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.