Southern Airways Annual Report 1969

AIRWAYS,INC

1969
Anmml
Report
the year of preparation
New Jet Routes Span
the Eastern United States.
STOCKHOLDERS, CUSTOMERS, EMPLOYEES AND FRIENDS:
The year 1969 was perhaps the most
significant year of progress in the his-
tory of our Company, in spite of dis-
appointing financial results. During
the period Southern received major
route awards which substantially ex-
panded the area we serve, and which
will enable us to participate in vastly
stronger markets.
The Civil Aeronautics Board ex-
tended our system to Chicago, St.
Louis, Tallahassee, Orlando and
Miami and granted the Company, for
the first time, authority to provide
non-stop service in many long-haul
markets. Some of these are Chicago-
Memphis, Miami-Memphis, and Miami-
Birmingham. Our present system now
consists of 8,061 unduplicated route
miles, more than twice the route mile-
age at the beginning of 1968. Company
routes now serve fifty-six airports of
thirteen states in a service area
bounded by New York, Miami, Chica-
go and New Orleans.
Although we achieved record high
revenues of 537,835,508, we incurred
a loss of 5821,928. The revenue in-
crease of 29 percent over 1968 was
simply insufficient to overcome in-
creased costs of 30 percent; these
costs were chargeable in part to build-
ing for the future.
Aside from relatively minor start-up
costs in connection with the inaugura-
tion of Chicago service on April 1st,
the major costs of expanding our sys-
tem, training personnel, and obtaining
new equipment were incurred in 1969
and the first quarter of 1970. Likewise,
much of the developmental costs of
new markets is behind us.
To provide service over our drama-
tically expanded system, we have in-
creased the jet fleet from seven Doug-
las DC-9 aircraft at January, 1969 tQ
fifteen DC-9's today. In a continuing
effort to upgrade service and improve
efficiency, Southern operated 60 per-
cent of its 1969 seat miles with jet
equipment. This will be expanded to
80 percent in 1970.
In a further step designed to meet
our new and enlarged responsibilities,
we realigned the Company organiza-
tional structure during 1969. The prin-
cipal change was the creation of the
Office of the General Manager, with
the responsibility of the day-to-day
operation of the Company. Reporting
directly to the Office of the General
Manager are seven divisional level
positions including Flight Operations,
Technical Services, Sales and Market-
ing. Customer Services, Computer
Services, Personnel and Fiscal.
Although our Company. like most
other air carriers, is confronted with
the declining traffic growth and the
problems of inflation. nontheless our
future today appears brighter than at
any time in the past. Our system has,
in effect. been doubled. and we have
been awarded access to the most im-
portant traffic generating cities in the
eastern half of the United States.
Southern Airways today offers a long
range potential of public service and
in turn, for profits far and above those
at any time in the past.
Respectfully Submitted,
Frank W. Hulse,
President
March 26, 1970
FINANCIAL REVIEW
As a result of service being extended
to Washington, D.C. and New York in
the latter part of 1968 and to St. Louis
in- mid 1969. Southern's revenues
reached new highs during 1969, with
an overall gain over the previous year
of 29 percent. These revenue increases,
however, did not offset the increase in
operatii;ig expenses resulting from
initial costs associated with developing
new routes plus the general inflationary
trend experienced during the year. The
major contributing factors to the
$821,928 loss in 1969 were higher
operating expenses and greatly in-
creased interest expense together with
reduced revenue growth in the fourth
quarter of 1969 brought on by a soft-
ening in the nation's economy.
Commercial Revenues
Total passenger revenues for 1969
were $28,050,097-highest in your
Company's history-and a 37 percent
increase over the previous year. This
increase is attributable not only to the
27 percent increase in revenue passen-
ger miles developed during the year,
FIVE YEAR COMPARISON
OPERATING STATISTICS
Passengers (scheduled service)
but also to an increase in yield per
revenue passenger mile as a result of
two fare adjustments which are dis-
cussed later in this report.
Cargo (mail, express and freight)
increased 11 percent in 1969 to
$2,163,178.
Charter sales continued to be one of
the strongest sources of added revenue
for your Company. This area increased
74 percent to $3,358,146 in 1969, and
was obtained primarily through com-
mitting a second DC-9 aircraft to full
time charter service.
Public Service Revenue
Public Service Revenue (subsidy)
decreased during the year from
$4,038,298 in 1968, to $3,579,639 in
1969. More significantly, subsidy, as
a percent of total operating revenues,
decreased from 14 percent in 1968 to
9 percent in 1969; hence your Com-
pany's dependence on subsidy con-
tinued to decline. Per passenger carried,
subsidy decreased from $3.18 in 1968
to $2.60 in 1969.
The Civil Aeronautics Board has
1969 1968
1,377,421 1,271,497
Passenger Miles (000) (scheduled service) 323,472 254,028
Plane Miles (000) 14,679 12,260
Available Seat Miles (000) 862,388 611,795
Cargo Ton Miles 3,677,374 3,018,209
Completion Factor 97.2% 98.1%
Average Passenger Load (scheduled service) 24.3 22.3
Passenger Load Factor (scheduled service) 42.4% 45.8%
Average Length of Passenger Haul 234.8 199.8
Employees At End Of Year 1,747 1,538
FINANCIAL STATISTICS
Employee Wages and Benefits (000) $ 17,197 $ 14,240
Commercial Revenues (000) $ 34,256 $ 25,262
Net Income (Loss) (000) $ (822) $ (211)
Stockholders' Equity (000) $ 4,248 $ 5,070
Common Shares Outstanding 1,024,871 1,024,871
Book Value per Share $ 4.14 $ 4.95
Net Income per Share (Loss) $ (.80) $ (.21)
1Adjusted to reflect three-for-two stock split in May 1966.
