Western Airlines Annual Report 1972

Western Airlines
Nineteen Seventy-Two
Annual Report
Notice to Stockholders
A rule adopted by the Civil Aeronautics
Board ("CAB") in July 1970, as amended on
December 29, 1972, imposes obligations on
certain stockholders of air carriers. Any person
who owns as of December 31 of any year or
subsequently acquires, either beneficially or as
a trustee, more than 5% of any class of capital
stock of an air carrier must file with the CAB
a report containing the information required by
Part 245.12 of the CAB's Economic Regula-
tions on or before April 1 as to the capital stock
owned as of December 31 and/or a report
corrtaining the information required by Part
245.13 of the CAB's Economic Regulations
within 1 O days after acquisition as to the capital
stock acquired after December 31 . Any bank
or broker which holds as trustee more than 5%
of any class of capital stock of an air carrier
on the last day of any quarter of a calendar
year must file with the CAB within 30 days after
the end of the quarter a report in accordance
with the provisions of Part 245.14 of the CAB's
Economic Regulations.
Any person required to report under either
Part 245.12, Part 245.13 or Part 245.14 of the
CAB 's Economic Regulations who grants a
security interest in more than 5% of any class
of capital stock of an air carrier must within 30
days after granting such security interest file
with the CAB a report containing the informa-
tion required in Part 245.15. 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.
Western
Air Lines, Inc.
1972
Annual Report
2 Highlights of 1972
3 President's Letter
5 Year in Review
22 Ten Years of Growth
24 Balance Sheet
26 Statement of Earnings
27 Statement of Changes in Financial Position
28 Statement of Shareholders' Equity
28 Notes to Financial Statements
30 Accountants' Report
Highlights
of
1972
2
Operating 1972 1971 Change
Available seat miles 10,300,178,000 9,776,869,000 + 5.4%
Revenue passenger miles
Passengers carried .
Passenger load factor-actual %
- breakeven point % .
Financial
Operating revenues
Operating income
Net earnings .
Net earnings per share
Net earnings per share assuming conversion
of the debentures
Cash dividends per share .
Stock dividend paid (3% in April 1973)
Shares of common stock outstanding
Shareholders' equity
Shareholders' equity per share .
Cash, certificates of deposit, and short-term
securities .
Working capital .
Unused bank cred it
Property and equipment at cost .
Long-term debt .
Number of employees at year end
Wages and salaries paid .
Operations of a competing trunk carrier were sub-
stantially suspended from June 30 to October 2,
1972, and operations of a competing regional carrier
were substantially suspended from December 15,
1971 , to April 10, 1972
Affected data adjusted where appropriate throughout
5,995,925,000 5,251,989,000 + 14.2
6,931,000 6,206,000 + 11 .7
58.2 53.7 + 4.5 pts.
54.4 52.2 + 2.2 pts.
$365,663,000 $325,595,000 + 12.3%
$ 23,607,000 $ 16,306,000 + 44.8
$ 11 ,216,000 $ 6,457,000 +73.7
$ 0.81 $ 0.46
$ 0.74 $ 0.45
$ 0.09 $
10%
13,926,000 13,894,000 + 0.2
$ 96,723,000 $ 86,397,000 +12.0
$ 6.95 $ 6.22
$ 55,382,000 $ 81 ,024,000 - 31.6
$ 20,592,000 $ 53,207,000 - 61 .3
$ 65,000,000
$452,333,000 $413,612,000 + 9.4
$1 30,487,000 $152,040,000 - 14.2
9,676 9,039 + 7.0
$126,618,000 $111 ,584,000 + 13.5
this Annual Report for the 3% stock divide nd
declared on January 22, 1973, payable on April 10,
1973, to shareholders of record on February 20,
1973, and for the 2 for 1 stock split effected on
September 13, 1972, and distributed on October 30,
1972.
Presidents
Letter
To Our Stockholders:
The year 1972 was one of the best in Western
Air Lines' 46-year history. Despite the uncer-
tainty of a pending merger that ultimately was
denied, and the continuing problems that faced
the airline industry, the performance of your
company was excellent. Profits increased 7 4
percent; we resumed payment of dividends to
stockholders, provided outstanding service to
a record number of travelers and shippers, and
finished the year in a strong financial position.
Much of the credit for the company's gratify-
ing progress must go to its 9,600 employees,
who, notwithstanding the difficulties, demon-
strated great poise, professionalism and dedi-
cation . As a result of their support and the
able leadership of J. Judson Taylor, who guided
the company from heavy losses in 1969 to
profitability in 1972, Western today is in an
excellent position to continue its growth.
From late 1970 until the summer of 1972
your company pursued a merger application
with American Airlines in the belief that the
consolidation of these two companies would
produce worthwhile benefits to our share-
holders and to the public. At the same time,
however, we recognized that the proposed
merger would face opposition and that it might
not be approved by the Civil Aeronautics Board
and the President. Accordingly, we were deter-
mined to conduct our day-to-day operations as
efficiently and profitably as possible and con-
tinue our planning in a manner that would per-
mit Western to move ahead as a viable carrier
should the merger be turned down. As our 1972
results detailed in this report indicate, we have
been successful in attaining these objectives.
Western is today - and in the future will be
more than ever- a performance-oriented com -
pany. In 1972, based on Civil Aeronautics
Fred Benninger
Chairman
Arthur F. Kelly
President
Board standards, we had the best on-time
record of any trunk airline. In providing coach
and economy passengers - who represent 87
percent of our revenue - with first class leg-
space on every flight, we believe we did more
to make the passenger comfortable in a mean-
ingful way than any other airline. Our ratio of
commendations-to- complaints improved sig-
nificantly during the year. Western had fewer
consumer complaints filed with the Civil Aero-
nautics Board than any other trunkline.
Of continuing concern for the future is the
matter of traffic growth vs. cost increases. We
believe traffic will continue to grow at a healthy
rate. Most estimates for our industry indicate
that revenue passenger miles should increase
10-11 percent in 1973. We believe these fore-
casts are reasonable. In order to benefit from
this growth, however, we must insure that costs
are carefully controlled. Every item of operat-
3
4
ing expense is being considered from a profit-
planning standpoint.
In the summer of 1973, Western will intro-
duce its first wide-bodied jets, four DC-1 Os.
The aircraft will make the company's service
more competitive on major routes where other
carriers operate wide-bodied aircraft. When
combined with a full-year's utilization of the
five Boeing 727s that were received in 1972,
they will permit us to increase our capacity by
approximately 12 percent for the year.
Our revenue per passenger mile in 1972 was
essentially the same as in 1971 despite the
September fare increase that amounted to
approximately 1.8 percent for Western's sys-
tem . The carry-over effect for 1973 will be
approximately 1.2 percent. We are continuing
our efforts to obtain fare increases for Main-
land-Hawaii and certain intra-California routes.
The stringent new security measures ordered
by the government that were introduced
throughout our system in January 1973 will
increase the company's costs. We are hopeful
that the Civil Aeronautics Board will permit the
airlines to recover these added costs by a sur-
charge to be paid by the passengers.
In order to meet our goals of improved per-
formance and greater efficiency, we have in-
creased our emphasis on corporate planning.
We recently established a corporate planning
department which we believe is unique in the
airline industry. Not only is it responsible for
developing both near-term and long -range
forecasts, but it also includes flight scheduling,
cost control and fleet planning. Consolidation
of these important functions with economic
research and analysis will permit the depart-
ment to develop an annual profit plan and to
adjust schedules and establish budgets to con-
form with the plan.
We are optimistic about the future of Western.
We feel we have a strong management team,
dedicated and resourceful employees and a
route system that, although in need of expan-
sion, will produce continuing traffic growth. We
have been aggressive and innovative competi-
tors and we intend to be even more so in the
future.
Your continued support will help us in this
endeavor. We hope you will fly and ship on
Western whenever possible and encourage
your friends, neighbors and associates to do
likewise.
Arthur F. Kelly
President and Chief Executive Officer
March 8, 1973
Year
Rln.
ev1ew
Earnings
Net earnings in 1972 were $11,216,000, a 7 4
percent increase over 1971 net earnings of
$6,457,000.
(All per-share figures appearing throughout
this report are adjusted for stock splits and
stock dividends, including the three percent
stock dividend declared January 22, 1973.)
Net earnings per share, based on the
weighted average number of shares outstand-
ing during the year were 81 cents a share,
compared to 46 cents a share for 1971. For
purposes of comparison to interim reporting
made during 1972, the net earnings per share
unadjusted for the stock dividend were 83 cents
a share compared to 48 cents a share for 1971 .
