Seventeenth ANNUAL REPORT 1956 40-PASSENGER FAIRCHILD F-27 TURBO-JET SOUTHWEST AIRWAYS Santa . . ~.... SOUTHWEST AIRWAYS ~ d ~ . p ~--~~ , , __ alemft. I \\ I ' I ', / ~ Bend-Redmond I I / I I I I - ,~ A Klamath Falls J S') Boise I \ ~I -~ ' ,, ---- " If ~:..,emucca T \ , , Elko \ . ,, ---~ \ I -- ~ / Salt Lake City - eno - - Ely ,ame,to ' " ' l , esto,#/ \ l , Fresno ,, \ ' I I Paso Ro San Luis Ob \ Santa Ma Santa Bar Elt'isting Routes Proposed Routes . - - - - - 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