Western Air Lines Annual Report 1966

Western Air Lines Inc. 1966 Annual Report
Highlights of 1966 2
President's Letter 3
Review of the Year 5
Board of Directors 12
Ten Years of Growth 22
Balance Sheet 24
Earnings and Retained Earnings 26
Source and Application of Funds 27
Notes to Financial Statements 28
Accountants' Report 28
Highlights of 1966
1966 1965
Operating
Seat miles produced 4,336,125,000 3,616,702,000
Seat miles sold 2,642,541,000 2,045,158,000
Passengers carried . 4,401,507 3,574,793
Passenger load factor - actual % 60.9 56.5
- breakeven point % 48.5 46.3
Financial
Operating revenues $ 156,189,964 $ 123,599,314
Operating income . $ 31,982,772 $ 22,991,955
Net earnings $ 16,035,959 $ 12,130,688
Cash dividends paid $ 4,295,740 $ 3,433,752
Common stock outstanding 4,301,290 4,292,190
Earnings per share . $ 3.73 $ 2.83
Cash dividends per share . $ 1.00 $ 0.80
Shareholders' equity $ 74,809,694 $ 62,710,025
Shareholders' equity per share $ 17.39 $ 14.61
Cash and short-term securities $ 19,707,488 $ 14,731,294
Working capital $ 17,131,042 $ 11,502,712
Property and equipment at cost $ 209,782,368 $177,465,034
Long-term debt . $ 47,500,000 $ 41,640,000
Number of employees at year end 5,564 4,420
Wages and salaries paid $ 40,948,024 $ 32,902,116
2
President's Letter
To Shareholders, Employees, Customers and Friends:
As indicated in the financial data and descriptive text
of this annual report, the year 1966 was an extremely
important one in the progress of Western Air Lines.
It was a record year in every respect: all-time highs in
passengers boarded, air freight carried, revenues and
profits. And, although approximately $2,400,000, or 56
cents a share, of net income resulted from the effects of
the 43-day strike that shut down several other airlines,
it would have been a year of new records for Western
without this additional traffic.
Equally important are the route expansion programs
which were undertaken in the interest of future growth.
Foremost of these was the completion of a merger
agreement with Pacific Northern Airlines, the leading
carrier of Alaska traffic. Implementation of the proposed
merger will give the traveling and shipping public one-
carrier service along the North American rim of the
Pacific Ocean, from Anchorage to Acapulco. For
Wes tern, the merger presents an opportunity to operate
additional long-haul routes and to improve utilization of
the combined jet fleets.
If approved by the Civil Aeronautics Board and stock-
holders of both companies, the combining of the two
carriers is expected to take place this summer.
As detailed in the Route Development section of this
report, the company is awaiting CAB decisions in route
cases in which Western seeks to have its route system
extended to Vancouver and Toronto, Canada, and from
the Pacific Northwest and Rocky Mountain States into
the Oklahoma-New Mexico-Texas-Louisiana area.
During the year, the company also filed new applica-
tions for a number of other routes. The most extensive
of these was filed in the Transpacific route case.
This will be the largest and most complex route pro-
ceeding ever conducted by the Civil Aeronautics Board.
It will cover half the world, from the East Coast of the
U.S. to Asia.
Because a majority of visitors to the Pacific originate
their travel in states served by Western, the company is
a logical candidate for routes into this vast area. The case
will be a long one, requiring perhaps two to three years
to complete. Western won routes from California to
Hawaii in the first Transpacific case in 1960 but the
award was later rescinded by the CAB; however, we
firmly believe we can, and should, win them again.
In the meantime, the company has many other growth
problems which must be solved in 1967 and 1968.
Training, which already consumes a considerable amount
of the company's resources and energies, will be acceler-
ated to prepare for expected increases in traffic and the
introduction of 20 Boeing 737 twinjets in 1968.
In 1966, the company operated approximately 300
departures a day; by 1969, normal growth of our exist-
ing route system will increase this to more than 500
departures a day. The 5 50 pilots who operated our air-
craft last year will be increased to a total of 800 in the
three-year period. Two hundred and seventy stewardesses
were trained last year; in 1968, delivery of the new 737s
will make it necessary to train more than 500 steward-
esses in a single year.
We believe 1967 will be another profitable year for
Western. We plan to increase our seat mile production
about 16 percent and expect traffic to grow.
There are factors, however, which make the company's
goal of improved financial performance increasingly
difficult. Costs and competition continue to increase. The
labor contracts that were negotiated in the airline indus-
try in 1966 established patterns that will mean signifi-
cant increases in wages and salaries in the coming year.
Taxes, landing fees, rentals and material costs also are
steadily rising.
These are not new challenges to the employees and
management of Western Air Lines. With your continued
support we will meet them as we have in the past.
, ..... ,,o c. ~
PRESIDENT
February 27, 1967
3
Review of the Year
Earnings
Earnings reached an all-time high of $16,035,959, or
$3.73 a share, the 18th consecutive year in which the
company has reported a profit.
This compares with net income of $12,130,688, or
$2.83 a share, in 1965 anc;l the previous record of
$13,351,027, or $3.11 a share, in 1964.
Per-share earnings for 1966 are based on 4,301,290
shares of stock outstanding as of December 31, 1966.
Included in the 1966 earnings is approximately
$2,400,000, or 56 cents a share, which resulted from
heavier-than-usual traffic in July and August when sev-
eral of Western's competitors were idled by a 43-day
strike.
Operating income totaled $31,982,772, equal to 20.5
percent of operating revenues, compared to $22,991,955,
or 18.6 percent of revenues, in 1965.
Earnings from operations before taxes were
$30,007,001, or $6.98 a share. Provisions for taxes on
income from operations, both current and deferred,
totaled $14,050,000, or $3.27 a share.
