Southern Airways Annual Report 1977

+
Southern
Highlights
SOUTHERN AIRWAYS, INC.
Year ended December 31
PASSENGER REVENUES
OPERATING REVENUES
OPERATING INCOME
NET INCOME
PRIMARY EARNINGS PER SHARE
REVENUE PER PASSENGER MILE
SCHEDULED SERVICE
REVENUE PASSENGER MILES
AVAILABLE SEAT MILES
PASSENGER LOAD FACTOR
REVENUE PASSENGERS CARRIED
REVENUE PLANE MILES FLOWN
NUMBER OF EMPLOYEES
*Includes excess insurance proceeds from the loss of a DC9 aircraft which
increased net income by $3.6 million {$2.09 per share). Also includes prior years'
mail revenue which increased net income by $500,000 (29 cents per share).
These highlights should be read in conjunction with the Financial Statements
and Notes to the Financial Statements appearing elsewhere in this report.
1977
$130,828,000
$159,511,000
$ 7,524,000
$ 8,253,000*
$ 4.76*
$ 0.125
1,044,818,000
2,043,061,000
51.1%
3,457,000
28,638,000
2,922
Per Cent
1976 Increase
$115,206,000 13.6
$140,167,000 13.8
$ 2,492,000 201.9
$ 405,000 1,937.8
$ .22 2,063.6
$ 0.117 6.8
978,991 ,000 6.7
1,926,166,000 6.1
50.8% .6
3,245,000 6.5
27,646,000 3.6
2,766 5.6
#
Southern
A General Office
B Reservations Center
C Training Center
D Maintenance Base
E Jet Engine Test Cell , Fuel Facility
and Waste Treatment Plant
Contents
Highlights ........ ..... . .. .. . . .... . . .. . Outside Foldout
Southern's Facility Complex . .. ... . .... Inside Front Cover
About the Complex ...... . . . .... . ... .... . . . .. . . . Flyleaf
About the Company .. . .... .. ... . . . ... . . ... Inside Flyleaf
Report to Stockholders . ... . . . .. . ... . ... . .. . . . .... . . 1-3
Ten Year Operating and Financial Summary .. . ........ .4, 5
Management's Discussion of Summary of
Operations . .. . .. . . .... ..... . . . . . . .. . .. ... ... ... 6-9
Review of Operations .. ... . ... ... ... . .. ... . . . . . . . 11-20
About the Complex
Southern completed its three-year building
program in October 1977, occupying a new
General Office and Reservations Center.
Completed earlier were a Maintenance Base
and Training Center
The facility is located at Hartsfield Atlanta
International Airport. It was built to Southern's
specifications and leased for 30 years with
renewal options. More than 40 acres remain
available for expansion.
The Maintenance Base encloses more than
325,000 square feet of hangar and support-
shop space. The hangar accommodates
simultaneously four large jet aircraft.
The Training Center houses a DC9 flight
simulator, with expansion room for an
additional simulator or other training aids.
Training is conducted in an academic
atmosphere.
As protection for the environment, the
facility includes a waste treatment plant to
ensure that chemicals used in maintaining
aircraft do not pollute nearby streams
and rivers.
Within this complex work some 1,200
Southern employees. All aircraft are
maintained here and reservations calls from
throughout the United States are
answered here.
This complex has been engineered for
human and technical efficiencies to support
Southern's growth.
Statements of Income . . ................... . ........ 21
Balance Sheets ...................... . .......... 22,23
Statements of Changes in Financial Position ... . ........ 24
Statements of Retained Earnings ..... .. ..... .. .... . .. 25
Notes to Financial Statements ........ . ... : ....... . 25-31
Report of Independent Auditors . .. . ..... ... . .... . ... . 32
Directors and Officers .... .. . . ....... . . Inside Back Flyleaf
Southern Route Applications . ...... . . Outside Back Flyleaf
Southern Routes . ... . ..... .. ... .. .... Inside Back Cover
F-1
About the Company
Southern Airways, Inc., is a certificated, scheduled airline, engaged in transportation of
persons, property and mail. The Company serves 14 states, the District of Columbia, and
the Cayman Islands in the British West Indies. Additionally, the Company operates an
extensive charter business throughout the United States and to the Cayman Islands, and
to other points in the Caribbean, Canada, Mexico, and the Bahamas.
Southern began scheduled service on June 10, 1949. During 1977, the Company's
aircraft flew more than 28 million miles, serving almost 3.5 million passengers.
Aircraft in service include 29 DC9 jetliners, seven Metro II turboprops, and two
Martin 404 piston-engine aircraft. Today, more than 97 per cent of Southern's revenue
passenger miles are generated aboard DC9s.
Incorporated in the State of Delaware, Southern is a publicly held corporation with
more than 5,300 stockholders residing in 45 states and 10 foreign countries. The
Company's stock is registered and traded in the NAS DAO/Over-the-Counter Market.
Southern is one of 10 "Local Service Carriers" operating in interstate commerce to
serve cities of small and intermediate
size as well as in major metropolitan
areas. For rendering air services to small
and intermediate-size communities that
otherwise could not sustain scheduled
service, Southern receives public
service revenue (subsidy) from the
Federal Government.
On the longer haul, more densely
traveled routes, where Southern
competes with larger Trunk Carriers, the
Company does not receive a subsidy.
Southern's fares and quality of service
are competitive.
Southern is headquartered at
Hartsfield Atlanta International Airport
where the Company's Maintenance
Base, Reservations Center, Training
Center and General Office are located.
F-2
Market Price of Common Stock
Range of high and low bid and asked prices for the
Company's Common Stock:
Bid Prices Asked Prices
Year High Low High Low
1976
First Quarter . . .. 5 3 6 3%
Second Quarter .. . .. . . 5 4 5 5
Third Quarter . . . ..... .. 6 5 7 5%
Fourth Quarter ........ 5 3 5% 4
1977
First Quarter . . ...... .. 4 3 4 4
Second Quarter . . . .. . . 4 3% 4 4
Third Quarter .. ... .. ... 4 3% 4 4
Fourth Quarter . ... . .. . 5 4 5% 4
1978
First Quarter through
March 2 ....... . . . . . 6 5 7 5%
The foregoing prices do not represent actual transactions. They
represent prices between dealers and do not include retail markup,
markdown or commission . There have been no active markets in
the Company's convertible preferred stock, convertibl e
subordinated debentures, or warrants.
Report To Stockholders
The year 1977 was the most profitable of
Southern's 28-year operating history. New
highs were attained in all revenue categories.
This was the Company's sixth consecutive
profitable year.
Net income rose to $8.2 million on revenues
of $159.5 million. Per share earnings totaled
$4.76.These gains compared with 1976 net
income of $405,000 on revenues of $140.2
million and per share earnings of 22 cents. The
1977 profits included nonrecurring gains of
$4.1 million.
In every way, the year 1977 was a significantly
productive one for Southern. The Company's
three-year building program was completed
and in October the highly efficient, new office
and reservations facilities were occupied.
During the year, maintenance activities were
expanded to perform increased contract
maintenance for other airlines, government
agencies, and aircraft operators. A program to
modernize the interiors of Southern's DC9
aircraft was undertaken and the "wide-look"
cabins already are appearing in the fleet.
We have improved our service at smaller
cities with high speed, jet-powered equipment,
the Swearingen Metro I ls. This aircraft replaces
the obsolete and expensive piston-powered
Martin 404.
Sales and marketing efforts continue to be
broadened and intensified. Innovative
promotional fares place emphasis on pleasure
travel along Southern's routes. Special
attention is being given to developing
outstanding sales people. Indeed, throughout
the Company, employee training to improve job
Graydon Hall Frank W. Hulse
efficiency continues as a major priority.
Hundreds of employees undergo advanced
courses to upgrade their job knowledge.
During the year, two new directors joined the
Board: David H. Hughes, Orlando, Florida, and
Frank M. Young, 111, Birmingham, Alabama.
Leaving our Board of Directors because of the
mandatory retirement age was Sartain Lanier,
Atlanta, Georgia. Mr. Lanier has served long
and well. Fortunately, we will retain his counsel
as he becomes a senior director.
Southern today is processing more
applications before the Civil Aeronautics Board
than at any time in the Company's history.
These proceedings are discussed elsewhere in
this Report, but we are happy to say that
1
Report To Stockholders (continued)
Available Seat Miles/Revenue Passenger Miles
IN MILLIONS
2400 - - - - - - - - - - - - - - - - -
Seat Miles
Passenger Miles
1200
600
0
1973 1974
Passengers Carried
IN THOUSANDS
1975 1976 1977
4000 - - - - - - - - - - - - - - - - -
2000
1000
Southern has recently been successful in
obtaining from the Civi I Aeronautics Board two
long-sought and valuable route awards. The
first grants both Milwaukee, Wisconsin, and
Minneapolis-St. Pau I, Minnesota, authority
from Memphis. The second extends Southern
from Memphis to Denver, Colorado, via Wichita,
Kansas. Although other carriers also may serve
the same markets, these new routes represent
significant additions to the Company's system.
They provide great challenge and at the same
time great opportunity for future growth and
profits.
Equipment is being acquired, to serve the
newly awarded routes as well as others we
expect, and to provide expanded service on
our existing system. At the time of this Report,
the Company has obtained an option to acquire
eight DC9 aircraft currently operated by
another airline. Other aircraft acquisitions also
are under active consideration .
Of importance to the Company's future are
proposals before Congress to alter significantly
the regulation of air carriers. Entry by new
carriers, and particularly by the so-called
"commuter" and supplemental airlines into
new markets, including markets served by
Southern, would be greatly liberalized. Lower
fares would be encouraged. The present system
for payment of subsidy to Southern and other
local service carriers would be greatly modified
and, in time, terminated. Your management
favors regulatory reform insofar as it would
make more efficient Civil Aeronautics Board
action and insure the best possible service for
0
1973 1974 1975 1976 1911 the traveling public, especially including
2
service for the smaller communities. We are
hopeful that the regulatory reform proposals
which are enacted into law will avoid
unnecessary deregulation and permit the
carriers to continue to provide a service
universally recognized as the outstanding
scheduled service in the world.
Other Federal legislation of vital importance
to Southern includes proposals now pending in
Congress to permit financial assistance from
user charges for air carriers to retrofit their
current generation of jet aircraft or replace
them with quieter and more fuel-efficient
equipment. The objective is, of course, to
insure an improved environment through the
elimination or reduction of air and noise
pollution - an objective which Southern feels
justifies funding in one form or another by the
Federal government.
