Southwest Airways Annual Report 1950

:lent/i
ANNUAL REPORT
1950
C o M P A N Y
SAN FRANCISCO AIRPORT
SOUTH SAN FRANCISCO, CALIFORNIA
..
Southwest Airways Company
General Offices
LELAND HAYWARD .
JOHN H. CONNELLY
TED R. MITCHELL .
ALWIN W. JOHNSON
HARRY S. WHITE .
WALTER ROCHE
CORNELIUS H. SULLAVAN
FLOYD HENDRICKSON
BERT ALLENBERG
JOHN H. CONNELLY
LELAND HAYWARD
FLOYD HENDRICKSON
San Francisco Airport
South San Francisco, California
Chairman
President
Vice-President
Treasurer
Sales Manager
Secretary
Assistant Secretary
Assistant Secretary
ALWIN W. JOHNSON
DANIEL O'SHEA
WALTER ROCHE
HARRY S. WHITE
PRICE, WATERHOUSE & COMPANY
3 51 California Street, San Francisco, California
WALTER ROCHE
309 First National Bank Building, Phoenix, Arizona
To the Stockholders and Employees of
Southwest Airways Company
In the year 1950, which was the fourth full year of
operation by Southwest Airways as a Federally cer-
tificated local service air carrier, the Company con-
tinued to progress and earned a net pro.fit of $135,-
473.05, equivalent to $.2079 a share 90 the outstand-
ing capital stock, ~fter provision for Federal income
Operating Revenues: 1950
Passenger, express
~r~ight, charter, etc. . . . . .. . . . . . $1,269,857
Mail .......................... 943,888
Total operating revenues .... $2,213,745
Operating Expenses ........... 1,968,883
Operating Pro.fit.~ ... ..... -.. $ 244,862
Non~operating 'expense (net) .... 16,856
Net Profit Before Federal
Income Taxes . ............... $ 228,006
Federal income taxes ........... 92,533
Net Profit After .
Taxes ...... ~ ... $ 135,473
taxes of $92,532.50. This compares with a net profit
of $81,143.17 for the year 1949, or $.1253 a share
after Federal income taxes of $53,078.45. A sum-
mary of the Company's operations fr9m the inception
of certificated flight operations on December 2, 1946
is set forth in the following table:
1949 1948
$1,148,588 $ 962,421 $
1947*
710,451
1,249,992 1,401,332 1,504,510
$2,398,580 $2,363,753 $2,214,961
2,263,878 2,283,989 2,172,077
$ 134,702 $ 79,764 $ 42,884
481 15,602 37,403
$ 134,221 $ 64,162 $ 5,481
53,078 36,100
$ 81,143 $ 28,062 $ 5,481
*Covers Jhe 13 month period e.nding Dec.ember 31, 1947.
Southwest Airways Company
OPERATING STATISTICS
1950 1949 1948 1947*
Revenue miles flown ............ 2,375,224 2,419,695 2,363,827 1,854,117
Revenue passenger miles ........ 22,236,008 20,947,484 18,046,778 15,348,113
Passenger load factors .......... 45.80% 41.56% 36.56% 39.73%
Number of passengers carried:
Scheduled service ............ 118,860 114,573 97,424 83,994
Charter service . . . . . . . . . . . . .. 3,111 1,345 530 1,082
Total passengers carried ..... 121,971 11 5,918 97,954 85,076
Mail ton miles . ................ 46,406 51,136 45,892 35,146
Express ton miles ............... 49,394 34,199 31,856 32,177
Freight ton miles . ... . .......... 126,773 90,177 75,064 10,431
Excess baggage ton miles ........ 7,495 6,746 6,142 5,142
*C011
ers the 13 month period ending December 31, 194i .
The above statements show the Company's consistent
trend of increasing non-mail operating revenues and
the lessening necessity for Government support in
the form of mail pay. Operating revenue from passen-
gers, express, freight, charter, etc., increased 10.5%
in 1950 over 1949. Revenue received for transporting
mail by aircraft decreased 24.5% in 1950 over 1949.
