1926 1966 :' Board of Directors OTIS CHANDLER, Publisher, Los Angeles Times & Vice President, Times-Mirror Co., Los Angeles, California HUGH w. DARLING, Darling, Shattuck, Hall & Call Attorneys-at-Law, Los Angeles, California TERRELL c. DRINKWATER, President Western Air Lines, Inc. GOODRICH LOWRY, Chairman of the Board Northwest Ban corporation, Minneapolis, Minnesota DONALD H. MC LAUGHLIN, Chairman of the Board Homestake Mining Co., San Francisco, California EDWIN w. PAULEY, Chairman of the Board Pauley Petroleum, Inc., Los Angeles, California STANLEY R. SHATTO, Senior Vice President- Operations, Western Air Lines, Inc. J. JUDSON TAYLOR, Senior Vice President and Treasurer, Western Air Lines, Inc. VERNON o. UNDERWOOD, President, Young's Market Co., Inc., Los Angeles, California HARRY J. VOLK, President, Union Bank Los Angeles, California JOHN M. WALLACE, Chairman of the Board Walker Bank & Trust Co., Salt Lake City, Utah ALEXANDER WARDEN, Newspaper Consultant Great Falls, Montana HOWARD c. WESTWOOD, Covington & Burling Attorneys-at-Law, Washington, D.C. Directors Emeriti ROBERT E. DRISCOLL, Honorary Chairman of the Board First National Bank of the Black Hills, Rapid City, South Dakota SIDNEY F. WOODBURY, President Pine Street Co., Portland, Oregon Executive Staff Senior Officers TERRELL c. DRINKWATER, President STANLEY R. SHATTO, Senior Vice President-Operations MARVIN w. LANDES, Senior Vice President-Service ARTHUR F. KELLY, Senior Vice President-Sales J. JUDSON TAYLOR, Senior Vice President and Treasure, DOMINIC P. RENDA, Senior Vice President- Legal and Secretary G. G. BROODER, Senior Vice President Operations Division STANLEY R. SHATTO, Senior Vice President ANTON B. FAVERO, Vice President-Maintenance HAROLD w. CAWARD, Vice President-Flight Operations TERRELL s. SHRADER, Vice President-Industrial Relations RICHARD B. AULT, Tfice President-Engineering PETER P. WOLF, Assistant Vice President and Director of Communications CHARLES s. FISHER, Assistant Vice President and Director of Flight Schedules JAMES w. STONE, SJistem Chief Pilot Service Division MARVIN w. LANDES, Senior Vice President PHILIP E. PEIRCE, Vice President-Ground Senices RICHARD P. ENSIG:--:, Vice President-InFlight Services Sales Division ARTHUR F. KELLY, Senior Vice President BERT D. LYNN, Vice President-Advertising and Sales Promotion HARRY L. WHITE, Director of Sales Administration WILLIS R. BALFOUR, Director of Agency and Interline Salei s. J. ROGERS, Director of Traffic RAY SILVIUS, Director of Public Relations MEMPHIS E. SULLIVAN, Special Assistant to the Senior Vice President Treasury Division J. JUDSON TAYLOR, Senior Vice President and Treasurer CHARLES J. J. cox, Vice President and Controller KENNETH w. KENDRICK, Director of Purchasing and Stores H. s. GRAY, Director of Budget EUGENE D. OLSON, Assistant Treasurer legal Division DOMINIC P. RENDA, Senior Vice President and Secretar; JOHN w. SIMPSON, Assistant Secretary and Director of Law THOMAS M. MURPHY, Director of State and Community Affairs JAMES L. MITCHELL, Assistant Vice President and Director of Research JAMES M. KEEFE, Director of Properties Our cover Rcprciwnting the progress that has been made in airline snvicc during WcstC'rn\ ,lQ years of operation arc six :1ircraft that playn .... 11,718,062 Materials ~ repairs 11,410040 Utilities anti &,sog,793 Service to p.- 4,023,212 l.entals ind lancl fees .... 3,599,210 3,313,110 Advertising and 3,741,207 3,243,993 Insurance . . >" 2,490,247 2,121,579 Interest . . . 2,105,096 1,946,968 Other costs . . 2,292,057 2,025,356 113,544,219 105 147 015 &T,M&NDCCS $ 12,130,688 $ 18,351,027 Scat Miles Produced Passenger Revenues by Aircraft 1jpe by Class of Service millions of dollars in billions 120 100 80 - 60 electra 40 pTsiori" 20 '61 '62 '63 '64 '65 '61 '62 '63 '64 '65 Deluxe Coach 7 In order to provide the additional funds required for the acquisition of aircraft and equip- ment ordered during the year, Western, late in 1965, negotiated a new agreement with the bank and insurance companies to whom the company owed $41,640,000 at December 31, 1965. The new credit agreements will consolidate the outstanding loans into the new agreements, and provide for a $55,000,000 aggregate line of credit which will permit Western to borrow an addi- tional $13,360,000 as required. The bank portion of the credit, which amounts to $25,000,000, is in the form of a revolving fund credit until March 31, 1969. During this period, the interest rate on the revolving credit is percent in excess of the prime commercial rate but in no event to be less than 4 percent or more than 5 percent. On March 31, 1969, the balance then owing to the bank will become a term loan repayable over a five-year period with an interest rate of 5 percent. The new credit agreements with the insurance companies provide for $30,000,000 of long-term funds repayable between 1970 and 1980 and car- rying an interest rate of 5 percent. The terms of these credit agreements are explained in more detail in Footnote 2 of the Notes to the Financial Statements. The additional funds provided by the new credit agreements, plus anticipated internal funds to be generated, will, in the opinion of the com- pany, provide adequate financing for all aircraft and equipment now on order. The removal of the provisions for current payments of the long-term debt is a prime reason for the increase in working capital from $8,826,579 to $11,502,712 at the close of 1965. The State- ment of Source and Application of Funds for 1965 ( with comparative figures for 1964) further explains both the sources of $45,410,523 in funds and the usage thereof totaling $42,734,390. Cash and short-term securities declined from $22,421,395 at the end of 1964 to $14,731,294 at December 31, 1965, and total current a sets 8 Below: Pilots in ground school typify increasing em/Jhasis Western places on training of employees. 