Southern's future is bright, indeed. Today,
the Company's system extends from the
Atlantic Ocean to the Rocky Mountains, from
the Canadian Border to the Caribbean.
Immediately before us are opportunities we
long have sought and challenges as great as
any we have ever faced.
Frank W. Hulse
Chairman
/4---~
Graydon Hall
President
April 3, 1978
Operating Revenues
IN MILLIONS OF DOLLARS
80
40
0
1973 1974 1975 1976 1977
Net Income
IN MILLIONS OF DOLLARS
10.0 - - - - - - - - - - - - - - - - - -
0
1973 1974 1975 1976 1977
3
Ten-Year Operating and Financial Summary
SOUTHERN AIRWAYS, INC.
1977 1976 1975 1974 1973 1972 1971 1970 1969 1968
Summary of Operations
(In thousands, except per share amounts)
Operating revenues
Passenger $130,828 $115,206 $ 95,666 $ 86,821 $ 65,949 $ 52,052 $ 45,302 $ 37,187 $ 28,050 $ 20,503
Charter 9,594 8,803 8,208 6,908 5,358 4,839 4,067 3,835 3,358 1,934
Public service 5,220 5,723 5,961 6,805 6,814 7,1 38 6,974 4,823 3,580 4,038
Other 13,869 10,435 8,115 7,818 6,488 5,603 4,917 4,563 3,641 3,652
159,511 140,167 117,950 108,352 84,609 69,632 61 ,260 50,408 38,629 30,127
Operating expenses
Depreciation and amortization 7,272 5,381 4,634 4,397 3,673 2,559 2,637 2,632 2,396 1,770
Other 144,715 132,294 107,240 97,072 79,447 64,180 58,216 49,556 35,807 27,764
151 ,987 137,675 111,874 101,469 83,120 66,739 60,853 52,188 38,203 29,534
Operating income (loss) 7,524 2,492 6,076 6,883 1,489 2,893 407 (1,780) 426 593
Interest on long-term debt 2,943 2,468 2,918 3,929 3,083 1,362 1,678 1,789 1,720 1,136
Miscellaneous deductions (income)- net (6,012) (514) (612) (623) (2,023) ( 110) 23 (236) 15 (120)
Income (loss) before income taxes, extraordinary
tax credit and accounting change 10,593 538 3,770 3,577 429 1,641 (1,294) (3,333) (1,309) (423)
Income taxes (credit) 2,340 133 1,028 985 109 450 (235) (487) (212)
Income (loss) before extraordinary tax credit
and accounting change 8,253 405 2,742 2,592 320 1,191 (1,059) (3,333) (822) (211)
Tax benefits of net operating loss carryforward 325 97 409
Cumulative effect of accounting change 565
Net income (loss) (1) $ 8,253 $ 405 $ 2,742 $ 3,482 $ 417 $ 1,600 $ (1,059) $ (3,333) $ (822) $ (211)
Earnings (loss) per common and common equivalent share ( 1)
Primary $ 4.76 $ .22 $ 1.58 $ 2.19 $ .23 $ 1.06 $ (1.02) $ (3.25) $ (.80) $ (.21)
Fully diluted $ 3.07 $ .22 $ 1.14 $ 1.40 $ .23 $ .80 $ (1.02) $ (3.25) $ (.80) $ (.21)
Average number of common and common equivalent shares
Primary 1,733 1,581 1,765 1,599 1,314 1,440 1,035 1,025 1,025 1,025
Fully diluted 2,800 1,581 2,912 2,913 1,314 3,099 1,035 1,025 1,025 1,025
Financial Position- at year end
(In thousands, except per share amounts)
Current assets $ 34,932 $ 28,306 $ 30,324 $ 27,214 $ 25,793 $ 15,923 $ 14,336 $ 12,380 $ 12,308 $ 15,754
Current liabilities ( 1) 34,919 25,447 24,366 23,620 21,629 10,399 10,944 12,012 8,707 7,696
Property and equipment-net (1) 69,162 40,651 34,818 36,414 36,467 16,987 18,739 20,336 21,086 20,333
Long-term debt (excluding current maturities)(1)
Notes payable and other 40,289 21,545 19,006 22,687 27,523 9,238 8,535 9,408 9,903 12,228
Convertible subordinated debentures 8,289 9,307 9,743 10,178 10,178 11 ,345 12,682 12,682 12,682 12,682
Total stockholders' equity 21 ,381 13,246 12,900 10,277 7,043 5,514 2,493 915 4,248 5,070
Common stockholders' equity (deficiency) (2) 20,400 12,204 11 ,858 9,171 4,803 3,245 (30) 915 4,248 5,070
Common stockholders' equity (deficiency) per common share (1) 12.90 7.72 7.50 5.80 3.40 2.55 (.03) .89 4.14 4.95
Common shares outstanding 1,581 1,581 1,581 1,580 1,413 1,271 1,062 1,025 1,025 1,025
Operating Statistics
Scheduled service
Passengers carried (thousands) 3,457 3,245 2,935 2,940 2,494 2,101 1,875 1,589 1,377 1,271
Available seat miles (thousands) 2,043,061 1,926,166 1,688,633 1,618,776 1,643,569 1,279,175 1,222,289 1,111,287 763,748 554,516
Revenue passenger miles (thousands) 1,044,818 978,991 852,547 832,372 721,135 596,197 527,552 430,736 323,472 254,028
Passenger load factor 51 .1% 50.8% 50.5% 51.4% 43.9% 46.6% 43.2% 38.8% 42.4% 45.8%
Breakeven passenger load factor 48.5% 50.6% 48.2% 49.0% 45.1% 44.9% 44.6% 42.9% 44.8% 47.1%
Revenue per passenger $ 37.80 $ 35.46 $ 32.55 $ 29.49 $ 26.41 $ 24.73 $ 24.11 $ 23.36 $ 20.33 $ 16.08
Revenue per passenger mile 12.5~ 11 .n 11 .2 10.4 9.1 8.7 8.6 8.6 8.7 8.1 q:
Al I services
Available seat miles (thousands) 2,290,839 2,167,198 1,906,443 1,803,177 1,798,409 1,418,799 1,336,982 1,228,373 862,388 611,795
Cost per seat mile 6.6~ 6.4 6.0<!: 5.8<C 4.6<C 4.7<C 4.6 4.3 4_
5q; 4.9
Number of employees at year end 2,922 2,766 2,519 2,639 2,478 2,084 1,994 1,757 1,747 1,538
( 1) See Note G for effect of compliance with Finan- (2) After deducting equity of preferred sharehold- Annual dividends of $.36 per share have been
cial Accounting Statement No. 13 in 1978 and ers at $6 per outstanding preferred share plus paid on preferred shares for 1972 through
future years. cumulative dividends at the end of each of the 1977. No cash dividends on common stock
years 1971 (year preferred shares were first have been paid since 1967.
issued) through 1977.
4 5
Management's Discussion of 1977 and 1976
Summary of Operations
Common Stockholders' Equity
DOLLARS PER COMMON SHARE
14.0 0 - - - - - - - - - - - - - - - - - - -
3.50
6
0
1973 1974 1975 1976 1977
Overview
Net income in 1977 of $8,253,000 ($4. 76 per share)
was the product of sustained traffic growth, regulatory
fare increases and several items of a nonrecurring
nature. These positive influences were sufficient to
offset the substantial cost increases incurred during
the year, particularly the ever-increasing cost of fuel
and other goods and services used by the Company.
This compared to net income of $405,000 (22 cents
per share) in 1976 and $2,742,000 ($1 .58 per share)
in 1975.
Items of a nonrecurring nature added approximately
$4,106,000 ($2 .38 per share) to net income in 1977,
$145,000 (9 cents per share) in 1976, and $2,079,000
($1 .18 per share) in 1975. Exclusive of the effect of
these items, net income would have been
approximately $4,147,000 ($2.38 per share) in 1977,
compared with $260,000 (13 cents per share) in 1976
and $663,000 ( 40 cents per share) in 1975.
The pretax effect of one of these items in 1977, the
excess of insurance proceeds over the purchase price
on the loss of an aircraft, amounting to $5,350,000, is
included in Miscellaneous Deductions (Income) in the
accompanying Summary of Operations. It accounts for
substantially all of the net change in that category
between 1977 and 1976. The pretax effect of other
such events, a retroactive mail rate adjustment of
$1 ,012,000 in 1977; a $2,074,000 settlement of a fuel
price dispute and a $595,000 reimbursement of
certain landing fees in 1975, were included in the
determination of income from operations.
As a result of increased debt to finance various
capital additions, along with an increase in the prime
interest rate during the second half of 1977, interest
expense increased by $475,000 over 1976. The
increase followed a decline of $450,000 in interest
expense in 1976 when debt was reduced and the
prime interest rate was lower.
Operating Revenues
Total operating revenues reached record levels of
$159,511 ,000 in 1977 and $140,167,000 in 1976, up
13.8 per cent and 18.8 per cent, respectively,
compared with prior years.
Passenger revenues of $130,828,000 in 1977
represented a 13.6 per cent gain over the prior year,
while the $115,206,000 in passenger revenues in 1976
reflected a 20.4 per cent gain over 1975.
Capacity, as measured by available seat miles
(AS Ms), was increased by 5. 7 per cent in 1977
following a 13.7 per cent increase in 1976. This added
capacity was brought about by increases in the number
of DC9 aircraft in late 1975 and in 1976; and alterations
to increase the capacity of existing DC9 aircraft in
1977. Additionally, the Company purchased seven new
Metro 11 aircraft in 1977. These 18-passenger, jet-
powered aircraft are intended primarily to replace the
Company's Martin 404 aircraft. The complete phase-out
of the Martin 404 equipment is expected to be
completed by mid-1978.
Improved yields (revenue per passenger mile) also
contributed to improvements in passenger revenues.
Yields increased from 11.2 cents in 1975 to 11 . 7 cents
in 1976 and to 12.5 cents in 1977, increases of 4.5 per
cent and 6.8 per cent, respectively. These
improvements reflected certain fare increases
throughout the period and the elimination of certain
discount fares in 1976.
