Seventh AN ~EP 1319~8 Ill Ill llllllll lllll lllllllllllllllllll llllllll lllll llllllll lllll lllll Ill lllll Ill 11111111111111111111111 o ~ o l]ATIONAL : ~ETY oUNCIL 1847 AVIAT ION SAFETY AWA RD TO SOUTHWEST AIRWAYS c a. in rl.'..:-,,911iri,,n ,,r irs ..... ,,nrributillll to $,1fo _ ~ir'Imnsp,,rt<1ti,,n h,wi119 op.:.-at12d the .:11tin2 y.:arof 1947 and , 0 as of'.D12c-.,mb1Zr 31, 1941 IS, IDS, aaa PASSENGER MILE S 1Pirh,,ur l1 poss-1119-,r ,,r .-r,n t:u,,lirv in s,h.,duf-,d p<1ss-1n9l'r c,myin9 fli9hr ,,~x,rntions outhvlest SOUTHWEST AIRWAYS COMPANY DIRECTORS BERT ALLENBERG JOHN H. CONNELLY LELAND HAYWARD FLOYD HENDRICKSON OFFICERS AND LELAND HAYWARD . JOHN H. CONNELLY , JAMES G. RAY . AL. W. JOHNSON. WALTER _ ROCHE . CORNELIUS H. SULLAVAN TED R. MITCHELL . MICHAEL E. COLE . GILBERT MILLER DANIEL O'SHEA JAMES G. RAY WALTER ROCHE OFFICIALS . Chairman . President Vice President . Treasurer . Secretary Assistant Secretary General Operations Manager . General Traffic Manager GENERAL OFFICES San Francisco Airport South San Francisco, California - ~outhwest ~---- TO THE STOCKHOLDERS AND EMPLOYEES OF SOUTHWEST AIRWAYS COMPANY On behalf of the Board of Directors we are pleased to submit a review of operations and the financial statements of the Company for the thirteen month period from December 1, 1946 to December 31, 1947. The first commercial flight by a Southwest Airways DC-3 carrying passengers, mail and prop- erty was made on December 2, 1946. The thirteen month period since that date has been one of development and progress in the solution of problems in administration, operating procedures and traffic generation. In spite of rising costs of materials and labor the Company now is in a sound finan~ial condition. During the period under review Southwest earned a profit of $5,480.69 after adjustment for accrual of retroactive airmail revenue. The Company's permanent retroactive and prospective airmail rate of payment was not established by the Civil Aeronautics Board until May U, 1948. Payment of the balance due pursuant to the retroactive rate decision was received dur- ing May 1948. Prior to establishment of the permanent mail rate the Company operated under a temporary rate of mail compensation so nominal as to place a severe financial handicap on the administration of the Company's affairs. Pending final determination of the Company's permanent mail rate it was necessary to resort to additional bank and equity financing. During the period under review 4565-3/10 shares of Southwest Airways Company common capital stock were sold, yielding the Company $150,654.90. OPERATIONS AND SERVICE The operating record during this initial period of operation was outstanding. Except for sea- sonal variations, a steadily increasing amount of passengers, mail, express and freight has been trans- ported. Many new methods of operation have been successfully developed and pioneered by the Company, including the use of a drawbridge type door with built in steps for entering and leaving the aircraft, stops of two minutes or less at intermediate stations, use of commercial radio stations in approaches and takeoffs during fog bound conditions, first commercial airline use of FIDO (Fog Intensive, Dispersai of) for operation during zero ceiling weather. These and other innovations in the airline industry have brought national prominence to the Company. Operating and traffic statistics during the period under review may be summarized as follows: Revenue Number of Miles Passengers Passenger Ton-Miles Carried Flown Carried Revenue Mail Express Freight 1946 December 37,096 897 $ 7,994.59 1,106 882 1947 January 57,341 1,692 $12,399.83 1,896 614 February 68,136 2,165 15,674.44 1,723 902 March 94,376 4,112 26,993.46 2,175 1,096 April 122,873 6,270 45,476.03 2,333 1,501 83 May 166,893 8,295 61,192.21 2,855 3,428 134 June 160,596 8,257 61,167.15 2,744 3,165 397 July 192,630 10,517 01,719.09 3,062 3,778 380 August 195,407 11,393 90,415.12 3,029 4,272 907 September 220,313 11,317 96,097.19 3,211 4,122 1,954 