2
issued an order, effective December
29, 1969, eliminating further reductions
in subsidy arising from the theoretical
profit to be derived from future im-
provements in operating authority
awarded by the Board. While this
change did not provide any immediate
gain to Southern, it will be of benefit
should Southern be awarded addition-
al route authority.
On February 5, 1970, the Local Ser-
vice Industry filed a request with the
CAB for a moratorium on the use of
the revenue sharing factor in comput-
ing future subsidy payments. Should
this request be granted expeditiously,
it would have the effect on Southern
of stabilizing 1970 public service rev-
enues at a level only slightly less than
that for 1969.
Operating Expenses
Operating expenses totaled
$37,409,160, up 30 percent over 1968.
Total available seat miles increased
41 percent as a result of introduction
of additional DC-9s to accommodate
the new service into New York and St.
1967 1966 1965
1,180,297 1,051,554 848,149
222,142 196,366 156,421
11,803 11,287 10,611
498,322 416,738 374,757
2,593,645 2,281,380 1,763,784
97.8% 98.5% 98.5%
19.4 18.0 15.3
45.9% 48.6% 43.2%
188.2 186.7 184.4
1,499 1,365 1,248
$ 12,582 $ 10,800 $ 9,516
$ 20,000 $ 17,513 $ 14,688
$ (238) $ 807 $ 938
$ 4.849 $ 4,937 $ 4,291
1,024,871 1,005,000 1,005, 00() I
$ 4.73 $ 4.91 $ 4.271
$ (.23) $ .80 $ .931
THE 1969 EXPENSE DOLLAR
DEPRECIATION,
AMORTIZATION
/,p1.; AND AIRCRAFT
;p LEASE
J's--,,.% RENTALS
11.2%
MAINTENANCE
MATERIALS &
OUTSIDE SERVICES 10.7%.
OTHER
18.5%
FUEL
11.3%
EMPLOYEE
WAGES AND
BENEFITS
43.9%
SEAT MILES PRODUCED and
OPERATING EXPENSE PER SEA
T MILE
------------or::~~!
Per Seat
m ~
Mllhons m Cents
800 1-------L,----l-------+----.l 5.0
700 4.8
600 4.6
500 4.4
400 4.2
300 4 o;
1965 1966 1967 1968 1969
Louis and to provide additional charter
capability. Operating expenses per
available seat mile decrease from 4
cents in 1968 to 4.3 cents in 1969.
Also contributing to the increase in
expense was the continuing upward
spiral of costs for labor, material and
services. Employee wages and benefits
increased 21 percent, depreciation,
amortization and aircraft lease rentals
67 percent: fuel 39 percent and other
operating expenses 32 percent.
Interest Expense
Interestondebt was $1,719,541 con-
trasted to $1,135,812 in the preceding
year. This reflects the added costs
associated with the $8,000,000 deben-
ture issue placed in November 1968,
plus the increase in interest rates on
bank debt previously outstanding.
Income Taxes
1969 results include the provision
for refund of federal income taxes of
$486,961 resulting from the carryback
of 1969's net operating loss to prior
years. In addition, the Company uses
accelerated depreciation methods on
certain of its aircraft and at Decem-
ber 31, 1969 it had a net operating loss
carryforward to be used to offset in-
come of future years amounting to
approximately $1,025,000. The Com-
pany also has an available investment
tax credit carryforward of $1,220,000
to offset future federal income tax
liability.
Aircraft Acquisition and Financing
The Company received delivery of
a new 95-passenger DC-9-30 jet air-
craft during each of the months of
April, May and June 1969. The air-
craft received in April was purchased
out of the proceeds of the $8,000,000
debenture issue sold in November
1968. The aircraft received in May
and June were acquired under a twelve-
year lease which provides for the full
payout of the purchase price of the
aircraft over the lease period, assigns
the investment tax credit to the lessors,
and provides a fair market purchase
option to the Company at the end of the
lease term.
The Company has entered into short-
term lease agreements for five addi-
PUBLIC SERVICE REVENUE
As a Per Cent of Total Revenue and Per Passenger
% of
Total Per
Revenue Passenger
30..----+---+----+--- t6.00
20
t----t----+---+---1 1.00
1965 1966 1967 1968 1969
PASSENGERS BOARDED
and REVENUE PASSENGER MILES
Percent Increase Over Prior Year
30 .--.....,.--"""""--.---
1965 1966 1967 1968 1969
(SCHEDULED SERVICE)
tional DC-9-10 jet aircraft, bringing
to six the number of aircraft under
such lease arrangements. In general,
the lease agreements provide for initial
lease terms of six months with renewal
options for 23 additional six-month
periods. Accordingly, Southern now
has sufficient equipment to meet its
system capacity requirements for 1970
under all reasonable traffic growth as-
sumptions. However, the Company an-
ticipates that these leased aircraft will
be returned over the next several years
and replaced with new 95 passenger
DC-9-30 aircraft as traffic warrants
and financing is arranged.
Yields and Fare Increases
System yield increased from 8.1
cents per revenue passenger mile in
1968 to 8.7 cents per revenue passen-
ger mile in 1969 even though the aver-
age length of haul of each passenger
increased from 199.8 miles in 1968 to
234.8 miles in 1969. This increase in
yield is attributable to fare increases
during 1969; the first effective Febru-
ary 20, 1969 which provided Southern
with approximately a 13 percent in~
crease, and the second effective
October 1, 1969which produced about
a 7 percent increase.
These fare increases played a signi-
ficant part in minimizing the losses of
not only Southern but the entire Local
Service Industry and were needed by
all carriers, especially those having
short haul characteristics, to more
properly offset the actual cost of pro-
viding air service.
Effective February 1, 1970 the CAB
approved a proposal of the airlines for
developing new joint fares in all mar-
kets having over 200 passengers per
quarter and not currently having such
joint fares and also dividing the rev-
enue obtained under joint fares be-
tween the long haul and short haul
carriers.Preliminaryestimates indicate
that the combined net effect of the new
~oint ~ares and new method of dividing
1
~t~rlme revenue will not have a sig-
mf1cant effect on Southern 's passenger
revenues.
