Pacific Northern Airlines Annual Report 1963

_ 1963_
ANNUAL
REPO
RT
PACIFIC NORTHERN AIRLINES THE ALASKA FLAG LINE
PACIFIC NORTHERN AIRLINES
Directors:
Officers:
G. P. O'GRADY, Washington, D. C.
PAUL PORZELT, New York, New York
R. A. ROW AN, Los Angeles, California
M. B. KIRKPATRICK, Anchorage, Alaska
C. W. NELSON, Seattle, Washington
H. A. OLSEN, 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: SEATTLE-TACOMA INTERNATIONAL AIRPORT, 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 AGENTS: BANKERS TRUST COMPANY, NEW YORK, NEW YORK
BANK OF AMERICA, N.T.& S.A., SAN FRANCISCO, CALIFORNIA
REGISTRAR: MANUFACTURERS HANOVER TRUST COMPANY, NEW YORK, NEW YORK
CROCKER-CITIZENS NATIONAL BANK, SAN FRANCISCO, CALIFORNIA
COMMON STOCK LISTED: AMERICAN STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE
To the Stockholders of Pacific Northern Airlines:
All the Company's personnel in Alaska and their families escaped
injury and all the Company's property was undamaged when the
most powerful earthquake on record struck the Alaska area on March
27. Major earthquake damage was suffered in the Anchorage area and
seismic sea waves carried major destruction to the port cities of
Kodiak, Seward, Valdez, Whittier, Cordova and to many smaller com-
munities. Deaths and injuries are far lower than expected, but prop-
erty losses will be counted in the hundreds of millions of dollars
when the full extent of damage becomes known.
It is too early to assess the full meaning of this disaster; however, plans
are being formulated for massive federal aid to the stricken areas. Al-
though the nature and scope of these programs are not yet clearly
defined, consideration is being given by the government to measures
for rehabilitation such as enabling legislation to authorize extension
of credits by the Federal Reserve Board to banks in the disaster area
and the application of retroactive war disaster type insurance to cover
actual losses. Preliminary estimate of the total losses incurred by
earthquake and water damage is in excess of five hundred million
dollars; however, there is complete confidence that effective federal
aid will be extended to permit speedy and full recovery of Alaska's
economy.
Many business properties in the Anchorage area suffered far less
damage than had first been feared. Hotels and motels are confident
that repairs can be made to restore accommodations to previous
levels in time for the summer tourist business, which has the lar-
gest bookings of any year thus far. It is felt that if accommoda-
tions can be provided there will be little or no effect from the quake
experienced in this very important segment of Alaska's economy.
Severe damage to surface transport facilities such as highways, bridges
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and docks, coupled with the need for speedy rebuilding of the affected
area, will unquestionably increase air traffic demands far above normal
levels during the initial phases of recovery. The Company anticipates
no problems in expanding its services to meet any unusual demands
for air support.
The results shown on the Company's financial statements do not
properly reflect the position of the Company. This is because the
Civil Aeronautics Board has not yet acted on petitions of the Com-
pany to fix mail rates retroactive to October 1, 1962. Since that date
the Company has received only temporary mail compensation at
rates which obviously are inadequate to meet the carrier's needs. The
Federal Aviation Act and the stated policy of the Civil Aeronautics
Board provide for payment of adequate rates of compensation to
permit a carrier to earn a fair return on its investment after taxes.
Accordingly, the Company believes it is entitled to and will receive
an amount required to produce this result. The Company's invest-
ment of approximately $14 million is the largest investment in any
form of transportation dedicated solely to Alaskan service.
In February, the Company took occupancy of its new administration
and maintenance base at Seattle-Tacoma International Airport.
Advance planning, coupled with ideal weather conditions, permitted
complete transfer to the new location without disruption of any func-
tion of the airline's operation. This new facility, expressly designed
for PNA's existing and prospective requirements, is the largest of its
kind in the Pacific Northwest and Alaska. With the exception of its
District Sales Office located in downtown Seattle, this facility now
houses under one roof all the Company's activities in this area which
were previously maintained at eight widely separated locations. It is
believed this consolidation will result in improved efficiency in all de-
partments and will ultimately result in savings which are expected to
be as high as several hundred thousand dollars per year.
