annual report 1953 PACIFIC NORTHERN AIRLINES, INC. Directors: G. P. O'Grady Washington, D . C. W. E. Boeing, Jr. Seattle, Washington Paul Porzelt New York, New York R. A. Rowan Los Angeles, California M. B. Kirkpatrick Anchorage, Alaska C. W. Nelson Seattle, Washington A. G. Woodley Seattle, Washington Officers: A. G. Woodley H. A. Olsen John A. Cunningham J. H. Foster C. W. Nelson M. E. Diamond Dean B. Hart President and General Manager Vice President - T raj f ic and Sales Vice President - Operations Vice President - Engineering and Maintenance Secretary-Treasurer Assistant Secretary Assistant Secretary General Counsel: G. P. O'Grady, 1625 Eye Street, Washington, D. C. General Offices: 1626 Exchange Building, Seattle, Washington City Ticket Offices: Anchorage Homer Kodiak Cordova Juneau Portland Kenai Seattle Auditors: Lybrand, Ross Bros. & Montgomery Transfer Agent: Bankers Trust Company New York, New York Registrar: Manufacturers Trust Company New York, New York Common Stock listed on the American Stock Exchange 2 To the Stockholders of PACIFIC NORTHERN AIRLINES its Customers and Personnel 1953 was a year of significant and successful growth. It marked the inauguration of a new overseas route from Portland and Seattle direct to Juneau, the capital of Alaska, and t0 other points within the Territory. System-wide services and facilities of the Company were improved and greatly expanded during the year. With respect to earnings, 1953 was a year of transition. Despite several temporary factors which adversely affected the econ- omy of the Territory, the Company successfully completed its major expansion program and achieved virtually a break-even result for the year. EXPANSION PROGRAM In March new capital was raised through the public sale of 360,000 shares of common stock. Funds thus obtained, together with collateral bank loans of $1 million, were used for expanding the Company's facilities. Two additional DC-4 aircraft were purchased, and another DC-4 was secured on a long-term lease arrangement with an option to purchase. This brings the Company's flight equipment to a total of five DC-4's used primarily on its overseas routes between the United States and Alaska, and four DC-3's used on its routes within the Territory. The Company's services were expanded primarily on its overseas routes, but the greater capacity afforded by DC-4 aircraft was also extended to certain routes within Alaska. Revenue plane miles operated during 1953 amounted to 3,462,000, an increase of 36 percent over last year. Because of the larger equipment utilized, available ton miles operated amounted to 16,141,000. a growth of 54 rercent over 1952. AVAILABLE TON MILES 1950 1949 0 0 0 0 0 0 N It') 0 M ,..... N N 1952 1951 0 0 0 0 0 0 00 -0 -0 CIO ~ IO 0 "'It 1953 0 0 0 ~ -0 FINANCIAL Operating revenues were $6,129,464, the highest in the Company's history and 22 percent greater than in 1952. Notwithstanding chis marked improvement, it is probable chat greater revenues could have been achieved had not the following factors adversely af- fected the general business economy of the Territory, resulting in a substantially lower volume of air traffic during the year: 1) Following the change of national administration, the Defense Department in February 195 3 issued a "freeze order" on virtually all military construction projects in Alaska, as well as elsewhere, pending review and reapproval. This order interrupted work on Alaskan construction contracts totaling almost a quarter of a billion dollars. Although practically all the major Alaskan projects were subsequently reap- proved, the prolonged suspension interval seriously im- paired the 1953 level of construction activity. 2) Com- mercial fishing, one of the Territory's major industries, 1949 C") 1950 " 0 1951 1952 1953 3 experienced its worst season in recent years. 3) In July, during the peak season for tourist travel to Alaska, the eruption of Mount Spur blanketed the most important tourist area in Alaska with several inches of volcanic ash and resulted in widespread cancellations by vacation travelers. Total operating expenses for the year amounted to $6,039,304. Although rising cost trends have been a major problem co the airline industry in pose-war years, the Company succeeded for the fifth successive year in achieving substantial unit cost reductions by means of greater economies, expanded airlift production, and in- creased productivity per employee. Total operating coses per revenue ton mile of traffic amounted to 59c in 1953, a reduction of 9 percent from the 