Pacific Northern Airlines Annual Report 1966

PARTNER IN THE PROGRESS OF ALASKA FOR THIRTY-FIVE YEARS
INTERNATIONAL DATE LIN E
WESTERN AND
PACIFIC NORTHERN
ROUTE SYSTEMS
- - - WESTERN ROUTES
- - - PACIFIC NORTHERN ROUTES
To the
Shareholders
of
Pacific
Northern
Airlines,
Inc.:
Two highlights of 1966 overshadow the other noteworthy achievements during
the year :
( 1) Announcement on October 26, 1966 of the proposed merger of
Western Air Lines and Pacific Northern Airlines.
( 2 ) Realization during 1966 of the most favorable operating results
in Pacific Northern's thirty-five year history.
The proxy statement which accompanies this annual report contains detailed in-
formation concerning the Western-Pacific Northern merger proposal, and your
attention is invited to that document for full consideration of the matter.
Net earnings of $2,289,000 in 1966 amounted to $2.14 per share, the highest in
the Company's history and a gain of 149 percent over the 86 cents per share
earned last year. Total revenues of $20,993,000 were 24 percent higher than in
1965, while the corresponding increase in total operating expenses amounted to
only 12 percent. Thus the Company realized an operating profit of $4,363,000,
a gain of $2,555,000 over last year. These significant improvements in earnings
enabled Pacific Northern to initiate quarterly dividends. On February 10, 1967
the Board of Directors voted a dividend payment of 12 cents per common share,
payable March 17 to shareholders of record as of March 3, 1967.
1
2
During 1966 the Company again established new records in all classes of revenue
traffic with gains over last year of 29 percent in revenue passenger miles and 20
percent in total revenue ton-miles. The revenue passenger load factor was in-
creased from 49.6 percent last year to 54.9 percent in 1966 while the break-
even passenger load factor was reduced from 44.5 percent to 42.2 percent. In
terms of total traffic and capacity, the Company improved its system plane load
factor in 1966 to 67 percent, compared to the 1966 industry average of 51 per-
cent. The Company's 1966 performance factor of 98.6 percent also reflects im-
provement over last year and is greater than the 1966 industry average of 95. 7
percent. PNA's productivity increased from 48,138 ton-miles of traffic per em-
ployee in 1965 to 53,726 ton-miles in 1966, a gain of 12 percent.
The favorable sales achieved by the Company during the year are a direct result
of several significant factors. Foremost among these are the important advances
in economic growth of the State of Alaska. Alaska's population has doubled since
1950 and its current rate of growth ranks second highest in the nation. Since the
1960 census Alaska's population has increased by 24.5 percent, compared to a
growth rate of 9.1 percent for the nation as a whole. Commercial fishing is
Alaska's largest industry and for the second consecutive year established a new
record in 1966 with a gain of 11 percent over last year in wholesale value of
products. Current developments in the petroleum industry may well place Alaska
among the nation's top oil producing areas within the next decade. The world's
largest chemical plants for processing the petroleum by-products of ammonia and
urea are now under construction in the Kenai area, and a major methane gas
liquefaction plant is expected to commence deliveries to Japan in 1969. These
and important developments in the forest products industry and in construction
projects and tourism contributed to the significant traffic gains realized by Pacific
Northern during the year. 1966 also marked the first full year of operation under
the revised Mainland-Alaska competitive route pattern, established by the Civil
Aeronautics Board in June of 1965, which gave Pacific Northern exclusive oper-
ating rights in the Seattle/Tacoma-Ketchikan and Juneau markets but added third
carrier competition in the Seattle/Tacoma-Anchorage market. The Company's
traffic gains also reflect the important contribution of an additional Boeing 720
jet aircraft which was acquired and placed in service during the last half of 1966.
For Pacific Northern 1967 marks the completion of 35 years as a partner in the
progress of Alaska. For the State of Alaska 1967 is the Alaska Purchase Centen-
nial year. During this anniversary year the Company will celebrate its well estab-
lished role as the leading airline between the contiguous states and Alaska. The
State in turn will celebrate not only its recently acquired political status as a full
partner in the Union, but also its inevitable role, because of its strategic position
and dominant resources, in the impending economic development of the Pacific
Basin.
