Western Airlines Annual Report 1971

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 Tran sf er Agents
Security Pacific National Bank
124 West Fourth Street, Los Angeles, California 90014
Chemical Bank
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, Hall, Rae & Gute
523 West Sixth Street, Los Angeles, California 90014
Independent Accountants
Peat, Marwick, Mitchell & Co.
555 South Flower Street, Los Angeles, California 90071
Annual Meeting
Fourth Thursday in April
Western Air Lines, Inc. 1971 Annual Report
2 Highlights of 1971
3 President's Letter
4 Year in Review
14 Ten Years of Growth
16 Balance Sheet
18 Statement of Earnings
19 Statement of Changes in Financial Position
20 Notes to Financial Statements
23 Accountants' Report
Notice to Stockholders
Under a new rule adopted by the Civil Aeronautics Board in
July 1970, any person who owns as of December 31 of any
year or acquires ownership, either beneficially or as a trustee,
of more than five percent of any class of capital stock of an
air carrier shall file with the CAB a report containing
information required by Subpart B of Part 245 .13 of the
Board's Economic Regulations. This report must be filed with
the Civil Aeronautics Board on or before April 1 of each
year as to capital stock or capital owned as of December 31
of the preceding year and within 1 O days of the acquisition,
unless such person has otherwise Wed with the CAB a report
covering such acquisition or ownershfp. Any stockholder
who believes that he may be required to file such a report
may obtain further information by writing to the Director,
Bureau of Operating Rights, Civil Aeronautics Board,
Washington, D. C. 20428.
Highlights of 1971
Operating
Seat miles produced
Seat miles sold . .
Passengers carried
Passenger load factor- actual %
Financial
Operating revenues
Operating income .
- breakeven point% .
Net earnings . . .
Common stock outstanding
Net earnings per share
Net earnings per share assuming conversion of the debentures
Stock dividend paid
Shareholders' equity . . . . . . . . . . .
Shareholders' equity per share . . . . . . . .
Cash, certificates of deposit, and short-term securities
Working capital . . . . . .
Property and equipment at cost.
Long-term debt . . . . . .
Number of employees at year end
Wages and salaries paid . . .
Operations of a competing regional carrier were substantially
suspended from December 15, 1971, and operations of a competing
trunk carrier were substantially suspended from July 8 to
December 14, 1970.
2
1971
9,776,869,000
5,251,989,000
6,206,000
53.7
52.2
$325,595,000
$ 16,306,000
$ 6,457,000
5,395,000
$ 1.20
$ 1.15
10%
$ 86,397,000
$ 16.01
$ 81,024,000
$ 53,207,000
$413,612,000
$152,040,000
9,039
$111,584,000
1970
9,839,299,000
5,159,081,000
6,187,000
52.4
52.7
$298,109,000
$11,811,000
$ 595,000
5,394,000
$ 0.11
$ 0.11
$ 79,905,000
$ 14.81
$ 64,600,000
$ 35,238,000
$413,883,000
$174,184,000
8,830
$100,629,000
Change
0.6%
+ 1.8
+ 0.3
+ 1.3 pts.
0.5 pts.
+ 9.2%
+38.1
+ 8.1
+ 8.1
+25.4
+51.0
- 0.1
- 12.7
+ 2.4
+10.9
Affected data adjusted where appropriate throughout this Annual
Report for the 10% stock dividend paid March 5, 1971 .
President's Letter
To Our Stockholders:
As detailed in the following pages, 1971 was a year of
improved performance for Western Air Lines. Despite a
generally sluggish economy and continuing inflation,
your company increased its earnings to $6,457,000, or
$1.20 a share, from $595,000, or 11 cents a share, for
the previous year.
The improvement in earnings was derived from both
operating and nonoperating sources. Operating Income
increased 38 percent, largely because of higher yields
and improved load factors.
Earnings before taxes also were aided substantially by
decreased interest expense on the one hand and increased
interest income on the other.
Although your company did not increase seat mile production
during the year because of the economic slowdown, we were
able to increase seat miles sold by 1.8 percent despite the
fact that one of our major competitors was on strike in the
latter half of 1970.
There is mounting evidence that 1972 will see a renewal of the
growth in air travel. Western's success during the year will
depend to a considerable degree on the extent of that traffic
growth and the success of the Administration 's efforts to slow
down the forces of inflation.
Throughout 1971 and early 1972, your company has worked
vigorously to obtain approval of the merger with American
Airlines. Despite opposition from various parties to the case,
we continue to believe that the merger is in the public
interest and that it should be approved. While awaiting the
final decision of the Civil Aeronautics Board and the
President, however, we are moving ahead with plans that
are designed to continue the company's growth and enhance
its financial strength.
Through aggressive marketing and excellent service, Western
was successful in maintaining a surprisingly good share of the
Mainland-Hawaii market, despite the fact that it is the only
California-Hawaii carrier which does not operate the new
wide-bodied jets on these routes. However, in order to meet
increases in wide-bodied competition on these and Mainland
routes, the company has taken two steps:
prior to May 31, we will complete conversion of the interiors
of our Boeing 707s that are used in Hawaii service to a new
" wide-body look" that will improve the appearance and
comfort of these aircraft;
and, as protection for the company's future should our
proposed merger with American not be approved, we have
ordered for delivery in the spring of 1973 four McDonnell
Douglas DC -10s. Details of these orders are contained
in the "Aircraft" section of this report.
In the meantime, in order to provide additional capacity on
some of its Mainland routes, the company is taking delivery
of five additional long-bodied Boeing 727 trijets in 1972 -
three in the spring and two in the fall. These will be the first
additions to the Western fleet since 1969.
In an effort to increase load factors in the coming months,
the company has adopted the serving of complimentary
champagne on every flight as a symbol of the total quality of
our service and of the "champagne attitude" we have toward
our passengers. We believe that when combined with our first
class legspace, excellent on-time performance and other high
standards of service, the serving of champagne will identify
Western as a carrier which provides an outstanding product.
As in the past, our primary goal for 1972 is to achieve
improved earnings through judicious control of costs and
aggressive marketing. Although Western's rate of return on
investment increased to 6.16 percent from 5.22 percent in
1970, it still is far short of the 12 percent standard set by
the Civil Aeronautics Board for trunk airlines in its 1971
Passenger Fare Investigation.
Our task was made more difficult early this year when, as
part of its decision in the Alaska Service Investigation, the
Civil Aeronautics Board suspended Western's authority at
Juneau and Ketchikan. Routes serving these cities produced
three percent of Western's revenues and approximately
$1 million in earnings before taxes in 1971. Accordingly,
the company is working vigorously in an appeals court
proceeding to reverse this CAB decision.
Your continued support will be sincerely appreciated.
We hope you will fly on Western whenever possible and urge
your friends to do likewise.
~T
J. Judson Taylor
President and Chief Executive Officer
March 15, 1972
3
Year in Review
Earnings
Net earnings for 1971 were $6,457,000, or $1.20 a share,
compared to net earnings of $595,000, or 11 cents a share,
for 1970. (If all of the holders of the company's 5 %
Convertible Subordinated Debentures had converted their
debentures into common stock at the end of 1971, the
earnings per share for the year would have been $1.15.)
Operating income totaled $16,306,000, equal to five percent
of operating revenues, compared to $11,811,000, or four
percent of operating revenues, in 1970.
Interest income, derived from the temporary investment of
cash into certificates of deposit and short-term securities,
increased 57.9 percent, from $2,021,000 to $3,190,000.
