Pacific Northern Airlines, Inc. Annual Report to Stockholders 1949

PACIFIC NORTHERN AIRLINES, INC
*
Annual Report to Stockholders
1949
PACIFIC NORTHERN AIRLINES, INC
Austin E. Lathrop
G. P. O'Grady
A. G. Woodley
John E. Manders
C. A. DuRose
Clarence W. Nelson
M. E. Diamond
Dean B. Hart
General Office: Anchorage, Alaska
DIRECTORS
A. G. Woodley
OFFICERS
R.A.Rowan
John E. Manders
President and General Manager
Vice-President and General Counsel
Vice -President, Operations
Secretary-Treasurer
. Assistant Secretary
. Assistant Secretary
Treasury and Accounting Office: 1626 Exchange Building, Seattle, Washington
General Traffic and Sales Office: 1324 Fourth Avenue, Seattle, Washington
vVashington Counsel: Gerald P. O'Grady, 1025 Connecticut Avenue NW, Washington, D. C.
Auditors : Lybrand, Ross Bros. & Montgomery
Report to Stockholders of
PACIFIC NORTHERN AIRLINES, INC
The year 1949 was the first year in the Company's eighteen years of operation that
a profit was not realized. Operating losses were $95,978 after charges for depreciation
of $210,227. These losses were offset in part by non--operating profits and tax carry-
back resulting in a net loss of $59,448.
During the year the Company in order to further develop air travel in the Terri--
tory reduced its passenger fares on all its routes. These reductions amounted in some
instances to as much as 35 per cent. While these lower rates stimulated air travel and
increased passenger miles flown by 340,000 over the previous year, the gross revenues
were less by $65,000. Also influencing the decrease in gross revenue was the increased
diversion of passengers and freight revenues by the numerous non--scheduled carriers
operating one--plane one--carrier non--stop service from the States to points on the Com--
pany' s routes in Alaska in competition with the two--carrier two-plane services of the
Company and Pan American Airways connecting at Juneau.
Normal wage :md salary increases and higher rental and landing fees at Juneau,
Kodiak, and Anchorage accounted for certain increases in operating costs. However,
the major factor of cost increase was the requirement of the Post Office Department for
additional schedules to be operated commencing September 1 , 1949. on some of the
Company' routes which schedules were not needed for passenger or cargo traffic but
were essential in order to handle the increased volume of mail between those points.
These schedules involved approximately 10,000 additional miles each month, the cost
of which could not be offset by any revenues other than mail. The Company therefore
petitioned the Civil Aeronautics Board to establish a permanent mail rate to apply not
only to these additional schedules but also to all schedules operated by the Company
and designated by the Post Office Department for the transportation of mail. The rate
heretofore set by the Board was established in May, 1947 and applied only to services
performed on the Anchorage ... Juneau route. Mail rates on other routes of the Com--
pany have never been set by the Board, and the rates currently being paid are those that
were in effect at the time of the passage of the Civil Aeronautics Act in 1938 and which
have been continued in effect under Section 409a of the Act which requires that the
then effective rate would continue to apply until such time as temporary or permanent
rates would be fixed by the Board. These rates were those established by competitive
bidding prior to 1938 and have no relation to present costs or standards of service being
rendered today.
No action on the Company's application was received from the Board within the
year, but subsequently on February 14, 1950, the Board issued an order proposing a
system temporary rate of 49c an airplane mile for the period beginning April 1 and end-
ing September 30 of each year and a rate of 7 Sc an airplane mile from October 1 to
PACIFIC NORTHERN AIRLINES, INC.
March 31 of each year, the effective date to be January 1, 1950. This would be an av-
erage rate of 62c an airplane mile based on a designated daily mileage of 2333 miles.
This rate is the lowest effective rate received by any carrier in Alaska and approxi-
mately 5 7 c per airplane mile less than the average paid for Alaskan services. On Feb-
ruary 21, 1950, the Company filed an answer to the Board's order in which it accepted
the temporary rate but petitioned that the effective date be made as of October 1 , 1 949,
which would be the first of the month following the month in which additional sched-
ules were ordered. If this petition is granted, the Company will receive approximately
$54,000 additional mail pay for 1949, which will offset the net loss for the year by that
amount.
The fixing of a temporary mail rate is only an expedient of the Board calculated to
permit the carrier to break even on its operations and to provide against impairment of
its working capital until such time as the Board can grant a permanent rate which will
give the carrier sufficient compensation to enable the carrier to make a profit on its in-
vestment. The Company estimates that when a permanent mail rate has been so estab-
lished that it will receive additional mail payments for services in 1949 to eliminate en-
tirely the book loss for the year and in addition realize approximately $60,000 after
Federal taxes.