Alaska's situation is little understood. It is the northernmost but also the western-
most of the fifty states of the Union. It is a land of superlatives and a land of
contrasts. It is the largest in size, the least in population, the richest in natural
resources and the least developed of any area under the U.S. flag. The current
pace of Alaska's development promises within the next decade to outweigh the
past century of its geographical isolation and economic oblivion. The jet age has
greatly relieved the problems of Alaska's separation from its sister States, but
the full benefits of this technological improvement still await realization. Conse-
quently, air transportation and Pacific Northern Airlines, or PNA merged with
Western, will play an even greater role in Alaska's immediate future than in its
recent past.
April 18, 1967
PRESIDENT AND
GENERAL MAN AGER
3
4
PACIFIC NORTHERN AIRLINES.INC. (AN ALASKA CORPORATION)
Balance Sheet
December 31, 1966
With Comparative Figures for 1965
ASSETS
1966 1965
Current assets:
Cash
Certificate of deposit
Receivables, less reserve
Expendable parts and supplies, less obsolescence
reserve of $137,996 .
Prepaid expenses, principally insurance
Total current assets
$ 2,768,139
500,000
2,745,196
240,507
221 ,651
6,475,493
Investments, principally cash surrender value of life insurance,
net of $68,918 premium loan (1965, $29,630 ) . 168,795
Operating properties and equipment at cost ( Note 5 ) :
Flight equipment.
Flight equipment deposits
Other property and equipment
Less depreciation and aircraft overhaul reserves
Net operating properties and equipment .
Deferred charges, net of amortization :
Preoperating expenses .
Lease deposits and other
Total deferred charges
20,816,336
1,849,570
22,665,906
9,144,238
13,521 ,668
132,846
152,639
285,485
$ 1,405,419
2,915,034
215,701
163,962
4,700,116
177,671
17,521 ,035
163,029
1,464,839
19,148,903
8,778,069
10,370,834
254,168
147,137
401,305
$20,451 ,441 $15,649,926
See accompanying notes to financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current instalments on long-term debt ( Note 5 ).
Accounts payable and accrued liabilities
Federal and state income taxes ( Note 2)
Air travel plan deposits .
Advance ticket sales .
Total current liabilities
Long-term debt, less current instalments ( Note 5)
Deferred Federal income taxes .
Stockholders' equity:
Common stock-$1 par value per share. Authorized
2,000,000 shares; issued 1,068,109 (Note 5 ) .
Paid-in surplus .
Retained earnings ( N ates 1, 5 and 6 )
Total stockholders' equity
Contingent liabilities ( Notes 3 and 4 )
See accompan ying notes to financial statements.
1966 1965
$ 1,552,627
2,803,618
775,729
76,925
350,015
5,558,914
7,367,661
583,955
1,068,109
584,905
1,653,014
5,287,897
6,940,911
$20,451 ,441
$ 1,197,347
2,421 ,910
720,138
70,975
269,767
4,680,137
5,771 ,475
546,919
1,068,109
584,905
1,653,014
2,998,381
4,651 ,395
$15,649,926
5
PACIFIC NORTHERN AIRLINES~INC. (AN ALASKA CORPORATION)
Statement of Earnings and Retained Earnings
Year Ended December 31, 1966
With Comparative Figures for 1965
1966 1965
(Restated)
Operating Revenues:
Note 6
Passenger $16,716,734 $13,138,637
U.S. Mail and air cargo 3,806,402 3,587,435
Other 470,732 272,426
Total operating revenues 20,993,868 16,998,498
Operating Expenses:
Flying and ground operations 9,661,520 8,507,122
Maintenance 2,946,455 3,053,815
Selling and advertising 1,680,046 1,460,424
General and administrative 1,105,079 1,089,612
Depreciation and amortization . 1,237,154 1,079,575
Total dperating expenses 16,630,254 15,190,548
Operating profit 4,363,614 1,807,950
Interest expense . ( 490,123 ) (447,957)
Other expenses, net . ( 3,783) (7,562)
Earnings before income taxes . 3,869,708 1,352,431
Federal and state income taxes (Note 2):
Current 1,430,625 399,190
Deferred 73,073 37,517
Total income taxes 1,503,698 436,707
Net earnings from operations . 2,366,010 915,724
Loss on disppsition of piston aircraft,
less applicable income tax offset of $70,571 (76,494)