9 decreased from $34,146,311 to $27,987,436 at the close of 1965. These decreases were accomplished by the revisions made to the loan agreements dur- ing 1965 and 1966 to permit the company to lower both working capital and the related level of long- term debt. Shareholders and Stock At the close of 1965, there were 4,292,190 shares of Western Air Lines common stock issued and outstanding. The stock was held by approximately 20,000 stockholders residing in each of the 50 states and several foreign countries, almost triple the number who held stock prior to the May 1964 three-for- one stock split. At the 1965 annual meeting of shareholders held in Los Angeles in April, 91.8 percent of all shares were voted in person or by proxy. Shareholders' equity in 1965 increased to a record $62,710,025, or $14.61 a share, compared to 1964 equity of $54,013,089, or $12.58 a share. In April, the symbol for Western's stock was changed from "WSX" to "WAL" on the New York and Pacific Coast stock exchanges. Equipment Western moved closer to an all-jet fleet during 1965, taking delivery on six Boeing 720B fanjets and ordering for future delivery additional 720B's and a fleet of new twin-jet Boeing 737s. Delivery of the 720B's during 1965 (January, March, May, June [2] and July) increased the company's fleet of the four-engine jets to 18. Addition of four others in 1966 will increase the fleet to 22 720B's by July and permit the com- pany to complete the phase-out of its Douglas DC-6B piston planes in the latter part of the year. After long and careful study, Western ordered as the eventual succes or to its Electras a fleet of 16 short-range Boeing 737s for delivery in 1968 and 1969 and took options for nine additional 73 7 . 10 Below: W AL's all-jet fleet of the future will include short- range Boeing 737, ordered in 1965. WE STER ---- 11 Below: Modern jets and traditional mariachis make Acapulco popular addition to WAL system. To facilitate training for the twin-jet fleet, the company also ordered for delivery in 1967 a 737 simulator which will electronically duplicate the actual airplane in a ground trainer and permit company pilots to be trained on the new Boeing plane even before the first aircraft is delivered. Early in 1966, the company ordered two additional 720B's and obtained an option for two more, all for delivery in 1967. During 1965, the company sold eight DC-6B's and leased one and, at year's end, oper- ated 18 Boeing 720B's, 12 Lockheed Electra prop- jets and five DC-6B's. Facilities In addition to completing the move into its new headquarters and expanded main maintenance base at Los Angeles International Airport, Western continued to improve and expand its passenger and cargo service facilities at a number of points on the system during 1965 and participated in the planning of airport terminal improvement for the future at other locations. To provide improved reservations services in the company's No. 1 traffic-generating city, Los Angeles reservations offices were moved from their downtown location to the refurbished building which formerly housed company headquarters. At Denver, the company moved its arrival and departure activities to a new concourse which provides all-weather passenger loading bridges and comfortable waiting areas. A new main terminal building is scheduled for completion in April. Passenger loading bridges were completed at Portland and increased at Los Angeles and Seattle; construction was begun on a new Western board- ing facility at San Francisco, new terminals at Aca- pulco, Palm Springs, Sacramento and San Diego, additional aircraft gate positions at Phoenix and loading bridges at Minneapolis/St. Paul. Below: "Fanjet Commuter" service) introduced in 1965) offers four-engine jets at low fares. Sales and Service The best on-time record in the domestic airline industry, improvements in the product for the comfort and convenience of the business traveler and continued development of tour packages and low-cost services to stimulate greater vacation and pleasure travel were the goals and accomplishments of Western's 1965 marketing program. Western's excellent on-time record proved to 14 be a valuable sales tool throughout the year. According to figures supplied to the Civil Aeronau- tics Board by domestic airlines for the top passen- ger markets of the U.S., Western moved into the No. 1 on-time position in February and through November (latest figures available) led