Pacific Northern Airlines Annual Report 1961

N72DV
President's Report
To the Stockholders of Pacific Northern Airlines:
Without exception, 1961 was a highly successful year of operations
for Pacific Northern Airlines. Net earnings reflected a gain of 28 %
over last year. Total revenues were the highest in the Company's his-
tory, and new all-time records were established in every category of
traffic. Substantial improvement was achieved in load factors, and
revenue ton-miles of traffic per employee were 12 % higher than the
peak productivity rate of any previous year. Pacific Northern's leading
position among all of the airlines serving Alaska remained unchallenged.
The Company's 1961 operating profit amounted to $667,000 after
charges of $822,000 for depreciation and simifar non-cash items. Net
earnings were $262,000 or 25 cents per share after income taxes of
$343,000. Stockholder equity at the close of 1961 amounted to
$3,532,000 or $3.31 per share, an increase of 8% during the year.
Unquestionably the most significant achievement during 1961 was
the successful completion of long term financing for Boeing 720 jet
aircraft. The first plane will be delivered on March 23 and immediately
assigned to flight crew training. The second plane will be available in
the latter part of April and both will be in revenue service on the Com-
pany's major routes beginning in May of 1962. The inauguration of
PNA's jet services will coincide with the opening of the World's Fair
in Seattle and there is every reason to believe that the Company's
expanded services will be fully utilized from the outset by many of
the four million out-of-state visitors who are expected to attend
the exposition.
On April 10, 1962, Pacific Northern will celebrate its 30th Anniversary.
In the years ahead, I am confident that the Company's progress and
prosperity will continue to match the dynamic growth of Alaska and
the Pacific Northwest.
March 13, 1962
PRESIDENT AND
GENERAL MANAGER
1
2
The Year in Review:
Financial
Total revenues of $12.3 million in 1961 were 6% higher than last year.
This year's net earnings of $261,814 were 28 % higher than the 1960
net profit of $205,193. Operating costs per ton-mile of revenue traffic
were reduced from 60 in 1960 to 57 in 1961. These favorable financial
results were achieved in the face of jet competition throughout 1961
on the Company's main route between Seattle and Anchorage.
Traffic
During 1961, revenue passengers totaled 147,000, an increase of 9%
over last year. Revenue passenger miles were 123 million, a 5 % gain
over 1960. Ton-miles of U. S. mail traffic reached 2.1 million, 32 %
ahead of last year. Property ton-miles aggregated 5.4 million, an in-
crease of 27 % over 1960. Total revenue ton-miles of traffic were 20.6
million in 1961, 13% ahead of the previous year.
Load factors and productivity showed similar improvement. The Com-
pany's plane load factor in system operations rose to 65 % in 1961
from 62 % the year before. Revenue ton-miles of traffic per employee
increased from 29,649 in 1960 to 33,202 in 1961, a gain of 12% . PNA's
load factor and productivity rate rank among the highest in the entire
U. S. airline industry.
Jet Financing
During 1961, the Company completed its long-term financing of $11.4
million for the purchase of jet equipment. Approximately $4 million
has been guaranteed by the Civil Aeronautics Board under the Guar-
anty Loan Act. Bank loans comprise $8.5 million of the total financing,
and private loans totaling $2.5 million were negotiated with other
parties. In addition, $0.4 million of subordinated debentures were sold
in a private offering. The debentures were issued with detachable
stock purchase warrants entitling the holders to purchase 88,800
shares of Pacific Northern's common stock at a price of $4.50 per
share. The warrants may be exercised at any time after November
10, 1962 and until November 10, 1971.
Mail Rates
During 1961, the Civil Aeronautics Board established new final mail
rates for Pacific Northern's system operations. These rates will auto-
matically become effective on May 1, 1962, coinciding with the inau-
guration of jet services, and will supercede the final mail rates in effect
prior to that date. The mail rate applicable to the first twelve months
of jet operations was premised upon total operating revenues of $16.6
million, total operating expenses of $14.4 million, operating profit of
$2,215,000, interest expense of $637,000, and net income of $742,000
after income taxes of $836,000. Cash flow (net income plus deprecia-
tion) was projected at $2.4 million. These financial results were pre-
dicated on 183 million revenue passenger miles and 30. 7 million total
ton-miles of revenue traffic during PNA's first twelve months of jet
operations.
