Western Air Lines Annual Report 1967

WESTERN AIR LINES INC. 1967 ANNUAL REPORT
Western Air Lines lnc.1967 Annual Report
Highlights of 1967 2
President's Letter 3
Review of the Year 4
Corporate Citizenship 12
Ten Years of Growth 24
Balance Sheet 26
Earnings and Retained Earnings 28
Source and Application of Funds 29
Notes to Financial Statement 30
Accountants' Report 30
Highlights of 1967
2
Operating 1967 1966*
Seat miles produced 5,879,442,000 4,800,901,000
Seat miles sold 3,327,160,000 2,898,088,000
Passengers carried 5,107,672 4,700,839
Passenger load factor-actual % 56.6 60.4
- breakeven point % 49.5 47.9
Financial
Operating revenues $192,481,649 $177,183,831
Operating income $ 25,339,604 $ 36,346,386
Net earnings $ 12,221,465 $ 18,325,475
Cash dividends paid $ 4,888,874 $ 4,295,740
Common stock outstanding 4,893,244 4,835,344
Earnings per share $ 2.50 $ 3.79
Cash dividends per share (annual rate) $ 1.00 $ 1.00
Shareholders' equity $ 90,016,046 $ 81,750,605
Shareholders' equity per share $ 18.40 $ 16.91
Cash and short-term securities $ 21,871,520 $ 22,989,993
Working capital $ 19,584,782 $ 18,047,621
Property and equipment at cost $288,598,572 $232,448,274
Long-term debt $ 80, 188,843 $ 54,867,661
Number of employees at year end 7,282 6,294
Wages and salaries paid $ 57,974,743 $ 47,350,672
*All financial data in this report give effect, retroactively throughout the periods shown, to the merger of
Pacific Northern Airl ines Into Western on July 1, 1967, which was accounted for as a pooling of Interests.
To Shareholders, Employees, Customers and Friends:
For Western Air Lines, 1967 was a year of progress in which
the company consummated a merger, added a~ imp~r_t~nt
Canadian city to its route system and prepared its fac1l1t1es
and personnel for continued growth.
Although the number of passengers carried and the number
of seat miles sold increased over the previous record year,
it was a disappointing year in terms of profits. Despite the
company's ability to reduce the cost of producing a seat
mile in the face of inflationary trends, the combined effect
of a lower yield per revenue passenger mile and a lower
load factor resulted in a decrease in earnings from the
previous year, when a 43-day strike against other airlines
increased Western's traffic.
The decreased ticket yield, from 5.67 cents in 1966 to 5.37
cents in 1967, was caused primarily by the increased use
of discount travel; 39 percent of seat miles sold on the
Western system during the year were sold at a discount,
compared to 22 percent in the previous year.
This phenomenon is not unique to Western but is an indus-
trywide problem which has developed because of the
domino-effect that occurs when one airline introduces a dis-
count fare and others must meet it for competitive reasons.
Many costs of handling a passenger-the reservation,
check-in, baggage handling and aircraft operati~g
expenses through the takeoff and landing phases-are vir-
tually the same for short or long flights. On a long ha_ul,
however, these basic costs may be spread over the entire
flight to produce lower seat mile costs than are obtainable
on a short trip.
There are several airlines which have low average revenues
per passenger mile comparable to Western's, but they ha~e
a higher average length of haul. And there are several air-
lines whose routes, like Western's, are short, but they have
higher ticket yields. No other airline has the same com-
bination of short hauls and low yields.
This is the main reason Western has been working so dili-
gently to obtain routes with distance and traffic density
through Civil Aeronautics Board proceedings.
For many years, Western operated quite successfully on the
theory that the company could grow and prosper by devel-
oping commerce in its own western region. But, faced with
additional competition on many of its key routes and from
"jumbo jets" and "air buses" that are expected to have
lower seat mile costs than are available with smaller aircraft,
Western some years ago was forced to modify its domestic
trunkline philosophy and seek franchises for transconti-
nental and international routes that can support the huge
aircraft that will have to be obtained to remain competitive.
President's Letter
In 1967 Western purchased five long-range Boeing 707-320C
lntercontinentals for 1968 delivery and reserved 1971
delivery positions for two Boeing 747 Jumbo Jets.
While awaiting the results of several CAB route proceed-
ings we hope and expect will give us this mu~h-nee~~d
route expansion, Western arranged the merger with Pac~f 1c
Northern Airlines, which added 3,388 miles and n1_ne
Alaskan cities to the WAL route system. The two companies
were integrated with a minimum of difficulty and displace-
ment and, as detailed in this report, many plans and pro-
grams are underway to stimulate travel to Alaska and,
through the Western-sponsored Alaska Business Council,
develop the economy of the 49th state. We believe this is a
good merger with great promise for continued development.
Perhaps the greatest challenge of 1968 will be the intro-
duction of a record number of aircraft in a single year. The
30 jet aircraft now operated by your company were phased
into operation over a seven-year period; beginning in June,
Western will receive 22 new jet aircraft in a seven-month
period.
Addition of the five long-range 707-320C jets will give
Western improved capability in a number of areas-Military
Airlift Command contract flying, if needed by the Depart-
ment of Defense; charter operations, particularly to Mexico
City during the 1968 Olympic Games; and, beca~se of the
convertibility of this airplane, great cargo potential.
Introduction of the twin-engine Boeing 737s will permit
Western to introduce jet service to smaller communities
and in markets which do not have sufficient traffic or length-
of-haul to justify the use of. four-engine jets.
In January of this year, Western reached a preliminary
agreement for the purchase of six Boeing 127:-2oos, _a
medium-range three-engine jet which, when delivered in
late 1969, would release both 707s and 720B's for additional
service on the company's longer routes or on new long-
haul routes which might be authorized for Western.
Western Air Lines continues to be in a sound financial
condition with programs established for future growth. We
believe there will be little additional erosion of yield in
1968 and all areas of Western management are working
earnestly to hold costs at the lowest possible level consis-
tent with safe, reliable service.
Your continued support will assist us in making 1968 a good
year for Western Air Lines.
March 5, 1968 President
3
Review of the Vear
Earnings Earnings in 1967 were $12,221,465, or $2.50 a
share, compared to $18,325,475, or $3.79 a share, in 1966
when a strike against other airlines resulted in additional
net income to the company of approximately $2,500,000, or
51 cents a share. Per-share earnings for 1967 are based on
4,893,244 shares of stock and for 1966 on 4,835,344 shares
outstanding as of December 31 in each year.
(All earnings figures and other financial data in this report
give effect, retroactively throughout the periods shown, to
the merger of Pacific Northern Airlines into Western on July
1, 1967, which was accounted for as a pooling of interests.)
Operating income totaled $25,339,604, equal to 13.2 percent
of operating revenues, compared to $36,346,386, or 20.5
percent of revenues, in 1966.
Earnings from operations before taxes were $22,346,465,
or $4.57 a share. Provisions for taxes on income from oper-
ations both current and deferred, totaled $10,125,000, or
$2.07 a share.
In appJying investment tax credits related to the purchase
of aircraft and other eligible equipment, Western since 1962
has amortized the credits to earnings over the productive
life of the equipment rather than take the full amount into
income in the year in which the investment credit was
realized. Included in 1967 earnings is $1,054,953 from this
source. Deferred for credit to future years is $7,107,000, an
increase of $1,309,000, over the amount deferred at the
close of 1966.
4
Dividends For the 17th consecutive year, shareholders of
Western Air Lines received cash dividends in 1967.
Quarterly dividends of 25 cents a share were paid on
February 20, May 29, August 21, and November 20 for a
total payment of $1 a share.