the indus- try for the year. Western boarded 3,574,793 passengers during the year, greatest number in company history. Passenger revenues also established a new record of $116,565,319, compared to $111,432,041 in 1964, the previous high. Although remaining among the highest in the industry, the company's overall load factor decreased from 58 percent in 1964 to 56.5 percent in 1965. Revenues from air cargo shipments ( freight, express, excess baggage, air mail and regular first class mail) increased to $5,538,639 for 1965 from $5,279,081 in 1964. The Civil Aeronautics Board established a new mail rate effective June 19, 1965, which reduced the rate of compensation for all the domes- tic trunklines, including Western. The line haul charge was reduced from 30.1 7 cents per mail ton mile to 27.15 cents per mail ton mile. This reduc- tion results in a decrease in the total rate of mail compensation for Western of approximately 7.4 percent. However, revenues from mail increased from $1,560,611 in 1964 to $1,730,084 in 1965. At the same time, the CAB instituted an inves- tigation to determine the proper rate of compensa- tion to be paid beginning January 1, 1967, either on the same basis now in effect, or on the basis of a new priority mail plan to be formulated by the Post Office Department for the consolidation of air mail and first class mail into a single class of priority mail to be moved by whatever transporta- tion means are most appropriate to attain overnight delivery of 95 percent of all priority mail. Highlighting Western's campaign to obtain a larger share of the huge business travel market, which continues to represent the major share of all air travel, was the inauguration on April 1 of Western's "Fan jet Commuter" service between Los Angeles and San Francisco / Oakland. Operated with 720B fanjets at a fare of $13.50 - lowest per- mile jet fare in the U.S. - the service wa extended into the plea ure travel field in July when it was established on the Los Angeles-Las Vegas and Las Vegas-San Francisco routes, providing a "triangle" of low fare jet commuter services between the three cities. Speeded-up baggage handling, improved reservations service and continued emphasis on streamlined ticketing procedures also were stressed for the convenience of the air traveler. In order to provide even greater speed and accuracy in handling its rapidly growi~g number of passenger reservations, Western has ordered for introduction in 1968 an electronic reservations and communications system which will use IBM's most advanced computing equipment. Using television- like devices at ticket counters and reservations offices throughout the system, more than 500 agents at a time will be able to "talk" with the com- puters to obtain all information pertinent to a pas- senger's travel plans. Capable of storing more than 300 million characters of information and of dis- playing information on the agent set screens at a rate of more than 3,000 words per minute, the sys- tem will provide a new dimension in service to Western's passengers. The computer also will be used for electronic switching of messages from point to point on the company's route system and for processing payrolls, accounting reports, mainte- nance records and other data needed for manage- ment decisions. Two of the most famous vacation areas on the North American continent- Yellowstone Park and Acapulco, Mexico- were added to the company's route system during the year. Western resumed flights to Yellowstone in June after a 17-year absence, upon completion of a new airport. Working with tour operators, travel agents and other airlines throughout the U.S., the company made Yellowstone a focal point of its major summertime promotion, "North Country Adventure ~' which annually promotes vacation travel to the Pacific Northwe t, Canada, Alaska, Montana, W yomin g, South Dakota and Minnesota. Already boasting some of the finest winter 15 resort areas in the West, the company added still another in Acapulco, the sun-and-sea resort on the west coast of Mexico. Twelve special weekend flights were operated between Los Angeles and Acapulco in December and regular daily service was inaugurated to Acapulco in the first month of the new year. Also added to Western's Mexico serv- ice for 1966 was an additional daily nonstop flight between Los Angeles and Mexico City, resulting in an overall increase of 50 percent in Mexico service, from 14 flights a week to 21 flights a week. Many of the factors which have contributed to Western's growth in the past again received emphasis during 1965: Cooperation with travel agents, who produced approximately 38 percent of the company's passenger revenues, through educa- tional seminars, familiarization trips and the mar- keting of numerous tour packages; expansion of the use of non-airline credit cards, which Western pioneered among airlines in 1959; increased atten- tion to group travel and convention sales, which increased 20 percent during the year; and expanded sales effort in military and government travel, which increased 27 percent on WAL's sys- tem during the year. Promotion of winter vacation travel, which has