Pacific Northern Airlines Annual Report 1959

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1959 ANNUAL REPORT
- PNA ROUTES
-- CONNECTING AIRLINES
To the Stockholders of Pacific Northern Airlines:
During 1959, Pacific Northern again established new records in
total revenues, revenue ton miles and revenue passenger miles, and
further strengthened its position as the leading airline serving
Alaska. Total revenues for the year amounted to $11 ,481,000, an
increase of $1 ,113,000 over last year. Revenue ton miles increased
substantially from 15,937,000 in the preceding year to 17,013,000
in 1959, and revenue passenger miles increased to 113,389,000
from 105,595,000 for the previous year.
In spite of these increases, net earnings fell $55,000 below last
year, due primarily to a strike in Alaska's important construction
industry and an unsatisfactory commercial fishing yield. Because
of these factors, revenues fell off during the last quarter of the year
when certain expenses, such as depreciation, interest and opera-
tional costs, could not be reduced proportionately. The Company
petitioned the Civil Aeronautics Board for increased rates of mail
compensation effective from October 23, 1959. In the opinion of
management, final settlement of this claim will result in 1959 net
earnings of $338,000, or 32c per share, compared to 37c per share
in 1958.
Management confidently considers that neither of these eco-
nomic factors is likely to recur, and that the continued growth of
Alaska's economy will not be interrupted during the coming year.
On the whole, 1959 was a year of satisfactory progress for
Pacific Northern. The Company's growth last year and during the
preceding five years is best illustrated by the following tabulation:
Calendar Total Revenue Revenue
Year Revenues Ton Miles Passenger Miles
1959 $11,481,000 17,013,000 113,389,000
1958 10,368,000 15,937,000 105,595,000
1957 10,030,000 15,564,000 105,820,000
1956 9,608,000 14,211,000 92,103,000
1955 7,538,000 12,671,000 76,110,000
1954 6,475,000 10,440,000 59,610,000
During the year, Pacific Northern flew its one millionth passen-
ger, marking the first time an airline has reached that significant
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milestone in Alaska service. It is interesting to note that although
it took almost 25 years before the 500,000th passenger was carried
in the fall of 1956, the rapid growth of Alaska made it possible to
tally up the second 500,000 passengers in only three years, and the
Company expects to carry the second million passengers within the
next five years.
Pacific Northern continued its unbroken record of 28 years with-
out a passenger fatality, thus again qualifying for the annual award
of the National Safety Council.
The Company in May, 1959 inaugurated a new route from
Seattle direct to Kodiak, Alaska, and the new service has been well
patronized. This route represents an addition of 1,441 route miles
and brings the Company's system to a total of 5,061 unduplicated
route miles, all permanently certificated for persons, property and
mail. This route now links the 13th Naval District Headquarters in
Seattle and the Headquarters of the 17th Na val District in Kodiak,
which embraces all of the Northwestern sea frontier northward to
the Arctic Ocean and westward along the Aleutian Chain to Japan.
The route provides considerable savings in distance and time for
access to this vast area and to the large commercial fishing opera-
tions of the Kodiak Archipelago and Shumagin Islands.
During the year, the Company added two Lockheed Constella-
tions to its flight equipment and profitably retired by sale its
remaining DC-4 aircraft and one DC-3. The Company's aircraft
now consist of three DC-3's which are used exclusively between
Alaskan points, and six Lockheed Constellations which are em-
ployed primarily in overseas operations between Portland-Seattle
and Alaska. No further acquisition of piston-engine equipment is
contemplated.
Extensive evaluation studies have been made regarding various
types of jet and turbo-prop aircraft in relation to the Company's
flight equipment replacement planning. Thus far no definite de-
cision has been reached in this matter. It is recognized that no
problem currently posed is of greater importance than the proper
selection of new equipment, not only from the immediate stand-
point, but with respect to the changing circumstances of the future.
Jet aircraft design is experiencing rapid technological changes, and
modifications and improvements already are being incorporated in
aircraft types now in production with resultant improvements in
operating performance and economy. The Company keenly appre-
ciates the advantages of an early decision on the selection of new
equipment. It firmly believes, however, that its conservative ap-
proach to the situation and its careful appraisal of the special
problems involved will best ensure Pacific Northern's profitable
entry into the jet era.