As disclosed in previous annual reports, in applying
investment tax credits related to the purchase of aircraft
and equipment, Western elected to amortize the credits
to earnings over the productive life of the equipment
NET EARNINGS MILLIONS OF DOLLARS
_$20
1962 63 64 65 66
Revenue Dollar
Expense Dollar
80.02% Coach passengers
2.90% Express, freight and
excess baggage
1.75% Mail
s
6
rather than take the full amount into income in the year
in which the investment credit was realized. Included in
1966 earnings is $800,000 from this source. Deferred
for credit to future years is $5,798,000, an increase of
$1,461,000 over the amount deferred at the close of
1965.
Dividends
For the 16th consecutive year, shareholders of Western
Air Lines received cash dividends in 1966. At its first
meeting of 1966, the board of directors voted to increase
the quarterly dividend rate from 20 cents a share to
25 cents a share effective with the dividend payable on
March 7. Dividends also were paid on May 31, August
15 and November 28 for a total payment of $1.00 a
share.
At the first regular board meeting of 1967, held in
Phoenix on January 16, a quarterly dividend of 25 cents
was voted, payable on February 20 to shareholders of
record on February 1.
EARNINGS PER SHARE
AND DIVIDENDS PAID
1962
Annual Meeting
63
DOLLARS
64 65 66
The 1967 meeting of shareholders will be held at the
Century Plaza Hotel, Los Angeles, on Thursday, April
27. On or about March 20, stockholders will receive a
formal notice of the meeting and proxy material.
Below Western's new passenger boarding area at San Francisco International Airport.
Also opened during 1966 was a new terminal building at Palm Springs.
7
Below Western's Southwest Regional Reservations Office at Los Angeles, which handled up to 22,000 telephone
calls a day during the strike, is designed for an ultimate capability of 60,000 calls a day.
Revenues
The total operating revenues for 1966 were a record
$156,189,964, a 26 percent increase over the
$123,599,314 of the previous year.
The number of passengers carried increased 23 per-
cent to an all-time high of 4,401,507. Seat miles sold
were up 22 percent in the first quarter, 28 percent in the
second, 40 percent in the third quarter ( strike period)
and 24 percent during the fourth quarter for a 29 per-
cent gain over the previous year.
Accompanying the increase in passenger boardings
was a continuation of the growth of discount fare travel.
During the year, more than 20 percent of Western's pas-
sengers used the family plan, excursion rate, military
furlough fare, youth fare or some other form of discount
ticket. As a result, the yield per seat mile sold decreased
from 5.71 cents in 1965 to 5.58 cents, the company's
8
OPERATING REVENUES
AND NET EARNINGS
1962 63 64 65
MILLIONS OF DOLLARS
-S1 60
120
80
40
66
lowest yield per seat mile sold since 195 7, when it was
5.58 cents. If adjusted for the 12 percent increase re-
flected in the Consumer Price Index, however, the cost
PROMOTIONAL FARES PERCENT OF TOTAL REVENUES
AS A PERCENT OF REVENUES
- 25%
20
15
10
At December 1 962 63 64 65
of a seat mile to Western's passengers was lower in 1966
than in 1957.
Of Western's income dollar, 93.8 percent was derived
from passenger traffic ( 80 percent from coach and 13.8
percent from deluxe). Express, freight and excess bag-
gage accounted for 2.9 percent, mail for 1.8 percent and
all other sources 1.5 percent.
Expenses
The total operating expenses for 1966 amounted to
$124,207,192, a 23 percent increase over 1965. Wages
SEAT MILES SOLD OPERATING REVENUES IN MILLIONS
AND OPERATING REVENUES
3 _ SEAT MILES SOLD IN BILLIONS _ $300
200
100
1962 63 64 65 66
9
and salaries increased 24 percent, other expenses were
up 27 percent and depreciation increased seven percent.
Contributing to the expense increase was a 20 percent
increase in seat miles produced and an 18 percent in-
crease in airplane miles flown.
The cost per seat mile produced increased during the
year, from 2.78 cents in 1965 to 2.86 cents in 1966.
The breakeven load factor ( percentage of seats pro-
duced which must be sold to produce a breakeven of
expenses and income) increased from 46.3 percent in
1965 to 48.5 percent in 1966. Contributing almost
equally to the increase in breakeven were increased ex-
penses and the decrease in yield per seat mile sold re-
ferred to in the Revenues section of this report.
Depreciation costs increased from $13,596,263 in
1965 to $14,542,185 for 1966, largely through the
addition of Boeing 720B fanjets to the company fleet.
Also affecting depreciation costs during the year was a
change in policy which extended depreciation on the
company's Electras to a common terminal date of De-
cember 31, 1967, and reduced 1966 depreciation by
1,500,000.
Finances
Western Air Lines closed the year 1966 in a strong finan-
cial condition.
Working capital at December 31 totaled $17,131,042,
compared to $11,502,712 at the end of the previous year.
Cash totaled $10,208,387 and short-term securities were
carried in the amount of $9,499,101.
Current assets amounted to $38,437,453 and current
liabilities to $21,306,411, providing a current assets-to-
current liabilities ratio of $1.80 to $ 1.00.
At the end of 1966, Western's long-term debt con-
sisted of $30 million owed to insurance companies and
$17 .5 million owed to the Bank of America. An addi-
tional $7 .5 million is available under a 1965 agreement.
In the Fall of 1966, the company made arrangements
for additional borrowings of $60 million, $40 million
10
Brief Balance Sheet
Western owns:
Cash and short-term
securities .
Receivables due from
others.
Maintenance and
operating supplies
Buildings and
improvements, net .
Flight and other
equipment, net .
Deposits on new equipment .
Prepaid expenses
Deferred charges and other .
Western owes :
Payables due to
vendors and others .
Federal income taxes -
current and deferred
Deferred investment credits .
Tickets sold but not yet
used
N ates payable -
current and long-term .
Excess of what is owned
over what is owed, or
shareholders' equity .