Charter revenues, which increased by$ 791,000 in
1977 following a $595,000 increase in 1976, have
benefited both from the aforementioned increases in
capacity and from the Civil Aeronautics Board 's
relaxation of its limitations on the number of off-
system charters scheduled air carriers are permitted
to fly. Additionally, charter rates have been adjusted,
as required, in line with increasing operating costs.
Public service revenues, or government payments
to the Company to provide service to certain small
communities, were reduced by $503,000 in 1977,
following a $238,000 reduction in 1976. In both years,
CAB Rate of Return on Corporate Investment
YEARS ENDED JUNE 30
20 - - - - - - - - - - - - - - - - - - -
Southern
Local Service Industry
10
5
0
1973 1974 1975 1976 1977
7
Management's Discussion of 1977 and 1976
Summary of Operations (continued)
Source of Revenue Dollar
FOR THE YEAR 1977
82.0% Passenger- - - -~
6.0% Charter- - - - -- - -- - -- - ~
5.8% Cargo - - - - - - - - - - -- - - - - - - '
3.3% Public Service - - -- - -- -- - - -- ----'
2.9% Other- - - - - - - - - - - - - - -- - - - '
8
the decline resulted from reduced losses in subsidized
service and the removal of certain larger cities
from subsidy eligibility.
Other revenues increased by $3,434,000 in 1977
and by $2,3.20,000 in 1976. Included in the 1977
increase was $1 ,517,000 in additional mail revenue
received by the Company under the Civil Aeronautics
Board's order establishing temporary rates for the
carriage of mail for the period 1973 through 1977 (See
Note B of Notes to Financial Statements). This
revenue includes $505,000 applicable to the year
1977 and $1 ,012,000 applicable to the years 1973
through 1976. The remaining increases in Other
Revenue result primarily from increases in freight
services, contract main.tenance activities, sales of
training simulator time, sales of inflight beverages
and food , and other miscellaneous sales and services.
Operating Expenses
Operating expenses increased by $14,312,000 in
1977, following a $23,132,000 increase in 1976
exclusive of a fuel price settlement and landing fee
rebates totaling $2,669,000. Of these amounts,
increases of $3,980,000 and $3,117,000 in 1977 and
1976, respectively, are attributable to increases in the
unit price of fuel. Increased fuel consumption , as a
result of increases in the number of aircraft flown on
the system, resulted in further cost increases of
$938,000 in 1977 and $1 ,777,000 in 1976.
On a unit cost basis, operating expenses per
available seat mile increased to 6.63 cents in 1977, up
from 6.35 cents in 1976 and 6.01 cents in 1975
(before reduction of the fuel price settlement and
landing fee rebate totaling $2,669,000).
Labor costs increased by $6,847,000 in 1977 and by
$9,450,000 in 1976, primarily as a result of increased
salaries and benefits. A nine per cent increase in the
average number of employees in 1976 also contributed
to the labor cost increase in that year. The total number
of employees at the end of 1977 was up considerably
over prior year-end levels because of the expansion
of in-house aircraft engine overhauls, contract
maintenance for other carriers, and a greater volume
of flying operations. Nevertheless, the average
number of employees throughout the year 1977
increased by less than one-half of one per cent over
the 1976 level. There were 2,922 employees at
December 31, 1977, compared with 2,766 at
December 31 , 1976, and 2,519 at December 31 , 1975.
Rental expense decreased to $10,734,000 in 1977,
$495,000 less than 1976. Rental expense in 1976
increased $1,628,000 above the 1975 level. Of these
amounts, aircraft rentals decreased $1 ,656,000 in
1977 due primarily to the purchase in July of six
previously-leased DC9 (1 O series) aircraft, and the loss
of a leased DC9 (30 series) aircraft in April. In 1976,
aircraft rental cost increased by $570,000, brought
about mainly by two aircraft being acquired in 1975
under long-term lease arrangements. Occupancy of
the new Atlanta Training Center and Engine Test Cell,
effective October 1, 1975, and the new Maintenance
Base, effective October 1, 1976, increased rentals
by $1,314,000 in 1977 and by $924,000 in 1976.
Depreciation and amortization expense was
$7,272,000 in 1977 and $5,381 ,000 in 1976. The
$1 ,891 ,000 increase in 1977 was due primarily to
depreciation on the newly-purchased Metro 11 aircraft,
depreciation for a full year on two DC9 (30 Series)
aircraft added in June and August 1976, and additional
depreciation applicable to the July 1977 purchase of
six previously-leased DC9 ( 10 Series) aircraft. This
followed an increase in 1976 of $747,000 due
primarily to the depreciation on the two above-
mentioned DC9 (30 Series) aircraft that were acquired
in 1976.
Advertising costs leveled off in 1977 after a
$794,000 increase in 1976. The 1976 increase was the
result of the need to promote new services and to
initiate several new sales programs.
Increases in other operating costs, such as outside
goods and services and commissions, generally are
reflective of the expanded operating levels and
inflationary pressures.
Distribution of Total Expense Dollar
FOR THE YEAR 1977
I .
42.1 % Wages, Salaries. Employee Benefits
20.1 o/o Fuel, Oil - - - - - - - - - '
7.9% Deprec1
at1
on. Amortization, Aircraft Leases _ _ _ _,
6.3% Aircraft Maintenance, Material. Supplies, Services - - - ~
6.2% Landing Fees. Rentals - - - - - - - - - - - - '
2.7% Passenger Service - - - - - - - - - - - ~
14.7% All Other - - - - - - -- - - - - - - - - - '
9
Review of Operations
The highlight of 1977 was significantly improved
financial results. This was accomplished as more
passengers flew more revenue passenger miles than
in any of Southern's 28 previous years. For the first
time, revenue passenger miles generated exceeded
one billion.
These favorable results tended to overshadow some
of the Company's other accomplishments, many of
which are expected to have a highly favorable impact
on the future.
Among these are:
Completion of a three-year building program at
Hartsfield Atlanta International Airport;
Introduction of a new jet-powered aircraft fleet to
serve existing cities and routes that cannot
accommodate Southern's DC9 jetliners;
Implementation of sophisticated reservations
communications equipment that improves service to
customers;
Increased development of human resources, both
among existing employees and in filling staffing
requirements with new personnel;
Orlando's Walt Disney World; the French Quarter in New Orleans; the
excitement of New York; St. Louis, its arch and its river; and streetcars
that still run in Detroit: all on Southern's routes.
Creating a program, to be carried out in 1978-1979,
to modernize further Southern's DC9 fleet with wide-
bodied interiors, more comfortable seats, new galleys,
and a new interior decor;
Development of a program to provide major
maintenance support and services to other airlines
and aircraft owners or operators;
Continued aggressive efforts to acquire new routes
and to expand operating authority among existing
system points;
Establishment of procedures supported by training
programs to improve the quality of Southern's service
to its passengers and shippers;
Generation of new revenue sources through
innovative business development programs, including
discount fares designed to attract new customers to
flights with unused capacity.
Many of these accomplishments in turn resulted in
satellite programs that are expected to make both
immediate and long-range contributions. The
completion of Southern's three-year building effort is
expected to have many favorable influences on
11
Review of Operations (continued)
efficiency and cost reduction.
Southern long ago outgrew its maintenance and
support facilities in Atlanta. Available hangar and shop
space was insufficient to support the requirements of
a growing DC9 fleet. Compounding this problem was
the impending loss of two hangar buildings, both
scheduled to be demolished by the City of Atlanta to
create additional parking areas and access roads for
the Atlanta Airport. Also, imminent were rental rate
increases on the five buildings housing the General
Office and reservations personnel. Thus, the
development of new facilities was not only
economically feasible, but also mandatory.
Accordingly, in August 197 4, Southern entered into a
building program that has produced one of the most
efficient airline maintenance and operations centers
in the industry.
The last phase of Southern's building program was
completed in October 1977, climaxed by occupancy of
the General Office and Reservations building.
Southern's Consolidated Reservations Center now
answers all passenger inquiries generated throughout
a 64-city, 14-state domestic route network. (Southern 's
customers in the Cayman Islands, B.W.I., are answered
locally and reservations are confirmed to Atlanta by
high speed teletype equipment.) Each Southern
reservations agent is supported by a computer system
that provides schedules and seat availability to more
than 200 daily Southern flights, as well as to the
connecting schedules of every domestic carrier in the
United States, and many foreign carriers.
Southern's rapid rate of growth frequently has
created problems in reservations handling, primarily
because of inadequate capacity to handle the large
increases in call volume. The new Consolidated
Reservations Center incorporates improvements
expected to resolve these problems.
Among the improvements in this new facility is a call
distributing system that not only directs calls to agent
groups where a designated function is provided, but
also it generates information as to the number of calls
from each city, the level of service offered the caller,
the average time each caller waits before being
accommodated, and the determination of incoming
lines needed at a given time to serve each city. Among
other management information provided is the number
of reservations agents required for proper staffing at a
given time of day. The result of this equipment has
been improved efficiency in an already efficient
environment.
During January 1978, Southern reservations agents
answered 390,684 calls compared with 311,211 in the
Southern's fun: there is golf for duffers, and for champions; remote
lakes; and tennis, everyone.
13
Review of Operations (cont,nued)
corresponding period a year ago, an increase of 25.5
per cent.
Among the other accomplishments made possible
by Southern's modern physical plant are those taking
place in the Maintenance Base. This structure was
completed and occupied late in 1976; it became fully
operational early in 1977. Southern always has
provided its own airframe maintenance; however,
some major components such as jet engines and
auxiliary power units were sent to outside contractors.
Jet engine work is one of the most expensive elements
in maintaining an airline fleet, and an area that offers
one of the largest cost-saving possibilities.
Accordingly, Southern has developed complete in-
house capability for jet engine overhaul and related
testing . A collateral benefit of this program is the
reduced requirement for spare engines required to
compensate for transport and production time
required by an external repair center.
Southern's experience in overhauling and
refurbishing DC9 aircraft will make an additional profit
contribution as a result of an active maintenance
program being made available to other airlines and
aircraft owners. Southern has selected the name
Advanced Performance to define the services it is
offering for sale. To date, Southern is providing both
airframe and engine overhaul support to other airlines,
aircraft manufacturers, government agencies, and
private aircraft owners and operators.
Advanced Performance is being offered actively to
airlines and other aircraft operators throughout the
world, supported by advertising and sales efforts.
Other contract services already under way at
Southern include time leased for use of the Company's
DC9 flight simulator. This is the most modern DC9
simulator in the world, and availability excess to the
needs of Southern's own pilots is contracted fully by
other airlines or aircraft owners.