Interest expense decreased 23.5 percent, from $14,586,000 to
$11,162,000, as a result of the decrease in the prime
commercial interest rate and scheduled reductions in the
company's long-term debt. The increase in interest income,
along with the reduction in interest expense, contributed
a net increase of $4,593,000 to earnings before taxes, which
totaled $8,497,000 for 1971, compared to a loss of $1,655,000
for 1970.
Total taxes for 1971 amounted to $3,150,000 and
consisted of $2,600,000 for Taxes on Income and $550,000
in taxes related to the extraordinary gain from the
involuntary conversion of an aircraft. (See Note 1 of Notes
to the Financial Statement.)
Taxes on Income consisted of Current Federal and State
Taxes, $1,125,000; Deferred Income Taxes (which resulted
from timing differences between financial and tax reporting),
$2,600,000; charge equivalent to investment credits,
$1,200,000; and the amortization of deferred investment
credits, which reduced taxes on income by $2,325,000.
4
Revenues
Operating revenues for 1971 were a record $325,595,000,
up 9.2 percent from the previous year. Most of the
improvement came from increases in passenger revenues,
which in 1971 produced 90.9 percent of operating revenues.
Passenger revenues were up 7.6 percent, from $274,792,000
to $295,807,000. Contributing to the gain were a 6.5 percent
increase in yield (revenue per seat mile sold) and a 1.8
percent increase in the number of seat miles sold.
Western's yield increased from 5.42 cents in 1970 to 5.77
cents in 1971 largely as a result of two factors: the fare
increases on both domestic and Hawaii routes that became
effective in May 1971 and an improved "mix" beween full
fare travel and that which is sold at a discount. While full fare
travel increased 11 percent during the year, discount travel
decreased 15 percent and represented 31.4 percent of
all seat miles sold by Western, compared to 37.5 percent
for 1970.
Revenues from express, freight, excess baggage, mail,
charters and other operating sources increased 27.8 percent
to $29,788,000 from $23,317,000.
Fare Changes
In April 1971, the Civil Aeronautics Board issued its
opinions in certain phases of the Domestic Passenger Fare
Investigation, a proceeding that has been pending since
January 1970.
The CAB authorized an interim increase in domestic fares
of six percent which became effective May 7, 1971. Because
it did not include Hawaii and Alaska fares and could not affect
intra-California fares, which also are regulated by the State
Public Utilities Commission, the CAB increase averaged only
4.5 percent when applied to Western's system.
In other phases of the Investigation, the board also
determined that trunklines should be permitted to earn a
12 percent return on their investments and decided that
the level of future fare increases should be based on the
assumption that trunklines realize prescribed load factors.
In conjunction with its study of Mainland-Hawaii fares, the
CAB also permitted Western and other carriers to implement
an interim increase of approximately 1 O percent on May 15.
Still pending in the highly complex Fare Investigation are
a number of issues including:
a tentative decision by the CAB to prescribe fare
differentials relating to the number of seats abreast and the
maximum distance between rows of seats in the various
classes of service;
a tentative decision by the CAB to allow an additional
increase of three percent on domestic fares.
Expenses
Operating expenses increased 8.0 percent, from
$286,298,000 in 1970 to $309,289,000 in 1971 despite the
fact that seat mile production decreased 0.6 percent to
9.77 billion from 9.84 billion.
The increase in operating expenses without a corresponding
increase in production is largely attributable to
inflationary factors.
Wages and salaries, together with costs for related Social
Security, group insurance and retirement plans, in 1971
represented 41.1 percent of all operating costs. These items
of expense increased 12.3 percent despite the fact that the
number of employees at year's end was up only 2.4 percent
from the previous year.
Landing fees increased 30.9 percent and rentals of ground
facilities were up 9.3 percent.
Depreciation and amortization, which accounts for 11.4
percent of operating expenses, decreased to $35,144,000
from $36,583,000, largely because of the loss of a 7208
aircraft in the first quarter of the year.
The cost of producing a seat mile increased from 2.91 cents
in 1970 to 3.16 cents in 1971, and the beneficial effects
of the increased yield produced only a modest improvement
in breakeven load factor, from 52.7 percent in 1970 to
52.2 percent in 1971.
Finances
Aided by improved earnings, Western's financial condition
was strengthened in 1971.
Cash, certificates of deposit and short-term securities
continued to increase during the year and totaled $81,024,000
at December 31, 1971, compared to $64,600,000 at the
end of 1970.
Working capital at year's end was $53,207,000, an
increase of $17,969,000 from the 1970 total of $35,238,000.
The ratio of current assets to current liabilities was $1.81
to $1.00, up from $1.53 to $1.00 at the end of 1970.
The Statement of Changes in Financial Position shows the
sources and applications of working capital.
Total working capital provided was $50,661,000 compared
to $42,553,000 for 1970. As indicated, working capital
from operations as adjusted amounted to $45,017,000 and
consisted primarily of earnings amounting to $5,897,000
before extraordinary gain and adjustments for charges
and credits that did not affect working capital, including
depreciation, amortization and maintenance reserve provision
amounting to $38,607,000. The proceeds from the involuntary
conversion of an aircraft provided an additional $4,900,000.
5
Brief Statement of Earnings Brief Balance Sheet
(in thousands of dollars) (in thousands of dollars)
Western's revenues came from: 1971 1970 Change Western owns: 1971 1970
Passengers Cash, certificates of deposit, and
Coach $272,038 $246,019 +10.6% short-term securities . $ 81,024 $ 64,600
Deluxe 23,769 28,773 - 17.4 Receivables due from others 22,943 21,732
295,807 274,792 + 7.6 Maintenance and operating supplies . 11,005 11,104
Express, freight, and baggage . 15,075 13,993 + 7.7 Buildings and improvements, net . 12,955 13,364
Mail 5,156 4,752 + 8.5 Flight and other equipment, net 196,635 234,062
Charter 4,284 3,187 +34.4 Deposits on purchase contracts 7,148
Interest income 3,190 2,021 +57.9 Prepaid expenses . 4,150 4,579
Other income 5,274 1,385* Equipment not used in
328,786 300,130 + 9.5 operations, net . 2,214 2,417
Deferred charges and other . 2,278 3,310
340,352 355,168
Western's expenses were for:
Wages and salaries 111,584
Social security, group insurance
100,629 +10.9
Western owes:
and retirement plans 15,491 12,486 + 24.1 Payables due to vendors
Aircraft fuel . 38,663 37,357 + 3.5 and others 39,171 37,863
Depreciation and amortization . 35,144 36,583 - 3.9 Federal income taxes-deferred 19,433 17,495
Utilities and services . 26,667 24,737 + 7.8 Unamortized investment cred its 12,271 13,584
Materials and repairs . 20,487 20,424 + 0.3 Tickets sold but not yet used 5,281 5,949
Service to passengers 14,644 14,511 + 0.9 Other deferred items . 4,296 3,223
Interest 11,162 14,586 - 23.5 Notes payable-current and
Advertising and publicity 10,191 8,780 +16.1 long-term 173,503 197,149
Property, fuel and other taxes . 7,163 6,750 + 6.1 253,955 275,263
Landing fees 6,824 5,211 +30.9
Insurance and related costs 5,869 4,174**+40.6 Excess of what is owned over
Rentals of ground facilities . 5,793 5,301 + 9.3 what is owed, or
Rentals of flying equipment . 3,843 2,992 + 28.4 shareholders' equity $ 86,397 $ 79,905
Other costs . 6,764 7,264 6.9
Taxes on income (tax credits) 2,600 (2,250)
322,889 299,535 + 7.8
Earnings before
extraordinary gain . 5,897 595
Extraordinary gain- net . 560
Net earnings $ 6,457 $ 595
*Reduced by $2,700,000 for Mutual Aid payments
(such payments for 1971 were minimal).