SEAT MILES PRODUCED
AND OPERATING EXPENSES
1966 1965
$ 19,707,488 $ 14,73 1,294
11,827,054 8,827,891
4,764,100 2,641,137
8,194,947 8,050,048
115,405,708 99,753,352
8,649,775 5,923,190
2,138,8 11 1,787,114
869,222 1, 609,723
171,557,105 142,323,749
15,798,679 12,465,974
25,323,581 19,225,584
5,798,000 4,337,000
2,327,151 1,945,166
47,500,000 41,640,000
96,747,411 79,61 3,724
$ 74,809,694 $ 62,7 10,025
OPERATING EXPENSE IN MILLIONS
u SEAT MILES PRODUCED IN BILLIONS _ $300
200
100
1962 63 64 65 66
Brief Statement of Earnings
Western's revenues came from:
Passengers
Coach .
Deluxe
Express, freight and
baggage
Mail .
Other income
Gain on disposition of
property .
Western's expenses were:
Wages and salaries
Social security, group
insurance and retirement
plans .
Taxes.
Aircraft fuels
Depreciation and
amortization .
Materials and repairs .
Utilities and services
Service to passengers
Rentals and landing
fees
Advertising and publicity
Insurance
Interest
Other costs
Net earnings .
BREAKEVEN LOAD FACTOR
AND ACTUAL LOAD FACTOR
1966 1965
$125,748,335 $102,848,440
21,720,352 13,716,879
147,468,687 116,565,319
4,554,51 4 3,808,555
2,743,031 1,730,084
2,230,181 1,877,533
153,95 7 1,693,416
157,150,370 125,674,907
40,948,024 32,902,116
4,385,411 3,082,234
16,586,864 12,610,384
15,836,996 12,742,437
14,542,185 13,596,263
14,131,026 11,777,987
9,835,262 7,924,603
7,070,185 4,740,378
4,355,430 3,599,210
4,626,184 3,741,207
2,669,826 2,430,247
2,748,802 2,105,096
3,378,216 2,292,057
141,114,411 113,544,219
$ 16,035,959 $ 12,130,688
- 65%
~--------.......- _ 45
1962 63 64
BREAKEVEN LOAD FACTOR
65
- 40
66
SHAREHOLDERS' EQUITY
AND LONG -TERM DEBT
LONG -TERM DEBT
1962 63 64
MILLIONS OF DOLLARS
$75
65 66
from insurance companies and $20 million from Bank
of America. These agreements are scheduled for comple-
tion in the near future.
The additional funds to be provided by the new credit
agreements, plus funds to be generated internally, should,
in the absence of unforeseen circumstances, provide ade-
quate financing for all aircraft presently on order or on
option.
A Statement of Source and Application of Funds is
included in this report.
Shareholders and Stock
At the close of 1966, there were 4,301,290 shares of
Western Air Lines common stock issued and outstand-
ing, an increase of 9,100 over the number outstanding
at the end of 1965. The new shares were issued through
the exercise of qualified stock options.
The company's stock was held by approximately
23,000 stockholders.
At the 1966 annual meeting of shareholders held in
Los Angeles in April, 87 .1 percent of all shares were
voted in person or by proxy.
Shareholders' equity in 1966 increased to$ 74,809,694,
11
Board of Di rectors
OTIS CHANDLER , P1tblisher,
TERRELL C. DRINKWATER,
President,
EDWIN W. PAULEY, Chairman
of the Board, Patdey Petroleum,
Inc., Los Angeles, California
] . ]UDSONTAYLOR, Senior Vice
President and Treasrtrer,
GOODRICH LOWRY, Chairman
of the Board, Northwest
Bancorporation, Minneapolis,
Minnesota
Los Angeles Times & Senior Vi ce
President, T imes-Mirror
Company, Los Angeles, California
ll7 estern Air Lines, Inc. ll7 estern Air Lines, Inc.
* DONALD H. MCLAUGHLIN,
Chairman of the Board,
Homestake Mining Company,
San Francisco, California
HOWARD C. WESTWOOD,
Covington & B1trling, Attorneys-
at-Law, 111/ashington, D . C.
or $17.39 a share, from 1965 equity of $62,710,025, or
$14.61 a share, a 19 percent increase.
Board of Directors
Four new members were elected to Wescern's board of
directors during 1966.
In May, Art Linkletter, noted radio and television per-
sonality who also is engaged in a variety of business ac-
tivities, and Judge James D. Garibaldi of Los Angeles
were elected, increasing the size of the board to 15 mem-
bers.
In July, two veteran members of the board, Dr. Don-
12
HUGH W . DARLING, Darling,
Mack, Hall & Call, Attorneys-a/-
Law, Los Angeles, California
STANLEY R . SHATTO, Exeetttive
Vice President-Transportation,
ll7 estern Air Lines, Inc.
ALEXANDER WARDEN,
Newspaper Consul/ant,
Great Palls, Montana
ald McLaughlin of San Francisco and John M. Wallace
of Salt Lake City retired as active directors and were
named directors-emeriti. Named to succeed them were
Leonard K. Firestone, president of the Firestone Tire and
Rubber Company of California, and Richard W. Wright
of Denver, executive vice president of the Mountain
States Employers Council.
On November 29, Robert E. Driscoll, who was elected
to the board in 1951 and became a director-emeritus in
1965, died in Santa Monica, Calif.
ART LINKLETTER, Linkletter
Enterprises, Inc. Los Angeles,
California
J UDGE ]AMES D. GARIBALDI ,
Garibaldi & Lane, Los Angeles,
California
VERNON 0 . UNDERWOOD,
President, Young's Market Co.,
Inc., Los Angeles, California
RICHARD W . WRIGHT,
Exerntive Vice President,
Mo1tntt1in States Employers
Council, Inc., Denver, Colorado
smNEY F . WOODBURY,
President, Pine Street Company,
Portland, Oregon
)OHN M . WALLACE, Honorary
Chairman of the Bottrd, \IV alker
Bank & Tmst Company,
Salt Lake City, Utah
Equipment and Facilities
LEONARD K. FIRESTONE.
President, Firestone Tire &
Rubber Co. of California,
Los Angeles, California
Western took delivery of four additional Boeing 7 20B
aircraft during 1966- one in January, one in March and
two in July- and sold one DC-6B. At year's end, West-
ern operated a fleet consisting of 22 720B fanjets, 12
Lockheed Electra prop jets and four Douglas DC-6B' s.
