I I WESTERN : AIRLINES I 1954: ANNUAL REPORT I I stock transfer agents Western Air Lines Building, 6060 Avion Drive Los Angeles International Airport Los Angeles 45, California Citizens National Trust & Savings Bank Los Angeles Chase National Bank New York Security-First National Bank of Los Angeles Los Angeles New York Trust Company N ew York Listed and traded on New York Stock Exchange and Los Angeles Stock Exchange Traded on San Francisco Stock Exchange third Thursday in April General Offices Los Angeles Guthrie, Darling & Shattuck Los Angeles Peat, Marwick, Mitchell & Co. Los Angeles a year of growth. .1954 ,asa Seat Miles Produced .............. .-.. 721,255,000 613,814,000 Seat Miles Sold ..................... 402,255,000 359,965,000 Total Operating Revenues ............ $24,480,779 22,876,797 Net Income ........................ 1,458,699 1,184,864 Dividends Paid ..................... 429,277 429,128 Common Stock Outstanding .......... 716,213 715,213 Income per Share ................. 2.04 1.66 Dividends per Share .............. . 0.60 0.60 Cash and U.S. Government Securities .. $ 3,949,365 4,041,436 Working Capital .................... 1,489,717 755,134 Investment in Property and Equipment. 23,468,369 18,854,100 Long Term Debt .................... 3,754,918 2,072,244 Total Shareholders' Equity ............ $10,786,153 9,746,451 Shareholders' Equity per Share ........ 15.06 13.63 Number of Employees ................ 1,864 1,813 Wages and Salaries Paid .............. $ 9,239,386 8,367,963 1954, the twenty-ninth year of America's senior airline, was successful from the standpoint of earnings, growth and expansion. This result was attained notwithstanding a disappointing first six months common throughout the airline in- dustry. In June, Western inaugurated its now famed "Californian" flights which have estab- lished unprecedented standards of passenger service for domestic airlines. At the same time the Company put into effect a no-deposit credit plan, "Charge-A-Flight", for travel on Western's system. In the fall, four Douglas DC-6B aircraft were added to the fleet, making it possible to expand and improve service throughout the Company's system. Late in the year a six million dollar order was placed for five more of these airplanes for delivery in 1956. In both transportation offered and transpor- tation sold, Western reached new high levels. Although the narrowing of the profit margin in the first six months was an unfavorable factor, this trend was reversed by mid-year. Operating profit for the last six months of 1954 was accord- ingly 18% in excess of that earned in the com- parable period in 1953. Contributing to the im- provement were a resumption of the uptrend in general business conditions, inauguration of the "Californian" flights, other refinements in service, and f1.dditional schedules made possible by delivery of the four new airplanes. Earnings Net income for 1954, after taxes, amounted to $1,458,699 or $2.04 per share, as compared with $1.66 per share earned during 1953, and $1.72 per share in 1952. Gains on disposition of prop- erty were 52 per share in 1954 as compared with 11 per share in 1953. For several years the airlines have had to absorb the cost increases inherent in an inflationary economy without the benefit of related increases in the level of fares which have been sought by the industry but denied by the Civil Aeronautics Board. This remains a serious problem, and will continue to demand attention. Nevertheless, significant progress has been made in reducing Western,'s unit costs. This has been accomplished through the intro- duction of additional modern and efficient air- craft, increase in volume of traffic, and the attainment of greater efficiency and produc- tivity by the Company's personnel. Dividends In 1954, the Company paid four quarterly divi- dends of 15 each or a total of 60 per share, the same as paid in the previous two years. At its first quarterly meeting in 1955, the Board of Directors declared a regular dividend of 15 per share plus an extra dividend of 15 per share for a total of 30 per share payable March 15, 1955 to holders of record on March 2, 1955. Revenues All types of traffic reflected increases over the previous year with the exception of mail and incidental revenues. Gross revenues were $24,480,779-up 7%. Passenger revenues for the year 1954 were $22,423,388, an increase of 10% over the previous year. Express, freight, and excess baggage revenues totaled $968,487, an increase of 15%. Mail revenue amounted to $763,586, representing only 3% of Western's total operating revenues. Like most of the other major domestic airlines, Western receives no subsidy for carrying mail. Incidental revenues decreased $530,952, as expected, due to the termination of a maintenance contract with an air carrier engaged in the Korean airlift. Several things were responsible for the increase in operating revenues. Integration of additional DC-6Bs into the Company's