1942 AN UAL REPORT OF WESTERN AIR_ LINES, INC. OFFICERS DIRECTORS REGISTRAR STOCK TRANSFER AGENT AUDITORS GENERAL OFFICES William A. Coulter, President L. H. Dwerlkotte, Executive Vice-President Charlie N. James, Vice-President, Operations Thos. Wolfe, Vice-President, Traffic Paul E. Sullivan, Secretary-Treasurer J. J. Taylor, Assistant Secretary-Treasurer William A. Coulter L. H. Dwcrlkotte Harold P. Fabian Stanley W Guthrie George Albert Smith Citizens National Tru t & Saving Bank, Los Angeles, California Security-First National Bank of Los Angele , California Peat, Marwick, Mitchell & Co. Lockheed Air 'Terminal, Burbank, California ON T H ~ ~ ~ E H O ~ ~ * Since May 15, 1942, when two-thirds of its transport fleet was turned over to the Army, Western Air Lines has completely adjusted itself to a war footing. There were a few at first, who could see no ray of light for the future,-but that, we know now, was a narrow view. The plain facts were that the United States needed transport planes more than it needed normal airline service-at that time. * Valuable and necessary as airline service is, there arc times when military needs are greater. Actually, we should be proud that the nation's trust in the airlines as an arm of national defense was justified. When the need came, we were ready with the men, and the planes, and the priceless knowledge that only long experience can give. tft Today finds Western Air Lines serving the nation on the war front and the home front, too. Thirteen of our pilots and dozens of our ground personnel are filling hard and dangerous job in the armed forces. Day by day we are flying military cargo planes over a route that is longer by far than our entire pre-war system. While here at home we are utilizing our remaining equipment with maximum efficiency to maintain essential civilian passenger schedules. So, whether it carries the Indian IIeacl or the Army Star every Western Air Lines plane flies but one course-to VICTORY! T 0 T H E STOCKHOLDERS 0 F FEBRUARY 26, 1943 * There is submitted herewith Profit and Loss Statement of your com- pany for the calendar year 1942, together with the Balance Sheet of the company as at December 31, 1942, to which is appended the report of Messrs. Peat, Marwick, Mitchell & Company, accountants and auditors. Operations of your company for the year 1942 resulted in a net profit of $693,703.30 after all taxes and charges, including provision of $215,707.34 for depreciation and $315,000.00 for estimated Federal Income Taxes for the year 1942. In comparison, the year 1941 resulted in a net profit of $5,980.64, after provision of $197,780.43 for depreciation. The improvement in net income results largely from the following: (a) Increases in passenger load factors, revenue passenger miles flown, and air express, accompli hed with le s equipment and les revenue mile flown. (b) An increase in pas enger fares and the elimination of discounts effective July 1, 1942. ( c) An adjustment of the allocation of ground costs to commercial operations. ( cl ) et gain on sale or other di po ition of equipment. REVENUES * Although the changes mentioned hereinafter effected a decrease of 26.1 % in revenue miles flown in 1942 as compared with the previous year, passenger revenue amounted to $1,242,540.81 increasing 17-7% over the total of $1,055,821.10 for 1941. The increased load factors, stimulated by war conditions, account largely for the substantial gain in operating profit. Passenger revenues continued the trend of previous years in contributing an increa ing percentage of Gro Revenue , being 52.3% as again t 52% in the year 1941. Mail revenue of $76o,572.94 was 10-4% lower than the $848,654.64 received during the previous year. This is due to cancellation of certain mail flights after May 26, 1942, becau e of the ale of airplanes to the United States Government. Air express recorded a substantial gain of 141.9%, increasing from $69,022.32 in 1941 to $166,944.00 111 1942. During the past year your company has experi- enced many changes of importance chiefly as a result of directing a large part of its operations to activities for the U. S. Army Air Forces. On May 15, 1942, the United States Government requisi- tioned nine of the twelve airplanes then owned by your company. Of these, five Boeing 247D air- planes and two Douglas DST airplanes were sold to the Government and two Douglas DC-3 air- planes were converted to Army cargo type. At the request of the U. S. Government your company purchased a Lockheed Lodestar airplane, with the result that three Douglas DC-3 airplanes and one Lockheed Lodestar were operated in commercial service