**Expenses for 1970 are net of an insurance dividend.
6
Working capital applied during the year amounted to
$32,692,000. Scheduled reductions of long-term debt
accounted for $22,1 44,000 (for further details see Note 2 of
Notes to the Financial Statement) and $7,148,000 was used
as deposits toward the purchase of new aircraft. As in 1970,
Western continued to keep its purchases of property and
equipment at a minimum, totaling $3,400,000 in 1971,
compared to $4,796,000 in the previous year.
Dividends
On March 5, 1971, a 10 percent stock dividend was paid to
shareholders of record as of January 15, 1971.
Annual Meeting
The 1972 regular meeting of shareholders will be held at
the Beverly Hilton Hotel, Beverly Hills, California, on
April 27. On or about March 24, formal notice of the meeting
and proxy material will be mailed to each stockholder of
record as of March 10, 1972.
Corporate Award
Western received for the second consecutive year an award
from the Financial Analysts Federation for excellence in
corporate reporting during 1970. Your company was one
of only two U.S. airlines to win the honor which is given to
companies who are judged superior in reporting financial
information to stockholders and the financial community
through press releases, quarterly reports to stockholders
and interviews with financial analysts.
Shareholders, Stock and Debentures
At the close of 1971 , there were 5,395,000 shares of Western
common stock issued and outstand ing , compared to
5,394,000 shares at the end of 1970 (after giving retroactive
effect to the 10 percent stock dividend paid on March 5, 1971 ).
As a result of the 10 percent stock dividend, the number
of shares of stock reserved for conversion of the 5 %
Convertible Subordinated Debentures was increased from
807,000 shares at the end of 1970 to 888,000 shares
at the end of 1971 and the conversion price was decreased
from $36.75 to $33.41 a share. Holders of the debentures
received interest payments on February 1 and August 1, 1971 .
The company's stock was held by approximately 11 ,000
shareholders at year end.
At the 1971 annual meeting of shareholders in Beverly Hills
in April, nearly 77 percent of all shares were represented
in person or by proxy.
Shareholders' equity at December 31, 1971, was $86,397,000,
or $16.01 a share, compared to $79,905,000, or $14.81 a
share, at December 31, 1970, after giving effect to the
10 percent stock dividend.
Aircraft
At the end of 1971 , Western operated 70 aircraft, compared
to 72 at the end of the previous year. The reduction in the size
of the company's fleet resulted from the withdrawal from
service of a Lockheed Electra that had been used on Alaskan
routes and from the loss of a Boeing 7208 in a training
accident.
In addition, six Lockheed Electras (three in passenger-
freighter configuration which are leased to others and three
in all-cargo configuration awaiting sale) were carried in
" Flight Equipment Not Used in Operations" under Deferred
Charges on the Balance Sheet.
Late in August, the company ordered three Boeing 727s
(extended version) with the new " wide-body look" for
delivery in May and June 1972 at a total purchase price of
approximately $22.5 million. Also arranged, but recently
dropped, were options to purchase three other such aircraft
for delivery in 1973. Instead, the company has elected to
purchase two more 727s for delivery in September and
October this year at a cost of approximately $15 million.
7
In September 1971, Western agreed to purchase four
McDonnell Douglas DC-1 O aircraft for delivery in April,
June (2) and July 1973 if the proposed merger with American
shall not have been approved by that time. Total purchase
price of these aircraft and related spares, exclusive of spare
engines, is estimated at approximately $85 million. The
four wide-bodied trijets had been on option to American
Airlines which in August 1971 had agreed to purchase the
aircraft contingent upon a successful consummation of
the American-Western merger.
The purchase agreement provides that if the American-
Western merger is not consummated by the time delivery is
due, the four DC-1 Os will be acquired and operated by
Western . Pending a decision on the merger, American will
make the required progress payments of approximately
$24 million on the aircraft, an obligation which will be
assumed by Western if the merger has not been
consummated by the time delivery is due.
The method of financing the 727 and DC-10 orders has not
yet been determined.
In an effort to keep its five Boeing 707s competitive with
wide-bodied aircraft being operated by other airlines, the
company has ordered conversion kits that will give the
707 passenger compartments a " wide-body look. " The kits,
to be installed in the spring of 1972, include sculptured
wall panels, sculptured ceilings with indirect lighting and
overhead baggage compartments instead of hat racks.
In December 1971, Western became the first U.S. trunkline
to complete conversion of the engines used on Boeing 727
and Boeing 737 aircraft to a configuration which virtually
eliminates visible exhaust smoke. The program was begun
in early 1970 and was completed a full year in advance
of a deadline agreed to between the airline industry and the
U.S. Department of Health, Education and Welfare. For
its expeditious execution of the program, your company has
been commended by the _
Federal Aviation Administration
8
and the City of Inglewood (Calif.), which is located directly
under the approach lanes to Los Angeles International Airport.
Western's Jet Fleet
On Hand On Order
Owned Leased 1972 1973
DC-10 4
8-707-300C 5
8-7208 25
8-720 3
8-727-200 6 5
8-737-200 30
Marketing
Western carried a record 6,206,000 passengers in 1971,
compared to 6,187,000 in 1970 when a strike against a major
competitor inflated Western's traffic.
While Western's major competitors devoted much of their
1971 effort to introducing new wide-bodied aircraft, and
lounges and special fares to stimulate the sale of their
increased capacity, your company's marketing efforts were
directed at providing increased reliability and personal
service for its customers.
First-class legspace for all passengers on all flights,
a program which was inaugurated in 1970, continued to
serve as the major theme of the company's advertising
and sales promotion activities.
Also stressed in sales, service and operations programs
were continuing improvements in the key ingredients of
excellent airline service - on-time performance; fast,
accurate and complete reservations service; faster and more
reliable baggage handling; a high standard of in-flight
service; and improved communication with customers.
After disappointing on-time performances in January and
February, Western was ranked by CAB figures as No. 1
in the trunkline industry in six of the next eight months (March,
April, June, July, September and October) and was second
in the industry for the year. On two occasions during the
year, Western set what is believed to be an industry record :
on-time departure of 99.5 percent of its originating
flights for the entire day.
The company continued to augment the services of its
ACCU-RES computerized reservations service by:
expanding the service to Alaska and Mexico;
adding immediate confirmation of rooms at Anchorage
hotels to the service already available for hotel space
in Hawaii and Mexico;
inaugurating an automatic ticketing system whereby the
computer automatically prints flight coupons for all
unticketed passengers on the day of their departure from
major cities, thus saving many man-hours and permitting
employees to spend more time assisting passengers with
other aspects of their trip;
introducing a "fare-quote" system wherein the computer
can instantly display for an agent's use fares for up to
12 legs of an itinerary on Western as well as 15 connecting
airlines.
To make it possible for travelers in off-line areas to make
toll-free telephone calls to Western reservations, the company
introduced in May a nationwide Inward Wide Area Telephone
Service (IN-WATS), using five " 800 series" telephone
numbers to cover the United States. Introduction of this
system was another airline industry "first" for your company.
The unique service proved immediately popular, and has
introduced many new customers to the company by making
it easier for travel agencies and interline offices to book
space on Western .
Late in 1970, the company launched a program of placing
Customer Service Directors on the highly competitive
Los Angeles-Hawaii route to serve as management's
representative with the customer, monitoring every aspect
of his flight and determining the customer's reaction to
Western's service. During 1971, this function was expanded
to other key long-haul routes to ensure quality control.