In the fall of 1963 the Civil Aeronautics Board concluded public hear-
ings on its investigation of the air service pattern between the Pacific
Northwest and Alaska. The case is now awaiting a decision of the
hearing examiner, and it is expected this decision will be released in
the very near future. However, final orders of the Board in this case
probably cannot be obtained before the end of this year. The evidence
introduced at the hearings reinforces the Company's conviction that
the final orders of the Board in this investigation will result in better
public service and in more profitable operations for the Company.
The Civil Aeronautics Board authorized the .suspension of the Com-
pany's winter operations between Anchorage and King Salmon, and
approved the deletion of PNA's service to Iliamna and Big Mountain.
The Company anticipates modest financial advantages from these
alterations.
Special mention should be made of the dedication and ingenuity
demonstrated by the Company's personnel during the earthquake
disaster. Although Alaska-bound flights were turned back from An-
chorage at the time of the earthquake because of the complete disrup-
tion of communications, during the night Company personnel set up
emergency facilities so that scheduled operations were restored the
following morning and they have continued without interruption
since that time.
Through their tireless efforts in the aftermath of this emergency our
employees are continuing to demonstrate their allegiance to Alaska
and their faith in its future, which I am sure is shared by all Alaskans.
This spontaneous energy and loyalty assures a confident outlook for
the 49th State and for the Company.
PRESIDENT AND
GENERAL MANAGER
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PACIFIC NORTHERN A/Rl/NESt/NC. (AN ALASKA CORPORATION)
Balance Sheet, December 31, 1963 [
ASSETS LIABILITIES
Current assets:
Cash
Receivables:
Traffic
United States Government agencies (note 1)
Refundable Federal 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 4):
Flight equipment . . . . . .
Ground equipment . . . . .
Buildings and improvements to
leased property . . . . . .
Replacement parts for flight equipment
Construction work in progress
Deferred charges, net of amortization:
Preoperating expenses:
Jet aircraft . . . . . .
Airport hangar building lease .
Debt expense
Other . . ..
See accompanying notes to financial statements.
Assets
$16,041,800
1,066,379
176,891
1,483,970
28,841
18,797,881
$1,015,604
459,227
18,090
93,718
1,586,639
19,451
355,855
120,974
Allowances for
depreciation,
amortization
and overhauls
6,376,968
668,085
146,100
565,005
7,756,158
395,000
87,949
482,949
33,201
3,415
$ 814,651
1,567,188
234,881
290,030
2,906,750
136,895
11,041,723
519,565
$14,604,933
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Current liabilities:
Notes payable to bank, unsecured . . . . . .
Current installments on long-term debt (note 2).
Accounts payable:
T rade . . . . . . . .
Airline traffic accounts
Collections as agent . .
Accrued wages, taxes, interest, etc.
Air travel plan deposits . . . .
Unearned transportation revenue
Total current liabilities
$1,196,225
724,598
187,159
Long-term debt, less current installments of $1,234,715 (note 2) . . . . . . .
Provision for deferred taxes on income (note 3) . . . . . . . . . . . . . .
Stockholders' equity:
Common stock-$1 par value per share. Authorized
2,000,000 shares; issued and outstanding 1,068,109 shares
(note 2) . . . . . . . . . . . . .
Paid-in surplus-no change during 1963
Retained earnings (deficit) (note 2) . .
Contingent liabilities and commitments (notes 4 and 5)
See accompanying notes to financial statements.
1,068,109
584,905
1,653,014
(117,483)
$ 400,000
1,234,715
2,107,982
472,103
43,350
197,890
4,456,040
8,166,170
447,192
1,535,531
$14,604,933
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PACIFIC NORTHERN AIRLINES. INC.