195 2 cost level. Although costs per unit of service were consider- ably reduced, the total expense of establishing the ex- panded service was naturally greater and showed an in- crease of 36 percent over last year. This increase relates primarily to the operation of additional mileage with larger equipment. The Company's operating profit of $90,160 was reduced after interest expense and non- operating charges of $78,154 to a net income before taxes of $12,006. Income taxes on this amount and tax adjustments on deferred charges to income had the ef- fect of creating a tax liability in excess of earnings and resulted in a net defici c of $3,731 for the year. This sac- rifice of profits to accomplish expansion is considered a sound investment in future growth and earnings. UNIT COSTS Total operating expenses per revenue ton mile of traffic V) w ~ z 0 .... 0 V) z 0 ~ 10- 9- 8- 7- 6- 5- 4- 3- 2- l 1949 10,169,000 ~ Total 750,000 MAIL 3,171,000 CARGO 6,248,000 PASSENGER 1950 1951 1952 1953 TON MILES OF TRAFFIC TRAFFIC & SA.LES The Company offered 54 percent more ton miles of service for sale to its customers in 1953, and response to this increased airlift capacity was eminently satisfactory. The total number of passengers carried during the year was 78,283, an increase of 18,185 over the previous year. The average distance flown per passenger increased to 753 miles, as compared to 704 miles in 1952. Revenue passenger miles reached a new high of 58,977,000, a 39 percent gain over last year. Air cargo and revenue baggage increased 76 percent to 3,171,000 ton miles, a growth of 1,367,000 ton miles over 1952. The volume of U. S. mail transported showed a 44 percent increase, from 522,000 to 750,000 ton miles. Total revenue traffic increased 51 percent from 6,735,000 ton miles lase year to 10,169,000 in 1953. These substantial increases in all categories of traffic were experienced with an overall revenue load factor of 63 percent compared to the 1952 industry average of 59 percent: SAFETY Pacific Northern achieved another year of safe operation, marking the completion of twenty-two years of air transport service without a passen- ger fatality. In recognition of this achievement, which reflects the compe- tence and care exercised by all personnel, the Company will again receive the Aviation Safety Award of the National Safety Council. 1953 AVIATION SAFETY AWARD TON 5 OPERATIONS & MAINTENANCE Operations and maintenance continued at the high level of efficiency which has characterized these functions in prior years. The Company achieved a 97 percent system performance factor, a slight improvement over last year's creditable record. In Seattle, operations and traffic facilities were transferred during the year from Boeing Field to Seattle-Tacoma Airport. In Anchorage, these functions were transferred from Company owned premises to the new ad- ministration building at Anchorage International Airport. All scheduled trunkline carriers serving the Pacific Northwest now operate from Seattle- Tacoma Airport, and virtually all of the major carriers serving Anchorage operate from the Anchorage International Airport. Pacific Northern's new arrangements at these airports will facilitate the convenience of passengers transferring to other airlines and should promote the Company's further participation in interline traffic. PERSONNEL During the year, Mr. Paul Porzelt, a Partner of Emanuel, Deetjen & Co. of New York, and Mr. C. W. Nelson, Secretary-Treasurer of the Company since 1947, were elected Directors of the Company. Two new officers were named to the Company's Executive Staff. Mr. John A. Cunningham was elected Vice President- Operations. Prior to assuming this office with Pacific Northern, Mr. Cunningham was Vice Pres- ident- Operations of Mid-Continent Airlines. Mr. J. H. Foster, who has served the Company as Superintendent of Maintenance since 1947, was elected Vice President-Engineering and Maintenance. Amicable relations between Management and Personnel continued throughout the year. Personnel of the Company increased from an average of 372 employees during 1952 to 468 during 1953. The high morale and loyalty of employees is reflected in the Company's excellent productivity record for the year. The 26 per- cent increase in number of em- MILES OF REVENUE PER EMPLOYEE TRAFFIC ployees was attended by a 51 percent increase in revenue traffic. This productivity 20,000 15,000 10,000 5,000 1951 achievement of almost 22,000 ton miles of revenue traffic per employee surpasses all pre- vious records of the Company and further improves its posi- tion among the leaders of the aviation industry. 