Pacific Northern Airlines Annual Report 1964

PACIFIC NORTHERN AIRLINES
THE ALASKA FLAB LINE,
34TH YEAR OF SERVICE TO ALASKA
rowr BARROW
KOTZEBUE
NOME
To the Stockholders of Pacific Northern Airlines:
The Civil Aeronautics Board, on March 29, 1965, released its long-
awaited decision in the Pacific Northwest-Alaska Air Service Case.
The Board's order awards Pacific Northern Airlines exclusive authority
to serve Ketchikan and Juneau from Seattle-Tacoma for a period of
seven years and also confers the right to carry local Ketchikan-Juneau
traffic. The Company heartily endorses this portion of the order for
it will enable Pacific Northern to conduct a more economical operation
and to improve service in that market. With one carrier serving the
route, it will now be possible to give the people of Southeastern Alaska
a choice of departure times which heretofore was not possible because
of simultaneous competitive schedules. The Company is hopeful that
it will also be possible to inaugurate non-stop service between Seattle-
Tacoma and Juneau, Alaska's capital.
The Board's order also seeks to dispose of many other aspects of the
historically complex competitive relationships which have existed in
the Pacific Northwest-Alaska air route pattern. Except for a seven-year
suspension of the Company's Portland co-terminal, the Board does
not propose to disturb Pacific Northern's routes to Alaska. However,
the Board seeks to create modified competitive authorizations for
other carriers on the Seattle-Anchorage route and the Anchorage-
Juneau route which may have a significant, but as yet undetermined,
impact upon the Company's present operations. The Board estimated
in its opinion that its proposed air route changes would result in oper
ating gains of about $5 million for three of the airlines involved in
Pacific Northwest-Alaska operations. The Board estimated that Pacific
Northern's annual loss of $237,000 (prior to Federal subsidy) would
be converted into a profit of $2,244,000 without need for Federal
subsidy. This result for Pacific Northern depends entirely upon the
validity of many complex underlying assumptions upon which the
Board based its opinion. The Company is now analyzing these as
sumptions to determine whether the Board's facts are correct and
current and whether its projections are realistic. The Company will
not decide whether or not to file formal petitions for reconsideration
to the Board's order until these analyses have been completed, probably
in mid-April.
The Civil Aeronautics Board has not yet acted on the petition of the
Company to fix final mail rates retroactive to October 1, 1962, and for
that reason, the results shown on the Company's financial statements
do not properly reflect the position of the Company, Since October 1,
1962, the Company has received only temporary mail compensation
at rates which obviously are inadequate to provide a fair return on
investment after taxes as authorized in the Federal Aviation Act. The
Company believes it is entitled to and will receive from the Civil Aero
nautics Board for the periods subsequent to October 1, 1962, the
additional mail compensation required to produce this result. The
Board's delay in fixing final mail compensation for the Company un
doubtedly has been inter-related with its consideration of the Pacific
Northwest-Alaska Air Service Case. Now that the Board's policy de
terminations in the route investigation appear to be nearing finaliza
tion, it should be possible to proceed toward a final settlement of the
past mail compensation due the Company and to establish final mail
rates for the future.
The Company experienced substantial growth during 1964. Revenue
passenger miles for the system improved 16 per cent over the preceding
year and total revenue ton-miles reflect a 20 per cent gain. In spite of
the unusually severe winter conditions during the past season, the
performance factor for the system was a creditable 98.2 per cent of all
scheduled mileage and the percentage of on-time departures was equal
to the best in the industry. Productivity increased from 36,000 revenue
ton-miles of traffic per employee during the previous year to 44,000
revenue ton-miles in 1964, an increase of 22 per cent, reflecting the
advantages of the new facilities occupied by the Company in early 1964.
The Company continues its position as the leading airline serving
Alaska, and tomorrow, April tenth, will commence its 34th year of
Alaskan service.
A. G. WOODLEY /
PRESIDENT AND '
GENERAL MANAGER
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April 9,1965
PACIFIC NORTHERN AIRLINES. INC.