Fully diluted net earnings per share, assum-
ing that all holders of the company's 5 per-
cent Convertible Subordinated Debentures had
converted their debentures into common stock,
were 7 4 cents a share, compared to 45 cents
a share for 1971.
Operating income totaled $23,607,000, equal
to 6.5 percent of operating revenues, com-
pared to $16,306,000, or 5.0 percent of operat-
ing revenues, for 1971.
Interest expense (before reduction for inter-
est capitalized) decreased from $11,278,000 in
1971 to $10,240,000, reflecting both a de-
crease in long-term debt and lower effective
interest rates on notes payable to a bank.
Interest rates on such notes are fixed at one-
quarter percent over the bank's prime com-
mercial rate and vary with changes in the prime
rate, which was on the average lower in 1972
than in 1971. In 1972 the prime rate fluctuated
between 4 percent and six percent com-
pared to between 5 percent and 6 percent
in 1971 .
Interest income decreased from $3,190,000
for 1971 to $2,832,000 for 1972. The decrease
resulted from a decline in investments in certif-
icates of deposit and short-term marketable
securities as the company used cash to pay for
5
6
aircraft acquired in 1972 and to make deposits
on the DC-10 aircraft to be delivered in 1973.
Earnings before income taxes for 1972
totaled $17 ,516 ,000, more than double
Western's pre-tax earnings for 1971 .
Taxes on income were $6,300,000. Before
amortization of deferred investment credits of
$2,300,000 for 1972 and $2,325,000 for 1971 ,
the federal tax expense was $7,525,000 for
1972, compared with $3,950,000 for 1971. State
income taxes increased from $975 ,000 to
$1,075,000.
Revenues
Total operating revenues for 1972 were a
record $365,663,000 (after reduction of
$5,181,000 for payments to struck carriers
under the airlines' Mutual Aid Agreement) , a
12.3 percent increase over the $325,595,000 of
the previous year.
Passenger revenues increased 15.9 percent,
and represented 93.8 percent of total operating
revenues. Revenues from coach traffic
REVENUE DOLLAR
86.7% from coach passenger services
7 .1 % from deluxe passenger services
4.3% from express. freight, excess baggage
1.9% from mail and other
increased 16.5 percent and represented 92.4
percent of passenger revenues, or 86.7 per-
cent of the company's revenue dollar; deluxe
traffic increased 9.1 percent and contributed
7 .1 percent of the revenue dollar. Express,
freight and baggage increased 4.9 percent to
$15,819,000 and represented 4.3 percent of
operating revenues. Mail revenues decreased
3.0 percent and were 1 .4 percent of the total.
Charter revenues decreased from $4,284,000
to $2,100,000.
The average revenue per passenger mile for
1972 was 5.78 cents, almost identical to the
previous year 's 5.77 cents. The Civil Aero-
nautics Board in the fare level phase of the
Domestic Passenger Fare Investigation
approved a 2.7 percent fare increase on do-
mestic routes effective in September. However,
the increase did not apply on Hawaii, ,1\laska,
Mexico or intra-California routes and, accord-
ingly, represented an average increase of only
1.8 percent for Western's system. Offsetting
this fare increase was an increase in discount
travel, from 31.4 percent of all revenue passen-
EXPENSE DOLLAR
37.0% for wages and salaries
6.1 % for social security, group
insurance. retirement plan
11. 7% for aircraft fuel
10.6% for depreciation and amortization
5.8% for materials and repairs
5.4% for food and beverages
5.4% for utilities and services
3.8% for commissions
3.3% for advertising and publicity
10.9% for all other expenses
ger miles in 1971 to 37.6 percent in 1972. This
trend may be counteracted in part by the effect
of the Civil Aeronautics Board's decision,
which has yet to be implemented, holding that
youth standby, youth reservation and family
plan fares, some of the most popular discount
fares, are unlawful.
Expenses
Inflation continued to play a major role in
Western's expense picture in 1972 as operat-
ing expenses increased 10.6 percent on a 5.4
percent increase in available seat miles.
Operating expenses totaled $342,056,000,
compared to $309,289,000 for 1971 .
Personnel costs, which accounted for 43.1
percent of the expense dollar, increased 15.9
percent despite the fact that the increase in the
number of employees was only seven percent.
Of the $32,767,000 increase in operating ex-
penses, $20,207,000-61 .7 percent-was for
wages and salaries , plus related costs for
Social Security, group insurance and retire-
ment plans.
Other major items of expense and compari-
sons with 1971 levels are detailed in the ex-
penses section of the Brief Statement of Earn-
ings.
The cost of producing a seat mile increased
5.1 percent, from 3.16 cents to 3.32 cents.
Breakeven load factor increased from 52.2
percent to 54.4 percent.
Finances
The company continues in a strong financial
position.
The Statement of Changes in Financial
Position shows total working capital from all
sources provided $49,261,000 in 1972, com-
pared with $50,661,000 for 1971 .
Workin g capital generated by operations
totaled $47,206,000, compared to $45,017,000
in 1971 . Earnings before extraordinary gains
increased $5,319,000. However, the add back
for depreciation, amortization and accrued air-
craft overhauls was $3,353,000 less because
of a decrease in accrued overhaul costs.
Application of working capital totaled
$81,876,000, with $36,403,000 invested in five
Boeing 727 aircraft and other property and
equipment and $22,793,000 advanced to man-
ufacturers of four DC-10 aircraft and five spare
engines which will be delivered in 1973. Addi-
tionally, $21,463,000 was used for scheduled
repayment of long-term debt and $1,217,000
for the payment of cash dividends.
As a result, working capital decreased by
$32,615,000, from $53,207,000 to $20,592,000.
This decrease is primarily reflected in an in-
crease of $12,423,000 in current liabilities and
a decrease of $25,642,000 in cash, certificates
of deposit, and short-term securities which
totaled $55,382,000 at the close of 1972.
The company did not find it necessary to
use any part of the $65 million line of credit
which was arranged in 1972 (for details, see
OPERATING REVENUE VS. OPERATING EXPENSE
OPERATING REVENUE
OPERATING EXPENSE
340
320
(I.I
~ 300
~
~
:i 280
I
(I.I
~ 280
~ 240
220
200
180
160
1968 1969 1970 1971 1972
7
Brief Statement of Earnings Brief Balance Sheet
(in thousands of dollars) (in thousands of dollars)
Western's revenues came from: 1972 1971 Change Western owns: 1972 1971 Change
Passengers Cash, certificates of deposit, and
Coach $316,908 $272,038 +16.5% short-term securities . $ 55,382 $ 81,024 31.6 %
Deluxe 25,943 23,769 + 9.1 Receivables due from others . 28,760 22,943 + 25.4
342,851 295,807 +15.9 Flight equipment
Express, freight, and baggage 15,819 15,075 + 4.9 expendable parts . 10,456 9,733 + 7.4
Mail 5,000 5,156 - 3.0 Buildings and improvements, net 12,290 12,955 5.1
Charter 2,100 4,284 - 51.0 Flight and other equipment, net . 201,967 196,635 + 2.7
Interest income 2,832 3,190 - 11 .2 Deposits on purchase contracts . 24,772 7,148 +246.6
Other income 5,075 5,274 - 3.8 Prepaid expenses 4,332 5,422 20.1
Provisions for mutual aid Equipment not used in
payments (5,181) operations, net 2,952 2,214 + 33.3
368,496 328,786 +12.1 Deferred charges and other . 1,620 2,278 28.9
342,531 340,352 - 0.6
Western's expenses were for:
Wages and salaries 126,618 111,584 +13.5
Social security, group Western owes:
insurance and retirement Payables due to vendors
plans 20,664 15,491 +33.4 and others . 50,032 39,171 + 27.7
Aircraft fuel . 40,137 38,663 + 3.8 Federal income taxes-deferred. 19,033 19,433 2.1
Depreciation and amortization . 36,224* 35,144 + 3.1 Unamortized investment credits . 12,596 12,271 + 2.6
Materials and repairs 19,808 20,487 - 3.3 Tickets sold but not yet used . 6,843 5,281 + 29.6
Food and beverages 18,584 14,644 +26.9 Other deferred items 5,354 4,296 + 24.6
Utilities and services . 18,343 16,600 +10.5 Notes payable- current and
Commissions 12,949 10,067 +28.6 long-term 151,950 173,503 12.4
Advertising and publicity 11,156 10,191 + 9.5
245,808 253,955 3.2
Interest, net of amounts
Excess of what is owned over
capitalized 8,787 11,162 - 21 .3
what is owed, or
Landing fees 7,519 6,824 +10.2 shareholders' equity $ 96,723 $ 86,397 + 12.0
Property, fuel and other taxes 6,759 7,163 - 5.6
Rentals of ground facilities . 6,275 5,793 + 8.3
Insurance and related costs 5,285 5,869 - 10.0
Rentals of flying equipment 4,135 3,843 + 7.6
Other costs . 7,737 6,764 +14.4
Taxes on income 8,600 4,925 +74.6
Amortization of investment
tax credits (2,300) (2,325) - 1.1
357,280 322,889 +10.7
Earnings before
extraordinary gain 11 ,216 5,897 +90.2
Extraordinary gain- net 560
Net earnings $ 11,216 $ 6,457 +73.7
* Includes writedown of Boeing 720 nonfan aircraft amounting
to $1 ,000 ($500 , or $0.04 a share, after taxes).