Operating expenses in 1950 decreased approximately
13% over 1949, caused principally by a reduction in
depreciation of flight and other equipment of $274,-
805 due to certain equipment reaching a fully depre-
ciated status, and a change in flight equipment depre-
ciation rates effective January 1, 1950. Prior to that
date, flight equipment costs were amortized over
three years to a residual value of lOo/o. Beginning
January 1, 1950 the estimated residual value was
reduced to 5% and the then book value of flight
equipment was amortized over the four years ending
December 31, 1953. Other factors resulting in lower
costs were greater efficiency on the part of the Com-
pany's employees and the approval by the Civil Aero-
nautics Administration of substantial increases in the
intervals of time of use before overhaul of the various
aircraft components.
The Company began the year operating flight equip-
ment consisting of nine DC-3 Douglas aircraft of 24
seats each. These nine aircraft are now undergoing
conversion to 28 seats each. The Company also
owned two C-47 Douglas aircraft held in reserve,
which were converted in the Company's own shops
in the spring and summer of 1950 to DC-3 aircraft
of 27 seats each. This fleet of eleven operating air-
craft will make it possible for the Company to furnish
better service to the public and participate to an even
greater degree in the available charter, freight and
scheduled passenger business.
0 perating revenues ( exclusive
On January 1, 1950, the Civil Aeronautics Board re-
duced the Company's mail rate to an amount which
yielded 40.83 cents per scheduled mile flown in 1950,
as compared with 52.08 cents per mile received in
1949. This reduction in mail pay requirements mani-
fests a very healthy trend for the Company and is
brought about principally by an increase in non-mail
revenues and a decrease in operating expenses which
has been previously discussed. The following state-
ment shows the extent to which the Company's break-
even need per revenue aircraft mile fl.own has de-
creased in the past four years. It has been the constant
aim of the Company's management to reach a self-
sufficient status so that the compensation received for
carrying the mail will be for services rendered with-
out any element of subsidy. In furtherance of this
policy, the Company has voluntarily petitioned the
Civil Aeronautics Board to lower its mail compensa-
tion to a rate which will yield 33.5 cents per sched-
uled mile flown effective May 1, 1951.
1950 1949 1948 1947*
of mail pay) ............. .... $ .5346 $ .4747 $ .4071 $ .3832
0 perating expenses . ............ .8289 .9356 .9662 1.1715
Amount of mail pay needed
to break even ................ $ .2943 $ .4609 $ .5591 $ .7883
*Co1
1
ers the 13 month period ending December 31, 1947.
Southwest Airways Company
Simplified Comparative Statement of
INCOME and EXPENSES
Income Received from
Following Sources:
Passengers . . . . . . . . . . . . . . . . .
Express ................... .
Freight ................... .
Excess baggage ............. .
Charter ................... .
Incidental operating revenues .. .
Other income .............. .
Mail ..................... .
Gross Income ............ .
Disposition of Gross Income:
Wages and salaries paid
to employees ............. .
Gasoline and oil ............ .
Telephone, telegraph and
teletype ................. .
Other materials, supplies,
and services . . . . . . . . . . . . . . .
Rentals and landing fees ...... .
Insurance ................. .
Travel and incidental ...... , ..
Advertising and publicity ..... .
Depreciation ............... .
Taxes other than Federal
income taxes ............. .
Amortization of extension and
development expenses ...... .
Federal income taxes ......... .
Total Expenses ........... .
Balance retained by the Company
for use in the development of
the business . . . . . . . . . . . . . . . . .