6 ROUTE PROCEEDINGS Since October 1952 the Company has had pending before the Civil Aeronautics Board an application for renewal of its overseas routes between the United States and Alaska which technically expired in December 1953, along with the temporary certificates of North- west Airlines and Alaska Airlines, and operations are currently conducted pursuant to the Administrative Pro- cedure Act pending final orders of the Board on renewal applications. All other routes of the Company are per- manently certificated for the transportation of persons, property and mail. The Company's application also seeks authorization to extend service on its overseas routes to the additional points of Ketchikan and Fair- banks, Alaska. This application was consolidated for hearing with renewal applications of other carriers serv- ALASKA \ \ \ \ \ Fairbanks \ r----..... \ I ..._~ I . \' CANADA I \ , , Skwent~o \ ' , , \ kogwa ~ , t:-::.::::::-i~:...:..:.~ - Principal services in operation Services applied for ing the same general area. Also incorporated in this proceeding is an investigation instituted by the Civil Aeronautics Board to determine whether the public interest would be served by the merger of Pacific North- ern Airlines and Alaska Airlines, or by some consolida- tion of the routes of the two companies. Alaska Airlines is an Alaskan carrier serving certain routes in the Terri- tory not competitive to the Company and also operating an overseas route from Portland and Seattle direct to Fairbanks, which likewise is not directly competitive with the Company's routes. At the hearings in this case, which commenced in October 1953 and will conclude some time this month, the Company presented evidence to support its applica- tion for renewal and extension of its present overseas certificate. In connection with the merger investigation, the Company presented to the Board a proposal for merger with Alaska Airlines and outlined certain con- ditions upon which such a merger would be acceptable to the Company, including the condition that control of the merged company be vested in Pacific Northern's stockholders. The Company believes such merger would be in the public interest, would effect substantial overall savings, and would enhance the growth potential and earnings of the Company. In June 1953 a nonmail route authorization be- tween Anchorage and Flat was eliminated from the Company's certificate in an order of the Civil Aero- nautics Board issued for the purpose of conforming existing certificates to current operations. The Com- pany had voluntarily discontinued service over this route at the start of World War II. In the same order the Board added Gustavus to the Company's permanent certificate as an intermediate point on the Anchorage- ] uneau route. CANADA .,,,.. .,,,.. -- Seattle UNITED STATES Portland 7 MAIL RATE PROCEEDING Throughout 1953 the Company received mail com- pensation pursuant to an order of the Civil Aeronautics Board dated May 10, 1952. The order provided total annual compensation for transporting U. S. mail in the amount of $1,701,924 and was related to the volume of operations performed with the lesser number of air- craft owned by the Company at that time. During 1953 the Company increased its investment by $2 million and enlarged its fleet of aircraft by the addition of three DC-4's. Plane miles operated in 1953 exceeded the scope of operations contemplated in the Board's mail race order by 5 7 percent. In addition to operating a greatly expanded volume of service under a static mail compensation formula, the Company also transported a 44 percent greater volume of U. S. mail during the year without additional compensation. To secure equitable adjustment of these factors, the Company on February 10, 1954, petitioned the Civil Aeronautics Board co es- tablish annual mail compensation in the amount of $2,673,157. If the Board is unable to establish the new final race within 90 days from the date of the petition, the Company has requested that an increased temporary race be established pending the fixing of a final mail rate. THE YEAR AHEAD The Company has successfully completed its program of expansion and no change in route pattern is contemplated during 1954. The Company believes it has sufficient equipment to perform all the services required on its present system. The key to substantial earnings for the Company in 1954 will be found primarily in the future economic progress of Alaska. The Territory is