after May 26, 1942. This 67% decrease in the number of airplanes available for commercial operations was partially offset by greater utilization of the airplanes retained, but it was necessary to eliminate certain flights which reduced scheduled mileage by 2 7 .4 % . On June 4, 1942, a contract was entered into with the U. S. Army Air Transport Command for the transportation of military cargo and the train- ing of personnel. While the details of this contract are restricted, service of a substantial nature have been performed. Effective January 1, 1943, this contract wa revi ed and the activitie of your com- pany for the Air Tran port Command will be increa ed materially within the next few months. OPERATING EXPENSES * The 1942 oper- ating co ts may not be effectively compared with tho e of previou year bccau e a sub tantial por- tion of such co t have been allocated to other than commercial operations and becau e of the material change in operations resulti1ig from the loss of equipment and the decrease in schedules flown. However, it is known that a sub tantial increase in operating costs occurred during the year and the uptrend continues. The effects of Selective Service training of personnel, increased turnover ancl increased salaries and wages arc factors which contributed materially to the rise in costs. FINANCIAL POSITION * The attached bal- ance sheet of your company as at December 31, ~942, shows current assets of $1,643,647.18 includ- mg cash of $572,115.31 as against current liabilities of $680,326.32. As at December 31, 1941 current assets amounted to $518,913-46 including cash of $102,729.89 as against current liabilities of $291,043.89. EQUIPMENT * In addition to the equipment changes previously mentioned, your company, at the request of the Government, cancelled its out- standing orders for new airplanes. It is not known at this time when the Army will permit the airlines to purchase additional aircraft or what type. Four improved type radio ground stations were installed during the past year. o difficulty has been experi- enced_, and none is expected, in obtaining parts and s\1pphes necessary for maintaining the company's a1~planes a?~l other equipment in excellent oper- a~mg condition. As in peace times, safety of opera- tions has been and will continue to be one of the paramount objectives of your company. NEW ROU TES* Applications are now pending before the Civil Aeronautics Board for the follow- ing additional routes: (a) Between Los Angeles and San Francisco, California. Between Los Angeles and Sacramento-San Francisco, 0 0 0 o' 0 0 II') 'Four Year I I 1939 I I Revenue 1940 I I Chart 1941 I I 1942 I I I C~lif?rnia via the intermediate points Bakersfield, Visalia, Merced, and Stockton, California. B.ctwccn Los Angeles and l ] Centro, California, via Palm Springs, California. (b ) Between San Diego, California, and Phoenix, Ariz- ona, via El Centro, California, and Yuma, Arizona. ( c) Between Los Angele , California, and Denver, Colo- rado, via Las Vegas, Nevada, and Grand Junction, Colorado. (cl ) Between Leth bridge, Canada, and Nome, Alaska, vin Calgary, Edmonton, and Grande Prairie, Canada, and Juneau, Anchorage, and McGrath, Alaska, with shuttle service between Anchorage and Fairbank , Alaska. ( e) A system of secondary or "feeder routes" a shown by the map on the inside back cover of thi report. Hearings on the applications listed as (a ) and (b ) have been completed and the Examiners for the Civil Aeronautics Board in their report to the Board, have recommended that your company be granted a franchise for the non-stop route from Los Angeles to San Francisco, and the addition of San Bernardino, California, as an intermediate sched- uled stop between Los Angeles and San Diego, and a franchise for the route between San Diego, Cali- fornia, and Phoenix, Arizona, via El Centro, Cali- fornia. These cases now await the final decision of the Civil Aeronautics Board. Hearings have not been set on the other applications listed as ( e) to ( e ) . MAIL RATE* On December 21, 1942, the Civil Aeronautics Board issued its order to "show cause" why the mail rates for your company should not be reduced to o. 3 mill per pound mile of mail carried over the company's entire system effective January 1, 1943. Such rate would give your company annual mail revenue of 188,000.00 as compared with $76o,6oo.oo received for the year 1942, or a reduc- tion of 75.3/4. The Board bases this rate on the 0 0 0 0 0 0 0 0 0 0 0 0 o' o' o' o' 0 0 0 0 q ~ 0 II') "i N ' N - I - I - 1 I i-. " ; I T I I' PtSENGER REVENUE I iAll REVENUE All OTHER REVENU~ R.EVENUE PASSENGERS REVENUE PASSENGfR CARRIED MILES FLOWN t ~ - 0 \() ,..... co - 0 - co t\ 'st" co Lti (j) 0 a) Lti ,-..... -.t- \() ~ (J\- <:j" ~ ~ ~- ("') r:J:) co - co CJ;) ,tj- N - r-- N t.