8
Note 3 of the Notes to Financial Statements).
Long-term debt, exclusive of current matu-
rities amounting to $21,463,000 reflected under
current liabilities, totaled $130,487,000 and
consisted of $38,925,000 of installment notes
to a bank, $62 million of installment notes to
insurance companies, and the 5 percent
Convertible Subordinated Debentures amount-
ing to $29,562,000. Although the bank loan
agreement does not require Western to main-
tain compensating balances, it is Western's
practice to maintain deposits approximating 15
percent of borrowings under its loan agree-
ment with each of the participating banks.
Annual Meeting
The 1973 meeting of shareholders will be held
at the Beverly Hilton Hotel, Beverly Hills, Cali-
fornia, on April 26. On or about March 26, for-
mal notice of the meeting and proxy material
will be mailed to each stockholder.
Corporate Award
Western received for the third consecutive year
an award from the Financial Analysts Federa-
tion for excellence in corporate reporting dur-
ing 1971 . The company was one of only four
airlines to win the honor which is given to com-
panies who are judged superior in reporting
financial information to stockholders and the
financial community through press releases,
reports to stockholders and interviews with
financial analysts.
Dividends
At a special meeting held in August, your board
of directors voted to resume payment of divi -
dends by declaring a cash dividend of 1 O cents
a share on pre-split shares (four cents on split
shares) which was paid on September 12. An
additional cash dividend of five cents a share
on the split shares was paid on November 28.
In September 1972, Western's board of direc-
tors expressed by resolution its intention to
declare regular quarterly dividends, consistent
with sound business principles, either in cash,
stock or a combination of cash and stock,
equivalent on the average to 50 percent of
earnings.
At its first regular quarterly meeting of 1973,
the board of directors voted a stock dividend of
three percent. The value of the stock dividend
on the day it was declared plus the two cash
dividends paid in 1972, amounts to somewhat
more than 50 percent of 1972 earnings.
At the same meeting , the board also voted a
cash dividend of five cents a share. Both divi-
dends are payable on April 10 to shareholders
of record on February 20.
Shareholders, Stock and Debentures
On September 6, 1972, at a special meeting of
shareholders , a proposal by the board of
directors to increase authorized stock from 10
million shares to 25 million shares and to split
outstanding shares 2-for-one was over-
whelmingly approved. The split increased the
NET EARNINGS (PROFIT)
14
12
10
8 -
6 - -
u,
4 - -
z
0
:::;
2 - -
~
2
I 0
u,
a:
5 - 2
~
0 -4
0
- 6
- 8
- 10
- 12
- 14
1968 1969 1970 1971 1972
Record profit was $18 million in 1966
9
10
"Determine that the thing can and shall be
done, and then we shall find the way"
- Abraham Lincoln
Senior members of Western's management team are UPPER LEFT - Executive Vice PresideAt Dominic P.
Renda (center) with members of corporate planning department. LOWER LEFT- Charles J. J. Cox (left),
senior vice president-finance, with Eugene D. Olson, vice president-data processlng .. and systems.
UPPER RIGHT-Arthur F. Gardner, senior vice president-operations, conducts on-time
meeting which is attended daily by key members of executive staff to analyze previous day's operation.
LOWER RIGHT -Senior Vice President- Marketing Philip E. Peirce (second from left) discusses return of
" Very Important Bird" television commercials with members of advertising department.
11
12
number of Western shares outstanding from
5,404,000 to 13,511,000.
Adjusted for the three percent stock divi-
dend, there were 13,926,000 shares outstand-
ing at the end of 1972 and 2,279,000 shares
were reserved for conversion of the 5 per-
cent Convertible Subordinated Debentures.
The conversion price is $12.97 per share.
Holders of the debentures receive interest pay-
ments on February 1 and August 1.
The company's stock was held by approxi-
mately 10,500 shareholders at year end.
At the 1972 annual meeting of shareholders
in Beverly Hills in April, nearly 79 percent of all
shares were represented in person or by proxy.
Shareholders' equity at December 31, 1972,
was $96,723,000, or $6.95 a share, compared
to $86,397,000, or $6.22 a share, at December
31,1971.
Equipment and Facilities
At the end of 1972, Western operated 71 jet
aircraft, compared to 69 at the end of 1971 .
During the year, five Boeing 727-200s (ex-
tended version) were added to the fleet. In Sep-
tember 1972, three Boeing 720s which do not
have the fanjet engines were removed from
scheduled service and were transferred to
"Flight equipment for sale" under Deferred
Charges and Other Assets on the Balance
Sheet. Three Lockheed Electras, which are
leased to others , are carried in the same
account.
In early 1972, Western converted its five
Boeing 707s to the " wide-body look" by install-
ing sculptured wall panels, sculptured ceilings
with indirect lighting and overhead baggage
compartments instead of hat racks to make
them more competitive with the wide-body jets.
The five Boeing 727s which Western acquired
in 1972 are all equipped with these modern
interiors. The company plans to convert its
six leased 727s to the same interior late this
year.
With the termination of the merger agree-
ment with American, Western assumed respon-
sibility for the purchase of the four DC-1 Os that
had been ordered by American contingent
upon successful consummation of the pro-
posed merger. The purchase agreement be-
tween Western and the manufacturer provided
that if the merger were not approved, the four
DC-1 Os would be acquired by Western and that
Western would pay the progress payments on
the aircraft which would have been due at an
earlier date had Western ordered the aircraft
originally. Payments of $16.9 million, including
interest payments of $700,000, were made in
August and an additional $6.6 million was paid
during the balance of the year.
One of the DC-10 aircraft will be delivered in
April, two in June and one in July. All four air-
craft will go into service by August 1 on long-
haul, high-density routes where the company
is now competing with wide-body jets or ex-
pects to in the near future.
In connection with the operation of DC-1 0
RETURN ON INVESTMENT
12%
1 2 % - - - - - - - - - - - -
CAB GUIDELINE
10.5%
1 0 % - - - - - - - - - - - -
8%--===-- - - - - - - - -
1968 1969 1970 1971 1972
'1972 Figure for Trunk Carriers and PA is for Year-Ended 9/30/72.
"A fair exterior is a silent recommendation"
- Publilius Syrus
As each of Western's facilities needs refurbishing , it is redecorated
in the company's modern, bright and efficient " new look," typified
by this ticket counter at Los Angeles International Airport.
Western Airl,
13
14
aircraft, Western expects to expend substantial
sums for airport terminal building improve-
ments, a hangar addition and other related
facilities that will be required to efficiently oper-
ate and service these new-generation aircraft.
Included will be a single "high bay" hangar
and an employee parking structure at the com -
pany's Los Angeles International Airport head -
quarters at an estimated cost of nearly $1 O
million, a $6 million expansion of passenger
terminal facilities to provide four DC-10 gates
at Los Angeles International Airport and major
modifications of terminal facilities to accom-
modate the DC-1 Os at San Francisco, Minne-
apolis-St. Paul, Denver and Seattle-Tacoma.
Western's Jet Fleet
DC-10
8707-300C
87208
8727-200
8737-200
Owned
4 *
5
25
5
30
Leased
6
*To be delivered in April, June (2) and July 1973.
Marketing
Western carried a record 6,931,000 passen-
gers in 1972, an 11 . 7 percent increase over the
previous year. Passenger load factor for the
year increased 4.5 points to 58.2 percent, its
highest level since 1966.
Passenger loads were increased by strikes
which affected operations of a competing re-
gional carrier in the first quarter and of a com -
peting trunk carrier from July through Septem-
ber. However, these gains were offset in part by
the suspension of the company's authority to
serve Juneau and Ketchikan, effective Febru -
ary 7, 1972. Traffic to these two Alaska cities
had accounted for three percent of the com -
pany's total revenues during 1971 .
