Western Airlines Annual Report 1974

Western's Route System
VANCOUVER
I EAT FALLS
SEATTLE
TACOMA
PORTLANI
PIERRE
SACRAMI
DALLAS/ \
FORT WORTH
HONOLULU
HILO
sjEDMONTON
M CALGARY
.
MINNEAPOLIS
ST. PAUL
KODIAK
JUNEAU*
KETCHIKAN
HOUSTON
'Service Temporarily Suspended by Order Civil Aeronautics Board.
ANCHORAGE
0 MEXICO CITY
ACAPULCO
.Western/Continental Airlines "No-Change-of-Plane" Service.
Western Air Lines, Inc., 1974 Annual Report
President's Letter
Five Years of Western Progress
Management's Discussion of Financial Results
Review of Corporate Activities
Accountants' Report
Balance Sheets
Statements of Earnings
Statements of Changes in Financial Position
Statements of Shareholders' Equity
Notes to Financial Statements
Board of Directors
Corporate Officers
2
4
6
9
17
18
20
21
22
22
28
29
President's Letter
To Our Shareholders:
Although 1974 was a difficult year for the airline
industry, Western Air Lines' earnings totaled
$24,098,000, the highest in company history.
These results, which included an after-tax gain
of $5,148,000 from the sale of aircraft, were
achieved in the face of three major problems
that have affected the entire U.S. economy--the
energy crisis, inflation and recession.
In the first quarter, passenger travel exceeded
our expectations. We believe a major factor in
this was the shortage of automobile gasoline
which diverted many travelers from the highways
to scheduled air carriers. Western's revenue
passenger miles for the quarter increased 10.5
percent over the previous year. Our passenger
load factor gained 8.8 points, from 56.3 percent
in 1973 to 65.1 percent in 1974. This increase in
traffic, coupled with a 7.6 percent increase in
revenue per passenger mile resulting from fare
increases, enabled us to report a 20.6 percent
increase in revenues for the quarter. Although
operating expenses increased 15.3 percent, the
company increased its first quarter earnings
from $2,830,000 in 1973 to $7,712,000 in 1974.
The second quarter also was an excellent one,
producing an earnings increase of 16.7 percent.
However, in reporting record earnings for the
first six months, we also indicated to you that
the second half of the year would be a more dif
ficult period for continued earnings growth
because of inflation, rapidly rising fuel costs and
a softening of traffic growth.
Third quarter earnings were $10.6 million, an
increase of 5.5 percent over the previous year.
However, for the first time since the fourth quar
ter of 1972, operating expenses went up at a
more rapid rate than operating revenues.
When this trend became apparent, we imme
diately prepared for a fourth quarter which we
believed would produce little or no passenger
traffic growth. Plans were implemented to fur
ther cut back schedules, adjust personnel
commensurate with the projected traffic decline,
curtail or defer capital expenditures and reduce
other controllable costs in order to assure maxi
mum reduction in the level of expenses.
However, traffic in the last quarter was even
softer than expected, causing earnings for the
fourth quarter to decline from $3 million in 1973
to $561,000 in 1974.
Although the supply of jet fuel that had proved
so troublesome in the early part of the year im
proved and stabilized at an acceptable level
during the second quarter, price increases
continue to be one of the most serious threats
faced by our industry. In 1974, Western's jet fuel
costs went up 60.5 percent despite the fact that,
as a result of the company's conservation efforts,
we used seven percent fewer gallons than in
1973. At our current rate of consumption--
approximately 300 million gallons a year--each
one-cent per gallon increase pushes up the
company's fuel costs by approximately $3 mil
lion a year. The per-gallon cost of jet fuel
increased 9.8 cents during 1974. Because of
the uncertainties in the nation's fuel program,
we are unable at this time to predict what addi
tional increases will be forthcoming.
The two other major problems that Western
shares with the entire airline industry are infla
tion and the recession. Some of the programs
Western has undertaken to hold down costs,
increase revenues and improve productivity are
detailed in this report.
We believe we are lean and aggressive in the
marketplace, and I am confident that our prod
uct is the best we have ever produced. Charac
teristic of this excellence is the fact that in 1974
Western led the industry in on-time performance
for an unprecedented third consecutive year.
2
Western also moved into the No. 2 position
in the highly competitive Hawaii market reflect
ing continued emphasis on the creative market
ing of leisure travel.
The company's route to Anchorage provides
a major transportation link in the development
of Alaska's North Slope oil fields, with a strong
upward trend in passenger and cargo volume
becoming apparent on this route during 1974.
The company continues to be financially
sound, well-equipped and endowed with a good
route system. However, we believe it is abso
lutely essential in order to offset competitive
awards which have been made and to assure
continued development and growth that our
company be awarded new long-haul routes for
which we are seeking Civil Aeronautics Board
approval.
The year 1975 will be a challenging one for
Western; however, we know what our most dif
ficult problems will be, and we believe that we
are properly structured to face them. The degree
to which we will succeed depends on the
nation's economy and the regulatory climate in
our industry. Your continued support will be sin
cerely appreciated. We hope you will fly and
ship on Western whenever possible and urge
your friends and associates to do so.
President and Chief Executive Officer
March 17, 1975
Fred Benninger Arthur F. Kelly Dominic P. Renda
Chairman President Executive Vice President
3
Five Years of Western Progress
Financial
(Expressed in thousands except per share figures)
Operating revenues . . .
Operating expenses . . .
Operating income . . .
Interest expense, net of
amounts capitalized . .
Interest income
Gain on sale of equipment .
Other income and expense,
net
Earnings (loss) before
taxes on income
....
Taxes on income (tax credits)
Net earnings
Net earnings per shared;
Primary
Fully diluted
Average shares outstanding*^:
Primary
Fully diluted
Return on investments
. .
Cash dividends per shares .
Stock dividends
Shareholders' equity per
shares
Change
1974/1973 1974 1973
+ 15.9% $488,397 421,286
+ 18.1 450,037 381,164
-
4.4 38,360 40,122
+ 14.6 (10,334) (9,016)
+ 27.3 4,055 3,186
+913.2 9,575 945
167 49
+ 18.5 41,823 35,286
+ 19.0 17,725 14,900
+ 18.2 $ 24,098 20,386
$ 1.59 1.35
$ 1.41 1.21
15,125 15,050
17,590 17,516
% 9.65 11.08
$ 0.39 0.23
% 8 3
$ 8.75 7.55
1972 1971 1970
373,991 328,047 303,463
350,384 311,741 291,652
23,607 16,306 11,811
(8,787) (11,162) (14,586)
2,832 3,190 2,021
582 1,349 111
(718) (76) (1,012)
17,516 9,607 (1,655)
6,300 3,150 (2,250)
11,216 6.457S 595
0.75 0.43 0.04
0.68 0.41 0.04
15,030 15,012 15,011
17,495 17,481 17,480
6.35 5.93 5.22
0.08 -- --
--
10 --
6.43 5.76 5.32
S Includes $560 or $0.04 per share (primary) from the invol
untary conversion of an aircraft.
S Throughout this Annual Report data have been adjusted
when applicable for stock dividends and for the 21/2 for 1
stock split effected in 1972. See Notes 8 and 10 of Notes
to Financial Statements.
S The methodology used to compute the rate of return ap
proximates the regulatory methodology used by the CAB.
S Throughout this Annual Report data have been reclassi
fied when applicable to conform with the financial state
ment presentation in 1974.
4
Operations
Change
1974/1973 19740)
Passengers carried^ . .
+ 0.1% 7,391
Available seat miles(b>
. .
-
0.5 11,123,544
Revenue passenger
miles<b> + 4.2 6,747,451
Passenger load factor
--actual (%) . . . .
+ 2.8 pts. 60.7
--breakeven (%) . . .
+ 3.6 56.0
--profit margin (%) . .
-
0.8 4.7
Average revenue per
passenger mile ($) . .
+ 10.6% .0660
Average length in miles
per passenger trip . .
+ 4.1 913
Available ton miles'6)
. .
+ 1.5 1,469,537
Revenue ton miles(b>
. .
+ 6.3 769,984
Cargo revenue ton miles(b>. +24.5 95,239
Cargo tons carried . . .
+ 12.6 85,363
Operating expense per
available seat mile ($) .