Completed in the first phase of Southern 's building
program was a Training Center, now the focal point
for improving technical and passenger-handling skills.
In addition to containing Southern 's DC9 flight
simulator, a DC9 cabin mock-up is available for flight
attendant training , while comfortable classrooms
house audio-visual training aids to support modern
teaching techniques for all personnel.
New employees receive both indoctrination and
qualification training in this center. Flight personnel
return for recurrent training, and station personnel
now are brought to the Atlanta center for instruction
in new methods and programs.
Large employee groups are accommodated in a
Relaxation, tranquility, history, and a salute to American music abide
along Southern routes.
15
Review of Operations (continued)
Diving in the Caribbean Sea off Grand Cayman Island, walking on a
secluded beach, or along the Atlantic Coast or the white sands of the
Gulf of Mexico, Southern routes beckon water lovers.
250-seat auditorium, also housed in the Training
Center. This is the site of the Company's annual
stockholders meeting.
More than 45,000 student hours of training were
provided in 1977, averaging 23 employees in training
every work day of the year. Th is is expected to increase
substantially as Southern is putting increasing
emphasis upon training activities to improve the
overall quality and consistency of the Company's
service. (Southern's simulato(and other training
facilities leased by other airlines and aircraft owners
produced $525,000 in revenues during 1977.)
Although most training facilities are in use through-
out the day, the classrooms and auditorium , when not
committed , are available to selected civic and business
entities, in turn creating good community relations
and sometimes additional revenues.
The most significant passenger facility undertaken
by the Company is at Hartsfield Atlanta International
Airport, where a new terminal is scheduled for
completion in January 1981 . Within this, Southern will
occupy 13 passenger boarding gates, providing more
than four times the space now available to the
Company within the present terminal. Although located
on a concourse more than 4,000 feet from the primary
building, people movers will whisk passengers to their
flights in less than five minutes. Meanwhile, under way
is expansion of present terminal facilities to meet an
immediate need. Southern's administrative space at
the Atlanta terminal is being relocated to satisfy
increased passenger requirements. Currently,
Southern enplanes some 600,000 passengers annually
in Atlanta, compared with 125,000 served annually
16 years ago when this space was first acquired.
Another facility contributing to an improved level
of service for Southern 's customers is a recently
completed passenger terminal area in St. Louis. This
evidences the growth experienced to and from cities
outside Southern 's original passenger base in the
Southeast. St. Louis has become a key destination and
origination point, currently ranking among the top ten
busiest Southern stations. The improvements there
portray this progress.
In addition to ground improvements, two major
efforts have taken place related to aircraft. On
August 8, 1977, the first Metro 11 service was
inaugurated as part of the planned replacement for
the Martin 404 fleet. The selection of the Metro 11
resulted in the purchase of eight of the aircraft. Initially,
four cities, Athens and Moultrie-Thomasville, Ga., and
17
Review of Operations (continued)
Anniston and Gadsden, Ala., were introduced to the
improved level of service offered by the faster, more
fuel-efficient aircraft. Although offering fewer seats
compared with the Martin 404s, the increased speed
of the Metro 11 has permitted increased schedule
frequency in each of the four markets, offering
travelers a greater choice of flight times. In turn, total
passengers in these markets doubled during the first
quarter of Metro 11 operation. Subsequently, Metro 11
schedules have been expanded, with eight cities
being served exclusively by the new aircraft. In
addition to the initial four points, Greenwood, Tupelo,
and University-Oxford, Miss., and Jackson, Tenn., now
are served by Metro I ls.
Initial introduction of Metro lls was accompanied by
operational problems commonly associated with the
addition of a new aircraft into a fleet. Southern is
working to resolve these temporary problems, and
reaffirms the Company's commitment to continue to
provide reliable service to areas not requiring or not
capable of supporting 80- or 100-passenger jetliners.
Substantiating Southern 's reliance on DC9s as its
primary aircraft, has been the decision to acquire the
newest version of this aircraft, the DC9-Super 80,
scheduled for delivery in the 1980s. Southern expects
to purchase four aircraft at a total purchase price
exceeding $60 million to replace aircraft currently
operated on its more heavily traveled routes. Further,
the Company has committed to purchase the two
aircraft currently operated under a lease expiring in
1979, and has purchased an option to acquire eight
additional used DC9s for delivery in the fourth quarter
of 1979.
With the passenger growth, expanded facilities, and
an increased fleet of aircraft have come new staffing
demands. Southern long has prided itself on being
one of the most human resource-efficient airlines in
the industry. This is attributed to high employee
morale, and has been furthered by the opportunities
for advancement created by expansion and
profitability.
Parallel to Southern 's emphasis on training, is
development of procedures to ensure the highest
possible level of passenger-related proficiency.
Southern's facilities in Memphis, Tenn., have been
selected for development of programs to be introduced
system-wide. Memphis is Southern's second busiest
originating point. In 1977, 430,369 passengers boarded
here. In January 1978, Southern operated 55 flights
daily from Memphis. Passenger and service areas
were expanded two years ago and are among the most
attractive and efficient on Southern's system. Ideas
Southern sports: racing in all its forms, and professional sports in all
its leagues.
19
Review of Operations (continued)
for better passenger handling are put into practice
here: those that are proved beneficial become
standards for all Southern personnel.
The airline industry is labor intensive, both cost-
wise and service-wise and Southern long has
recognized that product quality is directly related to
people quality. Continuing efforts select the best
qualified people for entry positions, providing a base
for advancing careers as well as accommodating
needs of the Company. Supporting this direction will
be a computerized Personnel Management Reporting
System now being implemented. Not only will this
permit instant display of employee records, but also
will assemble data for personnel-related reports that
presently require manual compilation . This system
includes an employee skills bank that can be searched
quickly when position openings occur. In addition to
providing the Company with a ready source of
advancement-eligible personnel , it will offer
Southern 's employees the assurance of consideration
for each promotion opportunity for which they are
qualified.
While tangible improvements are evident, the
successful growth of an airline also is dependent
upon route improvements and additions. At the
beginning of the year, Southern was a participant in
six route proceedings; during the year this number
increased to 17.
Southern long has sought operating authority
for service between Greenville-Spartanburg, S.C.,
and both Washington , D.C., and New York City. This
was authorized in December 1977, enabling the
Company to combine existing authority with the new
authority resulting in service between Birmingham,
Ala., Greenville-Spartanburg, and New York, and along
a route from Memphis to Huntsville-Decatur, Ala. , to
Greenville-Spartanburg, then to Washington and New
York, and return .
Permanent operating authority to continue flights to
the Cayman Islands, B.W.I., was approved by the
British Government late in 1977. Operating authority
of unlimited duration already was granted by the U.S.
Civil Aeronautics Board.
All other route cases are in procedural stages. These
pending routes are outlined on the route map in
th is Report.
The continuing improvement in Southern's quality
of service and expanding routes has opened new areas
for sales and marketing efforts. Increased emphasis
has been and continues to be placed upon new
revenue sources, a major one being the discretionary
traveler who can be motivated by an appealing fare.
Historically for Southern, Saturday has been a low
passenger traffic day. Previously, many flights were
not operated on Saturdays, and many operating did so
with relatively low load factors. Passengers for these
flights have been attracted with special excursion
20
rates requiring part of the travel on a Saturday.
During the last four months of 1977, Southern
offered a "Saturday Special " fare at 40 per cent below
normal rates. The fare applied to all flights on the
domestic system , requiring only that travel begin on a
Saturday, end on the following Monday or Tuesday, or
on any other Saturday within a 30-day period, with
the entire itinerary being planned and paid for before
departure. A three-month trial period ended
December 10 indicated wide acceptance by the public,
with the collateral benefit of improved identity for
the Company.
The success of this promotional fare resulted in
offering it again between mid-January and mid-March
1978.
Meanwhile, Southern has introduced even more
dramatic fare selections, also aimed at attracting
new customers.
"Fabulous 50" has been selected as the name for
Southern 's new 50 per cent discount fare, usable on
all flights system-wide, with advance reservations
required. Capacity restrictions are imposed to limit the
number of seats available at this discount, but the
attractiveness of the fare is expected to fill the allotted
seats with passengers who otherwise would select
surface travel , or not travel at all.
Also receiving increased sales focus are Southern's
charter and cargo services.
Southern has become a dominant force in charter
sales among scheduled airlines. The nonstop range,
up to 1,200 miles, and seating capacity, 80- or 100-
passengers, of Southern 's DC9 aircraft are particularly
appealing to tour operators, and business, military,
and athletic team customers. Charter flights are
operated throughout the United States, into Canada,
Mexico, the Bahamas, to the Cayman Islands, and to
other points in the Caribbean. As many charters
operate during other than normal scheduled flying
times, profitable aircraft utilization can be
accomplished by charter usage.
Cargo, long an incremental revenue source for the
Company, is gaining in importance and attention .
Southern now transports individual items weighing
as much as 500 pounds, although many low-weight
items such as fruits, flowers and seafood are high-
income producers. Growing as a revenue source is
Swift, the Company's small package shipping service
where expedited treatment is available for items
requiring next-flight attention. To make this even
more attractive, interline agreements with other
airlines offer additional destinations for these
priority items.
Whether the customer is a passenger or a shipper,
Southern offers a high level of reliable service,
competitive rates, and personnel who recognize their
obligation to these customers.
Statements of Income
SOUTHERN AIRWAYS, INC.
Year ended December 31,
Operating Revenues
Passenger
Mail, express and freight-Note B
Public service revenue
Charter
Other
Operating Expenses
Flying operations
Maintenance
Aircraft and traffic servicing
Passenger service
Promotion and sales
General and administrative
Depreciation and amortization
Other
Operating Income
Other Deductions (Income)
Interest on long-term debt
Gain on involuntary conversion and disposal of property- Note B
Miscellaneous deductions (income)-net-Note B
Income Before Income Taxes
Income taxes-Note D
Net Income
Net Income per Common and Common Equivalent Share- Note I
Primary
Fully diluted
See Notes to Financial Statements.
