Pacific Northern Airlines, Inc. Annual Report to Stockholders 1951

PACIFIC NORTlIBRN AIRLINEf, INC
*
Annual Report to Stockholders
1951
PACIFIC NORTHERN AIRLINES, INC
DIRECTORS
G. P. O'Grady R.A.Rowan
-. . . -- -
W. E. Boeing, Jr. John E. Manders
A. G. Woodley
. \
OFFICERS
:1 A. G. Woodley President and General Manager
. . . . . V-ice:. President and General Counsel
: John E. Manders
,H. A. Olsen .. , , .~ . Vice-President, Traffic & Sales
I
, C. A. DuRose Vice-President, Operations
. Se.cr_etary::-Treasurer
. Assistant Secretary
. Assistant Secretary
--Gla~ence-..cW. Nelson ... -= __ .._ _ ..
M. E. Diamond .
Dean B. Hart
General Office: 1626 Exchange Building; Seattle 4, Washington
General Sales Office: 1324 Fourth Avenue; Seattle 1, Washington
District Sales Offices: 761 S. W. Broadway; Portland, Oregon
505 Fourth Avenue; Anchorage, Alaska
Baranof Hotel Bldg.; Juneau, Alaska
Washington Counsel: Gerald P. O'Grady,
1025 Connecticut Avenue Northwest
Washington, D. C.
Auditors: Lybrand, Ross Bros. & Montgomery
Report to Stockholders of
PACIFIC NORTHERN AIRLINES, INC
The year 1951 marked the completion of the Company's twentieth year in Alaskan
service and was in terms of development the most significant year in the Company's
history.
The long-pending application of the Company before the Civil Aeronautics Board
to extend its Alaskan routes to the Continental United States was finally approved by
the Board in September of 1950. This decis:un granted the Company authority to oper-
ate 1448 additional route miles between Seattle and Anchorage and an additional 923
miles between Seattle and Juneau, the southern terminus of the Company's Alaskan
routes.
As is required in international and overseas cases, it was thereafter necessary to ob-
tain the President's approval of this decision. Unfortunately, it was not until May 1951,
or eight months later, that such approval was obtained, at which time the President di-
rected the Board to include Portland, Oregon, an additional 127 route miles, in the Com-
pany's certificate, so that Portland would be a co-terminal with Seattle for the new Alas-
kan service.
During this period of delay, the Company was unable to put into effect its plans for
inauguration of this service and the delay, coming as it did during the accelerated activ-
ities on the Korean F rant with the resultant demand for transport aircraft, placed the
Company, because of its limited capital an :l the inflated cost of such equipment, in a
difficult position to obtain sufficient aircraft to activate the new routes. One additional
DC-4 aircraft was purchased and service wa3 inaugurated on October I, 1951, between
Portland-Seattle and Anchorage, which serv~ce is. being operated on a daily schedule.
Service between Portland-Seattle and Juneau has not been commenced and of necessity
will have to be deferred until additional capital can be obtained to permit the Company
to purchase at least two additional aircraft and related equipment to properly conduct
service on this route.
The Company now has 3,206 unduplicated route miles and operates a minimum of
daily service on its routes for a total daily mileage of 6,274.
During 1951, the Company supplied 33,619,000 seat miles, of which 18,737,000
miles were utilized by 37,217 revenue passengers, the greatest number carried in the
Company's history, or 69 per cent increase over the previous year, resulting in passen-
ger revenues of $1,492,928, which were an increase of $528,210.
Air cargo likewise increased from 289,510 ton-miles in 1950 to 591,920 ton-miles
in 1951 or 105 per cent increase, resulting in revenues of $192,063 or only 55 per cent
revenue increase due to lower cargo rates in effect during the year. The volume of mail
carried increased from 139,047 ton-miles in 1950 to 218,157 ton-miles in 1951, an in-
crease of 57 per cent, with a revenue increase from $502,537 to $607,049 or 21 per
cent. This disproportionate increase of revenue to volume was due to additional mail
loads being offered by the Post Office Department,, which under the existing rate were not
compensated for since the temporary rate was limited to a certain fixed mileage basis.