+ 18.8 .0405
Employees at end of year. -
4.6 9,424
1973(a) 1972(a) 1971 1970(a)
7,382 6,931 6,206 6,188
11,175,518 10,300,178 9,776,869 9,839,299
6,476,087 5,995,925 5,251,989 5,159,081
57.9 58.2 53.7 52.4
52.4 54.4 52.2 52.2
5.5 3.8 1.5 0.2
.0597 .0578 .0577 .0542
877 865 846 834
+447,442 1,328,871 1,266,130 1,266,124
724,083 675,825 598,448 584,554
76,474 76,233 73,249 68,646
75,793 75,649 77,731 73,140
.0341 .0340 .0319 .0296
9,875 9,676 9,039 8,830
(a) Operations of a trunk carrier were suspended from July 14 to
October 30, 1974. Operations of a trunk carrier were sus
pended and operations of a competing intrastate carrier were
partially suspended during the fourth quarter of 1973. Opera
tions of competing carriers were substantially suspended
from June 30 to October 2, 1972, from January 1 to April 10,
1972 and from July 8 to December 14, 1970.
(b) Expressed in thousands.
Management's Discussion of Financial Results
Although net earnings for 1974 were up 18.2
percent, operating income for the year declined
by 4.4 percent as inflation caused expenses to
increase at a more rapid rate than did revenues.
The earnings increase of $3,712,000 over the
previous year was attributable to after-tax gains
of $5,148,000 from the sale of aircraft, compared
to $683,000 from the same source in 1973.
The company's return on investment declined
from 11.1 percent to 9.7 percent. Gains from the
sale of equipment are not treated as income in
this computation. The fair rate of return estab
lished by the CAB for Western and other domes
tic trunklines is 12.0 percent.
Despite a decrease in long-term debt, interest
expense increased in 1974 and 1973 because of
higher interest rates. Interest on Western's bank
debt fluctuates with the bank's prime commer
cial rate.
Interest income from the company's invest
ments in certificates of deposit and short-term
securities likewise increased because of higher
interest rates. The total amounts of these invest
ments declined between 1973 and 1974.
Operating Revenues
(000s omitted)
1974 1973
%
Change
Passengers
Coach
. .
.$409,035 347,770 +17.6
Deluxe
...
28,310 28,952 -
2.2
437,345 376,722 + 16.1
Cargo . . .
27,662 23,040 +20.1
Charter 3,805 3,489 + 9.1
Transport related .. . ..
10,708 10,871 -
1.5
Other 8,877 7,164 +23.9
$488,397 421,286 + 15.9
The 15.9 percent increase in Western's oper
ating revenues during 1974 resulted largely from
a 10.6 percent increase in revenue per passen
ger mile and a 4.2 percent increase in passenger
traffic, as expressed in revenue passenger miles.
The increase in revenue per passenger mile
was attributable to the elimination of a number
of discount fares and the implementation of two
fuel-related fare increases in 1974 (one, a four
percent increase, expires on June 30, 1975, un
less extended).
Ninety-one percent of the increase in operat
ing revenues came from coach travel which tra
ditionally produces most of Western's revenues.
In 1974, revenues from coach passengers repre
sented 93.5 percent of the passenger revenues
and 83.8 percent of total operating revenues.
The increase in cargo revenues resulted from
a 24.5 percent increase in cargo ton miles on
an 8.3 percent increase in available cargo ca
pacity. These increases reflected the first full
year's utilization of four DC-1 Os which provided
increased cargo capacity in some of the com
pany's best cargo markets. Seventy-three per
cent of Western's cargo revenues came from air
freight, with mail accounting for 22 percent and
express and excess baggage making up the
balance.
The increase in "Other" revenues was attrib
utable to a $1,063,000 increase in receipts from
security surcharges which were introduced dur
ing 1973 by permission of the CAB and the
California Public Utilities Commission to cover
the costs of screening passengers and baggage
and of providing law enforcement officers at
airports.
Operating Expenses
(000s omitted)
1974 1973
%
Change
Wages, salaries and
employee benefits . .
.$182,334 165,363 +10.3
Aircraft fuel
..
71,437 44,510 +60.5
Depreciation and
amortization
. .
40,478 38,304 + 5.7
Materials and repairs . .
26,701 18,711 +42.7
Utilities and services
..
24,122 19,125 +26.1
Commissions
..
19,707 15,344 +28.4
Food and beverages ..
17,477 15,686 +11.4
Advertising and
publicity ..
10,911 11,673 -
6.5
Airport landing fees . . .
8,644 8,890 -
2.8
Rentals
Ground property
and equipment . ..
8,937 7,221 +23.8
Flying equipment . ..
7,066 5,633 +25.4
Property, fuel and
other taxes
. .
7,369 6,601 +11.6
Transport related
expenses . .
6,022 7,011 -14.1
Insurance and related
costs 4,714 4,613 + 2.2
Other
..
14,118 12,479 +13.1
$450,037 381,164 + 18.1
OPERATING REVENUE DOLLAR
1.8% from other |
2.2% from transport related |
0.8% from charter |
5.7% from cargo
5.7% from deluxe passenger services |
83.8% from coach passenger services i
40.5% for wages, salaries I
and employee benefits
15.9% for aircraft fuel I
9.0% for depreciation and amortization
5.9% for materials and repairs
5.4% for utilities and services
4.4% for commissions I
3.9% for food and beverages I
2.4% for advertising and publicity I
12.6% for all other expenses!
OPERATING EXPENSE DOLLAR
7
Although Western's operating expenses were
up 18.1 percent in 1974, costs in all categories
other than fuel increased 12.5 percent.
Fuel costs were up 60.5 percent although the
company used seven percent less fuel in 1974
than in the previous year. The average cost per
gallon in 1974 was 23.2 cents, compared to 13.4
cents in 1973 and 12.5 cents in 1972.
Most of the products and services that Western
requires, such as food and beverages and utili
ties and services, are consumed within a very
short time frame; only a small portion of the
company's expenditures are held for use in
future periods. Accordingly, Western's operating
expenses are extremely sensitive to inflation.
Wages, salaries and employee benefits, which
together represented 40.5 percent of Western's
operating expenses, increased by almost $17
million in 1974 despite the fact that the average
number of employees decreased by 1.1 percent.
In 1973, the increase had been $18 million on a
4.5 percent increase in employees. While wages
and salaries increased in line with increases in
the cost of living, the cost of employee benefits
went up at a much faster rate, increasing by
approximately $4 million in each of the past two
years. The higher costs in this category resulted
from increased Social Security taxes and from
larger company contributions to retirement
plans.
In 1973, the company converted from a pro
gram of complete engine overhauls to one of
regular inspections and overhauls as needed at
shorter hourly periods. As a result, materials and
repairs in 1973 were reduced by $7.9 million.
(See Note 9 of Notes to Financial Statements.)
Increases in commissions paid to travel
agents reflects a higher volume of sales made
through travel agents.
Flight equipment rentals reflect a full year's
rent of two DC-10 aircraft which were acquired
in June 1973. Ground property and equipment
rentals reflects an increase in the number of
facilities, higher rental rates and additional data
processing equipment. The increase in property,
fuel and other taxes resulted from an increase in
Western's property and equipment as well as
higher tax rates.
Finances
The company's financial position remained
strong during 1974.
As shown in the Statement of Changes in
Financial Position, total working capital provided
by all sources was $105,919,000, compared to
$87,621,000 in 1973.
Working capital provided by operations was
$66,875,000, an increase of $10,573,000. Pro
ceeds from the sale of equipment provided
$23,749,000, compared to $5,615,000 in the
previous year.
Applications of working capital during 1974
totaled $120,874,000. Expenditures for the pur
chase of property and equipment, including the
DC-10 and seven Boeing 727-200s that were
delivered in 1974, totaled $92,441,000.
The transfer of long-term debt to current lia
bilities accounted for $22,463,000. Another
$5,970,000 was used to pay cash dividends.
On August 23 ,1974, the company entered into
an amendment to its loan agreement with a
bank which provides the company with revolv
ing credit in the maximum amount of $65 million.
The amount available declines in semi-annual
amounts of $7,150,000 commencing December
31, 1975. The amendment further provides that
unused portions of this line of credit can be
taken into consideration when computing
required working capital balances. At year end,
the company had borrowed $13 million under
this line of credit. Although current assets were
$8 million less than current liabilities at the end
of 1974, the company has decided that it will
avail itself of the provisions of the amendment
to its bank loan agreement regarding working
capital balances and not increase its current
assets by further borrowings under the line of
credit.
8
Review of Corporate Activities
Annual Meeting
The 1975 meeting of shareholders will be held
at the Beverly Hilton Hotel, Beverly Hills, Califor
nia, on April 24. Formal notice of the meeting
and proxy material are enclosed with this report.