1977 1976
$130,828,000 $115,206,000
9,325,000 6,848,000
5,220,000 5,723,000
9,594,000 8,803,000
4,544,000 3,587,000
159,511,000 140,167,000
55,106,000 49,802,000
20,962,000 19,337,000
36,120,000 32,804,000
8,566,000 8,598,000
13,047,000 12,246,000
8,555,000 7,633,000
7,272,000 5,381,000
2,359,000 1,874,000
151,987,000 137,675,000
7,524,000 2,492,000
2,943,000 2,468,000
(5,722,000) (91,000)
(290,000) (423,000)
(3,069,000) 1,954,000
10,593,000 538,000
2,340,000 133,000
$ 8,253,000 $ 405,000
$ 4.76 $ .22
$ 3.07 $ .22
21
Balance Sheets
SOUTHERN AIRWAYS, INC.
Assets
Current Assets
Cash, including short-term investments of $10,312,000
in 1977 and $3,200,000 in 1976- Note C
Accounts receivable
U.S. Government-transportation and public service revenue
Trade receivables, less allowance for doubtful
accounts (1977-$179,000, 1976-$162,000)
Maintenance and operating supplies, at average cost less allowance
for obsolescence (1977 - $1,063,000; 1976- $1,717,000)- Note A
Prepaid expenses
Total Current Assets
Property and Equipment- on the basis of cost-
Notes A, C, G and H
Flight equipment, including purchase deposits
of $3,390,000 in 1977
Other property and equipment
Less allowances for depreciation and maintenance
Deferred Charges and Other Assets
Deferred charges- Note A
Other assets
See Notes to Financial Statements.
22
December 31,
1977 1976
$ 11,005,000 $ 8,131,000
2,984,000 1,703,000
13,677,000 11,492,000
16,661,000 13,195,000
6,759,000 6,006,000
507,000 974,000
34,932,000 28,306,000
84,807,000 58,812,000
14,325,000 7,865,000
99,132,000 66,677,000
29,970,000 26,026,000
69,162,000 40,651,000
1,154,000 949,000
565,000 252,000
1,719,000 1,201,000
$105,813,000 $70,158,000
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable
Salaries, wages and vacations
Accrued interest payable
Accrued income taxes
Accrued taxes and other expenses
Air traffic liability
Current maturities of long-term debt- Note C
Total Current Liabilities
Long-Term Debt, less current maturities- Note C
Notes payable and other
Convertible subordinated debentures
Deferred Credits and Other Liabilities
Deferred income taxes
Other
Stockholders' Equity- Notes C, E and G
Preferred Stock, authorized 2,000,000 shares,
issuable in series:
Series A, $.36 Convertible, $1 par value, voting
(liquidation value $6 per share plus cumulative
dividends-aggregate of $981,000 in 1977 and
$1,042,000 in 1976); issued and outstanding-
163,581 shares (1977) and 163,781 shares (1976)
Common Stock, $2 par value, authorized 7,500,000
shares, issued and outstanding 1,581,080 shares (1977)
and 1,580,880 (1976)
Other paid-in capital
Retained earnings
Leases, Commitments and Contingencies- Notes G and H
December 31,
1977 1976
$ 7,390,000 $ 6,263,000
4,346,000 3,914,000
782,000 567,000
2,014,000 109,000
3,662,000 3,726,000
9,471,000 7,916,000
7,254,000 2,952,000
34,919,000 25,447,000
40,289,000 21 ,545,000
8,289,000 9,307,000
48,578,000 30,852,000
620,000 391 ,000
315,000 222,000
935,000 613,000
164,000 164,000
3,162,000 3,162,000
5,124,000 5,124,000
12,931,000 4,796,000
21,381,000 13,246,000
$105,813,000 $70,158,000
23
Statements of Changes in Financial Position
SOUTHERN AIRWAYS, INC.
Year ended December 31,
Funds Provided
From operations
Net income
Items not requiring outlay of working capital in current period:
Depreciation
Allowance for maintenance (deduction)
Amortization of deferred charges
Deferred credits and other liabilities
Total from operations
Issuance of long-term debt
Property and equipment dispositions, less gain included in operations
Funds Used
Additions to property and equipment
Utilization of DC9 engine maintenance reserve
Reduction of long-term debt
Dividends on preferred stock
Increase in deferred charges and other assets
Decrease in Working Capital
Working capital at beginning of year
Working Capital at End of Year
Increase (Decrease) in Working Capital by Component
Cash and short-term investments
Accounts receivable
Maintenance and operating supplies
Prepaid expenses
Trade accounts payable
Salaries, wages and vacations
Accrued interest, taxes and other expenses
Atr traffic liability
Current maturities of long-term debt
Decrease in Working Capital
See Notes to Financial Statements.
24
1977
$ 8,253,000
6,773,000
157,000
370,000
322,000
15,875,000
29,880,000
3,717,000
49,472,000
38,866,000
292,000
12,154,000
118,000
888,000
52,318,000
(2,846,000)
2,859,000
$ 13,000
$ 2,874,000
3,466,000
753,000
(467,000)
(1 , 127,000)
(432,000)
(2,056,000)
(1,555,000)
(4,302,000)
$ (2,846,000)
1976
$ 405,000
4,878,000
(82,000)
396,000
15,000
5,612,000
8,918,000
88,000
14,618,000
10,517,000
200,000
6,815,000
59,000
126,000
17,717,000
(3,099,000)
5,958,000
$ 2,859,000
$ (3,787,000)
1,351,000
361,000
57,000
(638,000)
(692,000)
(459,000)
(456,000)
1,164,000
$ (3,099,000)
Statements of Retained Earnings
SOUTHERN AIRWAYS, INC.
Years Ended December 31, 1977 and 1976
Balance January 1, 1976
Net income
Dividends on preferred stock for 1975 ($.36 per share)
Balance January 1, 1977
Net income
$ 4,450,000
405,000
(59,000)
Dividends on preferred stock for 1977 and 1976 ($.36 per share each year)
4,796,000
8,253,000
(118,000)
Balance December 31, 1977
See Notes to Financial Statements.
Notes to Financial Statements
SOUTHERN AIRWAYS, INC.
December 31, 1977
Note A - Summary of Significant Accounting Policies
Property, Equipment, Depreciation and Obsolescence
Provisions for depreciation of property and
equipment are computed on the straight-line method
calculated to amortize the cost of the properties over
their estimated useful lives. For DC9 flight equipment
the I ife is 15 years (new equipment) and six to 10 years
(used equipment) and 10 years for ratable parts, with
a 10 per cent salvage value; for Metro II flight
equipment, the life is seven years with a 10 per cent
salvage value; for ground equipment, the life ranges
from three to 10 years.
At the time properties are retired, the amounts
of costs and allowances for depreciation and
maintenance are eliminated from the accounts. Gains
and losses on disposals of flight equipment (exclusive
of ratable parts) are included in operations. Proceeds
from the disposal of ratable parts are credited to the
allowance for depreciation.
Expenditures for ordinary maintenance and repairs
are charged to expense. Expenditures for major spare
parts are capitalized and minor parts are included in
maintenance and operating supplies and charged to
expense as used.
A provision for obsolescence is made at an annual
rate of four per cent and six per cent for DC9 and
Metro 11 spare parts, respectively.
Deferred Charges
Expenditures for preoperating and route extension
and development costs are deferred and are amortized
over a five-year period. Costs associated with
obtaining leased DC9 aircraft are amortized over the
term of the leases. Deferred charges associated with
long-term debt are amortized over the period of the
financing arrangements.
$12,931,000
Income Taxes
Income taxes are provided at current tax rates for
all items included in the statement of operations
regardless of the years when such items are reported
for tax purposes.
The Company uses the flow-through method of
accounting for investment tax credit, and available
investment tax credit is recognized to the extent it
can be realized or offset against income taxes
currently payable or deferred.
Pension Plans
The Company has several pension plans covering
substantially all of its employees. There are no
unfunded past service costs. The Company's policy
is to fund pension costs accrued. At December 31,
1977, the assets of the pension fund exceeded the
actuarially computed value of vested benefits.
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership
Plan (ESOP) and a Tax Reduction Act Stock Ownership
Plan (TRASOP) for certain of its employees. The
TRASOP was established effective November 16,
1977. The Company's contribution to the ESOP is
determined annually at rates related to the base
compensation of active participants. The TRASOP is
funded by the additional one per cent investment tax
credit allowed for such plans.
Public Service Revenue
The Company receives public service revenue from
the Civil Aeronautics Board for providing service to
small and intermediate-size cities on its routes.
Amounts received and recognized as revenues are
those paid for the period based on the formula then
in effect.
25
Note B- Certain Significant Transactions and
Credits Affecting Operating Results
On April 4, 1977, a DC9 aircraft was destroyed
during severe weather conditions near Atlanta,
Georgia. A number of claims have been made and are
expected to be made against the Company for loss of
life, injury, and damage to property as a result of this
accident. In the opinion of management, the claims
are adequately covered by insurance. Insurance
proceeds in excess of the purchase price of the leased
aircraft and other related costs were $5,350,000
($3,606,000 or $2.09 per share primary after income
tax effect). In October, the Company used a portion
of the excess proceeds to acquire aircraft of sufficient
capacity to replace the aircraft destroyed.
On December 29, 1977, the Civil Aeronautics Board
issued an order establishing temporary rates for the
carriage of mail during the period 1973 through 1977
as a continuing part of the Priority and Nonpriority
Domestic Service Mail Rates Investigation instituted
in December 1970. Under the order, the Company
received $1,012,000 of additional mail revenue
applicable to the years 1973 through 1976, which is
included in mail, express and freight revenue for 1977.
The additional revenue had the effect of increasing
net income for 1977 by approximately $500,000 (29
cents per share primary).
In January 1976, pursuant to an offer tendered in
December 1975, the Company purchased $871,000
principal amount of 5% Convertible Subordinated
Debentures at a price of$ 750 for each $1 ,000
debenture plus certain brokerage and other related
expenses. A gain of $200,000 ($145,000 after income
taxes- 9 cents per share) resulted from the
repurchase. These debentures were used to satisfy
sinking fund requirements.