Equipment and Services
The Company's flight equipment during 1961 consisted of 7 Lockheed
Constellations ( 5 owned and 2 leased) and 3 Douglas DC-3s. After
the 2 Boeing 720 jets have been placed in service, the leases on the 2
L-7 49 aircraft will not be renewed and 2 of the Douglas aircraft will
eventually be sold.
The Boeing jets initially will be operated on the Seattle~
Anchorage
nonstop route and on the Seattle-Ketchikan-Juneau route. Each B-720
will be equipped with 119 seats, 24 in the first class cabin and 95 in
the tourist compartment.
3
4
PACIFIC NORTHERN AIRLINES~INC. (AN ALASKA CORPORATION)
Balance Sheet, December 31, 1961
ASSETS
Current assets:
Cash
Receivables:
Traffic
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
Investments, principally cash surrender value of life insurance
Operating properties and equipment, at
cost (notes 2 and 4): Assets
Flight equipment $ 6,450,702
Ground equipment 727,422
Buildings and improvements to
leased property . 152,369
Replacement parts for flight equipment 706,822
Construction work in progress,
including advances thereon 3,609,222
$11,646,537
Deferred charges, net of amortization:
Lease deposit
Preoperating expenses - airport hangar building
Other
See accompanying notes to financial statements.
$ 858,636
716,201
162,998
1,737,835
24,337
349,170
112,917
Allowances for
depreciation,
amortization
and overhauls
$
$
$
3,927,101
534,547
126,376
310,335
4,898,359
7,000
37,865
2,915
$ 618,800
1,713,498
236,253
139,423
2,707,974
57,729
6,748,178
47,780
$ 9,561,661
LIABILITIES
Current liabilities:
Current installments on long-term debt (note 2)
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, less current installments of
$632,034 (note 2)
Provision for deferred taxes on income (note 3)
Stockholders' equity:
Common stock - $1.00 par value per share.
Authorized 2,000,000 shares; issued and
outstanding 1,068,109 shares (note 2)
Paid-in surplus - no change during 1961
Retained earnings, all of which are restricted .
Contingent liabilities and commitments (notes 4 and 5)
See accompanying notes to financial statements.
$ 830,812
558,128
156,578
1,068,109
584,905
1,653,014
1,879,432
$ 632,034
1,545,518
361,853
140,194
31,875
132,691
2,844,165
2,921,238
263,812
3,532,446
$ 9,561,661
5
6
PACIFIC NORTHERN AIRLINES, INC.
(AN ALASKA CORPORATION)
Statement of Earnings and Retained Earnings
Year ended December 31, 1961
Operating revenues:
Passenger
Mail ( note 1)
Cargo and excess baggage
Other operating revenues
Total operating revenues
Operating expenses:
Flying operations
Maintenance and repairs
Aircraft and traffic servicing
Passenger service .
Promotion and sales
General and administrative
Depreciation, amortization and obsolescence provisions
Operating profit.
Non-operating expenses:
Interest, net
Other expenses, net, principally life insurance costs
Federal and state taxes on income, estimated (note 3)
Net earnings .
Retained earnings, January 1, 1961 .
Retained earnings, December 31, 1961
See accompanying notes to financial statements.
$ 3,773,602
2,016,308
2,376,222
880,200
985,634
801,675
821,548
40,816
21,170
$ 7,704,775
2,889,430
1,562,218
165,643
12,322,066
11,655,189
666,877
61,986
604,891
343,077
261,814
1,617,618
$ 1,879,432
Notes to Financial Statements
December 31, 1961
1. U.S. Mail Pay:
See comments under "The Year in Review"
2. Jet Program and Long-Term Debt:
The Company has contracted for the purchase of two Boeing 720 jet
aircraft with total investment in such aircraft and related equipment
estimated to be $11,423,036 of which $3,482,170 is reflected in con-
struction in progress at December 31, 1961. Financing arrangements
under the program and amounts borrowed thereunder at December
31, 1961 are as follows:
Term loans from bank, payable monthly
for ten years from time of borrowing
($200,000 estimated as due in 1962)
Term notes to aircraft manufacturer,
payable annually for ten years from
time of delivery of second aircraft
T erm notes to engine manufacturer,
payable quarterly over seven years,
repayment of each note commencing
approximately six months after
delivery of the related engine
($67,546 due in 1962 applicable to
borrowings at December 31, 1961)
Indebtedness subordinated to the above
(except as to $500,000 of the term
loans from bank) , payable in ten annual
installments beginning November, 1962:
Note to supplier . . . . .
