Pacific Northern Airlines Annual Report 1962

PACIFIC NORTHERN AIRLINES
THE ALASKA FLAG LINE
e NOME
POINT BARROW
.
KOTZEBUE
AKUTAT
SKAGWAY
* JUNEAU
IKAN
ill' SEATTLE
) TACOMA
l
-.-PORTLAND
32ND YEAR OF SERVICE TO ALASKA
To the Stockholders of Pacific Northern Airlines:
April 27, 1963, will mark the end of the Company's first full year of
operations with jet aircraft. Delivery of Pacific Northern's two Boeing
720 jets was made as scheduled in March and April of 1962. Crew train-
ing was accomplished as planned and both aircraft were placed in
revenue service on April 27, 1962, four days in advance of the original
target date. All phases of the long-term financing were executed
as planned.
Operationally, the Boeing 720 jets have been highly satisfactory, and
the cost levels and operating factors have been among the best in the
industry. Pacific Northern's experienced growth in traffic continued
through 1962. Revenue passenger miles increased 4. 7 per cent over the
prior year. Mail and cargo ton-miles were up 11.4 per cent, and total
revenue ton-miles increased 7.6 per cent. However, in spite of these
favorable factors the Company's operations resulted in a net loss of
$338,000 for the year.
Prior to inauguration of jet service, the Company was operating piston
aircraft in competition with jet equipment on both of its major routes,
which understandably produced a loss for that period. However, during
the five initial months of jet operations from May through September,
1962, substantial profits were realized which more than offset the earlier
losses. This normally would have been the result of operations for the
year, but in the fourth quarter, which is traditionally the seasonal low
traffic period, excess capacity and destructive competition were en-
countered on the Company's major routes, resulting in substantial
losses for all carriers involved.
It was in anticipation of this situation that the Company petitioned
the Civil Aeronautics Board on October 1, 1962, for revised rates of
1
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mail compensation in accordance with the provisions of the Federal
Aviation Act. Since that date the Company has been operating on
temporary rates of mail pay which will be renegotiated to provide the
proper level of earnings for the period subsequent to that time. While
it is impossible to determine the result of such negotiations, it is the
stated policy of the Civil Aeronautics Board to establish mail rates in
an amount sufficient to cover the carrier's operating need and to provide
a fair net return on the Company's investment.
The Board's order fixing prior mail rates was based upon detailed fore-
casts of revenues and expenses submitted by the Company and adopted
by the Board. The Company has been able to meet the forecast level of
expenses and has been able to produce the forecast levels of revenue
and traffic on all routes except the Seattle-Anchorage segment, which
has the greatest amount of excess competition and diversion of traffic
of any of the several routes involved.
The matter of excess competition has been a matter of great concern to
management and to the Civil Aeronautics Board, which is charged by
Congress to foster sound economic conditions, eliminate destructive
competitive practices and promote competition to the extent necessary
to assure sound development of air transportation. For this reason, the
Civil Aeronautics Board has instituted an investigation to determine
whether the present pattern of service between the Pacific Northwest
and Alaska is excessive and therefore uneconomic and destructive,
and to take whatever action may be appropriate to remedy and correct
the situation.
The Board's tentative conclusions attached to its order of investigation
proposed the establishment of a three-carrier service pattern for Alaska
which would leave the route structure of Pacific Northern Airlines un-
changed. The Board proposed the elimination of Pan American World
Airways' service on the routes competing with Pacific Northern. It
further proposed the elimination of Northwest Orient Airlines' author-
ity to operate between Seattle and Anchorage in competition with
Pacific Northern, other than on those flights originating or terminating
in the Orient. The board tentatively concluded that Pacific Northern
should relinquish the Portland-Seattle segment of its service, which is
presently restricted to traffic originating or terminating in Alaska.
Although the loss of this segment would have no material financial
effect, the Company believes that this service by Pacific Northern is
required because of the community of interest between Portland and
the greater number of Alaska points served by Pacific Northern. Ac-
cordingly the Company will resist the Board's proposal relating to
Portland service. Hearings on this matter are scheduled to commence
in Alaska on April 2 and will continue thereafter in Washington, D. C.
It is significant that Pacific Northern is the largest carrier in point of
service between the Pacific Northwest and Alaska and within Alaska.
It carries more passengers more passenger miles, and more cargo and
mail ton-miles in Alaskan service than does any other airline. It has
the largest investment of any form of transportation dedicated to
Alaska service. Should the Board's proposal for a three-carrier service
pattern for Alaska materialize, it would result in better service at lower
cost to the traveling public and inevitably~ result in more profitable
operations for all the carriers concerned.