October 189,263 7,755 64,543.78 2,785 3,147 2,184 November 169,923 6,466 55,705.19 3,189 2,299 1,962 December 176,412 5,925 57,783.46 5,038 2,971 2,430 Southwest in 1947 carried 35% of the total number of passengers served by all eight of the nation's operating certificated local service airlines, 25% of all feeder mail ton-miles, 35% of all feeder express ton-miles and 16% of all feeder freight ton-miles. I I PASSENGER 35% MAIL 25% EXPRESS 35% FREIGHT 16% _....,.., outhvlest SIMPLIFlED STATEMENT OF INCOME AND EXPENSES FOR 13 MONTH PERIOD DECEMBER 1 , 1946 TO DECEMBER 31, 1947 Income derived from following sources: Passengers and Mail Express Freight Charter Other Income Total Income Income Dispm;ed of as follows: Materials, Supplies, and Outside Services Gasoline and Oil Insurance Rentals for Fields, Buildings and Offices Travel and Incidental Expenses Advertising and Publicity Depreciation on Flight and Ground Equipment Taxes other than Income taxes Engine Overhaul Reserve Provision Interest on Bank Loans, etc. Total . This left available for Employees and. Stockholders This $947,921.17 was divided as follows: Paid to Employees as Wages and Salaries Stockholders' share, retained in surplus to increase company's financial strength $2,181,671.54 11,488.87 4,233.97 11,006.37 10,341.85 $2,218,742.60 $ 440,425.20 135,794.23 76,880.07 52,406.56 83,782.75 61,798.92 311,204.57 57,069.89 22,554.29 28,904.95 $1,270,821.43 $ 947,921.17 942,440.48 $ 5,480.69 ROUTE APPLICATIONS During the period under review the Company participated in proceedings before the Civil Aeronautics Board involving its applications for helicopter service in the Los Angeles area and for conventional routes in the Arizona-New Mexico area, both of which have been denied. In the "Ad- ditional California-Nevada Service Case", hearing on which was held in October 1947, the Company seeks extensive additions to its existing Route 76. The Examiner's report and recommendation in this case has not yet been issued. In addition, the Company instituted a proceeding in 1947 to modify its existing certificate for Route 76 so as to permit operations short of terminal points. The authority sought in this proceeding now has been granted and is being utilized by the Company. EQUIPMENT The Company's flight equipment consists of nine Douglas DC-3 aircraft in passenger service, one Douglas C-47 aircraft used for training purposes and transportation of cargo, and one uncon- verted Douglas C-47 aircraft which is not presently in use. It is believed that the flight equipment now owned by the Company will be adequate for all necessary schedules on the existing route sys- tem and will suffice for moderate route expansion. Ground and other equipment consists of that property necessary to operate 23 airport stations, and at San Francisco Airport the Company's gen- eral offices and the maintenance and engine overhaul base. In December 1947 and January 1948 all Company facilities located in Phoenix, Arizona, and the general offices at Los Angeles, California, were moved to San Francisco Airport. The engine overhaul shop was improved and enlarged in order to accommodate outside engine overhaul work and it is believed that this department will be a profitable addition to existing operations. ROUTE MAP SOUTHWEST AIRWAYS COMPANY EXISTING ROUTE 76 ---- PROPOSED SERVICE outhvlest OUTLOOK FOR 19 4 8 The management will continue its program of route expansion and development and at the same time improve service on existing routes. The permanent mail rate established by the Civil Aero- nautics Board for Southwest Airways will requi~e the management to practice the most stringent economy consistent with safety and efficiency. Under this rate the Company will be paid, effective from April 1, 1948, 55 cents per revenue mile fl.own when the monthly passenger load factor is 41.99% or less. For each 1% increase in passenger load factor this rate is reduced by 6/10 of a cent. The following table taken from the Civil Aeronautics Board rate order shows, for various load fac- tors between 40 per cent and 60 per cent, the anticipated rate of return on the recognized investment after provision for Federal income taxes: Passenger Load Factor 40% 45% SO% 55% 60% Return on Investment after Federal Income Taxes 3. 