At the first regular board meeting of 1968, held in Los
Angeles on January 15, a quarterly dividend of 25 cents was
voted, payable on February 19 to shareholders of record on
January 31.
Annual Meeting The 1968 meeting of shareholders will be
held at the Beverly Hilton Hotel, Beverly Hills, California,
on April 25. On or about March 20, stockholders will receive
a formal notice of the meeting and proxy material.
Revenues Total operating revenues for 1967 were a record
$192,481,649, a nine percent increase over the $177,183,831
of the previous year.
Passengers carried also increased nine percent to the all-
time high of 5,107,672. Seat miles sold were up 15 percent
over the previous year.
The failure of revenues to increase at the same rate as seat
miles sold is primarily attributable to the increased use of
discount fares. During the year, approximately 39 percent
of seat miles sold on Western were at a discount, compared
to 22 percent in 1966.
Greatest increase was in the use of excursion fares, which
represented more than 50 percent of all discounted seat
Highlight of
Western 's new
in-flight service on
Vancouver flights
is a distinctive tea
service. Flights
also feature an
Executive Hostess
and meal and
beverage services
which give flights
a truly inter-
national flavor.
miles sold for the year. Children's half-fares represented
15 percent of discount travel. Military 13 percent, Family
Plan 13 percent and Youth Standby nine percent.
Of Western's income dollar, 93 percent was derived from
passenger traffic (78 percent coach and 15 percent from
deluxe). Express, freight and excess baggage accounted
for four percent, mail for two percent and all other sources
one percent.
Expenses Total operating expenses for 1967 amounted to
$167,142,045, a 19 percent increase over 1966.
Wages and salaries increased 22 percent, depreciation 27
percent and other expenses 15 percent.
Contributing to the expense increase was a 22 percent
increase in seat miles produced.
The cost per seat mile produced decreased during the year,
from 2.93 cents in 1966 to 2.84 cents in 1967. This was due
in part to a 10 percent increase in daily utilization of jet
aircraft and a five percent increase in propjet utilization.
The breakeven load factor (percentage of seats produced
which must be sold to cover expenses) increased from 47.9
percent in 1966 to 49.5 percent in 1967, reflecting the
decrease in yield per seat mile sold.
Depreciation costs increased from $15,779,338 in 1966 to
$20,085,842 for 1967. Of this increase, $3.8 million resulted
from new Boeing 720B's delivered in 1966 and 1967 and
$550,000 resulted from reduction of the residual value of
PROMOTIONAL FARl!I
Al A PERCINT OF REVENUE
MILITARY
11183
FAMILY
OTHER
95
PERCENT OF TOTAL REVENUES
EXCURSION
15
'/OUTl-l 10
77.86% COACH PASSENGERS
14.76% DELUXE PASSENGERS
THI 1N7 EXPENIE DOU.AA
35.47% WAGES AND SALARIES
To call attention to
the international
scope of the
Western route
system, the
American flag has
been painted on
the tail of each of
the company's
four-engine jets.
12.15% FUELS
EXPRESS, FREIGHT AND
EXCESS BAGG,6GE
MAIL
OTHER
11.13%
DEPRECIATION
7.07% UTILITIES
AND SERVICES
4.81 %
SERVICE TO PASSENGERS
7.41 % TAXES
9.32% MATERIALS
AND REPAIRS
5
the Lockheed Constellations acquired in the PNA merger
to a minimal amount at the end of 1968.
Finances The company maintained a strong financial
position throughout 1967.
As indicated in the Statement of Sources and Applications
of Funds, operations provided $39,228,729, the net increase
in borrowings supplied $25,321,182 and other sources
provided $1,614,004 for a total of $66,163,915.
Of this amount, $59,737,880 was applied to the purchase
of airplanes, property, equipment (including deposits) and
other items and $4,888,874 was used for the payment of
cash dividends, leaving $1 ,537,161 as an increase in work-
ing capital.
Working capital at the end of the year was $19,584,782,
an increase of nine percent over 1966. Current assets
amounted to $46,956,844 and current liabilities to
$27,372,062, providing a current assets-to-liabilities ratio
of $1. 72 to $1.00.
Long-term debt (including current maturities) at December
31, 1967, totaled $81,691 ,470, and consisted of $30 million
in 5 percent notes payable to insurance companies, $45
million in notes outstanding under a revolving credit agree-
ment with a bank and $6,691,470 in 5-6 percent promis-
sory notes.
In the second quarter of 1967, the company negotiated an
agreement with the insurance companies providing for an
6
SHAREHOLDERS' EQUITY
AND LONG-TERM DEBT
1963
MILLIONS OF DOLLARS
- $100
Brief Statement of Earnings
Western's revenues came from:
Passengers
Coach
Deluxe .
Express, freight and
baggage
Mail
Other income
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
Key to Western 's
new reservation
system, to be
installed in 1968,
is th is television-
like agent set
which will visually
display in only
seconds complete
reservations
records and flight
information stored
in central
computer.
1967
$150,087,785
28,438,767
178,526,552
7,581 ,113
4,221 ,459
2,387,498
192,716,622
57,974,743
6,049,573
13,378,786
21 ,936,906
20,085,842
16,820,826
12,765,527
8,688,000
6,229,073
6,020,353
2,914,761
3,011 ,202
4,619,565
180,495,157
$ 12,221 ,465
1966
$137,115,714
27,069,707
164,185,421
6,849,085
4,254,862
2,707,396
177,996,764
47,350,672
5,285,601
18,322,243
18,197,491
15,779,338
15,823,355
10,888,346
7,773,207
5,1 65,376
4,845,697
3,326,656
3,238,925
3,674,382
159,671 ,289
$ 18,325,475
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
Notes payable -
current and long-term .
Excess of what is owned
over what is owed, or
shareholders' equity
DEBT AS A PERCENTAGE
OF EQUITY
1967 1966
$ 21 ,871,520 $ 22,989,993
16,185,954 14,557,884
6,314,423 5,004,607
9,512,014 8,353,188
149,503,637 128,769,135
24,090,535 8,649,775
2,584,947 2,360,462
1,278,921 1,323,502
231 ,341 ,951 192,008,546
22,146,783 18,771,156
26,818,025 26,591,330
7,107,000 5,798,000
3,562,627 2,677,167
81,691,470 56,420,288
141 ,325,905 110,257,941
$ 90,016,046 $ 81 ,750,605
INDUSTRY
WESTERN
'-----~~~~~-----~----~--- -0
1983 64 65 66 67
additional $40 million in borrowings for 1968 and 1969
through 65/a percent promissory notes which are due
September 1, 1984.
Also negotiated in the fall of 1967 was a new revolving
credit agreement with a bank. Superseding previous
agreements, the new arrangement provides for borrowings
up to $90 million until December 31, 1969, at which time
notes outstanding are convertible into a term note due
December 31, 1975. At December 31, 1967, $45 million was
outstanding under this agreement. The interest rate on all
notes will be percent over the bank's prime commercial
rate. Notes currently outstanding bear interest at the rate
of 6 percent annually.
Western sold $30 million of 5 percent convertible
subordinated debentures to the public by an offering on
January 30, 1968, through a group of underwriters headed
by Merrill Lynch, Pierce, Fenner & Smith. These debentures
are convertible into capital stock at $36.75 a share (subject
to adjustment in certain cases). They are redeemable at
the option of the company at an initial redemption price of
105.25 percent until January 31, 1969, and thereafter at
prices which decline annually to par in 1988.
Net proceeds from the sale have been added to the general
funds of the company which, together with funds available
under the company's existing loan agreements, internally
generated funds and proceeds from such other financing
as the company may deem appropriate in the future, will be
Reservations
records will be
stored electroni-
cally on whirling
disks which
resemble phono-
graph records. The
amount of Informa-
tion that can be
stored In one unit
of 11 disks would
have required
approximately
60,000 reservations
cards under the
old system.