Commercial and industrial activities in Alaska are expected to
reach record highs during 1960, which should be reflected in ex-
panded airline traffic and earnings. The petroleum industry has
reported successful explorations near Anchorage and drilling of
these fields will be accelerated. New construction projects, as well
as those backlogged because of the 1959 strike, will establish a
new peak in building activity and employment for the year.
Advance bookings indicate that 1960 will be the biggest year
for tourist travel to Alaska. During January and February, many
of Pacific Northern's summer flights have been completely booked
by travel groups. This situation has never existed in prior years and
reflects the great increase in tourism engendered by nationwide
interest in the new status of Alaska as a state.
During 1959, Pacific Northern provided more schedules and
carried more Alaskan traffic than any other airline serving the
49th State. The Company's routes extend to virtually all of the
areas in Alaska which are experiencing rapid growth in population
and where major efforts are focused on petroleum exploration, pulp
and timber enterprises, defense installations, construction projects
and commercial developments. In fact, the richest natural re-
sources of the huge state are located along the routes of PNA, and
it is these areas which also offer the best attractions for tourists
and for commercial opportunity. These inherent route advantages
assure an active share by Pacific Northern in Alaska's vigorous
development.
PRESIDENT AND
GENERAL MANAGER
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PEAT, MARWICK, MITCHELL & Co.
The Board of Directors
CERTIFIED PUBLIC ACCOUNTANTS
STU.A.RT BUILDING
SEATTLE 11
WASHINGTON
ACCOUNTANTS' REPORT
Pacific Northern Airlines, Inc.:
We have examined the balance sheet of Pacific Northern Airlines, Inc.
as of December 31, 1959 and the related statement of earnings and retained
earnings 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, It was not practicable to confirm amounts due from
certain United States Government agencies by communication with them, but we
satisfied ourselves as to these amounts by means of other auditing procedures.
In our opinion, subject to the finalization of retroactive mail pay as
mentioned in note 1, the accompanying balance sheet and statement of earnings and
retained earnings present fairly the financial position of Pacific Northern
Airlines, Inc. at December 31, 1959 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 described in note 2 (which
we approve).
Seattle, Washington
March 11, 1960
PACIFIC NORTHERN AIRLINES, INC.
(AN ALASKA CORPORATION)
Statement of Earnings and Retained Earnings
Year ended December 31, 1959
OPERATING REVENUES:
Passenger .
Mail ( note 1 )
Cargo and excess baggage
Other transport service
Incidental revenues, net .
Total operating revenues
OPERATING EXPENSES:
Flying operations
Maintenance and repairs (note 2)
Aircraft and traffic servicing
Passenger service
Promotion and sales
General and administrative
Depreciation and amortization ( note 2)
Operating profit
NON-OPERATING INCOME:
Gains on disposal of flight equipment and other
assets ( note 4)
Other
NON-OPERATING EXPENSES:
Interest, net .
Provision for obsolescence in inventories of
Constellation aircraft maintenance materials
Federal and state taxes on income ( notes 1 and 4)
Net earnings
Special charge, amortization of property acquisition
adjustment
Retained earnings January 1, 1959 .
Retained earnings, December 31, 1959 .
See accompanying notes to financial statements.
$7,015,239
3,242,550
1,068,774
28,602
126,033
11,481,198
$ 3,201,612
2,191,572
2,178,730
755,458
778,962
780,838
948,888 10,836,060
645,138
202,711
219 202,930
848,068
153,241
29,688 182,929
5
665,139
326,705
338,434
43,340
295,094
1,281,331
$ 1,576,425
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PACIFIC NORTHERN AIRLINES, INC.
Balance Sheet, December 31, 1959
Current assets:
Cash
Receivables :
Traffic
ASSETS
United States Government agencies ( note 1 )
Other
Less allowance for doubtful receivables .
Maintenance and operating supplies, at average cost
Less allowance for obsolescence
Prepaid expenses, principally insurance
Total current assets
Accrual of estimated retroactive mail pay (less provision
for applicable income taxes) ( note 1 ) .
