Pacific Northern Airlines Annual Report 1957

ANN
PACIFIC NORTHERN AIRLINES
~~~_L_~
PACIFIC NORTHERN AIRLINES, INC.
Directors
G. P. O'GRADY, WASHINGTON, D. C.
JOHN A. CUNNINGHAM, 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, PRESIDENT AND GENERAL MANAGER
H. A. OLSEN, VICE PRESID.ENT-TRAFFIC AND SALES
JOHN A. CUNNINGHAM, VICE PRESIDENT-OPERATIONS
J. H. FOSTER, VICE PRESIDENT-ENGINEERING AND MAINTENANCE
FELIX AUBUCHON, VICE PRESIDENT-ALASKA OPERATIONS
C. W. NELSON, SECRETARY-TREASURER
M. E. DIAMOND, ASSISTANT SECRETARY
DEAN B. HART, 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 KODIAK JUNEAU
HOMER CORDOVA PORTLAND
KETCHIKAN 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 and the
Pacific Coast Stock Exchange
President's Report
TO THE STOCKHOLDERS OF PACIFIC NORTHERN AIRLINES:
1957 was a successful year in all respects. The most significant achievement was
the award of a permanent franchise for overseas operations, pursuant to a special
act of Congress. All the routes of Pacific Northern, both within Alaska and between
the United States and Alaska, are now permanently certificated for persons, property
and mail. This was a goal of the utmost importance which had been sought for many
years. The Company now enjoys permanent security of its routes and is able to
plan effectively its long range development unhampered by uncertainty and time-
consuming and costly certificate renewal proceedings.
The 85th Congress also enacted other aviation statutes which offer material bene-
fits to Pacific Northern. During the 1957 session, legislation was passed authorizing
the Government to guarantee loans obtained by airlines for the purchase of airline
equipment up to a maximum for any one carrier of $5 million. Early in 1958 another
bill was enacted permitting airlines to retain capital gains realized upon retirement
of flight equipment for reinvestment in new types of aircraft. These statutes should
greatly facilitate the Company's long range financing plans for eventual replace-
ment of the Constellation fleet with turbo-prop or jet aircraft.
Operating profits in 1957 amounted to $673,000 after depreciation of $644,000.
This resulted in net income of $261,000 after income taxes and nonoperating expenses
totaling $412,000. Total revenues of $10 million were the highest in the Company's
history, continuing the trend which has resulted in the doubling of revenues during
the past five years.
1
2
As the dominant airline in the Alaska market, Pacific Northern continued to pro-
vide more service to the Territory than any other carrier and established new traffic
highs in 1957. The Company's revenue passenger miles, 36% larger than its next
ranking competitor, totaled almost 106 million, a gain of 15% over last year. Total
revenue ton-miles were in excess of 15 million, up 10% over 1956. Mail traffic in-
creased to 1,121,000 ton-miles, a gain of 24% over last year. Cargo ton-miles of
2,985,000 were lower than in 1956, but the effect upon total revenues was only a
fraction of one per cent.
The following tabulation summarizes Pacific Northern's growth since 1952, which
was the first full year of its overseas operations:
Calendar Total Revenue Revenue
Year Revenues Passenger Miles Ton-Miles
1957 $10,030,000 105,820,000 15,564,000
1956 9,608,000 92,103,000 14,211,000
1955 7,821,000 76,037,000 12,658,000
1954 6,476,000 59,547,000 10,426,000
1953 6,129,000 58,912,000 10,157,000
1952 5,024,000 42,224,000 6,723,000
The year was noteworthy in many other respects. The Company continued its
unbroken record of 26 years of operation without a passenger fatality and again
qualifies for the National Safety Council award. A fourth Lockheed Constellation
was purchased and placed in revenue service in June of 1957 pursuant to financing
arrangements which are described in accompanying notes to the financial statements
of this report. A retirement income plan for flight officers of the Company was put
into effect on February 1, 1957, and a similar retirement plan was made available
on January 1, 1958, to all employees not covered by collective bargaining agree-
ments. The group insurance plan was revised on July 1, 1957, to provide much more
liberal hospital and medical benefits to employees and their families.