7
applied toward the cost of aircraft, other equipment and
building construction.
Shareholders and Stock At the close of 1967, there were
4,893,244 shares of Western Air Lines common stock issued
and outstanding, compared to 4,835,344 shares at the end
of 1966.
In 1967, 44,400 shares of stock were issued to warrant
holders and 13,500 shares were issued through the exercise
of qualified stock options.
At year's end, 187,400 shares of Western stock were
reserved for stock options outstanding or available for grant
under the company's qualified stock option plan. Also,
816,326 shares have been reserved for conversion of the
$30 million of 5 percent convertible subordinated deben-
tures sold early in 1968.
The company's stock was held by approximately 24,000
shareholders.
At the 1967 annual meeting of shareholders in Los Angeles
in April, 84.4 percent of all shares were voted in person or
by proxy. At the meeting, company stockholders approved
the merger agreement dated November 10, 1966, between
Western and Pacific Northern Airlines based on the
exchange of stock at the rate of two shares of PNA stock
for one share of Western. The merger was approved by
PNA stockholders on May 18.
CONSUMER PRICE INDEX COMPARED TO
WESTERN'S AVERAGE REVENUE PER PASSENGER-MILE
CONSUMER PRICE INDEX
118.0-
116.0-
114.0-
112.0-
66
8
AVERAGE REVENUE PER
PASSENGER MILE
-5.9
-5.3
67
Shareholders' equity in 1967 increased to $90,016,046, or
$18.40 a share, from 1966 equity of $81,750,605, or $16.91
a share, a nine percent increase-.
Noncumulative Voting Western and the California Commis-
sioner of Corporations have been engaged for several years
in litigation in California concerning the method of voting
at elections of the company's directors. In 1956, the share-
holders, as permitted by the laws of Delaware, the com-
pany's state of incorporation, voted to provide for straight
(non-cumulative) voting at elections of directors. The Cali-
fornia Commissioner refused to authorize the change and
Western appealed to the courts.
In 1958, the Delaware Chancery Court ordered the company
to hold a special shareholders' meeting for the election
of directors by straight voting. At all ensuing annual share-
holders' meetings (1959 through 1967) directors have been
elected by straight voting.
In the California litigation, a 1958 judgment favorable to the
company was reversed in 1961. The company in 1964 again
obtained judgment. This judgment was reversed on January
25, 1968, and in a collateral case the California Court of
Appeal directed that judgment be entered enjoining the
company from holding any elections of directors at which
cumulative voting is not permitted. The company petitioned
the California Supreme Court to review the cases and
intends, if necessary, to seek review by the Supreme Court
of the United States.
Scheduled for
completion in 1968
is this Western
maintenance and
service facility at
San Francisco
International
Airport.
If a judgment enjoining the company from holding any elec-
tions of directors at which cumulative voting is not per-
mitted should be effective at the time of the annual meeting
on April 25, no election of directors will be held. In that
event, the present directors will remain in office until an
election is held.
Equipment and Facilities Western took delivery of five
additional Boeing 7208 fanjet aircraft during 1967 and
acquired three Boeing 720s through the merger with Pacific
Northern.
At year's end the company's jet-powered fleet consisted of
27 Boeing 720B's, three 720s and 12 Lockheed Electras.
Eighty-one percent of seat miles produced during the year
were produced by the 720B's and 720s, 16 percent by the
Electras and three percent by the six Lockheed Constella-
tions and three Douglas DC-6B's also operated by the
company.
During 1967, the company also announced plans to acquire
15 additional jet aircraft in 1968 and 1969 when it ordered
five Boeing 707-320C lntercontinentals and exercised
options for 10 Boeing 737 twinjets. The long-range 320C's
are for delivery in the summer of 1968, the 737s in the first
half of 1969. Already on order were 20 of the twinjets; 17
will be delivered in the last seven months of 1968 and three
in 1969.
In January 1968, the company entered into a preliminary
SEAT-MILES PRODUCED
AND OPERATING EXPENSES
SEAT-MILES PRODUCED IN BILLIONS
6- ----------~~~~ - - - ~ ~ - ~ - ~ - - - ~
l",001.)CicO
SEAT-MILES I'
OPERATING EXPENSE
------------------~-------------------0
85 66 87
agreement for the purchase of six Boeing 727-200 aircraft
which, together with supporting equipment, would cost
approximately $35 million. Delivery would be scheduled for
the last quarter of 1969.
In order to retire the Constellation aircraft, which operate
only on Alask.an routes, and at the same time provide
increased cargo lift on these routes, the company entered
into negotiations with Lockheed for the conversion of five
Electras to cargo-passenger configuration during the last
half of 1968. Three other Electras will be converted to all-
cargo configuration-one to be converted before the end
of 1968 and the others early in 1969-for systemwide use.
As part of its continuing practice of assuring that aircraft
in its fleet are standardized with the latest systems and
components, Western began a program during the year
in which each of the 720B's acquired prior to 1967 will
undergo a modification program at the Boeing plant.
The company intends to retire its Constellations and DC-
6B's during 1968.
In 1967, Western moved its Sacramento operations to a new
metropolitan airport and occupied new terminal facilities
at San Diego and Rapid City.
In 1968, the company will occupy under lease agreements
new maintenance and service facilities at Denver and San
Francisco. The facilities, of 139,000 and 169,000 square feet
The Boeing 737
will make its
appearance on
Western's routes
in the summer of
1968. Thirty of the
twinjets have been
ordered, 17 for
delivery in 1968
and 13 in 1969.
9
respectively, will house maintenance, reservations and
administrative activities.
Construction also will begin on a $1.5 million multi-purpose
facility at Anchorage International Airport. The structure
will contain space for cargo handling, ground equipment
maintenance, parts storage, an in-flight service kitchen and
reservations area.
Also scheduled to be opened in the summer of 1968 will be
a new terminal building at Vancouver.
Cargo facilities and equipment, which were improved at
several points on the company system in 1967, also will be
expanded in Alaska and at several major system stations
during 1968.
In the latter part of 1968, Western will introduce its new IBM
centralized reservations and data processing system. The
system-to be called ACCU-RES-is designed to perform
the confirmation and control functions involved in airline
reservations and will enable agents to obtain immediately
available space and other reservation information on any
of the company's flights. The system also will be able to
perform other functions, including storing flight informa-
tion, maintaining and processing passenger seating and
boarding lists, providing information on tours (including
itineraries and package prices) and on rental car avail-
ability, maintaining time-in-use records on numerous air-
craft components, and providing the means for developing
10
WESTERN'S LOAD FACTOR
AND INDUSTRY LOAD FACTOR
1963 64
WESTEAN'S LOAD l',,_c..,ol'-
INDUSTRY LOAD FACiOR
65
-55
-50
~
- 40
67
sophisticated management information services.
Sales and Service Western carried 5,107,672 passengers
during 1967, a nine percent increase over the previous year.
Although the average length of passenger trip also
increased, from 616 miles in 1966 to 651 miles in 1967, the
decrease in yield per passenger mile referred to in the
Revenues section of this report held the increase in pas-
senger revenues to nine percent, from $164,185,421 in 1966
to $178,526,552 in 1967.
The company's overall passenger load factor decreased
from 60.4 percent in 1966 to 56.6 percent in 1967.
Revenues from air cargo shipments (freight, express,
excess baggage, air mail and regular first class mail)
increased from $11,103,947 in 1966 to $11,802,572 in 1967.
Credit card purchases of air travel, a field in which Western
was an industry pioneer, continued to be a popular form
of passenger accommodation, increasing 11 percent over
the previous year.