fleet made it possible for Western to improve service on its entire system, and to offer the only all four-engine flights on the Pacific Coast. DC-6B service was extended to San Diego, linking that area and the Pacific Northwest with deluxe through flights. DC-6B schedules were also established between Los Angeles and Oakland via San Francisco, and between Los Angeles and Las Vegas, Nevada. sales and production trend mllllons of seat miles 1950 51 52 53 54 1950 51 52 53 54 seat mlles sold seat miles produced On June 1, the Company inaugurated its DC-6B "Californian" service on the Pacific Coast. Featuring fine California champagne, gourmet meals, and reserved seats, these luxury flights at no extra fare have received wide public acceptance. On September 26, the "Californian" service was extended to the Company's direct route between Minneapolis/ St. Paul and Los Angeles via Salt Lake City, and on non-stop flights between Seattle/ Tacoma and Los Angeles. To bring the advantages of modern credit to frequent travelers in the West, the Company introduced on June 1 a "Charge-A-Flight" credit card plan. This no-deposit arrangement enables the cardholder to charge transporta- tion, extra baggage, or air freight shipments anywhere on Western's system on a thirty-day account. Six thousand "Charge-A-Flight" cards have been issued, developing substantial new revenues. Coachmaster flights, pioneered by Western, are now being operated between all Pacific Coast cities served by W stern, between Los Angeles and Las Vegas, and between Los Angeles, Salt Lake City, and the Twin Cities. Air Coach produced 31% of the Company's passenger revenues during 1954, as compared with 23% in 1953. Expenses Operating expenses for 1954 were $22,505,103, as compared with $20,385,466 for 1953, an increase of 10%. Contributing to the increase were 17% additional available ton miles flown, the introduction of new aircraft, the inaugu- ration of "Californian" luxury services, and the constant rise in wage rates and costs of supplies, parts and equipment. This increase is not considered unreasonable, however, in view of the progressive expansion and improvement in service offered. The unit cost of producing a revenue-ton-mile was de- creased from 53.5 in 1953 to 52.7 in 1954. Western again in 1954 had one of the lowest "break-even load factors" in the air transport industry as reported by the Civil Aeronautics Board. Finances The financial position of the Company was considerably improved during 1954. At the year end, cash and United States government securities totaled $3,949,365. Working capital totaled $1,489,717, comparing with $755,134 at the close of 1953. Additions to flight equipment and other properties during the year amounted to $5,450,000. The related expenditures, after applying deposits previously made, were financed by additional bank loans of $3,600,000 and by funds from other current sources. The Company's long-term debt at December 31, 1954, was $3,754,918 - an increase of only $1,682,674 over the amount at December 31, 1953. Financing of the full purchase price of the five DC-6B aircraft scheduled for delivery in 1956 has been arranged with several western banks headed by the Bank of America. Properties and Equipment At year end, the Company owned and operated a fleet of 32 aircraft composed of eight 60-pas- senger Douglas DC-6Bs, six 66-passenger Douglas DC-4 Coachmasters, nine 40-passenger Convair-240s and nine 22-passenger Douglas DC-3s. During the year, the Company's operations at San Francisco International Airport were moved to a new Terminal Building. Operations at Portland International Airport were trans- simplified balance sheet Western owns: 1954 Cash and U.S. Govt. securities. $ 3,949,365 Owed by others ......... . ... 1,791,652 Materials and supplies ........ 282,036 Buildings and improvements, net 2,242,955 Flight and other equipment, net. 10,903,178 Deposits on new equipment .... Prepaid expenses ............ 769,794 Deferred charges ... . ........ 265,221 20,204,201 Western owes: Notes payable .............. 5,180,918 Accounts payable ............ 2,739,222 Income taxes ................ 903,243 Tickets sold but not yet used ... 594,665 9,418,048 Excess of what is owned over what is owed, or shareholders' equity . ... $10,786,153 erred to a new and modem terminal building, providing facilities for the handling of an increased volume of traffic in the Pacific North- west. In line with a policy of keeping all facili- ties modern and efficient, new or remodeled sales offices were occupied during 1954 or will be occupied during 1955 in Beverly Hills, Den- ver, Las Vegas, Long Beach, Minneapolis, Palm Springs, Rapid City, San Diego, and Seattle. Shareholders As of December 31, 1954, there were issued and outstanding 716,213 shares of the capital stock of the Company, held by approximately 6,500 individual shareholders residing in each of the forty-eight states. The shareholders' equity was increased during