Sixteenth ANNUAL REPORT 1955 . SOUTHWEST AIRWAYS Santa San -. . 01/THWEST AIRWAYS . ,P Salem F{ I \\ I \ .. _. I \\ / ~ Bend-Redmond I I I I / I I I 411t" Klamath Fall, 7\-------r- / \ I ---Y, ' I , --T \ I #~,ij/;_;'"cca \ ,, ----q \ / , , ' / !Nit Lake cay , ___ .o . Marysville R ~-- - eno ~ - - Ely S:::ento /~ l , ode,to/ \ 1 , Me,ced~ , . lf'"'"o \ Paso Ro San Luis 0 \ \ ' \ \ La, Vega./ Existing Routes lnyokern .--9,~ _... ~ ~::;~::~,:;~ j Oxnard-Ventura t J # Bur an.k -~ Los Angeles ' Ont~io- Riverside -San Bern;irdino long Bea I ~. ~ 1 Avalon ~J! Palm Springs - Indio \ Santa M Diego Proposed Routes----- Navy Contract * SOUTHWEST AIRWAYS COMPANY John H. Connelly . Ted R. Mitchell . . . Alwin W. Johnson . R. E. Costello Max A. King . Walter Roche . Floyd Hendrickson OFFICERS General Offices: San Francisco International Airport San Francisco, California President and General Manager Executive Vice-President Vice-President and Treasurer Vice-President-Traffic and Sales . Vice-President-Public Relations Secretary Assistant Secretary BOARD OF DIRECTORS Bert Allenberg John H. Connelly Floyd Hendrickson Alwin W. Johnson Leland Hayward, Chairman *Elected June -4, 1956 Ted R. Mitchell* Daniel O'Shea Walter Roche William B. Smullin AUDITORS PRICE, WATERHOUSE & COMP ANY 120 Montgomery Street, San Francisco, California REGISTRAR AND TRANSFER AGENT WALTER ROCHE 8 5 8 First National Bank Building Phoenix, Arizona 2 o,;' SOUTHWEST AIRWAYS *' --- -~. ,i- ,', u Eightg,fonrth ~ongrtss of tht tinittd ~tatts of gmmca AT THE FIRST SESSION &pn and Wtl a, ,Jae Cily of Waalaington on Wednaday, tlaefi/tla day of January, one tJ,owanJ raw lwnJral aml fi/ty{we To amend 8t'\tlon ~01 ( ) of thP Chll .,eronnutl<'tc Ad of 103...~. us amended. Be it enMt,d by tht> Sf'11aff' and 1/01111(' of Reprr"e11tatfres of the United Stafc1t of A111t1i,a in ('ony,e ... ,, 1111x,111blnl. Thnt sedicm 4- 01 (e) of the Civil Aeronautit-s .kt of 1U38, 11s umended ( 4V r. S. C. 487' ( e); 62 Stat. 987), is amended by nddin,r nt the end ther-eof the fo))owing: "(3) If any applicant who makt>s applitation for a certificate within one hundred and twenty dnys afte1 the date of enadment of tl}is para,zraph shnll show tlu,t, from .Jaunrnry 1, rnr>3. to the date of its apphcahon, it or its prec.let-es.~r in interest. wns an nir currier furnish- ing, within the continentRI limiti- of the rnited Stutes, locul or feeder aervice consisting of the c-11rriage of pe1~11!>!. property, un,l mail, under a tempo1Rr) t"t"rtifitnte of public conHnien<.'e Hild nete~itv issued by the Civil Aeronautil's Bourn the date of enactml'nt of thisJn,ragraph nnd the dat.e of its application: Prmided. That the Hour in i~mng the certificate is empowered to limit the duration of t.he certificate. as to not over one-half of the i11termetli11te points llllllled therein, w-hidi points it finds hn,e ,,-nemtetl insufficient tntffic to warrant a finding that the public comenien<'e and n~ity require~ pemurne11t te1t itka- tion at such time." APFIDIED MAY 191955 1iited Stat re8ident of PRESIDENT'S REPORT To the stockholders and employees of Southwes.t Airways Company Gross operating revenues reached a new high of $4,228,022 for the year 1955, an increase of. 2 2. 3 6 % over the previous year. This gain . was accomplished in spite of a 9.67% reduction in federal subsidy. Net earnings for the year were $115,518 or $.17 per share of outstanding capital stock after providing for federal income taxes of $72,784. Our auditors, Price Waterhouse & Company, have prepared detailed financial statements which cover the year's operations and are printed immediately after this letter. The following important events occurred in 19 5 5 having a direct effect on your com- pany's business: As a result of legislation passed by Con- gress and signed by the President of the United States on May 19, 195 5, the Civil Aeronautics Board issued to your company the first permanent operating certificate awarded to a local service air line. The significance of having a franchise of un- limited duration will be reflected in future years by a stability of operations not hereto- fore possible. A new route was awarded to the Company for a three-year period between San Fran- cisco and Los Angeles, California, via the intermediate points San Jose, Monterey, Bakersfield, Palmdale /Lancaster, and Bur- bank. Service on this new route was inaugu- rated on January 19, 1956. Operating re- strictions over the Company's entire system were also liberalized so that flights operating between terminal points are now required to make only two intermediate stops, pro- vided that a service pattern is maintained which will give each city served at least two trips per day. This change in restrictions has made it