Note C - Long-Term Debt
At December 31, 1977 1976
Notes payable to banks under
Credit Agreement
"A" Term Loans, payable
quarterly through 1982 $10,962,000 $13,183,000
"B" Revolving Loans,
payable quarterly
through 1980 4,000,000 4,400,000
"C" Term Loans, payable
quarterly through 1984 6,029,000 6,754,000
Other notes payable
Term note payable quarterly
through 1988 7,303,000
Term note payable quarterly
through 1987 10,752,000
Promissory note 2,516,000
Capital lease obligations 4,963,000 160,000
Convertible Subordinated
Debentures
5% due December 1, 1981 3,474,000 3,474,000
6% due November 1, 1983 5,833,000 5,833,000
55,832,000 33,804,000
Less current maturities 7,254,000 2,952,000
$48,578,000 $30,852,000
26
Notes payable to banks under the Credit Agreement
bear interest at the lead bank's prime rate (7 per
cent at December 31, 1977), plus one per cent ("A"
and "C" Term Loans) and two per cent (''B" Revolving
Loan) and are payable in quarterly installments.
Substantially all the Company's assets not pledged as
collateral under the term notes described below are
pledged as collateral under the terms of the Credit
Agreement. Additionally, the "A" and "C" Term Loans
are 90 per cent guaranteed by the Federal Aviation
Administration.
On February 2, 1976, the "B" Loan was converted
from a term loan to a revolving credit loan under which
the Company may borrow, repay and reborrow through
1981, subject to quarterly reductions in the amount
of funds available. The bank has agreed, subject to
certain conditions, to expand the "B" Loan commitment
to permit additional borrowings of $11 ,000,000.
The Term note due in 1988 is payable in 40
quarterly installments beginning May 1, 1978, plus
interest at prime plus 2 per cent. The Metro II flight
equipment purchased with the loan proceeds is
pledged as collateral under the Note.
The Term note due in 1987 is composed of a Class A
Note ($1,077,000) and a Class B Note ($9,675,000),
both payable in 40 quarterly installments with interest
at 10 per cent and 8 per cent respectively. The
proceeds of the loan were used to purchase six
DC9-10 aircraft which previously were leased. These
aircraft are pledged as collateral under the terms of
the Agreement. Additionally, the Class B Note is 90
per cent guaranteed by the Federal Aviation
Administration.
The Promissory note bears interest at prime plus
of one per cent, and is expected to be refinanced
under a commitment for long-term financing related
to the purchase of four new DC9-80 aircraft. These
aircraft are on order and are expected to be delivered
beginning in 1980. See Note H.
The 5% Convertible Subordinated Debentures due
December 1, 1981, are convertible (until maturity or
prior redemption) into common stock at $10.86 per
share; are subordinated, generally, to all existing and
future indebtedness for borrowed money; are callable
at premiums currently ranging from 1.25 per cent
downward; and require annual sinking fund payments
on December 1 of each year in an amount equal to
$435,000.
The 6% Convertible Subordinated Debentures due
November 1, 1983, are convertible (until maturity or
prior redemption) into common stock at $1 0 per share;
are subordinated, generally, to all existing and future
indebtedness for borrowed money, are callable at
premiums ranging from three per cent downward; and
require annual sinking fund payments beginning
November 1, 1978, in an amount equal to $583,000.
The terms of the Credit Agreement, the Term note
due in 1987, and both issues of convertible
subordinated debentures place certain requirements
and restrictions upon, among other things, (a) working
capital, (-b) indebtedness and lease obligations, (c)
capital expenditures, (d) net worth and (e) payments
relating to capital stock, including dividends. Retained
earnings available for the payment of dividends at
December 31, 1977, under the most restrictive
requirement, amounted to approximately $3,831 ,000.
In connection with the Credit Agreement, the
Company maintains average compensating balances,
based on bank ledger balances adjusted for treasury
tax contributions and uncollected funds, equal to the
sum of 15 per cent of the average daily balance of the
"A" and " B" Loans outstanding, 15 per cent of the
Credit Agreement Other Notes
Loans Payable
unused portion of the "B" Loan Commitment, and 20
per cent of the average daily balance of the "C" Loan
outstanding. Based upon outstanding borrowings at
December 31, 1977, the Company should maintain
average compensating balances of approximately
$3,900,000, which stated in terms of the Company's
book cash balances is approximately $2,500,000. The
difference is attributable to average uncollected funds
and float. During 1977, the Company maintained
average compensating balances of approximately
$4,300,000. The excess of actual compensating
balances maintained over the amount required during
1977 may be used to satisfy requirements in
future periods. Compensating balances are not
restricted as to withdrawals, serve in some instances
as compensation to the participating banks for their
account handling function and other services, and
additionally serve as part of the Company's minimum
operating cash balances.
A summary of minimum principal payments under
the Credit Agreement loans, other indebtedness and
both issues of convertible subordinated debentures is
as follows:
Capital Convertible
Lease Subordinated
Obligations Debentures Total
1978 $ 5,023,000 $ 1,114,000 $ 99,000 $1 ,018,000 $ 7,254,000
1979 4,626,000 3,844,000 111 ,000 1,018,000
1980 3,905,000 1,450,000 124,000 1,018,000
1981 3,185,000 1,583,000 139,000 2,754,000
1982 3,046,000 1,729,000 156,000 583,000
Thereafter 1,206,000 10,851 ,000 4,334,000 2,916,000
$20,991 ,000 $20,571 ,000 $4,963,000 $9,307,000
A reduction in the " B" Loan Commitment under the
Credit Agreement is required equal to 25 per cent of
net income in excess of $1 ,500,000 plus 50 per cent
of net income in excess of $3,000,000 earned in any
fiscal year. The above summary of minimum principal
payments includes $1 ,081 ,000 applicable to 1978 for
this commitment.
Note D-lncome Taxes
Income taxes are as follows:
Interest capitalized in 1977 relating primarily to
equipment purchase deposits amounted to $116,000.
If the Company did not have a policy of capitalizing
interest, net income would have been reduced by
$57,000 (3 cents per share primary) for 1977. Interest
capitalized in 1976 was not significant.
Current:
Federal
State
Investment tax credit
Deferred:
Federal
State
Investment tax credit
1977
$ 3,798,000
530,000
(2,217,000)
2,111 ,000
186,000)
2,000)
417,000
229,000
$ 2,340,000
9,599,000
6,497,000
7,661 ,000
5, 514,000
19,307,000
$55,832,000
1976
$ 361,000
42,000
(193,000)
210,000
(122,000)
( 15,000)
60,000
( 77,000)
$ 133,000
27
Deferred income taxes result from timing differences
in the recognition of expense for tax and financial
reporting purposes. The sources of these differences
and the tax effect of each are as follows:
1977 1976
Accelerated depreciation $( 390,000) $ 25,000
Provision for inventory
obsolescence 295,000 51 ,000)
Provision for maintenance 35,000) 39,000)
Deferred compensation 46,000) 61,000)
Other 12,000) 11 ,000)
Investment tax credit 417,000 60,000
$ 229,000 $( 77,000)
Differences between income taxes and amounts
derived by applying the statutory federal income tax
rate of 48 per cent to income before income taxes
are as follows:
1977 1976
Amount % Amount %
Computed at
statutory federal
income tax rate of
48 per cent $5,085,000 48 $ 258,000 48
State income taxes,
net of federal
income tax benefit 275,000 3 16,000 3
Capital gains 963,000) (10)
Investment tax
credit (1,800,000) (17) (133,000) (25)
Other ( 257,000) ( 2) ( 8,000) ( 1 )
$2,340,000 22 $ 133,000 25
Note E - Capital Stock and Options
The Series A Preferred Stock is convertible into
common stock on a share for share basis, can be
redeemed at the Company's option at $6 per share
plus accumulated dividends and is entitled upon
liquidation to receive $6 per share plus accumulated
dividends. The liquidation preference for the 163,581
shares outstanding at December 31, 1977,
aggregated $981 ,000 which is $818,000 more than
the aggregate par value of such shares.
Each share of preferred stock is entitled to receive
annual dividends of 36 cents cumulative only to the
extent of annual net profits. Payment of dividends is
also subject to the limitations prescribed by the
Indenture Agreements covering the 5% and 6%
Convertible Subordinated Debentures and to
limitations contained in the Credit Agreement and the
Term note due in 1987. (See Note C)
During 1977, 200 shares of the Company's preferred
stock were converted to 200 shares of common stock.
Authorized common shares include 1,559,963
shares and 1,560,163 shares reserved at December
31, 1977, and 1976, respectively, for issuance as
follows:
28
1977 1976
For convertible securities
conversions:
5% Convertible Subordinated
Debentures (Note C) 319,853 319,853
6% Convertible Subordinated
Debentures (Note C) 583,300 583,300
Series A Convertible Preferred
Stock 163,581 163,781
1,066,734 1,066,934
For exercise of outstanding
warrants at $6 per share, issued
with Convertible Preferred Stock 457,229 457,229
For options under Qualified Stock
Option Plan (11 ,000 shares) and
Employee Stock Option Plan
(25,000 shares) 36,000 36,000
1,559,963 1,560,163
At December 31 , 1977, there were outstanding
options for 11,000 shares of common stock under the
Company's Qualified Stock Option Plan, of which
4,000 shares (at $5.81 per share) expire in 1978, 3,000
shares (at $3.50 per share) expire in 1979, and 4,000
shares (at $2.95 per share) expire in 1980. Option
transactions during the two years ended December
31, 1977, are summarized as follows:
Number of Option Price
Shares Per Share Total
Outstanding
January 1, 1976 45,000 $2 .94-$5.81 $225,000
Expired in 1976 (34,000) 5.25 (179,000)
Outstanding
December 31 ,
1976 and 1977 11 ,000 $2.94-$5.81 $ 46,000
The Qualified Stock Option Plan expired on October
26, 1975, except for options which were outstanding
at that date.
Options granted under the Plan are intended to
constitute "qualified stock options" as defined in
Section 424(b) of the Internal Revenue Code of 1954,
as amended. Options are exercisable at not less than
100 per cent of the fair market value of the stock on
the date of grant, terminate not later than five years
after date of grant, and are not exercisable during the
first 24 months after date of grant. Each option is
exercisable with respect to one-third of the number
of shares at any time after 24 months following date
of grant, with respect to an additional one-third after
36 months, and with respect to the balance after 48
months. No options were exercised during the two
years ended December 31, 1977. Options became
exercisable as follows:
1977 1976
Number of Shares 3,667 2,333
Option Price:
Per Share $2.94-$5.81 $3.50-$5.81
Total $ 15,000 $ 11 ,000
Quoted Market Price at Date
Exercisable:
Per Share $3.63-$4.50 $5.00-$5.50
Total $ 15,000 $ 12,000
Options for 6,333 shares (aggregating $34,000 at
option prices) and 3,667 shares (aggregating $19,000
at option prices) were exercisable at December 31 ,
1977, and 1976, respectively.