1950
Per $1.00
Amount of Revenue
$1,139,969 $ .5121
18,877 .0085
43,925 .0198
4,056 .0018
41,898 .0188
21,132 .0095
12,207 .0055
$1,282,064 $ .5760
943,888 .4240
$2,225,952 $1.0000
$1,013,610 $ .4554
243,729 .1095
78,106 .0351
215,050 .0966
65,323 .0293
69,994 .0314
52,320 .0235
83-,5 72 .0375
82,256 .0369
72,054 .0324
21,932 .0099
92,533 .0416
$2,090,479 $ .9391
$ 135,473 $ .0609
1949
Per $1.00
Amount of Revenue
$1,059,558 $ .4400
14,136 .0059
36,007 .0149
3,796 .0016
15,607 .0065
19,484 .0081
9,448 .0039
$1,158,036 $ .4809
1,249,992 .5191
$2,408,028 $1.0000
$ 990,789 $ .4115
249,126 .1035
68,724 .0285
283,727 .1178
63,771 .0265
68,314 .0284
54,697 .0227
65,649 .0273
357,061 .1483
70,610 .0293
1,339 .0005
53,078 .0220
$2,326,885 $ .9663
$ 81,143 $ .0337
s SHOWN by the certified finan-
cial statements included in this
report, the Company is in excel-
lent condition, having a work-
ing capital ratio of 2.6 to 1 and
a net worth of $1,070,952.28,
equivalent to $1.64 a share of outstanding capital
stock. The eleven operating aircraft are included
therein at an average book value on December 31,
1950 of $22,500 each and are insured for a value of
$85,000 each.
On, April 10, 1950, the Company and West Coast
Airlines, Inc. jointly filed a petition with the Civil
Aeronautics Board proposing a merger of West
Coast into Southwest. This joint petition was the
result of resolutions by the Board of Directors of
West Coast Airlines, Inc. on December 2, 1949 and
of Southwest Airways Company on February 27,
1950, authprizing such action. Under the terms of
the proposed merger agreement, Southwest will ac-
quire a maximum of out of 187,3711/2 outstand-
ing shares of capital stock of West Coast for $5.25
per share and the balance of the West Coast stock
will be acquired by Southwest in exchange for South-
west stock under a formula involving an adjusted
book value of the respective shares of stock. Although
September 1949 financial statements of both com-
panies formed the basis on which a merger agreement
was reached, it should be pointed out that the actual
ratio of exchange of stock will be determined from
the financial condition of each of the companies at
the end of the second month preceding the date of
approval of the merger by the Civil Aeronautics
Board. As of December 31, 1950 this exchange would
have been 2.07 shares of Southwest for 1 share of
West Coast. The following condensed pro-forma bal-
ance sheets before and after merger show the finan-
cial changes that have taken place between the time
immediately before the merger negotiations took
place and the end of 1950.
AS OF SEPTEMBER 30, 1949 AS OF DECEMBER 31, 1950
Southwest West Coast
Current assets $ 813,510 $ 675,061
Equipment (net) 335,123 341,390
Other assets 107,836 109,420
Total Assets $1,256,46') $1,125,871
Current Liabilities $ 295,191 $ 187,958
Long term debt ------
145,000
Reserves 38,159 9,848
$ 333,350 $ 342,806
NET WORTH:
Capital stock $ 323,830 $ 187,371
Surplus 599,289 595,694
$ 923,119 $ 783,065
Total Liabilities $1,256,469 $1,125,871
A public hearing on the merger was conducted by the
Civil Aeronautics Board in November 1950 during
which the merger was opposed by United Airlines, Inc.
and Western Air Lines, Inc. It is not believed, however,
that the Civil Aeronautics Board will allow such oppo-
sition to in any way deter the Board's sound develop-
ment of the nation's air transport system on the West
Coast. Under date of April 11, 1_951 the Examiner
After Merger Southwest West Coast After Merger
$ 911,445 $1,002,074 .$ 732,117 $1,152,088
676,513 369,940 224,398 594,338
217,256 131,574 65,333 196,907
$1,805,214 $1,503,588 $1,021,848 $1,943,333
$ 483,149 $ 383,536 $ 155,458 $ 538,994
145,000 - 75,000 75,000
48,007 49,100 14,933 64,033
$ 676,156 $ 432,636 $ 245,391 $ 678,027
t, 415,224 $ 325,805 $ 187,371 $ 416,745
713,834 745,147 589,086 848,561
$1,129,058 $1,070,952 $ 776,457 $1,265,306
$1,805,214 $1,5.03,588 $1,021,848 $1,943,333
rendered his report on the merger headng and recom-
mended that the Civil Aeronautics Board approve the
merger of Southwest and West Coast and transfer the
certificate of public convenience and necessity of West
Coast to Southwest. The oral argument will probably
be held in the summer of 1951 and the Board's decision
should be forthcoming shortly thereafter. If the Civil
Aeronautics Board renders a decision favorable to the
merger and the transaction is consummated in the man-
ner provided for and outlined above, Southwest Airways
will emerge as the continuing operating company.
