Southwest Airways annual report 1956

Seventeenth
ANNUAL REPORT 1956
40-PASSENGER FAIRCHILD F-27 TURBO-JET
SOUTHWEST AIRWAYS
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Elt'isting Routes
Proposed Routes .
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Navy Contract




SOUTHWEST AIRWAYS COM
Gener~f Oflices:
OFFICERS
John H. Connelly . . . . President and General Manager
T. R. Mitchell . . . . . Executive Vice-President
* Alwin W. Johnson . . . . . . . Vice-President and Treasurer
Treasurer
Vice-President-Traffic and Sales
Vice-President-Public Relations
Secretary
*Resigned 12/31/56
E. Roger Dahl (Elected Sept. 19 57)
R. E. Costello .
Max A. King . . .
Walter Roche . . .
Floyd Hendrickson .
B O A R D 0 F
. Assistant Secretary
DIRECTORS
Leland Hayward, Chairman
Bert Allenberg
John H. Connelly
* Alwin W. Johnson
T. R. Mitchell
R. E. Costello (Elected June 19J7) Daniel O'Shea
Walter Roche
Floyd Hendrickson
William B. Smullin
AUDITORS
PRICE WATERHOUSE & CO.
120 Montgomery Street, San Francisco, California
REGISTRAR
Bank of America
300 Montgomery Street
San Francisco
TRANSFER AGENT
Crocker-Anglo National Bank
1 Montgomery Street
San Francisco
1
.
SOUTHWEST AIRWAYS
......
A D EC ADE 0 F PRO GRE SS
1947
1948
1949
19 50
19 51
1952
1953
19 54
1955
1956
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
F I N A N C I A
Total Operating
Revenues Expenses
$2,214,961 $2,172,077
2,363,753 2,283,989
2,398,580 2,263,878
2,213,745 1,968,883
2,390,964 2,352,265
2,883,069 2,740,413
3,271,655 3,401,012
3,455,519 3,185,691
4,228,022 4,056,575
5,225,736 5,154,251
A
II IJ
~~~
OPERATIONS A N D
Revenue
Miles
Flown
1,854,117
2,363,827
2,419,695
2,375,224
2,526,630
2,716,503
2,845,172
2,563,039
3,316,457
4,048,797
Number of Passengers Carried
Scheduled
Service
83,994
97,424
114,573
118,860
135,158
164,281
178,817
180,715
236,083
259,522
Charter
Etc.
1,082
530
1,345
3,111
2,663
776
9,549
23,099
32,535
29,718
Total
85,076
97,424
115,918
121,971
137,821
165,057
188,366
203,814
268,618
289,240
* See President's report opposite page, 5th paragraph, regarding temporary rates
2
L
Non- Net
Operating Profit
Income or (Loss)
(Expense) After Taxes
$ (37,403) $ 5,481
(15,602) 28,062
(481) 81,143
(16,856) 135,473
56,932 73,231
(3,942) 86,714
(14,596) (90,812)
(39,089) 126,739
16,8 5 5 115,518
(48,230) 5 ,010':
TRAFF I C
Seat Miles-Schedule Service
Load
Available
38,627,001
49,356,216
50,399,055
48,546,414
51,216,039
56,621,670
63,007,173
57,528,963
79,005,186
107,084,154
Sold
15,160,237
17,783,649
20,947,484
22,236,008
26,332,303
3 1,133,636
34,763,675
34,842,303
47,131,928
55,917,208
Faaor
or % Sold
39.25%
36.03
41.5 6
45.80
51.41
54.99
5 5 .16
60.56
59.66
52.22






PRESIDENT'S REPORT
TO OUR STOCKHOLDERS, EMPLOYEES AND CUSTOMERS
Although Southwest Airways Company began op-
erations in 19 3 9 and inaugurated its initial airline
activity as a scheduled freight air carrier for the U. S.
Army 16 years ago ( 1941), it was not until 1946
that the Company was certificated as a scheduled pas-
senger airline by the Civil Aeronautics Board. The
statistical record of these past 1 O years as a certifica-
ted air carrier is reflected on the page opposite to this
letter so that the Company's 6 5 9 stockholders, 460
employees, its customers, suppliers, and friends may
study the past decade, note the trends, and view the
future. We trust that these figures are presented
clearly and briefly to enable quick interpretation.