contributed to the growth of traffic to "Sun Country" resorts, continues to be Western's largest single advertising and sales campaign of the year. Highlighting the 1965 program was the prepara- tion and distribution of a full-color, eight-page Sun- day newspaper supplement- first of its kind to be used to develop travel in the West-which described to more than four million subscribers in northern cities the many attractions of "Sunbreak" areas on the company system. Western also joined with government and resort organizations in Utah to promote new fam- ily skiing centers in that state. In 1966, these efforts are being expanded to include other popular win- ter sports areas on the company's system, including those in Colorado, California, Nevada, Montana, 16 South Dakota, Idaho, the Pacific Northwest and Canada. Route Development On February 7, 1966, the company received the disappointing news that the U.S. Court of Appeals for the District of Columbia had affirmed an order by the Civil Aeronautics Board, issued on Decem- ber 14, 1965, denying Western's application to serve Hawaii. On three separate occasions during 1965 the Court had returned to the CAB its decisions on Western's application for California-Hawaii route authority and right up until the Court's final deci- sion in February 1966 the company had remained hopeful that the Hawaii route that was first given to Western in December 1960 would finally be implemented by a favorable court decision. As a result of this final verdict, the company has filed a new application for service to Hawaii and beyond to the Orient for inclusion in the new route proceeding that will be held to again review the air service needs of the vast Pacific area. Extensive hearings were held in 1965 in the Pacific Northwest-Southwest Service Investigation, an examination of the need for new and improved air service from the Pacific Northwest, through Utah and Colorado, to the Texas-Oklahoma- Louisiana area and the Kansas-Missouri area. In addition to Western, nine domestic trunklines and several local service carriers are seeking authority to serve these routes. The Bureau of Operating Rights, a part of the CAB's staff, recommended to the CAB that it grant Western authority to provide service between Salt Lake City and Denver, on the one hand, and Dallas, Fort Worth, Houston, and San Antonio, on the other hand. This would permit Western to link these major Texas cities with the Northern Rocky Mountain area, including Colorado, Utah, Wyoming, Idaho, Montana, and Alberta, Canada. Western is the only applicant in the proceeding that could provide this service, of particular benefit to the oil industry - an important segment of the Southwest and the Northern Rocky Mountain area economy. Briefs to the Examiner were filed Decem- ber 20, and in addition to the Texas-Utah, Colo- rado, Wyoming, Idaho, Montana, Alberta, Can- ada area, Western is pressing for the routes to the Pacific Northwest which the BOR recommended for two of the other trunkline applicants. An exam- iner's decision is expected in the spring of 1966, with a CAB decision by the end of 1966. In 1965, the United States Government con- cluded negotiations with Mexico and Canada which provide for new air service by U.S. carriers to those countries. The Air Transport Agreement between the United States and Mexico was extended to June 30, 1970, and Acapulco was added to Western's Los Angeles-San Diego-Mexico City route. The Civil Aeronautics Board granted Western an interim exemption to serve Acapulco as a co-terminal with Mexico City pending com- pletion of a normal certificate proceeding in 1966. The new Air Transport Agreement between the United States and Canada authorizes for U.S. carriers, among other things, several routes of inter- est to Western, including a Los Angeles/San Fran- cisco-Vancouver route and a Los Angeles-Toronto route. Western and several other carriers are appli- cants for this new authority. In addition, the new Canadian bilateral agreement establishes Denver as a co-terminal with Great Falls on Western's pres- ent Calgary route. Hearings on applications for the new U.S.-Canada routes will be held in 1966. Personnel Ten years ago, when Western operated only pi ton aircraft and carried fewer than a million passen- gers a year, the company employed 69 men and women for each airplane it flew. Average annual salary per employee was $5,500 and the company's total assets were equivalent to $11,000 per employee. In 1965, Western provided jobs for 126 employees for each airplane in its fleet; wages and salaries totaled $32,902,116, an average of $7,700. There were 4,420 employees on the employment roster as of December 31, and Western's assets were equal to $32,200 per employee. Western is justifiably proud of the contribu- tions its employees, among the most experienced in the airline industry, have made to the development of air transportation. Their ability to comprehend and put to practical use the increasingly complex technologies of the Jet Age has produced an upsurge of public and investor confidence that is unmatched in the history of the industry. Eighty-nine percent of Western's