Investments, principally cash surrender value of life
insurance
Operating properties and equipment, at cost
(notes 2, 3 and 4): Assets
Flight equipment $ 7,207,105
Ground equipment 654,036
Buildings and improvements to leased
property 136,834
Replacement parts for flight equipment 540,910
Construction work in progress . 16,891
$ 8,555,776
Deferred charges, net of amortization:
Route extension and development .
Preoperating expenses-Constellation aircraft .
Preoperating expenses-airport hangar building
Other
See accompanying notes to financial statements.
$ 589,297
564,628
343,405
1,497,330
28,642
471,403
29,688
Allowances for
depreciation,
amortization
and overhauls
$ 2,940,305
448,764
118,490
224,232
$ 3,731,791
5,674
21,773
8,055
10,359
$ 236,685
1,468,688
441,715
116,565
2,263,653
164,000
44,729
4,823,985
45,861
$ 7,342,228
(AN ALASKA CORPORATION)
LIABILITIES
Current liabilities:
Note payable to bank, unsecured
Current installments on long-term debt
Accounts payable:
Trade
Airline traffic accounts
Collections as agents
Accrued wages, taxes, etc.
Federal and state taxes on income, estimated .
Air travel plan deposits
Unearned transportation revenue
Total current liabilities
Long-term debt:
Chattel mortgage notes to bank, non-current
portion ( note 3) .
Stockholder equity:
Common stock-$1.00 par value per share.
Authorized 2,000,000 shares; issued and
outstanding 1,068,109 shares
Paid-in surplus-no change during 1959
Retained earnings, all of which are restricted (note 3) .
Contingent liabilities and commitments (notes 5, 6 and 7)
See accompanying notes to financial statements.
$ 555,1~7
541,448
133,955
1,068,109
584,905
1,653,014
1,576,425
$ 200,000
944,676
1,230,570
195,494
79,750
21,250
149,891
2,821,631
1,291,158
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3,229,439
$ 7,342,228
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Notes to Financial Statements
(1) U. S. MAIL PAY:
The Company is a certificated air carrier sub-
ject to regulation by the Civil Aeronautics Board.
Under the provisions of the Federal Aviation Act,
the Company is entitled to a reasonable return on
investment after income taxes. Since October 23,
1959 the Company has been receiving mail pay
based on temporary rates which are subject to
final negotiation and settlement. Management be-
lieves, based on past experience, that there will
be a favorable retroactive adjustment to October
23, 1959 when rates are finally reviewed and
settled and has accrued such estimated adjust-
ment in the amount of $353,000 through De-
cember 31, 1959. The effect on net earnings of
accrual of such estimated additional mail pay is
$164,000, after reduction for applicable income
taxes of $189,000 ( assessable in year of receipt) .
These amounts have been included in their re-
spective categories in the statement of earnings.
(2) ALLOWANCES FOR DEPRECIATION AND
OVERHAULS-FLIGHT EQUIPMENT:
Effective January 1, 1959 the Company adopted
the accounting procedure of excluding from the de-
preciable bases of Constellation aircraft amounts
estimated to represent the cost of built-in over-
hauls of engines and of amortizing such costs
over the service lives of the engines. Prior to 1959
the procedure was followed of depreciating en-
gine costs, less allowances for residual values,
over the lives of the related aircraft. Also effec-
tive January 1, 1959, the depreciable bases of air-
frames were revised through redetermination of
residual values thereof. In addition, the estimated
useful lives of Constellation aircraft were ad-
justed to provide for approximate common retire-
ment dates. The effect of these changes in ac-
counting procedure upon the financial statements
is not considered to be of material significance.
(3) LONG-TERM DEBT:
The Company is indebted under a Loan Agree-
ment which had a balance at December 31, 1959
amounting to $2,235,834, of which $944,676 rep-
resents principal payments due within one year
and is included in current liabilities. Substan-
tially all of the Company's flight equipment is
pledged as collateral under the Loan Agreement.
Among other provisions, the Loan AgTeement to-
gether with amendments thereto require that the
Company shall maintain specified amounts of
working capital and shall not declare or pay any
dividends or purchase, redeem or otherwise ac-
quire for value any of its capital stock.
