Fifteenth ANNUAL REPORT 1954 SOUTHWEST AIRWAYS \ SOU,HWEST AIRWAYS COMPANY General Offices San Francisco International Airport San Francisco, California JOHN H. CONNELL y TED R. MITCHELL ALWIN w. JOHNSON R. E. COSTELLO MAX A. KING WALTER ROCHE FLOYD HENDRICKSON LELAND HAYWARD, Chairman BERT ALLENBERG JOHN H. CONNELLY WARNER EDMONDS, JR. FLOYD HENDRICKSON PRICE, WATERHOUSE & COMPANY President and General Manager Executive Vice-President Vice-President and Treasurer Vice-President-Traffic and Sales Vice-President-Public Relations Secretary Assistant Secretary ALWIN W. JOHNSON DANIEL O'SHEA WALTER ROCHE WILLIAM B. SMULLIN 3 51 California Street, San Francisco, California WALTER ROCHE 3 O 9 Central and Washington Building, Phoenix, Arizona 1 . ___ 2 . SOUTHWEST AIRWAYS- YREKA CRESCENT CITY REDDING EUREKA-ARCATA RED BLUFF YUBA CITY MARYSVILLE SACRAMENTO .. . SOUTHWEST AIRWAYS --- PRESIDENT'S REPORT T-o the stockholders and employees of Southwest Airways Company The year 19 5 4, which was Southwest's eighth full year of operation as a Federally certificated local service airline, was one of the Company's most successful years. Earnings were $126,739 or $ .19 per share of outstanding capital stock, after providing for Federal income truces of $104,000. Financial statements prepared by our auditors, Messrs. Price, Waterhouse & Co., follow this let- ter and set forth in detail Southwest's operations for the year. 19 5 4 represented a highly important year in the progress of Southwest and confirmed the confi- dence of your directors and management in the use of modern post-war aircraft in local airline service. In this year the operating costs of our Martinliner aircraft were stabilized and high effi- ciency in operation was achieved. The public ac- ceptance of these aircraft has been overwhelmingly favorable and new records in traffic development have resulted. That this trend is continuing in 19 5 5 is indicated by a 2 9. 3 % increase in number of passenger seat miles sold in January 19 5 5 over 1954 and a 44.6 % increase in February 1955 over 19 5 4. In addition, revenues from charter and con- tract operations in 19 5 4 increased by 2 3 % over the year 19 5 3. Contract operations include regu- larly scheduled flights for the U.S. Navy between Burbank and Inyokern, California and for Lock- heed Aircraft Corporation between Burbank and Palmdale, California. The Civil Aeronautics Board in 19 5 4 placed Southwest's mail and subsidy rate on a permanent basis and in doing so recognized the use of South- west's Martinliner aircraft for both cost and in- vestment return purposes. This was a far-reaching decision on the part of the Civil Aeronautics Board and one which will make possible the full development of traffic on Southwest's route. The renewal of Southwest's operating certificate and the issue of the continued suspension of United Air Lines at Santa Barbara, Monterey, Eureka and Red Bluff, California, were subjects of a public hearing held in Washington, D.C. in October 1954. It is your management's opinion that a de- cision by the Board, favorable to Southwest will be forthcoming in the summer of 19 5 5. In the meantime, there is a strong possibility that legis- lation may be passed by Congress,. making perma- nent the operating certificates of the leading local service airlines. Southwest also has on file with the Civil Aeronautics Board applications for ex- tensions of the Company's route to Stockton and Bakersfield, California, and to Reno and Las Vegas, Nevada. The Board has granted Southwest temporary authority under an exemption order to serve Stockton, California and such service was commenced on March 7, 19 5 5. Final decision by the Board on these matters has been def erred by the Board for simultaneous decision with the Company's certificate