Net earnings 2,289,516 915,724
Retained earnings, January 1 2,998,381 1,504,127
Adjustments (Note 6) . 578,530
Retained earnings, January 1, as restated 2,998,381 2,082,657
Retained earnings, December 31 . $ 5,287,897 $ 2,998,381
6 See accompanying notes to financial statements.
Notes to Financial Statements
Note 1-Proposed Merger and Dividends
See President's report for information concerning the proposed merger and divi-
dend payments.
Note 2-Federal Income Taxes
Investment tax credits applied against 1966 and 1965 tax expense amounted to
$446,048 and $250,998 respectively, leaving an unused investment credit of
approximately $20,000 which can be applied to reduce future income taxes. The
U.S. Treasury Department has accepted the Company's income tax returns
through 1965.
Note 3-Long-Term Leases
Minimum annual rentals under leases expiring more than three years from
December 31, 1966 aggregate $393,000.
Note 4-Retirement Plans
The costs of retirement plans charged to operating expense in 1966 totaled
$532,092 including $65,977 for past service costs, thereby leaving ( after actu-
arial adjustments) approximately $146,412 of unfunded past service benefits
at December 31 , 1966 to be funded over eleven years.
Note 5-Long- Term Debt
Long-term debt consists of $8,395,288 of notes secured by mortgages on flight
equipment at interest rates of 5 to 6 percent of which $1 ,452,627 is due
within one year, and $525,000 of unsecured subordinated debt at interest rates
of 5 to 6 percent of which $100,000 is due within one year. $250,000 of this
debt has been retired subsequent to year-end. Included in the unsecured debt is
the unamortized balance of $200,000 of 6 percent subordinated debentures
issued in 1961 with detachable warrants which entitle the holders to purchase
88,800 shares of the capital stock of the Company for $4.50 per share. All of
7
8
the detachable warrants were exercised subsequent to year-end. Among other
provisions, certain of the documents covering the Company's long-term borrow-
ings require that the Company shall maintain current assets in excess of current
liabilities ( excluding any indebtedness to banks ) by not less than $1 ,000,000
and maintain net worth of not less than $5,000,000 and not less than 40 per-
cent of total indebtedness ( with subordinated debentures and provisions for
deferred Federal income taxes classified as net worth rather than as indebted-
ness ). Under the most limiting of the provisions, retained earnings at Decem-
ber 31 , 1966 were restricted as to payment of dividends in the approximate
amount of $3,870,000.
Note 6-Restatement of 1965 Earnings
Retained earnings at January 1, 1965 and income for 1965 have been restated
to reflect as adjustments applicable to prior years, U.S. Mail revenues of $20,291 ,
current Federal and state income taxes of $67,872 and special credits of $626,111 ,
all previously reported in 1965 income.
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 , 1966 and the related statements 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 account-
ing records and such other auditing procedures as we considered necessary in
the circumstances.
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 , 1966 and the results of its operations for the year
then ended, in conformity with generally accepted accounting principles applied
on a basis ( after giving retroactive effect to the restatement referred to in note 6 )
consistent with that of the preceding year.
February 10, 1967 (except as to note
5, which is as of February 17, 1967)
PEAT, MARWICK, MITCHELL & CO.
Directors:
Officers:
PACIFIC NORTHERN AIRLINES
G. P. O'G RADY, Washington, D. C.
PAUL W. KITTO, Seattle, Washington
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
A. G. WOODLEY, President and General Manager
H. A. OLSEN, Vice President- Traffic and Sales
J . H. FOSTER, Vice President- Engineering and Maintenance
F. V. 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
G. P. O'GRADY, 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
SEE CENTENNIAL ALASKA - A GREAT STATE OF AFFAIRS