Highlighting the company's marketing pro-
grams during the year were:
. . . continued advertising and promotion of
first class legspace for every passenger on
every flight, a Western feature that no other
major carrier offers;
. .. increased emphasis on providing our
passengers with the best on-time performance
in the industry;
. . . a quality of total service both on the
ground and in the air to give Western the best
record in the industry in customer reaction;
. .. and , in order to emphasize the company's
overall attitude of hospitality and sincerity for
the comfort of its passengers , champagne
service was selected as the company's major
marketing theme for the year.
Enhanced by the teamwork and enthusiasm
of the company's employees, each of these
major programs was carried out efficiently and
effectively.
Reaction of coach and economy passengers
(who represent approximately 88 percent of the
nation 's air travel) continues to be enthusiastic.
In its efforts to achieve the best possible on-
time performance, your company's executive
staff- president, division heads and appropri-
ate department heads-meet every weekday
at 8 a.m. to analyze the previous day's opera-
tions. As a result, based on Civil Aeronautics
Board standards, Western was No. 1 in the
industry in on-time performance for 1972.
Among the methods your company uses to
determine customer attitudes toward its serv-
ice is careful evaluation of commendations and
complaints to the company and to the Civil
Aeronautics Board. In 1972, the trend of both
commendations and complaints addressed to
the company was highly favorable. For ex-
ample, Western had fewer complaints filed with
the CAB than any other trunkline and had one
of the lowest ratios of complaints per 100,000
passengers carried in the industry.
As in the past, Western continued to stress
in its marketing programs the many attractive
leisure destinations that we serve. In 1972, your
company carried more passengers between
"The use of travelling is to regulate imagination
by reality, and instead of thinking how things
may be, to see them as they are"
-Samuel Johnson
15
16
"Socieiy is built upon trust and trust upon one
another's integriiy"
- Robert South
17
18
the U.S. and Mexico than any other U.S.
carrier, was the leading carrier between Alaska
and the 48 contiguous states, and again was
third in total traffic in the highly competitive
Mainland-Hawaii market.
For 1973, your company has geared itself
to be even more aggressive and innovative in
pursuit of larger market shares and higher load
factors.
Late in 1972, the sales and service divisions
were combined into a new marketing division
that also integrated product research and de-
velopment and all phases of marketing into one
closely knit organization. Introduced late in the
year was a new internal program that encour-
ages every employee and family member to
participate more actively in selling Western's
services and to receive appropriate recogni-
tion for those efforts. The program is called
"Team Up." It was introduced to employees
and their families by 11 teams of company
officers who held meetings in every city on the
system.
During 1973, Western plans to intensify its
seasonal vacation-selling campaigns such as
Ski Western's World, North Country Adventures
and Take a Sunbreak.
Western continues to be the industry leader
in ethnic marketing. In California, for example,
your company advertises in black-oriented
newspapers and radio stations, Spanish-lan-
guage newspapers and television, and both
Japanese and Chinese-language newspapers.
The company will continue to develop group
travel which maintains a steady growth, partic-
ularly in the leisure markets Western serves. A
close working relationship also continues with
travel agents and tour operators - who in 1972
accounted for 42 percent of the company's
passenger sales.
One of the most significant developments in
group travel is a "Travel Group Charter" con-
cept approved by the Civil Aeronautics Board
in 1972. Western does not plan at present to
operate these charters, but instead intends to
compete aggressively against them and to sell
our own product which in many respects is
superior. Our program will be to explain
through advertising that, as a result of the com-
plexities of the travel group charters, a passen-
ger may be far better off to select one of West-
em's more reliable group package plans.
Aiding our efforts in all of these areas will be
the introduction of the four DC-10s that will go
into service in the summer of 1973. The addi-
tional capacity of these large wide-bodied air-
craft (239 seats vs. 137 for the largest aircraft
now in our fleet and much greater cargo ca-
pacity) will permit the company to gain a larger
share of available passengers and air cargo
during peak travel periods without increasing
frequency.
Your company also will continue to expand
its services to our customers who purchase
travel through the use of Western's own
"TravelCard" and other credit plans. In 1972,
credit purchases on all credit plans utilized by
60%
59%
58%
57%
56%
55%
51%
50%
49%
PASSENGER LOAD FACTOR
ACTUALVS.BREAKEVEN
~ -
~
f- -
46%-----:.-,.... _ _ _ _ _ _ _ _
47% - - - - - - - - - - - - -
4 6 % - - - - - - - - - - - - -
4 5 % - - - - - - - - - - - - - -
1968 1969 1970 1971 1972
our customers increased 20 percent to a total
of $95,759,000, or 29 percent of total passen-
ger sales.
Personnel
As of December 31, Western had 9,676 em-
ployees, compared to 9,039 at the end of 1971 .
Wages and salaries for 1972 amounted to
$126,618,000 (37.0 percent of operating ex-
penses) compared to $111,584,000 (36.1 per-
cent of operating expenses) in the previous
year. Company contributions to Social Secu-
rity, group insurance and employee retirement
plans increased 33.4 percent to $20,664,000.
Approximately 85 percent of the company's
employees are represented by four unions.
Following is the contractual status for each
group of these employees.
Employee
No. of
Contract Open
Employees
Group on 12/31 /72
for Amendment
Clerical , Office, 3,673 October 1, 1972
Fleet & Passen- (in mediation on
ger Service date of this report)
Pilots 1,222 March 1, 1973
Dispatchers 39 June 30, 1973
Mechanics 1,830 November 16, 1973
& Related
Employees
Stock Clerks 117 November 16, 1973
Flight Attendants 1,312 April1,1974
Management Changes
Elected to the board of directors at the board 's
October meeting was Walter J. Hickel, former
Secretary of the Interior and governor of
Alaska. Hickel succeeded William Boyd, who
resigned effective September 15, 1972.
At its first meeting of 1973, the board of
directors elected Arthur F. Kelly, a veteran of
35 years with the company, president and chief
executive officer to succeed J. Judson Taylor,
64, who was elected vice chairman at the same
meeting.
Mr. Kelly, who had been promoted from
senior vice president-marketing to executive
vice president in October, joined the company
in 1937 as a regional manager. He was elected
vice president in 1949, a senior vice president
in 1965 and to the board of directors in 1968.
Also elected a vice chairman at the October
directors' meeting was Stanley R. Shatto, for-
mer executive vice president-transportation.
Mr. Shatto, 64, had headed up the company's
operations division since 1947.
Returning to Western as an executive vice
president on January 1; 1973, was Dominic P.
Renda, a veteran of 27 years in the air trans-
portation industry. Mr. Renda had served with
Western at the executive level from 1946 to
1968 and for the past five years has been
senior vice president-international and public
affairs of Continental Airlines and president of
Air Micronesia. At the board of directors' first
meeting of 1973, Mr. Renda also was elected
to the board succeeding Edwin W. Pauley who
resigned and was named a director-emeritus.
Other officers elected to increased responsi-
bilities during 1972 were: Charles J. J. Cox to
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
PASSENGER MILES VS. SEAT MILES
SEAT MILES
PASSENGER MILES
1968 1969 1970 1971 1972
19
20
senior vice president-finance from vice presi-
dent-finance; Arthur F. Gardner to senior vice
president-operations from line captain; Gerald
P. O'Grady to senior vice president-legal and
secretary from vice president-corporate affairs
and secretary; Philip E. Peirce to senior vice
president- marketing from senior vice presi-
dent-service; Richard 0. Hammond to vice
president and treasurer from treasurer and
assistant secretary; Roderick G. Leith to vice
president and controller from assistant treas-
urer and controller; and Robert Leinster from
assistant vice president-service (staff) to vice
president. In January 1973, Robert 0. Kinsey,
formerly vice president and assistant to the
president, was named vice president-corpo-
rate planning.
Regulatory Matters
Merger Case-On July 28, 1972, the Civil
Aeronautics Board denied the application of
Western and American Airlines for approval of
a merger that had been proposed in an agree-
ment reached in late 1970. The CAB indicated
that the application was denied principally
because approval of the merger would have
given American routes to Hawaii from the
western states which would have been incon-
sistent with the CAB's 1969 decision on Trans-
pacific route patterns.
Alaska Service Case Appeal- In December
1971, the CAB suspended effective February
7, 1972, the company's authority to serve
Ketchikan and Juneau for a period of seven
years. Western appealed the decision to the
U.S. Court of Appeals for the District of Colum-
bia Circuit seeking a reversal of the CAB deci-
sion on the grounds that the agency exceeded
its statutory authority and set a dangerous
precedent when it took away from one carrier
a profitable, permanently certificated route not
for the purpose of correcting any deficiencies
in service but for the purpose of providing
financial assistance to another carrier. Argu -
ments before the court were completed on
June 16, 1972, but at the time this report was
written no decision had been announced.