renewal case. In February 19 5 5 Southwest joined with Alle- gheny Airlines, Inc. in a joint venture to purchase additional flight equipment from the trustee in bankruptcy for California Central Airlines, Inc., an intra-state carrier not possessing a Federal Civil Aeronautics Board certificate of public convenience and necessity. I am happy to report that we were the successful bidders and that Southwest acquired an additional Martinliner aircraft, a Douglas DC-3 aircraft and certain spare parts at very advan- tageous prices. All station equipment and intangi- bles that were included in the original purchase were immediately resold to a third party in order that the bankrupt company's operations could be reactivated and their personnel re-employed. In- cluding the flight equipment recently obtained, Southwest's fleet now consists of fifteen aircraft, of which five are Martinliners and ten are Doug- las DC-3's. , It is a pleasure to announce at this time the election to Southwest's Board of Direaors of Mr. Warner Edmonds, Jr., attorney and civic leader of Santa Barbara, California. In the field of transportation no method of travel has grown as fast in all history as air travel. This is an achievement in which every Southwest stockholder and employee can be justly proud. I know that many of our stockholders regularly use the air for business or pleasure travel, but those who have not yet flown are in for a treat, as mil- lions of new travelers are discovering every year. Like them, you will find that air travel is Ameri- ca's, biggest travel bargain, for it combines all the advantages of speed, comfort, dependability, safety, and economy. Growth in air travel is important to the prosperity of the nation, and the State of California. It is equally important to you as a stockholder or employee and to your Company. This is your airline-we hope you will use it. I want to take this opportunity to express my appreciation to the employees of Southwest for their highly skilled an~ efficient effort on behalf of the Company and for their continued support in our common goal of keeping Southwest as one of the outstanding local air carriers in America. 4 BALANCE ASSETS December Jl Current Assets: Cash in banks and on hand . Accounts receivable: U.S. Government-mail, passengers and other Traffic and agents ... . .. ............ . .. . . Miscellaneous, less allowance for possible losses in collection (1954-$570; 1953- . $1,189) Employees ......... .............. ... . .. . Refundable federal taxes on income ......... . Inventories of materials and supplies, motor fuel, and customers' work in process, at approxi- mate cost, not in excess of market ~ .. . ... . Prepaid expenses. . . . ........... ........... . Investments in Stocks of Service Organizations, at cost ................ . , Property and Equipment, at cost: Flight equipment-pledged under note payable Ground and other equipment .............. . Less- Accumulated depreciation ..... .... ... . Constructio~ work in progress. ' Deferred. Charge's: Extension and development expense. . .. ..... . Other ..... ... ........... ... . .... ..... ... . 1954 1953 $ 217,958 335,612 201,155 30,003 2,885 175,524 112,561 $ 1,075,698 $ 4,321 $ 2,608,070 445,631 $ 3,053,701 1,488,562 $1,565,139 11,283 $ 1,576,422 $ 34,083 33,265 $ 67,348 $ 2,723,789 $ 147,993 250,347 188,393 41,916 2,345 49,023 199,513 161,239 $ 1,040,769 $ 4,321 $2,545,862 426,975 $ 2,972,837 1,262,655 $1,710,182 25,339 $ 1,735,521 $ 22,092 22,998 $ 45,090 $ 2,825,701 SOUTHWEST AIRWAYS SHEET (AN ARIZONA CORPORATION) L I A B I L I T I E S December 31 Current Liabilities: Note payable to bank . . Accounts payable ................. . ...... . Taxes collected or withheld from others . . .... . Accrued expenses ..................... .... . Transportation