M P A N Y General Offices San Francisco Airport So. San Francisco, Calif. OFFI S LELAND HAYWARD . . Chairman of the Board of Director.r JOHN H. CONNELLY. President and General Manager BOARD OF DI ECTORS T. R. MITCHELL Vice President HARRY S. WHITE . Vice President ALWIN W. JOHNSON . Treasurer WALTER ROCHE . . Secretary FLOYD HENDRICKSON Assistant Secretary Bert Allenber g John H. Connelly Leland Hayward Floyd Hendrickson Alwin W. Johnson Daniel O'Shea Walter Roche HarryS. White AUDITORS Price, Waterhouse&Co. 3 51 California Street, San Francisco, California EGIST R Walter Roche TRA SFE 309 First National Bank Building, Phoenix, Arizona NT We are pleased to present here for your consideration the eleventh annual report of Southwest Airways Company covering the calendar year 1951. The Company has now been operating for over five full years under a Certificate of Public Convenience and Necessity issued by the Civil Aeronau- tics Board for the transportation by air of passengers, U. S. Mail, express and freight Operating Revenues: 1951 Passenger, express, freight, charter, etc. __________ $1,601,833 Mail _________ ___________ ____________________ 789,131 Total operating revenues $2,390,964 Operating Expenses __________________ 2,352,265 Operating Profit ________________________ $ 38,699 Non-operating income (expense) -------------------------- 56,932 Net Profit Before Federal Income Taxes------------------------ $ 95,631 Federal income taxes ____________ 22,400 Net Profit After Taxes ______________ $ 73,231 to the stockholders and employees of Southwest Airways Company over three route segments serving 3 3 cities in California and Oregon. Net profit for the year 1951, after Federal income taxes, amounted to $73,230.79. The following table shows the financial history of Southwest's operations since the Com- pany's inception as a certificated air carrier on December 2, 1946: 1950 1949 1948 1947 $1,269,857 $1,148,588 $ 962,421 $ 710,451 943,888 1,249,992 1,401,332 1,504,510 $2,213,745 $2,398,580 $2,363,753 $2,214,961 1,968,883 2,263,878 2,283,989 2,172,077 $ 244,862 $ 134,702 $ 79,764 $ 42,884 (16,856) (481) (15,602) (37,403) $ 228,006 $ 134,221 $ 64,162 $ 5,481 92,533 53,078 36,100 $ 135,473 $ 81,143 $ 28,062 $ 5,481 2 3 Analysis of the summary of earnings will reveal that for the year 1951 the Company's revenue from non- mail sources (passengers, express, freight and char- ter) increased $331,976, or 26.14% over the year 1950; compensation for carrying U. S. mail reflected a (avorable decrease of $154,757 or 16.40%. Due to the inflationary spiral, operating expenses increased $383,382 or 19.47% over the year 1950. The trend of inueased operating expenses was first felt by the Company in the early summer of 1951, and rising prices coupled with the impact of the renegotiation of labor contracts at the year end, has continued this trend into 1952. The problem of rising costs, which is common to all industries in the present economy, is receiving constant attention from the management and every effort is being made to keep costs to a mini- mum consistent with safe and sound operating proce- dures. Although it is one of the Company's major efforts to achieve self-sufficiency and independence from government support in the form of mail pay, the inflationary conditions mentioned above are beyond the control of management. For this reason the Com- pany felt compelled to file a petition with the Civil Aeronautics Board for an increased mail rate to be- come effective February 1, 1952. The following sum- mary shows the Company's break-even point before mail pay for the past five years: PER REVENUE MILE FLOWN 1951 1950 1949 1948 1947 Operating revenues ( exclusive of mail pay)------------------------------- $ .6340 $ .5346 $ .4747 $ .4071 $ .3832 Operating expenses ______________________ .9309 .8289 .9356 .9662 1.1715 Amount of mail pay needed to break even ______________________________ $ .2969 $ .2943 $ .4609 $ .5591 $ .7883 1951 1950 1949 ).948 1947 Revenue miles flown .................... 2,526,630 2,375,224 2,419,695 2,363,827 1,854,117 Revenue passenger miles Flown in scheduled service ...... 26,332,303 22,236,008 20,947,484 18,046,778 15,348,113 Passenger load factors (21 seat basis)-........................... 51.41% Number of passengers carried: Scheduled service--- 135,158 Charter service .......................... 2,663 Total passengers carried ...... 137,821 Mail ton miles ................................ 62,909 Express ton miles .......................... 46,480 Freight ton miles .......................... 