() - ,...._- - N (X) N Lti Lr\ <::I" -- a, 0) r- '-0- 0 '-0 Lr) - '-D rr) ----- ..__ 0) ~ ~ N 0) 0 ~ N ~ '<:::t 8 ~ '<:::t ~ ~ Q ~ ~ ~ company have accepted this responsibility and while the extent of the work performed may not now be described, it is believed that they have been of material aid to the war effort. It is gratifying to be able to report that the employees of your company have exhibited the highest degree of cooperation and loyalty during the past year. Their efforts are helping to bring about the early victory we all seek. OUTLOOK FOR FUTURE * t the present time our principal concern is to win the war- everything else is secondary. However, it is becom- ing increasingly apparent that postwar aviation, both foreign and domestic, will be conducted on an improved and expanded scale. Larger and faster equipment is a certainty. Existing routes may be expanded and supplemented with feeder routes, and indications are that air cargo will play an important part in the future world commerce. The ir Transport Command and the airlines are jointly moving cargo and per onnel to all corners of the earth by air with a regularity.- and routine un- dreamed of prior to the war. Events of today are laying a solid foundation for the old saying-"It' a small world." 1/~t::1~ ' PRESIDE T BALANCE SHEET AS 0 Current Assets: Cash in Banks and on I land Accounts Receivable: ASSETS United States Post Office Department Interline and Agents' Traffic Balances . Customers' Accounts Receivable Sundry ( including $9,765.83 due from Officers and Employees) Less Reserve for Doubtful Accounts . . . . . . . . . Billed and Unbilled Charges to United States Army Air Forces, less advance payment $125,000.00 ( ote 1) . . . . . . Inventory of Parts and Supplies, at the Lower of Cost ( first-in, first-out) or Replacement Market . . . . . . . . . Investments: Securities of Other Corporations . . . . . . . . . Property ot Used in Operations, at Cost-less Reserve for Depreciation of 8,646.65 . . . . . . . . . . . Properties and Equipment: Land and Land Improvements . . . . . . . . Buildings and Lea ehold Improvements . . . . . Airplane , Propellers, Engines and Flying Equipment Radio Stations,Furnitureand Fixture , Shop and Other Equipment Less Reserve for Dcprecia tion . . Deferred Charge : Prepaid Insurance, Rent, Taxes, etc. Development of Air Routes . . . $ 72,639.69 11,434.07 253,805.32 127,156.47 465,035.55 5,098.17 1,724.34 2,339.62 9,096.57 109,781.11 835,207.55 272,910.42 1,226,995.65 457,523.44 $ 572,115.31 459,937.38 469,769.23 141,825.26 1,643,647.18 4,063.96 769,472.21 88,146.05 6,820.89 DECEMBER 31, 1942 LIABILITIES Current Liabilities: Totes Payable to Bank 3% Equipment Notes Payable to Bank, portion clue in 194 3 Accounts Payable . . . . . . . . . Interline and Agents' Traffic Balance Payable ccrued Salaries, \1/ages, Taxc , Insurance, etc. Provision for Federal Taxc on Income (Subject to Review by Federal Internal Revenue Department) Reserve for Overhaul of Equipment . . . . . . . . Unused Portion of Tickets Sold . . . . . . . . . 3fo Equipment 1ote Pa_ able to Bank, clue 1944 to 1946 Common Capital Stock of 1.00 Par Value Per Share. 500,000 Shares; Is uecl and Outstanding 409,954 Share Surplus: Capital Surplus Earned Surplus ( ote 1) Con tin gent Liabilities: Proposed Additional Assessment of Federal Taxes on Income Damage Claim , if Any in Exces of Insurance Coverage \ hich i Carried in Substantial mount uthorizcd . $ 648,214.12 637 65.11 1,738.36 $ 50,000.00 40,000.00 130,976.75 49,489.49 94,860.08 315,000.00 680,326.32 4,205.18 29,685.56 102,000.00 409,954.00 1,2 5,979.23 2,512,150.29 $2 512,150.29 otc to Fi11aucial tatcrnc11ts OTE 1: The net profit for the year and the earned surplus arc subject to any adju tmcnts that may be made by rmy ir Force uclitors and through renegotiation of billed and unbilled charges to Army contracb. 