(AN ALASKA CORPORATION)
Statement of Earnings and Retained Earnings
Year ended December 31, 1964
Operating revenues:
Passenger $10,495,721
Mail (note 1) 2,123,073
Cargo and excess baggage 2,178,701
Other operating revenues 330,007
Total operating revenues 15,127,502
Operating expenses:
Flying operations
Maintenance and repairs
Aircraft and traffic servicing
Passenger service
Promotion and sales
General and administrative
Depreciation, amortization and obsolescence
provisions (note 3)
Operating profit
$4,311,351
2,657,923
2,994,678
1,065,297
1,364,278
957,357
1,246,495 14,597,379
530,123
Non-operating expenses:
Interest
....
Other expenses, net
544,356
16,399 560,755
Net earnings (loss) (30,632)
Special credits:
Partial receipt of past due C.A.B. payments
received in 1964 (note 1) 1,413,123
Reduction of depreciation provisions of
prior periods (note 3) 187,449
Investment tax credits of prior years allowable
in 1964 (note 4) 51,670 1,652,242
Net earnings after special credits (notes 3 and 4) 1,621,610
Retained earnings (deficit), January 1, 1964 (117,483)
Retained earnings, December 31, 1964 $ 1,504,127
See accompanying notes to financial statements.
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PACIFIC NORTHERN AIRLINES, INC. (AN ALASKA CORPORATION)
Balance Sheet, December 31, 1964
ASSETS
Current assets:
Cash
,
$ 1,039,887
Receivables:
Traffic $1,079,804
United States Government agencies (note 1) . . .
572,879
Other 67,788
1,720,471
Less allowance for doubtful receivables 24,968 1,695,503
Maintenance and operating supplies, at average cost . . .
344,672
Less allowance for obsolescence 135,002 209,670
Prepaid expenses, principally insurance 228,607
Total current assets 3,173,667
Investments, principally cash surrender value of life insurance 175,895
Operating properties and equipment, at
cost (notes 2, 3 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:
Preoperating expenses:
Jet aircraft
Airport hangar building ....
Assets
$15,984,509
1,206,444
140,615
1,450,489
38,786
18,820,843
Lease deposits
Debt expense .
Other
. . .
Allowances for
depreciation,
amortization
and overhauls
7,027,477
759,670
110,169
621,405
8,518,721 10,302,122
276,500
103,024
379,524
103,070
29,193
428 512,215
$14,163,899
LIABILITIES
Current liabilities:
Current installments on long-term debt (note 2)
Accounts payable:
Trade $ 725,298
Airline traffic accounts 655,114
Collections as agent 163,633
Accrued wages, taxes, interest, etc
Federal and state taxes on income, estimated (note 4)
Air travel plan deposits
Unearned transportation revenue
Total current liabilities
Long-term debt, less current installments of $1,201,243 (note 2)
Provision for deferred taxes on income (note 4)
Stockholders' equity:
Common stock--$1 par value per share. Authorized
2,000,000 shares; issued and outstanding 1,068,109
shares (note 2) 1,068,109
Paid-in surplus--no change during 1964 584,905
1,653,014
Retained earnings (note 2) 1,504,127
Contingent liabilities and commitments (notes 5 and 6)
$ 1,201,243
1,544,045
574,188
85,000
62,475
260,462
3,727,413
6,968,823
310,522
3,157,141
$14,163,899
See accompanying notes to financial statements. See accompanying notes to financial statements.
Notes to Financial Statements
December 31, 1964
1.U.
S. mail pay:
The Company is a certificated air carrier subject to regulation by the Civil Areo-
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 were designed to provide
approximate break-even need (as determined by the Board) and which are
subject to final negotiation and settlement. These temporary rates were not
intended to include the return on investment element; such element is to be
determined upon finalization of rates. Management believes, based on past
experience, that there will be a favorable retroactive adjustment (not reflected
in the financial statements) to October 1, 1962 upon finalization of the rates
since mail pay received under the temporary rates, including the adjustment
referred to in the succeeding paragraph, is considered to be inadequate to
accomplish the desired objective.
In 1964 the temporary rates were adjusted (not finalized) by the Board for
the period from October 1, 1962 through May 31, 1964, resulting in additional
mail pay of $1,878,439. Of the total adjustment, $1,413,123 was allocated by the
Board "for administrative purposes only" (subject to reallocation upon finaliza
tion of rates) to periods prior to 1964 and is, therefore, presented in the state
ment of earnings and retained earnings as a special credit.