These trips, therefore, were performed as a developmental service with the assuran~e
that such service would be compensated for upon the fixing of a final rate.
Upon inauguration of the States-Alask:i Service the Company petitioned the Board
for a temporary rate of mail pay of 84 cents a mile, which was estimated to be a break-
even need, especially during the high-cost developmental period of this new service. The
PACIFIC NORTHERN AIRLINES, INC.
Board, in fixing a temporary rate arbitrarily granted the Company only 50 cents a mile
for the States-Alaska Route and reduced the Company's then existing temporary winter
rate of 7 5 cents a mile on its intra-Alaskan Routes to 4 7 cents a mile, pending a confer-
ence which would determine through analysis and negotiations a final rate of mail pay
for the past and future periods. It should be noted that the Board has failed to establish
a final rate for the Company's operations since the award of the Grandfather Certificates
to the Company in December, 1942. Conferences on this matter were held in Washing-
ton, D. C. during the month of March, and decision of the Board in respect to a final rate
of mail compensation for the past and future periods is now pending and is expected to
be issued during the early part of May at which time a supplemental report will be sub-
mitted showing the effect of this final rate on the financial position and future earnings of
the Company.
On January 4, 1952, the Company discontinued its lease arrangement of hangar
and passenger facilities at the Military Air Base in Anchorage and moved its operation
to the new International Airport, recently completed by the CAA, where it leases two-
fifths of a new, modern hangar also constructed by the CAA and adequate for the im-
mediate needs of the Company. The passenger terminal proposed by the CAA at this
new airport has not yet been constructed and it was necessary for the Company to build
office and passenger facilities of its own, wh:ch facilities will serve the Company until
the Government completes the proposed Administration Building, at which time the
Company intends to lease office space and passenger facilities in these premises.
During the year, Mr. William E. Boeing, Jr., President of Mesabi Western Corpor-
ation, was appointed a Director to fill the vacancy created by the death of Mr. Austin E.
Lathrop. Since the close of the year, Mr. J. E. Manders resigned as Vice-President and
General Counsel and Director of the Company.
The Company can again point with understandable pride to another year of safe
operation and the completion of twenty years of air transport service in which it experi-
enced approximately 100 million passenger miles without a fatality. This excellent rec-
ord of safety can be attributed to the skill and loyalty of both ground and flight person-
nel who have consistently demonstrated a sense of responsibility to the traveling public
and who have faithfully adhered to the Company's policy of providing the best in service
consistent with safety.
Labor relations between Management and Personnel have continued satisfactorily
during the year. Contracts negotiated or renewed during the year covering working
agreements with four groups of employees are comparable to the industry's average.
The number of employees increased from an average of 150 during the year to 370 at
the close of the year. This was necessitated by inauguration of service on the new route
and the establishing of new traffic and operations facilities at Portland and Seattle.
The Employees' Group Insurance Program covering health, accident and life insur-
ance, including hospitalization benefits for the employees and their families, has oper-
ated successfully during the year. .
Voluntary wage increases, in keeping with the Wage Stabilization Regulations,
were granted during the year, and in line with industry-wide practice the hours of serv-
ice were limited to forty hours per week. Cost of living differential is paid to employees
domiciled in Alaska at the rate of $90 per month at Juneau, $110 at Cordova, and $125
per month in Anchorage and elsewhere in Alaska.
As indicated in the financial statement submitted by Lybrand, Ross Bros. & Mont-
gomery as at December 31, 1951, there is a deficit working capital of approximately
PACIFIC NORTHERN AIRLINES, INC.
$242,000, although the net loss for the year after adjustment of over-provision for prior
years Federal income taxes was $ 1 7,903. T his condition was brought about by two fac-
tors; namely, the action of the Civil Aeron'lutics Board in reducing the existing rate of
mail pay so as to purposely effect substantial losses during the fourth quarter, which co-
incided with the beginning of the normal low revenue period of the winter season, and
the necessity, prior to the Board's action, of using working capital to supplement loans
for the purchase at inflationary costs of equipment which was essential to commence
service on the newly-certificated route.