Seventy-six percent of seat miles produced during the
year were produced by the 720B's, 20 percent by the
Electras and four percent by the DC-6B's.
In August, the company increased its orders for 1967
deliveries from four 720B's to five. One will be delivered
HARRY] . VOLK, President,
Union Bank, Los Angeles,
California
Director-Emeritus
in May, one in June, one in August and two in Septem-
ber.
At the same time, the company rescheduled delivery
of its Boeing 7 3 7 twin jets and increased its options for
737s from .five to 10.
Under the original schedule, 15 of the twinjets were
to have been delivered in 1968 and five in 1969. Under
the new schedule, all 20 will be delivered between
March and December of 1968.
On January 31, 1967, the company exercised its op-
tion for five 7 3 7 s, to be delivered in the first quarter of
13
Pacific Northern
and Western
Route Systems
WESTERN 'S ROUTES
PACIFIC NORTH ERN ROUTES
1969. The five remaining on option also would be for
delivery in 1969.
To provide facilities that will be needed to maintain
the company's growing fleet, Western completed ar-
rangements in 1966 for the construction of a $2.8 mil-
lion maintenance base at San Francisco and a hangar
and maintenance facilities at Denver, to be leased and
occupied in 1968.
Late this year, Western will install a 737 electronic
flight simulator for use in training company pilots who
will fly the new twinjets. Also to be delivered late in
1967 will be the main elements of the company's new
IBM data processing system which will be used to proc-
ess reservations, perform message-switching and handle
a variety of commercial data processing activities.
Merger Agreement
On October 26, 1966, the managements of Western Air
Lines and Pacific Northern Airlines jointly announced
14
their intention to effect a merger between the two
corporations.
The agreement of merger, dated November 10, 1966,
is subject to approval by shareholders of the two com-
panies, the Civil Aeronautics Board, other state and fed-
eral agencies and holders of the companies' long-term
debt. Hearings before the CAB will begin on March 6;
Western's shareholders will vote on the proposal at the
annual meeting of April 27, PN A stockholders on May
18.
The agreement is based on the exchange of two shares
of PN A stock for one share of WAL stock, the exchange
to be made at the time the merger is consummated.
There were 1,068,109 shares of PNA common stock out-
standing as of December 31, 1966.
PNA, which would operate as the Alaskan Division of
Wes tern, is the dominant carrier serving Alaska. I ts
routes serve cities which are inhabited by 80 percent of
the population of Alaska and link Anchorage, the Kenai
Below In 1966, Western's stewardesses corps was enlarged beyond the 500 mark for the first time; more than
650 new stewardesses will have to be trained during the next two years and much retraining will be required.
PASSENGERS CARRIED
SYSTEM WIDE
PASSENGERS
1966
1965
STRIKE
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
_500,000
_375,000
_250,000
_1 2s.ooo
- 0
Peninsula, Juneau, Ketchikan and other points to Seattle,
where PNA's headquarters is located and where the two
air line route systems would join.
Additional information about the agreement of mer-
ger will be contained in proxy material to be mailed to
stockholders on or about March 20.
WESTERN'S LOAD FACTOR
AND INDUSTRY LOAD FACTOR
1962
Sales and Service
63 64 65
- 65%
- so
- 45
- 40
66
In 1962, Western carried more than 2,000,000 passen-
gers in a single year for the first time.
In 1966, only four years later, this figure was more
than doubled as 4,401,507 passengers were carried on
company flights.
15
Passenger load factor for the year was 60.9 percent,
highest since 1956.
With 20 percent more seat miles available for sale,
W Al sold 29 percent more seat miles than in 1965.
Passenger revenues reached $147,468,687, an increase
of 27 percent over the previous year, and air cargo reve-
nues ( freight, express, excess baggage, air mail and regu-
lar first class mail) increased 32 percent to $7,297,545.
Highlighting the company's marketing program dur-
ing the year was a combined sales-and-service effort en-
titled the "Flub Stub" program.
It was based on the company's pride and confidence in
its employees. And, for the first time in the airline in-
dustry, a company was willing to back up that confidence
with cash guarantees to its customers.
Focal point of the program was an eight-point creed
which was displayed at ticket offices and airport coun-
ters and advertised widely. The creed contained specific
promises of a cordial and courteous attitude and excel-
lent service.
"Anytime we don't live up to one of these promises-
or give you an immediate explanation why we can't, you
get a Flub Stub worth a buck," the company promised.
The program was successful in a number of ways: it
became a conversation piece among air travelers and
drew attention in a light-hearted way to the company's
sincere concern for its customers. It also reminded em-
ployees of the importance of the service features listed
in the creed and ultimate! y pointed out to supervisors
several areas where additional training or other attention
was needed.
In other marketing programs, the company adhered to
two principles: cooperation with other elements of the
travel industry to produce travel as a complete product
and the creation of tour packages which were easy to
purchase and simple to use.
In its cooperative effort, the company teamed with
hotels, auto rental companies, bus lines, railroads, steam-
ship companies, other airlines, tour operators, travel
16
Fight cold
7ways:
agents and representatives of city, state and federal tour-
ism departments in the U.S., Canada and Mexico.
Travel agencies continued to sell a significant amount
of the company's products: $56 million in 1966.
For winter vacationers who want to escape the cold,
Western launched its 15th annual "Sun Break" cam-
paign on a theme of "Fight Cold Seven Ways." The
seven "cures" for cold-weather woes were W Al destina-
tions: Acapulco, las Vegas, Los Angeles, Mexico City,
Palm Springs, Phoenix/Scottsdale and San Diego.
For winter vacationers who prefer winter sports, the
company followed up the successful 1965-1966 "Ski
Utah" program by expanding it to a "Ski Western Amer-
ica" theme. It featured Banff and Lake Louise via Cal-
gary; the High Sierra via the Reno gateway; Jackson
Hole (Wyoming), Sun Valley (Idaho) and Utah's Alta,
Brighton, Solitude and Park City via the Salt lake City
gateway; and Vail, Colorado, via the Denver gateway.