It will be observed from Note C to the financial state-
ments that there is a contingent stock option outstand-
ing which entitles the holder to purchase 32,500 shares
of the unissued common stock of th~ Company at $1.50
per share. This option was granted to Mr. Nick Bez,
President of West Coast Airlines, Inc. as an induce-
ment for him to continue his activities on behalf of the
merged company. Mr. Bez has a history of long success-
ful association in the Pacific Northwest and as one of
its leading citizens is well-known throughout the area.
The directors of Southwest believe that the continued
interest of Mr. Bez is very important and desirable for
the successful development of the merged company in
the Pacific Northwest and offered the option method
as being the most economical manner of assuring the
continuation of his services. The following is a copy of
the option agreement.
~
or
BY .~ e.si~J . Jo~
~ tar
..:;.-
Southwest Airways Company
As a result of the merger application mentioned
above, the Civil Aeronautics Board reopened the case
involving the Southwest certificate renewal .and the
United Airlines suspension issues in order to deter-
mine the effect of the merger on these points. A deci-
sion in this case is expected to be made by the Civil
Aeronautics Board in the near future.
On December 19, 1949, the Company was awarded
a certificate for local service operations between Los
Angeles, California and Phoenix, Arizona via seven
intermediate points. After several postponements by
the Civil Aeronautics Board of the date of activation
of this route, the Board on March 10, 1950 rescinded
the operating certificate for this route segment be-
cause of certain legal complications which the Board
(AN ARIZONA CORPORATION)
felt required reconsideration. The Board then re-
opened the "Additional California-Nevada Service
Case" for rehearing and redetermination of the serv-
ice requirements between Los Angeles and Phoenix.
In this reopened case, the public hearing of which -
was completed in February 1951, Southwest is apply-
ing for authority to serve Santa Ana-Laguna Beach,
Oceanside, San Diego, El Centro, Indio, Blythe, Palm
Springs, Banning-Beaumont, San Bernardino-River-
side, Ontario-Pomona, California, and Yuma, Ajo,
and Phoenix, Arizona. There are two other air car-
rier applicants in this case, and it is not possible at
this time to determine whether the Board will author-
ize any new local service in this area or when the
decision will be rendered.
President
Current Assets,
Cash in banks and on hand . . . . . . . . . . . . . . . . . . .
U. S. Government securities, at cost . . . . . . . . . . . ..
Accounts receivable:
U. S. Post Office Department, for carrying mail . .
Traffic and agents ....................... .
Miscellaneous, less allowances for possible losses
in collection (1950-$1,248.58; 1949-
$1,511.46 ............................ .
Employees ............................ .
Inventories of mo.tor fuels, lubricants and materials
and supplies, at approximate cost
Investments in Stocks of Service
Organizations, at cost ........ : ......... .
Property and Equipment, at cost
Flight equipment ......................... .
Ground and shop equipment ................ .
Leasehold improvements ................... .
Ocher .................................. .
Less-Accumulated depreciation ............. .
Deferred Charges:
Prepaid insurance and taxes ................. .
Extension and development expense .......... .
Engine overhaul in process, etc ............... .
BALANCE
December 31
1950 1949
$ 299,569.43 $ 293,775.80
299,473.84 300,075.23
168,705.25 115,117.36
123,339.79 68,246.62
29,238.12 20,795.92
1,323.08 1,081.07
80,424.77 87,510.63
$1,002,074.28 $ 886,602.63
$ 511.00 $ 511.00
$1,183,974.30 $1,008,468.26
107,652.49 91,591.10
120,697.22 103,299.31
94,064.48 134,592.02
$1,506,388.49 $1,337,950.69
1,136,448.33 1,056,609.54
$ 369,940.16 $ 281,341.15
$ 33,027.23 $ 28,298.03
72,597.78 37,253.26
25,437.21 19,704.68
$ 131,062.22 $ 85,255.97
$1,503,587.66 $1,253,710.75
SHEET
Southwest Airways Company
Current Liabilities:
Accounts payable ..........................