employees are represented by five labor unions. Contracts were signed during the year with the pilots and dis- patchers. Agreements which cover the company's mechanics, stewardesses and clerks will be open for negotiation in 1966. Six Western vice presidents were elevated to the newly created position of senior vice president and eight assistant vice presidents elected vice presi- dent by the company's board of directors. The new senior vice presidents are Stanley R. Shatto, operations; Marvin W Landes, service; Arthur F Kelly, sales; J. Judson Taylor, treasury; Dominic P. Renda, legal; and G. G. Brooder. Elevated to vice presidents were Richard B. Ault, engineering; Harold W Caward, flight opera- tions; Charles J. J. Cox, controller; Richard P. Ensign, in-flight services; Anton B. Favero, main- tenance; Bert D. Lynn, advertising and sales pro- motion; Philip E. Peirce, ground services; and Terrell S. Shrader, industrial relations. Elected assistant vice presidents were Charles S. Fisher, flight chedule ; James L. Mitchell, research; and Peter P. Wolf, communications. Eugene D. 01 on, former assistant controller, was elected assi tant trea urer. 17 Ten Years of Growth 1965 1964 1963 1962 1961* 1960 1959 1958* 1957 1956* Financial Revenues: ** Passenger . $ 116,565 111,432 93,913 81,170 59,737 64,356 59,194 31,459 39,243 26,249 Express, freight and excess baggage . 3,808 3,718 3,248 2,964 2,271 2,473 2,256 1,305 1,596 954 Mail 1,730 1,561 1,320 1,427 1,231 1,393 1,295 732 1,067 775 Other 1,496 934 946 809 1,013 855 508 474 313 210 Total Revenues 123,599 117,645 99,427 86,370 64,252 69,077 63,253 33,970 42,219 28,188 Operating Expenses:** 13,596 Depreciation and amortization . 11,718 9,762 11,895 11,211 10,000 6,643 4,136 3,01 I 2,294 Payroll . 32,902 29,040 24,749 21,840 17,987 19,478 17,704 11,947 14,335 10,283 Other 54,109 49,988 43,598 41,254 32,864 33,323 27,696 16,831 20,076 13,009 Total Operating Expenses . 100,607 90,746 78,109 74,989 62,062 62,801 52,043 32,914 37,422 25,586 Operating Income** 22,992 26,899 21,318 11,381 2,190 6,276 11,210 1,056 4,797 2,602 Interest** (2,105) (1,947) (2,322) (2,286) (1,889) (1,330) (1,127) (1,023) (780) (394) Other Income and Expenses-Net** 260 799 621 483 ( 119) 438 180 74 . 90 31 21,147 25,751 19,617 9,578 182 5,384 10,263 107 4,107 2,239 Provision for Taxes on Income** . 9,900 12,400 9,800 4,875 125 3,050 5,456 227 2,233 1,205 Net Earnings from Operations** 11,247 13,351 9,817 4,703 57 2,334 4,807 ( 120) 1,874 1,034 Extraordinary Items (Less Applicable Income Taxes):** Gain on disposition of property 883 191 889 807 105 210 1,522 528 2,010 Write-down of aircraft (583) (578 ) Net Earnings** $ 12,130 13,351 9,425 5,014 864 2,439 5,017 1,402 2,402 3,044 --- - - - - - - - - Shareholders Net earnings from operations per sharet . $ 2.62 3.11 2.29 1.10 0.01 0.54 1.47 (0.04) 0.65 0.38 Extraordinary items per sharet . 0.21 (0.09) 0.07 0.19 0.03 0.06 0.50 0.18 0.73 Total. $ 2.83 3.11 2.20 1.17 0.20 0.57 1.53 0.46 0.83 1.11 Dividends paid per share: --- -- Casht $ 0.80t 0.65 0.37 0.33 0.33 0.33 0.27 0.24 0.23 0.22 Stock 5% 4% 4% 4% 4% Shares outstanding-actual** 4,292 4,292 1,431 1,431 1,431 1,431 1,041 928 849 779 - adjusted**t . 4,292 4,292 4,292 4,292 4,292 4,292 3,273 3,034 2,886 2,751 Shareholders' equity- total** $ 62,710 54,013 43,452 35,601 32,017 32,584 24,545 18,996 17,469 14,991 Shareholders' equity- a sharet 14.61 12.58 10.12 8.29 7.46 7.59 7.50 6.26 6.05 5.45 Working capital** $ 11,503 8,827 6,580 12,364 5,505 16,841 11,518 5,320 4,688 4,600 Long-term debt** 41,640 26,970 32,940 39,488 36,097 24,790 25,272 19,748 16,827 9,677 Properties and equipment - net** . 107,803 79,953 71,162 62,859 58,493 33,302 37,546 31,035 24,652 17,216 Total assets** . 142,324 124,172 111,202 98,830 85,697 72,433 67,223 49,596 44,017 32,075 Operations Route miles at end of year . 9,687 9,474 9,474 9,545 8,827 8,827 8,827 9,153 8,799 6,350 Airplanes at end of year: Boeing 720-B 18 12 10 7 4 Boeing 707 - leased . 2 2 Lockheed Electra II 12 12 12 12 12 6 5 Douglas DC-6B 5 14 14 16 19 27 27 27 21 14 Other aircraft- piston powered 4 5 8 14 16 Airplane miles flown** 32,343 32,442 29,035 25,262 20,624 25,996 25,689 16,449 21,986 14,851 Ton miles produced** 434,881 401,999 352,038 307,570 224,819 207,554 196,178 123,416 137,640 86,196 Ton miles sold** . 212,818 203,539 168,002 137,492 101,232 109,316 103, 74 l 56,710 74,468 48,481 Scat miles produced** 3,616,702 3,388,541 2,929,673 2,402,344 1,718,854 1,776,076 1,623,007 981,740 1,175,071 740,174 Seat miles sold** 2,045,158 1,964,512 1,615,189 1,307,173 957,560 1,034,481 982,010 533,443 702,727 458,131 Expre s, freight & mail ton miles old** 16,099 14,136 12,291 11,574 8,987 9,538 8,899 5,309 7,118 4,667 Pas engers carried 3,574,793 3,532,978 2,812,640 2,128,225 1,529,137 1,721,619 1,689,278 970,498 1,379,653 928,746 Express, freight & mail tons carried . 