3
1969's LABORS REAP HARVEST OF NEW ROUTES FOR 1970
From an operating authority stand-
point, the year 1969 was probably the
most significant for your Company in
its 20-year history. Of four route pro-
ceedings pending at the first of 1969,
three of these were concluded suc-
cessfully.
The Southern Airways, Inc. Route
Realignment Investigation, in which
your Company sought to improve its
operatin~ authority within its historic
service area, as well as the extension
of its system down the Florida penin-
sula to Key West, was divided into two
parts: "Realignmenf'and "Extension."
The realignment porticn, improving
the then existing operating authority
by reducing the number of segments
from 15 to seven, was approved by the
Civil Aeronautics Board on February
20, 1969, and the authority became
effective April 21 , 1969.
In the extension portion of the pro-
ceeding your comp[c!ny so ught au-
thority to serve between Tallahassee,
Orlando, Miami/Ft. Lauderdale, Mar -
athon, Key West and a number of the
larger traffic-producing points on our
present system, including Memphis,
Birmingham, Huntsville and Atlanta.
On September 25, the CAB released
its decision granting Southern permis-
sion to serve Tallahassee, Orlando, and
Miami/ Ft. Lauderdale. Although we
were not awarded as much of the
Atlanta authority as we sought, un-
restricted authority was granted be-
tween numerous points west of Atlanta
and the Florida markets such as non-
effective November 24, 1969, and ser-
vice commenced February 15, 1970.
ln the Central Route 81 Case, the
CAB, on May 8, 1969, approved
Southern's bid for Memphis-St. Louis
authority. Although unsuccessful carr-
ier applicants caused a delay for many
of the route awards in the proceeding
through requests for CAB and court
stays, the service was implemented
July 7, 1969, and traffic continues to
grow.
In the Gull States-Midwest Points
Service Investigation, on May 7, 1969,
the CAB granted the Company Mem-
phis-New Orleans nonstop authority,
but denied your Company authority to
operate in the I ucrative Memphis-
Chicago market. Southern vigorously
opposed the award of this Chicago
authority to another applicant and, on
September 5, 1969, the CAB issued its
decision on reconsideration, taking
the unusual step of reversing its earlier
decision with respect to Chicago and
awarded Southern nonstop Memphis-
Chicago authority. Permission to op-
erate the Chicago service became
effective on ovember 18, 1969 and
service began April 1, 1970.
The fourth and final proceeding pen-
ding at the beginning of 1969 was the
Southern Tier Competitive Nonstop
Investigation in which Southern sought
entry into the Dallas/ Ft. Worth market.
Unfortunately, major trunkline carriers
were selected for the majority of routes
awarded and the Company was un-
sucessful in this endeavor.
stop authority between Miami and In its first bid, using an expedited
both Memphis and Birmingham. Per- procedural method of the CAB, your
mission to operate this service became Company was signally successful in
4
its efforts to link the Gulfport/ Biloxi
area into the Washington and New York
markets. Our application was filed on
June 25, 1969, and on September 19,
1969 final operating authority was ap-
proved. The then operating Washing-
ton and New York flights were ex-
tended to Gulfport/Biloxi beyond
Eglin AFB so that we are able to carry
the Gulfport-New York passenger and
earn revenues for his entire trip of
some 1,100 miles while only incurring
expenses of operating 146 miles be-
tween Gulfport/ Biloxi and Eglin AFB.
The new service to Gulf port/ Biloxi
began October 26, 1969, and this ser-
vice has been an important factor in
assisting the rebuilding of the Gulf
Coast area which was ravaged August
17, 1969 by hurricane "Camille."
As 1969 drew to a close your Com-
pany was participating in three other
route proceedings, the North Carolina
Points Service In vestigation and Ad-
ditional Service to Augusta and Co-
lwnbia Case. Both the e proceedings
involve possible additional operating
authority to ew York and the latter
proceeding to Washington as well. In
both instances, a CAB Hearing Exam-
iner has recommended in favor of
other applicants. Nevertheless your
Company is continuing to pursue this
possibility of augmenting its current
Washington and New York operations.
Additionally, another proceeding,
the Atlanta-Detroit/ Cleveland/ Cincin-
nati In vestigation, was in the initial
stages. Your Company i actively
seeking nonstop authority between At-
lanta and both Cleveland and Detroit.
A final CAB decision in this proceed-
ing is not expected until early 1971.
Left to right -(kneeling) Richard N. Harbottle; (seated) George M. Gross, Graydon Hall, John J. Janisch, T.A. Wiley, Jr.; (standing) E verett
L. Martin, W Bayne Grubb, WS. Magill, Jr., A.L. Maxson, David Russell, J. Kenneth Courtenay.
COMPANY CORPORATE STRUCTURE REORGANIZED TO PREPARE FOR THE '70s
T he past year saw your Company
reorganize its structure to streamline
and improve the efficiency of its day-
to-day opera tio ns, and e nable yo ur
Company to capitalize effectively on
the new opportunities ahead. Imple-
menting the plan which was developed
with the a sistance of a leading manage-
ment consulting firm , your Company
established seven new divisional levels.
The heads of these divisions report to
the newly created Office of the Gen-
eral Manager. Graydon Hall was
elected xecutive vice president and
general manager,and George M. Gross,
vice president and associate general
manager.
T he seven new divisions and their
heads are: Technical Services, Richard
N. Harbottle, Vice President; Flight
Operations, W. Bayne Grubb, vice pres-
cient; Customer Services, Jo hn J.