the year from $9,746,451 to $10,786,153. This represents a book value for each share of stock outstanding of $15.06 at the end of 1954, as compared with $13.63 at the close of 1953, or $12.57 in 1952. During 1954, 440,000 shares were traded on the New York Stock Exchange within a price range of $8 low and $18 high. On the Los 1953 4,041,436 1,639,492 383,575 2,322,383 7,521,714 l, 154,038 790,727 269,426 18,122,791 3,727,244 2,963,035 1,046,045 640,016 8,376,340 9,746,451 Angeles Stock Exchange 10,049 shares were traded between a low of $8 7/s and a high of $17. On the San Francisco Stock Exchange 9,464 shares were traded within a price range of $9 low and $18 high. The year end closing price of the stock on the New York Stock Ex- change was $18. At the Annual Meeting of Shareholders in Los Angeles, on April 15, 1954, approximately 80% of the outstanding stock was represented in person or by proxy. Appreciation is expressed to those shareholders who were so represented. The Company solicits the support of its share- holders and hopes they will use its passenger and cargo services and will urge such use by their friends and associates. Personnel One of the greatest assets of Western Air Lines is its loyal and experienced personnel. At the end of 1954, the Company had 1,864 employees - 73% men, 27% women. For each individual employee, the Company had a gross investment of $12,600 in property and equipment as com- pared with $4,500 in 1946. The average length of service with the Company for all employees is six years. The average length of service of pilot captains is 13 years. Seventeen per cent of the personnel have been with Western ten years or more, 45% five years or longer, placing the Company among the highest in the industry for service longevity. Approximately 90% of the Company's em- ployees are represented by seven labor unions. Contracts with these unions were in effect at the end of 1954 and no negotiations were pending. For a number of years the Company has made available a voluntary employee Group Insurance Program under which life, accident and sickness and accidental death and dismem- berment insurance is provided for employees, and hospital insurance with medical and surgi- cal benefits is provided for employees and for members of their families. All employees are eligible to participate in this insurance, the cost of which is borne jointly by the Company and the employees. Benefits under all coverages have been broadened from time to time and the program is now one of the finest available. Approximately 68% of the employees carry group life insurance, while about 89% have availed themselves of the accident and sickness and hospitalization coverages. Eighty-six per cent of the eligible employees are participating in the Company-wide Con- tributory Retirement Program which was placed in effect on July 1, 1952, at which time the Company agreed to pay all past service premiums. During 1954, the Company con- tributed $408,857 to the Retirement Program, and collected and remitted to the insurance company $250,651 from participating em- ployees for their portion of current service premiums. Another "first" was added to Western Air Lines history on June 1, 1954, when the Company introduced its now-celebrated "Californian" flights. Establishing un- precedented standards for luxury service by a domestic airline, the "Californian" schedules feature reserved seats, champagne, filet mignon dinners, vanda orchids for the ladies, and select cigars for men passengers on deplaning. These no extra-fare flights have won wide attention and public acceptance that made possible steady expansion of the unique "red-carpet" service. le~s, Freight, ~ age, 3. 9 % WESTER s revenue dollar The Westernaire Federal Credit Union operated by the employees, of which 90% are members, had another successful year. A divi- dend of 5% was paid on savings accounts. The Employees Suggestion System has been con- tinued with cash awards for suggestions which have been accepted and adopted to improve the efficiency of the Company. The Triple-E employees' club in the Los Angeles area has continued to work closely with and co-sponsor activities with such organizations as Boy Scouts of America, National Polio Foundation, and the Blood Bank program of the American Red Cross. The Company maintains for its employees one of the most liberal free transportation policies in the industry. During 1954, Western's personnel and their families were issued 6,994 passes on Western's system, and under arrange- ments between Western and other scheduled airlines were issued 3,556 passes on the systems of other carriers for total space-available trans- portation which, computed on the basis of first class rates, would have cost employees $1,200,000. To improve the operating safety and effi- ciency of Western's personnel and procedures, to develop additional ways and means of increasing revenues, and to provide a forum for the exchange of ideas, a