Shareholders, Stock and Debentures
As of December 31,1974, there were 15,159,000
shares of Western stock outstanding. An addi
tional 2,465,000 shares were reserved for the
conversion of the company's 51/4% Convertible
Subordinated Debentures. The conversion price
of these debentures is $11.99. Holders of the
debentures received interest payments on
February 1 and August 1.
At the 1974 annual meeting of shareholders
in April 1974, 72.4 percent of all shares were
represented in person or by proxy.
Shareholders' equity at December 31, 1974,
was $132,718,000, or $8.75 per share, compared
to $113,652,000, or $7.55 per share, at the close
of 1973.
The company's stock was held by approxi
mately 17,000 shareholders of record at year's
end, compared to approximately 14,000 share
holders at the end of the previous year. The stock
is traded on the New York Stock Exchange and
the Pacific Stock Exchange.
The following table sets forth the range of sale
prices of the stock on the New York Stock
Exchange, adjusted when applicable for stock
dividends.
1973 High Low
First Quarter 12% 8 3/8
Second Quarter 11 6
Third Quarter 12% 73/s
Fourth Quarter 12 3/4 6%
1974
First Quarter 121/4 7%
Second Quarter 1314 101/2
Third Quarter 111/4 6%
Fourth Quarter 83/4 51/2
Dividends
Shareholders received four regular cash divi
dends and two stock dividends during 1974.
Cash dividends of 10 cents per share were paid
on March 20, June 3, September 16 and Decem
ber 3. During 1973, cash dividends of five cents
per share w.ere paid on April 10, June 7 and
August 27, and ten cents per share was paid on
November 26.
NET EARNINGS (PROFIT) DOLLARS IN MILLIONS
9
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, equiv
alent on the average to 50 percent of earnings.
Consistent with this policy, a three percent
stock dividend was paid on April 20, 1973,
(based on 1972 earnings), a five percent stock
dividend was paid on March 20, 1974 (based on
1973 earnings), and a three percent stock divi
dend was paid on September 16, 1974, based
on anticipated earnings for the year.
In January 1975, the board declared the first
regular quarterly cash dividend of 1975 in the
amount of 10 cents per share and an extra cash
dividend of seven cents per share based on 1974
earnings. Both dividends were paid on March 4
to shareholders of record on February 10.
Equipment and Facilities
At the end of 1974, Western operated 72 jet air
craft, compared to 74 at the end of 1973.
Additions to the fleet during the year included
one McDonnell Douglas DC-10 and seven Boe
ing 727-200S.
Scheduled for delivery during 1975 are one
DC-10, which will be Western's sixth, and three
727-200s. All four of the aircraft are scheduled
for delivery in May and June. The company pres
ently intends to lease the DC-10 and purchase
the 727s. The company also holds options for
10 more 727-200s for delivery in 1977 and 1978.
Western's policy of adjusting capacity by sell
ing four-engine and two-engine aircraft while
taking delivery of the new three-engine aircraft,
which are more suited for certain markets, was
continued throughout 1974. Seven Boeing
720B's and three Boeing 737s were delivered to
purchasers during the year.
The company intends to continue this program
of progressive aircraft retirement and will dis
pose of an undetermined number of aircraft in
1975.
Western's Fleet
Owned Leased
1975
Delivery
DC-10 3 2 1
B707-300C 5 --
1*
B720B 18 -- --
B727-200 12 6 3
B737-200 26 -- --
64 ~8 ~5
Subject to CAB approval of the Western-Pan American route transfer.
10
RETURN ON INVESTMENT
0 2% 4% 6% 8% 10%
o
tn
12%
11.1
WESTERN AIRLINES--Five Years of Western Progress, annual report
INDUSTRY (trunks and Pan Am)* source McDonnell Douglas
airline industry data
* 1974 figures for trunk carriers and Pan Am is for year ended 9/30/74
New environmental regulations related to
emissions and noise could have a materially
adverse effect on the company and perhaps
change its current fleet plans. Under a recently
enacted law, the Environmental Protection
Agency is authorized to issue regulations setting
standards for aircraft emissions, and the Secre
tary of Transportation is charged with the
responsibility of enforcing such standards. State
and local governments may not adopt or enforce
aircraft emission standards unless such stand
ards are identical to the federal standards.
The engines which power Western's Boeing
737 and 727 aircraft have been retrofitted to
meet current emission standards, but the tech
nology necessary to accomplish modifications
of engines for the balance of Western's fleet is
still in the developmental stages. Nevertheless,
January 1, 1978, is the deadline for modification
of engines on 707s and 720B's, and January 1,
1983, is the deadline for modification of engines
on DC-10s. Pending further developments in
technology, the economic impact of these addi
tional retrofits cannot be determined.
Under the Noise Control Act of 1972, the EPA
makes recommendations for control of aircraft
noise, but the Federal Aviation Administration
continues to set the standards, rules and regula
tions which must be economically reasonable,
technologically practicable and consistent with
safety. Both federal agencies currently have
under consideration noise regulations which, if
adopted, would have an adverse financial impact
on Western because they would require expen
sive modification or premature retirement and
replacement of every aircraft in the present fleet
except the DC-1 Os and the seven 727s delivered
in 1974. Western has not determined which air
craft it would modify and which it would retire in
such event.
Despite these possibilities, the company is
continuing to keep all aircraft up-to-date in
appearance. Plans have been made to modify
the Boeing 720B interiors to a wider, brighter
appearance. New, more comfortable seats will
be installed with the center pull-down feature in
the coach sections--this makes it possible to
use the center seat as a table when it is not
occupied.
At the same time, the company's five 707s
and the first 727s will receive the new seats and
new color decor. All other aircraft in the fleet
also will feature new seat fabrics and new side-
wall and ceiling decor. These renovations are
scheduled for completion by May 1976.
11
CAB
GUIDELINE
PASSENGER LOAD FACTOR-ACTUAL VS BREAKEVEN
45%
In December 1974, Western started conver
sion of one of its Boeing 707-300C's to a com
bination cargo-passenger aircraft for service
between California and Alaska. Completed in
early January, this aircraft is now capable of
carrying up to 31,410 pounds of cargo plus 79
passengers.
A number of construction projects were
started in 1974. At the Los Angeles headquar
ters, a single "high bay" hangar to provide main
tenance support for the DC-10 fleet and an
employee parking structure were started during
the year. The parking structure was occupied in
early March 1975 and the DC-10 hangar is
scheduled for completion by July 1975. It is
planned that these two projects, costing approxi
mately $11 million, will be financed by a non
profit corporation organized for the purpose of
assisting in the financing of improvements at
airports operated by the City of Los Angeles
under an agreement whereby Western will lease
the facilities.
Fares and Rates
All of Western's fares and rates underwent
change in 1974. The most significant of these
changes were increases in domestic fares of
six percent on April 16 and of an additional four
percent on November 11 (both designed to off
set increasing fuel costs) plus the elimination
of family plan, youth and Discover America fares
as required by the Civil Aeronautics Board on
June 1.
In its continuing effort to make air travel attrac
tive to budget-minded customers, Western intro
duced, commencing last October, a series of
special excusion fares for roundtrips of seven or
more days in duration. Initially, the fares offered
a 25 percent discount and applied only between
Minneapolis/St. Paul and the West Coast points
of Los Angeles, Ontario, Portland, Seattle, San
Diego and San Francisco for travel during the
off-season period ending with June 14, 1975.
Subsequently, Western secured approval to
offer corresponding fares with a 20 percent dis
count for travel during the summer, and to
expand both the off-season and summer dis
count excursion plans to all of Western's domes
tic markets that have trip distances of 750 miles
or more.
Also available to passengers are night coach
fares with a 20 percent discount. On November
1, 1974, the company extended these fares,
which were available on some of Western's
12
other routes, to West Coast markets for the first
time in recent history.
In addition, Western has maintained a number
of group fares which serve as valuable market
ing tools.
Western's passenger fare structure is divided
into six geographical areas--Domestic U.S.,
Hawaii, Intra-California, Alaska, Mexico and
Canada--with each area regulated separately by
the Civil Aeronautics Board, agencies of other
national governments or, in the case of intra-
California markets, by the state Public Utilities
Commission.
Marketing
Western's 1974 marketing year is notable for the
company's ability to maintain growth despite a
fuel shortage in the early months and a general
decline in the economy during the later part of
the year.
A total of 7,391,000 passengers were carried
in 1974, compared to 7,382,000 in 1973. Passen
ger load factor for the year was 60.7 percent,
compared to 57.9 percent in 1973.