The Miami-Los Angeles Competitive Non-
stop Case-Western is an applicant, along with
eight other carriers, for competitive authority
on the Miami-Los Angeles nonstop route
which is now served exclusively by National
Airlines. Hearings in the case were completed
on February 12, 1973. A final decision is not
expected until late in 1973 or early 197 4.
Reopened San Diego Service Case - In
1970, Western was awarded authority to pro-
vide the first nonstop service between San
Diego and Denver and inaugurated the service
in June of that year. In April 1971, the CAB
ordered further hearings to receive additional
evidence on the question of authorizing com-
petition over the route. On December 12, 1972,
the CAB decided to permit Western to continue
to operate the route on an exclusive basis.
Certain parties have requested the CAB to
reconsider and reverse its December action
and to authorize a competing carrier over the
route. Such requests remain pending at the
time of the writing of this report.
Las Vegas/ Reno-Portland I Seattle Nonstop
Service Investigation-Western is an applicant
for the nonstop service between Las Vegas
and Portland/Seattle, between Reno and
Portland/Seattle and between Las Vegas and
Reno. The administrative law judge's initial
decision issued in January 1971, concluded
that Western should be authorized to operate
between Las Vegas and Portland/Seattle, that
another carrier should be authorized to oper-
ate between Reno and Portland/Seattle and
that Western's request for authority to operate
between Las Vegas and Reno should be
denied. Upon review, the CAB remanded the
case to the administrative law judge for further
proceedings. Hearings were completed on
February 15, 1973. A final decision is not
expected until late 1973 or early 1974.
\\Eternal vigilance is the price of liberiy"
- John Philpot Curran
Strict security measures, including checkpoints similar to this
one at Los Angeles International Airport, are in effect at all
Western facilities and airports served by the company.
21
Ten Years of Growth
Financial 1972/1971 1972 1971 1970 19694 1968 1967 19664 1965 1964 1963
Revenues:7
Passenger + 15.9% $ 342,851 295,807 274,792 220,530 205,753 178,527 164,186 129,704 121,928 103,183
Express, freight and excess baggage . + 4.9 15,819 15,075 13,993 11,969 9,331 7,581 6,848 5,991 5,897 5,055
Mail 3.0 5,000 5,156 4,752 4,503 4,128 4,221 4,255 3,135 2,962 2,603
Other . 24.9 7,174 9,557 7,272 3,350 2,741 2,153 1,895 1,768 2,095 3,472
Provisions for mutual aid payments (5,181) (2,700)
Total Revenues . + 12.3 365,663 325,595 298,109 240,352 221,953 192,482 177,184 140,598 132,882 114,313
Operating Expenses:7
Depreciation and amortization . + 3.1 36,224 35,144 36,583 34,821 25,051 20,085 15,779 14,676 12,980 12,373
Payroll + 13.5 126,618 11.1 ,584 100,629 87,495 71 ,885 57,975 47,350 38,73 1 34,500 30,114
Other . + 10.2 179,214 162,561 149,086 130,437 105,335 89,082 77,708 62,391 57,650 50,969
Total Operating Expenses + 10.6 342,056 309,289 286,298 252,753 202,271 167,142 140,837 115,798 105,130 93,456
Operating Income (Loss) 7 + 44.8 23,607 16,306 11,811 (12,401) 19,682 25,340 36,347 24,800 27,752 20,857
Interest expense, net of amounts capitalized7
. 21.3 (8,787) (11,162) (14,586) 0 4,748) (6,536) (3,011) (3,239) (2,553) (2,491) (2,916)
Other Income and Expenses- Net7 19.6 2,696 3,353 1,120 (125) 15 17 775 253 783 621
Earnings (loss) before extraordinary gains and
taxes on income5

7
+106.1 17,516 8,497 (1,655) (27,274) 13,161 22,346 33,883 22,500 26,044 18,562
Taxes on Income (Tax Credits)7 +142.3 6,300 2,600 (2,250) (15,075) 4,725 10,125 15,558 10,337 12,493 9,252
Earnings (loss) before extraordinary gains5

7 + 90.2 11,216 5,897 595 (12,199) 8,436 12,221 18,325 12,163 13,551 9,310
Extraordinary gains (less applicable income taxes) 5

7 560 883 191
Net Earnings (Loss) 7
+ 73.7 $ 11,216 6,457 595 (12,199) 8,436 12,221 18,325 13,046 13,551 9,501
Primary earnings (loss) per share before
extraordinary items2

5
.
$ 0.81 0.42 0.04 (0.88) 0.61 0.89 1.34 0.89 0.99 0.68
Primary net earnings per share2 $ 0.81 0.46 0.04 (0.88) 0.61 0.89 1.34 0.95 0.99 0.70
Fully diluted earnings (loss) per share before
extraordinary items5 $ 0.74 0.41 0.04
(0.88) 0.58
Fully diluted net earnings (loss) per share . $ 0.74 0.45 0.04
(0.88) 0.58
Return on investment % 6 6.35 5.93 5.22
0.71 6.54 10.28 16.28 15.37 18.72 14.49
Cash dividends paid per share3 $ 0.09
0.18 0.35 0.35 0.35 0.28 0.23 0.13
Stock dividends paid per share (3% in April 1973) . 10%
Shares outstanding - actual 7 +150.6 13,521 5,395 4,904
4,904 4,902 4,893 4,835 4,826 4,826 1,609
-adjusted 7 + 0.2 13,926 13,894 13,890
13,890 13,884 13,860 13,696 13,670 13,670 13,670
Shareholders' equity-total 1 + 12.0 $ 96,723 86,397 79,905
79,310 93,862 90,016 81,750 67,361 57,748 46,988
Shareholders' equity-a share 6.95 6.22 5.75
5.71 6.76 6.50 5.97 4.93 4.22 3.44
Working capital7 61.3 20,592 53,207 35,238
20,447 25,764 19,585 18,047 11,522 8,274 5,031
Long-term debt7 14.2 130,487 152,040 174,184
197,150 183,718 80,189 54,867 47,411 33,938 41,106
Property and equipment-net7 + 10.3 239,029 216,738 247,426
285,757 284,787 183,106 145,771 124,096 99,928 93,284
Total assets 7 + 0.6 342,531 340,352 355,168
367,588 349,039 231 ,342 192,008 157,973 138,335 125,806
Operations
Airplanes operated at end of year:
Boeing 720-B 25 25 26 26 27 27 22 18 12 10
Boeing 707-300C 5 5 5 5 5
Boeing 737 30 30 30 30 17
Boeing 727-200-owned 5
Boeing 727-200- leased 6 6 6 6
Other . 4 5 11 15 24 26 26 35 35
Airplane miles flown7
. + 5.2 90,925 86,425 86,298 72,650 60,125 51,692 42,830 36,554 36,746 33,388
Available ton miles7
+ 5.0 1,328,871 1,266,130 1,266,124 1,077,657 891,001 728,200 585,378 483,033 450,856 400,395
Revenue ton miles4

7
. + 12.9 675,825 598,448 584,554 448,420 418,856 360,791 314,137 244,588 231,303 191,229
Available seat miles7
+ 5.4 10,300,178 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
Revenue passenger miles 7 + 14.2 5,995,925 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
Express, freight and mail revenue ton miles7 + 4.1 76,233 73,249 68,646 60,514 47,446 38,940 33,070 26,435 24,625 20,622
Passengers carried+ . + 11 .7 6,930,874 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
Express, freight and mail tons carried 2.7 75,649 77,731 73,140 66,107 58,129 48,579 42,714 33,511 30,956 25,890
Passenger load factor- actual + 4.5 pts % 58.2 53.7 52.4 47.3 54.1 56.6 60.4 55.9 56.0 52.5
-breakeven point + 2.2 pts % 54.4 52.2 52.7 53.1 50.7 49.5 47.9 46.2 44.4 44.3
Average length in miles per passenger trip . + 2.2% 865 846 834 699 675 651 616 589 572 590
Operating expenses per available seat mile + 5.1 $ .0332 .0316 .0291 .0297 .0285 .0284 .0293 .0288 .0277 .0280
Average revenue per revenue passenger mile. + 0.2 $ .0578 .0577 .0542 .0551 .0537 .0537 .0567 .0578 .0574 .0589
Employees at end of year + 7.0 9,676 9,039 8,830 9,225 8,919 7,282 6,294 5,068 4,719 4,126
1 All financial data in this report give effect, retroactively throughout the March 5, 1971 , the May 1964 three-for-one split, and the equivalent operat i ons of a competing trunk carrier were substantially suspended from 5 Extraordinary gains are from the involuntary conversion of and major
periods prior to 1968, to the merger of Pacific Northern Airlines into outstanding shares of Pacific Northern Airl ines, Inc., merged into the June 30, 1972, to October 2, 1972. Operations of a competing regional sales of aircraft.