Two major travel destinations, each attractive to both busi-
ness and vacation travelers, were added to the Western
route system in July when the company entered Alaska
through the PNA merger and inaugurated service over
newly awarded routes to Vancouver, British Columbia.
Although both areas have been included in the company's
marketing programs for many years as destinations for
Among the many
Alaskan attractions
that became a part
of Western 's route
system with the
PNA merger is
Glacier Bay, north
of Juneau.
summer travel via Western flights to the Seattle/Tacoma
gateway, and as marketplaces for southbound travel to
warmer points on Western's system in winter, their addition
to the WAL system triggered major new sales efforts
during 1967.
Western's interest in Vancouver goes back to 1959 when
the company opened an off-line sales office there. After
receiving CAB authority to serve the city, the company
inaugurated daily nonstop flights to Vancouver from Los
Angeles, San Francisco and Portland on July 1, 1967.
The addition of Alaska expanded Western's routes along
the entire North American rim of the Pacific Basin, from
Anchorage to Acapulco.
Following two basic themes: "Western Means Business in
Alaska" and "America's New Frontier- Modern Alaska,"
the company launched advertising and sales campaigns
throughout the U.S.
The "Western Means Business" campaign called attention
to the growth and potential of Alaska's leading industries
and business opportunities: commercial fishing, lumbering,
petroleum, personal services, construction, mining
and tourism.
In promoting traffic to and from both areas, the company
followed its fundamental concept of selling travel through
"total involvement." This concept, which also is the back-
bone of Western's three seasonal marketing campaigns -
GROWTH IN SEAT-MILES SOLD VS.
OPERATING REVENUES
1963 64
% INCREASE
- - - - - - - - - - - - -- 100
65 66
0
67
Take a Sun Break, North Country Adventures and Ski
Western America - is built around a cooperative effort
involving all elements of travel - hotels, ground and water
transportation, connecting airlines, car rental, tour oper-
ators, and local, state, or provincial tourism organizations.
By pre-packaging and pricing travel in a manner that makes
it easier and less expensive for the traveler and by combin-
ing advertising and sales promotion budgets and sales
effort into a joint campaign, the participants,achieve much
greater impact than they might with individual campaigns.
Western, having created the concept several years ago,
continues to supply much of the leadership and direction
of a program that now includes some of the largest travel-
oriented companies in the U.S.
During the year, Western also observed its 10th anniversary
of service to Mexico and continued to devote a major share
of its marketing effort to the company's two south-of-the-
border destinations - Mexico City and Acapulco - while
preparing for expected increases in travel during 1968, the
year of the summer Olympics in Mexico City.
Familiarization tours and seminars were conducted for
travel agents who, during 1967, participated in 38 percent
of the company's passenger revenues.
Backing all of Western's sales programs during 1967 was
an expansion of the companywide "Flub-Stub" philosophy
wherein a passenger may ask for a coupon (stub) anytime
Western "flubs" and can't provide an acceptable
explanation.
Western 's
counselaires,
" leading ladies"
of the sales divi-
sion , celebrated
the beginning of
the new year with
a new working
wardrobe of bright
colors and the
latest styling .
11
Corporate Citizenship
In July of the past year, at the time of the merger of Pacific
Northern Airlines into Western, your company announced:
"In order to qualify as a full citizen of Alaska, Western Air
Lines will dedicate major energies and resources to the
economic development of the state."
President Terrell C. Drinkwater then explained that the
company would undertake the responsibility of organizing
and supporting an "Alaska Business Council" which would
have as its prime objective the advancement of Alaska's
economy, including areas not served by Western and efforts
having no direct relationship to air transportation.
Members of the council, Alaskans who represent the key
industries and geographic areas of the state, will be
appointed by the governor of the state in the near future.
Already familiar with the needs of the state and what is
being done by other agencies, the council members will
lay out annual and long-range programs that will augment
- not compete against- existing development programs
conducted by federal, state and local organizations.
Serving with the council will be an Advisory Board, consist-
ing of distinguished U.S. business leaders and educators;
Area Coordinators-members of the Western Air Lines staff
at each major city in which the company maintains offices;
and Area Advisory Boards- prominent members of com-
panies and organizations with existing or potential interest
in Alaska and with established or prospective local market-
ing facilities that could be used to stimulate the distribution
and sale of Alaskan products.
The idea that an airline should sponsor such a program
was first put forth by the company in 1966 in the Trans-
pacific route case when it proposed that, if certificated to
serve the Hawaiian Neighbor Islands of Kauai, Maui and
Hawaii, it would organize a similarly constituted program
to stimulate the economic development of these areas.
Western selected the Neighbor Islands and Alaska as bene-
ficiaries of the new concept because of two factors which
the 49th and 50th states have in common: lacking rail and
high-speed highway links with other states, their commer-
cial development, until recently, has been almost totally
dependent upon sea transportation; and, each has great
natural resources which have not been developed.
The Alaska Business Council and the proposed Neighbor
Island Development Council are the most dramatic
examples of Western's interest in the areas it serves.
Being a good corporate citizen in every community it serves
has been a subject of prime importance to Western Air
12
Lines and its employees for many years and its attention to
such matters has increased in each of its 42 years.
A complete list of the company's participation in programs
for the betterment of communities would be too long to
print here; however, in order to assure shareholders of their
company's sincere interest in the economic and social wel-
fare of the West, a resume of activities and accomplish-
ments is submitted.
For young people, Western sponsors Junior Achievement
companies, supports scouting, participates in career guid-
ance seminars, conducts tours of its facilities to emphasize
employment opportunities that exist, provides executive
representation on education councils, s-upports local
schools in student incentive programs and foreign exchange
projects, assists its stewardess alumni group in fund-
raising for orphanages and, in support of Vice President
Humphrey's 1967 "Youth Opportunity Program," provided
hundreds of underprivileged children with their first air-
plane flight and a tour which emphasized the theme: "Any
Job You See Today, Can Be Yours -Stay in School and
Prepare Yourself For It."
In addition to a systemwide corporate charitable contribu-
tions program, Western encourages its employees to partici-
pate in local drives, perform volunteer services, join service
clubs, chambers of commerce and to run for public office.
One sales manager, for example, served as mayor of his
community; a pilot is a member of the Los Angeles board of
education; and a passenger service manager is a member
of his local school board.
For its support of programs with national objectives,
Western has been awarded the Department of Commerce
"E" Award for developing travel to the U.S., the Minuteman
Award for its 1967 Savings Bond Drive and has been cited
for its participation in the Sister Cities program.
Your company has worked for many years to stimulate
travel to and within the Western hemisphere. Recently, it
has been an active participant in the "Discover America"
program and two years ago opened an office in the Orient
which works closely with the U.S. Travel Service to develop
travel to and throughout Western America. Currently,
Western is working closely with the President's Task Force
On Travel to continue, on an even broader scale, the work
it began many years ago.
The responsibilities of citizenship, whether for an individual
or a corporation, are many and varied. In as many areas as
it is possible, your company is dedicating a considerable
amount of its energies and resources.
Totem Bight, Ketchikan, Alaska
Vancouver, British Columbia
FAIRBANKS
(TO THC ORIENT)
- ~ - - - -- - --/ ANCHORAGE
KING
SALMON
CORDOVA
YAKUTAT
KETCHIKAN
VA NCOUVER
\ ALGARY
GR\T FALLS
BILLINGS
PIERRE
RAPID CITY SIOUX FAL
SAN ANTONIO
MEXICO CITY
ACAPULCO
WESTERN AIR LINES SYSTEM
PROPOSED ROUTES - - - - - - - - - -
Western's Vacationlands:
~ J.
