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 \ \ ' : ------------------- r't3'itri~ ... ,, ...... ,, ......... 'so ......... .., ............ ... ......... ...... ... ... ............ ... ... ---......... ...... TQROtlIP- BOSTO J --------- ----- ___ :,.. ____ _ 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