Western on July 1, 1967, which was accounted for as a pooling of interests. Company on July 1, 1967. carrier were substantially suspended from December 15, 1971 to April 10, bThe methodology used to compute the rate of return is essentially
2 Based on the weighted average number of shares of the Company 3 Cash dividends per share for periods prior to January 1, 1967, are stated 1972. Operations of a competing trunk carrier were substantially that used by the CAB.
outstanding during the respective periods, adjusted to give retroactive on the basis of the Company's shares (exclusive of equ ival ent Pacific suspended from July 8 to December 14, 1970. Western's operations were 7 OOOs omitted .
effect to the 3% stock dividend declared January 22, 1973, the 2-for-1 Northern shares) outstanding at the date such dividend s were declared as suspended from July 29 to August 16, 1969, because of a strike.
22 stock split effected September 13, 1972, the 10% stock dividend paid adjusted for the stock dividends and the stock spl its. Five other major carriers were struck from July 8 to August 19, 1966.
23
Balance Sheet
Western Air Lines, Inc.
December 31, 1972 and 1971
(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 1972 and $475 in 1971)
Flight equipment expendable parts, at average cost less allowance
for obsolescence of $5,371 in 19n and $4,281 in 1971 (Note 1)
Prepaid expenses .
Total current assets .
Properties and Equipment at Cost:
Flight equipment .
Ground equipment
Deposits on aircraft purchase contracts (Notes 1 and 4)
Less allowance for depreciation and amortization (including
reserves for overhauls of flight equipment of $18,164 in 1972
and $20,237 in 1971) (Notes 1 and 9)
Deferred Charges and Other Assets:
Flight equipment for sale
Other items .
See accompanying Notes to Financial Statements.
24
1972 1971 Change
$ 10,506 $ 13,446 21.9%
19,502 30,056 35.1
25,374 37,522 32.4
55,382 81,024 31.6
28,760 22,943 + 25.4
10,456 9,733 + 7.4
4,332 5,422 20.1
98,930 119,122 17.0
363,957 345,539 + 5.3
63,604 60,925 + 4.4
24,772 7,148 +246.6
452,333 413,612 + 9.4
213,304 196,874 + 8.3
239,029 216,738 + 10.3
2,952 2,214 + 33.3
1,620 2,278 28.9
4,572 4,492 + 1.8
$342,531 $340,352 + 0.6
LIABILITIES AND SHAREHOLDERS' EQUITY 1972 1971 Change
Current Liabilities:
Accounts payable. $ 20,726 $ 16,606 + 24.8%
Accrued salaries, wages and vacation benefits 15,550 13,374 + 16.3
Accrued liabilities. 7,459 6,893 + 8.2
Accrued income taxes 6,297 2,298 +174.0
Advance ticket sales . 6,843 5,281 + 29.6
Current maturities of long-term debt (Note 3) 21,463 21,463
Total current liabilities . 78,338 65,915 + 18.8
Long-Term Debt (Note 3) . 130,487 152,040 14.2
Deferred Credits (Notes 1 and 2):
Deferred federal taxes on income 19,033 19,433 2.1
Unamortized investment tax credits 12,596 12,271 + 2.6
Reserves for overhauls of leased flight equipment 1,707 1,632 + 4.6
Other . 3,647 2,664 + 36.9
36,983 36,000 + 2.7
Shareholders' Equity (Notes 3, 6 and 8):
Common stock-$1.00 par value per share
Authorized 25,000,000 shares
Issued 13,521,000 and 5,395,000 shares 13,521 5,395 +150.6
Capital in excess of par value . 21,951 29,750 - 26.2
Retained earnings 61,251 51,252 + 19.5
96,723 86,397 + 12.0
Commitments and Contingent Liabilities (Note 4).
$342,531 $340,352 + 0.6
25
Statement of Earnings
For the years ended December 31, 1972 and 1971
(in thou sands of dollars)
Operating Revenues:
Passenger
Express, freight and excess baggage
Mail
Other .
Provisions for mutual aid payments (Note 7)
Operating Expenses:
Flying operations .
Maintenance
Passenger service
Aircraft and traffic servicing
Marketing and administrative
Depreciation and amortization (Notes 1 and 9)
Operating income
Other Income (Expense):
Interest expense
Interest capitalized (Note 1)
Interest income
Other- net .
Earnings before taxes on income and extraordinary gain
Taxes on income (Notes 1 and 2)
Earnings before extraordinary gain
Extraordinary gain net of income taxes (Note 2)
Net earnings
Per share data (Note 10):
Primary:
Earnings before extraordinary gain
Net earnings.
Fully diluted (assuming conversion of the debentures) :
Earnings before extraordinary gain
Net earnings .
* Includes write -down of Boeing 720 nonfan aircraft amounting to $1,000
($500, or $0.04 a share, after taxes) .
* *The extraordinary gain resulted from the involuntary conversion of an aircraft.
See accompanying Notes to Financial Statements.
26
1972
$342,851
15,819
5,000
7,174
(5,181)
365,663
91,213
37,1 02
40,964
69,390
67,163
36,224*
342,056
23,607
(10,240)
1,453
2,832
(136)
17,516
6,300
11 ,216
$ 11 ,216
$ 0.81
0.81
0.74
0.74
1971 Change
$295,807 + 15.9%
15,075 + 4.9
5,156 3.0
9,557 24.9
325,595 + 12.3
82,958 + 10.0
39,422 5.9
34,652 + 18.2
58,173 + 19.3
58,940 + 14.0
35,144 + 3.1
309,289 + 10.6
16,306 + 44.8
(11,278) 9.2
116
3,190 11 .2
163
8,497 + 106.1
2,600 + 142.3
5,897 + 90.2
560 **
$ 6,457 + 73.7
$ 0.42
0.46
0.41
0.45
Statement of Changes in Financial Position
For the years ended December 31, 1972 and 1971
(in thousands of dollars)
Sources of Working Capital:
Earnings before extraordinary gain
Add back charges (credits) which did not affect working capital:
Depreciation, amortization and provision for overhauls (Notes 1 and 9)
Taxes (Notes 1 and 2):
Deferred income taxes
Investment credits applied and deferred to future periods
Amortization of investment credits .
Other .
Total from operations before extraordinary gain .
Extraordinary gain, after deducting credits of $1 ,960
which did not affect working capital .
Total from operations
Proceeds from disposition of property:
Involuntary conversion of an aircraft .
Other .
Exercise of stock options .
Other
Total sources of working capital .
Applications of Working Capital:
Cash dividends .
Purchases of property and equipment, net of deposits previously made
Deposits on aircraft purchase contracts (Notes 1 and 4) .
Payments of long-term debt and transfers to current liabilities
Total applications of working capital .
Increase (Decrease) in Working Capital
Summary of Changes in Working Capital:
Increases (decreases) in current assets:
Cash, certificates of deposit, and short-term securities .
Inventories, receivables, and prepaid expenses .
Decreases (increases) in current liabilities
Increase (decrease) in working capital .
*The net proceeds from the involuntary conversion of an aircraft were
$3,500 after current income taxes of $1,400.
See accompanying Notes to Financial Statements.
$
1972
11,216
35,254
(3,275)
5,500
(2,300)
811
47,206
47,206
1,689
236
130
49,261
1,217
36,403
22,793
21,463
81,876
$ (32,615)
$ (25,642)
5,450
(12,423)
$ (32,615)
1971
$ 5,897
38,607
2,600
1,200
(2,325)
438
46,417
(1 ,400)*
45,01 7
4,900*
526
35
183
50,661
3,400
7,148
22,144
32,692
$17,969
$16,423
684
862
$17,969
27
Statement of Shareholders' Equity
For the years ended December 31, 1972 and 1971
(in thousands of dollars)
Balance at December 31, 1970
Exercise of stock options
10% stock dividend
Net earnings
Balance at December 31, 1971
Exercise of stock options
Conversion of debentures
2 for 1 stock split (Note 8)
Net earnings
Cash dividends ($0.09 per share) .
Balance at December 31, 1972 (Notes 3 and 8)
See accompanying Notes to Financial Statements.