North Country Mount Hood , Oregon Cook Inlet, Alaska Seattle Space Need le Parliament Bui lding, Victoria Alaska
Sun Country Disneyland Top: Las Vegas Bottom: San Diego Phoenix Palm Springs
When Western inaugurated the Flub-Stub program in 1966,
it was based on an eight-point creed which listed specific
categories of performance - a smile from every Western
employee, best cup of coffee in the sky, clean planes, etc.
Failure of Western to deliver entitled the customer to ask
for a Flub-Stub, worth one dollar at any WAL ticket counter.
In April the program was expanded beyond the eight points
to: "Anytime our service isn't what you think it should be
and you haven't received an acceptable explanation, ask
for a Flub-Stub."
The subject of national news stories, a new expression for
newspaper headline writers, and imitated by companies in
other industries all across the U.S., the Flub-Stub program
continues to bring nationwide recognition to Western while
effectively performing its primary purpose of developing
explanation and good-humored interaction between an
employee and a customer that usually resolves the problem
immediately and on-the-spot.
Personnel and Managment As of December 31, Western
had 7,282 employees, compared to 6,294 (includes 730 PNA
employees) at the end of 1966.
Wages and salaries amounted to $57,974,743 - approxi-
mately 35 percent of operating expenses - compared to
$47,350,672, or 34 percent of operating expenses, in the
previous year.
Approximately 85 percent of the company's employees are
covered by agreements with eight unions. Contracts were
Mexico, where the past lives with the present, is
a popular Western destination with many tourist attractions :
TOP - University City Stadium will be the site of opening
and closing ceremonies and track and field events during
the 1968 Summer Olympic Games. CENTER - Mexico City's
Plaza of the Three Cultures incorporates modern skyscrapers
with pre-Conquest and colonial architecture. BOTTOM -
Sailing on a peaceful bay and restful tropical evenings are
two attractions that have made Acapulco an international playground .
signed during the year with stewardesses and clerical,
office, fleet and passenger service employees. Agreements
which cover the company's pilots are being negotiated at
the present time; contracts for mechanics, dispatchers and
food handlers will be open for negotiation in 1968.
In addition to the election of Arthur G. Woodley, former
PNA president, as a vice president and director of Western,
five new vice presidents and seven other corporate officers
were elected during the year. Other former Pacific Northern
officers who were named vice presidents of Western were
Gerald P. O'Grady, PNA assistant secretary, director and
general counsel, elected vice president-properties and
facilities; and Harold Olsen, PNA vice president of traffic
and sales, elected vice president-cargo sales. J.P. Maginnis
was elected vice president-procurement and Peter P. Wolf
was elevated from assistant vice president to vice presi-
dent-communications.
Elected assistant vice presidents were Joseph M. Fogarty,
maintenance and overhaul; Ernest T. Kaufmann, regulatory
affairs; J. S. Neel, stations; S. J. Rogers, tariffs; and Harry
L. White, sales administration. Henry M. deButts was
elected assistant vice president-government and industry
affairs based at the company's new Washington, D.C., office,
which was opened in October.
At the first 1968 meeting of the board of di rectors in
January, Gordon Pearce was named secretary, Larry H. Lee
was elected assistant vice president-industrial relations
A popular feature
of Western 's
program to be a
good corporate
citizen in the
communities it
serves is a tour of
the company 's
main maintenance
base and head-
quarters at Los
Angeles
International
Airport.
21
and Rick 0. Hammond, assistant treasurer, was also named
assistant secretary.
Route Development During 1967, Western's route system
was increased from 9,687 to 14,156 unduplicated certifi-
cated route miles; 3,388 miles were acquired through the
merger of Pacific Northern Airlines into Western. An addi-
tional 1,081 miles were added when the Civil Aeronautics
Board selected the company to operate a new route
between Los Angeles and Vancouver.
In other efforts to strengthen its route system, the company
participated in a number of Civil Aeronautics Board hear-
ings and filed additional applications during 1967.
Five cases in which hearings were held during the year
but in which no final decisions have been rendered were:
Pacific Northwest-Southwest Service Investigation - On
April 12, the CAB issued a decision which authorized cer-
tain carriers, but not Western, to provide long-haul service
between the Pacific Northwest and the Texas-Oklahoma-
Louisiana and Kansas-Missouri areas. Deferred for con-
sideration in a reopened proceeding were issues of
turnaround service between the Pacific Northwest and Salt
Lake City/Denver and between the Southwest cities and
Salt Lake City/Denver. The company is an applicant for
all the major markets within the area covered by this pro-
ceeding. Hearings in the reopen~d proceeding were con-
cluded in October.
Transpacific Route Investigation - In 1966, Western filed
two applications in this new case. One application involves
EMPLOYEES
AND SALARIES PAID
NUMBER OF EMPLOYEES MILLIONS OF DOLLARS
8,000- ~-----------~---.. - - - - - - - - - - $80
6,000-
4,000
2,000-
0- -----~-~-------------------1'--0
1963 64 65 66 67
22
domestic routings to the State of Hawaii from principal
cities on the company's existing routes and the additional
cities of Atlanta, Chicago, Cleveland, Dallas/Fort Worth,
Detroit, Houston, Kansas City, Miami/Ft. Lauderdale, New
Orleans and St. Louis. Hawaii co-terminal points are Hono-
lulu, Hilo, Kahului on the island of Maui and Lihue on the
island of Kauai. The other application is for international
services and, in addition to cities named in the domestic
application, includes Mexico City/ Acapulco on the Main-
land and, beyond Hawaii: Tokyo, Osaka, Seoul, Okinawa,
Taipei, Manila, Hong Kong, Singapore, Saigon and 'Bang-
kok. Hearings in the case were concluded in June.
Salt Lake City-Las Vegas-Southern California Service -
Involved is the question of competition for Western between
Los Angeles and Salt Lake City (nonstop and via Las Vegas)
and between San Diego and Las Vegas (nonstop and via
Palm Springs). The Examiner recommended that a local
service carrier be authorized to compete with Western in
these markets. Western has requested the CAB to review
certain portions of the Examiner's decision.
Twin Cities-California Service - In August 1966, Western
received temporary authority to provide nonstop or through-
plane service between Minneapolis/St. Paul and both Los
Angeles and San Francisco. At the same time, the CAB
instituted a new proceeding to examine the need for perma-
nent nonstop service between the Twin Cities and Cali-
fornia. Western's temporary authority will remain in effect
until 90 days after final action in this case. The company
In an effort to
avoid increased
congestion at Los
Angeles and San
Francisco Inter-
national Airports,
Western has
proposed schedule
patterns for new
routes that would
serve outlying or
" satellite,"
airports.
is seeking permanent authority for nonstop service; a num-
ber of other carriers are seeking similar or competitive
service in these two nonstop markets. Hearings have been
concluded but the Examiner's decision has not been issued.
Anchorage-Fairbanks Case -A hearing before the CAB on
the company's application and the application of another
carrier with respect to service between Anchorage and
Fairbanks was held in December. Hearings before the
Alaska Transportation Commission were held in February
1968 on a similar issue.
Cases in which the company is an applicant and which are
scheduled for hearings early in 1968 include:
Southern Tier Competitive Nonstop-A CAB proceeding
to investigate the need for additional service in 18 markets
which lie along the southern portions of the U.S., extending
from California to Georgia and Florida. Western has filed
to serve all markets covered by this proceeding; hearings
are scheduled to begin in April.
Service to Omaha - Service between Omaha and Chicago,
Denver, Kansas City, Minneapolis/St. Paul, Seattle/Port-
land, and St. Louis. Western has filed to serve all markets
and also has requested the CAB to include service to Los
Angeles. No hearing date has been set.