In July, a customs facility was opened in the company's
Los Angeles terminal building which provides Western's
passengers who are arriving from Mexico City, Acapulco or
Vancouver with faster and more convenient customs,
immigration and public health processing.
In September, after studying cabin air circulation patterns,
the company established smoking and no-smoking sections
on all flights.
In October, the company launched a new marketing program,
" YouthFlight," designed to attract more young travelers
to Western. In November, Western formed a "Booster Club,"
composed of customers who have taken the time to write
a complimentary letter or customer comment card to the
company. Members are given special luggage tags which
identify them as " boosters," an introductory visit to the
company's Horizon Club, and special mailings to announce
features of Western service and encourage their enthusiasm.
In November, the company introduced a new Travelcard
to replace and update its Charge-A-Flight program, which
had been introduced in 1954. In addition to providing
broader use for travel on connecting carriers, Travelcard
offers new and easier payment terms, and may be used for
charging a variety of vacation package tours, as well as
shipments via the company's new Speed Pak service that
permits small packages to be shipped from airport ticket
counters. It may also be used for cashing personal checks
up to $25 at any Western ticket counter and for charging
tickets that are sent to the customer's home or office by mail.
Group travel continues to be a major source of revenue,
especially to vacation destinations. Throughout 1971, the
company devoted intensive effort to the development of
this source of business, particularly in the highly competitive
9
Hawaii markets where tour operators and travel agents
book a large share of the traffic.
For 1972, Western has launched a unique marketing and
passenger service feature-complimentary champagne to
every passenger on every flight.
Designed to strengthen the company's competitive position
at a time when other carriers are starting to copy Western's
popular legspace theme and to counteract the lounges
featured by carriers flying larger aircraft, the champagne
campaign was found to be highly effective in pre-
inauguration service tests and opinion surveys.
Western believes adding champagne to first class legspace
and the existing excellent ground and in-flight services
will serve as a symbol of the total quality and "champagne
attitude" the company is seeking to extend to all of its
customers.
Personnel and Management
As of December 31, Western had 9,039 employees, compared
to 8,830 at the end of 1970.
Wages and salaries for 1971 amounted to $111,584,000,
(36.1 percent of operating expenses) compared to
$100,629,000 (or 35.1 percent of operating expenses) in the
previous year. Company contributions to Social Security,
group insurance and employee retirement plans amounted
to an additional $15,491,000 for the year.
Approximately 85 percent of the company's employees are
covered by agreements with labor unions. Contracts were
signed with the pilots union and company dispatchers
during 1971.
Western is currently negotiating contracts with the unions
representing mechanics and related employees and stock
clerks, whose agreements became open for amendment
on November 1, 1971.
Other employees are covered by agreements which will
become open for amendment on the following dates:
10
stewardesses - March 31, 1972; clerical, office, fleet and
passenger service employees - October 1, 1972; pilots -
March 1, 1973; and dispatchers - June 30, 1973.
At the board of directors' meeting in April, Fred Benninger
was elected chairman of the board of directors to succeed
Kirk Kerkorian, who expressed a desire not to be re-elected
after serving as chairman since July 1970. At the same
time George Mason, who had been elected to the board in
January 1971, resigned.
At the regular July meeting, the directors returned the size
of the board to 21 members when it elected Louis B.
Lundborg, retired chairman of the Bank of America, and
William R. Boyd, executive, Metro-Goldwyn-Mayer.
Mr. Lundborg's election is subject to CAB approval. An
application for such approval has been filed with the CAB.
Merger Case
The final procedural step in the American-Western Merger
Case - oral argument before the five CAB members -
was completed in Washington, D.C., on February 17.
Supporting the merger were the Department of Transporta-
tion, which indicated that the American-Western merger
conforms to its newly issued guidelines for mergers in the
transportation industry, and many states and communities
served by the two carriers.
On the other hand, the Antitrust Division of the Department
of Justice, the CAB's Bureau of Operating Rights, labor
unions which represent Western's employees and other
airlines who would compete against the merged carrier
either supported the examiner's recommendation against
approval of the merger or urged that it not be approved
without certain service restrictions or route deletions.
The Merger Agreement, which provides for an exchange
of 1 .3 shares of American stock for each share of Western
stock outstanding on the date of consummation of the
merger, was approved by stockholders of both companies
on March 19, 1971. Western's shareholders cast 3,915,220
votes for the merger and 81,707 against. American's
stockholder vote was 15,782,533 for and 226,373 against.
It is not possible to predict when the final decision in this
case will be released; however, your management expects
the decision to be rendered in a few months.
Alaska Service Case
On December 9, 1971, as part of its decision in the
Alaska Service Investigation, the Civil Aeronautics Board
ordered the following changes in Western's Alaska
route authority:
suspended the company's authority to serve Ketchikan
and Juneau for a seven-year period in favor of a
subsidized carrier;
made permanent the temporary transfer of short-haul
routes west of Anchorage which the company had arranged
with another carrier in 1970;
made permanent the temporary suspension of Western's
service to Yakutat and Cordova; and
made Western's Seattle-Kodiak authority seasonal,
between April 15 and October 15.
The company is in accord with the decision as it relates
to the short-haul routes west of Anchorage, service to Yakutat
and Cordova and seasonal service to Kodiak, but has
appealed to the federal courts for judicial review of that part
of the Board's decision that would suspend Western's
permanently certificated route serving Juneau and Ketchikan .
In 1971, service to these two cities generated approximately
three percent of Western's total revenues and produced
approximately $1 million in earnings before taxes.
Although denying the company's request for a stay of the
CAB order pending completion of judicial review, the
U.S. Court of Appeals for the District of Columbia Circuit
agreed to hear the case on an expedited basis.
In the meantime, however, Western was required to
discontinue service on the Seattle-Ketchikan-Juneau-
Anchorage "inside route" effective February 7, 1972.
The company continues to operate Seattle-Anchorage
nonstop service and twice-weekly flights between Anchorage
and Honolulu. It also plans to operate three flights a week
between Seattle and Kodiak under its seasonal authority
after April 15.
Your company continues to believe that the CAB exceeded
its statutory authority in suspending Western at Ketchikan
and Juneau and will persist in its efforts to obtain a reversal
of this decision.
Other Route Cases
In the Las Vegas/Reno-Portland/Seattle Nonstop Service
Investigation, all procedural steps have been completed and
a final decision by the CAB is awaited. The examiner in
the case recommended that Western be given nonstop
authority between Las Vegas and Portland/Seattle. The
company also is seeking Las Vegas-Reno and Reno-
Portland/Seattle routes which also are at issue in the case.
In the San Diego - Denver Nonstop Service Case, in which
Western was permitted to eliminate a mandatory Phoenix
stop on flights between San Diego and Denver, the CAB
ordered further hearings to update the record in order to
determine whether to authorize another carrier to compete
with Western in this market. In the meantime, Western
continues to provide the nonstop service which was
inaugurated in June 1970. An Examiner's Initial Decision
in the reopened case is expected soon.
Pending before the CAB are the company's applications
for routes to Tokyo from Seattle/Tacoma, nonstop and via
Anchorage; to Guadalajara from California; and to Texas
points from Minneapolis/St. Paul.