Company Progress Council was established in April, 1954. Its membership consists of the six Vice Presidents of the Company, representatives of the seven labor unions, and representatives of other employee organizations. Regular meetings are held during which problems facing the Com- pany and their possible solutions are discussed. Many benefits have been and will be derived from the activities of this Council. In 1954, a Legal Division was established in the Company's organization. This new division is responsible for the Company's legal affairs, Research, Route Development and Properties. It is headed by Mr. D. P. Renda who was elected a Vice President. Mr. Renda has been an attorney for Western since 1946 and had served as Assistant Secretary since 1947. Mr. Earnest H. Brown, a twenty-five year employee of the Company and its Director of Personnel since 1942, was elected Assistant Secretary succeeding Mr. Renda. Civil Aeronautics Board Proceedings During 1954 a number of steps were taken to strengthen Western's position as an inde- pendent regional trunkline, and it is anticipated that favorable results will be realized in 1955. Western operates a 5,525 mile system serving 44 cities located in 12 western states, and in the Province of Alberta, Canada. A map show- ing present and proposed routes appears on the back cover of this report. The Civil Aeronautics Board has held hear- ings in the so-called "Denver Service Case," which includes Western's application for a new 980 mile route between Denver and San Francisco/Oakland via Salt Lake City. In December, the Civil Aeronautics Board's Bureau of Air Operations recommended the granting of Western's application, modified to include Reno, Nevada, as an intermediate point between Salt Lake City and San Francisco/ Oakland. The final decision in this proceeding should be forthcoming before the end of 1955. Hearings were held in December, 1954, on the Company's application for authority to serve Sioux Falls, South Dakota, as an inter- I I ~ - I = I I. WESTERN'S expe mediate point on its routes between Denver and Minneapolis/St. Paul, and between Rapid City and the Twin Cities. The final decision in this case is expected in 1955. In 1954, the Company filed two applications to provide additional service in the Pacifi'c Northwest area. One application is for a 570-mile route from Portland, Oregon, to Calgary, Alberta, Canada, via Spokane, Wash- ington, and the other application is for author- ity to serve Spokane, Washington, as an inter- mediate point between Seattle, Washington, and Portland, Oregon, on the Company's Pacific Coast route. The Company is endeavoring to have these applications assigned for hearing in 1955. No action has been taken by the Civil Aero- nautics Board on the Company's application filed in 1953 for an 889-mile route between Denver, Colorado, and San Diego, California, via Phoenix, Arizona. It is hoped that this matter will be set for hearing before the end of 1955. simplified statement of income Western's income came from: 1954 1953 Passengers ................. $22,423,388 20,302,792 Express, freight and baggage .. 968,487 846,063 Mail ...................... 763,586 875,587 Gain on disposal of property .. 507,520 137,814 Other income ............... 352,932 910,736 25,015,913 23,072,992 Western's expenses were: Wages and salaries .......... 9,239,386 8,367,963 Social security, group insurance and retirement plan ...... 747,927 611,493 Gasoline and oil ............ 3,627,644 3,219,067 Materials and repair parts .... 1,960,041 1,754,256 Depreciation and obsolescence. 1,783,789 1,740,585 Advertising ................. 681,597 708,847 For service to passengers ...... 938,356 756,734 Rentals and landing fees ...... 684,624 620,714 Insurance ... ......... ...... 801,640 759,276 Interest ................... . 160,196 188,447 Taxes ...................... 1,630,663 1,908,712 Utilities and services ......... 716,557 662,087 Other costs .. ...... ....... .. 584,794 589,947 23,557,214 21,888,128 Net Income ................... $ 1,458,699 _J_.J_ 84,864 Wages and Salaries 42.4% In a decision issued January 25, 1955, the Civil Aeronautics Board ordered the continued suspension of the Company's operations at El Centro, California, and Yuma, Arizona, until December 31, 1957, and again denied the Com- pany's application to extend its route from Yuma to Phoenix, Arizona. The Company is still anxious to activate its certificate of public convenience and necessity approved by the President of the United States in 1946, for a route between Los Angeles and Mexico City. Notwithstanding strong civic support in Southern California for this needed service, the Governments of the United States and Mexico have not yet been able to resolve a bilateral agreement which would make possi- ble the inauguration of service over this route. Similarly, although authorized in 1946 by the United States Government to provide serv- ice to Calgary on its route between Great Falls