Denver-Twin Cities Service - To determine the need for
additional service on a route which Western presently
serves exclusively. Hearings began on February 20.
Denver-Calgary Service - Involves Western's application
to operate on a nonstop basis between Denver and Calgary,
BREAKEVEN LOAD FACTOR
ANO ACTUAL LOAD FACTOR
ACTUAL LOAD l'i>-c'IOI'-
1963 64 65 66
- 65%
-60
- 55
-45
- 40
67
a route presently operated by Western on a multi-stop basis.
Hearings are scheduled to begin in March.
Service to Albuquerque -A CAB proceeding to determine
the need for additional or competitive nonstop service
between Albuquerque and San Francisco/Oakland, Los
Angeles/Long Beach, Las Vegas, Dallas/Fort Worth and
Chicago. Western has applied to serve all markets encom-
passed by the proceeding. Hearings are scheduled to begin
in May.
Other cases in which Western is seeking new route
authority but which probably will not go to hearings until
after mid-1968 are Dallas/ Fort Worth-Phoenix Nonstop;
Memphis/ Huntsville/ Birmingham-Los Angeles Service;
Omaha-Des Moines Transcontinental Service; and the Twin
Cities-Milwaukee Long-Haul Investigation which wi 11
examine air service needs from the Twin Cities and/or
Milwaukee to the Pacific Northwest and to the East Coast.
In the Pacific Northwest-California Service Investigation,
other airlines have applied to provide additional competi-
tive nonstop service between Los Angeles and Seattle via
the major cities on the company's coastal route.
Western also has a number of other route applications on
file with the CAB, including: addition of Sitka to the com-
pany's Seattle-Anchorage route; a Denver-Miami route via
the intermediate cities of Oklahoma City, Tulsa and Atlanta
via Memphis and Atlanta; and for route authority from
Denver and Minneapolis/St. Paul to points in Europe and
the Near East via East Coast cities of the U.S.
In addition to basic
commodities,
growth of air
cargo brings
many unusual
" passengers" to
Western flights ,
such as this
orphaned moose
calf which flew
from Anchorage to
the San Diego Zoo.
23
Ten Years of Growth
1967 19663 1965 1964 1963 1962 19613 1960 1959 19583
Financial
Revenues:4
Passenger $ 178,527 164,186 129,704 121 ,928 103,183 89,837 67,442 71 ,577 66,209 37,722
Express, freight and excess baggage 7,581 6,848 5,991 5,897 5,055 4,747 3,833 3,775 .3,325 2,359
Mail . 4,221 4,255 3,135 2,962 2,603 2,659 2,364 2,300 2,113 1,515
Other 2,153 1,895 1,768 2,095 3,472 2,878 2,935 3,022 2,734 2,742
Total Revenues 192,482 177,184 140,598 132,882 114,313 100,121 76,574 80,674 74,381 44,338
Operating Expenses:4
Depreciation and amortization 20,085 15,779 14,676 12,980 12,373 14,605 12,033 11,040 7,665 4,893
Payroll 57,975 47,350 38,731 34,500 30,114 27,108 22,837 23,982 22,179 15,898
Other 89,082 77,708 62,391 57,650 50,969 47,997 38,848 38,740 33,108 21,729
Total Operating Expenses . 167,142 140,837 115,798 105,130 93,456 89,710 73,718 73,762 62,952 42,520
Operating lncome4 25,340 36,347 24,800 27,752 20,857 10,411 2,856 6,912 11 ,429 1,818
lnterest4 (3,011) (3,239) (2,553) (2,491) (2,916) (2,725) (1 ,930) (1,428) (1 ,280) (1,198)
Other Income and Expenses - Net4 17 775 253 783 621 472 (140) 439 180 92
Earnings before Taxes on lncome4 22,346 33,883 22,500 26,044 18,562 8,158 786 5,923 10,329 712
Taxes on lncome4 10,125 15,558 10,337 12,493 9,252 4,130 443 3,365 5,483 547
Net Earnings from Operations4 12,221 18,325 12,163 13,551 9,310 4,028 343 2,558 4,846 165
Gain on Major Dispositions of Property (Less
Applicable Income Taxes)4 883 191 889 807 86 302 1,587
Net Earnings4 $ 12,221 18,325 13,046 13,551 9,501 4,917 1,150 2,644 5,148 1,752
Shareholders
Net earnings from operations per share' $ 2.50 3.79 2.52 2.81 1.93 0.83 0.07 0.53 1.27 0.05
Gain on disposition of property per shareI . 0.18 0.04 0.19 0.17 0.02 0.08 0.44
Total . $ 2.50 3.79 2.70 2.81 1.97 1.02 0.24 0.55 1.35 0.49
Dividends paid per share:
Cash2 $ 1.00 1.00 0.80 0.65 0.37 0.33 0.33 0.33 0.27 0.24
Stock 5% 4% 4%
Shares outstanding - actual4 4,893 4,835 4,826 4,826 1,965 1,965 1,965 1,965 1,575 1,462
- adjusted I 4 4,893 4,835 4,826 4,826 4,826 4,826 4,826 4,826 3,807 3,568
Shareholders' equity - total4 $ 90,016 81 ,750 67,361 57,748 46,988 39,061 35,574 35,854 27,610 21,930
Shareholders' equity - a share1 18.40 16.91 13.96 11.97 9.74 8.09 7.37 7.43 7.25 6.15
Working capital4 19,585 18,047 11,522 8,274 5,031 12,315 5,369 16,757 10,961 5,085
Long-term debt4 80,189 54,867 47,411 33,938 41,106 48,856 39,018 25,097 26,563 21,869
Property and equipment - net4 183,106 145,771 124,096 99,928 93,284 80,052 69,865 46,833 44,808 40,381
Total assets4 231 ,342 192,008 157,973 138,335 125,806 115,266 95,258 78,836 74,565 57,360
Operations
Route miles at end of year 14,156 13,075 13,075 12,991 12,991 13,086 12,368 12,368 12,656 11 ,685
Airplanes at end of year:
Boeing 720-8 27 22 18 12 10 7 4
Boeing 720 . 3 3 2 2 2 2
Boeing 707 - leased 2 2
Lockheed Electra 11 12 12 12 12 12 12 12 6 5
Other aircraft - piston powered 9 11 12 21 21 22 25 37 41 45
Airplane miles flown4 51 ,692 42,830 36,554 36,746 33,388 29,551 25,239 30,410 29,988 20,546
Ton miles produced4 728,200 585,378 483,033 450,856 400,395 348,854 256,572 237,118 224,665 149,736
Ton miles sold4 360,791 314,137 244,588 231,303 191,229 159,658 121 ,850 127,609 120,753 72,647
Seat miles produced4 5,879,442 4,800,901 4,016,921 3,794,648 3,335,083 2,746,549 1,967,313 2,016,690 1,854,525 1,191 ,828
Seat miles sold 4 . 3,327,160 2,898,088 2,243,695 2,124,582 1,753,037 1,435,992 1,080,189 1,150,785 1,095,399 639,038
Express, freight & mail ton miles sold4 38,940 33,070 26,435 24,625 20,622 19,786 16,315 15,214 13,574 9,807
Passengers carried 5,107,672 4,700,839 3,807,706 3,717,189 2,970,909 2,270,455 1,659,323 1,841 ,863 1,809,991 1,083,369
Express, freight & mail tons carried . 48,579 42,714 33,511 30,956 25,890 25,256 20,378 19,829 18,417 13,487
Passenger load factor - actual % 56.6 60.4 55.9 56.0 52.5 52.3 54.9 57.0 59.0 53.6
- breakeven point% 49.5 47.9 46.2 44.4 44.3 48.6 55.4 56.5 56.3 54.1
Average length in miles per passenger trip 651 616 589 572 590 633 651 625 605 590
Average revenue per passenger mile $ .0537 .0567 .0578 .0574 .0589 .0626 .0624 .0622 .0604 .0590
Employees at end of year 7,282 6,294 5,068 4,719 4,126 3,713 3,418 3,347 3,586 3,154
'Based on shares of the Company outstanding at the close of the respective periods, adjusted to give retroactive effect to stock Company's shares (exclusive of equivalent Pacific Northern shares) outstanding at the date such dividends were declared as
dividends, the May 1964 three-for-one stock split, and the equivalent outstanding shares of Pacific Northern Airlines , Inc., merged adjusted for stock dividends and the stock split. 3five other major carriers were struck from July 8 to August 19, 1966;
into the Company on July 1, 1967. 2Cash dividends per share for periods prior to January 1, 1967 are stated on the basis of the Western 's operations were adversely affected by strikes during 1958 and 1961 . 4000 omitted.