11
Route System
HONOLUl!U
- - - - - - - - Service Temporarily Suspended by Order of Civil Aeronautics Board
10 Years of Growth
Financial 1971/1970 1971 1970 19694 1968 1967 19664 1965 1964 1963 1962
Revenues:7
Passenger + 7.6% $ 295,807 274,792 220,530 205,753 178,527 164,186 129,704 121,928 103,183 89,837
Express, freight and excess baggage . + 7.7 15,075 13,993 11,969 9,331 7,581 6,848 5,991 5,897 5,055 4,747
Mail + 8.5 5,156 4,752 4,503 4,128 4,221 4,255 3,135 2,962 2,603 2,659
Other . +109.0 9,557 4,572 3,350 2,741 2,153 1,895 1,768 2,095 3,472 2,878
Total Revenues . + 9.2 325,595 298,109 240,352 221,953 192,482 177,184 140,598 132,882 114,313 100,121
Operating Expenses:7
Depreciation and amortization . 3.9 35,144 36,583 34,821 25,051 20,085 15,779 14,676 12,980 12,373 14,605
Payroll + 10.9 111,584 100,629 87,495 71,885 57,975 47,350 38,731 34,500 30,114 27,108
Other . + 9.0 162,561 149,086 130,437 105,335 89,082 77,708 62,391 57,650 50,969 47,997
Total Operating Expenses + 8.0 309,289 286,298 252,753 202,271 167,142 140,837 115,798 105,130 93,456 89,710
Operating Income {Loss)7 + 38.1 16,306 11,811 {12,401) 19,682 25,340 36,347 24,800 27,752 20,857 10,411
Interest expense7
- 23.5 {11,162) (14,586) (14,748) {6,536) {3,011) (3,239) {2,553) {2,491) (2,916) (2,725)
Other Income and Expenses-Net7 +199.4 3,353 1,120 (125) 15 17 775 253 783 621 472
Earnings (loss) before extraordinary gains and
taxes on income5

7
8,497 (1,655) (27,274) 13,161 22,346 33,883 22,500 26,044 18,562 8,158
Taxes on Income (Tax Credits)7 2,600 (2,250) (15,075) 4,725 10,125 15,558 10,337 12,493 9,252 4,130
Earnings {loss) before extraordinary gains5

7 5,897 595 {12,199) 8,436 12,221 18,325 12,163 13,551 9,310 4,028
Extraordinary gains (less applicable income taxes)5

7 560 883 191 889
Net Earnings {Loss)7 $ 6,457 595 (12,199) 8,436 12,221 18,325 13,046 13,551 9,501 4,917
Primary earnings (loss) per share before
extraordinary items2

5
. $ 1.10 0.11 (2.26) 1.56 2.27 3.45 2.29 2.55 1.75 0.76
Primary net earnings per share2 $ 1.20 0,11 (2.26) 1.56 2.27 3.45 2.46 2.55 1.79 0.93
Fully diluted earnings (loss) per share before
extraordinary items5 $ 1.06 0.11 (2.26) 1.49
Fully diluted net earnings (loss) per share . $ 1.15 0.11 (2.26) 1.49
Return on investment %6 6.16 5.22 0.71 6.54 10.28 16.28 15.37 18.72 14.49 9.40
Cash dividends paid per share1 0.45 0.91 0.91 0.91 0.73 0.59 0.33 0.30
Stock dividends paid per share 10%
Shares outstanding- actual7 5,395 4,904 4,904 4,902 4,893 4,835 4,826 4,826 1,965 1,965
-adjusted2

1 5,395 5,394 5,394 5,392 5,382 5,318 5,308 5,308 5,308 5,308
Shareholders' equity-total7 + 8.1 $ 86,397 79,905 79,310 93,862 90,016 81 ,750 67,361 57,748 46,988 39,061
Shareholders' equity-a share2 + 8.1 16.01 14.81 14.70 17.41 16.73 15.37 12.69 10.88 8.85 7.36
Working capital7 + 51 .0 53,207 35,238 20,447 25,764 19,585 18,047 11 ,522 8,274 5,031 12,315
Long-term debt7 12.7 152,040 174,184 197,150 183,718 80,189 54,867 47,411 33,938 41,106 48,856
Property and equipment- net7 . 12.4 216,738 247,426 285,757 284,787 183,106 145,771 124,096 99,928 93,284 80,052
Total assets7 4.2 340,352 355,168 367,588 349,039 231,342 192,008 157,973 138,335 125,806 115,266
Operations
Airplanes operated at end of year:
Boeing 720-8 25 26 26 27 27 22 18 12 10 7
Boeing 720 3 3 3 3 3 3 2 2 2 2
Boeing 707-300C 5 5 5 5
Boeing 737 30 30 30 17
Boeing 727-200 - leased 6 6 6
Propeller . 2 8 12 21 23 24 33 33 34
Airplane miles flown1

+ 0.1 86,425 86,298 72,650 60,125 51 ,692 42,830 36,554 36,746 33,388 29,551
Ton miles produced7
1,266,130 1,266,124 1,077,657 891 ,001 728,200 585,378 483,033 450,856 400,395 348,854
Ton miles sold4

7
+ 2.4 598,448 584,554 448,420 418,856 360,791 314,137 244,588 231,303 191 ,229 159,658
Seat miles produced7
0.6 9,776,869 9,839,299 8,509,441 7,096,229 5,879,442 4,800,901 4,016,921 3,794,648 3,335,083 2,746,549
Seat miles sold4

7

+ 1.8 5,251,989 5,159,081 4,021,296 3,841 ,864 3,327,160 2,898,088 2,243,695 2,124,582 1,753,037 1,435,992
Express, freight and mail ton miles sold7 + 6.7 73,249 68,646 60,514 47,446 38,940 33,070 26,435 24,625 20,622 19,786
Passengers carried4

+ 0.3 6,206,440 6,187,527 5,752,072 5,692,947 5,107,672 4,700,839 3,807,706 3,717,189 2,970,909 2,270,455
Express, freight and mail tons carried + 6.2 77,731 73,140 66,107 58,129 48,579 42,714 33,511 30,956 25,890 25,256
Passenger load factor-actual + 1.3 pts. % 53.7 52.4 47.3 54.1 56.6 60.4 55.9 56.0 52.5 52.3
- breakeven point 0.5 pts. % 52.2 52.7 53.1 50.7 49.5 47.9 46.2 44.4 44.3 48.6
Average length in miles per passenger trip. + 1.4% 846 834 699 675 651 616 589 572 590 633
Operating expenses per seat mile produced + 8.6 $ .0316 .0291 .0297 .0285 .0284 .0293 .0288 .0277 .0280 .0327
Average revenue per seat mile sold + 6.5 $ .0577 .0542 .0551 .0537 .0537 .0567 .0578 .0574 .0589 .0626
Employees at end of year + 2.4 9,039 8,830 9,225 8,919 7,282 6,294 5,068 4,719 4,126 3,713
'All financial data in this report give effect, retroactively throughout the equivalent outstanding shares of Pacific Northern Airlines, Inc., merged 4Operations of a competing regional carrier were substantially suspended 5Extraordinary gains are from the involuntary conversion of and major
periods prior to 1968, to the merger of Pacific Northern Airlines into into the Company on July 1, 1967. from December 15, 1971. Operations of a competing trunk carrier sales of aircraft.
Western on July 1, 1967, which was accounted for as a pooling of Interests. 1Cash dividends per share for periods prior to January 1, 1967, are stated were substantially suspended from July 8 to December 14, 1970. Western's ~
The methodology used to compute the rate of return Is essentially
2Based on shares of the Company outstanding at the close of the on the basis of the Company's shares (exclusive of equivalent Pacific operations were suspended from July 29 to August 16, 1969 because of a that used by the CAB.
respective periods, adjusted to give retroactive effect to the 10% stock Northern shares) outstanding at the date such dividends were declared as strike. Five other major carriers were struck from July 8 to August 19, 1966.