and Edmonton, Alberta, Canada, Western has been unable to inaugurate this service in the absence of an agreement b tween the Govern- ments of the United States and Canada. Outlook The Civil Aeronautics Board through its d ci- sions has declared that a properly balanced Under a three-year contract effective January 1, 1955, between two of the West's pioneer companies, Union Oil Company of Cali- fornia will supply 55 million gallons of aviation gasoline for Western Air Lines flights along the Pacific Coast and between Southern California and Montana via Nevada, Utah, Idaho and Wyoming. system of domestic air transportation requires the development of an independent trunk airline in the West to provide safe, adequate and dependable service in accordance with the best interests of the public in that territory. Furthermore, that the overriding public interest necessitates, "the preservation of Western as a strong carrier in the western part of our country." To develop the Company's services and route structure, the Board of Directors and Management have undertaken a sound, long- range program designed to follow this man- date. This program is being materially accelerated by the steady growth of the West. In less than ten years the Los Angeles metropolitan area alone has absorbed a migration equal to the combined population of the cities of Pittsburgh and Baltimore. Similar startling examples can be cited in other areas served by Western. The rapid decentralization of industry, develop- ment of natural resources, including water and minerals, and the emerging economic inde- pendence of the West all contribute to the increasing need for regional air transportation. With the advent of coast-to-coast, non-stop flights, the four large transcontinental airlines must devote their main attention to this highly competitive long-haul business. Their service to many intermediate cities is minimized. Thus, the importance of the regional service offered by Western within its territory becomes more and more apparent. The pending regional route applications discussed elsewhere in this report are a part of the program the Company has adopted to provide and improve this inter- mediate type of air transportation. Toward the end of 1954, the Postmaster General started an experiment in transporting first-class mail by air, by Western and other airlines, between the major metropolitan centers on the Pacific Coast. This experiment, which involves no payment of subsidy, is work- ing well. It is expected that the public interest will in the reasonably near future require all domestic first-class mail to be carried by air where delivery can be thereby expedited, as is the case in many other nations. With pride, announcement is made of the election of Dr. Donald H. McLaughlin, of San Francisco, President of the Homestake Mining Company, to \iVestern's Board of Directors. Serving on this Board are outstanding civic and business leaders from practically all sections of Western Air Lines' system. Most prognostications of business trends in the West for 1955 are very optimistic. Western Air Lines, which is now one of the essential public utilities of the West, shares this view. A healthy increase in traffic of all types is fore- cast. Constant effort will be made to maintain the Company as the recognized leader offering the best air transportation services in the West. Much progress was made in 1954 by the West's own airline. More is expected in 1955. Respectfully submitted, I .. ,oa...c:.. ~~ President February 18, 1955 Los Angeles, California statement ol inc Operating Revenues: 1954 1953 Passenger ......... . ........ . ... . ......... . $22,423,388 20,302,792 Express, freight and excess baggage .... . .... . . 968,487 846,063 Charter and other transport services .......... . 47,418 43,503 Mail ...................... . ............ . . . 763,586 875,587 Incidental revenue - net ................... . . 277,900 808,852 24,480,779 22,876,797 Operating Expenses: Flying operations ............... . .......... . 7,311,395 6,557,636 Ground operations ....................... .. . 2,960,759 2,775,060 Flight equipment maintenance - direct ....... . 2,602,666 2,177,944 Ground and indirect maintenance ............ . 1,197,839 1,116,157 Passenger service .......................... . 1,743,498 1,477,868 Traffic and sales ............................ . 2,204,549 2,044,680 Advertising and publicity ................... . 723,049 749,434 General and administrative .................. . 1,251,832 1,156,809 Employee welfare .......................... . 747,927 611,493 Depreciation .............................. . 1,761,589 1,718,385 - - - - 22,505,103 20,385,466 Operating Income .. . .................. . 1,975,676 2,491,331 Non-Operating Income: Gain on disposition of property .............. . 507,520 137,814 Other .................................... . 27,614 58,381 535,134 196,195 Non-Operating Charges: Interest .. . ........................... . ... . 