Western's summertime "North Country Adventures"
campaign emphasized vacations in Western Canada and
Alaska, as well as the many national parks throughout
the West.
In a bid to obtain a larger share of the burgeoning
air cargo market during 1967, the company conducted a
sales-and-service air cargo seminar. Cargo sales man-
agers were named in key cities on the Western system.
Also established during the year was a sales office in
Tokyo to serve as headquarters for the company's efforts
to participate in U.S. travel performed by residents of
the Pacific and military personnel who are returning to
the West.
Personnel
As of December 31, Western had 5,564 employees,
compared to 4,420 at the end of 1965.
W ages and salaries amounted to $40,948,024, com-
pared to $32,902,116 in the previous year.
Two new divisions were formed during the year, con-
EMPLOYEES
AND SALARIES PAID
6,000 _ NUMBER OF EMPLOYEES
4 ,000 -
-
, ... _
I
0-
I
1962 63
MILLIONS OF DOLLARS
_$60
-40
I
I - 20
- 0
64 65 66
17
solidating functions which had been assigned to other
divisions. Elected vice president of a new Economic
Planning Division, which includes research, tariffs and
flight schedules, was Dr. John R. Summerfield, former
Douglas Aircraft Company and RAND Corporation
economist.
Jack M. Slichter, former vice president of the Air
Transport Association, was elected vice president of a
new Government and Industry Affairs Division.
Other corporate officers elected during the year were
Luis Pasquel, vice president-Mexico; Ray Silvius, vice
president-public relations; Willis R. Balfour, assistant
vice president-agency and interline sales; Eugene D. Ol-
son, assistant vice president-data processing and systems;
and Rick 0. Hammond, assistant treasurer.
On February 1, 1967, Henry M. deButts, former ad-
ministrative assistant to the chairman of the Civil Aero-
nautics Board, joined Western as assistant vice president
in the Government and Industry Affairs Division.
Three labor contracts were signed during 1966, one
covering clerks, passenger agents and baggage handlers;
one covering mechanics, inspectors and other mainte-
nance personnel; and the third covering stock clerks.
An agreement covering Western's stewardesses was
signed in February 1967.
Eighty-nine percent of the company's employees are
represented by unions.
Route Development
In addition to entering into a merger agreement with
Pacific Northern Airlines, Western was extremely active
in seeking additional routes during 1966.
All procedural steps were concluded in three Civil
Aeronautics Board cases in which the company is an
applicant. Final decisions in these cases are expected
soon. They are:
Pacific Northwest-Southwest Service Investigation-
In this case, the area under examination runs from Seattle
to New Orleans and involves service to almost every ma-
jor city between these two points. The Bureau of Operat-
ing Rights, a part of the CAB staff, has recommended
that Western be granted Idaho Falls-Salt Lake City-Den-
ver-Dallas/Ft. Worth-Houston-San Antonio authority.
The examiner in the case recommended that Western be
granted a Seattle-Portland-Salt Lake City-Casper-Den-
ver-Albuquerque-Dallas/Ft. Worth-Houston route. Ma-
jor route awards also have been recommended for other
carriers.
Los Angeles/San Francisco-Vancouver Route-The
Bureau of Operating Rights has recommended that
Western be given Los Angeles and San Francisco-to-
Vancouver routes via Portland, while the examiner rec-
ommended that the new authority be awarded to United
Airlines.
Los Angeles/ Chicago-Toronto Service Investigation
- Western is seeking Los Angeles-Toronto nonstop serv-
ice. Both the Bureau of Operating Rights and examiner
have recommended another airline for this route.
In February of 1966, after the board reconsidered and
reversed the award of a California-Hawaii route it had
made in December 1960, Western filed two new appli-
cations for routes to Hawaii and the Orient for inclusion
in a new Transpacific case.
19
One application involves domestic routings that would
link Hawaii with major cities throughout the U.S. In an
application for international services, Western seeks
routes from the U.S. and from co-terminal points of
Mexico City and Acapulco beyond Hawaii to Tokyo,
Osaka, Seoul, Okinawa, Taipei, Manila, Hong Kong,
Singapore, Saigon, and Bangkok.
Hearings in this case opened in Honolulu on February
15; a final decision is expected in about two years.
In August, the company received temporary author-
ity from the CAB to provide nonstop or through-plane
service between Minneapolis/St. Paul and Los Angeles
and San Francisco. At the same time, the board instituted
a Twin Cities-California proceeding to examine the need
for permanent nonstop service between these areas.
Western will seek to have its authority for nonstop
service, which is effective until 90 days after final CAB
action in this proceeding, made permanent. Included in
the case are applications of a number of other carriers
who have requested authority to provide nonstop serv-
ice on these routes competitive with Western. Hearings
are scheduled to begin June 1; a decision is expected in
1968.
The CAB also established a Salt Lake City-Las Vegas-
Southern California Service Case. This proceeding in-
volves the question of competitive service between Los
Angeles and Salt Lake City (nonstop and via Las Vegas)
and between San Diego and Las Vegas (nonstop and via
Palm Springs), as well as the removal of the restriction
which prohibits Bonanza Air Lines from providing turn-
around service between Los Angeles and Palm Springs.
Hearings in this case will be held later this year.
Already providing seasonal service to West Yellow-
stone via the Salt Lake City gateway, the company also
is seeking authority to fly to Yellowstone Park through
Denver, Casper and Billings gateways. Hearings in the
case were held late in 1966 and the examiner has recom-
mended that Frontier Airlines be granted the route in-
stead of Western. A decision is expected by early summer.
20
Western is awaiting CAB approval of a request to
have its application consolidated into the Gulf States-
Midwest Points case which involves consideration of the
need for new long-haul services between the Gulf States
area (Texas, Louisiana, Mississippi and Alabama) and
the major Midwest trade centers of Chicago, Detroit,
St. Louis and Kansas City. Western also has other appli-
cations on file which have not been set down for hear-
ing and which involve the following routes: Las Vegas-
Phoenix; Las Vegas-Denver; Minneapolis/St. Paul-
Chicago /Detroit/Philadelphia/Boston/New York City;
Seattle /Tacoma -Portland- Great Falls- Billings- Minne-
apolis/St. Paul-New York City; to add Milwaukee,
Omaha, Des Moines, Chicago, Albuquerque, Tucson and
Sacramento to Western's route between the Twin Cities
and the West Coast; Sacramento/Reno-Portland/
Seattle; Los Angeles/San Francisco-Miami; Los Ange-
les/San Francisco-Atlanta; Los Angeles/San Diego-
Tucson; Las Vegas-Phoenix-Tucson.