The Company's stock, which has been listed on the American Stock Exchange
since 1953, was listed on the Pacific Coast Stock Exchange on August 1, 1957.
In January of 1958, the Civil Aeronautics Board ordered an investigation to de-
termine whether the four airlines now operating between the United States and
Alaska could be reduced in number by merger, consolidation, route transfer, sus-
pension, or similar arrangements. The C.A.B.'s power to accomplish any such result
is extremely limited and, accordingly, the Board has stated that it prefers to deal
with the problem on the basis of voluntary proposals from the airlines. In addition
to Pacific Northern, the carriers included in the investigation are Pan American
World Airways, Alaska Airlines and Northwest Airlines. Although this proceeding
will probably extend over a period of several years before final conclusions are
reached, Pacific Northern welcomes the investigation and is in complete accord
with the Board's objectives. It is obvious that the elimination of one or two of the
carriers now serving the States-Alaska market would greatly strengthen the econo-
mic position of the remaining airlines and would probably enable them to conduct
highly profitable operations without Government subsidy. As the largest and most
economically situated carrier in the Alaska market, Pacific Northern is confident
that its own long range development will be greatly enhanced if conclusive action
is taken with respect to any of the other carriers.
The outlook for 1958 is highly promising. Significant activities are now taking
place in Alaska in connection with tourism, petroleum exploration, pulp and timber
development and military defense construction. There appears to be no question
that the Territory's rapid economic development will continue at an accelerated
pace and that these activities will be directly reflected in Pacific Northern's further
substantial growth.
A. G. WOODLEY
PRESIDENT AND
GENERAL MANAGER
3
4
AUDITOR'S REPORT
LYBRAND, Ross BROS. c.. MONTGOMERY
CERTIFIED PUBI.I C AC C OU N TANTS
Pacific Northern Airlines, Inc.
Seattle, Washington
We have examined the balance sheet of
PACIFIC NORTHERN AIRLINES, INC.
,tQCll. " 0 " O
LOUI SV LI.C LOS ANGl!:Llt S
S U TT1.C
COOPERS C. LYBRA N D
as of December 31, 1957, and the related statement of income and
retained earnings for the year then ended. It was not practicable
to confirm the balances receivable from the United States
Government. 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 other
auditing procedures as we considered necessary in the circumstances.
Changes in accounting methods prescribed by the Civil
Aeronautics Board in connection with the revised system of accounts
for air carriers effective January 1, 1957 are reflected in the
accompanying statements as explained in the financial comments.
In our opinion, the accompanying balance sheet and
3tatement of income and retained earnings present fairly the
financial position of Pacific Northern Airlines, Inc. at
December 31, 1957, and the results of its operations for the year
then ended, in conformity with generally accepted accounting
principles, applied on a consistent basis except for the changes
referred to in the preceding paragraph.
A.4. ::-:-t .. ~1o...
Seattle, W a s h i n g t o n ~
fY6-p--
March 26, 1958
PACIFIC NORTHERN AIRLINES, INC. (AN ALASKA CORPORATION)
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1957
OPERATING REVENUES:
Passenger
Air mail
Cargo and excess baggage
Other transport service
Incidental revenues, net
Total
OPERATING EXPENSES:
Flying operations
Maintenance .
Aircraft and traffic servicing
Passenger service
Promotion and sales
General and administrative
Depreciation .
Operating profit
OTHER EXPENSES, NET:
Interest expense .
Miscellaneous income
Income before provision for taxes thereon
Provision for federal and territorial income taxes
Net income .