Carefully calculated scheduling, attention to
special markets and absence of labor union
difficulties helped Western maintain a positive
marketing stance during this year of economic
uncertainty.
Vacation and leisure markets--which the com
pany works hard to develop--continued to grow
during 1974. Western's traffic on Hawaii routes
was up 15.8 percent, considerably ahead of the
industry average. This made it possible for
Western to reach the No. 2 position in this highly
competitive market in May and hold that position
for the remainder of 1974.
Western also held the No. 2 ranking in terms
of passengers carried between the U.S. and
Mexico and between the Mainland and Alaska.
Revenue passenger miles in these markets
increased 5.2 percent and 13.3 percent respec
tively.
All three of these markets--Hawaii, Alaska
and Mexico--were prime beneficiaries of the
vacationer trend of switching from more distant
international points to closer and less costly
vacation locations.
Development of Alaska's North Slope oil
fields also played a major role in Western's 1974
marketing. While the dramatic traffic increases
that had been anticipated have not yet material
ized, a definite upward trend was seen, and
Western got an early start in establishing itself
as a major link in the pipeline's transportation
network.
Elements of Western's efforts in gaining
pipeline traffic included an intensified cargo
marketing plan, inauguration of an equipment
interchange with Continental Airlines between
Alaska and the "oil country'' centers of the
Southwest, a tie-in with satellite communication
for transmitting passenger and cargo reserva
tions between Alaska and the rest of Western's
system, and the development of a "rest and
recreation" marketing program for pipeline
workers to visit Hawaii and the Lower 48 states.
The company anticipates continued pipeline
travel activity throughout the remainder of the
1970s. And, in an effort to play an even more
important role in the movement of passengers
and cargo to Alaska, Western is seeking to pur
chase from Pan American World Airways its Port-
land/Seattle-Fairbanks route. The purchase,
which is described in the Regulatory Matters
section of this report, would give Fairbanks, con
struction gateway for the pipeline activity, its first
through-plane service to California cities.
Another specialized market which grew in
1974 was that of meetings and convention travel,
which contributed revenues of more than $19
million in 1974 for a 34.7 percent increase over
the previous year.
Western continues to stress sales through
travel agents as a way to expand marketing
exposure. In 1974, sales made through travel
agencies were 50 percent of the company's
passenger sales volume for the first time. This
was due in large measure to the sales of pre
paid vacations to major resort destinations on
Western's system (approximately one-third of
agency revenues come from tour sales).
In the first half of 1974, Western's marketing
division was restructured to create 10 regions,
each headed by a regional vice president who is
responsible for all activities within his region.
This led to increased productivity through better
cross-utilization of personnel, facilities and
equipment. It also has given Western improved
communication and the flexibility essential to
meet the demands of today's economy.
Western continued its program of updating
and improving passenger and cargo services
during 1974. Fare quote capability was added to
the computerized reservations system. This has
given Western the ability to keep fares updated
on a systemwide basis, increasing accuracy and
consistency in quoting and calculating fares.
An automated ticketing and passenger check-in
system is scheduled for implementation in the
first half of 1975.
Western's "First Class Legspace" marketing
program continued to provide an advertisable
difference in 1974 since the company remains
the only domestic trunkline which can guarantee
this tangible benefit to all passengers on all air
craft. Despite the effects of the fuel crisis, which
resulted in Western's converting four 707s and
the six 720B's that are used in Hawaii service to
all-coach aircraft, the added legspace for all
passengers was retained as an effective feature
of the company's marketing program.
Management Changes
Victor L. Brown, tenth Presiding Bishop of the
Church of Jesus Christ of Latter-day Saints and
a former airline executive, was elected to West
ern's board of directors at the October 1974
meeting.
Bishop Brown, who lives in Salt Lake City,
succeeds Vernon O. Underwood, chairman of
the board of Young's Market Company of Los
Angeles, who resigned and was elected a direc
tor-emeritus. Underwood had served on the
board since 1964.
Effective January 1, 1974, the responsibilities
of Dominic P. Renda, Western's executive vice
president, were expanded to include supervision
of the day-to-day activities of the company's
operating divisiohs. At the same time, Ray Sil-
vius, formerly vice president-public relations,
became vice president-corporate affairs and
assistant to the president.
In April, the following changes in the align
ment of executive functions were made: Anton B.
Favero, formerly senior vice president-mainten
ance, became senior vice president-operations;
Robert V. Johnson was named vice president-
flight operations from assistant vice president-
flight operations; Joseph M. Fogarty became vice
president-maintenance from assistant vice pres
ident-maintenance; and P. Norman Rose, for
merly director of flight control, became assistant
vice president-flight control.
Paul Donahue, formerly assistant controller
and director-general accounting, became vice
president-procurement. Henry deButts, formerly
vice president-Washington, D.C., became vice
president-regulatory affairs, moving to Los
Angeles. Neil Stewart, formerly assistant vice
president-public affairs, became vice president-
government and industry affairs.
14
Dan Zaich moved to vice president-personnel
relations from vice president-labor relations.
Robert 0. Kinsey, formerly vice president-corpo
rate planning, became senior vice president-
corporate planning.
In Marketing, Willis R. Balfour was named vice
president-sales and service from vice president
marketing for passenger sales. Jack M. Slichter,
formerly vice president of government and
industry affairs, became vice president-field
management. Larry H. Lee moved to vice presi
dent-inflight service from vice president-indus
trial relations. Jack S. Neel, formerly vice
president-marketing, Pacific Rim Division,
became vice president-marketing administra
tion. David E. Holt became vice president-
passenger sales from assistant vice president of
marketing for travel agency and vacation sales.
Appointed to the new position of regional vice
president were: Luis Pasquel L., Mexico; Allen
F. Hoss, Hawaii; Raymond M. Waters, Alaska;
William R. Bell, Seattle/Tacoma; Paul R. Hard
ing, San Francisco; Harry L. White, Los Angeles;
Grant G. Murray, Salt Lake City; William J .
Grant,
Denver; Lynn D. Zumbrunnen, Minneapolis/St.
Paul; and Lawrence A. Nichols, field (including
San Diego, Phoenix, Las Vegas, Sacramento
and Reno).
In Corporate Affairs, Wayne Lichtgarn, for
merly director of consumer affairs, became
assistant vice president-consumer affairs.
J. Judson Taylor, vice chairman, retired from
Western March 31, 1974, completing a 34-year
career. He had served as Western's president
and chief executive officer from October 1969
until January 1973 and was the company's chief
financial officer prior to being elected president.
Personnel
As of December 31, Western had 9,424 employ
ees, compared to 9,875 at the end of 1973. The
year-end total, which included 137 part-time
employees, represents a decrease of 574
employees from the year's peak level of 9,998
employees. (The number of employees was fur
ther reduced to 9,169 at the end of January 1975
and was 9,168 at the end of February. Part-time
employees totaled 127 at the end of January and
117 at the end of February.)
Wages and salaries for 1974 amounted to
$154,250,000, compared to $141,016,000 in the
previous year. Social Security taxes and com
pany contributions to group insurance and
employee retirement plans increased 15.3 per
cent, from $24,347,000 for 1973 to $28,084,000
for 1974.
Western is committed to a policy of equal
employment. Job assignments are determined
on the basis of best-qualified applicant without
15
discrimination in race, color, creed, age, sex or
national origin.
The company confirms its continuous commit
ment and, in this regard, maintains Equal
Employment Opportunity/Affirmative Action
Plans which are filed with the Federal Aviation
Administration and the Department of the Inte
rior (in Alaska).
Approximately 87 percent of the company's
employees are represented by labor unions. Fol
lowing is the contractual status for each group
of these employees:
Employee Group
Number of
Employees
12/31/74 Union
Contract Open
for Amendment
Flight
Attendants
1,324 ALPA April 1, 1974
(In mediation on
date of this report.)
Agent & Clerical 3,515 (U.S.)
153 (Mexico)
BRAC
SNTA*
July 1, 1975
Jan. 19,1976
Pilots 1,244 ALPA Sept. 1, 1975
Dispatchers 33 TWU Nov. 1, 1975
Mechanics &
Related
1,900 IBT April 1, 1976
(Pay-Pension)
Nov. 16, 1976
(Contract)
*Sindicato Nacional de Trabajadores de Aviacion y Similares
Regulatory Matters
Pan American-Western Route Transfer: On Sep
tember 27, 1974, Western and Pan American
announced they had reached an agreement to
transfer Pan American's Portland/Seattle-Fair-
banks, Alaska, route to Western. The route and
related equipment used on the route, including
one Boeing 707-300C aircraft, would be sold
to Western for $6,650,000. This transfer, which
must be approved by the Civil Aeronautics
Board, has been recommended for approval by
an administrative law judge in an initial decision
released February 13. In view of the fact that the
case is being accorded expedited treatment, a
decision by the full board is expected within a
few months.