7000s omitted.
14 dividend paid March 5, 1971, the May 1964 three-for-one split, and the adjusted for the stock dividend and the stock split. 15
Balance Sheet
Western Air Lines, Inc.
December 31 , 1971 and 1970
(in thousands of dollars)
ASSETS
Current Assets:
Cash .
Certificates of deposit
Short-term securities (at amortized cost, including accrued interest,
which approximates market)
Receivables (net of allowance for doubtful accounts of
$475 in 1971 and $350 in 1970)
Maintenance and operating supplies (at average cost)
Prepaid expenses .
Total current assets
Properties and Equipment at Cost:
Flight equipment
Ground equipment
Deposits on purchase contracts (Note 3)
Less allowance for depreciation and amortization (Note 6)
and maintenance
Deferred Charges and Other Assets:
Flight equipment not used in operations, net
Other items .
See accompanying Notes to Financial Statements.
16
1971 1970 Change
$ 13,446 $ 16,590 - 19.0%
30,056 20,640 +45.6
37,522 27,370 +37.1
81,024 64,600 +25.4
22,943 21 ,732 + 5.6
11,005 11,104 0.9
4,150 4,579 9.4
119,122 102,015 +16.8
345,539 354,507 2.5
60,925 59,376 + 2.6
7,148
413,612 413,883 0.1
196,874 166,457 +18.3
216,738 247,426 - 12.4
2,214 2,417 - 8.4
2,278 3,310 - 31 .2
4,492 5,727 - 21.6
$340,352 $355,168 - 4.2
LIABILITIES 1971 1970 Change
Current Liabilities:
Accounts payable $ 16,606 $ 18,699 - 11.2%
Accrued salaries and wages 13,374 11,731 +14.0
Accrued liabilities . 9,191 7,433 +23.7
Unused transportation 5,281 5,949 - 11.2
Current maturities of long-term debt (Note 2) . 21,463 22,965 6.5
Total current liabilities . 65,915 66,777 - 1.3
Long-Term Debt (Note 2) 152,040 174,184 - 12.7
Deferred Credits and Other Liabilities (Note 1 ):
Deferred federal taxes on income . 19,433 17,495 + 11.1
Unamortized investment credits 12,271 13,584 - 9.7
Other . 4,296 3,223 +33.3
36,000 34,302 + 4.9
Shareholders' Equity (Notes 2, 5 and 8):
Common stock-$1.00 par value per share
Authorized 10,000,000 shares
Issued 5,395,000 and 4,904,000 shares . 5,395 4,904 +10.0
Capital in excess of par value 29,750 19,235 +54.7
Retained earnings 51 ,252 55,766 8.1
86,397 79,905 + 8.1
Commitments and Contingent Liabilities (Note 3).
$340,352 $355,168 - 4.2
17
Statement of Earnings
For the years ended December 31, 1971 and 1970
(in thousands of dollars)
Operating Revenues:
Passenger
Express, freight and excess baggage
Mail
Other (Note 7) .
Operating Expenses:
Flying operations .
Maintenance
Passenger service .
Aircraft and traffic servicing .
Marketing and administrative
Depreciation and amortization (Note 6)
Operating income . .
Other Income {Expense):
Interest expense
Interest income
Other- net . .
Earnings (loss) before taxes
on income and extraordinary gain*
Taxes on income (tax credits) (Note 1) .
Earnings before extraordinary gain* .
Extraordinary gain* net of federal income taxes (Note 1)
Net earnings . . . . . . .
Per share data (based on shares outstanding
at the end of each year with 1970 data
adjusted for the 10% stock dividend paid
in March 1971):
Primary:
Earnings before extraordinary gain* . . . . .
Net earnings . . . . . . . . . . . . .
Fully diluted (assuming conversion of the debentures):
Earnings before extraordinary gain*
Net earnings . . . . . . . . . . . . .
*The extraordinary gain resulted from the involuntary conversion of an aircraft.
See accompanying Notes to Financial Statements.
18
1971
$295,807
15,075
5,156
9,557
325,595
82,958
39,422
34,652
58,173
58,940
35,144
309,289
16,306
(11,162)
3,190
163
8,497
2,600
5,897
560
$ 6,457
$ 1.10
1.20
1.06
1.15
1970
$274,792
13,993
4,752
4,572
298,109
74,615
37,658
31,371
52,693
53,378
36,583
286,298
11,811
(14,586)
2,,021
(901)
(1,655)
(2,250)
595
$ 595
$ 0.11
0.11
0.11
0.11
Change
+ 7.6%
+ 7.7
+ 8.5
+109.0
+ 9.2
+ 11.2
+ 4.7
+ 10.5
+ 10.4
+ 10.4
3.9
+ 8.0
+ 38.1
- 23.5
+ 57.9
Statement of Changes in Financial Position
For the years ended December 31, 1971 and 1970
(in thousands of dollars)
Sources of Working Capital:
Earnings before extraordinary gain . . . . . . . .
Add back expenses which did not affect working capital:
Taxes (Note 1)
Deferred income taxes . . . . .
Charge equivalent to investment credits
Amortization of investment credits . .
Other
Depreciation and amortization (Note 6)
and maintenance reserve provision .
Other non-cash items . . . . . .
Total from operations before extraordinary gain
Extraordinary gain . . . . . . . . . . . .
Deduct income which did not affect working capital:
Gain before taxes . . . . . . . . .
Related deferred income taxes - credit (Note 1)
Reduction related to current taxes (Note 1) on the
involuntary conversion of an aircraft . .
Total from operations as adjusted
Proceeds from disposition of property:
Involuntary conversion of an aircraft .
Other . . . . . .
Exercise of stock options . . . . .
Other . . . . . . . . . .
Total working capital provided
Applications of Working Capital:
Purchases of property and equipment . . . . . . . .
Deposits on purchase contracts . . . . . . . . . .
Payments of long-term debt and transfers to current liabilities
Total working capital applied
Increase in Working Capital . . . . . . . . . . .
Summary of Changes in Working Capital:
Increases (decreases) in current assets:
Cash, certificates of deposit, and short-term securities
Federal income taxes refundable . . . . .
Inventories, receivables, and prepaid expenses
Decreases (increases) in current liabilities
*These proceeds from the involuntary conversion of an aircraft were
$3,500 after current taxes of $1,400.
See accompanying Notes to Financial Statements.
$1,110
850
1971
$ 5,897
2,600
1,200
(2,325)
38,607
438
46,417
560
(1,960)
(1 ,400)*
45,017
4,900*
526
35
183
50,661
3,400
7,148
22,144
32,692
$17,969
$16,423
684
862
$17,969
1970
$ 595
(850)
(2,050)
41,529
446
39,670
39,670
3,220
(337)
42,553
4,796
22,966
27,762
$14,791
$36,147
(12,286)
2,001
(11,071)
$14,791
19
Statement of Shareholders' Equity
For the two years ended December 31, 1971
(in thousands of dollars)
Amount at December 31, 1969.
Net earnings
Amount at December 31, 1970.
10% stock dividend paid in March
Exercise of stock options
Net earnings
Amount at December 31, 1971 (Notes 2, 5, and 8)
See accompanying Notes to Financial Statements.
Notes to Financial Statements
Note 1. Taxes on Income.
The 1971 net income tax and the 1970 net income tax credit
are summarized as follows (in thousands):
Exclusive of taxes related to
extraordinary gain:
Current income taxes-
Federal . . . .