24 25
Western Air Lines Inc. Balance Sheet
December 31, 1967, with comparative figures for 1966 (Note 8)
26
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 (Note 3)
Less allowance for depreciation and maintenance
Deferred Charges and Other Assets .
See accompanying notes to financial statements
1967 1966
$ 21,871,520 $ 12,990,892
9,999,101
16,185,954 14,557,884
6,314,423 5,004,607
2,584,947 2,360,462
46,956,844 44,912,946
226,298,763 192,373,822
38,209,274 31,424,677
24,090,535 8,649,775
288,598,572 232,448,274
105,492,386 86,676,176
183, 106, 186 145,772,098
1,278,921 1,323,502
$231,341,951 $192,008,546
LIABILITIES
Current Liabilities:
Accounts payable
Accrued salaries and wages
Accrued liabilities
Unused transportation
Accrued federal income taxes (Note 1)
Current maturities of long-term debt
Total Current Liabilities
Long-Term Debt (Note 2) .
Deferred Credits (Note 1 ):
Deferred federal taxes on income .
Unamortized investment credits
Shareholders' Equity (Notes 2 and 5):
Common stock - $1.00 par value per share
Authorized 10,000,000 shares
Issued 4,893,244 and 4,835,344 shares
Capital in excess of par value
Retained earnings .
1967
$ 12,518,764
5,647,819
3,980,200
3,562,627
160,025
1,502,627
27,372,062
80,188,843
26,658,000
7,107,000
33,765,000
4,893,244
18,844,385
66,278,417
90,016,046
$231,341,951
1966
$ 10,776,210
4,484,722
3,510,224
2,677,167
3,864,375
1,552,627
26,865,325
54,867,661
22,726,955
5,798,000
28,524,955
4,835,344
17,969,435
58,945,826
81,750,605
$192,008,546
27
Western Air Lines Inc. Statement of Earnings and Retained Earnings
For the year ended December 31, 1967, with comparative figures for 1966 (Note 8)
Operating Revenues: 1967
Passenger $178,526,552
Express, freight and excess baggage . 7,581,113
Mail 4,221,459
Other . 2,152,525
192,481 ,649
Operating Expenses:
Flying operations 39,587,944
Maintenance . 27,471,090
Passenger service 16,323,837
Aircraft and traffic servicing 29,733,283
Marketing and administrative 33,940,049
Depreciation and amortization (Note 6) 20,085,842
167,142,045
Operating Income 25,339,604
Other Income (Expenses):
Interest expense ( Note 7) (3,011,202)
Interest income . 234,973
Other expense - net (Note 7) (216,910)
Earnings before Taxes on Income 22,346,465
Taxes on Income (Note 1) 10,125,000
Net Earnings
$2.50 per share in 1967 and $3.79 in 1966 . 12,221,465
Retained Earnings at Beginning of Year 58,945,826
71,167,291
Cash Dividends Paid
Annual rate - $1.00 per share 4,888,874
Retained Earnings at End of Year (Note 2) $ 66,278,417
See accompanying notes to financial statements
28
1966
$164,185,421
6,849,085
4,254,862
1,894,463
177,183,831
34,538,123
24,468,946
13,942,347
24,194,072
27,914,619
15,779,338
140,837,445
36,346,386
(3,238,925)
812,933
(36,794)
33,883,600
15,558,125
18,325,475
44,916,091
63,241,566
4,295,740
$ 58,945,826
Western Air Lines Inc. Statement of Source and Application of Funds
For the year ended December 31, 1967, with comparative figures for 1966 (Note BJ
Funds Provided:
Net earnings .
Add back
Depreciation and maintenance reserve provision
Deferred income taxes .
Charge equivalent to investment credit .
Loss on dispositions of property .
Total from operations
Increase in long-term debt .
Proceeds from disposition of property, net of taxes .
Exercise of stock options and warrants
Total .
Funds Applied:
Purchase of airplanes, property, and equipment .
Payment of cash dividends .
Other items .
Increase in working capital .
Total .
1967 1966
$12,221,465 $18,325,475
21,498,917 16,792,325
3,931,045 5,028,036
1,309,000 1,461,000
268,302 49,364
39,228,729 41,656,200
25,321,182 7,456,186
681,154 427,195
932,850 359,450
26,935,186 8,242,831
66,163,915 49,899,031
59,637,747 38,795,321
4,888,874 4,295,740
100,133 283,040
64,626,754 43,374,101
1,537,161 6,524,930
$66,163,915 $49,899,031
29
Notes to Financial Statements
30
Note 1. Taxes on Income. Federal income tax returns have been
examined by the U.S. Treasury Department through 1963 for the Company
and through 1965 for Pacific Northern Airlines, Inc., which was merged
into the Company on July 1, 1967. The 1967 provision for income taxes ls
summarized as follows:
Current income taxes .
Deferred income taxes
Charge equivalent to investment credits,
net of amortization of $1,054,953 .
$ 4,884,955
3,931,045
1,309,000
$10,125,000
Investment credits are being amortized to income over the lives of the
related equipment.
Note 2. Long-Term Debt (Unsecured). On December 31, 1967, long-term
notes payable were as follows:
$90,000,000 revolving fund credit until December 31,
1969, at which time notes outstanding are con-
vertible into a term note due December 31, 1975,
with equal quarterly payments commencing on
March 31, 1970, at interest % over the bank's
prime commercial rate .
5 % promissory notes due September 1, 1981, with
payments of $1,000,000 per year starting 1970 and
increasing to $4,000,000 per year in 1976
6% % promissory notes due September 1, 1984
(authorized $40,000,000) .
5% to 6% promissory notes due 1968 to 1972.
Less current maturities
. $45,000,000
30,000,000
6,691,470
81,691,470
1,502,627
$80,188,843
The following schedule shows the amount of long-term debt maturing
in each of the five years subsequent to December 31, 1967:
1968
1969
1970
1971
1972
$ 1,502,627
1,502,627
10,002,627
10,002,627
9,180,961
Pursuant to the loan agreements, the Company contemplates it will
borrow $60,000,000 in 1968 and $25,000,000 in 1969 and convert the notes
outstanding under the revolving credit into the term loan described above.
The related agreements with the bank and insurance companies pro-
vide among other things (including restrictions on additional borrowings)
conditions and requirements which at December 31, 1967 operated to
restrict retained earnings from cash dividend distribution in the amount
of $51,740,774, leaving $14,537,643 not so restricted.