21 ,898 18,992 16,250 16,037 12,364 13,354 12,792 8,010 11,537 8,200 Passenger load factor - actual % 56.5 58.0 55.1 54.4 55.7 58.2 60.5 54.3 59.8 61.9 - breakeven point % 46.3 44.6 43.6 48.0 55.5 53.3 50.0 54.1 53.5 56.G Averag length in miles per passrngrr trip 572 556 574 614 626 601 581 550 509 493 Average revenue per pass<'nger mile . $ .0571 .0567 .0582 .0623 .0632 .0626 .0605 .0595 .0558 .0573 Employees at end of year 4,420 4,092 3,513 3,078 2,794 2,730 2,962 2,547 2,773 2,343 18 tBased on shares outstanding at close of respective periods adjusted to give 19 retroactive cff ect to stock dividends and to the May 1964 three-for-one stock split. *Operations were adversely affected by strike. **000 omitted. :j:In reased to an annual rate of$ 1.00 in 1966. Western Air Lines Inc. Balance Sheet Assets CURRENT ASSETS: Cash .... Short-term securities ( approximating market) Receivables: Traffic balances ( net of allowance for doubtful accounts $125,000) U.S. and State Government Departments Other . . . . . . . . . . . . . . Expendable parts and supplies . Prepaid expenses . . . . TOTAL CURRENT ASSETS . Deposits on equipment purchase contracts (Note 3) Properties and equipment at cost: Flight equipment . . . . . . Buildings on and improvements to leased property . . Other property and equipment ( including construction in progress) . . . . . . . . . . . . . . Less allowance for depreciation and maintenance Def erred charges and other assets . . . . . . . . . . . . See accompanying notes to financial statements 20 December 31 1965 $ 3,226,341 11,504,953 7,568,715 1,094,514 164,662 8,827,891 2,641,137 1,787,114 27,987,436 5,923,190 145,650,100 10,857,005 15,034,739 171,541,844 63,738,444 107,803,400 609,723 $142,323,749 December 31 1964 $ 4,338,795 18,082,600 7,466,941 876,649 673,448 9,017,038 1,687,777 1,020,101 34,146,311 9,673,244 119,191,490 4,736,322 18,454,196 142,382,008 62,428,561 79,953,447 398,819 $124,171,821 Liabilities CURRENT LIABILITIES : Accounts payable . Accrued salaries and wages Other accrued liabilities Air travel plan deposits . . Unused transportation . . Federal taxes on income (Note I) . Current maturities of long-term debt TOTAL CURRENT LIABILITIES . . . Long-term debt (Note 2) . . . . . . . Deferred federal taxes on income (Note 1 ) Deferred investment credits (Note 1) . . SHAREHOLDERS' EQUITY (Notes 2 and 5): Common stock-$1.00 par value per share Authorized 10,000,000 shares Issued 4,292,190 shares . Capital in excess of par value Retained earnings . . . . . $ December 31 1965 7,074,014 3,075,472 2,034,713 281,775 1,945,166 2,073,584 16,484,724 41,640,000 17,152,000 4,337,000 4,292,190 16,500,126 41,917,709 62,710,025 $142,323,749 $ December 31 1964 7,006,248 2,642,393 1,646,482 293,675 1,940,163 5,820,771 5,970,000 25,319,732 26,970,000 15,080,000 2,789,000 4,292,190 16,500,126 33,220,773 54,013,089 $124,171,821 21 Western Air lines Inc. Statement of Earnings and Retained Earnings OPERATING REVENUES: Passenger . . . . . . . . . . . Express, freight and excess baggage . Charter and other transport service Mail . . . . . . . . Incidental revenue - net . . . . OPERATING EXPENSES: Flying operations Maintenance . . . Passenger service . Aircraft and traffic servicing . Promotion and sales . . . . General and administrative . Depreciation and amortization (Note 6) Operating Income . . . OTHER INCOME ( EXPENSES) : Interest expense . . Interest income . . . . . Other expense - net . . . Earnings before Taxes on Income . PROVISION FOR TAXES ON INCOME (Note I) NET EARNINGS FROM OPERATIONS . GAIN ON DISPOSITION OF PROPERTY ( Less Applicable Income Taxes) NET EARNINGS . . . . . . . . RETAINED EARNINGS AT BEGINNING OF YEAR . CASH DIVIDENDS PAID $0.80 per share in 1965 and $0.65 in 1964 . RETAINED EARNINGS AT END OF YEAR (Note 2) See accompanying notes to financial statements 22 December 31 1965 $116,565,319 3,808,555 579,589 1,730,084 915,767 123,599,314 24,368,243 17,701,842 8,809,333 16,055,632 14,942,638 5,133,408 13,596,263 100,607,359 22,991,955 (2,105,096 ) 382,177 (121,764) 21,147,272 9,900,000 11,247,272 883,416 12,130,688 33,220,773 45,351,461 3,433,752 $ 41,917,709 December 31 1964 $111,432,041 3,718,470 152,190 1,560,611 781,274 117,644,586 22,957,569 16,301,799 7,835,866 14,245,901 13,086,494 4,600,400 11,718,062 90,746,091 26,898,495 (1,946,968) 853,456 (53,956 ) 25,751,027 12,400,000 13,351,027 13,351,027 22,659,669 36,010,696 2,789,923 $ 33,220,773 Western Air lines Inc. Statement of Source and Application of Funds FUNDS PROVIDED: Net earnings . . . . . . . . . . . Less gain on disposition of property . Net earnings from operations . . . . Add back Depreciation and maintenance reserve provision . Deferred income taxes . . . . . . . Charge equivalent to investment credit . Total from operations Increase in long-term debt . . . Proceeds from disposition of property, net of taxes Flight equipment lease/sale contracts Total FUNDS APPLIED: Purchase of airplanes and other property, buildings and equipment . . . . Payment of cash dividends . Reduction of long-term debt . Other items . . . . . . . Increase in working capital Total . . . . December 31 1965 $12,130,688 883,416 11,247,272 13,979,818 2,072,000 1,548,000 28,847,090 14,670,000 1,893,433 16,563,433 45,410,523 39,223,742 3,433,752 76,896 42,734,390 2,676,133 $45,410,523 December 31 1964 $13,351,027 13,351,027 12,326,276 3,040,000 1,826,000 30,543,303 88,617 182,509 271,126 30,814,429 19,798,803 2,789,923 5,970,000 9,572 28,568,298 2,246,131 $30,814,429 23 Notes to Financial Statements Note 1. Taxes on Income. Federal income tax returns have been examined by the U. S. Treasury Department through 1963. The 1965 provision for income taxes is summarized as follows: Charged to Operations: Current income taxes ... .. . ........... $ 6,280,000 Def erred income taxes ............... . Charge equivalent to investment credits, net of amortization of $580,000 ...... . Applicable to Gain on Disposition of Property ...... ... .. . .... . .. ..... . 