State . . . . . .
Deferred income taxes .
Charge equivalent to investment
credits . . . . .
Amortization of deferred
investment credits
Related to extraordinary gain:
Current income taxes . .
Deferred income taxes (credit) .
1971 1970
$ 150
975
2,600
1,200
(2,325)
2,600
1,400
(850)
550
$3,150
$ 225
425
(850)
(2,050)
(2,250)
$ (2,250)
Deferred income taxes arise from timing differences between
financial and tax reporting . These differences are caused
primarily by depreciation practices.
Investment credits generated and unapplied on tax returns
amounted to $17,308,000 at December 31, 1971, and have
been offset on the balance sheet against deferred federal
taxes on income. Such unapplied investment credits will
expire as follows: $1,735,000 in 1976, $2,740,000 in 1977,
$9,204,000 in 1978, $3,612,000 in 1979 and $17,000 in 1980.
Of the $12,271,000 unamortized investment credit balance
at December 31, 1971, $1,340,000 remains from investment
20
Capital in
Common Excess of Retained Shareholders'
Stock Par Value Earnin s E uit
$4,904 $19,235 $55,171 $79,310
595 595
4,904 19,235 55,766 79,905
490 10,481 (10,971)
1 34 35
6,457 6,457
$5,395 $29,750 $51,252 $86,397
credits utilized to reduce taxes otherwise payable and
$10,931,000 is related to investment credits not yet utilized for
such purposes.
Federal income tax returns have been examined by the U.S.
Treasury Department through 1967. The federal income tax
return for 1968 is being examined.
Note 2. Long-term Debt {Unsecured).
For the years ended December 31, 1971 and 1970,
long-term debt was as follows (in thousands):
1971 1970
Senior Debt
Promissory note due December
31, 1975 with quarterly
payments of $4,865. The
interest rate is% over the
bank's prime commercial
rate . . . . . . . $ 77,850
5 % promissory notes due
September 1, 1981 with
annual payments of $1,000
from September 1, 1970
which will increase to $4,000
a year starting in 1976 . 28,000
6%% promissory notes due
September 1, 1984 with
annual payments of $1,000
from September 1 , 1970
which will increase to $2,000
a year starting in 1975 and
further increase to $7,000 a
year starting in 1982 . . 38,000
$ 97,312
29,000
39,000
5% to 6 % promissory notes
Less current maturities
Subordinated Debt
5 % convertible subordinated
debentures due February 1,
1993, with sinking fund
payments of $1,500 a year
starting in 1979 . .
1971
143,850
21,463
122,387
29,653
$152,040
1970
2,184
167,496
22,965
144,531
29,653
$174,184
The following schedule shows the amount of long-term debt
maturing in each of the five following calendar years:
1972 $21,463,000
1973 21,463,000
1974 21,463,000
1975 22,463,000
1976 6,000,000
The related agreements with the bank and the insurance
companies provide, among other things (including restrictions
on additional borrowings), conditions and requirements which
operate to restrict retained earnings from which cash dividend
distributions can be made. The indenture for the debentures
provides, among other things, a requirement restricting cash
dividends to $5,000,000 plus net earnings and proceeds from
stock as ad_ded to shareholders' equity subsequent to
December 31, 1967. This requirement is presently more
restrictive than those in the loan agreements and at December
31, 1971 operated to restrict retained earnings from cash
dividend distribution in the amount of $49,889,000, leaving
$1,363,000 not so restricted .
Reserved for the conversion of the debentures are 888,000
shares of common stock at a conversion price of $33.41 per
share (subject to adjustments in certain cases).
Note 3. Commitments and Contingent Liabilities.
The estimated minimum annual rentals under long-term
leases of ground facilities, with expiration dates ranging to
the year 2000, were approximately $3,200,000 at December
31, 1971 and $3,000,000 at December 31, 1970.
Annual rentals under a lease agreement covering six Boeing
727 aircraft aggregated $2,992,000 in 1970, $3,843,000 in
1971 and will amount to $4,130,000 in each year hereafter
through 1984.
Western has on order three Boeing 727 aircraft for delivery in
the spring of 1972 at a cost of approximately $22,500,000, of
which approximately $6,400,000 has been paid in advance
deposits. Also, American Airlines, Inc. exercised options for
four McDonnell Douglas DC-10 aircraft for delivery in April,
June (two) and July 1973, subject to consummation of the
proposed merger with Western. Western agreed to purchase
these aircraft from the manufacturer if the merger is not
consummated (see Note 8). The total purchase price of these
aircraft and related spares, exclusive of spare engines, is
estimated to approximate $85,000,000. American will make
the required advance payments, subject to Western's
assumption of this obligation if the proposed merger is not
consummated. The required advance payments will
aggregate approximately $24,000,000.
Also, at December 31, 1971, the outstanding commitments
for aircraft interior modification kits and spare parts amounted
to approximately $2,750,000 and for ground facilities and
equipment amounted to approximately $750,000.
Early in 1972, Western agreed to purchase two additional
Boeing 727 aircraft from the manufacturer, at a cost of
approximately $15,000,000, with delivery scheduled for the
fall of 1972.
The company has not decided how much of the funds on
hand together with the funds that will be generated internally
before the deliveries of the aforementioned five 727 and four
DC-10 aircraft will be used to meet the related commitments.
Also, the source of the additional financing that will be needed
has not been arranged.
At December 31, 1971, various legal actions were pending
against the City of Los Angeles and various actions and cross
actions were pending against Western and other airlines,
alleging excessive aircraft noise in the vicinity of Los Angeles
International Airport. Western's counsel in these actions,
which also represents most of the other airlines, is of the
opinion that the airlines have substantial defenses to the
imposition of any liability. An interlocutory judgment has been
entered in one of these cases against the City of Los Angeles,
awarding damages aggregating $660,000 to 520 property
owners. The City has announced its intention to appeal.
21
Western is a defendant, together with numerous other airlines,
in a purported class action relating to charges for inflight
services. Western believes that these actions will not result in
any material liability to the company.
Western is also a defendant along with other domestic
airlines in numerous actions seeking repayment and damages
involving the collection of allegedly illegal fares (which in
one action is alleged to amount to $300,000,000). In the
opinions of Western and of the counsel representing the
carriers, the carriers involved are not liable for the repayment
of any or all of the fares in question.
In December 1971, the CAB suspended the company's
authority to serve the cities of Ketchikan and Juneau for a
period of seven years. Western estimates that during 1971
service to these cities generated approximately three percent
of Western's total revenues and produced approximately
$500,000 in net earnings. The company has appealed this
decision to the federal courts.
Note 4. Retirement Plans.
The company has retirement plans covering all eligible
employees. The cost of these plans charged to operating
expense totaled $6,504,000 in 1971 and $4,660,000 in 1970.
The company's actuary is of the opinion that the assets under
each plan exceed the related liabilities for the accrued
vested benefits.
Note 5. Stock Options.
The qualified stock option plan for officers is summarized
as follows:
1971 1970
Average Average
per per
Shares share Shares share
Granted 6,500 $31.41 2,500 $15.68
Exercised. 1,480 $23.62
Exercisable at end
of year . 48,660 $24.26 28,490 $23.95
Outstanding at end
of year . 124,040 $24.62 120,450 $24.22
An additional 79,300 shares were reserved at December 31 ,
1971 for the issuance of additional options.
22
Note 6. Depreciation and Amortization.