A total of 25,000 shares of common stock are
reserved for issuance to participating employees
under an Employees' Stock Option Plan (an employee
stock purchase plan as defined by section 423(b) of
the Internal Revenue Code of 1954). This plan is
currently inactive and there are no participants.
The Company makes no charge to income with
respect to options.
Note F-Pension, Employee Stock Ownership, and
Incentive Compensation Plans
Pension expense was $4,032,000 in 1977 and
$3,251 ,000 in 1976, which includes $312,000 in 1977
and $273,000 in 1976 applicable to the Employee
Stock Ownership Plan adopted in 1975. The Company
has an incentive compensation plan under which
approximately $410 ,000 was accrued in 1977.
Note G-Leases
The Company leases flight equipment, maintenance
and training center, general office building, airport
terminal space, and other property and equipment.
Other property and equipment includes the following
amounts for leases that have been capitalized:
December
1977 1976
Assets $5,025,000 $168,000
Less accumulated amortization 84,000 7,000
$4,941,000 $161 ,000
Amortization of amounts capitalized as the cost of
property and equipment is included in depreciation
expense.
The following is a schedule by years of the aggregate
future minimum rental payments under capital leases
and noncancellable operating leases that have initial
or remaining terms equal to or exceeding one year:
Capital Operating
Leases Leases
1978 $ 667,000 $ 8,053,000
1979 667,000 7,526,000
1980 667,000 6,810,000
1981 667,000 6,381 ,000
1982 667,000 6,204,000
Subsequent to 1982 12,452,000 79,122,000
Total minimum lease
payments 15,787,000 $114,096,000
Amounts representing
interest 10,824,000
Present value of future
minimum lease payments $ 4,963,000
Rental expense included in operations for 1977 and
1976 was $10,787,000 and $11,299,000, respectively.
Contingent rentals and rentals received from subleases
are immaterial.
As permitted by Statement of Financial Accounting
Standard No. 13, the Company has accounted for
leases entered prior to January 1, 1977, in accordance
with generally accepted accounting principles existing
prior to the issuance of the Statement. The effect of
the change to the lease capitalization requirements
of Statement No. 13 is not material to the 1977
financial statements.
If the Company were required to restate its financial
statements in 1977 as it will be required to do in 1978,
to apply Statement No. 13 in accounting for leases,
the effect would result in certain leases being
capitalized with an increase (decrease) in amounts
reflected in the accompanying financial statements
as follows:
December 31
1977 1976
Property and Equipment- net $10,072,000 $19,947,000
Capital lease obligations
Current 2,362,000 4,706,000
Noncurrent 10,434,000 18,594,000
Increase (decrease) in
net income 1,089,00Q(al (80,000)
Increase (decrease) in
earnings per common and
common equivalent share-
primary .63(al (.05)
Retained Earnings (1,215,000) (2 ,304,000)
Common stockholders' equity
per common share (.77) (1.46)
(a) Includes increase in net income of $241 ,000
( 14 cents per share primary) applicable to the loss of an
aircraft discussed in Note B.
29
Note H - Other Commitments and Contingencies
The Company has an employment agreement with
its Chairman of the Board providing for his
employment to December 31 , 1979, at an annual
salary of not less than $90,000. In addition, upon his
retirement, the Company has agreed to pay $4,000
per month to him for life, or not less than 180 months
to him and his lineal descendants in the event of his
death. Provision for the amount due under the
retirement agreement is being made over a five-
year period beginning in 1975.
The Company is the defendant in a number of law
suits. In the opinion of management there is adequate
insurance coverage for those suits that are being
defended by the Company's insurance carriers. In the
opinion of management, the other suits will have no
material effect on the financial statements for 1977.
In October 1977, the Company signed an agreement
with McDonnell Douglas Corporation for the purchase
of four DC9-80 aircraft (with an option to lease for a
term of 14 years) at the approximate cost of $64 million,
with delivery during 1980. The financing arrangements
have not been completed, although the Company has
obtained a manufacturer's guarantee for a portion of a
financing package.
The Company, in order to comply with the Aviation
Noise Abatement Policy of the Department of
Transportation, is required to modify 50 per cent of
its DC9 aircraft by January 1, 1981, and have all these
aircraft modified by January 1, 1983. The estimated
cost to modify these aircraft is approximately $5.6
million. Legislation has been proposed to permit
financing of a portion of the cost of compliance with
this policy by air carriers from special ticket-tax
revenues presently allocated to airport development.
The Company has purchase commitments for
delivery in 1978 of three aircraft at the approximate
cost of $6,000,000.
Note I- Earnings per Share
Primary earnings per share for 1977 were computed
by dividing net income (less preferred dividend
requirement and adjusted as described below) by the
weighted average number of common and common
equivalent shares outstanding during the year-
1, 732,923 shares. Common equivalent shares
comprise that number of common shares issuable
upon exercise of stock options and warrants in excess
of 20 per cent of the number of common shares
outstanding at the end of the year. Proceeds from the
assumed exercise of the options and warrants in
excess of the amount which would have been required
to purchase 20 per cent of the outstanding common
stock at the average market price during the year were
assumed to have been applied to debt reduction and
the related interest, net of income tax effect, was
added to income for purposes of the calculation.
Fully diluted earnings per share for 1977 were
determined on the assumption that the weighted
30
average number of common and common equivalent
shares were further increased from the beginning of
the year by conversion of outstanding convertible
debentures and convertible preferred stock-a total
of 2,799,826 shares. This calculation also assumes no
preferred dividend requirement, and interest, net of
income tax effect, related to the debentures assumed
converted, was added to income for purposes of
the calculation.
Primary and fully diluted earnings per share for 1976
were computed by dividing net income, after reduction
for the preferred dividend requirement, by the
weighted average number of common shares
outstanding during the year-1,580,880 shares.
Common equivalent shares (described above) and
adjustments resulting from their assumed exercise
were excluded from the computation of primary
earnings per share for 1976 since their inclusion would
have increased earnings per share. Similarly, the
assumed conversion of convertible securities was
excluded from the computation of fully diluted
earnings per share for 1976 since the results of such
conversions would not have been dilutive.
Note J -Supplementary Information
1977 1976
Depreciation and Amortization:
Depreciation of property
and equipment $ 6,773,000 $ 4,878,000
Amortization of deferred
charges 370,000 396,000
Provision for inventory
obsolescence 240,000 233,000
7,383,000 5,507,000
Deduct-amounts charged
to other expense accounts 111,000 126,000
$ 7,272,000 $ 5,381,0Q0
Taxes, otherthan income taxes,
charged to operating
expenses:
Payroll taxes $ 2,498,000 $ 2,352,000
Fuel and oil taxes 1,036,000 881,000
Property taxes 865,000 782,000
Sales and use taxes 473,000 431 ,000
Other 178,000 175,000
$ 5,050,000 $ 4,621,000
Rents:
Rental expense under leases $10,787,000 $11 ,299,000
Rental expense charged to
other e?(pense accounts-
net (53,000) (70,000)
$10,734,000 $11,229,000
Advertising costs $ 1,676,000 $ 1,712,000
There were no royalties or research and development
costs.
Note K-Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results
of operations for the years ended December 31, 1977
and 1976:
Three Months Ended
1977 1976
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
- - -
(Thousands of dollars, except per share data)
Operating revenues $36,794 $38,556 $40,574 $43,587(b) $32,045 $35,860 $36,087 $36,175
Operating expenses 36,940 37,177 37,939 39,931 32,650 33,791 34,370 36,864
Operating income (loss) (146) 1,379 2,635 3,656 (605) 2,069 1,717 (689)
Net income (loss) (481) 4,296(a) 1,869 2,569(b) (649) 1,149 827 (922)
Net income (loss) per common and
common equivalent share
Primary (.31) 2.49(a) 1.09 1.48(b) (.42) .65 .47 (.59)
Fully diluted (.31) 1.59(a) .73 .95(b) (.42) .45 .33 (.59)
(a) Includes excess insurance proceeds from the loss of a DC9 aircraft which increased net income by $3,606,000 ($2.09 per
share primary and $1.29 per share fully diluted). See Note B.
(b) Includes mail revenue of $1,391,000 ($682,000 after income taxes-39 cents per share primary and 25 cents per share fully
diluted) related to the period 1973 through September 30, 1977. See Note B.
Quarterly earnings per share do not total earnings
per share for the year because the computation of
earnings per share for certain quarters did not include
common stock equivalents which were included in the
earnings per share computation on an annual basis.
Note L- Replacement Cost of Property and
Equipment (Unaudited)
The Company has estimated certain replacement
cost information for flight equipment and other
property and equipment, and has presented this
information in its annual report to the Securities and
Exchange Commission on Form 10-K, a copy of which
is available upon request. Form 10-K contains specific
information with respect to the approximate
replacement cost of flight equipment and other
property and equipment at December 31, 1977 and
1976, and the approximate effect which replacement
cost would have had on depreciation expense for such
years, as compiled in accordance with the rules of the
the Commission. Replacing items of property and
equipment with assets having an equivalent capacity
has generally required a greater capital investment
than was required to purchase the assets which are
being replaced due to the cumulative impact of
inflation.
Note M - Subsequent Event
In March 1978, the Company committed to purchase
two DC9 aircraft currently leased. In addition, the
Company purchased an option for the purchase of an
additional eight used DC9 aircraft. The purchase price
of these ten aircraft is approximately $24 million.
31
REPORT OF ERNST & ERNST, Independent Auditors
Board of Di rectors
Southern Airways, Inc.
Atlanta, Georgia
We have examined the balance sheets of Southern Airways, Inc. as of December 31, 1877 and
1976, and the related statements of income, retained earnings and changes in financial position
for the years then ended. Our examinations were 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.
In our opinion, the financial statements referred to above present fairly the financial position
of Southern Airways, Inc. at December 31, 1977 and 1976, and the results of its operations and
changes in its financial position for the years then ended, in conformity with generally accepted
accounting principles applied on a consistent basis.
Atlanta, Georgia
January 27, 1978
except as to Note M, as to
which the date is March 16, 1978.
Notice to Stockholders of Southern Airways, Inc.