on the threshhold of significant industrial development. This is evidenced by new pulp and timber enterprises, power projects, construction activities, petroleum exploration, the production of coal and strategic metals, and an expanding volume of tourist travel. Alaska's growth in population continues to be the most rapid under the American flag. These events clearly indicate a mounting level of general business activity and, together with the strategic importance of Alaska to the National Defense and the National Economy, assure the Ter- ritory of prosperous development which will be reflected in the further growth of Pacific Northern. Respectfully submitted, March 5, 1954 d7~ President and General Manager For all Americans ic is the keyscone of our defense sys- tem, guarding the approaches co the North American continent and domi- n ting the air routes of the world. Within the span of a few years huge military bases and airfields have been built and manned as pare of our long range program of strategic plans. Over a billion dollars have been invested during rhe lase five years in these North Pacific bastions of national security. Alaska's vast mineral resources include virtually all of the strategic metals which are in shore supply throughout the world. Since its purchase from Russia the Terricory has yielded over a billion dollars in min- eral wealth from the production of gold, copper, coal, silver, and platinum metals. Current emphasis is shifting co the mining of tin, tungsten, .fluorite, nickel, cobalt, bismuth and chromire - merals which the United Scares is hard pressed co supply or acquire abroad in a world divided by an Iron Curtain. The aluminum industry is now looking to Alaska's immense power resources for rhe development of some of the concinenc's largest metallurgical and chemical industries. In 1952 the Aluminum Company of America announced plans for a $700 million dollar aluminum processing plane in the Terricory. Harvey Aluminum in 1953 divulged its plans for a second major aluminum development. The giant plant of the Aluminum Company of Canada is already an accualicy, located only 90 miles from the Alaskan border. Since World War II the Navy Deparcmenc has expended over $50 million for petroleum exploration in che Arctic slopes of Alaska with several significant dis- coveries. During 1953 a major oil exploration program was commenced in the Cor- dova area by Phillips Petroleum, and geologic investigations are also being conducted by ac lease five ocher major oil companies in central Alaska. Alaska's unique timber resources are of immense economic signifi- cance and can supply at least a million cons of newsprint annually in perpetuity, as well as huge amounts of high alpha cellulose for cexcile and plastic planes. The new $50 million pulp plant of Kerchikan Pulp and Paper will commence production in 1954. Ocher interests have announced plans ro construct a similar pulp plane in the Juneau area, and ac least two additional developments are imminent possibilities. The Territory is a magnet not only for huge irn;luscrial developments but also for a hose of mushrooming small enterprises. New retail and service establish- ments are being created each month co meet the insatiable demands of rapid popula- tion growth. The construction and fishing industries annually draw thousands of migratory workers to Alaska. Many remain co seek their permanent futures in the Territory, attracted by the ready availability of homesteads and small farm tracts and by the unlimited opportunities for small trades enterprises. ( l l offers something for everyone . ~ / The lure of Alaska extends beyond the realm of business to the hundreds of thousands who seek primarily the pleasures of travel and vacation enjoyments. Magnifi- cent mountains and colorful glacial fjords of unsurpassed beauty rim the sea coast of Alaska. Brilliant displays of northern lights, sweeping vistas of chains of lakes, and impressive waterfalls enchant both business and vacation travelers. ('/ .........