Alaska Interchange Case: On April 22, 1974,
the Civil Aeronautics Board authorized Western
and Continental Airlines to provide one-plane
interchange service between Alaska and the "oil
country'' centers of Louisiana, Texas, Oklahoma,
Kansas and Colorado. The service was inaug
urated on June 1.
Canadian Route Cases: Following the signing
of the United States-Canada Air Transport
Agreement on May 8, Western filed three sepa
rate applications with the CAB in which it asked
for authority to resume service to Edmonton,
Alberta, from Great Falls and Denver, after a
14-year absence; for new routes to Edmonton
and Calgary from Los Angeles, San Francisco
and Las Vegas; and for authority to provide the
first nonstop service by a U.S. carrier between
Flonolulu and Vancouver, B. C. All of these routes
were authorized for a U.S. carrier in the
amended agreement, and all may be imple
mented as soon as approved by the CAB, with
the exception of the Los Angeles- and San Fran-
cisco-Alberta portions which may not be oper
ated before April 25, 1976.
To date, only the Edmonton-Great Falls/
Denver application has been approved. The
company resumed service with two flights daily
into Edmonton on July 1, 1974. Flearings on
applications for Honolulu-Vancouver and Las
Vegas-Calgary/Edmonton authority will be held
in April and May. No date has been set for
hearings on the Los Angeles/San Francisco-
Calgary/Edmonton application.
Meanwhile, competitive authority has been
awarded to Canadian carriers. Service from San
Francisco to Calgary and Edmonton was inaugu
rated on December 1, 1974, and competitive
service by a Canadian carrier in the Vancouver-
Los Angeles nonstop market, which Western has
served exclusively since 1967, is scheduled to
begin in April 1975.
Route Realignment: On October 29, 1974,
Western filed an application with the CAB asking
for the consolidation of its various route seg
ments into one linear segment and the elimina
tion of certain outdated certificate conditions
which are no longer meaningful, but which
impede Western's operating flexibility. Western is
the first trunk carrier to seek this type of realign
ment; however, the CAB already has acted on
route realignment and consolidation applica
tions by several local service carriers.
Other Pending Cases and Applications: West
ern continues to have a number of additional
route matters pending before the CAB, most of
which saw little action during 1974. In the Miami-
Los Angeles Competitive Nonstop Case, Western
is an applicant for competitive nonstop authority
on this route which is now served exclusively by
another carrier. In an initial decision, announced
in June 1973, the administrative law judge rec-
16
ommended that Pan American Airways be
granted the route. The case has been delayed
pending an environmental impact statement.
However, oral argument has now been set for
April and a decision is expected before Fall.
The development of an environmental impact
statement has also stalled the Las Vegas/Reno-
Portland/Seattle Service Investigation. On
August 13, 1973, the administrative law judge
reaffirmed his earlier decision which concluded
that Western should be authorized to operate
between Las Vegas and Portland and Seattle,
that another carrier should be authorized to
operate between Reno and Portland and Seattle,
and that Western's request for authority to oper
ate between Las Vegas and Reno should be
denied. The case is now active with briefs to the
Board having been filed and oral argument
scheduled on April 16.
In the Remanded Additional Service to San
Diego Case: The CAB denied petitions request
ing reconsideration of its 1972 decision which
rejected applications for competitive authority
over Western's Denver-San Diego route. One
carrier has appealed this denial to a federal
court.
In the Transatlantic Route Case in which
Western is an applicant for new and competitive
authority between points on its existing routes
and points in Europe, the administrative law
judge issued his decision in January 1975. West
ern was not recommended for any new routes.
The recommendation is pending CAB review
with oral argument set for April 9.
Mexico Route Authority: Negotiations for
renewal of the United States-Mexico bilateral air
transport agreement will be resumed in 1975.
The currently effective agreement has been
extended to December 31, 1975.
Western has asked the Civil Aeronautics
Board for authority to provide the first service by
a U.S. airline from Los Angeles and San Fran
cisco to six cities in Mexico--La Paz, Mazatlan,
Puerto Vallarta, Guadalajara, Manzanillo and
Zihuatanejo--and for nonstop authority from San
Francisco to Mexico City and Acapulco. Western
also has on file an application for a route between
Los Angeles/San Francisco/Portland/Seattle/
Tacoma and points in the Orient, including cities
in Japan and the Peoples Republic of China via
Anchorage and Fairbanks. No estimate can be
made as to when the CAB action on these appli
cations may be expected or whether such action
will be favorable to Western.
Accountants' Report
Peat, Marwick, Mitchell & Co.
CERTIFIED PUBLIC ACCOUNTANTS
555 SOUTH FLOWER STREET
LOS ANGELES, CALIFORNIA 0071
The Board of Directors
Western Air Lines, Inc.:
We have examined the balance sheets of Western
Air Lines, Inc. as of December 31,1974 and 1973
and the related statements of earnings, share
holders' equity, and changes in financial position
for the respective years then ended. Our exami
nation 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 con
sidered necessary in the circumstances.
In our opinion, the aforementioned financial
statements present fairly the financial position
of Western Air Lines, Inc. at December 31,1974
and 1973, and the results of its operations and
the changes in its financial position for the
respective years then ended in conformity with
generally accepted accounting principles applied
on a consistent basis.
'CTVjfcXvijtSU ^ Ct>.
Los Angeles, California
February 25,1975
17
Balance Sheets
Western Air Lines, Inc.
December 31, 1974 and 1973
(in thousands of dollars)
ASSETS 1974 1973 Change
Current Assets:
Cash
.
$ 11,082 $ 10,527 + 5.3
Certificates of deposit
Commercial paper (at cost and accrued interest,
10,345 4,333 + 138.7
which approximate market) 5,940 32,761 --
81.9
Receivables (net of allowance for doubtful accounts of
27,367 47,621 --
42.5
$900-1974 and $595-1973)
Flight equipment expendable parts, at average cost less
allowance for obsolescence of $8,550--1974 and
39,138 36,024 + 8.6
$7,126-1973 12,206 13,497 --
9.6
Prepaid expenses 5,847 4,941 + 18.3
Total current assets 84,558 102,083 --
17.2
Properties and Equipment at Cost (Notes 4 and 9):
Flight equipment 442,624 414,911 + 6.7
Ground facilities and equipment 89,201 71,693 + 24.4
Deposits on aircraft purchase contracts 14,226 23,251 --
38.8
Less allowance for depreciation and amortization (including
reserves for overhauls of flight equipment of $12,299--1974
546,051 509,855 + 7.1
and $11,500-1973) 238,744 240,481 --
0.7
307,307 269,374 + 14.1
Deferred Charges and Other Assets:
Preoperating costs related to DC-10 aircraft 1,442 1,858 --
22.4
Other 3,518 4,142 --
15.1
4,960 6,000 17.3
$396,825 $377,457 + 5.1
See accompanying Notes to Financial Statements.
LIABILITIES AND SHAREHOLDERS' EQUITY 1974 1973 Change
Current Liabilities:
Accounts payable ...
$ 31,777 $ 26,009 + 22.2/c
Accrued salaries, wages and vacation benefits . . . . . . .
17,731 17,466 + 1.5
Accrued liabilities
. . .
8,475 11,026 --
23.1
Accrued income taxes
. . .
3,119 10,641 --
70.7
Advance ticket sales
. . .
9,017 8,547 + 5.5
Current maturities of long-term debt (Note 3) . . . . . . .
22,463 21,463 + 4.7
Total current liabilities
. . .
92,582 95,152 --
2.7
Long-Term Debt (Note 3) . . .
114,917 124,387 --
7.6
Deferred Credits (Notes 2, 4 and 9):
Deferred federal taxes on income
. . .
32,484 24,729 + 31.4
Unamortized investment tax credits
. . .
17,595 14,329 + 22.8
Other
. . .
6,529 5,208 + 25.4
56,608 44,266 + 27.9
Shareholders' Equity (Notes 3, 6 and 8):
Common stock--$1.00 par value per share
Authorized 25,000,000 shares
Issued 15,159,000 and 13,927,000 shares . . .
15,159 13,927 + 8.8
Capital in excess of par value . . .