The financial position of the Company has been materially improved and is con-
siderably better than would ordinarily be expected in the light of operating losses in-
curred in the past year. At the end of the year the ratio of current assets to current lia-
bilities was 1 . 7 to 1 , an increase over the previous year-end ratio of 1 .3 to 1 .
The amount of accounts receivable, which in the past has been relatively high due
to delays in processing government vouchers, has been materially reduced by pay-
ments, and it is expected that the fixing of a system mail rate for which the Company
has applied will maintain these receivables at a minimum.
Inventories of material and supplies have remained at fairly constant value which
represents a minimum necessary to insure uninterrupted operations and maintenance
schedules.
No increase has been made in capital investments with the exception of modifica-
tions of presently owned equipment in accordance with changes in C.A.A. specifica-
tions.
The mortgage payable on the DC-4 aircraft was liquidated during the year. The
balance of $63,000 in notes payable on three DC-3 aircraft purchased from the Doug-
las Aircraft Co. in 1946 at a cost of $375,000 will be liquidated in March 1951. All other
flight equipment and properties of the Company are wholly owned and free of any
encumbrance.
PACIFIC NORTHERN AIRLINES, INC.
All the Company's non-operating property, such as apartment house and single
family residences for employees in Anchorage, was sold during the year at a net profit
of $8,000.
The amount of $55,686 shown as due stockholders represents Federal Income Tax
liability resulting from compensation for mail services performed by the Company prior
to its operation as a corporation but received subsequent to the transfer of assets and
liabilities. By the Agreement of Transfer such earnings and tax liability thereon were to
accrue to the corporation. It is expected that this amount will be liquidated within the
year.
The contingent liability representing judgment for approx;imately $8,000 awarded
against the Company in connection with a claim based on alleged conversion of an air-
plane is likewise expected to be disposed of within the year. The Company's legal coun-
sel appealed this judgment to a higher court, and the case was argued before the Court
of Appeals in San Francisco on April 12, 1950, and has been submitted for decision.
The most important factor affecting the Company's future is the United States
Alaska Service Case, Docket 3286, et al. This is the case that was instituted by the
Board as an investigation as to the adequacy of service being rendered by the certificated
carriers between the United States and Alaska. Included in this case were the applica-
tions then pending for States-Alaska service. Hearings in these matters were concluded
in November, 1948.
The Examiner's report, which was submitted to the Board in December, 1949,
found the present services of the through carrier between Seattle and Alaska to be in-
adequate and recommended that Pacific Northern be authorized to extend its Alaskan
routes to Seattle. It also recommended that Pan American's route be extended from
Juneau to Anchorage, and that thereafter the Company and Pan American should enter
into an interchange agreement whereby the two companies in combination would serve
the traffc needs between the States and points in Alaska.
The Company has agreed in part with the Examiner's recommendations and has
taken exceptions in respect to the proposed interchange, contending that such an inter-
change agreement would not be conducive to the fullest development of transporta-
tion between the States and Alaska. Oral argument before the Board in Washington
was completed on April 6, 1950 and it is expected that, in view of the demonstrated
traffic demands between the United States a nd Alaska and the obvious importance of
improved transportation facilities to Alaska in respect to national defense requirements,
that expeditious action will be taken by the Board in rendering a final decision in this
case.
The Company confidently expects that the Board's decision will extend its serv-
ices to the United States without any entangling alliance with any other carrier so as
ASSETS
Current Assets:
Cash on hand and demand deposits in banks
Receivables:
Traffic balances
United States Post Office Department
Other (including $3,713 due from
employees)
Less allowance for losses
Claim for refund of federal income taxes
arising from 1949 net operating loss
carry-back . .
Maintenance and operating supplies, at cost
Total current assets .
Property and Equipment ( at cost
when first devoted to public service) :
Aircraft ( units costing $374,750
pledged as collateral for notes payable)
Ground equipment
Buildings and improvements
to leased property .
Replacement parts for
operating equipment
Prepaid Expenses and Def erred Charges:
Prepaid insurance . . . . . . . .
Route extension and development, at cost
Other
Property Acquisition Adjustment:
Cost
$736,665
94,204
67,546
56,993
$955,408
Excess of the par value of capital stock issued over
the cost to the previous owner of the net assets
received therefor
PACIFIC NORTHERN AIRLINES, INC
$156,590
144,304
4,599
305,493
7,730
Allowances for
Depreciation
$546,505
39,055
24,149
33,463
$643,172
17,100
22,598
22,713
( an Alaska corporation)
BALANCE SHEET AS
df DECEMBER 31 , 1949
$130,616
297,763
35,000
40,935
504,314
312,236
62,411
110,717
$989,678
)
}
LIABILITIES
Current Liabilities:
Notes payable to bank, portion due
within one year
Demand note payable to officer
Accounts payable:
General
Transportation taxes, employees'
withholding taxes, etc ..