In January 1966, Western began regular service to
Acapulco under temporary authority granted by the CAB
as a result of bilateral agreement discussions between the
U.S. and Mexico. This authority was made permanent in
September 1966.
21
Ten Years of Growth
Financial
Revenues:3
Passenger
Express, freight and excess baggage
Mail .
Other
Total Revenues
Operating Expenses: 3
Depreciation and amortization
Payroll
Ocher
Total Operating Expenses
Operating Income3
Inceresc3
Ocher Income and Expenses - Nec3 .
Earnings before Taxes on Income3
Taxes on Income3
Nee Earnings from Operacions3
Gain on Disposition of Property (Less Applicable Income Taxes)3
Net Earnings3 .
Shareholders
Nee earnings from operations per share1
Gain on disposition of property per share1
Total .
Dividends paid per share:
Cash1
Stock .
Shares outstanding - actual 3
-adjusced1

3
.
Shareholders' equity - total 3
Shareholders' equity - a share1
Working capital 3
Long-term debc3 .
Property and equipment - net3
Total assecs3
Operations
Route miles at end of year
Airplanes at end of year:
Boeing 720-B .
Boeing 707 - leased .
Lockheed Electra II
Douglas DC-6B
Ocher aircraft - piston powered
Airplane miles flown 3
Ton miles produced 3
Ton miles sold 3
Seat miles produced 3
Seat miles sold 3
Express, freight & mail con miles sold 3
Passengers carried
Express, freight & mail cons carried .
Passenger load factor - actual %
- breakeven point %
Average length in miles per passenger trip
Average revenue per passenger mile
Employees at end of year
' Based on shares outstanding at close of respective periods adjusted to give retroactive effect to stock
dividends and to the May 1964 three-for-one stock split.
2 Five other major carriers were struck from July 8 to August 19, 1966; Western's operations were
adversely affected by strikes during 1961 and 1958.
3 000 omitted .
22
19662 1965
$ 147,469 116,565
4,5 54 3,808
2,743 1,730
1,424 1,496
156,190 123,599
14,542 13,596
40,948 32,902
68,717 54,109
124 207 100,607
31,983 22,992
(2,749 ) (2,105 )
773 260
30,007 21,147
14,050 9,900
15,957 11,247
79 883
$ 16,036 12,130
$ 3.71 2.62
0.02 0.21
$ 3.73 2.83
$ 1.00 0.80
4,301 4,292
4,301 4,292
$ 74,810 62,710
17.39 14.61
17,131 11,503
47,500 41,640
132,250 113,726
171,557 142,324
9,687 9,687
22 18
12 12
4 5
38,035 32,343
528,081 434,881
275,938 212,818
4,336,125 3,616,702
2,642,541 2,045,158
22,379 16,099
4,401,507 3,574,793
30,466 21,898
60.9 56.5
48.5 46.3
600 572
$ .0558 .0571
5,564 4,420
1964 1963 1962 19612 1960 1959 19582 1957
111,432 93,913 81,170 59,737 64,356 59,194 31,459 39,243
3,718 3,248 2,964 2,271 2,473 2,256 1,305 1,596
1,561 1,320 1,427 1,231 1,393 1,295 732 1,067
934 946 809 1,013 855 508 474 313
117,645 99,427 86,370 64,252 69,077 63,253 33,970 42,219
11,718 10,980 13,098 11,211 10,000 6,643 4,136 3,011
29,040 24,749 21,840 17,987 19,478 17,704 11,947 14,335
49,988 43,598 41,254 32,864 33,323 27,696 16,831 20,076
90,746 79,327 76,192 62,062 62,801 52,043 32,914 37,422
26,899 20,100 10,178 2,190 6,276 11,210 1,056 4,797
(1,947) (2,322) (2,286) (1,889) (1,330) (1,127) (1,023) (780)
799 621 483 ____Dl.2) 438 180 74 90
- -
25,751 18,399 8,375 182 5,384 10,263 107 4,107
12,400 9,165 4,250 125 3,050 5,456 227 2,233
- -
13,351 9,234 4,125 57 2,334 4,807 (120) 1,874
191 889 807 105 210 1,522 528
- -
13,351 9,425 5,014 864 2,439 5,017 1,402 2,402
3.11 2.15 0.96 O.Ql 0.54 1.47 (0.04) 0.65
0.05 0.21 0.19 O.Q3 0.06 0.50 0.18
- - - -
3.11 2.20 1.17 0.20 0.57 1.53 0.46 0.83
- -
0.65 0.37 0.33 0.33 0.33 0.27 0.24 0.23
5% 4% 4% 4%
4,292 1,431 1,431 1,431 1,431 1,041 928 849
4,292 4,292 4,292 4,292 4,292 3,273 3,034 2,886
54,013 43,452 35,601 32,017 32,584 24,545 18,996 17,469
12.58 10.12 8.29 7.46 7.59 7.50 6.26 6.05
8,827 6,580 12,364 5,505 16,841 11,518 5,320 4,688
26,970 32,940 39,488 36,097 24,790 25,272 19,748 16,827
89,626 82,243 67,696 63,117 43,109 39,985 35,243 31,128
124,172 111,202 98,830 85,697 72,433 67,223 49,596 44,017
9,474 9,474 9,545 8,827 8,827 8,827 9,153 8,799
12 10 7 4
2 2
12 12 12 12 6 5
14 14 16 19 27 27 27 21
4 5 8 14
32,442 29,035 25,262 20,624 25,996 25,689 16,449 21,986
401,999 352,038 307,570 224,819 207,554 196,178 123,416 137,640
203,539 168,002 137,492 101,232 109,316 103,741 56,710 74,468
3,388,541 2,929,673 2,402,344 1,718,854 1,776,076 1,623,007 981,740 1,175,071
1,964,512 1,615,189 1,307,173 957,560 1,034,481 982,010 533,443 702,727
14,136 12,291 11,574 8,987 9,538 8,899 5,309 7,118
3,532,978 2,812,640 2,128,225 1,529,137 1,721,619 1,689,278 970,498 1,379,653
18,992 16,250 16,037 12,364 13,354 12,792 8,010 11,537
58.0 55.1 54.4 55.7 58.2 60.S 54.3 59.8
44.6 43.6 48.0 55.5 53.3 50.0 54.1 53.5
556 574 614 626 601 581 550 509
.0567 .0582 .0623 .0632 .0626 .0605 .0595 .0558
4,092 3,513 3,078 2,794 2,730 2,962 2,547 2,773
23
Western Air Lines Inc. Balance Sheet
December 31, 1966, with comparative figures for 1965
ASSETS
Current Assets:
Cash .