Janisch, vice president; Sales and Mar-
keting, T. A. Wiley, Jr., vice president;
Computer Services, David Russell, Di-
rector; Personnel, Everett L. Martin,
assistant vice president~ and Fiscal,
A. L. Maxson, Treasurer.
Also reporting to the Office of Gen-
eral Manager are the department of
System Planning, Contracts-Properties,
Governme nt Relatio ns and Public
Relations.
The Office of Economic Regulations
Di visio n, headed by J. Kenne th
Courtenay, vice president and secre-
tary, will continue to report directly
to Southem 's president, Frank W.
Hulse.
5
SALES AND MARKETING ACTIVITIES
BROADENED FOR THE FUTURE
The year 1969 has een your Com-
pany change from an airline operating
primarily in small city markets to one
also serving the most ophi ticated air
markets in the United States. Accord-
ingly, it has been necessary to redirect
many approaches both in how we sell
our customer and in the service we
provide to our customer.
Within our Sales and Marketing Div-
ision we have added new functions. A
Marketing Analysis Department has
been created with the responsibility of
conducting surveys of both present and
potential markets in order to deter-
mine the best revenue opportunities
for your Company. A program of cus-
tomer surveys provide the passengers'
reaction to our services and this in-
formation will be used as a basi for
upgrading the quality of services pro-
vided to our pa engers. Our new Cus-
tomer Service Standards and pecifi-
cations Department is responsible for
measuring the quality of our services
against rigid standards which have
been set at levels equal to or higher
than our competitors.
The Field Sales Department was
strengthened during the year with spe-
cial emphasis being placed on locating
sales representatives in those cities in
which Southern has the greatest po-
Atlanta City Ticket Office
Susanna Southern promotes "Southern Style."
tential for increased revenues.
Service to St. Louis through Mem-
phis from New Orleans and interme-
diate points was inaugurated during
July of 1969. During t:'he last six months
of the year, 66,663 pas engers were
carried on flights serving St. Louis
resulting in revenue of about
$1,500,000, approximately 10%of the
total system' pa enger revenue for
that period. While the results fell short
of our forecast, we have successfully
established our identity in the St. Louis
market, and we are effectively compe-
ting with one of the larger trunk lines.
A great deal of effort in the second
half of 1969 was devoted to the pre-
paration of schedules for service to be
introduced during 1970 for the new
flights to Chicago and through the
Florida Penin ula to Miami. As a re-
sult of this preparation, we have been
able, well in advance of the inaugura-
tion of service, to plan an effective
campaign to obtain a satisfactory pene-
tration of each new market. For ex-
ample, we are currently realizing more
traffic than was foreca ted in the new
Florida markets.
While changing economic condi-
tions have made realization of our
1970 traffic forecast more difficult, we
are confident that we will obtain satis-
factory traffic levels not only from new
route authorities, but also from the
basic system which we have served
for many years.
During 1969, in selected major cities,
your Company departed from its ad-
vertising philosophy of using a combin-
ation of adverti ing media. In these
metropolitan areas television was used
exclusively to sell your Company's
services. Throughout the year, surveys
were conducted to measure the ef-
fectivenessof this televi ion advertising.
Results indicated the commercials
were creating the de ired awareness
of your Company and its services.
In keeping with the new accent on
marketing, your Company has analyzed
the population profile and the adver-
tising media in every market it serves.
For 1970, this information has been
used to select the media which reaches
the highest percentage of Southern's
potential customers.
CUSTOMER SERVICES IMPROVED
BY COMPUTER AND IN PERSON
Your Company has recognized the
concept that service to the public must
be considered a total company involve-
ment rather than the fragmented efforts
of individual departments. To accomp-
lish this, all functions relating to the
passenger-from the time an inquiry
is made to our reservation office until
the passenger leaves the terminal after
his flight-have been placed under the
responsibility of one division, Cus-
tomer Services. This department is
now responsible for reservations, in-
flight service (including stewardesses
and cabin service) and all ground fun-
ctions including airport personnel.
To provide for our expected growth,
your Company is expanding its reser-
vations capabilities. An agreement has
been entered into with an independent
computer services company to provide
a modern Passenger-Name-Record
reservations system which delivers, in
addition, extensive marketing data for
use in making management decisions.
Using an independent facility instead
of purchasing our own equipment as-
sures that as computer technology in-
creases our system will be up1
graded
without large capital outlays by your
Company. This greatly improved faci-
lity will be partially operative by mid-
~ 970 and will provide our passengers
~
-
New Reservation Computer
instantaneous confirmations of reser-
vations on Southern and more than
twenty other airlines both domestic
and foreign.
Emphasis has been placed on im-
proved inflight service. Delicious, hot
meals are now being served on many
longer flights. On shorter trips, our
passengers are offered our attractive
"wine basket service", which includes a
hearty sandwich, a bottle of premium
wine, condiments and a New Orleans
praline.
PRODUCTIVITY OF TECHNICAL
SERVICES DIVISION INCREASED
The Technical Services Division is
made up of your Company's Supply,
Purchasing, Production Control, In-
spection, Communications and the
Maintenance/ Engineering Depart-
ments.
Of major emphasis during 1969 was
the preparation of personnel for main-
tenance support of the ever growing
jet fleet. DC-9 hours in revenue service
increased from 12.500 in 1968 to
25,700 in 1969. and they are pro-
jected to reach over 47,000 in 1970.
Accordingly, your Company has de-
veloped the capability necessary to
maintain this fleet of jet aircraft which
will increase to 15 in service on April
1, 1970. This has been accomplished
with no overall increase in direct main-
tenance personnel as result of reducing
the amount of maintenance expended
on the Martin fleet as the activity level
for this fleet decreases.
The proper maintenance of the
Martin fleet has not been neglected,
however. During 1969, as a result of
maintenance program improvements,
the average Martin engine life between
overhauls was increased about 20%,
while at the same time achieving a new
low in engine malfunctions.
All phases of the FAA Crash worth-
iness Program requirements, which
were due for 1969, were met through
the combined efforts of Engineering
and Maintenance, insuring an even
higher level of operating safety for all
Southern aircraft.