Retained earnings, January 1, 1957
Amortization of property acquisition adjustment (deduct)
Retained earnings, December 31, 1957
The financial comments on page 8
$2,972,405
1,851,084
1,935,107
630,978
636,664
686,861
644,020
191,262
38,812
are an integral part of the financial statements
$
$
5,919,866
2,997,409
964,789
70,132
78,136
10,030,332
9,357,119
673,213
152,450
520,763
259,638
261,125
713,070
(43,340)
930,855
5
6
PACIFIC NORTHERN AIRLINES, INC. (AN ALASKA CORPORATION)
BALANCE SHEET, DECEMBER 31, 1957
Current:
Cash
Receivables:
Traffic balances
United States Government
Other
Less allowance for losses
Maintenance and operating supplies,
at average cost
Prepaid expenses, mainly insurance .
Total current assets
Investments:
ASSETS
Cash surrender value of life insurance
Aeronautical Radio, Inc. stock, at cost
Property and equipment, at cost:
Flight equipment
Ground equipment
Buildings and improvements
to leased property
Replacement parts for flight
equipment
Construction work in progress
N onoperating property and equipment,
net of $59,262 depreciation .
Deferred charges, llet of amortization:
Property acquisition adjustment
Route extension and development
Preoperating expenses-Constellations
Other
Assets
$6,849,391
565,788
501,484
456,480
31,516
$8,404,659
The financial comments on page 8
$ 558,189
1,184,935
83,345
1,826,469
27,830
28,539
1,000
Allowance
for
Depreciation
$2,494,577
362,097
200,063
208,382
$3,265,119
86,680
22,695
87,094
43,760
are an integral part of the financial statements.
LIABILITIES
Current:
$ 204,438 Current portion of long-term debt
Accounts payable:
Trade. $ 689,293
Airline traffic accounts 545,481
Collections, etc. as agents 98,963
1,798,639
Accrued liabilities:
389,918 Salaries and wages 120,735
120,561 Other . 108,249
2,513,556
Provision for income taxes
Air travel plan deposits
Unearned transportation revenue
29,539
Total current liabilities .
Long-term debt:
Chattel mortgage notes to bank, noncurrent portion
Note payable, officer, due January 1, 1961
STOCKHOLDER EQUITY
5,139,540
Common stock, authorized 2,000,000 shares,
12,240 par value $1 each, issued and outstanding 1,068,109 shares 1,068,109
Paid-in surplus - no change during 1957 584,905
1,653,014
Retained earnings, all of which are restricted,
statement annexed . 930,855
240,2.29
$7,935,104
The financial comments on page 8
are an integral part of the financial statements.
$ 765,600
1,333,737
228,984
267,000
13,175
149,072
2,757,568
2,568,667
25,000
2,583,869
$7,935,104
7
8
FINANCIAL COMMENTS
UNIFORM SYSTEM
OF ACCOUNTS:
The Company has regularly maintained
its accounting records in accordance with
the uniform system of accounts for air
carriers prescribed by the Civil Aero-
nautics Board. Effective January 1, 1957,
the Board issued a revised system which
made changes, among others, in the ex-
pense classifications, and in the accounting
treatment of certain investments in flight
equipment and in airframe maintenance
costs. The changes have been reflected in
the Company's records for the year ended
December 31, 1957, and have had no sig-
nificant effect upon the amount of net in-
come reported by the Company, inasmuch
as they were recognized in the proceeding
which established the U. S. mail pay, re-
ferred to in the succeeding note.
U. S. MAIL PAY:
Under provisions of the Civil Aero-
nautics Act, the Company is entitled to
a reasonable return on investment after
income taxes, such provisions to be ad-
ministered by the Civil Aeronautics Board.
On April 23, 1957, the Board issued an
order instituting a proceeding which (1)
reopened the current final mail rates for
the purpose of determining new final mail
rates, and (2) established reduced tempo-
rary mail rates effective April 23, 1957. On
December 27, 1957, the Board fixed final
mail rates which provided additional mail
compensation amounting to $439,257 for
the period April 23 through November 30,
1957. This amount is reflected in the 1957
financial statements and was received by
the Company in early January 1958. In
the same proceeding the Board established
final future rates which were used by the
Company to compute the December 1957
mail pay and will remain in effect until
action is taken by either the Board or the
Company to revise them prospectively.