2,072,000 1,548,000 9,900,000' 810,000 ----- $10,710,000 Investment credits are being amortized to income over the lives of the related equipment. Note 2. Long-Term Debt (Unsecured). On December 31, 1965, long-term notes payable of $20,970,000 to a bank and $20,670,000 to insurance companies were outstanding. New loan agreements signed in January 1966 provide for the exchange of these notes for new notes and will permit addi- tional borrowings of $13,360,000 as required. The aggregate loans ( including amounts not yet borrowed) are summarized as follows: Bank Loans: $25,000.000 in a revolving fund credit until March 31, 1969 at interest not to exceed 5%. Notes outs tan ding on March 31, 196 9 will be converted into a 5% term note due in 1974, with equal monthly payments commencing in July 1969. Insurance Company Loans: $30,000,000 in 5 % notes due in 1981 , with payments of $1,000,000 per year starting in 1970 and increasing to $4,000,000 a year in 1976. The related agreements with the bank and insurance com- panies provide among other things (including restrictions on additional borrowings) conditions and requirements which at December 31, 1965 operated to restrict retained earnings from cash dividend distribution in the amount of $37 .073.048. leaving $4,844,661 not so restricted. Note 3. Commitments and Contingent Liabilities. Jet aircraft and other major items on order at D ecember 31, 1965 represented purchase commitments of approximately $96,000,000 in excess of related deposits. The estimated minimum annual rentals under long-term leases, with ex.piration dates ranging to 1991, were approxi- mately $1,000,000 at D ecember 31, 1965. Note 4. Retirement Plans. The costs of retirement plans charged to operating expense in 1965 totaled $1,513,4 14, including $73,164 for past-service costs, thereby leaving approximately $587,000 unfunded at December 31, 1965. Note 5. Options to Purchase Common Stock. On April 23, 1965 , options for 6,000 shares were granted at $33.33 a share under the company's stock option plan for officers which reserved 210,000 shares of the corporation's authorized and unissued stock for the purposes of the plan. As of December 31, 1965, options were outstanding to purchase a total of 133,500 shares at option prices aggregating $5,236,230 ( approximate fair market value on days of grant). The options are generally exercisable in equal annual increments over a five-year period. Note 6. Depreciation. The six Boeing 720B fanjet aircraft acquired in 1965 are being depreciated over useful lives estimated to end December 31, 1975, with residual values of $100,000 per aircraft. The estimated useful lives on the 12 Boeing 720B fanjet aircraft owned on January 1, 1965, were accordingly extended to December 31, 1975, and residual values reduced to $100,000 per aircraft, thereby reducing depreciation expense for 1965 by approximately $575,000 and increasing net earnings for the year by approximately $300,000. PEAT, MARWICK, MITCHELL & Go. CERTI1"I'ED PUBLIC ACCOUNTANTS 829 SOUTH SPRlNO STREET LOS .t.NOBLES,CALIP. 90014 The Board of Directors Western Air Lines, Inc.: We have examined the balance sheet of Western Air Lines, Inc. as of December 31, 1965 and the related statement of earnings and retained earnings for the year then ended. Our examination was ma.de in accordance vith 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. We previously ma.de a similar examination of the financial statements for 1964. In our opinion, the accompanying balaiice sheet and statement of earnings and retained earnings present fairly the financial position of Western Air Lines, Inc. at December 31, 1965 and the results of its operations for the year then ended, in confonnity vith generally accepted accounting principles applied on a basis consistent vith that of the preceding year. Also, in our opinion, the accompanying statement of source and application of funds for the year ended December 31, 1965 presents fairly the information shown therein. February 9, 1966 By Bill Henry -- /"'.,"' /; ~ . "'. . l The Wright plane in flight, September 1908. 