(AN ALASKA CORPORATION)
Statement of Earnings and Retained Earnings
Year ended December 31, 1963
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
Refundable Federal taxes on income (note 3)
Net earnings (loss) . . . . . . .
Retained earnings, January 1, 1963
Retained earnings (deficit), December 31, 1963
See accompanying notes to financial statements.
$4,470,962
2,300,619
3,004,544
973,320
1,200,471
872,911
1,595,661
593,654
438
$ 9,270,390
2,012,537
l,807,q27
245,907
13,335,861
14,418,488
(1,082,627)
594,092
(1,676,719)
18,090
(1,658,629)
1,541,146
$ (117,483)
Notes to Financial Statements
December 31, 1963
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 (not reflected in the financial statements)
to October 1, 1962 when rates are finally reviewed and settled.
2. Long-term debt:
Long-term debt is summarized as follows:
Secured:
5 -6% term loans from bank, secured by first mortgages
on flight equipment . . . . .
6% term notes to manufacturers
5% note to supplier
Total secured . . . . . .
Unsecured :
Subordinated to above indebtedness:
5% term loan from bank . . . . . . . .
6% subordinated debentures, issued with detachable
warrants entitling holders to purchase 88,800 shares
of the capital stock of the Company for $4.50 per
share . . . . .
5% note payable . . .
Total unsecured . .
Total long-term debt
Principal
installments
due within
$
one year
786,199
333,664
14,852
1,134,715
50,000
40,000
10,000
100,000
$1,234,715
Total
indebtedness
$6,517,219
2,043,814
14,852
8,575,885
425,000
320,000
80,000
825,000
$9,400,885
As of December 30, 1963, the Company entered into an agreement for a 6%
interim bank loan not to exceed $1,500,000 (none drawn in 1963), payable on
demand or on May 31, 1964 if no demand is made. The interim loan is secured
under the same provisions as the bank loans with an indebtedness of $6,517,219,
shown above.
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 (provision waived as of December 31, 1963) and shall not declare
or pay any dividends or purchase, redeem or otherwise acquire for value any
of its capital stock.
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3. Federal taxes on income:
Certain adjustments (relating principally to depreciation and overhaul reserves
and preoperating expenses) to income determined in accordance with the rules
and regulations of the Civil Aeronautics Board are required to be made in de-
termination 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 estimated amount of $447,192 of which a provision
reduction of $2,582 pertained to the year 1963.
The Company has available for reduction of future Federal income taxes (prin-
cipally pertaining to the next four years) a potential unused tax credit of $742,000
which resulted from acquisitions in 1962 and 1963 of operating properties and
equipment. Application of such credit is limited as to each year to $25,000 plus
twenty-five per cent of the tax liability in excess of $25,000. In addition, there is
available under carryover provisions of the Internal Revenue Code, approxi-
mately $1,550,000 of operating losses available to offset taxable income of the
next seven years.
4. Long-term leases:
Minimum annual rentals under leases expiring more than three years from
December 31, 1963 aggregate $284,088.
5. Retirement plans:
The Company has two contributory retirement plans covering (1) flight officers
and (2) other employees of the Company. During 1963 the Company charged to
operating expenses and other accounts, provisions totaling $232,780 of which
$36,096 was for past service benefits. The unfunded past service benefit costs of
both plans have been estimated by the Company's independent actuaries to
aggregate $173,950 at December 31, 1963.
PEAT, MARWICK. MITCHELL & Co.
The Board of Directors
C ERTIFIED PUBLIC ACCOUNTANTS
967 STUART BUILD.ING
SEATTLE 1,WASHINOTON
ACCOUNTANTS I REPORT
Pacific Northern Airlines, Inc.:
W
e have examined the balance sheet of Pacific Northern Airlines, Inc.
as of December 31, 1963 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 any retroactive increase in mail pay as
mentioned in note 1 to the financial statements, the accompanying balance sheet
and statement of earnings and retained earnings present fairly the financial
position of Pacific Northern Airlines, Inc. at December 31, 1963 and the results
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 18, 1964
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33RD YEAR OF SERVICE TO ALASKA