2.Long-term
debt:
Long-term debt is summarized as follows:
Secured:
514-6% term loans from bank, secured by first and
second 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(4% 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 Total
one year indebtedness
$ 881,199 $6,491,020
216,148 950,150
3,896 3,896
$1,101,243 $7,445,066
$ 50,000 $ 375,000
40,000 280,000
10,000 70,000
$ 100,000 $ 725,000
$1,201,243 $8,170,066
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.Extension
of service life of jet flight equipment:
In 1964, the service life of jet flight equipment was extended from 10 to 12 years,
effective October 1, 1962, resulting in reduced depreciation provisions for 1964
and for prior periods by the amounts of $148,557 and $187,449, respectively.
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4. 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
determination of income reportable for tax purposes. The deferred income tax
liability arising from the resulting differences between book and taxable income
was provided for in prior years in the estimated amount of $447,192. Of this
amount, $136,670 was transferred in 1964 to the estimated current tax liability
account to cover taxes currently payable on the approximate excess of deduc
tions included in the statement of earnings (for tax purposes, previously allowed
or to be claimed in the future) over those allowable in computing taxable
income in 1964.
No provision for Federal income taxes for the year 1964 has been made in the
accompanying statement of earnings because of the application against 1964
operating results of a tax operating loss carryover from 1963 in an approxi
mately equivalent amount. The Company has available for reduction of future
Federal income taxes (principally pertaining to the next three years) a potential
unused investment tax credit of $700,000 which resulted from equipment acquisi
tions in 1962 and subsequent years. 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. The investment tax credit allowable in reduction of the tax liability other
wise payable for 1964 is estimated to be $51,670, which amount is shown as a
special credit in the statement of earnings.
5. Long-term leases:
Minimum annual rentals under leases expiring more than three years from
December 31, 1964 aggregate $284,088.
6. Retirement plans:
The Company has contributory retirement plans covering (1) flight officers,
(2) mechanics (covered in 1964) and (3) other employees of the Company.
During 1964 the Company charged to operating expenses and other accounts,
provisions totaling $418,199 of which $65,977 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 $417,194 at December 31, 1964.
Peat, Marwick. Mitchell & Co.
CERTIFIED PUBLIC ACCOUNTANTS
957 STUART BUILDING
SEATTLE, WASHINGTON 96101
ACCOUNTANTS' REPORT
The Board of Directors
Pacific Northern Airlines, Inc.:
We have examined the balance sheet of Pacific Northern Airlines, Inc.
as of December 31, 1964 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 additional 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, 1964 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 25, 1965
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Dual purpose advertising program
seiis PNA and Aiaska travei
PNA is the most vigorous advertiser
in the Alaska travel business. Adver
tisements like those shown here are
being placed in major magazines:
Holiday, Time, Newsweek, United
Airlines Mainliner and many others.
Many ads are in full color, showing
the true beauty of Alaska. Others
stress the unforgettable contrasts of
the 49th State. And all of them push
PNA as the finest way to get there.
Other ads are regularly scheduled in
major metropolitan newspapers. A
radio and television campaign is
scheduled for major Pacific Northwest
and Alaskan cities on PNA routes.
fly PNA
PACIFIC NORTHERN AIRLINES
THE ALASKA FLAG LINE,
dive for your dinner
...or order it saute'
PACIFIC NORTHEPN AWLINES
SCATTve-TACOMA AIRPORT. SCaTTlE. WASrt
roe ALASKA FLAB
AT S-5WJ SanfwcWArVtf
Alaska means business
..
.with a measure of pleasure"
PACIFIC NORTHERN AIRLINES
me ALASKA EfAB UNS.
Wstt. * BuKhiPes'or lAVJHK
8
PACIFIC NORTHERN AIRLINES
Directors:
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
H. A. OLSEN, Seattle, Washington
A. G. WOODLEY, Seattle, Washington
Officers:
A. G. WOODLEY, President and General Manager
H. A. OLSEN, Vice President--Traffic and Sales
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
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