SOUTHERN'S PEOPLE
MAKE THE DIFFERENCE
In keeping with your Company's
growth, additional personnel were
required to provide the force for
Southern's forward thrust. At the end
of 1969, your Company had 1,744
employees, 738 of whom had been with
Southern for five years or more, and
341 had ten or more years of service.
During 1969 there were 166 pro-
motions throughout your Company.
Last year also saw a successful
completion of a two-year contract
with the stewardesses, and the contin-
uation of a comprehensive training
program for supervisory personnel.
The training program, keyed to im-
proving service and economy through
the utilization of modern management
techniques, provides supervisors with
the management skills so necessary for
directing future operations of your
Company.
PILOT TRAINING PREPARES
FOR NEW JET ROUTES
The Flight Operations Division
established a Training and Standards
Department, assuring the highest pos-
sible qualifications for our pilots. Dur-
ing the year, 35 captains and 47 first
officers successfully completed their
DC-9 jet training. Your Company now
has sufficient qualified pilots not only
to meet the commitments arising from
operating new route authorities, but
also those arising from our greatly
expanded level of charter sales.
7
8
SOUTH~RWAYS,/NC
BALANCE SHEET
December 31, 1969 and 1968
ASSETS
CURRENT ASSETS
Cash ............................................... .
Certificates of deposit. ................................. .
Accounts receivable:
U.S. Government:
Transportation and public service revenue ......... .
Refundable income taxes ......... . ............ .
Trade receivables .................. . .............. .
Maintenance and operating supplies, at average cost,
less allowances for obsolesence ( 1969-5279,420;
1968-5282,359) .......... . ...... . ................ .
Prepaid expenses . . .................................... .
Total Current Assets
INVESTMENTS AND OTHER ASSETS-at cost ................... .
PROPERTY AND EQUIPMENT-on the basis of cost-Notes A and B
Flight equipment. .. . .................................. .
Less allowances for depreciation and maintenance .. . ........ .
Deposits on new equipment. . ........... . ............... .
Other property and equipment. . . ... . .................... .
Less allowances for depreciation . .. ... ... .. ... ...... . .... .
DEFERRED CHARGES
Unamortized pre-operating, route extension, and
development costs .. . . . . .. ..... .... . .. . .... .. . ... . .
Deferred lease costs .. ... .. .. ..... ... ... ... .. . .. ... .. .. .
Unamortized long-term debt expense . .. ..... .. . ... ... . . ... .
1969
S 4,304,163
951,361
436,338
3,781,643
5,169,342
1,462,334
1,581,978
12,517,817
63,190
25,611,105
5,736,717
19,874,388
19,874,388
3,206,850
1,995,062
1,211 ,788
21,086,176
985,521
363,566
758,421
2,107,508
$35,774,691
1968
S 4,143,852
5,534,316
722,581
552,482
3,016,283
4,291,346
1,011,101
773,714
15,754,329
47,455
20,568,356
4,610,250
15,958,106
3,179,958
19,138,064
2,857.605
1,663,114
L194.--l91
20.332,555
730,111
206,780
839.899
1,776,790
537,911,129
LIABILITIES
CURRENT LIABILITIES
Accounts payable ..................................... .
Collections and withholding as agents ..................... .
Salaries, wages, and vacations ............................ .
Accrued taxes and other expenses ........................ .
Air travel plan deposits ................................. .
Other ................ .. ............................. .
Current maturities of long-term debt-Note B ............... .
Total Current Liabilities
LONG-TERM DEBT, less current maturities-Note B
Notes payable to banks . . ............................ ... .
Convertible Subordinated Debentures ..................... .
DEFERRED TAXES ON INCOME-Note C ................ ....... .
STOCKHOLDERS' EQUITY - Note D
Common Stock, $2 par value:
Authorized-5,000,000 shares:
Issued and outstanding-1,024,871 shares ............ . . .
Other paid-in capital. .................................. .
Retained earnings ..................................... .
COMMITMENTS- Note F
See Notes to Financial Statements.
1969
$ 1,691,817
2,710,114
1,043,222
1,424,505
112,200
155,621
1.709.239
8,846,718
9,763,152
12,682,000
22,445,152
235,000
2,049,742
1,229,523
968,556
4,247,821
$35,774,691
1968
$ 1,321,297
2,459,524
822,166
1,012,926
112,625
145,866
1,821,739
7,696,143
12,228,237
12,682,000
24,910,237
235,000
2,049,742
1,229,523
1,790,484
5,069,749
$37,911,129
9
10
SOUTH
TAYS.INC
STATEMENT OF INCOME AND RETAINED EARNINGS
Years Ended December 31, 1969 and 1968
OPERATING REVENUES
Passenger ............................................. .
Mail, express, and freight. . ............................. .
Public service revenue ................................. .
Charter ............................................. .
Other operating revenues-net. .......................... .
OPERATING EXPENSES
Flying operations ..................................... .
Maintenance ......................................... .
Aircraft and traffic servicing ............................. .
Passenger service ..................................... .
Promotion and sales ................................... .
General and administrative .............................. .
Amortization and provision for depreciation ................ .
OTHER DEDUCTIONS AND (INCOME)
Interest on long-term debt-net of interest capitalized ......... .
Gain on disposal of property ............................. .
Other (income), less miscellaneous deductions ............... .
LOSS BEFORE INCOME TAX CREDIT
INCOME TAX CREDIT-Note C
Provision for income taxes
Current. ....................................... .
Deferred ....................................... .
Investment credit. .................. . ................. .
NET LOSS (per share: 1969-$.80; 1968-55.21 Note G)
RETAINED EARNINGS at beginning of year,
as previously reported .................... .. ............ .
Adjustment of public service revenue,
net of applicable income taxes ........................... .