125,243 Excess baggage ton miles .............. 8,660 It will be apparent from the above summary of opera- tions that the efforts of Southwest Airways have a significance not only in financial terms, but in the ever-widening range of the Company's services to people. In 1951 the Company transported 135,158 persons in scheduled air carrier service, a gain of ap- proximately 14% over the previous year. Revenue 45.S0o/o 41.56% 36.06% 39.23o/o 118,860 114,573 97,424 83,994 3,111 1,345 530 1,082 121,971 115,918 97,954 85,076 46,406 51,136 45,892 35,146 49,394 34,199 31,856 32,177 126,773 90,177 75,064 10,431 7,495 6,746 6,142 5,142 passenger miles flown increased by over 18o/o, indicat- ing not only an increase in the number of passengers carried, but reflecting a growth in the length of aver- age passenger trip. The amount of mail carried by Southwest increased from 46,406 ton-miles in 1950 to 62,909 ton-miles in 1951-an increase of 35.56o/o. 4 S-,,,,,,,.,,.bwap Simplified Comparative Statement of INCOME and EXPENSES Amount Received From: Revenue Doller Passengers ...................................... Express .......................................... Freight ........................................... Excess baggage .............................. Pessengers 61 % Charter ........................................... Incidental revenues ........................ Profit on disposition of property .... Interest earned ............................... Air Mail 32% Other income ................................. Mail ............................................... All Other, 4% Gross Income ....................... Disposition of Gross Income: Wages and salaries ........................ Where It Went Gasoline and oil ............................. Telephone, telegraph, teletype ...... 0 ther materials, parts and services ....................................... Rentals and landing fees ................ Insurance ....................................... Travel and incidental ..................... Advertising and publicity ............. Depreciation .................................. Taxes other than Federal income taxes .............................. Amortization of route development expenses ............... Federal income taxes ..................... Retained for Use Depreciation, 4% Total Expenses ..................... in the Business, 3% Balance Retained for Use in the Development of the Business ........ Amount $1,452,523 16,857 47,803 5,671 55,829 23,150 84,998 7,288 1,682 $1,695,801 789,131 $2,484,932 $1,161,636 291,419 85,733 303,555 104,166 86,689 63,650 69,168 103,727 90,174 29,384 22,400 $2,411,701 $ 73,231 1951 Per $1.00 of Revenue Amount $ .5845 $1,139,969 .0068 18,877 .0192 43,925 .0023 4,056 .0225 41,898 .0093 21,132 .0342 1,563 .0029 3,612 .0007 7,032 $ .6824 $1,282,064 .3176 943,888 $1.0000 $2,225,952 $ .4675 $1,013,610 .1173 243.729 .0345 78,106 .1222 215,050 .0419 65,323 .0349 69,994 .0256 52,320 .0278 83,572 .0417 82,256 .0363 72,054 .0118 21,932 .0090 92,533 $.9705 $2,090,479 $ .0295 $ 135,473 1950 Per$l.OO of Revenue $ .5121 .0085 .0198 .0018 .0188 .0095 .0007 .0016 .0032 $ .5760 .4240 $1.0000 $ .4554 .1095 .0351 .0966 .0293 .0314 .0235 .0375 .0369 .0324 .0099 .0416 $ .9391 $ .0609 Airline operations are conducted with a modern fleet of 10 Douglas DC3 aircraft, eight of which are equipped with 28 new seats each and two with 27 seats each. At the year end this flight equipment, exclusive of spare engines, radios, propellers, parts and assemblies, was stated on the records at an amortized value of $271,179. While the market value of these 10 aircraft is subject to fluctuation, the management maintains hull insurance coverage on the fleet of $850,000. The Company also operates complete aircraft maintenance, repair and overhaul fa- cilities at the San Francisco Airport for its own fleet and for the aircraft of others. Several of the Company's route development cases before the Civil Aeronautics Board were resolved recently. Most important to the continued success of the Company was the action of the Board in extending Southwest's Certificate of Public Convenience and Necessity to Septem- 1:-er 30, 1954, and suspending United Air Lines, Inc., from serving Santa Barbara, Monterey, Eureka and Red Bluff. United has appealed the issue of their suspension to the Seventh U. S. Circuit Court of Appeals, and a decision will probably be rendered early this summer. Other deci- sions by the Civil Aeronautics Board involving Southwest included the denial of a contemplated merger with