possible to now provide non- stop service for the :first time between (a) Eureka/ Arcata and San Francisco and ( b) Monterey and Los Angeles; one stop service between San Jose and Los Angeles; and one stop service between Bakersfield and San Francisco. Service from Sacramento to Los Angeles is also greatly improved. The Civil Aeronautics Board, at the same time, decided to restore United Air Lines' competitive service to Santa Barbara and Monterey. This decision will result in a substantial diversion of the business we have developed over the past several years at these cities. The result- ing reduction in income will be covered by additional public service revenue, and a petition for such increased federal subsidy was :filed with the Civil Aeronautics Board in January 19 5 6. The Company's fleet of aircraft was in- creased in 19 5 5 by one Martinliner, one Douglas DC-3, and one Lockheed 12-A executive-type airplane which will be used for charter and executive travel. In addi- tion, two Martinliner aircraft were pur- chased in January 19 5 6. At the present time our fleet consists of 7 Martinliners, 10 Douglas DC-3 aircraft, and one Lockheed 12-A. On December 2 9, 19 5 5, a fire razed one of the leased hangers which we occupied on the San Francisco Airport and destroyed one Martinliner aircraft and a substantial amount of equipment and other personal property. The loss was fully insured and collection of insurance proceeds has already been accom- plished. The aircraft was replaced within a few days and there was no interruption whatsoever of our normal air line service. Service to the public was improved in 19 5 5 over the previous year by an increase of 2 9. 3 9 % in revenue miles flown, pro- viding service to 268,618 passengers. This represents an increase of 64,804 in passen- gers carried or 3 1. 3 %- Since the close of the year public hear- ings have been commenced by the Civil Aeronautics Board to consider the extension of the Company's routes to Reno and Las Vegas, Nevada. A decision may be expected before the end of 19 5 6. In addition, the Company has filed route applications ex- tending north to Portland, Oregon; west to Boise, Idaho and Salt Lake City, Utah; and south to San Diego, California. Respectfully submitted, . . I SOUTHWEST AIRWAYS ......... ASSETS December 31 Current Assets: 1955 1954 Cash $ 188,004 $ 217,958 Accounts receivable: U.S. Government-mail, passengers and other .. . ... . ........ . . . 188,796 335,612 Traffic and agents . 247,845 201,155 Insurance claims receivable (Note A) 178,758 Miscellaneous, less allowance for pos- sible losses in collection ( 19 5 5- $467; 1954-$570) . . . . . ... .. . 28,757 30,003 Employees . ... 3,143 2,885 Inventories of materials and supplies, motor fuel, and customers' work in process, at approximate cost, not in excess of market . .... . .. . . 184,123 175,524 Prepaid expenses . . . . ... ...... . .. 68,800 112,561 $ 1,088,226 $ 1,075,698 Insurance Claims Receivable (Note A) $ 751,078 Property and Equipment, at cost: Flight equipment-pledged under note payable $ 2,442,432 $ 2,608,070 Ground and other equipment . . 300,304 445,631 $ 2,742,736 $ 3,053,701 Less-Accumulated depreciation 1,461,432 1,488,562 $ 1,281,304 $ 1,565,139 Construction in progress . . . . 24,260 11,283 $ 1,305,564 $ 1,576,422 Investments in Stocks of Service Organizations, at cost $ 4,321 $ 4,321 Deferred Charges: Extension and development expense .. $ 15,814 $ 34,083 Other . . . . . . . . . . . ..... . . . .. . . .. . 25,041 33,265 $ 40,855 $ 67,348 $ 3,190,044 $ 2,723,789 4 LIABILITIES Current Liabilities: Note payable to bank, current instal- ments ........ ..... .. . ...... . . Accounts payable . . . . . . . . . . . . . . . . . Taxes collected or withheld from others ... . ..... . . . ... . ..... . . . Accrued expenses . . . . . . . . . . . . . . . . . Transportation sold, not yet used or re- funded .............. . . . . .... . Federal taxes on income (estimated) (Note A) ................. .. . . Long-Term Debt: Notes payable to bank - secured by Chattel mortgage on flight equip- ment (Note B): 4% note maturing in monthly in- stalments to February 15, 1960 ... . 5% note . ...... .......... . . Conditional sales contracts, payable through 19 5 8 Provision For Federal Income Taxes of Future Years (Note A) 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 busi- ness, per accompanymg statement (Note B) ... . ..... .. ........ . . SOUTHWEST AIRWAYS ( AN ARIZONA CORPORATION) December 31 1955 1954 $ 132,000 597,777 69,674 79,854 22,678 72,658 $ 974,641 $ 434,000 8,397 $ 442,397 $ 171,711 $ 335,705 246,324 1,019,266 $ 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 $ 1,601,295 $ 1,327,275 $ 3,190,044 $ 2,723,789 5 . --- 6 . SOUTHWEST AIRWAYS STATEMENT OF Operating revenues: Passenger .... . .... . ......... . Mail ......... . ................ . Charter and contract operations ... . . Express, freight and excess baggage . Other ... .. .... . . Federal subsidy Operating expenses: Flying 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 .. Operating income Other (income) and expense: Interest Extension and development . . Net loss on disposition of assets . Other, net Estimated federal taxes on income Net earnings before extraordinary credit Extraordinary item: Excess of insurance recoverable over carrying value of replacement parts, etc. destroyed by fire, less estimated federal income taxes $7,000 . Net earnings for year . . . Earnings retained for use in the business: Balance, beginning of year . . . . . Excess of insurance recoverable over net book value of equipment de- stroyed by fire, less provision for fed- eral income taxes of future years (Note A) . ...... . . Balance, end of year . . . . . . . . . . . . EARNINGS Year Ended December 31 1955 1954 $ 2,781,027 74,259 293,683 94,851 19,390 $ 3,263,210 964,812 $ 4,228,022 $ 1,287,113 554,057 184,450 $ 2,025,620 $ 641,880 291,425 177,120 446,009 107,615 314,456 52,450 $ 2,030,955 $ 4,056,575 $ 171,447 $ 27,786 21,058 621 (14,395) $ 35,070 $ 136,377 65,784 $ 70,593 44,925 $ 115,518 745,246 158,502 $ 1,019,266 $ 2,006,971 61,885 226,700 69,382 22,5l4 $ 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 $ 30,485 8,553 1,715 (1,664) $ 39,089 $ 230,739 104,000 $ 126,739 $ 126,739 618,507 $ 745,246 NOTES TO FINANCIAL STATEMENTS December 31, 1955 Note A On December 2 9, 19 5 5, fire destroyed certain equipment and replacement parts having an aggre- oate net book value of approximately $525,000, and ~ubsequent to December 3 1, 19 5 5 insurance claims totaling approximately $910,000 were collected by the Company; claims remaining to be settled are nominal in amount. Claims receivable for damages sustained to replacement parts have been included in current assets and claims receivable for damages sustained to equipment have been shown separately. The Company proposes to elect use of the involun- tary conversion provisions of Section 10 3 3 of the Internal Revenue Code of 19 5 4, under which (a) taxable income is limited to the amount by which the insurance proceeds exceed the cost of equipment purchased to replace that destroyed and ( b) the tax cost basis of the new equipment will be equal to the basis of the destroyed equipment. The Company pro- poses to record in its accounts the newly acquired equipment at purchase cost, which is greater than the tax basis of the destroyed equipment, and there- fore, in future years the depreciation recorded in the accounts will exceed the amount allowable for income tax purposes. The excess of insurance recov- erable over net book value of equipment destroyed, less provision for federal income taxes of future years (representing estimated taxes which will be payable on income equivalent to the difference be- tween depreciation per books and depreciation allow- able for tax purposes) , has been credited to earnings retained for use in the business. Note B A new loan agreement was entered into January 3, 19 5 6 and subsequently amended whereby the bank loan has been increased to $1,202,000 to provide for the purchase of additional flight equipment. The new loan will mature in monthly instalments of $15,000 to November 15, 1960 with interest at 4% per annum; the remaining unpaid principal matures December 1 5, 196 0. The loan agreement provides among other things, that the Company ( 1) will not, without the 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) will maintain current assets at least equal to current lia- bilities. Note C The Company is now operating under a certificate of public convenience and necessity of unlimited duration, ordered by the Civil Aeronautics Board September 2 7, 19 5 5 . SOUTHWEST AIRWAYS COMPANY Nine Year Record of Progress FI NANC I A L Non- Profit or Net Operating (Loss) Before Federal Profit Total Operating Income Income Income or (Loss) Revenues Expenses (Expense) Taxes Taxes After Taxes 1955 $4,228,022 $4,056,575 $16,855 $188,302 $ 72,784 $115,518 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 C A 1111 Cl ~c::;ll:::l OPERATIONS AND TRAFFIC Revenue Number of Passengers Carried Seat Miles--Scheduled Service Miles Charter, Scheduled % Flown Total Etc. Service Sold Produced Sold 1955 3,316,457 268,618 32,535 236,083 47,131,928 79,005,1% 59.66% 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 2,663 135,158 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 SOUTHWltST AIRWAYS COMPANY IN HCOGIIITIQI!< 0, ITS C0HttllUTIOH ~o ,,.,, "'. raANS,0/IJ ATIOH HAVIH4J 0,IUT(O 'f. Y~A~~ ,