Common
Stock
$1.00
Par Value
$ 4,904
1
490
5,395
16
3
8,107
$13,521
Capital in
Excess of Retained Shareholders'
Par Value Earnings Equit
$19,235 $55,766 $79,905
34 35
10,481 (10,971)
6,457 6,457
29,750 51,252 86,397
220 236
88 91
(8,107)
11,216 11,216
(1,217) (1,217)
$21,951 $61,251 $96,723
Notes to Financial Statements
Note 1. Summary of Significant Accounting Policies.
a. Depreciation Method: Depreciation is provided by
allocating costs of property and equipment, exclusive of
estimated residual values, over estimated useful lives by
using the straight-line method. See Note 9 for estimated
useful lives.
b. Preoperating Costs: When new types of aircraft are
introduced, major costs, principally related to training,
necessary to put new aircraft into service are deferred and
amortized during the estimated periods to be benefited.
c. Reserves for Aircraft Overhauls: The estimated future
costs of airframe and engine overhauls are provided for by
charges to maintenance expense based on hours flown.
d. Interest Capitalized: Interest related to deposits on
aircraft purchase contracts with manufacturers is capital-
ized and amortized over the useful lives of the equipment.
e. Investment Tax Credits: Investment tax credits gener-
ated by acquisitions of assets to the extent used to reduce
current and/or deferred taxes are amortized to income
over the useful lives of the related assets.
f. Obsolescence of Expendable Parts: An allowance for
obsolescence of flight equipment expendable parts is
accrued over the useful lives of the related aircraft types.
Note 2. Taxes on Income: The 1972 and 1971 income
taxes are summarized as follows (in thousands) :
Exclusive of taxes related to
extraordinary gain:
28
Current income taxes-
Federal
State
Deferred income taxes (credit)
Investment credits applied and
deferred to future periods
Amortization of deferred
investment credits .
1972 1971
$5,300 $ 150
1,075 975
(3,275) 2,600
5,500 1,200
(2,300) (2,325)
6,300 2,600
Related to extraordinary gain:
Current income taxes .
Deferred income taxes (credit)
1972 1971
1,400
(850)
550
$6,300 $3,150
Deferred income taxes arise from timing differences
between financial and tax reporting. These differences are
caused primarily by depreciation practices.
Investment credits unapplied on tax returns amounted to
$14,434,000 at December 31, 1972 ($17,308,000 - 1971)
with $8,205,000 expiring in 1978 and $6,229,000 expiring
in 1979.
Of the $12,596,000 unamortized investment credit balance
at December 31, 1972 ($12,271,000 - 1971 ), $3,000,000
($1,340,000-1971) remains from investment credits uti-
I ized by reduction of taxes paid and $9,596,000
($10,931,000-1971) is related to investment credits not
yet utilized for reduction of taxes paid.
The federal income tax returns for 1968, 1969 and 1970
are being examined by the Internal Revenue Service.
Note 3. Long-term Debt (Unsecured): At December 31,
1972, and December 31, 1971, long-term debt was as
follows (in thousands) :
Senior Debt:
Installment note* due December
31, 1975, with quarterly principal
payments of $4,865. The interest
rate is % over the bank's
1972 1971
prime commercial rate . . . $ 58,388 $ 77,850
5 % installment notes due
September 1, 1981, with
annual principal payments of
$1,000 from September 1,
1972, which will increase to
$4,000 a year starting in 1976 . 27,000 28,000
65/a% installment notes due
September 1, 1984, with
annual principal payments of
$1,000 from September 1,
1972, which will increase to
$2,000 a year starting in 1975
and further increase to $7,000
a year starting in 1982
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
1972 1971
37,000
122,388
21,463
100,925
29,562
38,000
143,850
21,463
122,387
29,653
$130,487 $152,040
*The agreement under which the installment note to a bank
is issued was amended in late 1972 to provide for an addi-
tional $65,000,000 line of credit. The new borrowings will
be on a revolving basis until December 31, 1973, at which
time the amount borrowed may be converted by Western
into a term loan due June 30, 1979, and payable in sub-
stantially equal quarterly installments commencing March
31, 1976. The interest rate will be % over the bank's
prime rate until the end of 1973 when it will become %
over the bank's prime rate prevailing during the remaining
term of the loan.
The following schedule shows the amount of long-term
debt maturing in each of the five following calendar years
(assuming that $65,000,000 of funds available under the
line of credit will be drawn down and converted into a
long-term loan):
1973
1974
1975
1976
1977
$21,463,000
21,463,000
22,463,000
25,460,000
25,460,000
The financial agreements related to the senior debt pro-
vide, among other things (including restrictions on addi-
tional borrowings) , conditions and requirements which
operate to restrict retained earnings from which cash divi-
dend distributions can be made. In addition, the Indenture
for the debentures provides, among other things, a require-
ment restricting retained earnings from which cash divi-
dend distributions can be made. Under the most restrictive
requirements of these agreements, retained earnings not
restricted from cash dividends were $10,387,000 at
December 31, 1972 ($1 ,363,000-1971).
At December 31 , 1972, 2,213,000 shares of common stock
were reserved for conversion of debentures (2,279,000
shares at a conversion price of $12.97 a share after giving
effect to the three percent stock dividend declared on
January 22, 1973).
Note 4. 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 $4,000,000 at December
31, 1972 ($3,200,000- 1971). Annual rentals through 1984
under a lease agreement covering six Boeing 727 aircraft
aggregate $4,130,000.
At December 31 , 1972, Western had on order four
McDonnell Douglas DC-10 aircraft for delivery in April ,
June (two) and July 1973. The cost, including spare parts
and five spare engines, is estimated to be $90,000,000
of which $22,793,000 has been paid in advance deposits.
At December 31 , 1972, 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 air-
lines, is of the opinion that the airlines have substantial
defenses to the imposition of any liability. In three such
actions against the City of Los Angeles, judgments (one of
which is being appealed) have been entered against the
City for damages aggregating $1 ,184,000 to approximately
578 property owners on the theory of inverse condemna-
tion. In another action wherein the plaintiff was awarded
judgment against the City for $14,000, the court decided
in favor of the airline cross-defendants on the issue of
indemnification and the City has appealed such ruling .
Western is a defendant along with other domestic airlines
in numerous actions seeking repayment and damages
involving the collection of allegedly illegal fares. In the
opinions of Western and of the counsel representing the
carriers, the carriers involved are not liable for the repay-
ment of any or all of the fares in question. Western and
other domestic airlines are also defendants in various
purported class actions including actions seeking refunds
of alleged overcharges in construction of joint fares over
interline routings. In the opinion of management, such
action will not result in a material adverse effect upon
Western 's financial statements.
Note 5. Retirement Plans: Retirement plans cover all
classes of employees except mechanics and related
employees who are covered by a union sponsored plan
toward which the company makes monthly contributions.
Costs of company sponsored plans are funded annually
as benefits accrue. Actuarial gains and losses and costs
of changes in benefits are amortized over ten-year periods.
The costs of all plans charged to operating expenses
totaled $9,622,000 in 1972 and $6,504,000 in 1971. The
increase in 1972 costs over 1971 costs was caused pri-
marily by an increased number of pilots becoming eligible
for coverage. The company's actuaries are of the opinion
that the assets under each company administered plan ex-
ceed the related liabilities for the accrued vested benefits.
Note 6. Stock Options: The qualified stock option plan
for officers is summarized as follows (adjusted for stock
splits and stock dividends) :
1972 1971
Average Average
per per
Shares share Shares share
Granted . 17,382 $15.20 16,738 $12.20
Exercised 25,542 9.25 3,811 9.17
Exercisable at
end of year . 182,775 9.64 125,300 9.42
Outstanding at
end of year . 311 ,248 9.90 319,408 9.56
An additional 186,809 shares were reserved at December
31 , 1972, for the issuance of additional options.
Note 7. Mutual Aid Agreement: Western is a party to the
Mutual Aid Agreement which provides for mutual financial
aid in the event that any of the participating carriers is
forced to suspend operations because of certain types of
strikes. Operations of a competing trunk carrier were sub-
stantially suspended from June 30 to October 2, 1972, and
operations of a competing local service carrier were sub-
29
stantially suspended from December 15, 1971, to April 10,
1972. Both of these carriers were parties to this agreement.
Note 8. Stock Split and Stock Dividend: An increase in
authorized capital stock from 10,000,000 to 25,000,000
shares and a two and one-half for one stock split were
effected September 13, 1972. The stock split, requiring
issuance of 8,107,000 additional shares, was recorded by
a transfer of $8,107,000 from capital in excess of par value
to common stock.