7% 6.7% 9.2% 11. 7% 14.2% The Company's passenger, express and cargo revenues show a healthy and gradual increase, and with a continuation of the present level of prices the management should be able to meet its problems during the year with success. CONCLUSION The success of Southwest Airways has been the direct result of the loyalty, resourcefulness, skill and intelligence of the men and women in its employ. It is with great pride that the Board of Di- rectors looks back on the Company's first thirteen months of commercial airline operation and to the manner in which its employees and officers have met the challenge and maintained the traditions of Southwest Airways. Sincerely yours, Chairman President outhvlest AN ARIZONA CORPORATION CURRENT ASSETS: Cash in banks and on hand Accounts receivable: A S S E T S U. S. Post Office Department, for carrying mail (Note A) Traffic and agents Miscellaneous, less reserve of $1,400 Officers and employees Inventories of motor fuels, lubricants and materials and supplies, at approximate cost, not in excess of market INVESTMENT IN STOCK OF SERVICE ORGANIZATION, at cost . PROPERTY AND EQUIPMENT, at cost: Flight equipment - pledged, per contra Ground and shop equipment Leasehold improvements Other Less - Reserve for depreciation DEFERRED CHARGES: Prepaid insurance Prepaid taxes Extension and development expense Uniforms, deposits, etc. . BALANCE SHEET $ 826,158.77 34,496.81 18,954.42 1,800.01 $1,019,211.16 62,735.6.7 82,399.95 62,463.16 $1,226,809.94 ~ 334,300.26 $ 5,773.43 3,680.14 10,977.24 13,809.65 $ 53,826.93 881,410.01 58,180.21 $ 993,417.15 1,001.00 892,509.68 34,240.46 $1,921,168.29 AS OF DECEMBER 31, 1947 LIABILITIES CURRENT LIABILITIES: Notes payable to bank - secured by chattel mortgage on flight equipment, Note A Accounts payable Taxes collected or withheld from others . Accrued expenses Transportation sold, not yet used or refunded NOTES PAY ABLE TO BANK - secured by chattel mortgage on flight equipment ( due-$350,000 on November 30, 1949 and $150,000 on November 30, 1950, Note A) RESERVE FOR AIRCRAFT ENGINE OVERHAUL . CAPITAL STOCK AND SURPLUS: Common Stock: Authorized, 10,000,000 shares of 50c par value per share Issued, 23,393 shares -Note C Capital surplus, per accompanying statement Earned surplus : Balance, November 30, 1946 Profit for thirteen months ending December 31, 1947, per accom- panying statement . $ 575,088.21 5,480.69 Balance, December 31, 1947 (no cash divi- dends may be paid under the tetms of the bank loan) ( See notes to the financial statements) $ 11,696.50 178,971.00 580,568.90 $ 340,000.00 177,275.86 23,966.35 73,211.12 12,924.27 $ 627,377.60 500,000.00 22,554.29 771,236.40 $1,921,168.29 _..._.., I outhvJest STATEMENT. OF PROFIT AND LOSS FOR THE 13 MONTH PERIOD ENDING DECEMBER 31, 1947 (NOTE Bl Operating revenue: Passenger Mail (Note A) Express . Freight . Charter and special revenue Other Total operating revenue Operating expenses: Flying operations Flight equipment maintenance - direct Depreciation - flight equipment Ground operations Ground and indirect maintenance Passenger service Traffic and sales . Advertising and publicity General and administrative expenses Depreciation - ground equipment Total operating expense Net operating profit Other income : Discounts earned Refund of prior year's taxes Other Other deductions : Interest . Loss on disposition of equipment, net . Expenses of merged companies, net Other Net profit for the thirteen-month period $ 677,161.54 1,504,510.00 11,488.87 4,233.97 11,006.37 6,560.43 $ 419,628.77 273,017.37 263;015.56 $ 955,661.70 413,116.68 112,222.72 61,306.16 226,612.22 85,405.43 269,563.26 48,189.01 $ 1,069.15 1,410.68 1,301.59 $ 28,904.95 4,057.49 6,359.76 1,862.53 $2,214,961.18 2,172,077.18 $ 42,884.00 3,781.42 $ 