The Company borrowed $500,000 on a mortgage loan agreement with banks, and
$250,000 as a subordinated loan from Directors. Additional flight equipment and spare
parts cost $973,700, ground equipment and improvements to properties were an addi-
tional $174,400, and pre-operating costs on the new route, capitalized at $73,590,
brought the total to approximately $1,222,000 . Although the depreciated value of equip-
ment at December 31, 1951, was $1, 191,000, the market value is conservatively esti-
mated at $2,000,000, against which there is no encumbrance other than the balance on
mortgage agreements, which at the year end amounted to $465,633.
It is evident that the Company requires equity financing and intends to obtain such
capital whenever the air line market appears favorable. Additional equipment to handle
the potential traffic available to the Company, both between the States and Alaska and
within the Territory, is essential if the Company is to take advantage of the available
business. Working capital equal to three m onths operating expenses should likewise be
supplied by equity. The method of providing mail pay under a final rate for a future pe-
riod has, by well-established Board policy, been based on a ten-per-cent return after taxes
on recognized investment for international and overseas carriers.
The prospect for the future year is most encouraging. The award of the route be-
tween Alaska and the Continental U nited States supplies the most important factor in
the development and security of the Comp:my. Present estimates indicate gross rev-
nues of over $4,000,000 will be realized in 1952. Additional equipment to the extent ade-
quate to operate desired schedules would result in revenues of approximately $6,000,-
000 or almost three times the gross revenue of the past year. -
The program of military, economic and social development of the Territory has
increased from year to year and transportation between the United States and Alaska
and within the Territory will keep abreast of this development and growth.
April 22, 1952
A. G. w OODLEY
President.
ASSETS:
Current:
Cash on hand and demand deposits in banks
Receivables:
Traffic balances, including $93,763.42
from governmental agencies
United States Post Office Department
{Note 1) . . . . .
Other . . . . . . . . .
Less allowance for losses
Maintenance and operating supplies, at cost
Prepaid insurance, rent, and passenger
ticket stationery
Total current assets
Investments:
Cash surrender value of life insurance
Aeronautical Radio, Inc., at cost . .
Property and equipment (at cost
when first devoted to public service) :
Cost
Flight equipment (Note 2) . $ 1,653,373.96
Ground equipment . . . . . 188,796.41
Buildings and improvements
to leased property
Replacement parts for
flight equipment . .
Construction work in
progress (Note 3)
132,450.64
96,439.77
25,195.84
$ 2,096,256.62
Deferred charges:
Unamortized cost of route extension and
development . . . . . . . .
Other
Property acquisition adjustment, representing
the 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
(an Alaska corporation)
BALANCE SHEET, DECEMBER 31, 1951
$153,096.00
$279,668.25
138,715.70
10,654.77
429,038.72
14,592.57 414,446.15
57,101.97
30,610.15
655,254.27
3,656.38
1,000.00 4,656.38
Allowances for
Depreciation
$750,944.96
65,940.52
25,422.37
63,122.81
$905,430.66 1,190,825.96
$ 96,187.80
23,543.46 119,731.26
130,353.51
$2,100,821.38
}
LIABILITIES:
Current:
Current portion of long-term debt (Note 2)
Accounts payable:
General . . . . . . . . . .
Transportation taxes, collections for
account of shippers, etc.
Air line traffic balances
Accrued salaries and wages
Accrued insurance, taxes, etc.
Accrued interest payable
Deposits on travel card accounts
Unearned transportation revenue .
Total current liabilities
Long-term debt (Note 2)
Total liabilities .
CAPITAL:
Common stock, authorized 2,000,000 shares,
par value $1 each, issued and outstanding
666,444 shares . . . . .
Paid-in surplus (no change during year)
Earned surplus (Notes 1 , 2, and 3) :
Balance, January 1, 1951 . $22,129.61
Net loss for the year ended
December 3 1 , 19 5 1 ,
details annexed . . . . . 17,903.69
Balance, December 31, 1951
The accompanying notes are an integral part of the financial statements.