37,440 26,468 + 41.5
Retained earnings . . .
80,119 73,257 + 9.4
132,718 113,652 + 16.8
Commitments and Contingent Liabilities (Note 4)
$396,825 $377,457 + 5.1
19
Statements of Earnings
For the years ended December 31, 1974 and 1973
(in thousands of dollars)
Operating Revenues:
Passenger . . .
Cargo
Other
Operating Expenses:
Flying operations
Maintenance (Note 9)
Passenger service
Aircraft and traffic servicing . . . .
Marketing
Administrative and other
Depreciation and amortization (Note 9)
Operating income
Other Income (Expense):
Interest on long-term debt . . . .
Interest capitalized
Interest income
Gain on sale of equipment . . . .
Other--net
Earnings before taxes on income .
Taxes on income (Note 2)
Net earnings
1974 1973
$437,345 $376,722
27,662 23,040
23,390 21,524
488,397 421,286
139,689 103,790
50,809 38,651
45,268 42,444
82,817 75,619
62,011 55,554
28,965 26,802
40,478 38,304
450,037 381,164
38,360 40,122
(11,495) (10,505)
1,161 1,489
4,055 3,186
9,575 945
167 49
3,463 (4,836)
41,823 35,286
17,725 14,900
$ 24,098 $ 20,386
Net earnings per share (Note 10):
Primary $ 1.59 $ 1.35
Fully diluted 1.41 1.21
See accompanying Notes to Financial Statements.
Change
+ 16.1%
+ 20.1
+ 8.7
+ 15.9
+ 34.6
+ 31.5
+ 6.7
+ 9.5
+ 11.6
+ 8.1
+ 5.7
+ 18.1
-
4.4
+ 9.4
-
22.0
+ 27.3
+913.2
+ 18.5
+ 19.0
+ 18.2
20
Statements of Changes in Financial Position
For the years ended December 31, 1974 and 1973
(in thousands of dollars)
Sources of Working Capital: 1974 1973
Net earnings $ 24,098 $ 20,386
Add back charges (credits) which did not affect working capital:
Depreciation, amortization and provision for overhauls (Note 9) . .
41,327 29,436
Taxes (Note 2):
Deferred federal income taxes 8,300 4,050
Investment credits applied and deferred to future periods . . .
5,375 5,800
Amortization of investment credits (2,650) (2,425)
Gain on sale of equipment (9,575) (945)
Total from operations 66,875 56,302
Proceeds from sale of equipment 23,749 5,615
Proceeds from issuance of long-term debt 13,000 15,362
Purchase deposits reimbursed upon lease of equipment --
12,125
Exercise of stock options 930 5
Other 1,365 (1,788)
Total sources of working capital 105,919 87,621
Applications of Working Capital:
Purchases of property and equipment and deposits thereon 92,441 74,280
Transfers of long-term debt to current liabilities 22,463 21,463
Cash dividends 5,970 3,462
Preoperating costs related to DC-10 aircraft --
2,077
Total applications of working capital 120,874 101,282
Net decrease $ (14,955) $ (13,661)
Summary of Changes in Working Capital:
Increases (Decreases)
Cash, certificates of deposit and commercial paper $ (20,254) $ (7,761)
Receivables 3,114 7,264
Expendable parts and prepaid expenses (385) 3,650
Accrued income taxes 7,522 (4,344)
Accounts payable, advance ticket sales, accrued and
other current liabilities (4,952) (12,470)
Net decrease $ (14,955) $ (13,661)
See accompanying Notes to Financial Statements.
Statements of Shareholders' Equity
For the years ended December 31, 1974 and 1973
(in thousands of dollars)
Common
Stock
$1.00
Capital In
Excess of Retained Shareholders'
Par Value Par Value Earnings Equity
Balance at January 1, 1973 . .
$13,521 $21,951 $61,251 $ 96,723
Exercise of stock options . .
1 4 --
5
Net earnings . .
-- --
20,386 20,386
Cash dividends ($0.23 per share) . .
-- --
(3,462) (3,462)
Stock dividend (3%) . .
405 4,513 (4,918) --
Balance at December 31, 1973 . .
13,927 26,468 73,257 113,652
Exercise of stock options . .
105 825 --
930
Conversion of debentures
. .
1 7 --
8
Net earnings . .
-- --
24,098 24,098
Cash dividends ($0.39 per share) . .
-- --
(5,849) (5,849)
Stock dividends (5% and 3%) . .
1,126 10,140 (11,387) (121)
Balance at December 31, 1974 (Notes 3 and 8) . . . .
$15,159 $37,440 $80,119 $132,718
See accompanying Notes to Financial Statements.
Notes to Financial Statements
(All dollar amounts except amounts per share are expressed in thousands.)
Note 1. Summary of Significant Accounting Policies.
a. For Comparability: The 1973 figures have been reclassified when applicable to conform with the
financial statement presentation in 1974.
b. 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.
c. 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 (five years for DC-10 preoperating costs).
d. Reserves for Overhauls of Flight Equipment: The estimated costs of future airframe and engine
overhauls are provided for by charges to maintenance expense based on hours flown.
e. Interest Capitalized: Interest related to deposits on aircraft purchase contracts with manufacturers
is capitalized and amortized over the useful lives of the equipment.
f. Investment Tax Credits: Investment tax credits generated 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.
g. Obsolescence of Expendable Parts: An allowance for obsolescence of flight equipment expend
able parts is accrued over the useful lives of the related aircraft types.
h. Advance Ticket Sales: Passenger ticket sales are recorded as a current liability until the trans
portation service is provided, at which time the revenue is recognized.
Note 2. Taxes on Income: Income taxes are summarized as follows:
1974 1973
Current income taxes:
Federal $ 5,325 $ 5,775
State 1,375 1,700
Deferred federal income taxes 8,300 4,050
Investment credits applied and
deferred to future periods 5,375 5,800
Amortization of investment credits (2,650) (2,425)
$17,725 $14,900
Deferred income taxes arise from timing differences between financial and tax reporting. The tax effects
of these differences follow:
1974 1973
Depreciation $ 7,361 $ 539
Overhauls of flight equipment (453) 3,446
Preoperating expense (200) 892
Other 1,592 (827)
$ 8,300 $ 4,050
Investment credits unapplied on tax returns amounted to $13,600 at December 31, 1974 ($12,787--1973)
with $104 expiring in 1978, $3,109 in 1979, $4,164 in 1980 and $6,223 in 1981.
Of the $17,595 unamortized investment credit balance at December 31, 1974 ($14,329--1973), $5,887
($4,935--1973) remains from investment credits utilized by reductions of taxes paid and $11,708 ($9,394
--1973) is related to investment credits not yet utilized for reduction of taxes paid.
A reconciliation between the amount computed by multiplying earnings before taxes by a tax rate of
48% and the amount of reported taxes on income follows:
1974 1973
% of Earnings % of Earnings
Amount before Taxes Amount before Taxes
Taxes on income at 48%
Increases (reductions) in taxes
.
$20,075 48.0% $16,937 48.0%
resulting from:
Amortization of investment credits
. .
State income taxes net of federal
(2,650) (6.3) (2,425) (6.9)
income tax benefit 715 1.7 884 2.5
Other (415) (1.0) (496) (1.4)
Taxes on income
.
$17,725 42.4% $14,900 42.2%
The federal income tax returns for 1968 through 1972 are being examined by the Internal Revenue
Service.
Note 3. Long-term Debt (Unsecured): At December 31, 1974 and 1973 long-term debt was as follows:
1974 1973
4 Senior Debt:
Revolving line of credit $ 13,000 $ --
Installment note due December 31,1975 with quarterly principal
payments of $4,865. The interest rate is Va % over the bank's
prime commercial rate 19,463 38,926
514 % installment notes due September 1,1981 with annual
principal payments of $1,000 from September 1,1974 which
will increase to $4,000 a year starting in 1976 25,000 26,000
23
1974 1973
6%% installment notes due September 1,1984 with annual
principal payments of $1,000 from September 1,1974 which
will increase to $2,000 a year starting in 1975 and further
increase to $7,000 a year starting in 1982
8%% installment notes due November 16,1985 with
quarterly principal payments of $768 starting in 1981 . .