0 pposite: 18 years later, crowd at Vail Field watches Western begin Los Angeles-Salt Lake City service. Lower Right: First stop on eastbound fiights was Las Vegas. Ety years can seem like a long, long time or of no more consequence than the blink of an eye, depending on your measuring stick. In the life of commercial aviation, forty years is the whole bit. So Western Air Lines, sole survivor of the hand- ful of pioneer private contractors to carry United States mail starting in 1926, is more than just the oldest U.S. airline-its history encompasses the entire lifetime of the business. It would be in the best tradition of historians, looking back to those beginnings, to tell how the men who chipped in to organize Western were far-sighted geniuses who foresaw that in 1966 commercial avi- ation would be what it is today, a financial and tech- nical collossus which is the major means of passenger and mail transportation in the world. It wouldn't be true. Western Air actually came into being in April 1926 largely because businessmen in Los Angeles felt that they had been side-tracked by the government- operated transcontinental airline which flew from New York to San Francisco. Few of them had ever flown. Most of them were inclined to regard aviators as a brave but unbusinesslike breed, but they were deter- mined that Los Angeles should no longer remain one day farther away from New York than San Francisco. But, being businessmen, and successful in their own fields, they made up their minds to apply the Left: Early Western stewardess provides "latesf' in-fiight service. Lower Le/ t: Tri-motor Fokker F-10 was used on Los Angeles-San Francisco ,,model airway~' Right: Luxury aloft in a ~stern four- engine Fokker F-32. same resourcefulness to their pioneer airline. Behind the skill and daring of their pilots they threw the full weight of sound business judgment. When the uncertainties of single-engine aircraft became apparent, they branched out to pioneer the tri-motor Fokker. When the need for better com- munication developed, Western's Herbert Hoover Jr. helped develop the air-ground two-way radio. The radio compass, the forerunner of many of today's radio navigation systems, was invented and perfected by Western's engineers. As passenger traffic increased, the first in-flight meal service was provided in 1928; four-engine aircraft were added in 1930. The uncer- tainties of weather were reduced through application of the "air mass analysis" system of weather fore- casting to Western's operations by Irving Krick. This introduction of free enterprise type methods to what previously had been a rather haphazard operation brought safety and success to Western Air during its first half-dozen years and enabled it to survive while all of the other pioneering commercial airlines were passing out of the picture, having failed or been absorbed. Western's successful operation brought national attention. It was selected by the Guggenheim Fund for the Promotion of Aeronautics to operate a "model airway" between Los Angeles and San Francisco in 1928 and this route today is not only the most heavily traveled in the world but provides commuter flights at the lowest per-mile jet fares in the United States. Left: Westnn's "model airway" also included the mo.rt e>.:tensiV(' weather reporting system ever attempted. Lower Le/ t: Passengers Jneparc to go ashore at Catalina Island after fiight on Western's Sikorsky flying boat. OjJposite: Pilots Jimmy James (left) and Fred Kelly with Herbert Hoover Jr., the company's suf1erintendcnt of communications. Those were st1rnng days, when aviation was young. The first air passengers thought of themselves, with some reason, as hardy daredevils. The first stock- holders thought of themselves as contributors to a civic enterprise rather than as investors in a going business, but their combination of skilled operation and sound business management made Western the first airline ever to pay its stockholders a dividend. As Western progressed, it expanded. The com- pany had its ups and downs, less by its own fault than through the uncertainties of politics. Cancellation of all private air mail contracts by President Roosevelt in 1934, following charges of collusion between airline officials, rocked the industry to its foundations. West- ern was forced to pull back from its expanding routes and had a struggle to survive. But survive it did. And today's passengers who step aboard a Western airliner to en joy a "Hunt Breakfast" or a "Champagne Flight:' secure in the proven fact that they're safer and more comfortable than they could be in their own automobile, may not be aware of it but they are luxuriating in the comfort and safety which was established as Western's policy in those pioneer days of the Roaring Twenties. About the author: Bill Henry, Los Angeles Times columnist, is a veteran newsman who has gained international recognition as a war correspondent, radio and television news analyst, presidential appointee to various committees and a longtime participant in U.S. Olympic Committee activities. He is the author of An Appro v ed History of the Olympic Games. He received the National Headliners Award twice, as an outstanding columnist and for radio reporting, and has received a number of other major awards for outstanding service to journalism. He also was honored by the International Olympic Commit- tee and by the Freedoms Foundation. A native Californian, he was one of the original stock- holders of Western Air Express and has followed the company's growth throughout its 40 years. Western Air Lines is indebted to him for writing these recollections of the company's early days.