(4) DEFERRED INCOME TAXES:
In accordance with a requirement of the uni-
form system of accounts prescribed by the Civil
Aeronautics Board, the Company includes in in-
come gains on trade-ins of flight equipment
whereas for income tax purposes the gains must
be applied as a reduction of the cost of the flight
equipment acquired in the related purchase trans-
action. In 1958 and 1959 gains of approximately
$145,000 and $173,000, respectively, were in-
cluded in income. The Company has adopted de-
ferred tax accounting procedures to provide for
the estimated effect on income of future years of
the resulting difference between book and taxable
income and, accordingly, has provided for de-
ferred tax reserves of approximately $36,000 and
$43,000. Such amounts have been included in the
allowance for depreciation and are being credited
against income tax provisions over the lives of
the applicable flight equipment.
(5) LONG-TERM LEASES:
On June 1, 1959 the Company executed a fifty-
year lease with the Port of Seattle requiring the
construction of an airport hangar building on the
leased premises at Seattle-Tacoma International
Airport. Concurrent with the execution of the
above lease agreement the Company assigned the
lease to a third party under an agreement where-
by such third party is to construct the facility
and lease it back to the Company. The Company
is required under the lease-back agreement to pay
one year's rent ( $187,920 ) in advance prior to
occupancy and thereafter to pay corresponding
rent on a monthly basis with an option to pur-
chase the facility at the end of the twenty-five
year lease-back period. The Company is also re-
quired to pay the ground rentals under the lease
with the Port of Seattle of $500 a month until
the earlier of building completion or May 31,
1960; $1 ,530.92 per month from that date through
May 31 , 1969 and thereafter at such amount or
at a newly negotiated rate. The Company is fur-
ther required to pay all taxes relating to the
premises and improvements thereon.
On December 30, 1959 the Company sold all of
its terminal buildings and facilities in the State
of Alaska at book value and concurrently ex-
ecuted an agreement to lease such properties for
a period of fifteen years at the monthly rental of
$4,000, with an option to renew under certain
conditions. The agreement also gives the Com-
pany an option to repurchase the properties upon
expiration of the lease.
(6) RETIREMENT PLANS:
The Company has two contributory retirement
plans covering ( 1) flight officers and ( 2) other
employees of the Company. During 1959 the Com-
pany charged to operating expenses and other
accounts provisions totaling $174,712 of which
$33,886 was for past service benefits. The un-
funded past service benefits of both plans have
been estimated by the Company's independent actu-
aries to aggregate $260,642 at December 31, 1959.
(7) CONTINGENT LIABILITIES:
At December 31, 1959 the Company was con-
tingently 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 liability, if any, would not materially
affect the financial statements.
PACIFIC NORTHERN AIRLINES, INC.
Directors
G. P. O'GRADY
J. A. CUNNINGHAM
PAUL PORZELT
R. A. ROWAN
M. B. KIRKPATRICK
C. W. NELSON
A. G. WOODLEY
Officers
A. G. WOODLEY
H. A. OLSEN
J. A. CUNNINGHAM
J. H . FOSTER
FELIX AUBUCHON
T. D. STUART
C. W. NELSON
M. E. DIAMOND
D. B. HART
GENERAL COUNSEL
GENERAL OFFICES
CITY TICKET OFFICES
AUDITORS
TRANSFER AGENT
REGISTRAR
COMMON STOCK LISTED
Washington, D. C.
Seattle, Washington
New York, New York
Los Angeles, California
Anchorage, Alaska
Seattle, Washington
Seattle, Washington
President and General Manager
Vice President-Traffic and Sales
Vice President-Operations
Vice President- Engineering and Maintenance
Vice President-Alaska Operations
Vice President- Industrial Relations
Secretary-Treasurer
Assistant Secretary
Assistant Secretary
G. P. O1
GRADY, 1625 EYE STREET, N. W. , WASHINGTON , D.C .
400 NORTON BUILDING , SEATTLE, WASHINGTON
ANCHORAGE
HOMER
KETCHIKAN
KODIAK
CORDOVA
KENAI
PEAT, MARWICK, MITCHELL & CO .
JUNEAU
PORTLAND
SEATTLE
BANKERS TRUST COMPANY, NE,'V YORK, NEW YORK
MANUFACTURERS TRUST COMPANY, NEW YORK, NEW YORK
AMERICAN STOCK EXCHANGE
PACIFIC COAST STOCK EXCHANGE