On January 22, 1973, a three percent stock dividend,
requiring issuance of 405,000 additional shares was
declared payable on April 10, 1973, to shareholders of
record on February 20, 1973. The dividend will be recorded
in 1973 by a transfer from retained earnings of $405,000 to
common stock and of $4,513,000 to capital in excess of
par value.
Note 9. Depreciation and Amortization: The estimated
useful lives over which costs of operating property and
equipment are amortized are as follows: for the five Boeing
707-300C aircraft acquired in 1968, the thirty Boeing 737-
200 aircraft acquired in 1968 and 1969, and the five Boeing
Accountants' Report
727 aircraft acquired in 1972, 12 years to a residual value
of 15%; for the seventeen Boeing 720B aircraft acquired
during 1961 to 1965, 1 Oto 15 years with a common retire-
ment of December 31, 1975 and a residual value of
$100,000 per aircraft; and for the eight Boeing 720B aircraft
acquired in 1966 and 1967, 10 years to a residual value of
$100,000 per aircraft. For ground equipment the- useful
lives range from four to ten years. For buildings and im-
provements on leased property the estimated useful lives
are generally the period of the leases.
Note 10. Earnings per Share: Earnings per common
share are based on the weighted average number of
shares of common stock outstanding during the respective
periods, adjusted when appropriate to give retroactive
effect to stock splits and stock dividends including the 3%
stock dividend declared on January 22, 1973. Earnings per
common share assuming dilution from conversion of the
debentures are calculated as if the debentures were con -
verted at the beginning of the period with related adjust-
ments to interest and income tax expense. Outstanding
stock options have no material dilutive effect on earnings
per common share.
PEAT, MARWICK, MITCHELL & Co.
30
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, 1972
and 1971 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 posi-
tion of Western Air Lines, Inc. at December 31, 1972 and 1971, and the results of its
operations and changes in its financial position and shareholders' equity for the respec-
tive years then ended in conformity with generally accepted accounting principles
applied on a consistent basis.
Los Angeles, California
February 16, 1973
Board of Directors
James D. Aljian
General Manager, Tracinda Investment Company, Beverly Hills, California
Fred Benninger
Chairman of the Board, Western Air Lines, Inc., Los Angeles, California
Chairman of the Board, Metro-Goldwyn-Mayer, Inc., Culver City, California
Chairman of the Board , MGM Grand Hotel, Inc., Las Vegas, Nevada
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, Garibald i & Lane, Los Angeles, California
Cary Grant
Actor-Producer, Beverly Hills, California
Director and Executive, Faberge, Inc., New York, New York
Walter J. Hickel
Chairman of the Board , Hickel Investment Company, Anchorage, Alaska
Arthur F. Kelly
President, Western Air Lines, Inc., Los Angeles, California
Peter M. Kennedy
Chairman, Dominick & Domin ick, New York, New York
Kirk Kerkorian
Sole Proprietor, Tracinda Investment Company, Beverly Hills, California
Arthur G. Linkletter
Radio and Television Performer
Chairman of the Board , Linkletter Productions, Beverly Hills, California
Dominic P. Renda
Executive Vice President, Western Air Lines, Inc., Los Angeles, California
Walter M. Sharp
President, Community Bank, Huntington Park, California
Stanley R. Shatto
Vice Chairman of the Board , Western Ai r Lines, Inc., Los Angeles, California
William Singleton
Vice Presfdent-Corporate Development, Metro-Goldwyn-Mayer, Inc., Culver City, California
J. Judson Taylor
Vice Chairman of the Board , Western Air Lines, Inc., Los Angeles, California
Vernon 0. Underwood
President, Young 's Market Company, Inc., Los Angeles, California
Harry J. Volk
Chairman, Unionamerica, Inc., Los Angeles, California
Chairman, Union Bank, Los Angeles, California
Arthur G. Woodley
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
Edwin W. Pauley
Chairman of the Board, Pauley Petroleum, Inc., Los Angeles, California
John M. Wallace
Walker Bank & Trust Company, Salt Lake City, Utah
Sidney F. Woodbury
President, Pine Street Company, Portland, Oregon
In Memoriam
Alexander Warden, a director
from 1950 until his retirement in
1968 and a director-emeritus
since that time, passed away on
March 7, 1973. His contributions
to the development of the com-
pany are deeply appreciated by
his friends and associates at
Western.
31
Corporate Officers
Fred Benninger, Chairman of the Board
Arthur F. Kelly, President and Chief Executive Officer
J. Judson Taylor, Vice Chairman of the Board
Stanley R. Shatto, Vice Chairman of the Board
Dominic P. Renda, Executive Vice President
Charles J. J. Cox, Senior Vice President-Finance
Arthur F. Gardner, Senior Vice President-Operations
Philip E. Peirce, Senior Vice President-Marketing
Administration Division
Dominic P. Renda, Executive Vice President
Gerald P. O'Grady, Senior Vice President-Legal and Secretary
Robert 0. Kinsey, Vice President-Corporate Planning
Lawrence H. Lee, Vice President- Industrial Relations
Ray Silvius, Vice President-Public Relations
Jack M. Slichter, Vice President-Government and Industry Affairs
Henry M. deButts, Vice President-Washington, D.C.
Ernest T. Kaufmann, Vice President-Regulatory Affairs
Charles S. Fisher, Assistant Vice President- Product Planning
H. S. Gray, Assistant Treasurer-Financial Planning
Thomas J. Greene, Assistant Secretary
Neil S. Stewart, Assistant Vice President-Government Affairs
Dan A. Zaich, Assistant Vice President-Labor Relations
Finance Division
Charles J. J. Cox, Senior Vice President-Finance
Richard 0. Hammond, Vice President and Treasurer
Roderick G. Leith, Vice President and Controller
Jack P. Maginnis, Vice President-Procurement
Eugene D. Olson, Vice President-Data Processing and Systems
Marketing Division
Philip E. Peirce, Senior Vice President-Marketing
Willis R. Balfour, Vice President-Marketing, Passenger Sales
Robert Leinster, Vice President-Marketing, Passenger Services
Bert D. Lynn, Vice President-Marketing, Advertising and Sales Promotion
J. S. Neel, Vice President-Marketing, Pacific Rim Division
Harry L. White, Vice President-Marketing, Central-Hawaii Division
Luis Pasquel, Vice President-Sales and Service, Mexico
David E. Holt, Assistant Vice President- Marketing for Travel Agency and Vacation Sales
S. J. Rogers, Assistant Vice President-Marketing, Pricing/Budget
Operations Division
Arthur F. Gardner, Senior Vice President-Operations
Richard B. Ault, Vice President-Engineering
Harold W. Caward, Vice President-Flight Operations
Anton B. Favero, Vice President-Maintenance
Peter P. Wolf, Vice President-Communications
Joseph M. Fogarty, Assistant Vice President-Maintenance
32
Western Airlines
Route System
HONOLULU
HILO
KODIAK
ANCHORAGE
JUNEAU
KETCHIKAN
VANCOUVER
CALGARY
SEATTLE/TACOMA
GREAT FALLS
HELENA
BUTTE BILLINGS MINNEAPOLIS
PORTLAND ST. PAUL
W. YELLOWSTONE SHERIDAN
IDAHO FALLS
PIERRE
POCATELLO RAPID CITY SIOUX FALLS
CASPER
SACRAMENTO CHEYENNE
SAN FRANCISCO
OAKLAND
SAN JOSE
RENO SALT LAKE
CITY
DENVER
LOS ANGELES
LONG BEACH
ONTARIO
SAN DIEGO
LAS VEGAS
PALM SPRINGS
PHOENIX
Service Temporarily Suspended by Order of Civil Aeronautics Board
MEXICO CITY
ACAPULCO
General Offices
Western Air Lines Building, 6060 Avian 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 Pacific National Bank*
124 West Fourth Street, Los Angeles, California 90014
Chemical Bank*
20 Pine Street, New York, New York 10015
Debenture Trustee
The Ohase Manhattan Bank
1 Chase Manhattan Plaza, New York, New York 10015
Stock Listing
Listed and traded on
New York Stock Exchange
Pacific Coast Stock Exchange
Debenture Listing
Listed and traded on
New.York 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
* -As of May 1, 1973, Bank of America National Trust &
Savings Association will replace Security Pacific
National Bank as Los Angeles Transfer Agent and
Chemical Bank will replace the Chase Manhattan Bank
as New York Registrar. Thereafter, Bank of America
National Trust & Savings Association will function as Los
Angeles Registrar-Transfer Agent and Chemical Bank
will function as New York Registrar-Transfer Agent.