RETAINED EARNINGS at beginning of year, as restated ...... ... .
RETAINED EARNINGS AT END OF YEAR
See Notes to Financial Statements.
1969
$28,050,097
2,163,178
3,579,639
3,358,146
6842448
37,835,508
12,659,124
6,110,720
9,078,742
1,875,449
3,002,821
2,286,399
2,395,905
37,409,160
426,348
1,719,541
15,696
1,735,237
(1,308,889)
(486.961)
(486,961)
(821,928)
J .790,484
1.790,484
$ 968,556
1968
$20,503,123
1,949,557
4,038,298
1,934,461
8742839
29,300,278
9,117,641
5,121,450
7,502,089
1,282,685
2,306,037
1,607,534
1,769,762
28,707,198
593,080
1,135,812
(90,177)
(29,714)
1,015,921
(422,841)
(387,862)
235,000
{58,997)
(211,859)
(210,982)
2,122,525
(121,059)
2,001,466
$ 1,790,484
SOUTH~WAYS,JNC
STATEMENT OF SOURCE AND APPLICATION OF FUNDS
Years Ended December 31, 1969 and 1968
1969 1968
FUNDS PROVIDED BY
From Income:
Net loss ......................................... .
Items not requiring outlay of funds:
Provision for depreciation ....................... .
Amortization of deferred charges .................. .
Deferred taxes on income ........................ .
Sale of 6 % Convertible Subordinated Debentures ........... .
Refunds of equipment purchase deposits ................... .
FUNDS APPLIED TO
Additions to property, plant and equipment-net. ........... .
Equipment purchase deposits-net ........................ .
Increase in deferred charges ............................. .
Decrease in long-term debt-net ......................... .
Increase in investments and other assets .................... .
Increase (decrease) in working capital. ....................... .
Working capital at beginning of year. ......................... .
Working capital at end of year. .............................. .
ACCOUNTANTS' REPORT
Board of Directors
Southern Airways, Inc.
Atlanta, Georgia
$ (821,928) $ (210,982)
2,160,358 1,703,817
377,578 233,003
235,000
1,716,008 1,960,838
8,000,000
ll793l570
3,509,578 9,960,838
4,882,370 845,744
13,008
533,475 583,004
2,465,085 1,239,815
15,735 14,492
7,896,665 2,696,063
(4,387,087) 7,264,775
8,058,186 793,411
$ 3,671,099 $ 8,058,186
We have examined the balance sheet of Southern Airways, Inc. as of December 31, 1969, and the related
statements of income and retained earnings and source and application of funds 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 circum-
stances. We previously made a similar examination of the financial statements for the preceeding year, which
have been restated for changes in unamortized debt discount as explained in Note D.
During 1969, the Company reduced the economic useful life of cylinders used in Martin 404 aircraft and
decreased the provision for overhaul applicable to DC-9 engines as described in Note A to the financial state-
ments. These changes, with which we concur, had the effect of decreasing the net loss approximately $33,000.
In our opinion, the accompanying balance sheet and statements of income and retained earnings and source
and application of funds present fairly the financial position of Southern Airways, Inc. at December 31, 1969,
and the results of its operations, the ~~hanges in capital, and source and application of funds for the year then
ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of
the preceding year.
<S-ur,J;J &JnJJi:I
Atlanta, Georgia
January 30, 1970, except as to Notes B and F,
as to which the date is March 10, 1970.
ERNST & ERNST
11
SOUTHERN AIRWAYS, INC. - NOTES TO FINANCIAL STATEMENT
December 31, 1969
NOTE A -CH NGE IN LIFE OF DEPREC IABLE
ASSET AND PROVISION FOR OVERHAUL.
During 1969, the Company redetermined the eco-
nomic useful life of cylinders used in Martin 404 aircraft
and reduced the useful life of these assets from seven
years to three years. This change had the effect of in-
creasing the provision for depreciation approximately
$153 ,000 and increasing the net loss approximately
98,000 ( .10 per share).
The Company has consistently followed the policy of
providing for DC-9 engine overhaul based on hours of
service. Based upon a review of its maintenance program
applicable to D -9 engine , the Company reduced the
rate from $ I 2.50 per hour to $7 .50 per hour effective
January. 1969. This change had the effect of reducing
the provision for maintenance approximately S205,000
and de.creasing the net loss approximately 5131,000
($. 13 per share).
NOTE B- LONG-TERM DEBT.
Long-term debt at December 31, 1969, is summarized
as follows :
12
Notes payable to banks in quarterly
installments through 1976 (ll (5) (6) 6,255,000
Note payable to banks due Decem-
ber 31, 1975 (1) (5) (6) (7) 3,000,000
Notes payable to banks in quarterly
installments through 1974 (2) (5) (6) 2,2 17,39 1
5-3/ 4% Convertible Subordinated
Debentures due December 1, 1981
(3) (6) 4,682,000
6-1 /2 % Convertible Subordinated
Debentures with warrants attached
due November 1, 1983 (4) (6) 8 000
1
000
24, 154,39 1
Less current maturities 1.709.239
S22 445 152
(1) The interest rate is 1/4 of 1 % above the lead
bank's prime rate.
(2) The interest rate is 1/2 of 1 % above the lead
bank's prime rate.
(3) The 5-3/ 4% Convertible Subordinated Deben-
tures due December 1, 1981 are convertible
(until maturity or prior redemption) into Com-
mon Stock at S16 per share; are subordinated,
generally, to all existing and future indebted-
ness for borrowed money; are callable at pre-
miums ranging from 5.75% downward ; and
require annual sinking fund payments beginning
December 1, 1976, in an amount equal to 10%
of the principal amount outstanding at Decem-
ber 1, 1975. Also, the Company may make ad-
ditional voluntary sinking fund payments equal
to the required amount.