__,/ . -- For the sportsman Alaska offers a virtual paradise for hunting and fresh and sale water fishing. Winter sports enthusiasts can enjoy sun-can skiing in dazzling snow, and skating in scenic settings of incomparable beauty. -11 Those who travel primarily for pleasure will find Alaska replete with historic lore dating back to Russian ownership and gold rush days. Amateur photographers will be overwhelmed by the panoramic variety of colorful wildflowers, bird life, wild game, totem poles, gold mining dredges, native fishwheels, and an endless array of ocher attractions. The summer is filled with sparkling days and with nights warmed by the mid- night sun. Swimming, golfing, gold panning expeditions, and mountain trail excursions are but a few of the recreational enjoyments. Sightseeing tours to native villages will reveal pageants and costumes and folklore un- tainted by commercialism. Trips to newly staked homesteads will impart che strong feeling of vitality and pioneering of America's last great frontier. The dynamic growth of the Territory's larger cities will disclose the fascinating paradox of log cabins in the shadows of skyscrapers and game trails still flank- ing modern highways. A vacationland still uncrowded and unspoiled, Alaska offers unique hospitality and adequate accommodations for visitors. The Territory will soon become -one.of the leading tourist meccas of the world. Whether travelers to Alaska seek business or pleasure, they will find along the routes of Pacific Northern Airlines the greatest scenic attractions and the areas where most of the significant economy de- velopment is taking place in the Territory. ANALYSIS OF SOURCE AND USE OF FUNDS DURING 1953 FUNDS WERE PROVIDED BY: Operations, after adding back charges thereto not requiring ex- penditures of funds for depreciation ($505,594) and amorti- zation of route extension and development ($48,090)______________ $ 549,953 Issuance of 401,665 shares of common stock________________________________ 986,570 Additional borrowings on long term obligations (net)________________ 187,077 Changes in working capital and reserve for income tax contingencies ________ ---------------------------------------------------------------------- 193,454 Total funds available__________________________________________________________ $1,917,054 FUNDS WERE USED FOR: Property and eq ui pmen t__ _______________________________ --------------------------------- $1,858,627 Other purposes ____________ -------------------------------------------------------------------- 58,427 Total funds used _________________________ ----------------------------------------- $1,917,054 PACIFIC NORTHERN AIRLINES, INC. STATEMENT OF INCOME AND EARNED SURPLUS FOR THE YEAR ENDED DECEMBER 31, 1953 OPERA TING REVENUES : Passenger ___________________________________________________________________________________________________________________________ _ Air mail -------------------------------------------------------------------------------------------------------------------------___ _ Cargo _________________________________________________________________________________________________________________________________ _ Excess baggage ------------------------------------------------------------------------------------------------ __________________ _ Other transport service -------------------------------------------------------------------------------------------------------- Incidental revenues, net ----------------------------------------------------------------------------------------------------- Total ________________________________________________________ ------------------------------------ ___________________ _ ______ _ OPERATING EXPENSES : F 1 y i ng operations _________________________________________________________________________________________ _ Direct maintenance - ffight equipment ----------------------------------------------------- G round operations ________________ --------------------------------------------------------------------___ _ Ground and indirect maintenance --------------------------------------------------------------- Passenger service ________________________________________________________________________ --------------_____ _ Traffic and sales _____________________________________________________________________________________________ _ Advertising and publicity ________________ ------------------------------------------------------------ Ge neral and administrative-------------------------------------------------------------------------- Depreciation: Flight eq ui pmen t -------------------------------------------------------------------------------------- Ground eq ui pm en t _______________ --------------------------------------------------------------------- 0 pera ting income ------------------------------------------------------------------------____ _ DEDUCTIONS FROM INCOME: Interest on long-term no ces ---------------------------------------------------------------------------- 0 ch er i n t er est ___________________________________________________________________ ----------------------------- Amortization of route extension and development _ ____________________________________ _ Miscellaneous, nee _________________________________________________________________________________________ _ Profit before taxes on income ------------------------------------------------------------ PROVISIONS FOR Federal and Terricorial income taxes, nee of $2,263 adjust- ments of prior year taxes --------------------------------------------------------------------------- Net loss ________________ ------------------------------------------------------------------------------ EARNED S URPL us, Jan u~ ry 1, 19 5 3 ____________________ _________ ----------------------------------- EARNED SURPLUS, December 31, 195 3------------------------------------------------------------ $1,879,127 751,823 715,983 541,936 439,582 607,775 106,905 490,579 425,612 79,982 48,922 3,912 20,967 4,353 The accompanying notes are an integral part of the financial statements. $3,473,712 1,751,626 823,665 44,339 21,701 14,421 6,129,464 6,039,304 90,160 78,154 12,006 15,737 3,731 50,020 $ 46,289 11 PACIFIC NORTHERN AIRLINES, INC. BALANCE SHEET December 31, 1953 ASSETS Current: Cash on hand and demand deposits in banks _____________ ____________________________ _ Receivables: Traffic balances, including $102,178 from governmental agencies _______________ _ United States Post Office Department _______________________________________________ _ Ocher------------------------------------------------------------------------ Less, Allowance for losses ______ _____ _______________________ ___________________________ __ _ Maintenance and operating supplies, at average cost _________________________________________ _ Prepaid expenses, mainly insurance ______________________________________________________ _ Total current assets _________________________________________________________________________________ _ Investments: Cash surrender value of life insurance _________________________________________________________________ _ Aeronautical Raaio, Inc. stock, at cosc__ ____ _ ______ _______________________________________________ _____ _ Property and Equipment, most of which is pledged as collateral for debt ( at cost to the Company or predecessor): Cost Flight equipment ------------------------------------------------- $3,295,878 Ground equipment__ _______________________________________________________________ _ 380,886 Buildings and improvements to leased propercy ___________________ _ 213,877 Replacement parts for flight equipment _______________________________ _ 186,734 Construction work in progress _______________________________________________ _ 60,691 $4,138,066 $ 392,499 230,360 10,348 633,207 22,847 11,381 1,000 Allowances For Depreciation $1,437,723 152,377 73,925 80,741 $1,744,766 Excess of Par Value of Common Stock issued at organization and amount of then recorded lia- bilities assumed over book amount of assets acquired, plus subsequent adjustment of assumed liabilities --------------------------------------------------------------------------------------------------------------------- Route Extension and Development at Cose__ _________________________________________________________________________________________ _ Other Deferred Charges -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the financial statements. 12 $ 179,857 610,360 194,625 124,480 1,109,322 12,381 2,393,300 130,020 25,894 64,388 $3,735,305 ( An Alaska Corporation J LIABILITIES Current: Current portion of long-term debt _______________________ _ Accounts payable: Trade _____________________ _ Taxes withheld or collected for benefit of taxing authorities _______________________ _ Accrued liabilities: Salaries and wages---------------------------------~-- Insurance and miscellaneous ___________________ _ Interest __ -------------------------------------------------- - - - Taxes other than federal income taxes _______ _ Provision for federal income taxes _______________ ______________________ _ Air travel plan deposits _____________________________________________________________ _ Unearned transportation revenue ________________________ _ Total current liabilities _______ _ Reserve for income tax contingencies .. __ _ Long-Term Debt: Chattel mortgage notes to bank ____________ _ Chattel mortgage note, for equipment purchase __________________ _ Demand notes payable to stockholders, subordinated to above mortgage notes to bank ___ ---------------------- - - - Less, Amount included in current liabilities ___________________________________________ __ _ Total liabilities ---------------------------------------------------- ---------------------- Commitments ( See Notes: ) CAPITAL AND SURPLUS Common Stock, authorized 2,000,000 shares, par value $1, each, issued and outstanding 1,068,109 shares _________________ _ Paid-in Surplus, excess of net proceeds from 401,665 shares of common stock over par value _______________________ _ Earned Surplus, all of which is restricted; statement annexed _______________________________ _ $ 540,013 76,997 91,150 91,687 9,006 28,930 778,400 63,042 125,000 966,442 356,876 1,068,109 584,905 46,289 The accompanying notes are an integral part of the financial statements. 13 $ 356,876 617,010 220,773 17,000 8,075 64,702 1,284,436 142,000 609,566 2,036,002 1,699,303 $3,735,305 NOTES TO FINANCIAL STATEMENTS CONSTRUCTION IN PROGRESS. The Company has instructed the vendor co sell a prefabricated hanger on which a deposit of $23,833, included in con- struction in progress, was made during 1951. The de- posit ( on a structure estimated to cost about $71,500) may be applied against the purchase price of another hangar, or the Company may elect co accept in full set- tlement a refund of one-half of the deposit; however, the Company is now working on plans under which it is expected that the full value of the deposit will ulti- mately be realized. An estimated $18,000 of additional expenditures will be necessary co complete other construction work in progress at December 31, 1953. LONG-TERM DEBT, in connection with which all of the flight equipment and $101,635 of ground property and equipment are pledged as collateral, consists of the following : Payable within one N oncurrent year portion Chattel mortgage notes to bank, payable $27,800 per month, interest 5 % ( or an amount equal to 2 % above the prime rate for unsecured loans charged from time to time by certain named banks, whichever rate is higher) ma- tttring April 20, 1956 __________ $333,600 Chattel mortgage for equip- ment purchase, payable in monthly installments, inter- est 5 % ----------------------------_ _ _ 2 3 ,2 7 6 Demand notes payable to stock- holders, dated March 6, 1953, interest 6% payable quar- terly, subordinated to above mortgage notes to bank ________ ___ _ Totals_________________________ $ 3 5 6 ,87 6 39,766 The chattel mortgage for the above bank loan con- tains certain restrictions and limitations under which the Company may not, among ocher things, without written consent during the term of the loan, make capital expenditures exceeding specified amounts, mort- gage or pledge real or personal property now owned or hereafter acquired, or pay dividends on its stock in excess of 50% of its net income after December 31, 1952. COMMITMENTS. Minimum annual rentals under leases of two or more years' unexpired terms aggregate $51,437. Of this amount $44,038 relates to leases which expire within two to five years. Other leases hav- ing an annual rental of $64,714 are presently being negotiated. In addition, under a lease-purchase agree- ment expiring June 5, 1955, covering an aircraft, the Company pays $240,000 annual rental, part of which may be applied on the purchase price. See also com- ments on Construction in Progress. ROUTE EXTENSION AND DEVELOPMENT. The operating expenses shown in the accompanying state- ment of income include amortization of the preoper- acing costs in connection with the Portland/ Seactle- Alaska route, but exclude amortization of the develop- ment coses of chat route which has been charged to income as a nonoperating expense, pursuant to the Uniform System of Accounts prescribed by the Civil Aeronautics Board. These coses were amortized over a period ended December 31, 1953. The cost of route extension and development shown in the accompanying balance sheet represents costs incurred in connection with the application for renewal of the certificate over the Portland/ Seattle-Alaska route described on page 6 of the Annual Report. These coses will be amortized during future periods. DEPRECIATION. Due to an estimated extension of the useful life of DC-4 aircraft and related flight equip- ment owned at January 1, 1953, the Company is de- preciating those assets over a period ending three years from that date. This extension resulted in a provision for depreciation which was $124,000 less than would have been provided under the depreciation rates previ- ously used, and correspondingly decreased the depreci- ation charged to operations for 195 3. DC-4 flight equipment acquired during 