Short-term securities (approximating market)
Receivables .
Maintenance and operating supplies .
Prepaid expenses
Total Current Assets
Property and Equipment at Cost:
Flight equipment
Ground equipment .
Deposits on purchase contracts (Nate 3)
Less allowance for depreciation and maintenance .
Deferred Charges and Other Assets .
See accompanying notes to financial statements
24
1966
$ 10,208,387
9,499,101
11,827,054
4,764,100
2,138,811
38,437,453
171,557,486
29,575,107
8,649,775
209,782,368
77,531,938
132,250,430
869,222
$171,557,105
1965
$ 3,226,341
11,504,953
8,827,891
2,641,137
1,787,114
27,987,436
145,650,100
25,891,744
5,923,190
177,465,034
63,738,444
113,726,590
609,723
$142,323,749
LIABILITIES
Current Liabilities:
Accounts payable
Accrued salaries and wages
Accrued liabilities .
Unused transportation .
Accrued federal income taxes (Note 1) .
Total Current Liabilities .
Long-Term Debt (Note 2) .
Deferred Credits (Note 1):
Deferred federal taxes on income
Unamortized investment credits .
Shareholders' Equity (Notes 2, 5 and 7):
Common stock - $1.00 par value per share
Authorized 10,000,000 shares
Issued 4,301,290 and 4,292,190 shares.
Capital in excess of par value .
Retained earnings .
$
1966
8,645,055
4,256,825
2,896,799
2,327,151
3,180,581
21,306,411
47,500,000
22,143,000
5,798,000
27,941,000
4,301,290
16,850,476
53,657,928
74,809,694
$171,557,105
$
1965
7,355,789
3,075,472
2,034,713
1,945,166
2,073,584
16,484,724
41,640,000
17,152,000
4,337,000
21,489,000
4,292,190
16,500,126
41,917,709
62,710,025
$142,323,749
25
Western Air Lines Inc. Statement of Earnings and Retained Earnings
For the year ended December 31, 1966, with comparative figures for 1965
Operating Revenues:
Passenger .
Express, freight and excess baggage
Mail
Other .
Operating Expenses:
Flying operations
Maintenance .
Passenger service
Aircraft and traffic servicing
Marketing and administrative
Depreciation and amortization (Note 6)
Operating Income
Other Income (Expenses):
Interest expense .
Interest income .
Other expense - net
Earnings before Taxes on Income .
Taxes on Income (Nate 1) .
Net Earnings from Operations
Gain on Disposition of Property (Less
Applicable Income Taxes) .
Net Earnings
$3.73 per share in 1966 and $2.83 in 1965
Retained Earnings at Beginning of Year
Cash Dividends Paid
$1.00 per share in 1966 and $0.80 in 1965
Retained Earnings at End of Year (Nate 2) .
See accompanying notes to financial statements
26
1966
$147,468,687
4,554,514
2,743,031
1,423,732
156,189,964
29,766,875
21,522,491
12,468,382
20,777,766
25,129,493
14,542,185
124,207,192
31,982,772
(2,748,802)
806,449
(33,418)
30,007,001
14,050,000
15,957,001
78,958
16,035,959
41,917,709
57,953,668
4,295,740
$ 53,657,928
1965
$116,565,319
3,808,555
1,730,084
1,495,356
123,599,314
24,368,243
17,701,842
8,809,333
16,055,632
20,076,046
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
Western Air Lines Inc. Statement of Source and Application of Funds
For the year ended December 31, 1966, with comparative figures for 1965
1966
Funds Provided:
Net earnings . $16,035,959
Less gain on disposition of property 78,958
Net earnings from operations . 15,957,001
Add back
Depreciation and maintenance reserve provision 15,765,535
Deferred income taxes 4,991,000
Charge equivalent to investment credit 1,461,000
Total from operations . 38,174,536
Increase in long-term debt . 5,860,000
Proceeds from disposition of property, net of taxes 315,394
Exercise of stock options . 359,450
6,534,844
Total . 44,709,380
Funds Applied:
Purchase of airplanes, property, and equipment 34,525,810
Payment of cash dividends . 4,295,740
Other items . 259,500
39,081,050
Increase in working capital 5,628,330
Total . $44,709,380
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
27
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
1966 provision for income taxes is summarized as follows:
Charged to Operations:
Current income taxes
Deferred income taxes
Charge equivalent to investment credits,
net of amortization of $800,000 .
$ 7,598,000
4,991,000
Applicable to Gain on Disposition of Property
1,461,000
14,050,000
75,000
$14,125,000
Investment credits are being amortized to income over the lives
of the related equipment.
Note 2. Long-Term Debt (Unsecured). On December 31, 1966,
long-term notes payable were as follows :
Bank Loans:
$17,500,000 (of a maximum $2 5,000,000 ) in a revolving
fund credit until March 31, 1969 at interest not to exceed
5%. Notes outstanding on March 31, 1969 will be con-
verted 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 companies
provide among other things ( including restrictions on additional
borrowings) conditions and requirements which at December 31,
1966 operated to restrict retained earnings from cash dividend
distribution in the amount of $43,487,434, leaving $10,170,495
not so restricted.