(4) The 6-1/2% Convertible Subordinated Deben-
tures due November 1, 1983, are convertible
(until maturity or prior redemption) into Com-
mon Stock at 516 per share, are i sued in integral
multiples of $1,000 with a warrant for the pur-
chase of 18 shares at S16 a share attached; are
subordinated, generally, to all existing and fu-
ture indebtednes for borrowed money; are
callable on or after November 1, 1973, at pre-
miums ranging from 6.5% downward; and re-
quire annual prepayments beginning November
1, 1978, in an amount equal to 10% of the prin-
ci pal amount outstanding at November I. 1977
less credit for principal amount converted or
called subsequent to November I, 1977. Also.
the Company may make add itional voluntary
prepayments equal to the required amount.
(5) All aircraft. engines, and related eq uipment
are pledged as collateral on this indebtedness.
(6) The agreements relating to the notes payable
and the Convertible Subordinated Debentures
place certain requirements and restri ction
upon, among other things, (I) net current assets,
(2) indebtedness and lease obligations, (3) net
worth, (4) capital expenditures, and (5) pay-
ments relating to capital stock including divi-
dends. The Company met all of these require-
ments on December 31, 1969, and retained
earnings is restricted from payments relating to
capital stock and dividends.
(7) Prepayments are required equal to 25% of the
first 51,000,000 o f net income of the Company,
plus 35% of the ne t inco me in excess of
1,000,000 [or the twelve month period ending
the preceding December 31.
(8) In order to provide [or the heavy expenditures
required in the early months of 1970 in connec-
tion with inaugurating servi ce under its new
route authorities, the ompany obtained in
January 1970 an amendment of its agreements
with creditor Banks providing for the deferral
o r a S325.000 note payment originally due on
February I. 1970. On February 5. the agree-
ments were also amended to, among other
things, increase the aggregate amount of in-
debtedness (as defined) and lease obligations
which may be maintained by the Company to
160% o f net worth (as defined ) for the period
ending March 3 1, I 970, and thereafter to 120%
of net worth. One or the major factors in the
computation or such ra tio is the amount of net
worth or the Company. As the result or the
start-up C,\penses mentioned previously, among
other things. the Company incurred substantial
losses (unaudited) during January and February
1970. and. had the ompany been required at
February 28. 1970 to meet this debt to net worth
ratio or I 20i, which is presently not required
until after March 31, 1970, it would have been
necessary for it to have raised S613,000 from the
issuance of a guaranteed note, raised 5926,000
from the issuan ce of its equity securities. and to
have used such proceeds together with S 1.566.000
o r cash on hand to retire an eq uivalent amount
of indebtedness. The ompany expects to obtain
an amendment ex tending beyond March 31 the
requirements of the Agreement pertaining to
the ratio of indebtedne s to net worth.
nder the February 5 Agreement, the Company
is required to comply by January 31. 1971 wi th
all of the conditions. terms, and covenants con-
tained in the agreements with the Banks in
effect prior to the February 5 Agreement. T he
ompany may be able to meet such require-
ments th rough earning generated from opera-
tions. However, i[ the ompany is not successful
in obtaining such earning or in obtai ning a
further amendment or its Agreement, it is re-
quired to obtain by January 31, 1971. cash pro-
ceeds from a sale (pursuant to, on or prior to
November 30, 1970 a filing with the Securities
and Exchange Commission or the receipt by
the creditor Banks of a written commitment for
a private placement) of its equity securities
sufficient to enable it to comply with the terms
of such agreements in effect prior to February
5, 1970 (including the debt to net worth ratio
of 120%).
NOTE C-INCOME TAXES.
The loss to be carried back for income tax purposes
will exceed the loss shown in the Income Statement
because of certain expenses deferred for financial state-
ments and additional depreciation to be claimed for
income tax purposes. Depreciation for financial state-
ments is computed on the straight line method, but
certain assets are depreciated on accelerated methods
for income tax purposes. Because of the aforementioned
differences in treatment of certain items for income
tax purposes, there is a net operating loss carry forward
to future years for income tax purposes of approximately
$1,025,000atDecember31, 1969.
The Company uses the flow-through method o f ac-
counting for investment credit and the available invest-
ment credit is recognized to the extent that it can be
realized or offset against current or deferred income
taxes. [nvestment credit realized as a reduction of de-
f erred income taxes amounted to approximately
$207,000 at December 3 1, 1969.
Investment credit carry-over at December 31, 1969,
for use in offsetting federal income taxes in future in-
come tax re turn s a mo unt ed to approximately
1,220,000and expiresin 1976(565,000), 1977 ( 810,000),
1978 (S37,000) and 1979 (S308,000).
NOTED -COMMON STOCK AND OTHER PArD-
JN CAPITAL.
In accordance with current accounting principles
applicable lo debt issued with stock purchase warrants,
the Company recognized retroactively to December
31, 1968. debt discount attributable to the stock pur-
chase warrants attached to 6-1/2% Covertible Subor-
dinated Debentures issued in 1968. This had the effect
of increasing Unamortized Long-Term Debt Discount
and Other Paid-In Capital by 5432,000. The Discount is
bei ng amo rt ized o ver the remaini ng term o f th e
indebtedness.
In May 1969, the c harter of the Company was
amended to increase the authorized capital of the
Company from 2,000,000 shares of 52 par value Com-
mon Stock to 5,000,000 shares of 52 par value Common
Stock.
These changes constitute the only changes in Com-
mon Stock and Other Paid-In Capital for the two years
ended December 31 , 1969.