Taxes collected or withheld from others .........
Accrued expenses .........................
Transportation sold, not yet used or refunded ....
Federal taxes on income ( estimated-Note D) ... .
Reserve for Aircraft Engine Overhaul
Capital Stock and Surplus:
Common stock:
Authorized, 10,000,000 shares of 50c par
value per share (Note C)
Issued.
December 31, 1949-647,660 shares ........ .
December 31, 1950-651,610shares ........ .
Paid-in surplus (Note C) ................. .
Earnings retained for use in the business,
per accompanying statement (Note B) ..... .
(AN ARIZONA CORPORATION)
1950
$ 196,825.63
37,424.94
41,966.09
13,305.27
94,013.51
$ 383,535.44
$ 49,099.94
$ 325,805.00
231,275.50
513,871.78
$1,070,952.28
$1,503,587.66
December 31
1949
$ 129,141.62
25,161.98
53,804.90
8,672.88
53,000.00
$ 269,781.38
$ 53,427.14
$ 323,830.00
228,273.50
378,398.73
$ 930,502.23
$1,,253,710.75
ST A TEMENT of INCOME and EARNINGS
RETAINED for USE in the BUSINESS
0 peratin g revenues:
Passenger ................................ .
Mail .................................... .
Express ................................. .
Freight ................................. .
Charter and special revenue .................
Total operating revenue . . ...... f
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 ................. .
Depreciation-ground equipment ............ .
Total operating expense ............... .
Operating profit ...................... .
Other income:
Discounts earned . . . . . . . . . . . . . . . . . . . . . . ... .
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . ,. . . . ... .
Other .................................. .
Other deductions.
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ . .
Extension and development ................. .
Other ...... ~ ........................... .
Provision for estimated federal taxes on income ........ .
Net income for year . ....................... .
Earnings retained for use in the business,
b I
egtnntng o year . ........................ .
Earnings retained for use in the
business, end of year . .................... .
1950
$1,139,969.14
943,888.17
18,876.53
43,925.17
67,086.39
$2,213,745 .40
$ 609,883.90
173,418.87
56,928.45
$ 840,231.22
333,900.90
142,953.25
90,807.50
261,842.13
86,954.44
186,866.23
25,327.30
$1,968,882.97
$ 244,862.43
$ 1,603.14
3,612.44
6,991.98
$ 12,207.56
$ 1,272.82
21,932.32
5,859.30
$ 29,064.44
$ 228,005.55
92,532.50
$ 135,473.05
378,398.73
$ 513,871.78
December 31
1949
$1,059,557.84
1,249,992.46
14,135.60
36,007.30
38,887.36
$2,398,580.56
$ 601,064.56
265,073.65
293,193.55
$1,159,331.76
334,936.72
124,316.64
85,629.60
237,491.75
70,700.73
187,603.78
63,867.14
$2,263,878.12
$ 134,702.44
$ 1,390.96
671.17
8,435.13
$ 10,497.26
$ 3,427.17
1,338.93
6,211.98
$ 10,978.08
$ 134,221.62
53,078.45
$ 81,143.17
297,255.56
$ 378,398.73
I
The Company is operating under an amended
certificate of public convenience and neces-
sity, issued by the Civil Aeronautics Board, the authority con-
tained in which is continued beyond the expiration date
therein prescribed (November 21, 1949) by the Adminis-
trative Procedure Act pending final disposition by the Board
of applications by the Company for extension of its operating
authority. The Civil Aeronautics Board examiner has recom-
mended that the Board extend the Company's certificate to
September 30, 1954.
On April 6, 1950, a joint application was
filed with the Civil Aeronautics Board by the
Company and West Coast Airlines, Inc., requesting approval
of a plan of merger of these companies, under which plan
Southwest Airways Company would be the survivor corpora-
tion. The hearing before the Civil Aeronautics Board with
respect to the merger plan has been completed but a decision
thereon has not as yet been rendered.