Less current maturities
Subordinated Debt:
51/4 % convertible subordinated debentures due
February 1, 1993, with sinking fund payments of $1,500
a year starting in 1979
35,000 36,000
15.362 15,362
107,825 116,288
22,463 21,463
85.362 94,825
29,555 29,562
$114,917 $124,387
Under the revolving line of credit a maximum of $65,000 will be available until December 31, 1975. At
that time semi-annual reductions of $7,150 in the amount available begin and continue until the final
reduction of $7,800 on December 31, 1979. The commitment fee is 1/2% per annum on the unused
portion. The interest rate was 14 % over the bank's prime commercial rate until December 31, 1974
when it became V2 % over such rate.
The following schedule shows the amount of long-term debt maturing in each of the five following cal
endar years under the assumption that the maximum drawdowns under the revolving line of credit, start
ing in 1975, will be made.
1975 $29,613
1976 20,300
1977 20,300
1978 20,300
1979 22,450
The financial agreements related to the senior debt and the Indenture for the debentures contain provi
sions which limit retained earnings from which cash dividend distributions can be made. The most
restrictive of these agreements limit amounts available for cash dividend distributions to $27,647 at
December 31, 1974 ($19,158--1973). The financial agreements related to the senior debt also contain,
among other things, requirements pertaining to working capital levels and provisions which may restrict
additional borrowings.
At December 31, 1974, 2,465,000 shares of common stock were reserved for conversion of debentures
at a conversion price of $11.99 per share.
Note 4. Commitments and Contingent Liabilities:
Total rental expense was $16,003 for 1974 ($12,855 for 1973). Rental expense for noncapitalized
"financing" leases was $9,422 for 1974 ($7,861 for 1973). For purposes of these disclosures, a "financ
ing" lease is one which, during the noncancelable lease period, either (i) covers 75% or more of the
economic life of the property or (ii) has terms which assure the lessor a full recovery of the fair market
value of the property at the inception of the lease, plus a reasonable return on his investment.
At December 31,1974 minimum rental expense under all noncancelable leases expiring after December
31, 1975 is as follows:
T
Annually
Flight
Equipment
Airport
Facilities
Other
Facilities
Financing
Leases
All Other
Leases
1975
. .
$ 7,243 $ 4,565 $ 1,084 $ 9,452 $ 3,440
1976
. .
7,243 4,512 1,069 9,452 3,372
1977
. .
7,243 4,303 1,009 9,452 3,103
1978
. .
7,243 4,246 883 9,452 2,920
1979
. .
7,243 4,022 699 9,452 2,512
24
Totals
Five-year Periods
Flight
Equipment
Airport
Facilities
Other
Facilities
Financing
Leases
All Other
Leases
1980-1984
.
35,183 17,434 1,876 45,753 8,740
1985-1989
.
15,565 16,563 22 25,694 6,456
1990-1994
.
4,670 8,239 --
9,638 3,271
Thereafter
1995-2007
.
8,172 5,688 2,484
Flight equipment leases are for six Boeing 727-200 aircraft acquired in 1969 under a lease expiring in
1984 and two McDonnell Douglas DC-10 aircraft acquired in June 1973 under a lease expiring in 1991.
The rental expense for DC-10 aircraft included in the above tabulation is normalized on a straight-line
basis because required cash payments are not level throughout the term of the lease. During the five-
year period 1975-1979 cash payments under flight equipment leases will total $1,976 less than the
expense amounts shown above. At December 31, 1974 other deferred credits in the accompanying
balance sheets include $2,147 ($672-1973) representing the excess of normalized rental expense over
cash payments.
The present values, in the aggregate and by major categories, of minimum lease commitments appli
cable to noncapitalized "financing" leases at December 31, 1974 and 1973 were as follows:
Interest Rates Used in
Computations
Present Values Weighted Average Range
1974 1973 1974 1973 1974 1973
Flight Equipment . . . .
$52,734 $53,594 9.2% 9.6% 8.4-10.0% 8.4-10.0%
Terminal Facilities
. . . .
12,503 12,886 6.6 6.6 6.0- 7.5 6.0- 7.5
Hangar and Other Facilities .
11,224 11,557 5.8 5.8 3.7- 8.6 3.7- 8.6
$76,461 $78,037
If (for purposes of disclosure required by regulations of the Securities and Exchange Commission) (i)
all of the above "financing" leases were capitalized, (ii) the related property rights were amortized on
a straight-line basis, and (iii) interest costs were accrued on the basis of the outstanding present value
lease commitments, amortization would have been $4,559 and interest would have been $6,402 for
1974 (($3,832 and $5,452, respectively, for 1973). Therefore, net earnings for 1974 would have been
reduced by $738 or $0.05 per share (primary) and $644 or $0.04 per share (primary) for 1973.
The interest rates used in these computations are based on the interest rates of the underlying debt.
At December 31, 1974 Western had on order three Boeing 727-200 aircraft and one McDonnell Douglas
DC-10 aircraft. The Boeing 727-200 aircraft are scheduled for delivery in May (2) and June 1975 at a
total purchase price, including related spares, estimated to be $26,000, of which approximately $6,500
had been paid in advance deposits. The DC-10 aircraft is scheduled for delivery in May 1975 at a total
purchase price, including spare parts, estimated to be $24,000, but which could exceed such amount
since the purchase price is based upon a formula which provides for escalation. Approximately $6,700
had been paid in advance deposits on the DC-10 aircraft. Also at December 31, 1974, under a purchase
contract which is conditioned upon CAB approval of the proposed transfer of the Pan Am Portland/
Seattle-Fairbanks route to Western, the company was committed to purchase one 707-300C aircraft at
a price of $6,250.
Western also had outstanding commitments for flight equipment modifications which amounted to
approximately $5,700 and for ground facilities and equipment which amounted to approximately $7,400.
A long-term lease of a DC-10 hangar and an employee parking structure, which together will cost
approximately $11,000 and are now under construction at the Los Angeles International Airport, is
being negotiated.
At December 31, 1974 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 the 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.
The City's cross-complaint for indemnity against the airlines in one of these cases was denied by a trial
court in 1974. This d-enial was upheld on appeal and is now final unless the City requests and is granted
a review by the U. S. Supreme Court. Proceedings on a number of other cross-complaints have been
stayed pending the results of this appeal.
Western is a defendant in several actions, including various purported class actions involving alleged
discrimination in employment practices. Western believes that such actions will not result in any material
liability.
Note 5. Retirement Plans: Retirement plans cover all classes of employees except mechanics and
related employees who are covered by a union-sponsored plan to 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 cost of
retirement plans charged to operating expense amounted to $13,617 in 1974 and $11,572 in 1973. The
additional costs in 1974 were caused primarily by increased payrolls and enrollments. Western's actu
aries are of the opinion that total assets under the plans exceed liabilities for accrued vested benefits.
In the opinion of Western's management the effect of recent pension legislation on Western's expenses
will not be material.
Note 6. Stock Options: Western presently has a qualified stock option plan for officers adopted in 1964
and a nonqualified stock option plan for officers and key personnel adopted in 1974. These plans are
summarized as follows (adjusted when applicable for stock splits and stock dividends):
Qualified Options Nonqualified Options
Number of Average
Shares Price
Number of Average
Shares Price
January 1,1973 . . .
336,614 $ 9.15 --
$ -
Options granted . . .
78,675 10.88 -- --
Options exercised . . .
(446) 8.41 -- --
December 31,1973 . . .
414,843 9.48 -- --
Options granted . . .
-- --
398,095 9.16
Options exercised . . .
(108,445) 8.58 -- --
Options canceled . . .
-- --
(12,875) 8.80
Options expired . . .
(185,919) 8.89 -- --
December 31,1974 . . .
120,479 11.21 385,220 9.17
Shares exercisable at:
December 31,1974
.... . . .
62,136 11.72 77,044 9.17
December31,1973
.... . . .
319,597 9.05 -- --
No additional options may be granted under the 1964 stock option plan, however an additional 644,780
shares were reserved under the 1974 stock option plan at December 31, 1974 for the issuance of
additional options.
Note 7. Mutual Aid Agreement: Western is a party to the Mutual Aid Agreement which provides for
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 trunk carrier were suspended from July 14 to October 30,
1974 and of another trunk carrier from November 5 to December 18, 1973. These carriers were parties
to this agreement.
Note 8. Stock Dividends: Stock dividends of 5% and 3% were paid on March 20, 1974 and Septem
ber 16, 1974, respectively. In lieu of issuing fractional shares, cash in the amount of $121 was paid to
shareholders. A 3% stock dividend was also paid on April 10, 1973; in lieu of issuing fractional shares,
shareholders were given the opportunity to sell the fraction or purchase an additional fractional-share
interest to make one full share.