AMORTIZATION OF
DEFERRED CHARGES:
The Company is amortizing route exten-
sion and development and preoperating
expenses - Constellations in accordance
with the policy established in 1955.
In 1957 the Board of Directors of the
Company authorized the amortization of
the Property Acquisition Adjustment Ac-
count to be accomplished in three equal
annual charges to retained earnings begin-
ning in the current period.
LONG-TERM DEBT:
In May 1957, the Company acquired an
additional Lockheed Constellation aircraft
financed in part from the proceeds of a
$1,000,000 bank loan. In connection with
this acquistion and financing , certain
modifications were made in the terms of
the loan agreement dated February 27,
1956, including an extended payment peri-
od. The December 31, 1957 balances of the
loans aggregated $3,334,267, on which in-
terest ranges from 5% to 6% (current-
ly 6%). Substantially all of the Company's
flight equipment is pledged under chattel
mortgages as collateral. The loan agree-
ment contains certain restrictions and lim-
itations including, among other things,
dividend payments.
RETIREMENT PLAN :
During 1957 the Company agreed to the
establishment of a contributory retirement
plan for flight officers and paid into the
plan's trust fund and charged to operating
expenses $57,125 which included a portion
of the amount necessary to fund past serv-
ice requirements. The Company's obli-
gation for past service requirements at
December 31, 1957, was computed to be
approximately $153,000 by the Company's
independent actuaries.
As of January 1, 1958, the Board of
Directors established a contributory re-
tirement plan for employees whose em-
ployment is not subject to the terms
of collective bargaining agreements. Past
service requirements have been computed
by the Company's independent actuaries
to be approximately $163,000 which will
be paid into the plan by the Company
during succeeding years.
The Company has filed application with
the United States Treasury Department
for approval of the flight officers' retire-
ment plan, and management intends to
file for approval of the other retirement
plan in 1958.
CONTINGENT LIABILITIES:
As of December 31, 1957, the Company
was contingently liable for claims arising
in the normal course of business in which
it is or may be a defendant, but in the
opinion of legal counsel the ultimate lia-
bility, if any, will not materially affect the
financial statements.
COMPARISONS
TRAFFIC
Revenue Passenger Miles
Revenue Ton-Miles of Traffic:
Passenger .
Mail.
Cargo
Excess baggage . .
Total Revenue Ton-Miles
FINANCIAL
Operating Revenues:
Passenger
Mail.
Cargo
Excess baggage
Other
Total Revenues
Operating Expenses:
Other than depreciation
Depreciation .
Total Operating Expenses
Operating Profit
N onoperating Expenses
Income Taxes .
Net Income
Retained Earnings at Year End
Common Shares OutstaJ1ding
Stockholder Equity- Net .
This Year
1957
105,820,000
11,323,000
1,121,000
2,985,000
135,000
15,564,000
$ 5,920,000
2,997,000
871,000
94,000
148,000
$10,030,000
$ 8,713,000
644,000
$ 9,357,000
$ 673,000
152,000
260,000
$ 261,000
$ 931,000
1,068,109
$ 2,584,000
Last Year 5 Years Ago
1956 1952
92,103,000 42,224,000
9,845,000 4,402,000
904,000 522,000
3,365,000 1,743,000
97,000 56,000
14,211,000 6,723,000
$ 5,237,000 $ 2,713,000
3,191,000 1,740,000
950,000 495,000
74,000 45,000
156,000 31,000
$ 9,608,000 $ 5,024,000
$ 7,889,000 $ 4,026,000
583,000 390,000
$ 8,472,000 $ 4,416,000
$ 1,136,000 $ 608,000
192,000 71,000
550,000 299,000
$ 394,000 $ 238,000
$ 713,000 $ 50,000
1,068,109 666,444
$ 2,366,000 $ 716,000