160,196 188,447 Amortization of routes, contracts and leases ... . 22,200 22,200 Other .................. . ................. . 19,715 42,015 202,111 252,662 Income before Federal Taxes on Income .. . 2,308,699 2,434,864 Provision for Federal Taxes on Income ( Note 1) .. . 850,000 1,250,000 Net Income ................... . .... . . . . $ 1,458,699 1,184,864 I I I me for the year ended december 31, 1954 (with comparative figures for 1953) statement of surl,lus earned surplus Amount as of December 31, 1953 . .. .... ........ . $ 4,462,199 Net income for 1954 . ....................... . 1,458,699 Excess of proceeds over par value of 1,000 shares of capital stock issued under restricted stock option plan . ..... . ... . 5,920,898 Dividends paid in cash - $0.60 a share . .. . .. .. . 429,277 Amount as of December 31, 1954 (Note 2) . . .. .. . $ 5,491,621 capital surplus 4,569,039 9,280 4,578,319 4,578,319 for the year ended december 31, 1954 balance sheet ......... . as ol December 31, 1954 (with comparative figures for 1953) -------assets--------------- --- - --------- ---- - - - ------- -- . ___ - - - - - -- - - - -- - - - - - - - - - - -- --- - --- - - -- - - I iabi I ities ----- - Current Assets: 1954 1953 Current Liabilities: 1954 195'3 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,951,955 3,045,126 Current portion of long term debt ...................... $ 1,426,000 1,655,000 U.S. Government Securities at cost ..................... 997,410 996,310 Accounts payable .................................... 1,033,282 1,162,876 Receivables: Accounts payable - taxes collected from others .......... 299,081 342,107 Traffic balances ................................. 1,357,740 1,009,307 Accrued salaries, wages, taxes, insurance and other ....... 1,137,709 1,213,252 U.S. and State Government Departments ........... 271,577 355,616 Air travel plan deposits ............................... 269,150 244,800 Other (net of allowance for doubtful accounts $30,000) 162,335 274,569 Unused transportation ............................... 594,665 640,016 1,791,652 1,639,492 Federal taxes on income- estimated ................... 543,243 842,045 Materials and supplies ................................ 282,036 383,575 Total Current Liabilities . .......................... 5,303,130 6,100,096 Prepaid expenses .................................... 769,794 790,727 Long term debt-secured (net of current portion included Total Current Assets . ............................. 6,792,847 6,855,230 in Current Liabilities) (Note 2) ........................ 3,754,918 2,072,244 Sundry securities ........................................ 68,728 16,377 Deferred Federal taxes on income (Note 1) .................. 360,000 204,000 Properties and equipment at cost (Note 2): Commitments and contingent liabilities (Note 3) Flight equipment .................................... 18,295,082 13,801,038 Retirement plan (Note 4) Buildings on and improvements to leased property ....... 3,351,564 3,294,762 Other property and equipment ........................ 1,821,723 1,758,300 Shareholders' Equity: 23,468,369 18,854,100 Common stock - $1.00 par value per share Less allowance for depreciation ................... 10,322,236 9,010,003 Authorized 2,000,000 shares (Note 5) 13,146,133 9,844,097 Issued 716,213 and 715,213 shares respectively ...... 716,213 715,213 Deposits on equipment purchase contracts .................. 1,154,038 Capital surplus ...................................... 4,578,319 4,569,039 Routes, contracts and leases, less amortization $157,860 ....... 44,425 66,625 Earned surplus from December 31, 1934 ( Note 2) ....... 5,491,621 4,462,199 Deferred charges ........................................ 152,068 186,424 10,786,153 9,746,451 $20,204,201 18,122,791 $20,204,201 18,122,791 NEW YORK ATLANTA l!!IALTIMORE l!IILLINOS !SOSTON l!!IU,.P-ALO CHARLOTTE CHICAGO CINCINNATI CLEVll!:L.AND COLUMBUS DALLAS DC:NVEFt DETROIT ORl!:ENSl!I0,-0 HOUSTON ~~c~~~~a LOS ANOELl!:8 LOUISVILLE MEMPHIS MILWAUKEE MINNEA.-0Ll8 NASHVILLE NEWARK NEW ORLltAN8 OKLAHOMA CITY OMAHA PHIL.ADELPHIA PITT81!!1UROH PORTLAND RICHMOND ST. LOUIS ir,!i~co PEAT, MARWICK, MITCHELL & Go. CERTIFIED PUBLIC .ACCOUNT.ANTS 616 SOUTH SPRINO STREET LOS AN6ELES 14, CALIF, ACCOUNTANTS' REPORT A,-RICA AUSTRALIA CANADA CONTINENTAl. EUROPE GREAT BRITAIN HONG KONG INOIA JAPAN ME)(ICO SOUTH AMEAICA The Board of Directors Western Air Lines, Inc.: We have examined the balance sheet of Western Air Lines, Inc. as of December 31, 1954 and the related statements of income and surplus for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the accompanying balance sheet and statements of income and surplus present fairly the financial position of Western Air Lines, Inc. at December 31, 1954 and the results of its operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Los Angeles, California February 18, 1955 Note 1. Deferred Federal Taxes on Income. Depreciation for Federal tax purposes will, through 