At December 31, 1969, 1,006,625 shares of Common
Stock of the Company were reserved as follows :
Qualified Stock Option Plan ap-
proved by Board of Directors in 1965:
Currently exercisable at a price of
510. 16-2/ 3 per share
Exercisable one-third each year be-
ginning in 1969 at a price of 519.18
per share
Exercisable one-third each year be-
gi nning in 1970 at a price of S13.75
per share
Exercisable one-third each year be-
gi nning in 1971 at prices ranging
from 58.69 to Sl 1.76 per share
Shares available [or additional op-
tions which may be granted under
the Plan
Employee Stock Option Plan ap-
proved by Board of Directors in
1967:
Exercisable in June 1970 at a price
of Sl 1.52 per share
Shares avai lable for additional op-
tions which may be granted under
the Plan
Shares reserved for conversion of
5-3/4% Convertible Subordinated
Debentures
Shares reserved for conversion of
6-1/2% Convertible Subordinated
Debentures
Shares reserved for sale pursuant to
stock purchase warrants issued with
6-1/2% Convertible Subordinated
Debentures at a price of S16 per
share
TOTAL
NOTE E-PENSION PLANS.
Shares
Reserved
33,750
1,000
900
7,100
1,833
292,625
500,000
The Company has several pension plans covering
substantially all of its employees. The total pension
expense for the year was $774,638 which incl uded
5304,758 under a defined-contribution plan. The Com-
pany's policy is to fund normal cost plus accrued interest
on the unfunded past service liability. At December 31,
1969. the total of the pension fund excet:dt:d the actuari-
ally computed value of vested benefi ts and the unfunded
past service liability was approximately $519,000.
NOTE F-COMMITMENTS AND CONTINGENCIES
At December 31, 1969, the Company was leasing five
DC-9 jet aircraft under leases expiring in 1980 and 1981,
at a minimum annual rental of S2.032,000; three DC-9
jet aircraft under six month leases, which assuming the
aircraft are retained for a full year, would result in ren-
tals of $1,231,250 in 1970; and a communications sys-
tem lease expiring in 1977 with a minimum rental of
79,000. In February, 1970 an additional three DC-9
jet aircraft were leased under six months leases which
committed the Company to minimum rentals or S630,000.
Certain unsuccessful applicants for Chicago. St. Louis,
and Miami operating authority have sought review in
the U.S. Court or Appeals_. District of Columbia Circuit,
of those awards to the Company by the CAB. The
Company believes such applicants cases are without
merit and expects favorable decisions before the end of
1970.
NOTE G-LOSS PER SHARE.
Loss per share of Common Stock was computed by
dividing the net loss by the number of shares of Common
Stock outstanding during the year. Conversion of de-
bentures and exercise of warrants would not have in-
creased the loss per common share.
EXECUTIVE COMMITIEE
FRANK W. HULSE
G. GUNBY JORDAN
W. B. Wl-IlTE, JR.
GRA YOON HALL
EL TON B. STEPHENS
DIRECTORS
CECIL A. BEASLEY, JR.
Ballard & Beasley
Washington, D.C.
ALEXANDER J. BRUNINI
Brunini, Everett, Grantham & Quin
Vicksburg, Mississippi
GRA YOON HALL
Southern Airways, Inc.
Atlanta, Georgia
F. BARTON HARVEY, JR.
Alex. Brown & Sons
Baltimore, Maryland
FRANK W. HULSE
Southern Airways, Inc.
Birmingham, Alabama
ALTON F. IRBY, JR.
Irby-Adams-Cates Company
Atlanta. Georgia
HENRY P. JOHNSTON
Radio and Television Consultant
Birmingham, Alabama
G. GUNBY JORDAN
The Jordan Company
Columbus, Georgia
SARTAIN LANIER
Oxford Industries, Inc.
Atlanta, Georgia
R. EUGENE ORR
Orr & Company, Inc.
Jacksonville, Florida
G. FRANK PURVlS, JR.
Pan American Life Insurance Company
New Orleans, Louisiana
F. D. SCHAS
Bullington-Schas & Company
Memphis, Tennessee
EL TON B. STEPHENS
EBSCO Industries, Inc.
Birmingham, Alabama
RICHARD A. TRIPPEER
R.A. Trippeer, Inc.
Memphis, Tennessee
W. B. Wl-IlTE, JR.
Bradley, Arant, Rose & White
Birmingham, Alabama
OFFICERS
FRANK W. HULSE, President
G~YDONHALL
Executive Vice President-
General Manager
GEORGE M. GROSS
Vice President-Associate General Mgr.
W. S. MAGILL, JR.
Senior Vice President-
Industry and Government Affairs
J. KENNETH COURTENAY
Vice President-Economic
Regulations and Secretary
RICHARD N. HARBOTTLE
Vice President-Technical Services
W. BAYNE GRUBB
Vice President-
Hight Operations
THOMAS A. WILEY, JR.
Vice President-
Sales & Marketing
JOHN J. JANISCH
Vice President-
Customer Services
A. L. MAXSON
Treasurer
RICHARD K. ROBINSON
Controller
EVERETT L. MARTIN
Assistant Vice President-
Personnel
WILLIAM E. OAKES
Assistant Vice President-
Economic Research
J. R. PRICE
Assistant Vice President-
Properties and Facilities
VICTOR C. PRUITT
Assistant Vice President-
System Planning
ARNOLD D. WINHAM
Assistant Vice President-
Sales
A. D. YAWN
Assistant Vice President
RAY W. BURDEN
Assistant Treasurer
MRS. MARY C. HA YES
Assistant Secretary
CECIL A. BEASLEY, JR.
Assistant Secretary
W. B. WHJTE, JR.
Assistant Secretary
GENERAL OFFICES
Atlanta Airport
Atlanta, Georgia 30320
COUNSEL
Bradley, Arant, Rose & White
Birmingham, Alabama
Ballard & Beasley
Washington, D.C.
AUDITORS
Ernst & Ernst
Atlanta, Georgia
STOCK TRANSFER AGENT
Tru t Company of Georgia
Atlanta, Georgia
ADVERTISING COUNSEL
Harris & Weinstein Associate , Inc.
Atlanta, Georgia
SOUTH~RWAYS.INC
General Offices: Atlanta Airport
Atlanta, Georgia 30320