26
Note 9. Depreciation and Amortization: The estimated useful lives over which costs of operating prop
erty and equipment are amortized are as follows: for the three McDonnell Douglas DC-10 aircraft
acquired in 1973 and 1974, 16 years to a residual value of 10%; for the five Boeing 707-300C aircraft
acquired in 1968, the twenty-six Boeing 737-200 aircraft acquired in 1968 and 1969, and the twelve
Boeing 727 aircraft acquired in 1972 and 1974, 12 years to a residual value of 15%; for the ten Boeing
720B aircraft acquired during 1961 to 1965, 10 to 15 years to become depreciated to residual values of
$100 per aircraft on December 31, 1975; and for the eight Boeing 720B aircraft acquired in 1966 and
1967, 10 years to a residual value of $100 per aircraft. For ground equipment the useful lives range
from four to ten years. For buildings and improvements on leased property the estimated useful lives
are generally the periods of the leases.
The costs of airframe and engine overhauls for flight equipment are charged to the reserves for over
hauls of flight equipment. Improved engine overhaul practices were implemented late in 1972 by con
verting from a complete overhaul every 8,400 hours for engines on Boeing 727-200 and 737-200 aircraft
and every 15,200 hours for engines on Boeing 707-300C and 720B aircraft to a scheduled maintenance
visit with regular inspection and overhaul as needed, every 6,000 hours for 727 and 737 engines and
every 8,000 hours for 707 and 720B engines. As a result, engine maintenance reserves (substantially
all of which were accrued in prior years under the former overhaul program) were reduced in 1973
based on revised estimates of costs. Reserves in excess of these revised estimates, amounting to
$7,900 ($3,950 or $0.26 per share (primary) after taxes), were applied to reduce maintenance expense
during 1973. Reserves for overhauls of leased flight equipment amounted to $1,486 at December 31,
1974 ($1,099-1973) and are included as other deferred credits in the accompanying balance sheets.
Note 10. Earnings per Share: Earnings per common share are based on the weighted average num
ber of shares of common stock outstanding during the respective periods adjusted when applicable
to give retroactive effect to stock dividends; 15,125,000 shares in 1974 (15,050,000-1973). Earnings per
common share assuming dilution from conversion of the debentures are calculated as if the deben
tures were converted at the beginning of the period with related adjustments to interest and income tax
expense. Fully diluted per share data are based on 17,590,000 shares in 1974 (17,516,000-1973). Out
standing stock options have no material dilutive effect on earnings per common share.
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 car
riers. 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 infor
mation required by Part 245.12 of the CAB's
Economic Regulations on or before April 1 as
to the capital stock owned as of December 31
and/or a report containing the information
required by Part 245.13 of the CAB's Economic
Regulations within 10 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 calen
dar year must file with the CAB within 30 days
after the end of the quarter a report in accord
ance 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 information
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.
Form 10-K: Shareholders may obtain free of
charge a copy of the company's annual report
on form 10-K as filed with the Securities and
Exchange Commission by writing to the Secre
tary, P.O. Box 92005, World Way Postal Center,
Los Angeles, California 90009.
27
Board of Directors
James D. Aljian*
Senior Vice President-Finance, Metro-Goldwyn-Mayer Inc. (entertainment), Culver City, 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
Miguel M. Blasquez
President, Inter-American Commercial Arbitration Commission, Mexico City, Mexico
Victor L. Brown
Presiding Bishop, The Church of Jesus Christ of Latter-day Saints, Salt Lake City, Utah
Hugh W. Darling*
Attorney-at-Law, Darling, Hall, Rae & Gute, Los Angeles, California
Leo H. Dwerlkotte
Las Vegas, Nevada
James D. Garibaldi
Attorney-at-Law, Garibaldi & Sausser, Los Angeles, California
Cary Grant
Director and Executive, Faberge, Inc. (cosmetics), Beverly Hills, California
Walter J. Hickel
Chairman of the Board, Hickel Investment Company (investment and development company), Anchorage, Alaska
Arthur F. Kelly*
President and Chief Executive Officer, Western Air Lines, Inc., Los Angeles, California
Peter M. Kennedy
Chairman .of the Board, Dominick & Dominick, Inc. (investment bankers), New York, New York
Kirk Kerkorian*
Vice Chairman of the Board, Chairman of the Executive Committee, Metro-Goldwyn-Mayer Inc., Culver City, California
Sole Proprietor, Tracinda Investment Company (investments), Culver City, California
Arthur G. Linkletter
Television Producer and Broadcaster
Chairman of the Board, Linkletter Enterprises, Inc. (investment and development company), Irvine, California
Dominic P. Renda*
Executive Vice President, Western Air Lines, Inc., Los Angeles, California
Walter M. Sharp*
President, Community Bank (banking), Huntington Park, California
William Singleton
Attorney-at-Law, Beckley, Singleton, DeLanoy & Jemison, Chtd., Las Vegas, Nevada
Harry J. Volk*
Chairman, Union Bancorp, Inc. (holding company), Los Angeles, California
Chairman, Union Bank (banking), Los Angeles, California
Arthur G. Woodley
Bellevue, Washington
*
--
Member, Executive Committee
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
Vernon O. Underwood
Chairman of the Board, Young's Market Company, Inc., Los Angeles, California
John M. Wallace
Walker Bank & Trust Company, Salt Lake City, Utah
Richard W. Wright
President, Mountain States Employers Council, Inc., Denver, Colorado
28
Corporate Officers
Executive Officers
Fred Benninger, Chairman of the Board
Arthur F. Kelly, President and Chief Executive Officer
Dominic P. Renda, Executive Vice President
Corporate Planning Division
Robert O. Kinsey, Senior Vice President--Corporate Planning
Charles S. Fisher, Vice President--Schedule Planning
H. S. Gray, Vice President--Financial Planning
Eugene D. Olson, Vice President--Data Processing and Systems
Carl M. Anderson, Assistant Vice President--Economic Planning
Finance Division
Charles J. J. Cox, Senior Vice President--Finance
Paul V. Donahue, Vice President--Procurement
Richard O. Hammond, Vice President and Treasurer
Roderick G. Leith, Vice President and Controller
Legal Division
Gerald P. O'Grady, Senior Vice President--Legal and Secretary
Henry M. deButts, Vice President--Regulatory Affairs
Thomas J. Greene, Assistant Secretary and Director of Law
Marketing Division
Philip E. Peirce, Senior Vice President--Marketing
Willis R. Balfour, Vice President--Sales and Service
David E. Holt, Vice President--Passenger Sales
Lawrence H. Lee, Vice President--Inflight Service
Robert Leinster, Vice President--Passenger Service
Bert D. Lynn, Vice President--Advertising and Sales Promotion
J. S. Neel, Vice President--Marketing Administration
Jack M. Slichter, Vice President--Field Management
John I. Good, Assistant Vice President--Cargo Sales and Service
S. J. Rogers, Assistant Vice President--Pricing
Operations Division
Anton B. Favero, Senior Vice President--Operations
Richard B. Ault, Vice President--Engineering
Joseph M. Fogarty, Vice President--Maintenance
Robert V. Johnson, Vice President--Flight Operations
Peter P. Wolf, Vice President--Communications
P. Norman Rose, Assistant Vice President--Flight Control
Corporate Affairs
Ray Silvius, Vice President--Corporate Affairs and Assistant to the President
Wayne B. Lichtgarn, Assistant Vice President--Consumer Affairs
Government and Industry Affairs
Neil S. Stewart, Vice President--Government and Industry Affairs
Personnel Relations
Dan A. Zaich, Vice President--Personnel Relations
Regional Officers
William R. Bell, Regional Vice President--Seattle/Tacoma
Paul R. Harding, Regional Vice President--San Francisco
Allen F. Hoss, Regional Vice President--Hawaii
William J. Grant, Regional Vice President--Denver
Grant G. Murray, Regional Vice President--Salt Lake City
Lawrence A. Nichols, Regional Vice President--Field
Luis Pasquel L., Regional Vice President--Mexico
Raymond M. Waters, Regional Vice President--Alaska
Harry L. White, Regional Vice President--Los Angeles
Lynn D. Zumbrunnen, Regional Vice President--Minneapolis/St. Paul
The principal occupation of each of the officers, except Mr. Benninger, is his position with Western.
General Offices
Western Air Lines Building, 6060 Avion Drive
Los Angeles International Airport
Los Angeles, California 90009
Stock Registrars/Transfer Agents
Bank of America National Trust & Savings Assn.
111 West Seventh 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 Listing
Listed and traded on
New York Stock Exchange
Pacific Stock Exchange
Debenture Listing
.isted 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