1957, exceed that reported on the books of account as a result of deducting accelerated depreciation in tax returns. Accordingly, the Federal tax provision reflected on the Statement of Income includes $156,000 set aside in 1954 to offset the estimated effect on Federal taxes which will occur in the years 1958-1961 when the depreciation recordable on the books of account will be more than that allowable for Federal tax purposes. Note 2. Long Term Debt-Secured. The notes payable of $5,180,918 ($1,426,000 current and $3,754,918 long term) are repayable in monthly amounts aggregating $1,305,000 annually plus interest at 3 % per annum with final maturity on December 31, 1960. Additional principal is to be repaid on or before each April 1 in amount equal to 33 % of net income of the preceding calendar year after adjustments for gains on disposition of property when the related proceeds are remitted to the lender. The in- debtedness is secured by specified properties representing a total cost of approximately $19,750,000. The related bank credit agreement includes, among other things, conditions and re- quirements which effectively limit the amount of earned surplus distributable as cash dividends. The greatest amount is restricted by the requirement that the excess of current assets over current liabilities ( exclusive of the current portion of long term debt) shall not be less than $1,300,000. Earned surplus as of December 31, 1954 was accordingly restricted in the amount of $3,875,904 leaving $1,615,717 not so restricted. In 1955 the credit agreement was amended to provide an additional $6,000,000 to be used for the acquisition of the Douglas DC-6B aircraft referred to in Note 3. The com- mitment fee is of 1 % per annum. Note 3. Commitments and Contingent Liabilities. The Company has ordered five new Douglas DC-6B aircraft with delivery scheduled to commence in May 1956. This represents a commitment as of December 31, 1954 of approximately $6,000,000 . As of December 31, 1954 the Company was contingently liable for claims and law suits in which it is or may be a defendant but management and its counsel believe the ultimate liability, if any, will not materially affect the financial statements. Note 4. Retirement Plan. The cost of the insured contributory retirement plan as charged to operating expenses in 1954 totaled $408,857 for both current and past services. Management contemplates that the remaining past service costs will be funded over a period of approximately nine years and will require annual payments of $106,000. Note 5. Options to Purchase Capital Stock. As of December 31, 1954 34,000 shares were reserved under a Restricted Stock Option Plan approved by the shareholders in 1951 for officers and key employees; in 1954 an option was exercised for 1,000 shares. Of the reserved shares 30,000 have been allocated and related options have been granted for 29,500 shares at prices ranging from $8.19 to $14.14 a share. The term of each option granted shall be five years from the date granted and the right to grant options under this plan shall terminate April 9, 1956. G. G. Brooder Assistant to the President Western Air Lines, Inc. Denver, Colorado WESTERN AIRLINES board ol directors and executive stall Stanley R. Shatto Vice President-Operations and Director Western Air Lines, Inc. Earnest H. Brown Assistant Secretary and Personnel Director Western Air Lines, Inc. Arthur F. Kelly Vice President-Sales Western Air Lines, Inc. Paul E. Sullivan Vice President-Administration and Secretary Wes tern Air Lines, Inc. C. J. J. Cox Controller and Assistant Treasurer Western Air Lines, Inc. Marvin W. Landes Vice President-Service and Director Western Air Lines, Inc. J. Judson Taylor Vice President and Treasurer Western Air Lines, Inc. Hugh W. Darling Director Guthrie, Darling & Shattuck, Attorneys at Law Los Angeles, California Donald H. Mclaughlin Director President, Homestake Mining Company San Francisco, California Harry J. Volk Director Vice President for Western Operations The Prudential Insurance Company of America Los Angeles, California ---------------------------------------------------------- Terrell C. Drinkwater President and Director Western Air Lines, Inc. Thomas M. Murphy Assistant to the President Western Air Lines, Inc. Los Angeles, California John M . Wallace Director President, Walker Bank & Trust Company Salt Lake City, Utah Robert E. Driscoll Director Chairman of the Board First National Bank of the Black Hills Rapid City, South Dakota L. Welch Pogue Director Pogue & Neal, Attorneys at Law Washington, D.C. Alexander Warden Director Publisher, Great Falls Tribune-Leader Great Falls, Montana Hector C. Haight Director Consultant Hughes Aircraft Company Culver City, California D. P. Renda Vice President-Legal Western Air Lines, Inc. Sidney F. Woodbury Director Chairman of the Board Woodbury & Company Portland, Oregon Joseph F. Ringland Director President, Northwestern ational Bank of Minneapolis Minneapolis, Minnesota ------------------------------WESTERN AIRLINES------ a decade of growth ... ------- financial summary ----------------------------------- 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 Revenues:* Passenger ..................... $22,423 20,302 16,250 13,688 11,395 8,471 7,813 10,114 10,474 5,654 Mail .......................... 