The Company has entered into a contractual agreement for the con-
struction of a hangar and office building at the Seattle-Tacoma Airport
which it will lease for a 25-year period. Construction of this facility is
under way and is scheduled for occupancy in March, 1964. It is esti-
mated that the economies of this move will permit savings substantially
in excess of lease rentals.
With the inauguration of jet aircraft on the Company's Pacific North-
west-Alaska routes, service on its intra-Alaska system was upgraded
by the assignment of four-engine equipment to these routes. In addition
to the two Boeing 720 jet aircraft, the Company's fleet consists of five
owned and one leased Lockheed 749 A Constellation aircraft and three
Douglas DC-3 aircraft, of which two will be retired during the year.
The Company's large investment in Alaska service affirms its faith in
the potential growth and development of Alaska. I am confident that,
with the continuing increases in all categories of traffic and with appro-
priate adjustment of our present rates of mail compensation, operating
results for 1963 will be satisfactory.
PRESIDENT AND
GENERAL MANAGER
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PACIFIC NORTHERN AIRLINES.INC.
Balance Sheet, December 31, 1962
ASSETS
Current assets:
Cash
Receivables:
Traffic
United States Government agencies (note 1)
R efundable Federal and state taxes on income
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 5):
Flight equipment
Ground equipment
Buildings and improvements to
leased property .
Replacement parts for flight equipment
Construction work in progress .
Deferred charges, net'of amortization
(note 3):
Preoperating expenses:
Jet aircraft .
Airport hangar building lease .
Debt expense .
Other
See accompanying notes to financial statements.
Assets
$16,202,226
1,018,695
164,939
1,521,875
15,830
18,923,565
$ 1,031,317
678,728
575,340
96,739
2,382,124
18,552
449,813
109,664
Allowances for
depreciation,
amortization
and overhauls
5,446,190
577,753
135,552
407,614
6,567,109
513,430
56,384
569,814
37,185
411
$ 432,817
2,363,572
340,149
238,158
3,374,696
97,894
12,356,456
607,410
$16,436,456
(
[
(AN ALASKA CORPORATION)
LIABILITIES
Current liabilities:
Current installments on long-term debt (note 2)
Accounts payable:
Trade
Airline traffic accounts
Collections as agents
Accrued wages, taxes, etc.
Air travel plan deposits .
Unearned transportation revenue
Total current liabilities
Long-term debt, less current installments of $1,226,147 (note 2) .
Provision for deferred taxes on income (note 4) .
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 1962 .
Retained earnings, all of which are restricted .
Contingent liabilities and commitments (notes 5 and 6)
See accompanying notes to financial statements.
$ 644,643
771,338
166,263
1,068,109
584,905
1,653,014
1,541,146
$ 1,226,147
1,582,244
412,613
34,000
169,270
3,424,274
9,368,248
449,774
3,194,160
$16,436,456
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PACIFIC NORTHERN AIRLINES~ INC.
(AN ALASKA CORPORATION)
Statement of Earnings and Retained Earnings
Year ended December 31, 1962
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 (loss)
Non-operating expenses:
Interest
Other expenses, net, principally life insurance costs
Federal and state taxes on income, estimated (note 4) :
Refundable through carryback of operating loss
of current year .
Excess accrual of prior years .
Less provision for deferred taxes .
Net earnings (loss) .
Retained earnings, January 1, 1962 .
Retained earnings, December 31, 1962 .
See accompanying notes to financial statements.
$
$
4,281,072
2,199,913
2,683,887
894,666
1,118,550
852,886
1,557,200
439,821
11,121
(575,340)
(24,700)
(600,040)
185,962
$ 8,667,196
2,647,571
1,783,185
188,800
13,286,752
$
13,588,174
(301,422)
450,942
(752,364)
(414,078)
(338,286)
1,879,432
1,541,146
Notes to Financial Statements
D ecember 31, 1962
1. U.S. mail pay:
The Company is a certificated air carrier subject to regulation by the Civil Aero-
nautics Board. Under provisions of the Federal Aviation Act, the Company is
entitled to mail pay adequate in amount to provide it with a reasonable return on
investment after income taxes. Since October 1, 1962 the Company has been
receiving mail pay based on temporary rates which are subject to final negotiation
and settlement. Management believes, based on past experience, that there will
be a favorable retroactive adjustment to October 1, 1962 when rates are finally
reviewed and settled.
2. Long-term debt:
Long-term debt is summarized as follows :
Secured :
T erm loans from bank, secured by first
mortgages on all aircraft and various
accessories (approximately $3,800,000
guaranteed to the extent of 90% by the
Civil Aeronautics Board)
T erm notes, secured by conditional
sales contracts .
T erm note, secured by second mortgage .
Other notes, secured by conditional sales
contract
Total secured
Unsecured:
Subordinated to first and second mortgages
above:
T erm loan from bank
6 % Subordinated Debentures, issued
with detachable warrants entitling holders
to purchase 88,800 shares of capital stock
of the Company at $4.50 per share
Other note payable
Total unsecured
Total long-term debt .
Interest
rates
5-6%
6%
6%
5%
5%
6%
5%
Principal
installments
due within
one year
$ 786,199
216,148
95,000
28,800
1,126,147
50,000
40,000
10,000
100,000
$1,226,147
Total
indebtedness
$ 7,303,418
1,382,446
950,000
33,531
9,669,395
475,000
360,000
90,000
925,000
$10,594,395
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. Amortization of deferred charges:
Preoperating and debt expenses incurred in connection with conversion to jet air-
craft service and securing the financing thereof are being charged to operations
as follows :
Preoperating expenses - over five years ($76,642 amortized through December
31, 1962)
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Debt expense - over ten years, the term of the debt to which the major portion
of the expense pertains ($2,989 amortized through December 31, 1962).
The period of amortization of the airport hangar building preoccupancy ex-
penses is to be determined upon completion of construction and occupancy (see
note 5) .
4. Federal taxes on income:
Certain adjustments (relating principally to depreciation, overhaul and obsolesc-
ence reserves) to income determined in accordance with the rules and regulations
of the Civil Aeronautics Board are required to be made in determination of income
reportable for tax purposes. The deferred income tax liability arising from the
resulting differences between book and taxable income has been provided for in
the stimated amount of $449,774 of which $185,962 pertained to and was charged
against operations of the year 1962, 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.
The Company has available for reduction of Federal income taxes of the next five
years a potential unused tax credit of $738,000 which resulted from acquisitions
in 1962 of operating properties and equipment. Application of such credit is
limited as to each year to $25,000 plus twenty-five percent of the tax liability
in excess of $25,000. Any unused credit is allowable in the sixth year as a deduction
from taxable income.
5. Long-term leases:
Minimum annual rentals under leases expiring m ore than three years from D e-
cember 31, 1962, is $268,488, the major portion of which pertains to an airport
hangar building under construction which is expected to be occupi d in 1964.
Under the terms of the twenty-five year hangar building lease, u pon occupancy
the Company is required to pay advance rental for a full year and to maintain
such prepayment throughout the term 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 1962 the Company charged to
operating expenses and other accounts provisions totaling $187,996 of which
$36,096 was for past service benefits. The unfunded past service benefit costs of
both plans have been estimat d by the Company's independent actuaries to
aggregate $205,363 at December 31, 1962.
PEAT, MARWICK. M I TCHELL & Co.
ACCOUNTANTS ' REPORT
The Board of Directors
Pacifi c Northern Airlines, Inc. :
We have examined the balance sheet of Pacific Northern Airlines, Inc.
as of December 31, 1962 and the related statement of earnings a nd r eta ined
earnings for the year tben ended. Our examination was made in accordance with
generally accepted auditing standards , and accor dingly included such tests of
the accounting records and such other auditing procedures a s we cons idered
necessary in the circumstances, It was not practicable to confirm amounts
due f r om certain United States Government agencies by communication with them,
but we satisfied oursel ves as to these am
ounts by means of other auditing
procedur es .
In our opinion, subject to any r etroactive upwa rd adjustment of mail
pay as mentioned in note 1 to the financial statements, the accompanying balance
sheet and statement of ear nings and r etained earnings pr esent fairly the financial
position of Pacific Norther n Ai rlines, Inc . at December 31 , 1962 a nd the results
of its operations for the year then ended, in conformity with generally accepted
accounting principles applied on a basis cons istent with t hat of the preceding
year.
Seattle, W
a shington
March 8 , 1963
PACIFIC NORTHERN AIRLINESJNC.
Directors:*
Officers:
G. P . O'GRADY, Washington, D. C.
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
A.G. WOODLEY, President and General Manager
H . A. OLSEN, Vice President - Traffic and Sales
J. H. FOSTER, Vice President - Engineering 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
GENERAL COUNSEL: G. P . O'GRADY, 1625 EYE STREET N.W., WASHINGTON, D. C.
GENERAL OFFICES: 400 NORTON BUILDING, SEATTLE, WASHINGTON
CITY TICKET OFFICES: SAN FRANCISCO, 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 HANOVER TRUST COMPANY, NEW YORK, NEW YORK
COMMON STOCK LISTED: AMERICAN STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE
*A vacancy exists on the Board of Directors which will be
filled by election at the annual meeting of stockholders.