Airline traffic balances
Due stockholders in connection with
acquisition of properties .
Accrued salaries, wages, interest, etc.
Deposits on travel card accounts .
Unearned transportation revenue .
Total current liabilities .
Notes Payable to Bank:
Due in monthly installments of $4,444 each with
33/4 per cent interest, less $53,325 included with
current liabilities ( chattel mortgage on certain air-
craft given as collateral) .
Contingent Liabilities (see below)
CAPITAL
Common Stock, authorized 2,000,000 shares,
par value $ 1 each:
Issued and outstanding 666,444 shares .
Paid-in Surplus
Earned Surplus:
Balance, January 1, 1949
Net loss for the year ended
December 3 1 , 1 949, details
annexed
Balance, December 3 1 , 1949 .
$82,234
59,448
Contingent liabilities:
1. A judgment for approximately $8,000 has been awarded against the company in connection with a claim based on al-
leged conv~rsion of an airplane owned by plaintiff. The Company's legal counsel has appealed the judgment to a
higher court, contending that there never was a conversion of the plaintiff's property, and tllat on the question of con-
version itself, as well as the pleadings, there should be a reversal of the judgment.
2. In connection with the acquisition of the business and net assets of a predecessor partnership, the company assumed the
liabilities of the predecessor partners for additional federal, state, or territorial income taxes, if any, relating to opera-
tions of the period September 4, 1945, through July 31, 1947, inclusive. Any overassessments of such taxes for that per-
iod inure to the benefit of the company.
$51,720
34,794
26,187
55,687
666,444
333
22,786
$53,325
30,000
168,388
18,393
2,125
17,515
289,746
10,369
689,563
$989,678
PACIFIC NORTHERN AIRLINES, INC.
STATEMENT OF INCOME
For the year ended December 3 1 , 1 949
Operating revenue:
Passenger
Airmail .
Cargo . . . . . .
Excess baggage . . . . . . . . . . .
Other transport service .
Incidental revenues, net . . . . . . . . .
Total
Operating expenses:
Flying operations . . . . . .
Direct maintenance - flight equipment .
Ground operations . . . . . .
Ground and indirect maintenance .
Passenger service . .
Traffic and sales . .
Advertising and publicity
General and administrative
Depreciation:
Flight equipment . .
Ground equipment
Total . . . . . . . . . . . .
Operating loss
Other income and expenses:
Gain on disposal of property,
equipment and investments, net . . $8,381
Rental income (loss), net:
Operating property . . . .
Non-operating property . . .
Deduct:
Interest expense . . . .
Other expense, net . . . .
971
(227)
6,285
1,310
Net loss before federal income tax credit
Federal income tax credit arising
from 1949 loss carry-back . .
Net loss . .
$745,647
395,354
94,897
14,208
183,890
3,468
390,897
185,250
190,270
178,287
97,000
114,683
7,605
159,223
188,047
22,180
9,125
7,595
$1,437,464
1,533,442
95,978
1,530
94,448
35,000
$59,448
PACIFIC NORTHERN AIRLINES, INC.
to enable it to render in the fullest degree better transportation services to the Territory.
It is estimated that when such extension of its Alaskan routes is authorized the Com-
pany's revenues will increase 300 per cent during the first year of the new operation.
It is a matter of great satisfaction to report that the Company has completed
eighteen years of operation without a passenger fatality. Also in the past year the
Company increased its already excellent performance factor from 97.27 per cent in
1948 to 97.98 per cent. This is due to constant improvement in operational and main-
tenance techniques and in no small measure to the intelligent and conscientious efforts of
the Company's personnel, for which the management expresses its appreciation and
thanks.
A.G. WOODLEY
April 14. 1950. President and General Manager.
PACIFIC NORTHERN AIRLINES, INC.
Pacific Northern Airlines, Inc.
Seattle, Washington
Dear Sirs:
We have examined the balance sheet of PACIFIC NORTHERN AIRLINES, INC.
as of December 31, 1949, and the related statement of income for the year then ended.
Our examination was made in accordance with generally accepted auditing standards,
and accordingly included such tests of the accounting records and such other auditing
procedures as we considered necessary in the circumstances.
In our opinion, the accompanying balance sheet and statement of income present
fairly the financial position of Pacific Northern Airlines, Inc. at December 31, 1949, and
the results of its operations for the year then ended, in conformity with generally ac-
cepted accounting principles applied on a basis consistent with that of the preceding
period.
Seattle, Washington
March 27, 1950
Lybrand, Ross Bros. & Montgomery.