sold, n~t yet used or refunded .. Federal taxes on income (estimated) . . . . . . . . . . Long .Term Debt: . Note payable to bank, maturing in monthly in- stalments to Nove~ber 15, 1957, interest at 5 % per annum ( instalments due within one year included in current liabilities)- _ secured by chattel mortgage on flight equipment (Note B) : . . .............. . Condi~ional sales contracts, pay~ble through 1958 .. ..... . .......... ....... . Capital Stock" and Surplus: Common stock: Authorized, 10,000,000 shares of 5 Oc par value per share Issued, 671, 410 shares . . . . . . . . . , . . . . . . . . . . Paid-in surplus ........................... . Earnings retained for use in the business, per accompanying sta_ tement (Note B) .... 1954 1953 $ 168,000 602,724 61,648 90,177 20,358 104,000 $ 1,046,907 $ 336,000 13,607 $ 349,607 $ 335,705 246,324 745,246 $ 1,327,275 $ 2,723,789 $ 175,000 729,326 77,773 86,552 33,697 $ 1,102,348 $ 504,000 18,817 $ 522,817 $ 335,705 246,324 618,507 $1,200,536 $ 2,825,701 6 . . SOUTHWEST AIRWAYS -~ STATEMENT of Income and Earnings Retained for Use in the Business Year ended December 31 Operating Revenues: Passenger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mail ......... . .... . ... . .. . .. . ... . ...... . Express .. . . ... . . .. . . ... i . .. . . . .... .. .. .. . Freight ... . ........... . ... . . . .. . ....... . Charter .. .. .. ... .. . . ......... . .... . . . .. . Excess baggage . . . . . . . . . . . . . . . . . . . . . . . . . . . Other .. .. . .... .. . ... .. . .. .. ..... .... ... . Federal subsidy . . . . . . . . . . . . . . . . . . . . . , . . . .. Total operating rev~nues . . . . . . . . . . . . . . . Operating Expenses: Fly~g operations . . . . . . . . . . . . . . . . . . . . . . . . . . Flight equipment maintenance . ... .... ..... . Depreciation on flight equipment ...... . ... . . Ground operations ... ... ............. . .... . Ground and indirect maintenance . . . .. . ...... Passenger service . . . . . . . . . . . . . . . . .. . . . . . . . . . . . Traffic and sales .......................... . Advertising and publicity . . . . . . . . . . . . . . . . . . General and administrative ..... . . ........ .. Depreciation on ground equipment ...... .. . . Total operating expenses ...... ... . . ... . Operating profit (loss) .... . ..... ~ . .. . . . Other Income: Net gain (loss) on disposition of equipment . . . . Other ......... . .. ... ..... .. . . .... . .... . . Other Deductions: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Extension and development . . .............. . Personnel training, new equipment ...... . ... . Other .... . .. . .... . ............ . . .. ..... . Provision for estimated federal taxes on income . . . . . . . . . Excess provision for federal taxes on income in prior year Credit arising from claim for refund of federal taxes on income resulting from carry-back of 195 3 operating loss . ..... . . .. ... . ....... .. ........ . .. .. . . . . . Net Income (Loss) for Year Earnings Retained for Use in the Business: Beginning of Year . End of Year . 1954 $ 2,006,971 61,885 27,013 35,097 226,700 7,272 22,514 $ 2,387,452 1,068,067 $ 3,455,519 $ 1,014,978 340,801 189,461 $1,545,240 $ 528,081 233,089 136,826 352,911 84,886 252,097 52,561 $ 1,640,451 $ 3,185,691 $ 269,828 ($1,715) 1,796 $ 81 $ 30,485 8,553 132 $ 39,170 $ 230,739 104,000 $ 126,739 618,507 $ 745,246 1953 $ 1,926,293 72,108 25,059 44,447 184,695 7,569 18,471 $ 2,278,642 993 ,013 $ 3,271,655 $1,081,292 375,602 154,190 $ 1,611,084 $ 592,660 268,653 156,082 379,496 104,008 241,025 48,004 $ 1,789,928 $ 3,401,012 ($ 129,357) $ 63,511 2,592 $ 66,103 $ 35,533 18,820 21,986 4,360 $ 80,699 ($ 143,953) 4,118 49,023 ($ 90,812) 709,319 $ 618,507 -0 SOUTHWEST AIR~AYS HOUSE & CO, PRICE WATER ANc1sco 4 s~FB