46,665.42 41,184.73 $ 5,480.69 STATEMENT OF CAPITAL .SURPLUS 13 MONTHS EN.DEB DECEMBER 31, 1947 Balance, November 30, 1946 $ 15,307.50 Excess of fair market value over par value of 4701/z shares of capital stock issued in 1947 as compensation 15,291.25 148,372.25 Excess of cash received over par value of 4,565-3/10 shares sold during 1947 Balance, December 31, 1947 NOTE A On May 11, 1948 the Civil Aeronautics Board fixed the rates of pay which the Company is to receive for transportation of air mail after December 1, 1946. As a result, the Company received on May 27, 1948, $945,707.14 of addi- tional pay, of which $728,257.34 applied to the period prior to January 1, 1948 and has been included in the amount due from the United States Post Office Department in the accompany- ing balance sheet. The remainder of $217,449.80 applied to the period from January 1, 1948 to March 31, 1948. Of the $945,707.14 received, $579,353.57 must be applied to the payment of outstanding notes payable under the terms of the bank loan agreement. NOTE B The Company commenced flight operations on December 2, 1946 under a Temporary Certifi- cate of Public Convenience which expires No- vember 21, 1949. The fiscal year of the Company was changed from November 30 to December . 31 and the accompanying statement of . profit and loss covers the thirteen months ending Decem- ber 31, 1947. $ 178,971.00 NOTE C Of the 23,393 shares of stock issued, certifi- cates representing 81 shares have not been deliv- ered to the stockholders entitled thereto, but will be issued upon the surrender of certificates repre- senting 54 shares of stock of merged predecessor: PnJ CE,\ VATE R HOUSE & Co. To the Board cf Directors cf Southwest Airways Co=ipan:, '.'!e have examined the acccrrpanyiny, balance sheet of Southwest Airways Company as of Decertber 31 1~47 and tt.e stater.ients of capi tal surplus and profit and loss for the thirteen months ended on that date . Our examination was mad e in accordance with generally accepted auditing standards and included such tests of the accounting records and other supporting evidence, and such ot her proce- dt:res as we considered necessary in the circumstances. It was not practicable to confirm the arr.ounts receivable from the U.S . Post Office Department , as .to ,;hich 'lfe have satisfied ourselves by other means . ln our opinion , the accompanying balance sheet and related sta te- ments of capital sur11lus and profit ahd loss, together with the notes attached thereto, present fairly the position of Southwest Airways Company as of December 31 1947 and the results of its operations for the thirteen months then ended, in conformity with gene!'ally accepted accounting principles . STATION :sAIRPORT- 220 FEET :t_ ': . . _ C O M M E R C I A L R A D I O A 5 A N . -. . . ~ . .. . - I N S T R U M E N T A p p R O A C H A I D C 0 N T R I H u I 0 N s Late in 1947 plans were being formulated by Southwest A. ' .. d 1tways progressive opera- t10ns epartment; plans that were to arouse national and world "d . f h -w1 e mterest a ew months ence when a compa DC 3 . ny - was to perform a scheduled landing at Monterey Calif . usin . 1 , ornia, g a commerc1a radio station transmitter as . . an mstrument approach aid. With Civil Aeronautics Administration 1 S approva ' outhwest successfully undertook t h d o prove t e m isputable value of another "first" th. b . . . - is o v10us nav1gat10nal aid. outhvJest On the morning of December 14, 1947, a Southwest Airways' DC-3 descended through a blanket of peasou p fog hanging over the northern California coastal region. Moments later the big passenger laden aircraft successfully completed the world's first commercial airline scheduled "blind" landing.* At Eureka-Arcata, the nation's "foggiest" airport, FIDO (Fog Intensive, Dispersal of) now had been used initially by commercial aviation and another "first" was added to Southwest's growing line. ,:,ceiling visibility manufactured by use of FIDO from a zero-zero conditions to CAA approved instrument minimums.