Depreciation for book purposes is computed on the straight-
line basis predicated on estimated useful lives, which are as
follows: for the five Boeing 707-300C aircraft acquired in
1968, twelve years to a residual value of 15%; for the thirty
Boeing 737-200 aircraft acquired in 1968 and 1969, twelve
years to a residual value of 15%; for the seventeen Boeing
7208 and the three Boeing 720 aircraft acquired during 1961
to 1965, a common retirement date of December 31, 1975 to
a residual value of $100,000 per aircraft; for the eight Boeing
7208 aircraft acquired in 1966 and 1967, ten years to a
residual value of $100,000 per aircraft.
Note 7. Mutual Aid Agreement.
Provisions for payments to the struck carriers participating in
the Mutual Aid Agreement, which Western joined effective
August 1970 were minimal in 1971, but were $2,700,000 for
the year 1970 and charged to " Other" operating revenues.
Operations of a competing regional carrier were substantially
suspended from December 15, 1971, and operations of a
competing trunk carrier were substantially suspended from
July 8 to December 14, 1970.
Note 8. Proposed Merger.
During March 1971 the shareholders of Western and
American Airlines, Inc. approved an Agreement of Merger,
dated January 14, 1971, providing for the merger of Western
into American . During December 1971 a hearing examiner
for the Civil Aeronautics Board recommended disapproval
of the merger. Exceptions to this recommendation have been
taken by Western and American and the matter has been
submitted to the CAB for a final decision and subsequent
approval by the President of the United States. The holders
of Western's long-term notes have expressed their intentions
to conform, upon consummation of the merger, the terms
and conditions of the Western credit agreements to the terms
and conditions that exist in American credit agreements.
This Agreement of Merger calls for the exchange of 1.3 shares
of American 's common stock for each share of Western's
common stock. The exchange ratio is subject to adjustment
in certain cases.
Accountants' Report
PEAT, MARWICK, MITCHELL & Co.
CERTIFIED PUBLIC ACCOUNTANTS
555 SOUTH FLOWER STREET
LOS ANGELES, CALIFORNIA 90071
The Board of Directors
Western Air Lines, Inc.:
We have examined the balance sheet of Western Air Lines,
Inc. as of December 31, 1971 and 1970 and the related
statements of earnings, shareholders' equity, and changes in
financial position for the respective years then ended.
Our examination was made in accordance 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.
In our opinion, the aforementioned financial statements
present fairly the financial position of Western Air Lines, Inc.
at December 31, 1971 and 1970, and the results of its
operations and changes in its financial position and share-
holders' equity for the respective years then ended in
conformity with generally accepted accounting principles
applied on a consistent basis.
Los Angeles, California
February 18, 1972
y~ ~;d,
~
~ -
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23
Board of Directors
James D. Aljian
Vice President, Tracinda Investment Company, Beverly Hills, California
Fred Benninger
Chairman of the Board, Western Air Lines, Inc., and Chairman of the Board,
Metro-Goldwyn-Mayer, Inc., Las Vegas, Nevada
William R. Boyd
Executive, Metro-Goldwyn-Mayer, Inc., Culver City, California
Hugh W. Darling
Senior Partner, Darling, Hall, Rae & Gute, Attorneys-at-Law, Los Angeles, California
Leo H. Dwerlkotte
Las Vegas, Nevada
James D. Garibaldi
Attorney-at-Law, Garibaldi & Lane, Los Angeles, California
Cary Grant
Actor-Producer, Universal City, California
Arthur F. Kelly
Senior Vice President-Marketing, Western Air Lines, Inc., Los Angeles, California
Peter M. Kennedy
Vice President, Dominick & Dominick, Inc., New York, New York
Kirk Kerkorian
Sole Proprietor, Tracinda Investment Company, Beverly Hills, California
Arthur G. Linkletter
Chairman of the Board, Linkletter Enterprises, Inc., Irvine, California
Louis B. Lundborg*
Director and Chairman (retired), Bank of America NT&SA, San Francisco, California
Edwin W. Pauley
Chairman of the Board, Pauley Petroleum, Inc., Los Angeles, California
Walter M. Sharp
President, Community Bank, Huntington Park, California
Stanley R. Shatto
Executive Vice President-Transportation, Western Air Lines, Inc., Los Angeles, California
William Singleton
Vice President-Corporate Development, Metro-Goldwyn-Mayer, Inc., Culver City, California
J. Judson Taylor
President, Western Air Lines, Inc., Los Angeles, California
Vernon 0. Underwood
President, Young's Market Company, Inc., Los Angeles, California
Harry J. Volk
Chairman of the Board, Union Bank, Los Angeles, California
Arthur G. Woodley
Vice President (retired), Western Air Lines, Inc., Bellevue, Washington
Richard W. Wright
President, Mountain States Employers Council, Inc., Denver, Colorado
Directors Emeriti
Dr. Donald H. McLaughlin
Chairman of the Board, Homestake Mining Company, San Francisco, California
John M. Wallace
Walker Bank & Trust Company, Salt Lake City, Utah
Alexander Warden
Great Falls, Montana
Sidney F. Woodbury
President, Pine Street Company, Portland, Oregon
*Mr. Lundborg's election was subject to approval by the Civil Aeronautics Board. An application for such
approval has been filed but approval has not been obtained.
24
Corporate Officers
Fred Benninger, Chairman of the Board
J. Judson Taylor, President and Chief Executive Officer and Director
Stanley R. Shatto, Executive Vice President-Transportation and Director
Arthur F. Kelly, Senior Vice President-Marketing and Director
Philip E. Peirce, Senior Vice President-Service
Charles J. J. Cox, Vice President-Finance
Gerald P. O'Grady, Vice President-Corporate Affairs and Secretary
Robert 0. Kinsey, Vice President and Assistant to the President
Corporate Affairs Division
Gerald P. O'Grady, Vice President-Corporate Affairs and Secretary
Ernest T. Kaufmann, Vice President-Regulatory Affairs
Finance Division
Charles J. J. Cox, Vice President-Finance
Eugene D. Olson, Vice President-Data Processing & Systems
Jack P. Maginnis, Vice President- Procurement
H. S. Gray, Assistant Treasurer-Financial Planning
Rick 0. Hammond, Treasurer and Assistant Secretary
Roderick G. Leith, Assistant Treasurer and Controller
Marketing Division
Arthur F. Kelly, Senior Vice President-Marketing and Director
Willis R. Balfour, Vice President-Agency & Interline
David E. Holt, Assistant Vice President-Agency & Tour Sales
Bert D. Lynn, Vice President-Advertising & Sales Promotion
Luis Pasquel, Vice President- Mexico
Ray Silvius, Vice President-Public Relations
Jack M. Slichter, Vice President-Market Planning
Henry M. deButts, Vice President-Washington, D. C.
Charles S. Fisher, Assistant Vice President-Product Development
S. J. Rogers, Assistant Vice President-Product Pricing
Neil S. Stewart, Assistant Vice President-Market Development
Harry L. White, Vice President-Marketing Administration
Service Division
Philip E. Peirce, Senior Vice President-Service
J. S. Neel, Jr., Vice President-Service (Line)
Lawrence H. Lee, Vice President- Industrial Relations
Dan A. Zaich, Assistant Vice President-Labor Relations
Robert Leinster, Assistant Vice President-Service (Staff)
Transportation Division
Stanley R. Shatto, Executive Vice President-Transportation and Director
Richard B. Ault, Vice President-Engineering
Harold W. Caward, Vice President-Flight Operations
Anton B. Favero, Vice President-Maintenance
Joseph M. Fogarty, Assistant Vice President-Maintenance & Overhaul
Peter P. Wolf, Vice President-Communications
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