$327,416.10
108,827.56
133,829.33
666,444.00
333.50
4,225.92
$ 183,466.56
570,072.99
63,176.93
33,279.57
4,451.61
3,825.00
39,378.53
897,651.19
532,166.77
1,429,817.96
671,003.42
$2,100,821.38
PACIFIC NORTHERN AIRLINES, INC.
STATEMENT OF INCOME
For the year ended December 3 1 , 19 5 1
Operating revenues:
Passenger
Air mail (Note 1 )
Cargo . . . . . . . . .
Excess baggage . . . .
Other transport service . . .. .
Incidental revenues, net .
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 mcome
Other expenses:
Interest expense . . . . .
Amortization of route extension
and development .
Miscellaneous, net . . . .
Less, rental income, net .
Loss before federal income tax credit . .
Less overprovision for prior years'
federal income taxes .
Net loss
$1,260,252.17
607,048.66
192,062.50
25,042.47
254,461.34
920.00
653,528.18
296,181.63
331,865.54
258,878.96
195,873.51
195,278.87
32,265.26
222,707.31
126,289.72
24,176.10
22,770.53
5,243.76
1,316.44
29,330.73
2,901.20
$2,339,787.14 _
2,337,045.08
2,742.06
26,429.53
23,687.47
5,783.78
$17,903.69
The accompanying notes are an integral part of the financial statements.
PACIFIC NORTHERN AIRLINES, INC.
NOTES TO FINANCIAL ST A TEMENTS
1. At December 31, 1951, the amount rec~ivable from the United States Post Office
Department included an accrual of $28,224.07 which the company expects to col-
lect, together with presently indeterminable amounts, when final mail rate is estab-
lished.
2. Long-ter~ debts, in connection with which substantially all of the flight equipment
is pledged as collateral, consist of the following:
Chattel mortgage note to a bank, face amount
$500,000.00, payable $13,900.00 per month,
interest 5 % , maturing August 20, 1954 . . .
Chattel mortgage for equipment purchase, pay-
able in monthly installments, interest 5 %
Demand notes payable, dated June 28, 1951,
interest 6 % , subordinated to the above mort-
gage note to a bank . . . . . .
Payable
Within
One Year
$166,800.00
16,666.56
$183,466.56
Noncurrent
Portion
$278,000.00
4,166.77
250,000.00
$532,166.77
The chattel mortgage for the above bank loan contains certain restrictions and lim-
itations, among which are the following: ( 1 ) the company may not without written con-
sent mortgage or pledge real or personal property owned on August 13, 1951, or pay any
dividends on its presently outstanding capital stock, (2) capital expenditures after 1951
are limited to $300,000 annually, except those out of proceeds from sales of capital
stock, (3) the demand notes payable of $250,000.00 are subordinated to the chattel
mortgage note.
3. At December 3 1 , 19 5 1 , the company was committed to the purchase of a prefabri-
cated hangar at a cost of $71,500.00 on which $23,833.33 had been paid at that date.
PACIFIC NORTHERN AIRLINES, INC.
ACCOUNTANTS' REPORT
Pacific Northern Airlines, Inc.
Seattle, Washington
We have examined the balance sheet of PACIFIC NORTHERN AIRLINES, INC.,
as of December 3 1 , 19 S 1, and the related statement of income for the year then ended.
It was not practicable to confirm the balances receivable from the United States Post
Office Department and other governmental agencies. We satisfied ourselves as to these
balances by means of other auditing procedures. Our examination was made in accord-
ance with generally accepted auditing standards, and accordingly included such tests of
the accounting records and such oth~r 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, 1951, and
the results of its operations for the year then_ endeq, in conformity with generally ac-
cepted accounting principles applied on a basis consistent with that of the preceding
period.
Seattle, Washington
March 3 1 , 19 S 2
_
Lybrand, Ross Bros. & Montgomery.