Under the terms of the plan of merger, no dividends or
other di~tributions to stockholders may be made by either
party thereto without prior written consent of the other.
Stock options have been .granted to certain
officers and employees of the Company; these
options, which entitle the holders to purchase 19,800 shares
of unissued common stock of the Company at $1.26 per
share, expire on December 31, 19 5 2, except that an option
in respect of 375 shares held by a former employee expires
on April 10, 1951. Similar options on 3,950 shares were
exercised during 1950 and the proceeds of $4,977 was cred-
ited $1,975 to capital stock account and $3,002 to paid-in
surplus. A contingent stock option is also outstanding, which
entitles the holder to purchase 32,500 shares of unissued
common stock of the Company at $1.50 per share. This
option may not be exercised until thirty days after the date
the Civil Aeronautics Board approves the proposed merger,
mentioned in Note B, and continues in effect for five years
thereafter. In the event such approval is not obtained on or
before January 1, 195 3, this option will expire.
The Company's federal income tax returns
for the taxable periods to and including the
year ended December 31, 1947 have been examined by a
Revenue Agent and additional taxes proposed to be assessed
have been provided for in the accounts. In the opinion of
officials of the Company the liability for federal income taxes
as shown in the accounts is sufficient to provide for all federal
income tax liabilities applicable to all open years; however,
the liabilities for these years cannot be finally determined
until the related returns have been reviewed by the Bureau of
Internal Revenue.
December 31, 19.50
PRICE,WATERHOUSE & Co.
To the Board of Directors of
Southwest Airways Company
SAN FFI.AN" C ISCO 4
l'ebruary 21 1951
In our opinion, the acccmpan;ying financial statements, together With
the explanatory- notes thereto, present fairly the position ot .Southwest AirWays
Company as of December 31 1950 and the results of its operations tor the year
then ended, 1n contol'lllity with generally accepted accounting principles applied
on a basis consistent with that of the preceding ;year. Our exam1nat1on ot suoh
financial statements was made in accordance with generally accepted auditing
standards and accordingly included such tests of the accounting records and
such other auditing procedures a we considered necessary 1n the oircumatances.
It was not practicable to confil'lll the amount receivable from the United State
Poat Office Department, as to which we have satisfied ourselves by M&rul o~
other auditing procedures.
From the commencement of flight operations
in December 1946 to December 31, 1949,
sufficient depreciation had been provided from income to
reduce the net carrying value of flight equipment to an
amount approximating residual value. The depreciation pro-
vided for flight equipment since January 1, 1950 consists
primarily of the amortization of recent major air frame over-
hauls, conversions and current additions. Because of the fore-
going, the depreciation provided during 1950 for flight
equipment was $236,000 less than the amount provided dur-
ing 1949. Recognizing that the principal flight equipment
was substantially depreciated, and therefore the Company
required less reliance on mail pay, the Civil Aeronautics
Board established a lower rate of pay for carrying mail, effec-
tive January 1, 1950; this decrease in mail rate largely ac-
counts for the reduction of approximately $305,000 in mail
revenue for 1950 as compared with 1949.
JIONAL DAff TY lJNCll
1949
AVIATION
SAFETY AWARD
TO
SOUTHWEST AIR~MAYS tO.
in rec"!}nici,,n of irs co11tribution to $,ifo .::fir1i,111s.jl\'rt,HiN1
htwimJ operated 3 )X'U-S ,1,nd,
n.s of 'i:>ec.zmber 31, 194-9
57~ 9411
llitft,,uta J"l!'s;i119et .-,y .:r,m fotalit}, in
.,-.dwdufod. pass.>fl9i?r c.myi119 fli9ltr op,imtfons
Aviation Safety Award
The National Safety Council presented the above award to Southwest in
1950 in recognition of the Company's e-ontinuously safe operations through
1949. A similar award was earned by the Company for the year 1950.
Soutnwest
C 0 M p A N y