At present your company is operating a fleet of 7
Martin 44-passenger aircraft; 11 DC-3 28-passenger
aircraft; and 1 Lockheed 8-place charter plane. On
February 15, 19 5 7, an order was placed with Fair-
child Engine & Airplane Company for three F-27
turbo-prop jet 40-passenger aircraft. Spare Rolls
Royce Dart turbo-prop jet engines are also on order
directly from Rolls Royce. Delivery of this equipment
is due September 19 5 8, and necessitated the negotia-
tion of a $2,600,000 loan with the Bank of America,
San Francisco, California.
Labor relations with our employees is on a pleas-
ant! sound basis. Wages are comparable to the top
scale of the industry and production efficiency is the
highest.
On January 19, 195 6, service was inaugurated over
the new San Francisco-Los Angeles segment via San
Jose and Bakersfield. Since that date this route has
steadily developed and at present is one of the strong-
est segments of your company's system with a pas-
senger load factor of 61.1 % for the second quarter
of 19 5 7. Off setting this splendid gain was the sub-
stantial diversion of traffic attendant to the Civil
Aeronautics Board decision, by a 2 to 2 vote, granting
Santa Barbara and Monterey, United Air Lines serv-
ice in competition with Southwest. This decision
necessitates a substantial increase in Southwest's sub-
sidy as your company is now splitting the traffic with
United Air Lines between these points and the prin-
cipal terminals, Los Angeles and San Francisco, and,
also, of course, splitting at many other points hereto-
fore jointly served by both companies and now con-
nected by both to Santa Barbara and Monterey.
As your company has been on a temporary mail
rate since January 9, 1956, and as it has been the
policy of the Civil Aeronautics Board to grant a
carrier on a temporary rate a subsidy rate calculated
to cover only the Carrier's break-even need without
regard to profit, it is expected that the temporary
rate as established may be increased to include a
profit element when the final rate is resolved by the
Board. We anticipate the final rate will be deter-
mined late in 19 5 7 or early in 19 5 8, and, of course,
be retroactive to January 9, 19 5 6.
The year of 19 5 6 was a period of intensive route
development which culminated in the 1957 award
by the Civil Aeronautics Board of certification to
Las Vegas, Nevada, via two routings; the 500 mile
route, San Francisco-Las Vegas via San Jose and Bak-
ersfield; and the densely-traveled 293 mile route,
Burbank-Las Vegas. Service ever these route seg-
ments will be inaugurated in October 19 5 7.
During 1957, hearings before an Examiner of
the Civil Aeronautics Board were held on the Com-
pany's application to extend service North to Port-
land and East to Reno, Salt Lake City, and Boise.
This case may be decided early in 1958. Your com-
pany's investment in route development should re-
sult in a larger, stronger company in the years ahead.
You, no doubt recall that at the Annual Stock-
holders Meeting of June 4, 1956, the issue of chang-
ing the Company's name to PACIFIC AIRLINES,
was approved. The delay in effectuating the name
change is attributable to the requirement of obtain-
ing Civil Aeronautics Board approval. For this pur-
pose a hearing was held July 23, 1957, before an
Exam~ner of the Civil Aeronautics Board, and a de-
cision should be forthcoming within the next six
months.
You will be pleased to know that Congress has
again, as it did in the permanent certificate legis-
lation last year, expressed its understanding of the
importance of developing the local airlines by the
passage of two important bills which were proposed
by the local carriers: (1) in September 1957, the
President signed a bill which provides that the Gov-
ernment will guarantee private loans for flight equip-
ment; ( 2) A bill permitting airlines to issue equip-
ment trust certificates, a privilege heretofore granted
only to railroads. These two bills are designed to ease
the problem of financing badly needed replacements
for obsolete DC-3 aircraft so that local carriers
may efficiently and more profitably serve their rapidly
expanding markets.
Respectfully submitted,
. rJIITHWEST AIRWAYS
- --- ~
A S S E T S
Current Assets:
Cash
Accounts receivable:
U. S. Goverment-mail, passengers
and other ......... .. ........ .
Traffic and agents . . . . . . . . . . . . . . .
