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