195 3 is being depreciated over a four-year estimated life. 15 FEDERAL AND TERRITORIAL TAXES ON INCOME. Certain expenditures are required by the Uniform System of Accounts prescribed by the Civil Aeronautics Board to be treated as deferred charges, but are chargeable against income for tax purposes. Mainly because of this required difference in accounting treatment, the 1953 Federal and Territorial taxes on income exceeded the Company's profit before taxes for the year. AUDITORS' CERTIFICATION LYBRAND. Ross BRos. & MONTGOMERY CERTIFIED PUBLIC ACCOUNTANTS SKINNER BUILDING SEATTLE I Pacific Northern Airlines, Inc. Seattle, Washington We have examined the balance sheet of PACIFIC NORTHERN AIRLINES, INC. N EW YORK P M tl.AOELPMIA. BOSTON BALTI M ORE P ITTS B UROt-4 O E T A OIT CL E V E LA N D C INCI NN AT I ST LOUIS LOUISVILLE BfA M INGHA.M DALLAS ~f~!:!~ ~~s 5 co LO N DO N PAR IS as of December 31, 1953, and the related statement of income and earned surplus for the year then ended. It ~as 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 :.tfas made in accordance wi'th generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as ~e considered neces- sary in the circumstances. In our opinion, the accompanying balance sheet and state- ment of income and earned surplus present fairly the financial position of Pacific Northern Airlines, Inc. at December 31, 1953, and the results of it s operations for the year then ended, in con- formity with generally accepted accounting principles applied on a consistent basis. ~~ Seattle, Washington March 5, 1954 a 65% OF ITS POPULATION LIVES IN THE AVIIAOI DAYTIMI TlMPllATUIIS City Summff Winter Juneou 62.1 33.8 Anc:hcM'ag .. 61.4 20.9 ICodlok ....... . . , . 65.3 38.8 MODERATE CLIMATE REGION SERVED BY PACIFIC NORTHERN AIRLINES ... THE ALASKA FLAG LINE S.ottle.. .... . ..... 67.4 42., Sonfra~o 58.9 SJ.8 Ok.090. , .. . ...... 78.6 32.1 Hew York ......... 7-4.4 38.8 '''" n .J 34,J While snow, ice and prolonged sub-zero winter temperatures are no rarities in the hinterland of Alaska, more than 65% of Alaska's present popu lation of 170,000 people lives in the moderate climate belt along Pacific Northem's routes. Juneau, Alaska's capital, for example, has the same average daytime winter temperatures as those prevailing in cities along the North Atlantic seaboard. Anchorage, Alaska's largest city, has temperatures comparable to the New England states. This favorable climate has been an influential factor in the building of modem and rapidly developing cities along more than 900 miles of Pacific Northern routes within Alaska. All of Alaska's important industries- including fishing, mining, fur and forest prod ucts-are of great benefit to the people in the cities and towns in the moderate climate zone. And it l>! in this same area that Alaska's current progress and prospects for future growth are most apparent. As a partner in the progress of Alaska, Pacific Northern has served the most productive region of Alaska with dependable air transportation for more than twenty years. Last year Pacific Northern began direct service daily between the Pacific Northwest and Anchorage in comfortable, 4 engine Flagliners. Convenient schedules to Western and Southeastern Alaska points are maintained by several flights daily from Anchorage. For information on Alaska or for reservations and information on Pacific Northern Airlines, write: General Sales Office, 1626 Exchange Building, Seattle 4, Wash. PACIFIC NORTHERN AIRLINES ---r/fe,,~~ .L~ in the progress of ALASKA ... Since 1932 Pacific Northern Airlines- The Alaska Flag Line-has been an Alaskan institution and has played an important part in the development of the Territory. Oldest of the Alaskan carriers still under original management, Pacific Northern has served the major cities of Alaska with dependable, scheduled air transportation. Late last year Pacific Northern started service on its direct route between the Pacific Northwest and Alaska linking Portland and Seattle with Anchorage, Alaska's Jar gest city. In the first year of operation on this 1580 mile States-Alaska route approximately 23,000 passengers have been carried in comfortable, 4 engine Pacific Northern Flagliners as well as thousands of tons of air cargo. Intra-Alaska service is maintained on convenient schedules by Pacific Northern from Anchorage west to Bristol Bay and from Anchorage to Kodiak via the Kenai Peninsula. Juneau, Alaska's capital, is also served from Anchorage with intermediate stops at Cordova and Yakutat. For au.tJwritatiue information on Ai