1 _I WESTERN AIR LINES INC. STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED DECEMBER 31 , 1942 Operating Revenue: Passenger Mail . . . . Commercial Express, Freight and Excess Baggage Other rfransportation . . . . . . . Equipment Rentals and Incidental Services Operating and General Expenses Depreciation . . . . . . Other Income: Gain on Disposition of Equipment . . . . . . . . . . Profit from Fixed Price and Fixed Fee United States Army Air Forces Contracts . . . . . . . . . . . . . Net Income from Restaurant Operations: Operating Revenue . . . . . . Less Operating Expenses . . . . . Income from Property not used in Operations-Net Interest and Discounts Received Sundry . . . . . Operating Profit 0 thcr Charges : Interest Paid . . . Profit Before 'faxes on Income Provision for Federal orrnal Income and Surtax ct Profit ( ote 1) $78,910.82 78,702.56 SURPLUS ACCOUNTS Balance as of December 31, 1941 . . . . . . . . . . . Adjustments Applicable to Prior Years: Mail Revenues for 1941 Disallowed by Post Office Department Unused Reserve for Overhaul of Aircraft Sold Adjusted Deficit at December 31, 1941 . Net Profit for the Year . . . . . . Amount at December 31, 1942 ( Note 1) Brackets denote clefici t $1 ,242,540.81 760,572.94 191,051.1 7 4,189.05 176,702.62 2,375,056.59 $1,582,159.59 215,707.34 1,797,866.93 577,189.66 401,370.36 31,701.78 208.26 6,498.90 1,077.87 151.11 441,008.28 1,018,197.94 9 494.64 1,008,703.30 315,000.00 $ 693,703.30 Capital Earned Surplus Surplus $ 648,214.12 (55,871.20 ) (23,025.60 ) 22,958.61 - - (55,938.19 ) 693,703.30 $ 648,214.12 637,765.11 ACCOUNTANTS' REPORT To the Board of Directors of WESTERN .A.IR LINES, INC. We have examined the Balance Sheet of Western Air Lines, Inc., as of December 31, 1942, and the statements of Profit and Loss and Surplus for the fiscal year then ended, have reviewed the system of internal control and the accounting procedures of the company and, without making a detailed audit of the transactions, have examined or tested accounting records of the company and other supporting evidence, by methods and to the extent we deemed appropriate. Except that it was not practicable to confirm the accounts receivable from the United States Army Air Forces, as to which we have satisfied ourselves by means of other auditing procedures, our examination was made in accordance with generally accepted auditing standards applicable in the circumstances and included all procedures which we considered necessary. In our opinion, the accompanying Balance Sheet and related statements of Profit and Loss and Surplus present fairly the position of Western Air Lines, Inc., at December 31, 1942, and the re ults of its operations for the fiscal year, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Los Angeles, California February 24, 1943 .PEAT, IARWICK, IITCIIELL & CO. TRAFFIC STATISTICS Percent of Increase 1939 1940 1941 1942 194 2 over 1941 Revenue: Passenger ......................... $ 503,998 $ 752,140 $1,055,821 $1,242,541 17.7 Mail ...... . . . .................... 809,980 808,488 848,655 760,573 (10.4) Express, Freight and Excess Baggage .. 45,249 58,094 83,702 191,051 128.3 Other ............................ 28,020 29,786 31,067 180,892 482.3 Total .......................... $1,387,247 $1,648,508 $2,019,245 $2,375,057 17.6 Revenue Miles Flown .................. 2,277,161 2,399,338 3,136,917 2,318,305 (26.10) Revenue Passengers .................... 30,075 47,407 69,791 77,801 11.48 Average Passenger per Revenue Mile Flown 4.85 6.59 7.30 10.52 44.11 Average Revenue per Passenger Mile ... . .. .0457 .0476 .0461 .0509 10.4 Passenger Seat Miles Flown ............. 27,564,517 32,359,017 48,592,298 39,348,869 (19.02) Revenue Passenger Miles ............... 11,035,541 15,803,768 22,892,281 24,393,816 6.56 Load Factor ........................... 40.04 48.84 47.11 61.99 31.59 Mail Pounds Carried .... ............... 957,884 951,451 1,289,505 1,547,984 20.04 Express Pounds Carried ................. 361,017 566,427 821,514 1,258,368 53.18 OPERATING STATISTICS Percent of Increase 1939 1940 1941 1942 1942 over 1941 Expense: Depreciation ...................... $ 142,844 $ 141,746 $ 197,781 $ 215,707 9.1 Other Operating and General Expenses 1,158,231 1,347,742 1,826,920 1,582,160 ( 13.4) Total Operating Expenses ......... $1,301,075 $1,489,488 $2,024,701 $1,797,867 ( 11.2) Operating Expenses per Revenue Mile. . . . .5714 .6208 .6454 .7755 20.1 Percent of Scheduled Service Performed. . . 95.65 96.39 96.85 96.17 (0.7) Number of Employees ( A vcragc) . . . . . . . . 194 241 330 485 47.0 Brackets denote decrease All of the above figures, except the number of employees, apply to commercial operations only. SAN FRAN BAKE LOS ANG \. (!) SAN WESTERN AIR Ll~ES, INC. FEBRUARY, 1943 LEGEND PRESENT EXISTING ROUTES OF WESTERN AIR LINES - 1,411 MILES PROPOSED PROPOSED EXISTING NATIONAL OF WESTERN ROUTES ALTERNATE ROUTE OF ROUTES PARKS OF OTHER AIR LINES - WESTERN CARRIERS AIR PLEASE ROUTES SEE NEXT PAGE FOR MAP SHOWING _ PROPOSED MILES OF WESTERN AIR CREEK PRAIRIE/ I ,DMONTQ~ N I ~! CALGARY / I I LINES - I i I I I i 5,874 4,880 MILES LINES FEEDER A WESTERN AIR INC. FEBRUARY, LINES, 1943 .I .J BUTTE ( /'. . ~ DILLON l , .._r. I LIVINGSTON r-- - ----- --- -----_J 'f,