By an offering on January 30, 1968, the Company sold $30,000,000 of
5 % Convertible Subordinated Debentures due February 1, 1993. The
initial annual interest requirement is $1,575,000. Reserved for conversions
are 816,326 shares of common stock at $36.75 per share (subject to
adjustment in certain cases). Sinking fund payments for retirement of
$1 ,500,000 principal amount of Debentures are required on February 1 of
each year commencing with 1979. The related Indenture provides among
other things a requirement restricting dividends to $5,000,000 plus net
earnings subsequent to December 31, 1967, which is presently more
restrictive than those in the loan agreements.
Note 3. Commitments and Contingent Liabilities. Jet aircraft and other
major items on order at December 31, 1967 represented purchase com-
mitments of approximately $145,000,000 in excess of related deposits.
The estimated minimum annual rentals under long-term leases, with
expiration dates ranging to 1997, were approximately $2,400,000 at
December 31, 1967.
In January 1968, the Company entered into a preliminary purchase
agreement for additional aircraft which, together with supporting equip-
ment, is expected to cost approximately $35,000,000. This agreement is
subject to cancellation under certain conditions.
Note 4. Retirement Plans. The costs of retirement plans charged to oper-
ating expense in 1967 totaled $2,143,145, including $87,804 for past-
service costs. Approximately $1,012,000 of past-service costs remained
unfunded at December 31, 1967.
Note 5. Stock Options and Warrants. At December 31, 1967, options were
outstanding for the purchase of 137,400 shares of common stock by offi-
cers at an average option price of $40.96 per share. An additional 50,000
shares were reserved for the issuance of future options. During the year,
options for 13,500 shares were exercised at option prices of $39.50 per
share. Also, warrants issued by Pacific Northern were exercised for the
equivalent of 44,400 shares of the Company at $9.00 per share. The differ-
ences between the par value of shares issued and the option and warrant
prices have been credited to capital In excess of par value.
Note 6. Depreciation. The residual value of the Lockheed Constellation
749 aircraft is being reduced to a minimal amount at the end of 1968,
thereby increasing depreciation expense for 1967 by $550,000 and
decreasing net earnings by approximately $275,000, or $0.06 per share.
Note 7. Capitalized Interest and Route Extension Costs. Reflecting CAB
developments, interest on equipment purchase contracts and route exten-
sion costs for 1967 were capitalized, thereby decreasing interest expense
by $811,369, other expenses by $206,412, and increasing net earnings by
approximately $500,000, or $0.10 per share.
Note 8. Pacific Northern Airlines, Inc. As of July 1, 1967, Pacific Northern
was merged into the Company and 578,454 shares of common stock were
issued in exchange for all of Pacific Northern stock oustanding, at the
rate of two shares of Pacific Northern stock for one share of the Com-
pany's stock. The excess of par value of Pacific Northern stock over the
equivalent par value of the Company's stock was credited to capital in
excess of par value. The transaction was accounted for as a pooling of
interests for accounting purposes and, accordingly, the financial state-
ments include Pacific Northern for periods prior to the date of merger.
Accountants' Report
The Board of Directors
Western Air Lines, Inc.:
We have examined the balance sheet of Western Air Lines, Inc. as of
December -31, 1967 and the related statement of earnings and retained
earnings for the year then ended. Our examination was made in accord-
ance with generally accepted auditing standards, and accordingly
included such tests of the accounting records and such other auditing
procedures as we considered necessary in the circumstances. We pre-
viously made a similar examination of the financial statements for 1966.
In our opinion, the accompanying balance sheet and statement of earn-
ings and retained earnings present fairly the financial position of Western
Air Lines, Inc. at December 31, 1967 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 applica-
tion of funds for the year ended December 31, 1967 presents fairly the
information shown therein.
Los Angeles, Calif. 90014
February 26, 1968
Board of Directors
Otis Chandler, Vice Chairman-Board of Directors, Times-Mirror Company and
Publisher, Los Angeles Times, Los Angeles, California
Hugh W. Darling, Darling, Mack, Hall & Call, Attorneys-at-Law,
Los Angeles, California
Terrell C. Drinkwater, President, Western Air Lines, Inc.
Leonard K. Firestone, President, Firestone Tire & Rubber Co. of California,
Los Angeles, California
Judge James D. Garibaldi, Garibaldi & Lane, Los Angeles, California
Art Linkletter, Linkletter Enterprises, Inc., Los Angeles, California
*Goodrich Lowry, Former Chairman of the Board, Northwest Bancorporation,
Minneapolis, Minnesota
*Donald H. McLaughlin, Chairman of the Board, Homestake Mining Company,
San Francisco, California
Edwin W. Pauley, Chairman of the Board, Pauley Petroleum, Inc.,
Los Angeles, California
Stanley R. Shatto, Executive Vice President-Transportation, Western Air Lines, Inc.
J. Judson Taylor, Senior Vice President and Treasurer, Western Air Lines, Inc.
Vernon 0. Underwood, President, Young's Market Co., Inc., Los Angeles, California
Harry J. Volk, President, Union Bank, Los Angeles, California
* John M. Wallace, Honorary Chairman of the Board, Walker Bank & Trust Company,
Salt Lake City, Utah
Alexander Warden, Newspaper Consultant, Great Falls, Montana
Howard C. Westwood, Covington & Burling, Attorneys-at-Law, Washington, D.C.
*Sidney F. Woodbury, President, Pine Street Company, Portland, Oregon
Arthur G. Woodley, Vice President-Alaska, Western Air Lines, Inc.,
Seattle, Washington
Richard W. Wright, Executive Vice President and Secretary,
Mountain States Employers Council, Inc., Denver, Colorado
* Director-Emeritus
31
32
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 G. Woodley, Vice President-Alaska and Director
Arthur F. Kelly, Senior Vice President-Sales
Jack M. Slichter, Vice President-Government and Industry Affairs
John R. Summerfield, Vice President-Economic Planning
Gerald P. O'Grady, Vice President-Properties and Facilities
Gordon Pearce, Corporate Secretary and Director of Law
Richard 8. Ault, 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 8. Favero, Vice President-Maintenance
Bert D. Lynn, Vice President-Advertising and Sales Promotion
J.P. Maginnis, Vice President-Procurement
Harold A. Olsen, Vice President-Cargo Sales
Luis Pasquel, Vice President-Mexico
Philip E. Peirce, Vice President-Ground Services
Ray Silvius, Vice President-Public Relations
Peter P. Wolf, Vice President-Communications
Willis R. Balfour, Assistant Vice President-Agency and Interline Sales
Henry M. deButts, Assistant Vice President-Government and Industry Affairs
Charles S. Fisher, Assistant Vice President-Flight Schedules
Joseph M. Fogarty, Assistant Vice President-Maintenance and Overhaul
Rick 0. Hammond, Assistant Secretary and Assistant Treasurer
Ernest T. Kaufmann, Assistant Vice President-Regulatory Affairs
Larry H. Lee, Assistant Vice President-Industrial Relations
James L. Mitchell, Assistant Vice President-Research
Jack S. Neel, Jr., Assistant Vice President-Stations
Eugene D. Olson, Assistant Vice President-Data Processing and Systems
S. J. Rogers, Assistant Vice President-Tariffs
Harry L. White, Assistant Vice President-Sales Administration
General Offices
Western Air Lines Building, 6060 Avion Drive
Los Angeles International Airport
Los Angeles, California 90009
Stock 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
Debenture Trustee
The Chase Manhattan Bank
1 Chase Manhattan Plaza, New York, New York 10015
Stock Listings
Listed and traded on
New York Stock Exchange
Pacific Coast Stock Exchange
General Counsel
Hugh W. Darling
Darling, Mack, Hall & Call
523 West Sixth Street, Los Angeles, California 90014
Independent Accountants
Peat, Marwick, Mitchell & Co.
629 South Spring Street, Los Angeles, California 90014
Annual Meeting
Fourth Thursday in April