Any person who owns, as of December 31 of any year, or
subsequently acquired ownership, either personally or as a
trustee, of more than five per cent (5%) in the aggregate of
any class of capital stock or capital of Southern Airways, Inc.,
shall file with the Civil Aeronautics Board a report containing
the information required by Part 245.12 of the Board's
Economic Regulations. This report must be filed on or before
April 1 of each year as to the capital stock or capital owned
as of December 31 of the preceding year; and in the case of
capital subsequently acquired, a report must be filed within
ten (10) days after such acquisition, unless such person has
otherwise filed with the Civil Aeronautics Board a report
covering such acquisition or ownership.
Any bank or broker covered by the provision, to the extent
that it holds shares as trustee on the last day of any quarter
of a calendar year, shall file with the Civil Aeronautics Board
within thirty (30) days after the end of the quarter, a report
in accordance with the provisions of Part 245.14 of the
Board's Economic Regulations.
Any person required to report pursuant to these provisions
who grants a security interest in more than five per cent
(5%) of any class of the capital stock or capital of an air
carrier, shall within thirty (30) days after granting such
security interest, file with the Civil Aeronautics Board a
report containing the information required in Part 245.15
of the Economic Regulations.
Any stockholder who believes that he may be required to
file such a report may obtain further information by writing
to the Director, Bureau of Operating Rights, Civil Aeronautics
Board, Washington, D. C. 20428.
32
Equal Opportunity Policy
It is the policy and practice of Southern Airways, Inc., to
recruit, hire, and promote those persons who are best
qualified without regard to their race, color, religion, sex,
age (40-65), national origin, or physical or mental handicap,
and not to discriminate against any employee or applicant
for employment because he/ she is a disabled veteran or
Vietnam era veteran.
To further this objective, the Company has est.ablished
procedures to insure that all personnel actions such as
compensation, benefits, transfers, lay-offs, returns from
lay-off, Company sponsored training, education, tuition
assistance, social and recreational programs, and all
Company facilities are administered without regard to race,
color, religion, sex, age (40-65), national origin, physical or
mental handicap, and will take into consideration those
employees who are disabled veterans or Vietnam
era veterans.
These practices are designed and implemented to be in
concert with the accepted standards and principles of equal
opportunity employment.
Directors and Officers
Directors
CECIL A. BEASLEY, JR.
Assistant Secretary,
Southern Airways, Inc. and
Partner-Ballard, Beasley and Nelson
(Attorneys) Washington, D. C.
GEORGE M . GROSS
Executive Vice President and
General Manager,
Southern Airways, Inc.
GRAYDON HALL*
President,
Southern Airways, Inc.
F. BARTON HARVEY, JR.
Partner-Alex. Brown & Sons
(Investment Bankers)
Baltimore, Maryland
DAVID H. HUGHES
President and Chief Executive Officer
Hughes Supply, Inc.
(Manufacturer and Distributor of
Electrical and Plumbing Supplies)
Orlando, Florida
FRANK W. HULSE*
Chairman of the Board and
Chief Executive Officer
Southern Airways, Inc.
ALTON F. IRBY, JR.
Chairman of the Board
Fred S. James & Company of
Georgia, Inc. (Insurance Agents
and Counselors)
Atlanta, Georgia
HENRY P. JOHNSTONt
Radio and Television Consultant
Birmingham, Alabama
G. GUNBY JORDAN*
Chairman of the Board
The Jordan Company (Construction)
Columbus, Georgia
SARTAIN LANIER**t
Chairman of the Board
Oxford Industries, Inc.
(Textile Manufacturer)
Atlanta, Georgia
A. L. MAXSON
Vice President-Finance
and Treasurer
Southern Airways, Inc.
G. FRANK PURVIS, JR.**
Chairman of the Board and Chief
Executive Officer-Pan American
Life Insurance Company
New Orleans, Louisiana
F. D. SCHASt
Retired Investment CouAselor
Memphis, Tennessee
ELTON B. STEPHENS*
Chairman and Founder
EBSCO Industries, Inc.
(Diversified Multinational Sales
Corporation and Metals Manufacturing)
Birmingham, Alabama
RICHARD A. TRIPPEER, JR.**
President-Union Planters
National Bank
Memphis, Tennessee
WM. BEW WHITE, JR.*
Assistant Secretary
Southern Airways, Inc. and
Partner-Bradley, Arant, Rose & White
(Attorneys)
Birmingham, Alabama
FRANK M . YOUNG , Ill**
Partner- North Haskell
Slaughter Young & Lewis
(Attorneys)
Birmingham, Alabama
Officers
FRANK W. HULSE
Chairman and Chief
Executive Officer
GRAYDON HALL
President
GEORGE M. GROSS
Executive Vice President
and General Manager
J. KENNETH COURTENAY
Vice President-Economic
Regulations and Secretary
JAMES G. GODSMAN
Vice President-Sales
A. L. MAXSON
Vice President-Finance
and Treasurer
OWEN L. McREE
Vice President-Customer
Sales and Services
J. R. PRICE
Vice President-
Properties
VICTOR C. PRUITT
Vice President-
Technical Services
T. M. SHANAHAN
Vice President-Flight
THOMAS A. WILEY, JR.
Vice President-
Marketing
RAY W. BURDEN
Assistant Treasurer
JAMES H. ISHEE
Assistant Treasurer
and Controller
J. PHILLIP DAY
Assistant Vice President-
System Planning
WILLIAM E. OAKES
Assistant Vice President-
Economic Research
CECIL A. BEASLEY, JR.
Assistant Secretary
MARY 0. HAYES
Assistant Secretary
WM. BEW WHITE, JR.
Assistant Secretary
*Member of Executive Committee
**Member of Audit Committee
tSenior Director
General Information
Counsel
Bradley, Arant, Rose & White
Birmingham, Alabama
Ballard, Beasley and Nelson
Washington, D.C.
Auditors
Ernst & Ernst
Atlanta, Georgia
Stock Transfer Agent
Trust Company Bank
Atlanta, Georgia
Form 10-K
A copy of the Company's Annual
Report to the Securities and
Exchange Commission on Form 10-K
is available to the Company's
securities holders, without charge,
on request to:
Mr. A. L. Maxson
Vice President- Finance and Treasurer
Southern Airways, Inc.
Hartsfield Atlanta International Airport
Atlanta, Georgia 30320
F-3
Route Applications Pending
Before the Civil Aeronautics Board*
Midwest-Atlanta Competitive
Service Case
(Atlanta-Detroit)
(Atlanta-Cleveland)
Docket No. 28115
Houston/New Orleans-Yucatan
Proceeding
(New Orleans-Merida)
(New Orleans-Pun,ta Cancun)
(New Orleans-Cozumel)
Docket No. 29 789
Louisville Service Case
(Louisville-Nashville)
(Louisville-Memphis)
Docket No. 29968
TWA/Southern Route Exchange Case
(Nashville-St. Louis)
(Nashville-Tampa)
(Nashville-Miami/Ft. Lauderdale)
(Tampa-Miami/Ft. Lauderdale)
Docket No. 29001
Caribbean Area Service Investigation
(Co-terminal points, New York/
Newark-Washington, D.C.-Memphis-
Birmingham-Atlanta-New Orleans-
Jacksonville-Orlando-Tampa/St.
Petersburg/Clearwater-Fort
Lauderdale-Miami and Puerto Rico-
Turks and Caicos Islands-Haiti-
Dominican Republic-U .S. Virgin
Islands-Antigua-Martinique-
Barbados-Trinidad-Netherlands
Antilles-Venezuela)
Docket No. 3069 7
*As of March 24, 1978
Service To Brunswick And
Savannah Case
(Atlanta-Brunswick)
(Atlanta-Savannah)
(Brunswick-Savannah)
( Bru nswick-Jac ksonvil le)
(Savannah-Jacksonville)
Docket No. 30570
Memphis-Denver Nonstop Service Case
Docket No. 29189
Atlanta-Florida Cities Case
(Between and among the following
points: Atlanta-Pensacola-Tallahassee-
Jacksonville-Gainesville-Tam pa/
St. Petersburg/Clearwater-Orlando-
Melbourne-West Palm Beach-Miami/
Fort Lauderdale)
Docket No. 31680
Proposed routes from:
NEW YORK/NEWARK
WASHINGTON, D.C.
MEMPHIS
BIRMINGHAM
ATLANTA
NEW ORLEANS
JACKSONVILLE
ORLANDO
TAMPA/ST. PETERSBURG/CLEARWATER
FORT LAUDERDALE
MIAMI
Florida-Atlanta Competitive Nonstop
Service Case
(Atlanta-Tallahassee-Daytona Beach-
Sarasota/Bradenton-Miami/Fort
Lauderdale)
Docket No. 30679
Nashville-Cleveland Subpart M Case
(Nashville-Cleveland)
Docket No. 31116
New Orleans-Orlando Case
(New Orleans-Orlando)
Docket No. 32043
Austin/San Antonio-Atlanta
Service Investigation
(Atlanta-Austin)
(Atlanta-San Antonio)
(Austin-San Antonio)
Docket No. 32143
to the following points:
PUERTO RICO
TURKS AND CAICOS ISLANDS
HAITI
DOMINICAN REPUBLIC
U.S. VIRGIN ISLANDS
ANTIGUA
MARTINIQUE
BARBADOS
TRINIDAD
NETHERLANDS ANTILLES
VENEZUELA
DESIGNED AND PRODUCED BY S TEIN CORPORATE COMMUNICATIONS/ ATLANTA
F-4
-a
Southern
NEBRASKA
COLORADO
TEXAS
MINNESOTA
MINNEAP LIS-
ST. PAUL
OKLAHOMA
\
\
IOWA \
\
\
\
\
\
\
WISCONSIN
*Substitute service to Natchez, Miss ,
1s provided by a commuter airline
Investigation
MICHIGAN
INDIANA
GRAND CAYMAN
NEW YORK
PENNSYLVANIA
NORTH CAROLINA
ESTON
NA e
























ST PA9' BEACH

~
I
Southern Airways
System
Scheduled to beg in
in Summer 1978
DELAWARE
...... Recommended by
Civil Aeronautics
Board administrative
law judge; awaiting
approval by the Board
- Pending before the
Civil Aeronautics Board
All service, authonzat,ons,
and pending routes shown as
of March 24, 1978
,,
Southern
Southern Airways, Inc .
General Office
Hartsfield Atlanta International Airport
Atlanta, Georgia 30320