Insurance claims receivable .. . .... .
Miscellaneous, less allowance for pos-
sible losses in collection ( 19 5 6-
$2, 692; 195 5-$467) ...... . .. .
Employees .... .. ... .. ......... .
Inventories of materials and supplies
and motor fuel, at approximate cost,
not in "excess ot'fflarket . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . .
Insurance Claims Receivable
Property and Equipment, at cost
Flight equipmen.t-pledged under note
payable . . . . . . . . . . . . . . . . . . . . .
Ground and other equipment . . ... . . .
Less-Accumulated depreciation .
Construction in progress . . . . . . . . . . . .
Investments in Stocks of Service
Organizations, at cost
Def erred Charges:
Extension and development expense ..
Other ............ . .... . .. . .... .
A L A
December 31
1956 1955
$ 114,011
689,596
286,157
26,041
4,834
206,94~#
119,873
$ 1,447,457
$ 3,736,446
561,455
$ 4,297,901
1,765,020
$ 2,532,881
81,080
$ 2,613,961
$
$
4,321
34,230
164,795
$ 199,025
$ 4,264,764
$ 188,004
188,796
247,845
178,758
28,757
3,143
,184,~
t-23
68,800
$ 1,088,226
$ 751,078
$ 2,442,432
300,304
$ 2,742,736
1,461,432
$ 1,281,304
24,260
$ 1,305,564
$
$
4,321
15,814
25,041
$ 40,855
$ 3,190,044
s


E T
LIABILITIES
Current Liabilities:
Notes payable to bank, including cur-
rent instalments on long-term debt
Accounts payable .... . ...... .
Taxes collected or withheld from
others .... . ..... .. ..... .
Accrued expenses . . . . . . . . . . . . . . . . .
Transportation sold, not yet used or re-
funded . . .................. . . .
Federal taxes on income (estimated) ..
Lon-g-Term Debt:
Notes payable to bank - secured by
chattel mortgage on flight equip-
ment (Note A):
4% notes maturing in monthly in-
stalments to December 15, 1960 ...
Conditional sales contrac'ts, payable
through 1958 ............ ..... .
Provision For Federal Income Taxes of
Future Years
Capital Stock and Surplus:
Common stock:
Authorized, 10, 0 U O ,0 0 0 shares of
5 0c par valut per share
Issued, 671,410 shares . ... . ... . .. .
Paid-in surplus .................. .
Earnings retained for use in the bus-
iness, per accompanying statement
(Note A) ... ............. . . .. .
SOUTHWEST AIRWAYS
(AN ARIZONA CORPORATION)
December 31
1956 1955
$ 335,210
1,029,379
79,985
134,545
28,876
53,821
$ 1,661,816
$ 857,000
3,187
$ 860,187
$ 136,456
$ 335,705
246,324
1,024,276
$ 1,606,305
$ 4,264,764
$ 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
$ 1,601,295
$ 3,190,044
.
. SOUTHWEST AIRWAYS
---
STATEMENT 0 F EARNINGS
Operating revenues:
Passenger .... , .. ... . ........... . ............ .
Mail .. . . . ..... . . .. .......... . .... .. ... ..... .
Charter and contract operations .. . . ............ .
Express, freight and excess baggage ... .. ......... .
Other .................................. ... .
Federal subsidy (Note B)
Operating expenses:
Flying operations . . .. . . ... ........... .. ..... . .
Flight equipment maintenance ................. .
D . . fl' h .
eprec1at1on on 1g t eqmpment .... ... ....... . .
Ground operations ........ . ....... ........... .
Ground and indirect maintenance .. ... .......... .
Passenger service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Traffic and sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and publicity ....... : . . ....... . ... . .
General and administrative ........ . .... . ... . ... .
D . . d .
eprec1at1on on groun eqmpment .... ......... .
Opera ting income
Other (income) and expenses:
Interest . ......... . ...... . ...... . ..... . ..... .
Extension and development . .. . : ...... ......... .
Net (gain) or loss on disposition of assets .. .. .. .. . .
Other, net ................ . .. ... ............ .
Estimated federal income taxes
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 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 destroyed by fire, less provision for fed-
eral income taxes of future years . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . .
'' See 5th paragraph of President's report on page 3
6
Year Ended December 31
1956 1955
$ 3,129,855
102,496
224,101
95,855
21,417
$ 3,573,724
1,652,012
$ 5,225,736
$ 1,583,351
847,228
264,646
$ 2,695,225
$ 753,179
309,442
211,185
546,390
193,828
400,023
44,979
$ 2,459,026
$ 5,154,251
$ 71,485
$ 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
$ 45,902 $ 27,786
$
$
$
$
7,243 21,058
(2,497) 621
(2,418) (14,395)
48,230 $ 35,070
....;...._
__
..:.__
23,255 $ 136,377
18,245 65,784
5,010 $ 70,593
44,925
5,010* $ 115,518
1,019,266 745,246
158,502
$ 1,024,276 $ 1,019,266






NOTES TO FINANCIAL STATEMENTS
December 31, 1956
NOTE A:
Notes payable at December 31, 19 5 6 comprised the follow-
ing:
Unsecured 4 % loans, paid in August 19 5 7
Secured 4 % loans under loan agreement dated
January 3, 1956 .......................................... .
Conditional sales contract .............................. .
150,000
1,037,000
8,397
$1,195 ,397
On May 1, 1957, the 1956 loan agreement was superseded
by a new agreement and the balance of $962,000 owing at that
date was converted to the following secured loans:
5 % loan payable in monthly instalments of
$15,000 to June 15, 19 58............................ 412,000
5 % loan payable in monthly instalments of
$30,000 from June 15, 1958 to June 15,
1963. Under the loan agreement the Com-
pany may borrow from time to time on
or before September 30, 1958, an additional
$2,050,000 550,000
$ 962,000
An additional $145,787 has been borrowed since May 1, 1957
under the 19 5 7 foan agreement.
Under the terms of the 1957 loan agreement, the Company
has agreed that it ( 1) will not, without the prior written con-
sent of the bank, pay any dividends in cash or purchase, re-
deem or otherwise acquire for value any of its outstanding
shares, and (2) beginning January 1, 1958 will maintain current
assets at least equal to current liabilities and beginning July
1, 1959 will maintain current assets in excess of current lia-
bilities by at least $100,000; for the purpose of these compu-
tations current instalments of the loan are to be excluded from
current liabilities.
NOTE B:
On July 26, 1957 the Civil Aeronautics Board increased the
temporary rate of pay which the Company is to receive for
transportation of mail on and after January 9, 1956. As a re-
sult the Company received on August 5, 1957 $357,342 of
additional pay of which $228,570 applied to the period prior to
January 1, 19 5 7 and has been included in the accompanying
financial statements. The temporary rate as established may be
more or less than the final rate which will be eventually
established by the Board.
NOTE C:
The Company has contracted for the purchase of three
Fairchild F-27 aircraft for delivery during June and July
19 5 8. The cost of the aircraft together with spare parts will
be approximately $1,790,000 on which an advance payment
of $90,000 was made in May 1957. An additional payment of
$150,000 will be required in 19 57 and the balance will be
payable in 1958.
The Company also has contracted to purchase from Rolls-
Royce Limited four spare engines for Fairchild F-27 aircraft
for delivery during February and March 1958; cost will be
approximately 66,500 sterling. An advance payment of ap-
proximately $56,000 was made in July 1957 and the balance,
approximately $130,000 at current rates of exchange, will be
payable upon delivery.
NOTE D:
In 1956, the Company agreed with the Air Line Pilots As-
sociation to create a retirement plan for pilots effective as of
April 1, 1956. The plan is to be insured and based on data fur-
nished by an insurance company, the past-service costs of the
plan are estimated to be approximately $190,000. As at De-
cember 31, 19 5 6 provision of $21,525, not deductible for tax
purposes in 19 5 6, had been made in the accounts with respect
to pension liability; this amount represents the current service
1,:ost for the period from April 1 to December 31, 19 5 6 plus
the portion of estimated past-service liability applicable to this
period on a ten-year payment basis.
7
NEW./ service to
LAS VEGAS
COACH FARES*
MONEY-SAVING EXCURSION FARES*
ALL-EXPENSE TOURS
*Subject to C. A. B. Approval