764 875 719 1,212 2,090 2,504 1,293 1,570 1,326 1,239 Express, freight and excess baggage . 968 846 662 507 497 313 483 410 318 206 Other ......................... 326 853 964 875 264 246 31 282 118 132 - - - - - - - - Total Revenues ............... 24,481 22,876 18,595 16,282 14,246 11,534 9,620 12,376 12,236 7,231 Operating Expenses:* Depreciation ................... 1,761 1,718 1,019 998 1,124 1,335 1,164 1,845 1,369 555 Payroll ........................ 9,239 8,367 7,067 6,084 5,353 4,855 4,973 5,773 5,916 3,110 Other ......................... 11,505 10,300 7,674 6,666 6,133 4,374 4,225 5,423 5,828 3,187 Total Operating Expenses . . . . . . . 22,505 20,385 15,760 13,748 12,610 10,564 10,362 13,041 13,113 6,852 Operating Profit* .................. 1,976 2,491 2,835 2,534 1,636 970 (742) (665) (877) 379 Other Income* ................... 333 (56) ( 103) 280 ( 196) (258) ( 186) (192) (20) - - - - - - 2,309 2,435 2,732 2,814 1,440 712 (928) (857) (877) 359 Provision for Federal Taxes on Income* 850 1,250 1,500 1,425 690 391 (589) 88 (277) 169 - - Net Income* ................... $ 1,459 1,185 1,232 1,389 750 321 (339) (945) (600) 190 * * * - - - - - -- Earnings per sharef ................ $ 2.04 1.66 1.72 2.52 1.43 0.61 (0.65) ( 1.80) ( 1.14) 0.46 Dividends paid per share ........... 0.60 0.60 0.60 0.50 * * * Working capital* .................. $ 1,490 755 1,364 435 981 243 (315) 1,410 (4,557) 764 Long-term debt* .................. 3,755 2,072 2,903 1,924 2,231 3,113 3,551 3,800 287 170 Properties and equipment- net* ..... 13,146 9,844 9,702 6,588 6,621 7,171 8,094 6,292 7,581 1,631 Shares outstanding* ............... 716 715 715 550 525 525 525 525 525 410 Shareholders' equity - total,:, ........ 10,786 9,746 8,991 6,396 5,045 4,295 3,974 4,314 3,665 2,009 Shareholders' equity-a share f ....... $ 15.06 13.63 12.57 11.63 9.61 8.18 7.57 8.21 6.98 4.90 ------- operating statistics ----------------------------------- Route Miles. . . . . . . . . . . . . . . . . . . . . . 5,525 5,525 5,016 5,016 5,016 4,727 4,727 4,725 4,808 3,117 Available Ton Miles':' . . . . . . . . . . . . . . 80,261 68,580 48,557 43,036 44,515 32,034 29,534 35,757 35,831 Revenue Ton Miles* . . . . . . . . . . . . . . . 42,669 38,088 31,434 27,549 24,697 16,383 14,660 20,887 22,877 Passengers and Tonnage Carried: Revenue passengers .............. 834,910 838,732 774,079 691,322 61~,624 422,193 353,569 491,680 602,302 303,931 Mail tons . . . . . . . . . . . . . . . . . . . . . . 3,283 3,284 3,243 3,419 2,150 1,359 1,543 1,722 1,852 3,347 Express and freight tons. . . . . . . . . . 4,276 4,206 3,729 3,191 3,396 2,435 2,702 2,252 1,640 754 Revenue Miles Flown:* Airplane miles.. . . . . . . . . . . . . . . . . 15,842 14,450 12,631 11,487 11,783 9,496 8,707 9,607 10,594 7,279 Passenger seat miles ............. 721,255 613,814 453,332 401,720 414,169 299,503 243,771 312,615 301,856 138,852 Passenger miles ................. 402,255 359,965 298,931 259,693 233,118 155,747 135,724 194,923 214,023 117,106 Mail ton miles. . . . . . . . . . . . . . . . . . 1,669 1,610 1,358 1,449 978 567 574 733 706 1,120 Express and freight ton miles. . . . . . 2,556 2,100 1,524 1,282 1,442 926 1,089 912 635 307 Other Statistics: Passenger load factor ...... .. ..... % 55.7 58.6 66.0 64.7 56.3 52.0 55.7 62.4 70.9 84.3 Average length in miles per passenger trip ................ 482 429 386 376 376 369 384 396 355 385 Average revenue per passenger mile $ .0557 .0564 .0544 .0527 .0489 .0544 .0576 .0519 .0489 .0483 Number of employees end of year .. 1,864 1,813 1,649 1,459 1,279 1,226 1,285 1,529 2,396 1,674 *000 omitted t based on shares outstanding at close of respective years vacation areas in 1Neslern America Puget Sound Playgrounds Mt. Rainier National Park Olympic National Park Columbia River Gorge Mt. Hood National Forest Redwood Empire Golden Gate-Bay Area California Beaches - Santa Monica and Malibu Hollywood - Pasadena Santa Catalina Island San Diego - La Jolla Tijuana - Mexico Palm Springs - Desert Resorts Las Vegas - Lake Mead Bryce and Zion National Parks Cedar Breaks National Monument Grand Canyon National Park Great Salt Lake Beaches - Mormon Temple Square Sun Valley Grand Teton National Park- Jackson Hole Dude Ranches Yellowstone National Park Glacier National Park Waterton International Peace Park Canada's Banff and Lake Louise Jasper National Park Montana and Wyoming Dude Ranches Rocky Mountain National Park Mt. Rushmore National Monument The Black Hills Minnesota's "Land of 10,000 Lakes" served by WESTERN AIRLINES _- -- _ --- - I/ --:--:. ~~ ~ s PHOENIX WESTERN AlkUNES Present and Proposed Routes