Arrangements for additional borrowings of $60,000,000 are
presently being finalized.
Note 3. Commitments and Contingent Liabilities. Jet aircraft
and other major items on order at December 31, 1966 together with
five optioned jet aircraft ordered in January 1967 represented pur-
chase commitments of approximately $125,000,000 in excess of
related deposits.
The estimated minimum annual rentals under long-term leases,
with expiration dates ranging to 1991 , were approximately
$1,000,000 at December 31, 1966.
Note 4. Retirement Plans. The costs of retirement plans charged
to operating expense in 1966 totaled $1,842,039, including $73,164
for past-service costs, thereby leaving approximately $622,000 un-
funded at December 31, 1966.
Note 5. Options to Purchase Common Stock. During 1966,
options for 11,500 shares were granted at an average option price
of $45.00 a share under the company's stock option plan for officers.
As of December 31, 1966, 200,900 shares of the corporation's
authorized and unissued stock were reserved for the purposes of the
plan and options were outstanding to purchase a total of 134,900
shares at option prices aggregating $5,3 54,860 (approximate fair
market value on days of grant ).
28
The proceeds from 9,100 shares issued upon exercise of options
in 1966 were credited in the amount of $9,100 (par value) to
common stock and in the amount of $3 50,350 to capital in excess
of par value. The related market value at dates first exercisable was
$388,669 and at dates exercised was $468,625.
The options are generally exercisable in equal annual increments
over a five-year period.
Note 6. Depreciation. The estimated useful lives of propjet Electra
aircraft were extended to December 31, 1967. Accordingly, depre-
ciation expense for the year 1966 was decreased by approximately
$1,500,000, increasing net income by approximately $780,000.
Note 7. Proposed Merger. In November 1966, the company and
Pacific Northern Airlines, Inc. entered into an Agreement of
Merger. Under the terms of the Agreement, which is subject to
approval of the shareholders of both companies, the Civil Aero-
nautics Board, other state and federal agencies, and holders of the
companies' long-term debt, Western will issue one common share
in exchange for two shares of Pacific Northern stock. Accordingly,
578,454 shares of the company's common stock were reserved at
December 31, 1966 for issuance in connection with said merger.
PEAT, MARWICK, MITCHELL & CO.
Certified Public Accountants
Los Angeles, Calif. 90014
The Board of Directors
Western Air Lines, Inc.:
We have examined the balance sheet of Western Air Lines, Inc.
as of December 31, 1966 and the related statement of earnings and
retained earnings for the year then ended. Our examination was
made in accordance with generally accepted audi ting standards, and
accordingly included such tests of the accounting records and such
other auditing procedures as we considered necessary in the circum-
stances. We previously made a similar examination of the financial
statements for 1965.
In our opinion, the accompanying balance sheet and statement of
earnings and retained earnings present fairly the financial position
of Western Air Lines, Inc. at December 31, 1966 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. Also, in our opinion, the accompanying
statement of source and application of funds for the year ended
December 31, 1966 presents fairly the information shown therein.
PEAT, MARWICK, MITCHELL & CO.
February 13, 1967
Western Air Lines Routes and Proposed Route
Corporate Officers
Terrell C. Drinkwater, President and Director
Stanley R. Shatto, Executive Vice President-Transportation
and Director
J. Judson Taylor, Senior Vice President, Treasurer
and Director
Arthur F. Kelly, Senior Vice President-Sales
Dominic P. Renda, Senior Vice President-
Legal and Corporate Secretary
Marvin W. Landes, Senior Vice President
( on leave of absence)
Jack M. Slichter, Vice President-Government and
Industry Affairs Division
John R. Summerfield, Vice President-Economic
Planning Divi.sion
Richard B. Aulc, Vice President-Engineering
Harold W. Caward, Vice President-Flight Operations
Charles J. J. Cox, Vice President and Controller
Richard P. Ensign, Vice President-In Flight Services
Anton B. Favero, Vice President-Maintenance
Bert D. Lynn, Vice President-Advertising and
Sales Promotion
Luis Pasquel, Vice President-Mexico
Philip E. Peirce, Vice President-Ground Services
Terrell S. Shrader, Vice President-Industrial Relations
Ray Silvius, Vice President-Public Relations
Willis R. Balfour, Assistant Vice President-Agency and
Interline Sales
Henry M. deBucts, Assistant Vice President-Government
and Industry Affairs
Charles S. Fisher, Assistant Vice President-Flight Schedules
Rick 0. Hammond, Assistant Treasurer
James L. Mitchell, Assistant Vice President-Research
Eugene D. Olson, Assistant Vice President-Data Processing
and Systems
John W. Simpson, Assistant Secretary and Director of Law
Peter P. Wolf, Assistant Vice President-Communications
Western Air Lines Routes and Proposed Routes
GREAT FALLS
\
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NEWYOR
- Vancouver-California case
- Tqronto-California case
- Transpacific case
- Pacific Northwest-Southwest case
Twin Cities case
Gulf States case
Other applications
Western Air Lines system
General Offices
Western Air Lines Building, 6060 Av ion Drive
Los Angeles International Airport
Los Angeles, California 90009
Registrars
Bank of America National Trust & Savings Assn.
111 West Seventh Street, Los Angeles, California 90014
The Chase Manhattan Bank
1 Chase Manhattan Plaza, New York, New York 10015
Stock Transfer Agents
Security First National Bank
124 West Fourth Street, Los Angeles, California 90014
Chemical Bank New York Trust Co.
20 Pine Street, New York, New York 10015
Stock Listings
Listed and traded on
New York Srock Exchange and
Pacific Coast Stock Exchange
General Counsel
Hugh W. Darling
Darling, Mack, Hall & CaU
523 West Sixth Street, Los Angeles, California 90014
Auditors
Pear: Marwick, Mitchell & Co.
629 South Spring Street, Los Angeles, California 90014
Annual Meeting
Fourth Thursday in April