March 15 1955 d of Directors of To the Boar Airways company southwest l statements, financia the accompanying of i Position In our opin on, t fairlY the tes thereto, presen 4 d the results with the no 31 195 an together f December ith southwest ,r...irwaY company asa: then ended, in conformitY wis con- f r the ye a bas . of its operations o ipleS applied on such t d accounting princ a.mination of accep e our ex generallY eding year, that of the prec with generallY S istent with i accordance ts made n uch tes tatements was included s financials d accordingly s as uditing standards an auditing procedure accepted a ch other records and su certain receiV- f the accounting stances, o in the c ircum test were d necessarY selected for we considere rnment United states Gove we satisfied our- ableS from the s ondence, but direct corre p these items, not confirmed bY ther auditing selves bY 0 s as to procG~ LJ,;w,t.-f2 NOTE A: The Compan~ is opera~ing under a cert!fi- , care of public convenience and necessity, issued by the Civil Aeronautics Board, the authority con- tained in which is continued beyond the expiration date therein prescribed ( September 3 O, 19 5 4) by the Adminis- trative Procedure Act pending final disposition by the Board of the application of the Company filed January 11, 19 5 4, for the renewal of the Company's certificate. Subsequent to December 31, 1954, the Com- pany purchased, at a trustee's sale in bank- ruptcy, certain aircraft and parts for approximately $240,000. The bank has consented to this purchase and has loaned the Company an additional $150,000. A new loan agreement has been signed whereby the total bank loans will mature in monthly instalments to February 15, 1960 with interest at 4% per annum. The new loan agreement provides among other things, that the Company ( 1) will not, without prior written consent of the bank, pay any dividends in cash or purchase, redeem or otherwise acquire for value any of its outstanding shares, and ( 2) maintain current assets at least equal to cur.rent liabilities between the date of the agreement and December 3 1, 19 5 5, and thereafter maintain current assets in excess of current liabilities by an amount equal to fifty per cent of net in- come before depreciation but after all taxes and principal payments on the loan; this provision is cumulative and applies as to each fiscal year within ninety days after the termination of such year. 7 SOUTHWEST AIRWAYS COMPANY Eight Year Record of Progress FINANCIAL Non- Profit or Net Operating (Loss) Before Federal Profit Total Operating Income Income Income or (Loss) Revenues Expenses (Expense) Taxes Taxes After Taxes 1954 $3,455,519 $3,185,691 $ (39,089) $ 230,739 $104,000 $126,739 1953 3,271,655 3,401,012 (14,596) (143,953) (53,141) (90,812) 1952 2,883,069 2,740,413 ( 3,942) 138,714 52,000 86,714 1951 2,390,964 2,352,265 56,932 95,631 22,400 73,231 1950 2,213,745 1,968,883 (16,856) 228,006 92,533 135,473 1949 2,398,580 2,263,878 ( 481) 134,221 53,078 81,143 1948 2,363,753 2,283,989 (15,602) 64,162 36,100 28,062 1947 2,214,961 2,172,077 (37,403) 5,481 5,481 OPERATIONS and TRAFFIC Revenue Number of Passengers Carried Seat Miles-Scheduled Service Miles Charter, Scheduled % Flown Total Etc. Service Sold Produced Sold 1954 2,563,039 203,814 23,099 180,715 34,842,303 57,528,963 60.56% 1953 2,845,172 188,366 9,549 178,817 34,763,675 63,007,173 55.16% 1952 2,716,503 165,057 776 164,281 31,133,636 56,621,670 54.99% 1951 2,526,630 137,821 2,663 1'.35,158 26,332,303 51,216,039 51.41 % 1950 2,375,224 121,971 3,111 118,860 22,236,008 48,546,414 45.80% 1949 2,419,695 115,918 1,345 114,573 20,947,484 50,399,055 41.56% 1948 2,363,827 97,424 530 97,424 17,783,649 49,356,216 36.03% 1947 1,854,117 85,076 1,082 83,994 15,160,237 38,627,001 39.25% 8 Above all*flY