)
less reserve for depreciation
and amortization
651 ,472 . 31
$1 , 893,861. 00
831 , 429.96
69 , 577 . 75
269,699. 12
48,961.41
75 , 851.57
30, 501. 39
6 , 784.51
2 , 639.92
2 , 589. 71
3 ,638. 37
5., 082 . 47
1., 062 , 431. 04
$1 .,067 , 513 . 51
Improvements to leased buildings less amortization 15 , 506 . 02
INTANGIBIE
U. S. Government air mail contract - at cost
DEFERRED
Unexpired portion of insurance premiums
paid and contingent premiums provided for
Prepaid rent
Prepaid advertising
Other deferred charges
$ 59 ,478. 69
26,255 . 09
16 , 637. 05
8, 251.84
$
BALANCE
NORTHWEST
388 .,238.28
122 .,005 . 47
1, 083 , 019.53
48 , 736 . 69
110, 622 . 67
June

$1 , 752 , 622.64
SHEET
AIRLINES , INC.
30, 1938
---------------------------------------------


CUR_RENT
Accounts payable :
For materials, expenses, etc .
For transportation sold over
other lines
Scrip deposits
Salaries and wages
Federal and state pay roll taxes
Due to employees
Accr:ued;
Local taxes
Federal capital stock tax
Federal and state taxes on
income - estimated:
LIABILITIES
$217,103.64
40,401.33
26,809.59
18,325.86
11,712.62
1,240.19 $ 315,593.23
$ 14,875.74
3,000.00 17,875.74
Provision for possible additional
assessments for prior years
DEFERRED INCOME
Unused tickets
4,915.47 $ 338,384.44
12,570. 47
RESERVE
For maxit~um additional crash insurance
premium for the year ended December
31, 1938
CAPITAL STOCK A1~D DEFICIT
Capital stock:
Preferred - 5% cumulative convertible -
par value $100.00 per share (entitled
upon retirement to $103.00 per share
plus accumulated dividends):
Authorized - 6.,000 shares
Less:
Retired
Unissued
$501,000.00
50,000.00
Outstanding - 490 shares
Common - no par value:
Authorized - 300,000 shares
Unissued (4,900 shares re-
served for conversion of
preferred sto~k) - 69,940
shares
Outstanding - 230,060 shares
Deficit:
$600,000.00
551,000. 00
$ 41,810.86
Paid-in surplus
Earned surplus (deficit) ( 60,775.60)(
49,000.00
1.,310 ,600. 00
18., 964. 74)
The Company is named as defendant in several lawsuits
for damages arising from the deaths of passengers in
an airplane accident. Damages asked in two of these
suits exceed the maximum insurance coverage of
$75,000. 00 per person by $5,000eOO and $547 . 50. It
is expected that final settlement of these suits will
be within the amount of the insurance coverage.
Dividends on preferred stock have been paid to April
1, 1938.
61,032.47
1,340,635.26
$1,752,622.64
========
STATEMENTS OF PROFIT AND IDSS AND DEFICIT
NORTHWEST AIRLINES, rnc.
Year ended June 30, 1938
OPERATING REVENUES
Mail
Passenger
Other transportation
OPER~TING EXPENSES
Maintenance
Depreciation and amortization
Other transportation
Traffic and advertising
Administrative and general
OTHER INCOME
Profit from disposal of
capital assets - net
Profit from repair and
supply services
Discounts and interest earned
Reserve for bad debts and
adjustments returned to incrnne
Sundry
Less sundry deductions _
FEDERAL AND STATE TAXES ON INCOME
Overprovision in prior years
Paid-in surplus;
Balance - June 30., 1937
Deduct:
PROFIT AND IDSS
NET
MENT
DEFICIT
$ 389.,640 .. 43
284.,019.33
1.,058.,502,61
238 .,541. 31
146., 940. 33
OPERATING IDSS
$ 21,07L 55
14 11 117 .15
7.,253,.95
2,500.00
2,408007
$ 47.,350.72
973. 2 8
IDSS BEFORE ADJUST-
FOR TAXES ON INCOME
tlET IDSS
Pr.em.iu.m 011. preferred stock retired
Additional Wisconsin income taxes
paid on predecessor compnay 1 s income
3,012.00
2.,234.78
Earned surplus (deficit):
Surplus - June 30., 1937
Deduct:
Net loss for the year
Dividends paid on preferred
stock - $5.00 per share
t46 ,607. 46
14.,362,22
$ 19.4. 08
60., 969, 68
DEFICIT - JUNE 30, 1938
$1,212., 143. 14
766Jl66l.68
44., 711. 47
$2 .,023 .,516-
.-
29
2
1
117.,644.,01
$ 94., 127. 72
46,377.44
47.,750.28
$ 46.,607.46
-------
-----,.~--
47,057.64
5.,246.78
41,810.86


60,775.60
18,964.74



Northvvest Airlines , Inc . ,
Saint Paul , Minnesota.
Saint Paul, Minnesota
September 2. 1938.
We have w..a.de an examination of the balance
sheet of 0RTHWEST AIRLINES, IJC, , as at June 30 , 1938
a.~d of the statements of profit and loss and deficit for
the year ended at that date . In connection therewith., we
examined or tested accounting records of the Company and
other supporting evidence and obtained information and
explanations from officers and employees of the Company;
1
Ne also made a general review of the accountL'r1g methods
and of the operating and income accounts for the year,
but 1e did not w..a.ke a detailed audit of the transactions.
In our opinion, based upon our examination,
the accompanying balance sheet and related state~ents of
profit and loss and deficit fairly present the position
of the Cornpe.ny at June 30, 1938 and the results of its
operations for the year ended at that date. Further, it
is our opinion that the statements have been pr0pared in
accordance with accepted principles of accounting , con-
sistently maintained b.,- the Compa..n .
Ernst & Ernst
Certified Public Accoun~ants .