West Coast Airlines, Inc., and the award of a route between Los Angeles, Cali- fornia, and Phoenix, Arizona, to Bonanza Air Lines, Inc. This latter decision was followed with a Board order of investigation "to determine whether the integration of the routes of Southwest and Bonanza into a single unified system by means of merger, consolidation, acquisition of con- trol, route transfer or in any other lawful manner would be in the public interest and in accord- ance with the public convenience and necessity as defined in Section 2 of said Civil Aeronautics Act." Preliminary and exploratory discussions have already been held in accordance with the Board's order. The Ninth U.S. Circuit Court of Appeals is now considering whether or not the Civil Aero- nautics Board has the authority to suspend the service of Western Air Lines at El Centro, California, and Yuma, Arizona, and to substitute Bonanza Air Lines. Southwest has also peti- tioned the Circuit Court of Appeals in this case to rule on the Civil Aeronautics Board's au- thority to rescind the Certificate of Public Convenience and Necessity which was issued to Southwest in December, 1949, to operate between Los Angeles, California, and Phoenix, Arizona. The outlook for 1952 in the local service airline industry is one of widening opportunities and especially so for Southwest Airways which serves an area that still continues to grow in popu- lation and industry. No annual report is complete without acknowledging the splendid work and cooperation of Southwest's employees, whose constant efforts are so important to the success of our Company. President 6 7 ASSETS CURRENT ASSETS: Cash in banks and on hand _____________________________________ _ U. S. Government securities, at cost .. ---- Accounts receivable: U. S. Government-mail, passengers and other Traffic and agents _ ______________________________________________ _ Miscellaneous, less allowances for possible losses in collection ( 1951-$704. 70; 1950-$1,248. 58)-------------------------------------------- Employees ------------------------------------------------------ Inventories of materials and supplies, motor fuel, and customers' work in process, at approximate cost------------------------------------------------ INVESTMENTS IN STOCKS OF SERVICE ORGANIZATIONS, at cost--------------------- PROPERTY AND EQUIPMENT, at cost: Flight equipment .. --------------------------------------- Ground and shop equipment-------------- Leasehold improvements----------------- Other ------------------------------------------------------ Less-Accumulated depreciation-- DEFERRED CHARGES: Prepaid insurance and taxes .. --- Extension and development expense ................... . Engine overhaul in process, etc ............................ . BA LAN U E December 31 1951 $ 87,474.18 500,022.79 188,786.63 114,113.22 30,216.02 3,669.19 102,753.55 $1,027,035.58 $4,321.00 $1,188,517.33 135,915.58 124,697.63 156,696.73 $1,605,827.27 1,119,485.48 $486,341.79 $18,838.96 55,073.49 14,403.31 $88,315.76 $1,606,014.13 1950 $ 299,569.43 299,473.84 194,013.37 97,086.46 30,183.33 1,323.08 80,424.77 $1,002,074.28 $511.00 $1,183,974.30 107,652.49 120,697.22 94,064.48 $1,506,388.49 1,136,448.33 $369,940.16 $ 33,027.23 72,597.78 25,437.21 $131,062.22 $1,503,587.66 S D E E T LIABILITIES CURRENT LIABILITIES: Accounts payable ...... ----- ... Taxes collected or withheld from others---~--------- Accrued expenses.---------------- Transportation sold, not yet used or refunded ______ . _____ Federal taxes on income (estimated)- RESERVE FOR AIRCRAFT ENGINE OVERHAUL.-. CAPITAL STOCK AND SURPLUS: Common stock: Authorized, 10,000,000 shares of 50c par value per share (Note B) Issued: December 31, 1950-651,610 shares---- December 31, 1951-655,985 shares-------- Paid-in surplus (Note B)---------------------------- Earnings retained for use in the business, per accompanying statement--.. ~~ 1951 $ 274,456.04 47,523.27 60,137.64 9,058.54 22,400.00 $ 413,575.49 $ 42,743.07 $ 327,992.50 234,600.50 . 587,102.57 $1,149,695.57 $1,606,014.13 December 31 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 8 9 of INCOME and EARNINGS RETAINED FOR USE in the BUSINESS Operating revenues: Year ended December 31 Passenger ........................................................................... _ Mail. ...... - Express ............................................................................... . Freight ................................................................................ . Charter ............................................................................... . Excess baggage .................................................................. . Other .................................................................................. . Total operating revenue ........................................... . Operating expense: Flying operations .............................................................. . Flight ~q~ipmen~ mainte?ance-direct ........................... . Deprec1atton-fl1ght equipment ...................................... . Ground operations ............................................................ . Ground and indirect maintenance .................................... . Passenger service ............................................................... . Traffic and sales ................................................................. . Advertising and publicity ................................................. . General and administrative ......................................... a Depreciation-ground equipment ................................... . Total operating expense ........................................... . Operating profit ........................................................ . Other income: Discounts earned ............................................................... Interest ............................................................................... . Net gain on disposition of equipment ............................. . 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, beginning of year .............................................................. . Earnings retained for use in the business, end of year .............................. , .............. . 1951 $1,452,522.93 789,131.36 16,857.02 47,802.59 55,828.51 5,671.23 23,149.98 $2,390,963.62 $ 735,296.34 198,509.33 78,776.99 $1,012,582.66 $ 429,086.70 165,655.26 107,868.49 314,708.48 70,742.23 226,670.67 24,949.95 $1,339,681.78 $2,352,264.44 $ 38,699.18 $ 1,682.02 7,287.76 84,998.48 $ 93,968.26 $ 1,645.37 29,384.35 6,006.93 $ 37,036.65 $ 95,630.79 22,400.00 .$ 73,230.79 513,871.78 $ 587_ ,102.57 1950 $1,139,969.14 943,888.17 18,876.53 43,925.17 41,897.99 4,056.36 21,132.04 $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 $1,128,651.75 $1,968,882.97 $ 244,862.43 $ 1,603.14 3,612.44 1,562.67 5,429.31 $ 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 TO FINANCIAL STATEMENTS NOTE On January 29, 1952, the Company's cer- tificate of public convenience and neces- sity, issued by the Civil Aeronautics Board, was amended so as to continue in effect up to and including September 30, 1954. Also, on January 29, 1952, the Civil Aeronautics Board suspended the certificate of United Air Lines, Inc., up to and including September 30, 1954, in so far as it authorizes service to Santa Barbara, Monterey, Eureka and Red Bluff, California; this would result in Southwest Airways Company having the exclusive right to furnish air trans- portation service to these points. United Air Lines, Inc., has filed an appeal in the 7th Circuit Court of Appeals to pre- vent the Civil Aeronautics Board from suspending United's authority to serve these points. NOTE Stock options have been granted to cer- tain officers and employees of the Com- pany; these options, which entitle the holders to purchase 15,425 shares of unissued common stock of the Company PRICE,WATERHOUSE & Co. To the Board of Directors of Southwest Airways Company 351. CALIFORNIA STREET SAN" FRANCISCO 4 March 14. 1952. In our opinion, the accompanying financial statements, together with the explanatory notes thereto, present fairly the position ~f Southwest Airways Company as of December 31, 1951, and the results of its operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consist- ent with that of the preceding year. Our examination of such financial statements was made in accordance with gen- erally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. Price, Waterhouse & Co. at $1.26 per share, expire on December 31, 1952. Similar options on 4,375 shares were exercised during 1951 and the proceeds of $5,512.50 was credited $2,187.50 to capital stock account and $3,325 to paid-in surplus. N O T E Because of increased operating costs, the. Company has petitioned the Civil Aero nautics Board for an increase in mail pay, effective February 1, 1952. 10 CRESCENT CITY ARCATA- EUREKA FT. BRAGG MENDOCINO UKIAH SANTA ROSA YREKA REDDING RED BLUFF CHICO OROVILLE MARYSVILLE YUBA CITY SACRAMENTO VALLEJO-NAPA OAKLAND SAN FRANCISCO WATSONVILLE SANTA CRUZ MONTEREY-CARMEL COALINGA ROUTE MAP OF