6-% subordinated debentures
Total
borrowings
arranged
$ 8,460,001
950,000
1,513,035
100,000
400,000
$11,423,036
Borrowings at
December 31,
1961
$1,150,000 ( 1
)
950,000 ( 1
)
630,431
100,000
400,000
$3,230,431
(
1
)
Interim financing to be converted to long-term indebtedness.
See comments under "Jet Financing" for stock options applicable to the
6-% subordinated debentures.
Other long-term debt of the Company at December 31, 1961, totaling
$322,841, consisted of: (a) $307,288 chattel mortgage notes to bank,
secured by substantially all of the Company's present flight equip-
ment, all due in 1962, and (b) a $15,553 note payable to vendor with
payment due based on purchases - $7,200 estimated as payable in
7
a
1962. Among other provisions, certain of the documents covering the
Company's long-term borrowings require that the Company shall
maintain specified amounts of working capital and shall not declare
or pay any dividends or purchase, redeem or otherwise acquire for
value any of its capital stock.
3. Deferred Income Taxes:
The deferred income tax liability arismg from differences (relating
principally to depreciation, overhaul and obsolescence reserves) be-
tween book and taxable income has been provided for in the estimated
amount of $263,812 of which $124,415 pertained to and was charged
against operations of the year 1961, with the remainder having been
provided for by accrual in prior years and by crediting to the deferred
liability account tax refunds arising from such differences.
4. Long-term Leases:
Minimum annual rentals payable under leases expmng more than
three years from December 31, 1961 are $66,360. Under its fifty-year
ground lease with the Port of Seattle, the Company is obligated to
construct an airport hangar building by June 1, 1963 at a mm1mum
cost of $1,000,000.
5. Retirement Plans:
The costs charged to operating expense in 1961 totaled $200,364, of
which $19,068 was for past service benefits. At December 31, 1961, the
remaining unfunded past service cost amounted to approximately
$253,000.
P EAT , MARWICK , MITC H ELL & Co.
The Board of Directors
CERTIFIED PUBLI C A CCOUNTANTS
STUART BUILDING
SEATTLE l. WASH JNGTON
ACCOUNTANTS ' REPO
RT
Pacific Northern Airlines , Inc .:
We have examined the balance sheet of Pacific Northern Airlines, Inc .
as of December 31, 1961 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 , the accompanying balance sheet and statement of
earnings and retained earnings present fairly the financial position of
Pacific Northern Airlines , Inc . at December 31, 1961 and the resul ts of its
operations for the year then ended, in conformity with generally accepted
accounting principles applied on a basis consistent with that of the preceding
year .
Seattle , Washington
March 13 , 1962
Directors:
G. P . O'GRADY, Washington, D. C.
J . A. CUNNINGHAM, Seattle, Washington
PAUL PORZELT, New York, New York
R. A. ROW AN, 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 President - Traffic and Sales
J . A. CUNNINGHAM
Vice President - Operations
J . H . FOSTER
Vice President - Engineering and Maintenance
FELIX AUBUCHON
Vice President - Alaska Operations
T . D. STUART
Vice President - Industrial Relations
C. W . NELSON
Secretary-Treasurer
M . E. DIAMOND
Assistant Secretary
D. B.HART
Assistant Secretary
PACIFIC NORTHERN AIRLINES, INC.
GENERAL COUNSEL
G. P . O'GRADY, 1625 EYE STREET N .W., WASHINGTON, D. C.
GENERAL OFFICES
400 NORTON BUILDING, SEATTLE, WASHINGTON
CITY TICKET OFFICES
PORTLAND, SEATTLE, KETCHIKAN, JUNEAU, CORDOVA,
ANCHORAGE, KENAI, HOMER, KODIAK, KING SALMON, YAKUTAT
AUDITORS
PEAT, MARWICK, MITCHELL & CO.
TRANSFER AGENT
BANKERS TRUST COMPANY, NEW YORK, NEW YORK
REGISTRAR
MANUFACTURERS TRUST COMPANY, NEW YORK, NEW YORK
COMMON STOCK LISTED
AMERICAN STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE