Western Airlines Annual Report 1975

Western
Airlines
1975
Annual
Report
Western Air Lines Route System
ANCHORAGE
EDMONTON
CALGARY
VANCOUVER
CT FALLS
HELENA
BUTTE
YELLOWSTONE
IDAHO FALLS
POCATELLO
MINNEAPOLIS
ST. PAUL
PORTLAND
SACRAMENT!
SAN FRANCISCO
LOS ANGI
DALLAS
FORT WORTH
HOUSTON
MEXICO CITY
ACAPULCO
KODIAK
JUNEAU*
KETCHIKAN
HONOLULU
HILO
Service Temporarily Suspended by Order Civil Aeronautics Board
Western/Continental Airlines "No-Change-of-Plane" Service.
President's Letter
To Our Shareholders:
Fifty years ago this month, a small group of Southern Cali
fornia civic leaders, businessmen and aviation-minded
pioneers were working feverishly toward the launching of
a new enterprise -- an air link between Los Angeles and
the eastern part of the U.S.
Their specific mission was to provide Los Angeles with
its first air mail service, but in achieving this goal they were
responsible for the beginnings of an industry whose signifi
cance in transporting passengers and cargo has tran
scended even their wildest dreams.
Western Air Express began service on April 17, 1926,
between Los Angeles and Salt Lake City via Las Vegas.
It is the sole survivor of a handful of small companies which
at that time sought to supply contract mail service as a
commercial venture. As Western nears the completion of
its first half-century of service, those of us who are now
associated with the company acknowledge with sincere
appreciation the contributions of our predecessors and the
support of shareholders, customers and employees.
The year 1975 was a difficult one for the airline in
dustry, with six of the nation's major carriers experiencing
significant losses. Of the five trunklines which reported a
profit --
including Western --
all showed a decline in the
level of earnings from the previous year.
The major reasons for the disappointing year were the
continuing impact of inflation on airline costs, a sluggish
economy that produced only modest traffic growth and a
government-controlled fare structure that did not permit
the industry to offset its substantial cost increases.
Western's traffic (expressed in revenue passenger miles)
was up 5.3 percent, compared to 1.3 percent for the in
dustry. Our passenger load factor remained one of the
highest in the industry at 60.7 percent, the same as in 1974.
The company's operating revenues, which passed the
half-billion dollar level for the first time in any single year,
were up 6.3 percent.
Despite continued efforts to hold down costs, operating
expenses increased 13.4 percent. Jet fuel costs, which
went up 30.4 percent, accounted for more than one-third
of the increase in operating expenses. Labor and em
ployee welfare, which account for 40 percent of the com
pany's expense dollar, increased 10.6 percent despite a
31/2 percent decrease in the number of employees.
Control of costs is an area which continues to receive
top priority attention from your management. As in the
past, every effort is being exerted to hold down those costs
that are controllable.
At the same time, we also are working diligently to in
crease revenues from our existing system and to further
our long-range program for expansion of Western's route
system. Your company has a number of route applications
on file which are described in detail in this report. We
continue to be hopeful that the Civil Aeronautics Board will
grant to us the authority sought in a number of pending
route cases. The year 1976 began on a positive note when
President Ford approved a CAB recommendation that
Western be awarded a new Honolulu-Vancouver route.
This 2,700-mile route should be an excellent one when
fully developed. We expect to inaugurate service on the
route in late June.
On February 11, the company inaugurated the first non
stop service from Seattle/Tacoma and Portland to Las
Vegas, which was authorized when the CAB selected
Western over other applicants for the route.
On March 15 the CAB announced it had awarded
Western nonstop authority between Los Angeles/Ontario
and Miami/Ft. Lauderdale. This will give Western its first
transcontinental route.
In order to further develop markets already served by
the company, we are continuing to improve our fleet. In
1975, we took delivery on three Boeing 727-200's, increas
ing our fleet of these aircraft to 21. We also took delivery
of our sixth McDonnell Douglas DC-10.
Early in 1976, we exercised an option for five additional
Boeing 727-200's that will be delivered in 1977. We also
extended to April 30 an option for a seventh DC-10. A
decision on the possible exercise of this option has not
been made. These aircraft will provide for needed growth.
Should additional capacity not be needed, however, less-
efficient aircraft will be sold.
Western continues to be performance oriented. In 1975,
your company led the industry in on-time performance for
an unprecedented fourth consecutive year. We believe that
on-time operation is an important element of competitive
airline service, and we will work diligently in 1976 to again
lead our industry in this aspect of customer service.
Early in 1976, a special committee of the board of direc
tors, consisting of eight members of the board who are not
officers or employees of the company and not associated
with Kirk Kerkorian, unanimously approved a proposal that
your company purchase the 16.5 percent block of Western
stock now owned by Mr. Kerkorian. The details of this pro
posal, which is subject to approval by the shareholders at
the Annual Meeting, are being submitted to you in our
Proxy Statement.
We are optimistic about the future. Western is in a sound
financial condition. We believe that the general upturn in
air travel which began in the third quarter of 1975 will con
tinue in 1976. However, the impact on earnings will depend
on the rate of inflation and whether or not CAB policy on
rates and fares will permit carriers to recover non-con-
trollable cost increases.
Your continued support will be sincerely appreciated.
We hope you will fly and ship on Western and will urge
your friends, neighbors and associates to do likewise.
Arthur F. Kelly
President and Chief Executive Officer
March 15, 1976
Highlights of 1975
Operating 1974 1975 Change
Available seat miles 11,124,000,000 11,696,000,000 + 5.2%
Revenue passenger miles 6,747,000,000 7,103,000,000 + 5.3
Passengers carried 7,391,000 7,531,000 + 1.9
Passenger load factor --
actual %
... .
60.7 60.7
--
breakeven point % .
56.0 59.8 + 3.8 pts
Financial
Operating revenues $488,397,000 $518,973,000 + 6.3%
Operating income $ 38,360,000 $ 8,561,000 -77.7
Earnings before cumulative effect of
change in accounting principle ....
$ 24,098,000 $ 5,160,000 -78.6
Net earnings $ 24,098,000 $ 12,320,000 -48.9
Earnings per share
Primary
Earnings before cumulative effect
of a change in accounting principle . .
$ 1.59 $ 0.34
Net earnings $ 1.59 $ 0.81
Fully diluted
Earnings before cumulative effect
of a change in accounting principle . .
$ 1.41 $ 0.33
Net earnings $ 1.41 $ 0.74
Cash dividends per share $ 0.39 $ 0.47
Shares of common stock outstanding . . .
15,159,000 15,164,000
Shareholders' equity $132,718,000 $137,938,000 + 3.9
Shareholders' equity per share $ 8.76 $ 9.10
Cash, certificates of deposit and
short-term securities $ 27,367,000 $ 37,384,000 + 36.6
Property and equipment at cost ....
$546,051,000 $566,670,000 + 3.8
Long-term debt $114,917,000 $107,617,000 -
6.4
Average number of employees 9,696 9,357 -
3.5
Wages, salaries & employee benefits . . .
$182,334,000 $201,661,000 + 10.6
(The remainder of this report consists of the company's Form 10K, a detailed
report filed annually with the Securities and Exchange Commission. Because
this procedure represents a change in our method of reporting to you, we are
most interested in your views as to the desirability of following this practice
in the future.)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1975 Commission File No. 1-1521
WESTERN AIR LINES, INC.
A Delaware Corporation IRS Employer Identification No. 95-1360150
6060 Avion Drive, Los Angeles, California 90009
(213) 646-2345
Common Stock
$1.00 par value
New York Stock Exchange
Pacific Stock Exchange
5V4% Convertible Subordinated Debentures New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
YES V NO
WESTERN AIR LINES, INC.
PART I
ITEM 1. BUSINESS
Routes
In terms of total operating revenues for the year ended December 31, 1975, Western Air
Lines, Inc. ("Western") is the 9th largest United States airline.
Western provides air transportation services to fourteen of the western states, including
Alaska and Hawaii. It also serves points in the provinces of Alberta and British Columbia,
Canada and the Republic of Mexico. It serves 40 cities, including Acapulco, Anchorage,
Calgary, Denver, Edmonton, Honolulu, Las Vegas, Los Angeles, Mexico City, Minneapolis/St.
Paul, Phoenix, Portland, Salt Lake City, San Diego, San Francisco, Seattle/Tacoma and
Vancouver. The cities served have estimated metropolitan populations in excess of 33 million
people.
In November 1975 Western was authorized by the Civil Aeronautics Board ("CAB") to
operate nonstop service between Las Vegas and Portland and between Las Vegas and Seattle.
Service was begun on February 11, 1976, the effective date of the new authority, with two daily
flights between Las Vegas and Seattle and one daily flight between Las Vegas and Portland.
In February 1976 the CAB with the approval of the President granted Western authority
to operate between Honolulu and Vancouver in competition with a Canadian carrier. Service
on the route is to be inaugurated in late June 1976.
In March 1976 the CAB granted Western authority to operate nonstop between Los
Angeles/Ontario and Miami/Fort Lauderdale, a route now served exclusively by another
trunk carrier. Service on this route is to be inaugurated in the summer of 1976. (See
"Properties -- Flight Equipment.")
Traffic Information
Among United States scheduled airlines, Western during the year ended December 31, 1975
accounted for approximately 5.4% of total scheduled domestic passenger miles and approxi
mately 3.7% of total scheduled domestic ton miles of air cargo. In 1975 Western's passenger
service accounted for approximately 90% of its operating revenues. Western believes that
a significant portion of its revenues is derived from leisure as opposed to business travel.
Approximately 53% of Western's passenger sales in 1975 resulted from sales by travel agents
to whom Western paid commissions. (See "Management's Discussion and Analysis of the
Statements of Earnings -- Operating Expenses" for total commissions paid to travel agents
for the past three years.)
1971 1972* 1973* 1974* 1975*
Passengers carried (000) 6,206 6,931 7,382 7,391 7,531
Available seat miles (000,000) 9,777 10,300 11,176 11,124 11,696
Revenue passenger miles (000,000) 5,252 5,996 6,476 6,747 7,103
Passenger load factor
--
actual (%) 53.7 58.2 57.9 60.7 60.7
--
breakeven (%) 52.2 54.4 52.4 56.0 59.8
--
profit margin (point difference) 1.5 3.8 5.5 4.7 0.9
Average revenue per passenger mile ($) .0577 .0578 .0597 .0660 .0665
Average length in miles per passenger trip 846 865 877 913 943
Available ton miles (000,000) 1,266 1,329 1,447 1,470 1,566
Revenue ton miles (000,000) 598 676 724 770 819
Cargo revenue ton miles (000,000) 73 76 76 95 109
Cargo tons carried 77,731 75,649 75,793 85,363 92,294
Operating expense per available seat
mile ($) .0319 .0340 .0341 .0405 .0436
Average number of employees 8,951 9,383 9,826 9,696 9,357
* For information on strikes against other air carriers, see Note (c) of Notes to Statements
of Earnings.
1
ITEM 1. BUSINESS (Continued)
The mileage figures shown in the foregoing table are on an airport-to-airport basis.
Revenue passenger load factor is the ratio of revenue passenger miles to available seat miles.
The revenue passenger breakeven point load factor represents the approximate per cent of
available seats which must be occupied for revenues to cover all expenses except income taxes.
The computation of the breakeven point load factor is based on the relationship between
earnings before taxes, passenger revenue and the revenue passenger load factor and excludes
the effects of mutual aid payments, gains on the sale of aircraft and the effects of changes in
accounting principles.
Certain of the statistics in the foregoing table reflect a practice which Western followed
during those years of providing first class leg room for all seats and therefore may not be com
puted on the same basis as are similar statistics reported by airlines which employ different
seating configurations or as were utilized by the CAB in establishing its long range load factor
standard. (See Business --
Rates and Fares.)
Route Proceedings
Western presently has the following route cases pending before the CAB:
1. The Transatlantic Route Proceeding, in which Western is an applicant for new and
competitive authority between points on its existing routes and points in Europe. In
January 1975 the administrative law judge issued his recommended decision denying
Western's application. This recommendation is now under review by the CAB.
2. The Las Vegas-Calgary/Edmonton Case, in which Western is an applicant for
nonstop authority between Las Vegas and Calgary/Edmonton. This is a new route author
ized by a recent agreement between the United States and Canadian governments. In
December 1975 the administrative law judge issued his recommended decision in which
he concluded that Western's application should be denied and that another carrier should
be authorized to provide the service. This recommendation is now under review by the
CAB.
3. The Western Route Realignment Proceeding, in which Western has filed an ap
plication asking for the consolidation of its various route segments into one linear segment
and for the elimination of certain outdated certificate conditions which are no longer
meaningful but which impede Western's operating flexibility. The application is under
study by the CAB staff at the present time.
Western is an applicant for new authority in three other cases in which hearings will be
held within the next several months. In the California-Alberta Route Proceeding Western is an
applicant for nonstop routes between Los Angeles and San Francisco on the one hand and
Calgary and Edmonton on the other hand. In the Seattle/Portland-Japan Service Investigation
Western is seeking a route between Seattle-Tacoma/Portland and points in Japan nonstop. In
the Denver-Oklahoma-Southeast Points Investigation Western has applied for routes between
Denver and Atlanta and Denver and Florida points nonstop and via Oklahoma City/Tulsa.
Western has other applications pending before the CAB with respect to which no action
has yet been taken. Among them is an application for authority to operate between San
Francisco, Los Angeles and San Diego on the one hand and the Mexican points of La Paz,
2
ITEM 1. BUSINESS (Continued)
Mazatlan, Puerto Vallarta, Guadalajara, Manzanillo, Zihuatenejo, Mexico City and Acapulco on
the other. Such authority must await amendment of the bilateral agreement between the United
States and Mexico which deals with air transportation between the two countries. Western
presently holds authority between Los Angeles/San Diego and Mexico City and between Los
Angeles and Acapulco.
No estimate can be made as to when CAB actions on these applications may be expected
or whether such action will be favorable to Western.
On the petition of an unsuccessful applicant a federal court of appeals reversed a CAB
decision denying applications for competitive authority over Western's Denver-San Diego
route. Western's petition to the United States Supreme Court to review the court decision was
denied, and thus Western almost certainly will face competition on that route.
Regulation
Legislation has been introduced in the Congress which proposes a reduction or elimination
of certain antitrust exemptions for air carriers, a relaxation of CAB control over fare changes
and easier entry into and exit from markets. The enactment of such legislation could have a
materially adverse impact on Western's operations. However, it is toe early to assess the
likelihood of such legislation being enacted in whole or in part, or its precise impact if adopted.
Rates and Fares
The CAB in recent years issued a series of decisions in various phases of the Domestic
Passenger Fare Investigation which will affect the pattern of airline fares for many years. In
the Load Factor Phase the CAB decided to adopt industry-wide passenger load factor standards
for domestic rate-making purposes. In determining amounts of fare increases required by air
carriers, the CAB will assume that the airlines attain a standard load factor whether or not it is,
in fact, actually attained. This in effect results in a disallowance of expenses for rate-making
purposes where the actual industry load factor is below the standard load factor. The CAB has
established a long range load factor standard of 55% (as computed by the CAB for rate-making
purposes) for use in fixing trunkline fares within the 48 contiguous states. The use of load factor
standards in rate-making proceedings results in fares lower than would otherwise be the case
to the extent actual industry load factors are less than the CAB's standards.
In a final decision in the Joint Fares Phase, the CAB directed the airlines to establish
joint fares in many markets where such fares had not been in effect and to make extensive
changes in both the levels of joint fares and the formula for division of the proceeds of such
joint fares between the carriers participating therein. The formula generally favors short haul
carriers at the expense of long haul carriers. In Western's case, the new division formula
appears to be more favorable than the former method of dividing the proceeds of joint fares,
but Western has not yet been able to develop an estimate of the net revenue effect.
In the Discount Fares Phase the CAB announced adoption of a policy that in the future
fare levels will be computed as if discount fares were not a part of the fare structure. Discount
fare tariffs are required to contain expiration dates not to exceed 18 months from their effective
dates and will be allowed to become effective only if they will generate sufficient traffic to offset
the loss of revenue from self-diversion and will not generate a need for additional capacity.
In its decision in the Fare Structure Phase, the CAB held that passenger fares for all
classes of service within the 48 contiguous states should be more closely aligned to costs of
3
ITEM 1. BUSINESS (Continued)
providing the service, which generally are higher on a per mile basis for short hauls than for
long hauls, and ordered changes in the entire passenger fare structure to be made effective
on April 29, 1975. Basic coach passenger fares since that date reflect a formula embodying a
uniform terminal charge plus a line haul charge per mile which decreases as mileages increase.
Application of this formula has produced an increase in coach fares for trips less than 750 miles
and a decrease in coach fares for trips of more than 750 miles. The CAB also ordered that
first class fares be increased in three stages over a two-year period from a level of 130% of
basic coach fares to new levels ranging from 150% to 163% of basic coach fares based on a
mileage scale which will result in differentials between first class fares and basic coach fares
which increase, rather than decrease, as trip lengths increase. The CAB also fixed a maximum
differential between coach and economy fares of $4. During 1975 the average length of a
passenger trip on Western's domestic system was 669 miles.
On April 27, 1973 the CAB instituted an investigation to determine whether the level and
structure of fares in the Mainland-Hawaii markets are unjust, unreasonable, unjustly discrim
inatory or unduly prejudicial or preferential. Hearings were held in May 1974 and a final
decision is expected sometime in 1976.
Investigations instituted in 1970 into the structure and level of domestic freight rates and
domestic mail rates are also pending before the CAB. Final decisions are not expected in these
proceedings until late 1976. In 1974 and 1975, the CAB authorized increases in air freight
rates in the U.S. which, assuming no change in traffic levels, were estimated to produce
additional annual revenues for Western in excess of $4,000,000.
Recently the CAB has instituted investigations into the level of night coach fares and the
conditions under which night coach service may be provided, and into the legality and
propriety of common fares between west coast points and Hawaii and between west coast
points and points in the midwest and east. Western offers night coach service between Seattle
and Anchorage, between Los Angeles/San Francisco and Minneapolis/St. Paul, and between
Los Angeles/San Francisco and Portland and Seattle and has common fares in west coast-
Hawaii markets and between Minneapolis/St. Paul and the west coast.
On April 16, 1974 the CAB approved a fuel cost related temporary surcharge of 6%
on all domestic fares. On November 15, 1974 the CAB permitted the 6% increase to be
incorporated into the fare structure and approved a further 4% increase in domestic fares for
a temporary period ending June 30, 1975 which was subsequently permitted to become
permanent. On November 15, 1975 and February 1, 1976 further increases of 3% and 1%
became effective. On February 27, 1976 the CAB issued an order permitting a further 2%
increase effective March 1, 1976.
Effective April 1, 1976 the airlines have authority from the CAB to include in their fares
(except intra-California and U.S.-Mexico fares) increments of $.62 per one-way ticket in 48
states-Alaska markets and of $.41 per one-way ticket in other markets served by Western to
cover the cost of precautionary measures which the airlines have been required by the
Secretary of Transportation to take to protect against hijacking and vandalism. Similar charges
had been authorized previously in the form of surcharges for each passenger boarding.
During the 1973-1975 period the CAB also permitted increases in fares to and from both
Mexico and Canada and between the Mainland and Hawaii and between the 48 contiguous
states and Alaska which totaled between 5% and 11%. Western's most recent effort to obtain
a 6% increase in fares to and from Mexico was suspended and is now being investigated
by the CAB.
4
ITEM 1. BUSINESS (Continued)
Increases in Western's rates and fares applicable to transportation between points within
the State of California are subject to regulation by the California Public Utilities Commission
("PUC"). In January 1976 the PUC authorized increases in intra-California fares which,
assuming no change in traffic levels, would produce additional annual revenues for Western
in excess of $1,200,000. The airlines are also allowed to include in their intrastate fares an
increment to cover the costs of screening passengers and baggage at airports and of providing
armed guards at airports. In Western's case this increment amounts to $.27 per passenger.
Competition
Service over substantially all of Western's routes is highly competitive and certain of
Western's competitors are substantially larger and have far greater financial and other resources
than Western. On all its major routes, Western competes with at least one trunk airline and on
some major routes with two or more such airlines. Western also is subject to competition from
local service carriers and in some areas from foreign air carriers and supplemental airlines
(supplemental airlines are authorized to provide charter service only). Western's competitive
position has been strengthened by its acquisition of six DC-10 aircraft during the 1973-1975
period. Additional competition may develop in the future through the authorization of competing
service by other air carriers.
On September 27, 1972 the CAB adopted an amendment to its Economic Regulations
establishing a new category of charter service called "Travel Group Charter." The effect of
this amendment is to substantially liberalize previous restrictions on charter service by domes
tic and foreign air carriers, including supplemental air carriers. The CAB has since adopted
further amendments to the rules governing Travel Group Charters, granting even more freedom
to operators of such services. The CAB has also authorized scheduled and supplemental air
carriers to operate "special event" charters and one-stop inclusive tour charters, both of which
are available for sale to the public at large. As a result all United States air carriers, including
supplemental air carriers, can operate and sell to the public at large (instead of affinity groups as
previously required) charters to a single point of destination (instead of three or more points
of destination as previously required).
On February 11, 1976 the CAB proposed still another category of charter service called
"advance booking charters," in which tour operators could purchase a minimum of 40 seats
from a direct air carrier to be sold to the traveling public. The tour operator simply would have
to submit passenger lists to the CAB in advance (not less than 60 days prior to scheduled
departure for European travel, and not less than 30 days prior to scheduled departure for all
other travel). No ground packages would be required, and no minimum charter prices would
be prescribed. In issuing this proposal, the CAB stated its intention ultimately to have two
basic charter types, one for air transportation only and one for inclusive tours (including ground
arrangements). The CAB further stated that it views these advance booking charters as an
eventual replacement for both affinity charters and travel group charters.
Western expects that there will be some adverse effect on its revenues and profits depend
ing upon the extent to which other air carriers engage in travel group charter, special event
charter, one-stop inclusive tour charter, or advance booking charter service within the areas
in which Western operates scheduled service. Western has not had sufficient experience to be
able to predict the extent of such adverse effects at this time.
5
ITEM 1. BUSINESS (Continued)
The CAB, by its decision in the Discount Fare Phase of the Domestic Passenger Fare
Investigation and by other actions since that decision was issued, has indicated that it disfavors
discount fares unless such fares clearly contribute to net revenues and are available to the
general public and are not offered only to special categories of passengers. Family fare,
youth standby and youth reservation discounts were eliminated by June 1974 in accordance
with a CAB order but other forms of discount fares, such as group fares, are still prevalent,
particularly in the Hawaiian markets. In recent months the major airlines have put into effect
in domestic markets a series of excursion and other discount fares which generally have been
met by all competing airlines. To some extent, these discounts dilute revenue from existing
traffic but for competitive reasons each airline tends to match discount fares offered by its com
petitors. The net result is that price is not a significant factor in inter-carrier competition. (See
"Rates and Fares.")
Fuel
Acting pursuant to the Emergency Petroleum Allocation Act, the Federal Energy Administra
tion promulgated regulations which as amended provide that domestic trunk airlines, including
Western, will each be allocated during each quarter at least 100% of fuel purchased in the
corresponding quarter of 1972 or a proportionate share of the available fuel supply. Since mid-
1974 Western has been able to obtain adequate fuel supplies. Western's contract with its
principal fuel supplier expires at the end of 1976. If the allocation regulations are repealed or
substantially amended, no assurance can be given that Western will be able to obtain adequate
supplies of fuel after the expiration of its contract.
In December 1975 the Congress passed and the President signed the Energy Policy and
Conservation Act. The President also revoked the excise tax on imported oil, effective December
23, 1975. These actions should have a stabilizing effect on the price of aviation fuel and lessen
considerably the likelihood of continuation of the unpredictable and uncontrollable price in
creases which have been prevalent in the last two years. However, there can be no assurance
that the cost of fuel will not continue to escalate. The cost of fuel remains an item having a
significant impact on Western's operating results and substantial increases in fuel costs without
offsetting fare increases would be detrimental.
Western's fuel costs have been:
Consumption Costs
(Millions of
Year Gallons) Per Gallon Total (Millions)
1973 329 $0.13 $44.5
1974 305 0.23 71.4
1975 317 0.29 93.1
Environmental Regulations
Under the National Emission Standards Act of 1967, as amended, the Administrator of
the Environmental Protection Agency ("EPA") is authorized to issue regulations setting forth
standards for aircraft emissions. The Secretary of Transportation is charged with the responsi
bility of enforcing such standards. Under this legislation, state and local governments may
not adopt or enforce aircraft emission standards unless such standards are identical to the
federal standards. In 1973 the EPA issued new emission standards for turbine engines
requiring changes in all JT8D engines, the type used on Western's Boeing 737 and 727
aircraft, which changes have been completed. Similar retrofits for JT3D engines used on
Western's Boeing 707 and 720B aircraft were to be required by January 1, 1978 but in
6
ITEM 1. BUSINESS (Continued)
response to a request of several airlines for a delay in this requirement, the EPA in October
1975 issued a notice of proposed rule making that would postpone that date until July 1, 1979.
At the same time the EPA proposed a requirement that all CF6 engines, the type used on
Western's McDonnell Douglas DC-10 aircraft, be retrofitted by January 1983 to meet emission
standards presently established for all engines manufactured after January 1, 1979. As the
technology necessary to complete the modification on the JT3D and CF6 engines to meet these
standards is still in the development stage, the precise economic impact cannot now be
determined; however, the costs of such modifications could be a substantial financial burden
for Western.
Pursuant to the Noise Control Act of 1972 the EPA in January 1975 announced that it
was recommending to the FAA adoption of a regulation which would require retrofitting all
engines on jet aircraft above 75,000 pounds that do not meet the maximum noise standards
prescribed for new aircraft. The EPA's proposal is that each airline be given until June 30,
1976 to quiet half the engines in its fleet and until June 30, 1978 to have all engines quieted.
In addition, each airline would have to supply annually to the FAA the necessary data to
compute the noise level for its fleet. This information will be used, when adequate technology
becomes available, as a basis for determining whether regulations requiring additional reduc
tions in aircraft noise should be adopted. The FAA is required to publish such proposed
regulations and to hold public hearings thereon.
The EPA proposal contrasts with an advance notice of proposed rule making issued by
the FAA on January 23, 1973. As amended, the FAA's proposed rule, known as the "Fleet
Noise Rule," would require air carriers to achieve within 36 months from the effective date
thereof a reduction in the noise generated by an airline's fleet to a level halfway between the
original noise level of the fleet and the level that would exist if each aircraft in the fleet were
certificated under the regulation specifying maximum noise standards for new aircraft. Within
twelve months thereafter all aircraft in an airline's fleet would have to meet the maximum
noise standards prescribed in that regulation.
The differences between EPA's proposed regulations and FAA's proposal will be reconciled
in accordance with procedures specified in the Noise Control Act. If either EPA's proposal
or FAA's proposal is adopted, modification of older aircraft, replacement of older aircraft with
less noisy aircraft or a combination of both actions will be required. Until a final regulation is
promulgated, the economic impact cannot be determined. However, implementation of either
EPA's or FAA's proposal would have a materially adverse effect upon Western in that it would
require expensive modification or premature retirement and replacement of every aircraft in its
present fleet except the McDonnell Douglas DC-10s and the Boeing 727-200s, which already
meet or can be readily modified to meet the maximum noise standards. Western has not finally
determined which aircraft it would modify and/or which aircraft it would retire in such event.
(See "Property -- Flight Equipment" for aircraft on order and aircraft on option.)
Noise standards which have been promulgated by California authorities limit the total noise
impact of airport operations on surrounding communities and are expected to have an adverse
economic effect upon Western and all other airlines serving major airports within California if
enforced in accordance with their terms. Most of the affected airlines, including Western,
have challenged the constitutionality of such standards in a suit for injunctive relief brought in
a federal court. The court has held that the standards governing maximum allowable noise
emissions by single flights are unconstitutional but the court reserved judgment on the standards
governing maximum allowable impact on the community at large.
At Los Angeles, the Board of Airport Commissioners, purporting to act in accordance
with state law, has promulgated a noise regulation governing airline operations at Los Angeles
International Airport (LAX). The regulation requires that each airline reduce by twenty percent
7
ITEM 1. BUSINESS (Continued)
per year the volume of its flights at LAX with aircraft which are not certificated as
meeting noise standards prescribed by the Federal Aviation Administration for new aircraft.
The objective of the regulation is to insure that by February 28, 1981 all operations at LAX will be
with aircraft certificated under those standards. Most of the airlines serving LAX, including
Western, have challenged the constitutionality of the regulation in a suit for injunctive relief
in a federal court. The court has not yet ruled on this matter, but if the regulation is upheld
and enforced in accordance with its terms, the required modification and/or premature
retirement and replacement of many of Western's aircraft would have a materially adverse effect
upon Western.
The issue of an airport proprietor's right to enact and enforce such regulations could
further be affected by actions of the federal government. On July 9, 1975 the FAA invited public
comment on certain specified policy options available to the FAA in establishing and administer
ing an airport noise policy. Hearings were held in a number of locations and the FAA expects
to complete its study of these policy options by June 30, 1976.
Employees
Wage levels and the cost of employee benefits, including pension costs for both union
and non-union personnel, have risen substantially in recent years and continued to rise during
1975. In 1975 wages and employee benefits accounted for approximately 40% of Western's
total operating expenses.
At December 31, 1975 Western had approximately 9,400 employees of whom approximately
86% were represented by five unions and covered by seven separate collective bargaining agree
ments. Western is currently negotiating changes in its collective bargaining agreements with
mechanics and related employees and stock clerks which become open for amendment of pay
and pension benefits on April 1, 1976, and for other contract terms on November 16, 1976.
Western has not suffered a significant work stoppage by its employees during the past five years,
and considers its relations with its employees to be satisfactory. Western's business could be
adversely affected by strikes or work stoppages by non-employees, such as air traffic controllers,
but its business has not been significantly so affected during the past five years.
During 1975, Western reached new agreements with its pilots, flight attendants, flight
dispatchers and clerical, office, fleet and passenger service employees. The contractual status
for each of the collective bargaining groups is:
Number of
Employees Contract Open
Employee Group 12/31/75 Union for Amendment
Mechanics and Related 1,784 International Brotherhood j April 1,1976
of Teamsters ] (Pay-Pension)
Stock Clerks 110 International Brotherhood j November 16, 1976
of Teamsters (Contract)
Flight Attendants 1,439 Air Line Pilots Association August 1, 1977
Pilots 1,245 Air Line Pilots Association September 1, 1977
Agent and Clerical 3,338 (U.S.) Brotherhood of Railway
and Airline Clerks
January 1, 1978
160 (Mexico) Sindicato Nacional de
Trabajadores de Aviacion
y Similares
January 18, 1977
(wages only)
January 18,1978
(Contract)
Dispatchers 33 Transport Workers Union April 30, 1978
8
ITEM 1. BUSINESS (Continued)
Western has retirement plans which cover all classes of employees except mechanics and
related employees and stock clerks who are covered by a union-sponsored plan to which
Western 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 and twenty year periods. The cost of retirement plans charged to operating expense
has increased steadily over the last five years from $6,504,000 in 1971 to $15,453,000 in 1975.
The additional costs over this period were caused primarily by increased wages, enrollments
and benefits.
In the opinion of Western's management the effect of recent pension legislation on
Western's expenses will not be material.
Dividends
Western paid regular cash dividends from 1951 to 1969. The annual rate was equivalent
to $0.33 per presently outstanding share for 1966 through 1968. In 1969 dividends of $0.17 per
share were paid during the first half of the year, but thereafter no dividends were paid until
1972. Western resumed the payment of cash dividends in the second half of 1972 at $0.08 per
share. During 1973 cash dividends in the amount of $0.23 per share were paid. In 1974 and
1975 cash dividends of $0.39 and $0.47 were declared and paid. The foregoing amounts are
as adjusted when applicable for the 10% stock dividend paid in 1971, the two and one-half for
one stock split effected in 1972, the 3% stock dividend paid in 1973 and the 5% and the 3% stock
dividends paid in 1974.
In September 1972 Western's Board of Directors expressed by resolution its intention to
declare regular dividends, consistent with sound business principles, either in cash, stock,
or a combination of cash and stock, equivalent on the average to 50% of earnings. However,
no assurance can be given as to the declaration of future dividends or the portion thereof which
will be paid in cash since this depends on earnings, the financial condition of Western and
other factors.
The loan agreements related to the senior debt and the indenture entered into in connection
with issuance of Western's 51/4% Convertible Subordinated Debentures contain provisions
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
$27,913,000 at December 31, 1975. However, in February 1976 Western entered into an agree
ment with Mr. Kirk Kerkorian whereby, subject to lender and shareholder approval, Western
will purchase from Mr. Kerkorian his block of 2,508,832 shares (approximately 16.5% of
Western's outstanding shares) for $7,306,700 cash and $23,000,000 principal amount of a new
issue of 10% Subordinated Sinking Fund Notes (the "Notes") to be registered under the
Securities Act of 1933. The indenture which Western anticipates entering into in connection with
the issuance of the Notes is expected to contain provisions that funds available for cash dividend
distributions be limited to $10,000,000 plus or minus any increase or decrease in shareholders'
equity after December 31, 1975. Further, Western is negotiating amendments to its loan agree
ments which may contain provisions more restrictive than those in its present agreements and
those in the indenture described above. (See "Increases and Decreases in Outstanding
Securities" and Note 8 of Notes to Financial Statements.)
General
Western and eight other trunk air carriers and six local service carriers are parties to a
Mutual Aid Agreement (the "Agreement") providing for mutual financial aid in the event
9
ITEM 1. BUSINESS (Continued)
that any of the participating carriers is forced to suspend operations because of certain
types of strikes. A party suffering a strike is entitled to receive from each of the non-struck
parties payments in respect of their increased revenues attributable to the strike less applicable
added direct expenses, as well as supplemental payments to the extent required to bring
the total payments up to a specified percentage of the struck airline's normal operating
expenses for the operations shut down as a result of the strike. No party is obligated to make
supplemental payments with respect to any calendar year which exceed, in the aggregate, 1%
of such party's operating revenues for the prior calendar year. Although the Agreement is
intended to reduce the impact of a strike on the struck airline, it would not offset all the
adverse effects. Any party has the right to withdraw from the Agreement at the end of any
calendar year on one year's notice to the other parties and to the CAB.
Since becoming a member in 1970, Western has made payments to other carriers under
this agreement amounting to $2,700,000 in 1970, $5,181,000 in 1972, $1,870,000 in 1973,
$1,203,000 in 1974 and $4,832,000 in 1975.
Along with other principal United States air carriers, Western has participated in planning
with responsible government agencies for meeting military and civil air transport require
ments in the event of certain emergencies. Western's present commitment in such an event is
to provide one Boeing 707 aircraft.
No material part of the business of Western is dependent upon a single customer, or a
very few customers, the loss of any one of which would have a materially adverse effect.
Western has no insurance with respect to amounts which may be extorted from it under
threat of damage or injury to its aircraft, personnel or passengers. Payment of a substantial
amount which proved to be unrecoverable could have a materially adverse effect upon Western's
results of operations.
10
ITEM 2. STATEMENTS OF EARNINGS
The following Statements of Earnings for the five years ended December 31,1975 have been examined
by Peat, Marwick, Mitchell & Co., independent certified public accountants, whose report thereon, which
is qualified as to consistency with respect to a change in accounting principle with which they concur,
appears elsewhere in this Annual Report, and should be read in conjunction with the financial statements
and the related notes appearing elsewhere herein.
1971 1972 1973 1974 1975
(in thousands of dollars)
Operating revenues:
Passenger $295,807 342,851 376,722 437,345 465,081
Cargo 20,231 20,819 23,040 27,662 31,329
Other 12,009 10,321 21,524 23,390 22,563
328,047 373,991 421,286 488,397 518,973
Operating expenses (a):
Fuel 38,663 40,137 44,510 71,437 93,134
Wages, salaries and employee
benefits 127,075 147,282 165,363 182,334 201,661
Depreciation 35,144 36,224 38,304 40,478 36,054 (b)
Other(c) 110,859 126,741 132.987(d) 155,788 179,563
311,741 350,384 381,164 450,037 510,412
Operating income 16,306 23,607 40,122 38,360 8,561
Other income (expenses):
Interest on long-term debt (11,278) (10,240) (10,505) (11,495) (8,964)
Interest capitalized(e) 116 1,453 1,489 1,161 440
Interest income 3,190 2,832 3,186 4,055 3.630(f)
Gain on sale of equipment 239 582 945 9,575 379
Other --
net (76) (718) 49 167 289
(7,809) (6,091) (4,836) 3,463 (4,226)
Earnings before provision
for taxes on income, extra
ordinary item, and cumula
tive effect of a change in
accounting principle
.
8,497 17,516 35,286 41,823 4,335
Provisions for taxes on income(f)
. .
2,600 6,300 14,900 17,725 (825)
Earnings before extra
ordinary item and cumula
tive effect of a change in
accounting principle 5,897 11,216 20,386 24,098 5,160
Extraordinary item(g) 560 -- -- -- --
Cumulative effect of a change in
accounting principle(d) -- -- -- --
7,160
Net earnings $ 6,457 11,216 20,386 24,098 12,320
11
ITEM 2. STATEMENTS OK EARNINGS (Continued)
1971 1972 1973 1974 1975
Earnings per share(h):
Primary:
Earnings before extraordinary
item and cumulative effect of
a change in accounting
principle $ 0.39 0.75 1.35 1.59 0.34
Extraordinary item 0.04 -- -- -- --
Cumulative effect of a change in
accounting principle --
0.47
Net earnings $ 0.43 0.75 1.35 1.59 0.81
Fully diluted (assuming conversion
of debentures):
Earnings before extraordinary
item and cumulative effect of a
change in accounting principle $ 0.38 0.68 1.21 1.41 0.33
Extraordinary item 0.03 -- -- -- --
Cumulative effect of a change in
accounting principle --
0.41
Net earnings $ 0.41 0.68 1.21 1.41 0.74
Pro forma amounts assuming the
accounting change is applied
retroactively:
Earnings before extraordinary item
Per share:
$ 7,871 10,573 16,074 24,608 5,160
Primary $ 0.52 0.70 1.07 1.63 0.34
Fully diluted 0.49 0.65 0.96 1.44 0.33
Net earnings 8,247 10,573 16,074 24,608 5,160
Per share:
Primary 0.55 0.70 1.07 1.63 0.34
Fully diluted 0.52 0.65 0.96 1.44 0.33
Cash dividends per share(i) --
0.08 0.23 0.39 0.47
See accompanying Notes to Statements of Earnings and Notes to
Financial Statements elsewhere in this Annual Report.
12
ITEM 2. STATEMENTS OF EARNINGS (Continued)
Notes to Statements of Earnings
(a) Operating expenses have been reclassified to present a more useful explanation. Functional
classifications continue to be used in reports to the Civil Aeronautics Board.
(b) Effective January 1, 1975 the estimated depreciable lives of eighteen Boeing 720B aircraft
were extended to a common expiration date of December 31,1978 in recognition of manage
ment's decision to continue use of such aircraft beyond the period in which they would have
become fully depreciated under estimated depreciable lives in effect at December 31, 1974.
For 1975, depreciation expense was decreased by approximately $5,300,000; earnings
before extraordinary item and cumulative effect of a change in accounting principle and net
earnings were increased by approximately $2,600,000 or $0.17 per share (primary).
(c) Operations of certain competing carriers were substantially suspended from December 15,
1971 to April 15, 1972, from June 30 to October 2, 1972 and from December 6 to 21, 1975;
operations of a trunk carrier were substantially suspended during the fourth quarter of
1973 and operations of another trunk carrier from July 14, to October 30, 1974 and from
September 1, 1975 to January 4, 1976. Mutual aid payments, included in "Other" operating
expenses, amounted to $5,181,000 --
1972, $1,870,000 --
1973, $1,203,000 --
1974 and
$4,832,000 --1975. Operations of a competing intra-California carrier, which was not a
party to the Mutual Aid Agreement, were partially suspended during the fourth quarter of
1973.
(d) "Other" operating expenses for 1973 were reduced by approximately $7,900,000 ($3,950,000
or $0.27 per share (primary) after taxes), because of a reduction in reserves for engine
overhauls caused by converting from a program of complete overhauls to one of regular
inspections at shorter hourly periods and overhauls as needed. See Note 2 of Notes to
Financial Statements.
In 1975 Western changed its method of accounting for costs of major flight equipment
maintenance from one of charging such costs to reserves (accumulated by charges to
income on an hours-flown basis) to one of direct expensing of such costs as incurred.
Western believes the newly adopted method is preferable because it better reflects changes
in the physical manner in which airframes and engines are maintained and is the method
followed by the other ten major U.S. airlines. The $7,160,000 cumulative effect of this change
on prior years ($13,785,000 less deferred income taxes of $6,625,000) is included in net
earnings for the year 1975. This change had no other material effect on net earnings for
1975. Periods prior to December 31, 1974 have not been restated. The pro forma amounts
reflect the retroactive effect of this change on net earnings for the periods prior to December
31,1974.
(e) If Western did not follow a policy of capitalizing interest related to deposits on aircraft
purchase contracts, earnings before extraordinary item and cumulative effect of a change
in accounting principle and net earnings would have been increased (decreased) as follows:
1971--$37,000; 1972 --
$(607,000); 1973 -- $(607,000); 1974 -- $(412,000) and 1975 --
$(28,000). Earnings before extraordinary item and cumulative effect of a change in account
ing principle per share (primary) and net earnings per share (primary) would have been
decreased by $0.04, $0.04 and $0.03 for 1972, 1973 and 1974, respectively. Earnings per
share would not have been affected in 1971 and 1975.
13
ITEM 2. STATEMENTS OF EARNINGS (Continued)
Notes to Statements of Earnings (continued)
(f) The provisions for taxes on income before extraordinary item and cumulative effect of a
change in accounting principle were:
1971 1972 1973 1974 1975
Current income taxes
Federal $ 150
(in thousands of dollars)
5,300 5,775 5,325 (5,425)
State 975 1,075 1,700 1,375 225
Deferred federal income taxes 2,600 (3,275) 4,050 8,300 9,905
Deferred investment credits 1,200 5,500 5,800 5,375 (2,555)
4,925 8,600 17,325 20,375 2,150
Amortization of deferred investment
credits (2,325) (2,300) (2,425) (2,650) (2,975)
$ 2,600 6,300 14,900 17,725 (825)
In 1975 the Internal Revenue Service concluded examinations of Western's federal income
tax returns through 1972. Western was successful in accelerating depreciation for tax
purposes which resulted in a refund for certain of the years under review. The provision for
taxes on income for 1975 includes reclassifications relating to timing differences (decreased
current federal income taxes of $4,025,000 and restored deferred investment credits of
$1,130,000, which are offset by increased deferred federal income taxes of $5,155,000).
The only effect of the refund was to increase interest income by $2,133,000 in the fourth
quarter of 1975.
(g) The extraordinary gain from involuntary conversion of an aircraft amounted to $1,110,000
less income taxes of $550,000 ($1,400,000 current and $(850,000) deferred).
(h) Earnings per share data are based on the weighted average number of shares of common
stock outstanding during the respective years, adjusted when applicable to give retro
active effect to a 10% stock dividend paid in 1971, a two and one-half for one stock split
effected in 1972, a 3% stock dividend paid in 1973 and 5% and 3% stock dividends paid
in 1974, as follows: 1971 --15,012,000; 1972 --
15,030,000; 1973 --
15,050,000; 1974 --
15,125,000 and 1975 --
15,163,000. The fully diluted per share data are based on the follow
ing number of shares; 1971 --17,481,000; 1972 -- 17,495,000; 1973 --
17,516,000; 1974 --
17,590,000 and 1975 --17,628,000. Outstanding stock options have no material dilutive
effect on earnings per share.
(i) Cash dividends per share are stated on the basis of Western's shares outstanding at the
date such dividends were declared, adjusted when applicable for a two and one-half for
one stock split effected in 1972, a 3% stock dividend paid in 1973 and 5% and 3% stock
dividends paid in 1974.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENTS OF EARNINGS
Net earnings for 1973 included $3,950,000 resulting from reductions in reserves for engine
overhauls. Net earnings for 1974 included gains of $5,148,000 from the sale of ten aircraft. Net
earnings for 1975 included $7,160,000 resulting from the elimination of reserves for aircraft and
engine overhauls.
Western's system rate of return on investment declined from 11.1% in 1973 to 9.7% in
1974 and further to 0.8% in 1975. (Gains from the sale of equipment and the results from
changes in accounting methods, such as the elimination of reserves for overhaul, are not
treated as income for this computation.) The fair and reasonable rate of return established
by the CAB for the domestic services of Western and other trunk lines is 12.0%.
These declines in the return on investment resulted from operating revenues increases of
$67,111,000 or 15.9% in 1974 and by $30,576,000 or 6.3% in 1975, while operating expenses
increased by $68,873,000 or 18.1% in 1974 and $60,375,000 or 13.4% in 1975.
14
ITEM 2. STATEMENTS OF EARNINGS (Continued)
Operating Revenues
Although revenue passenger miles increased by 271 million or 4.2% in 1974 and by
356 million or 5.3% in 1975, passenger revenues increased by $60,623,000 or 16.1% in 1974
and by $27,736,000 or 6.3% in 1975 primarily because of fare increases. (See "Business --
Rates and Fares''.)
Revenues from first class travel were $28,310,000 for 1974 and $29,655,000 for 1975, 6.5%
and 6.4% of passenger revenues. Coach travel traditionally produces most of Western's
revenues. Approximately 92% of all available seat miles offered for sale by Western in 1975
was in coach service.
Western has been able to sell the increased cargo capacity generated by additional and
larger aircraft. Cargo revenues increased by $4,622,000 or 20.1% in 1974 and by $3,667,000 or
13.3% in 1975, and the related increases in cargo revenue ton miles were 24.4% and 14.1%.
The more rapid rise in expenses than in revenues caused Western's breakeven load factor
to increase from 52.4% in 1973 to 56.0% in 1974 and 59.8% in 1975.
Operating Expenses
Available seat miles declined 0.5% in 1974 and increased only 5.1% in 1975. However, the
cost of fuel increased by $26,927,000 or 60.5% in 1974 and by $21,697,000 or 30.4% in 1975.
The price of fuel was 13.4 cents per gallon in 1973, 23.2 cents per gallon in 1974 and 29.4 cents
per gallon in 1975. Fuel costs are now 18.2% of operating expenses, up from 11.7% in 1973.
(See "Business --
Fuel.")
Largely because of the purchase of new aircraft, seven 727s and one DC-10 in 1974 and
three 727s in 1975, depreciation expense increased $2,174,000 or 5.7% in 1974 and would have
increased by $876,000 or 2.2% in 1975 had not Western extended the depreciable lives of its
eighteen 720B aircraft to 1978. As a result, depreciation expense decreased by $4,424,000 or
10.9% in 1975. (See Note (b) of Notes to Statements of Earnings.)
Wages, salaries and employee benefits continue to reflect the impact of inflation. The
costs of employee benefits increased $3,737,000 or 17% and $5,548,000 or 24% in 1974 and
1975. Costs of retirement plans increased $2,000,000 in 1974 and $1,800,000 in 1975, primarily
because of increased benefits; group insurance increased $700,000 and $3,100,000, primarily
because of increased rates.
Other operating expenses are tabulated below:
1973 1974 1975
Materials and repairs
(in thousands of dollars)
$ 18,711 26,701 30,349
Utilities and services 19,125 24,122 25,788
Commissions paid to travel agents 15,344 19,707 22,210
Food and beverages 15,686 17,477 18,545
Advertising and publicity 11,673 10,911 11,139
Airport landing fees 8,890 8,644 9,881
Rentals
Ground property and equipment 7,221 8,937 11,177
Flight equipment 5,634 7,066 8,306
Property, fuel and other taxes 6,601 7,369 9,304
Mutual Aid 1,870 1,203 4,832
Insurance and related costs 4,613 4,714 5,680
Provision for doubtful accounts 721 1,108 1,381
Other 16,898 17,829 20,971
$132,987 155,788 179,563
15
ITEM 2. STATEMENTS OF EARNINGS (Continued)
Western's operating expenses are extremely sensitive to inflation, as illustrated by the
increases in costs of utilities and services, food and beverages and in property, fuel and other
taxes.
Materials and repairs were reduced by $7,900,000 in 1973 because of the reduction in
reserves for overhauls explained in Note (d) of the Notes to Statements of Earnings. These
costs in 1974 and 1975 also reflect increasing prices of parts and materials for aircraft and
engine maintenance.
The increase of $1,432,000 in rentals of flight equipment in 1974 reflects a full year's rental
of the two DC-10 aircraft leased in 1973. Rentals for 1975 were up by $1,240,000 because
another DC-10 was leased in June. The increase in insurance costs in 1975 was largely due to
additions of this DC-10 and three Boeing 727s.
Ground property and equipment rentals increased by $1,716,000 in 1974 and by $2,240,000
in 1975 because of increases in the number and size of facilities leased and higher rental rates.
A new DC-10 hangar and a new employee parking structure were leased in April 1975 at an
annual rate of approximately $1,300,000.
Commissions paid to travel agents increased by $4,363,000 or 28.4% in 1974 and by
$2,503,000 or 12.7% in 1975 because of the steadily increasing proportions of total sales being
made by travel agents. During 1974 and 1975 approximately one-half of Western's passenger
sales came from travel agents.
The provision for doubtful accounts increased more rapidly than sales because of the
softened economy which caused heavier write-offs including those related to travel agents.
Other Items
Interest income would have decreased in 1975 by $2,558,000 or 63.1% were it not for
interest amounting to $2,133,000 related to a federal tax refund. (See Note (f) of Notes to
Statements of Earnings.) Otherwise, interest income is from Western's investments in certificates
of deposit and short-term securities. The amounts of these investments were sharply reduced
starting in the third quarter of 1974, because the need to borrow funds to maintain working
capital balances (which were used for such investments) substantially diminished. This
resulted from an amendment to a loan agreement with a bank which provides that unused
portions of a line of credit can be taken into consideration when computing required working
capital balances. (See Note 3 of Notes to Financial Statements.)
The increase of $990,000 in interest expense during 1974 resulted from higher interest
rates despite the reductions in long-term debt. Interest expense decreased by $2,531,000
in 1975 because of further reductions in debt outstanding and lower interest rates. Interest
on Western's bank debt fluctuates with the bank's prime commercial rate.
The amounts of interest capitalized were reduced by $328,000 and by $721,000 in 1974 and
1975 because Western had only four aircraft on firm order at the end of 1974 and none on order
at the end of 1975. Western capitalizes interest on advance payments for flight equipment.
Taxes on income in 1975, exclusive of the deferred taxes related to the change in account
ing principle, were a credit of $825,000 because the amortization of investment tax credits over
the lives of the related equipment exceeded the taxes attributable to earnings.
General
Western's routes within California, which accounted for 9% of operating revenues in 1973,
8% in 1974 and in 1975, have operated at substantial losses during all of the periods covered
by the Statements of Earnings. The California routes are an integral part of the total system
which Western operates.
16
ITEM 2. STATEMENTS OF EARNINGS (Continued)
Western's routes to Hawaii, which accounted for 14% of operating revenues in 1973, 15%
of operating revenues in 1974 and 17% of operating revenues in 1975, operated at a loss from
inauguration of service in 1969 through 1972. The loss declined during 1971 and 1972 due
to continuing increases in traffic and yield. For 1973 and 1974 Hawaii operations showed a
profit as a result of further increases in traffic and improvement in yield. For 1975 Hawaii
operations were nominally profitable.
ITEM 3. PROPERTIES
Flight Equipment
The following table lists the aircraft operated by Western on December 31, 1975:
Aircraft Type Number of Aircraft
Owned
Boeing 707-300C 5
Boeing 720B 18
Boeing 737-200 25
Boeing 727-200 15
McDonnell Douglas DC-10 3
Leased
Boeing 727-200 6
McDonnell Douglas DC-10 _3
75
The six Boeing 727 aircraft are leased to Western at an annual rental of $4,130,000 per year
through 1984. Two McDonnell Douglas DC-10 aircraft were leased in June 1973 for a term
expiring June 30,1991 at an average annual rental cost of $3,113,000. A third DC-10 aircraft was
leased in June, 1975 for a term expiring July 10, 1991 at an average annual rental cost of
$2,113,000. (See Note 5 of Notes to Financial Statements.)
To maintain an optimal level of profitability, management seeks to limit capacity additions
to estimated growth in traffic. Due to the uncertainty involved in forecasting future traffic
growth, Western has adopted a conservative approach toward the acquisition of new aircraft.
Western has placed on firm order only those aircraft it estimates it will need in the reasonably
foreseeable future. In most cases, rather than placing firm orders for aircraft, Western obtains
options which later may be exercised, cancelled or postponed. In 1975 Western postponed
delivery dates for ten Boeing 727-200 aircraft on which it has options from 1976-1977 until
1977-1978. In January of 1976, Western exercised its option to purchase five of those aircraft,
at an estimated cost, including buyer furnished equipment, of $54,000,000 with delivery sched
uled for March, April and May 1977. Additionally, Western postponed until April 30, 1976 its
option exercise date on one McDonnell Douglas DC-10 aircraft for delivery in June 1976.
Besides postponing or cancelling option delivery dates to maintain desired capacity levels,
Western has in the past sold various older aircraft as new planes were put into operation. For
example in 1974 Western sold three 737's and seven 720B's at an after-tax gain of $5,148,000.
Western sold no aircraft during 1975, but in the first quarter of 1976 Western sold one Boeing
737.
Western took delivery of three Boeing 727-200 aircraft in May and June 1975. The total
purchase price of these aircraft, including related spares, was approximately $26,242,600.
Western has options to purchase five 727-200 aircraft for delivery in 1978. Western's manage
ment has not yet determined whether it will exercise any of those options. In addition, Western
17
ITEM 3. PROPERTIES (Continued)
took delivery of one McDonnell Douglas DC-10 aircraft in June 1975. That aircraft was leased
as described above.
Purchases of the aircraft on order are expected to be financed out of internally generated
funds and the proceeds of bank loans to be arranged, or through lease financing. If Western
decides to exercise its option to purchase the McDonnell Douglas DC-10 aircraft for delivery in
June, 1976, or the five additional Boeing 727-200 aircraft for delivery in 1978, additional financing
or lease financing will be required. No assurance can be given as to the availability of such
financing or lease financing or the cost thereof.
Other than described above, Western is not currently negotiating for the acquisition of
aircraft. However, Western's management is constantly reviewing its needs for new or addi
tional aircraft in light of economic conditions, decisions in route cases, and many other factors.
The recent CAB decisions awarding Honolulu-Vancouver and Los Angeles-Miami routes to
Western may affect Western's equipment planning. Management currently is studying the
matter to determine if additional aircraft will be required and if so, how many and of what type.
The loan agreements relating to Western's long-term debt require lender approval for any
contracts for the purchase of capital assets involving an expenditure in excess of $10,000,000
and a scheduled delivery more than one year from the date of the purchase order, or for the lease
of aircraft for a period longer than two years. No assurance can be given that such approvals
can be obtained if sought by Western. Such approvals have been obtained for the acquisition of
the five Boeing 727-200 aircraft ordered in January 1976.
Ground Properties and Equipment
Western has built as improvements on leased land the structures comprising its general
offices and principal overhaul and maintenance base at Los Angeles International Airport. The
lease expires in 1993 subject to the right of the City of Los Angeles to terminate the lease
on March 31, 1988 or any March 31 thereafter. Western also leases hangars at Seattle/Tacoma,
Denver, San Francisco and Minneapolis/St. Paul, as well as terminal facilities at all airports
served and local ticket and administrative offices throughout its system. It also utilizes for its
flight operations public airports under contractual arrangements with the municipalities or
agencies controlling them. For the year ended December 31, 1975, total rentals under all of
Western's space lease arrangements, exclusive of airport landing fees, amounted to approxi
mately $8,596,000.
In connection with its operations, Western has spent and expects to spend considerable
sums for airport terminal building improvements, hangar construction and other related
facilities. At its Los Angeles headquarters, a single "high bay" hangar to provide maintenance
support for the DC-10 fleet and an employee parking structure were completed and occupied
during 1975. These two projects, costing approximately $11,000,000, have been financed by
a non-profit corporation organized for the purpose of assisting in the financing of improve
ments at airports operated by the City of Los Angeles under an agreement whereby Western
leases the facilities for a term expiring March 31, 1993 at an average annual rental cost of
approximately $1,300,000. During 1975 Western spent or contracted to spend approximately
$6,250,000 for other facilities and as of December 31, 1975 Western contemplated spending
an additional $3,500,000 for construction and improvements of airport and office facilities
during the next year. In addition, Western estimates that it will spend or commit during the
next twelve months $6,500,000 for ground support equipment.
Western owns its electronic reservations system and two flight simulators. The reservations
system includes two IBM/360 computers. Western leases certain electronic equipment related
to this system, an IBM 370/158-3 computer with related equipment, a third flight simulator and
miscellaneous equipment. The rentals paid under these leases in 1975 amounted to approxi-
18
ITEM 3. PROPERTIES (Continued)
mately $2,581,000. Except for the flight simulator, which is leased for a period of ten years, and
a 370/158-3 computer, which is leased for a period of eight years, all such equipment is leased
on a short-term basis.
ITEM 4. PARENTS AND SUBSIDIARIES
Information incorporated by reference to the Proxy Statement (Exhibit 1) dated March 22,
1976 for the Annual Meeting of Shareholders to be held on April 22, 1976:
Outstanding Stock and Voting Rights Page 2
Western has a wholly-owned subsidiary, WAL Communications, Inc., a Delaware corpora
tion organized for the purpose of holding certain radio licenses for Western. Its transactions
are insignificant in amount and are included in Western's financial statements. Therefore, there
are no separate financial statements.
ITEM 5. PENDING LEGAL PROCEEDINGS
Western and other airlines are parties to numerous actions in state courts wherein owners
of property located in the vicinity of major airports, primarily Los Angeles International Airport,
are seeking to enjoin certain aircraft operations at the airport and/or to recover damages
because of aircraft noise and engine emissions. Most of these cases have been brought
against the City of Los Angeles which in a number of these cases has in turn cross-complained
against the airlines for indemnification. The aggregate amount of damages sought in cases
against the City has been reported by the City to be in excess of $3 billion. Most cases have
held that governmental airport operators are liable to persons who suffer property damage as a
result of aircraft noise related to airport operations. Western and its counsel in these actions
feel that the damages claimed are not a realistic measure of the airlines' exposure and that in
most cases the request for relief is wholly out of proportion to any actual damage that may have
been suffered. 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. However, the questions of law involved in these matters have not been finally settled,
and, pending further judicial clarification, the relative rights and liabilities among such owners
of adjacent areas, the airport operators, the air carriers and the federal, state and local govern
ments are not entirely clear. Unfavorable decisions against Western in these actions could
have a materially adverse effect on Western. Further, any liability of airport operators, or the
granting of any injunctive relief against them, could result in higher costs to air carriers, for
example through higher landing fees.
Judgments have been entered against the City in eight such cases for damages totalling
$1,250,000 on the theory of inverse condemnation. In another case the trial court ruled in
favor of the airlines on the issue of indemnification and the decision has been upheld on appeal.
In a case involving a different airport the Supreme Court of California held that actions can
be maintained against airports for allegedly excessive aircraft noise based on nuisance,
negligence and zoning violations. Subsequently, a trial court awarded damages against the
City of Los Angeles for emotional and mental distress caused by airport noise on a nuisance
theory. The City of Los Angeles has settled a number of claims for personal injury and in one
such case where the City sought indemnification, the Court ruled in favor of the airlines and
that decision has become final.
The California Supreme Court has decided that jet noise damage litigation was not appro
priate for class action determination because of an insufficient community of interest to sustain
19
ITEM 5. PENDING LEGAL PROCEEDINGS (Continued)
a class suit. This holding has significance with respect to the Los Angeles situation where
several of the cases purportedly are on behalf of classes.
In light of this litigation certain communities which own and operate airports, including
Los Angeles and San Diego, have imposed or are considering imposition of limitations on
frequency and timing of airline flights. Enforcement of such restrictions at a major airport
served by Western could have a materially adverse effect upon Western's operations. (See
"Business --
Environmental Regulations" for information regarding regulations adopted at
Los Angeles and related litigation.)
Along with Northwest Airlines, Inc., Western is a defendant in an action brought by Alaska
Airlines, Inc. in a federal court, alleging that the defendants, both individually and in combina
tion, attempted to restrain trade, monopolize commerce and eliminate Alaska Airlines as a
competitor between Seattle and Anchorage, all in violation of the anti-trust laws. The com
plaint asks for treble damages in an amount yet to be ascertained but alleged to total at
least $34,500,000. Western's management does not believe such action will result in any
material liability to Western.
Western is also involved in various other litigation, including certain cases alleging dis
crimination in employment practices, that management believes will not have a materially
adverse effect upon Western.
ITEM 6. INCREASES AND DECREASES IN OUTSTANDING SECURITIES
Equity Securities
Capital
(Common)
Stock
Amount at January 1, 1975 15,159,000
Exercises of stock options on January 15, 1975 5,000
Amount at December 31, 1975 15,164,000
Debt Securities
The only transactions in unregistered securities during 1975 were drawdowns and re
payments under the revolving credit agreement with a bank, as were reported on Forms 8-K
submitted for the months of January, March, May, June, July, September, October and November
1975. (See Note 3 of Notes to Financial Statements.)
Proposed Purchase of Capital Stock and Issuance of Notes
If the agreement between Western and Mr. Kerkorian whereby Western will purchase Mr.
Kerkorian's stock is consummated, the number of outstanding shares of Capital Stock will
decrease to 12,655,000 and there will be outstanding a new issue of debt securities. (See
"Business --
Dividends" for a description of the agreement.)
51/4 %
Convertible
Subordinated
Debentures
$29,555,000
$29,555,000
ITEM 7. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
Approximate Number of
Title of Class Holders of Record
Capital (common) stock 17,500
$1.00 par value per share at February 27, 1976
51/4% convertible subordinated 750
debentures due February 1, 1993 at January 15, 1976
20
ITEM 8. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age(1) Position
Fred Benninger 59 Chairman of the Board
A. F. Kelly 63 President and Chief Executive Officer
D. P. Renda(2) 62 Executive Vice President
C. J. J. Cox 64 Senior Vice President --
Finance
Richard P. Ensign(3) 57 Senior Vice President -- Marketing
A. B. Favero 62 Senior Vice President --
Operations
Robert O. Kinsey 59 Senior Vice President --
Corporate Planning
Gerald P. O'Grady 62 Senior Vice President --
Legal and Secretary
R. O. Hammond 46 Vice President and Treasurer
R. G. Leith 47 Vice President and Controller
(1) At March 22, 1976.
(2) Mr. Renda previously served as an officer of Western from 1947 to 1968.
(3) Mr. Ensign previously served as an officer of Western from 1963 to 1971.
All of the executive officers listed above serve at the pleasure of the Board of Directors
except for Messrs. Kelly, Renda and Cox who have employment agreements. With the exception
of Mr. Renda and Mr. Ensign, all of the executive officers of Western have been officers or
employees of Western for the last five years.
ITEM 9. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Information incorporated by reference to the Annual Report for 1974 on Form 10-K, dated
March 27,1975.
ITEM 10. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Reference is made to the Index preceding the financial statements for a list of all financial
statements filed as part of this Annual Report.
(b) Exhibits
Copies of the following exhibits may be obtained by writing to the Secretary, P.O. Box
92005, World Way Postal Center, Los Angeles, California 90009 and enclosing a check payable
to Western Air Lines, Inc. in the amount of $45.00.
1. Agreement Between Western Air Lines, Inc. and The Air Line Flight
Attendants in the Service of Western Air Lines, Inc. as Represented by The
Air Line Pilots Association, International, effective April 1, 1974.
2. Agreement Between Western Air Lines, Inc. and All That Class of Clerical,
Office, Fleet and Passenger Service Employees Represented by The
Brotherhood of Railway and Airline Clerks, effective July 1, 1975.
3. Agreement Between Western Air Lines, Inc. and the Air Line Pilots in the
Service of Western Air Lines, Inc. as Represented by The Air Line Pilots
Association International, effective September 1, 1975.
4. Agreement Between Western Air Lines, Inc. and Employees Represented by
The Brotherhood of Railway and Airline Clerks in Calgary, Alberta, Canada,
effective September 1, 1975.
21
5. Agreement Between Western Air Lines, Inc. and the Flight Superintendents
in the Service of Western Air Lines, Inc. as Represented by Transport
Workers Union, effective November 1, 1975.
6. Certificate of Public Convenience and Necessity, as amended, for Route 63,
issued pursuant to Order 75-11-45, effective February 11, 1976.
7. Certificate of Public Convenience and Necessity, as amended, for Route
52, issued pursuant to Order 76-2-1, effective April 3, 1976.
8. Certificate of Public Convenience and Necessity, as amended, for Route
35, issued pursuant to Order 76-3-93, effective June 13, 1976.
PART II
Part II is omitted because Western has filed a definitive proxy statement with the Com
mission pursuant to Regulation 14A involving the election of directors.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this annual report to be signed on its behalf by the undersigned thereunto duly
authorized.
WESTERN AIR LINES, INC.
By R. G. LEITH
Dated March 17,1976
R. G. Leith
Vice President and Controller
WESTERN AIR LINES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Balance Sheets as of December 31, 1974 and 1975 25
Statements of Earnings for the five years ended December 31,1975 11
Statements of Changes in Financial Position for the five years
ended December 31, 1975 27
Statements of Shareholders' Equity for the five years ended
December 31, 1975 26
Notes to Financial Statements 28
Accountants' Report dated February 25,1976 24
Schedules supporting financial statements
V Property, Plant and Equipment for the years ended
December 31, 1974 and 1975 35
VI Accumulated Depreciation and Amortization of Prop
erty, Plant and Equipment for the years ended
December 31, 1974 and 1975 36
XII Valuation and Qualifying Accounts and Reserves for
the years ended December 31, 1974 and 1975 37
The remaining schedules as specified by Regulation S-X are omitted as the required
information is inapplicable or is given in the financial statements, notes to financial
statements and schedules supporting financial statements.
23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Western Air Lines, Inc.:
We have examined the balance sheets of Western Air Lines, Inc. as of December 31, 1975
and 1974, the related statements of earnings (included under Item 2, Statements of Earnings),
shareholders' equity, and changes in financial position for the five years ended December 31,
1975, and the supporting schedules for the two years ended December 31,1975. 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.
As set forth in note (b) of notes to statements of earnings, effective January 1, 1975,
the Company extended the estimated depreciable lives of Boeing 720B aircraft. This revision
in depreciation rates, with which we concur, does not constitute a change in accounting
principle but does affect the comparability of the financial statements.
In our opinion, the aforementioned financial statements present fairly the financial position
of Western Air Lines, Inc. at December 31, 1975 and 1974, and the results of its operations and
the changes in its financial position for the five years ended December 31, 1975, in conformity
with generally accepted accounting principles consistently applied during the periods except
for the change, with which we concur, in the method of accounting for costs of major flight
equipment maintenance as described in note (d) of notes to statements of earnings. The
supporting schedules, in our opinion, present fairly the information set forth therein.
PEAT, MARWICK, MITCHELL & CO.
Los Angeles, California
February 25, 1976, except as
to the third paragraph
of note 8 which is as
of March 5, 1976.
24
WESTERN AIR LINES, INC.
BALANCE SHEETS
(in thousands of dollars)
ASSETS
December 31,
1974 1975
CURRENT ASSETS:
Cash (Note 3) $ 11,082 10,546
Certificates of deposit 10,345 16,878
Commercial paper at cost and accrued interest (which approxi
mate market) 5,940 9,960
27,367 37,384
Receivables (net of allowance for doubtful accounts of $900 -- 1974
and $950 --
1975) 39,138 48,539
Flight equipment expendable parts, at average cost (less allowance
for obsolescence of $8,550 --1974 and $9,653 --1975) 12,206 14,943
Prepaid expenses and other current assets 5,847 6,944
Total current assets 84,558 107,810
PROPERTIES AND EQUIPMENT AT COST (Notes 2 and 5):
Flight equipment 442,624 477,816
Ground equipment 89,201 88,241
Deposits on aircraft purchase contracts 14,226 613
546,051 566,670
Less allowance for depreciation and amortization (including re
serves for overhauls of flight equipment of $12,299--1974) 238,744 256,985
307,307 309,685
DEFERRED CHARGES AND OTHER ASSETS 4,960 2,598
$396,825 420,093
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 22,507 28,857
Accrued salaries, wages and vacation benefits 17,731 19,680
Accrued liabilities 12,919 13,767
Advance ticket sales (Note 1) 16,962 27,546
Current maturities of long-term debt (Note 3) 22,463 15,750
Total current liabilities 92,582 105,600
LONG-TERM DEBT (Note 3) 114,917 107,617
DEFERRED CREDITS (Notes 2, 4 and 5):
Deferred federal taxes on income 32,484 42,435
Unamortized investment credits 17,595 18,645
Other 6,529 7,858
56,608 68,938
SHAREHOLDERS' EQUITY (Notes 3, 7 and 8):
Common stock --
$1.00 par value per share
Authorized 25,000,000 shares
Issued 15,159,000 shares --
1974 and 15,164,000 shares --
1975
.
15,159 15,164
Capital in excess of par value 37,440 37,461
Retained earnings 80,119 85,313
132,718 137,938
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 2 and 5)
$396,825 420,093
See accompanying notes to financial statements.
25
WESTERN AIR LINES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands of dollars)
Common
Stock
$1.00
Capital in
Excess of Retained Shareholders'
Par Value Par Value Earnings Equity
Balance at January 1, 1971 $ 4,904 19,235 55,766 79,905
Exercise of stock options 1 34 --
35
Net earnings -- --
6,457 6,457
Stock dividend (10%) 490 10,481 (10,971) --
Balance at December 31, 1971 5,395 29,750 51,252 86,397
Exercise of stock options 16 220 --
236
Conversion of debentures 3 88 --
91
Net earnings -- --
11,216 11,216
Cash dividends -- --
(1,217) (1,217)
Stock split (21/2 for 1) 8,107 (8,107) -- --
Balance at December 31, 1972 13,521 21,951 61,251 96,723
Exercise of stock options 1 4 --
5
Net earnings -- --
20,386 20,386
Cash dividends -- --
(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 -- --
(5,849) (5,849)
Stock dividends (5% and 3%) 1,126 10,140 (11,387) (121)
Balance at December 31, 1974 15,159 37,440 80,119 132,718
Exercise of stock options 5 21 --
26
Net earnings -- --
12,320 12,320
Cash dividends -- --
(7,126) (7,126)
Balance at December 31, 1975 (Notes 3, 7
and 8) $15,164 37,461 85,313 137,938
See accompanying notes to financial statements.
26
WESTERN AIR LINES, INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
(in thousands of dollars)
Year ended December 31,
1971 1972 1973 1974 1975
Sources of Working Capital:
Earnings before extraordinary item and cumulative
effect of a change in accounting principle
Add back:
Depreciation, amortization and provision for
overhauls of flight equipment (Note 2)
Deferred income taxes
Deferred investment credits
Amortization of deferred investment credits
. .
Gain on disposal of other property and equip
ment
Other
Total from operations before extraordinary
item and cumulative effect of a change in
accounting principle
Extraordinary item, net of amounts not affecting work
ing capital
Cumulative effect of a change in accounting principle
in 1975 amounting to $7,160 which did not affect
working capital
Total from operations
Reimbursements upon leasing of DC-10 aircraft and
buildings
Proceeds from disposal of property and equipment
Proceeds from issuance of long-term debt
Other --
net
Applications of Working Capital:
Purchase of property and equipment and advances
thereon
Reduction of long-term debt including transfers to
current liabilities and conversion of debentures
Cash dividends
Increase (Decrease) in Working Capital
.
Summary of Increases (Decreases) in Working Capital:
Cash, certificates of deposit and commercial paper
Receivables
Expendable parts and prepaid expenses
Accounts payable, advance ticket sales, accrued
and other current liabilities
Net increase (decrease)
$ 5,897 11,216 20,386 24,098 5,160
38,607 35,254 29,436 41,327 34,781
2,600 (3,275) 4,050 8,300 9,905
1,200 5,500 5,800 5,375 (2,555)
(2,325) (2,300) (2,425) (2,650) (2,975)
(239) (582) (945) (9,575) (379)
-- --
672 1,475 1,475
45,740 45,813 56,974 68,350 45,412
(1,400)
:
44,340 45,813 56,974 68,350 45,412
-- --
12,125 --
15,882
5,426 1,689 5,615 23,749 2,535
-- --
15,362 13,000 8,450
895 1,849 (4,532) 828 2,816
50,661 49,351 85,544 105,927 75,095
10,548 59,196 74,280 92,441 41,985
22,144 21,553 21,463 22,471 15,750
--
1,217 3,462 5,970 7,126
32,692 81,966 99,205 120,882 64,861
$ 17,969 (32,615) (13,661) (14,955) 10,234
$ 16,424 (25,642) (7,761) (20,254) 10,017
1,211 5,817 7,264 3,114 9,401
(528) (367) 3,650 (385) 3,834
862 (12,423) (16,814) 2,570 (13,018)
$ 17,969 (32,615) (13,661) (14,955) 10,234
See accompanying notes to financial statements.
27
NOTES TO FINANCIAL STATEMENTS
(All dollar amounts except per share amounts are expressed in thousands.)
Note 1. Summary off Significant Accounting Policies.
For Comparability: Prior years' figures have been reclassified where applicable to conform
with the financial statement presentation in 1975.
Depreciation Method: Property and equipment, exclusive of estimated residual values, are
depreciated over estimated useful lives by the use of the straight-line method.
Preoperating Costs: Major training costs necessary to introduce new aircraft into service
are deferred and amortized over the estimated periods to be benefited (five years for DC-10
preoperating costs).
Reserves for Overhauls off Flight Equipment: For the years 1971 through 1974 the estimated
costs of major flight equipment maintenance were accrued by charges to operating expense
based on hours flown. During 1975 this method was changed to direct expensing of overhaul
costs as incurred. (See Note (d) of Notes to Statements of Earnings.)
Interest capitalized: Interest related to deposits on aircraft purchase contracts is capitalized
and amortized over the useful lives of the equipment. (See Note (e) of Notes to Statements
of Earnings for effects on earnings before extraordinary item and cumulative effect of a change
in accounting principle and net earnings.)
Investment Credits: Investment credits generated by acquisition of assets are amortized
to income on a straight-line basis over the useful lives of the related assets. Amortization
for financial statement purposes may exceed accumulated amounts utilized on Western's
tax returns to the extent of available deferred federal taxes on income on the accompanying
balance sheets.
Obsolescence off Expendable Parts: An allowance for obsolescence of flight equipment
expendable parts is accrued over the useful lives of the related aircraft types.
Advance Ticket Sales: Passenger ticket sales are recorded as a current liability until
billed by other carriers for transportation provided by them or until recognized as revenues for
services provided by Western. At December 31, 1974 and 1975 $7,945 and $11,476 were
estimated to be payable to other carriers and $9,017 and $16,070 were estimated to be related
to transportation to be provided by Western.
Note 2. Property and Equipment.
The estimated useful lives of operating property and equipment 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-five Boeing 737-200
aircraft acquired in 1968 and 1969, and the fifteen Boeing 727 aircraft acquired in 1972,
1974 and 1975, 12 years to a residual value of 15%. In 1975 the estimated useful lives of the
eighteen Boeing 720B aircraft acquired during 1961 to 1967 were extended to a common retire
ment date of December 31, 1978 with a residual value of $100 per aircraft. See Note (b) of
Notes to Statements of Earnings.
The estimated useful lives of ground equipment range from four to ten years. For buildings
and improvements on leased property the estimated useful lives are generally the periods of the
leases.
For the years 1971-1974, the costs of major airframe and engine overhauls were charged to
reserves for overhauls of flight equipment. These reserves were eliminated in 1975 and
overhaul costs are now charged to the appropriate expense accounts in the year incurred as
28
NOTES TO FINANCIAL STATEMENTS (Continued)
(All dollar amounts except per share amounts are expressed in thousands.)
Note 2. Property and Equipment (continued).
are the costs of other maintenance and repairs. (See Note (d) of Notes to Statements of
Earnings.) Reserves for overhauls of leased flight equipment of $1,486 at December 31, 1974
are included as "other" deferred credits in the accompanying Balance Sheets.
Renewals are charged to properties and equipment accounts, which are relieved of the
items renewed or replaced; material betterments are charged to properties and equipment
accounts.
The cost and accumulated provisions for depreciation applicable to assets, at the date they
are retired or otherwise disposed of, are eliminated from the asset and reserve accounts, and
the gain or loss on such disposition is credited or charged to income.
For a detailed discussion of the possible impact of environmental regulations and related
litigation on Western's fieet, see "Business -- Environmental Regulations" and "Pending Legal
Proceedings" elsewhere in this Annual Report.
Note 3. Long-term Debt (Unsecured).
At December 31, 1974 and 1975 long-term debt was as follows:
1974 1975
Senior Debt:
Revolving line of credit $ 13,000 21,450*
Installment note due December 31, 1975. The interest rate was
1/4% over the bank's prime commercial rate 19,463 --
51/4% installment notes due September 1, 1981 with annual principal
payments of $1,000 on September 1 which will increase to $4,000
a year starting in 1976 25,000 24,000
65/s% installment notes due September 1, 1984 with annual principal
payments of $2,000 on September 1 which will increase to $7,000 a
year starting in 1982 35,000 33,000
83A% installment notes due November 16, 1985 with quarterly
principal payments of $768 starting in 1981 15,362 15,362
107,825 93,812
Less current maturities 22,463 15,750
85,362 78,062
Subordinated Debt:
51/4% convertible subordinated debentures due February 1, 1993,
with sinking fund payments of $1,500 a year starting in 1979 29,555 29,555
$114,917 107,617
* In accordance with Statement No. 6 of the Financial Accounting Standards Board, $9,750
of the amounts drawn down under the revolving line of credit at December 31, 1975, which
management intends to repay within twelve months, is included in current maturities.
Under the revolving line of credit a maximum of $65,000 was available until December 31,
1975. At that time semi-annual reductions of $7,150 in the amount available began and will
continue until the final reduction of $7,800 on December 31, 1979.
29
NOTES TO FINANCIAL STATEMENTS (Continued)
(All dollar amounts except per share amounts are expressed in thousands.)
Note 3. Long-term Debt (Unsecured) (continued).
The commitment fee is 1/2% per annum on the unused portion. The interest rate was 1A%
over the bank's prime commercial rate until December 31, 1974, when it became 1/2% over such
rate. The interest rate was 7%% for Western at December 31, 1975.
The following schedule shows the amount of long-term debt due in each of the five follow
ing calendar years excluding borrowings under the revolving line of credit:
1976 $6,000
1977 6,000
1978 6,000
1979 7,500
1980 7,500
The financial agreements related to the senior debt and the indenture for the 51/4%
convertible subordinated debentures contain provisions which limit retained earnings from
which cash dividend distributions can be made. These agreements limit amounts available
for restricted payments (cash dividend distributions and purchases of Western's Common
Stock) to $27,913 at December 31, 1975. (See Note 8 for the effect of the proposed transaction
with Mr. Kerkorian on these restrictions.) The financial agreements related to the senior debt
also contain, among other things, requirements pertaining to working capital levels and provi
sions which may restrict additional borrowings.
Although the loan agreement related to the revolving line of credit does not require
compensating balances, Western has an informal understanding to maintain on deposit with
each of the lending banks average balances equal to 10% of their portion of the total credit
availability or 15% of borrowings, whichever is greater. Accordingly, during 1975 the average
balance maintained amounted to approximately $6,900 (an average of $5,700 would have
been required based upon debt outstanding at December 31, 1975) after adjustment for the
estimated average float of $800 during the year.
At December 31, 1975, 2,465,000 shares of common stock were reserved for conversion of
debentures at a conversion price of $11.99 per share.
Note 4. Taxes on Income.
Deferred income taxes arise from timing differences between financial and tax reporting.
The tax effects of these differences follow:
1971 1972 1973 1974 1975
Depreciation
. .
$ 4,764 (3,062) 539 7,361 9,575
Overhauls of flight equipment (1,809) 594 3,446 (453) --
Preoperating expense (274) (69) 892 (200) (200)
Interest capitalized (37) 647 62 731 (429)
Pension plans (66) (1,337) (520) 801 (21)
Other 22 (48) (369) 60 980
$ 2,600 (3,275) 4,050 8,300 9,905
30
NOTES TO FINANCIAL STATEMENTS (Continued)
(All dollar amounts except per share amounts are expressed in thousands.)
Note 4. Taxes on Income (continued).
Investment credits not utilized on tax returns amounted to $19,925 at December 31, 1975
($13,600 --
1974) with $104 expiring in 1978, $5,409 in 1979, $4,164 in 1980, $6,223 in 1981
and $4,025 in 1982.
Of the $18,645 unamortized investment credit balance at December 31, 1975 ($17,595 --
1974), $3,082 ($5,887 --1974) remains from investment credits utilized by reductions of taxes
paid and $15,563 ($11,708 -- 1974) is related to investment credits not yet utilized for reduction
of taxes paid.
A reconciliation between the amount of reported taxes on income and the amount computed
by multiplying earnings before provision for taxes on income, extraordinary item and cumulative
effect of a change in accounting principle by a tax rate of 48% follows:
1971 1972 1973 1974 1975
Taxes on income at 48%
Increases (reductions) in taxes resulting
$ 4,079 8,408 16,937 20,075 2,081
from:
Amortization of deferred investment
credits
State income taxes net of federal in-
(2,325) (2,300) (2,425) (2,650) (2,975)
come tax benefit 507 559 884 715 117
Other 339 (367) (496) (415) (48)
Taxes on income $ 2,600 6,300 14,900 17,725 (825)
Western's management is of the opinion that the cash outlay for income taxes will not
substantially exceed income tax expense for the next three years.
Note 5. Commitments and Contingent Liabilities.
Total rental expense was $9,636, $10,410, $12,855, $16,003 and $19,483; rental expense
for noncapitalized "financing" leases was $5,546, $6,338, $7,861, $9,422 and $11,740 for 1971,
1972, 1973, 1974 and 1975, respectively. For purposes of these disclosures, a "financing"
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, 1975 minimum rental expense under all noncancelable leases expiring
after December 31, 1976 was as follows: Totals
Flight Airport Other Financing All Other
Equipment Facilities Facilities Leases Leases
Annually
1976 $ 9,371 4,752 2,728 13,195 3,656
1977 9,371 4,710 2,683 13,195 3,569
1978 9,371 4,675 2,548 13,195 3,399
1979 9,371 4,444 2,365 13,195 2,985
1980 9,371 4,069 2,269 13,217 2,492
Five-year Periods
1981-1985 41,691 19,070 8,853 59,549 10,065
1986-1990 26,203 16,937 6,501 41,823 7,818
1991-1995 2,620 9,152 2,925 10,422 4,275
Thereafter
1995-2005 --
7,982 --
4,830 3,152
31
NOTES TO FINANCIAL STATEMENTS (Continued)
(All dollar amounts except per share amounts are expressed in thousands.)
Note 5. Commitments and Contingent Liabilities (continued).
Flight equipment leases are for six Boeing 727-200 aircraft acquired in 1969 under a lease
expiring in 1984, two McDonnell Douglas DC-10 aircraft acquired in 1973 under a lease
expiring in 1991, and one McDonnell Douglas DC-10 aircraft acquired in 1975 under a lease
expiring in 1991. The rental expenses for certain leases included in the above tabulation are
normalized on a straight-line basis because required cash payments are not level throughout
the terms of the leases. During 1976 cash payments under financing leases will total $1,623
less than the expenses shown above. At December 31, 1974 and 1975 "Other" deferred credits
in the accompanying balance sheets include $2,147 and $5,116 representing amounts which
will be used to reduce future rental expenses.
The present values, in the aggregate and by major categories, of minimum lease commit
ments applicable to noncapitalized "financing" leases at December 31, 1975 and 1974 were as
follows:
Interest Rates Used in
Computations
Present Values Weighted Average Range
1974 1975 1974 1975 1974 1975
Flight Equipment $52,734 67,888 9.2% 9.4% 8.4-10.0% 8.4-10.5%
Terminal Facilities 12,503 12,097 6.6 6.6 6.0- 7.5 6.0- 7.5
Hangar and Other Facilities 11,224 24,242 5.8 7.7 3.7- 8.6 3.7-10.4
$76,461 104,227
If (for purposes of disclosure required by regulations of the Securities and Exchange Com
mission) (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 $3,104, $3,104,
$3,832, $4,559 and $5,564 and interest would have been $4,638, $4,517, $5,452, $6,402 and
$7,848 for 1971, 1972, 1973, 1974 and 1975, respectively. Therefore, net earnings for 1971, 1972,
1973, 1974 and 1975 would have been reduced by $1,054, $615, $644, $738 and $802 or $0.07,
$0.04, $0.04, $0.05 and $0.05 per share (primary), respectively.
The interest rates used in these computations are based on the interest rates of the under
lying debt.
During January 1976 Western exercised options, subject to lender approval, to purchase
five Boeing 727-200 aircraft for delivery in 1977 which will cost approximately $54,000 including
buyer furnished equipment.
Outstanding commitments for flight equipment modifications amounted to approximately
$1,500 and for ground facilities and equipment amounted to approximately $3,500 at December
31, 1975.
For a detailed discussion of the status at December 31, 1975 of legal proceedings, see
"Pending Legal Proceedings" elsewhere in this Annual Report.
32
NOTES TO FINANCIAL STATEMENTS (Continued)
(All dollar amounts except per share amounts are expressed in thousands.)
Note 6. 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 con
tributions. Costs of company sponsored plans are funded annually as benefits accrue. Actuarial
gains and losses are amortized over ten-year periods; costs of changes in benefits are amortized
over ten and twenty-year periods.
The cost of retirement plans charged to operating expense amounted to $6,504, $9,622,
$11,572, $13,617 and $15,453 for the years 1971, 1972, 1973, 1974 and 1975, respectively. The
increases in costs over the last five years have been caused by increased payrolls, enroll
ments and benefits. Western's actuaries are of the opinion that total assets under the
plans exceed liabilities for accrued vested benefits. Unfunded past service costs of the plans
amounted to approximately $11,900 at December 31, 1975.
Effective January 1, 1976, Western amended certain plans to comply with recent pension
legislation and to streamline benefits. In addition the actuarial method was changed for one
plan and certain actuarial assumptions were changed for all plans. These amendments and
changes will decrease Western's expenses in 1976 by approximately $1,800.
Note 7. Options to Purchase Common Stock.
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. Both plans
provide that option prices shall not be less than 100% of the fair market value of the stock at
date of grant. Options are exercisable in equal annual increments over a five-year period.
Under the 1964 plan, options expire five years after the date of grant; under the 1974 plan,
options are exercisable, to the extent not previously exercised, for an additional five years
before they expire.
Under the 1964 plan, no additional options could be granted after March 31, 1974; 120,479
and 115,576 shares of Western's authorized and unissued shares were reserved at December
31, 1974 and 1975 and represented shares subject to outstanding options.
Under the 1974 plan, 1,030,000 shares of Western's authorized and unissued stock were
reserved at December 31, 1974 and 1975; 385,220 and 384,770 shares were subject to outstand
ing options and 644,780 and 645,230 shares were reserved for future grants of options at
December 31, 1974 and 1975.
Options outstanding at December 31, 1975 were granted during 1971, 1972, 1973, 1974 and
1975. The tabulation of the number of "Shares becoming exercisable" below includes the
shares under options which have expired, lapsed, or have been superseded.
Additional information with respect to options granted under these plans is as follows:
Option Price Market Value
Number
of Shares
Average
per share Total
Average
per share Total
Shares under option:
At December 31, 1974 505,699 $9.66 $4,883 $5.75 $2,908
At December 31, 1975 ...
500,346 9.68 4,841 9.19 4,598
Shares becoming exercisable:
1974
. . . .
104,270 9.61 1,002 9.27 967
1975
...
103,159 9.65 996 7.04 726
At dates exercised:
1974
...
108,445 8.58 930 11.40 1,236
1975 4,589
33
5.63 26 6.44 30
NOTES TO FINANCIAL STATEMENTS (Continued)
(All dollar amounts except per share amounts are expressed in thousands.)
Note 7. Options to Purchase Common Stock (continued).
All numbers of shares and prices per share have been adjusted when applicable for a
10% stock dividend paid in 1971, a two and one-half for one stock split effected in 1972, a 3%
stock dividend paid in 1973, and 5% and 3% stock dividends paid in 1974.
Note 8. Proposed Purchase of Capital Stock and Issuance of Notes.
On February 17, 1976, Western entered into a purchase agreement with Mr. Kerkorian
under which Western agreed to purchase and Mr. Kerkorian agreed to sell his 2,508,832
shares of Western's $1.00 par value Capital (Common) Stock for $7,306 cash and $23,000 in
10% Subordinated Sinking Fund Notes due April 15, 1984 with sinking fund payments on the
principal amount of $2,300 annually starting in 1977 with the balance of $6,900 retired at
maturity.
This agreement is subject to the approval of Western's shareholders at a meeting to be
held on April 22, 1976.
Western's principal lenders have given their consents to the purchase of this stock and to
the issuance of these notes. However, the consents of certain lenders are subject to agreement
with respect to proposed changes in provisions of the currently effective loan agreements
relating to funds available for payment of future dividends and future purchases of stock. In
addition, agreement has not yet been reached with respect to changes, if any, in the interest
rates related to the loans.
Note 9. Supplementary Profit and Loss Information.
1973
Year ended December 31,
1974 1975
Charged to operating expenses:
Maintenance and repairs $36,834 48,885 55,715
Amortization of preoperating costs 219 426 417
Taxes other than taxes on income:
Payroll taxes 7,029 7,825 8,413
Aircraft engine fuels and oils 1,026 1,141 1,911
Property and other 5,575 6,228 7,393
Rentals of flight equipment 5,634 7,066 8,306
Other rentals 7,221 8,937 11,177
Airport landing fees 8,890 8,644 9,881
Advertising costs 10,571 9,224 9,209
34
WESTERN AIR LINES, INC.
SCHEDULE V --PROPERTY, PLANT AND EQUIPMENT
For the years ended December 31,1974 and 1975
(in thousands of dollars)
Year Ended December 31,1974
Land
Buildings on and improvements to
leased property
Airplanes, engines and other flight
equipment
Spare parts for airplanes, engines and
other flight equipment
Furniture, fixtures, shop and other
equipment
Construction work in progress
Deposits on purchase contracts
Year Ended December 31,1975
Land
Buildings on and improvements to leased
property
Airplanes, engines and other flight
equipment
Spare parts for airplanes, engines and
other flight equipment
Furniture, fixtures, shop and other
equipment
Construction work in progress
Deposits on purchase contracts
Balance at
beginning
of period
Additions
at cost Retirements
Balance at
end of
period
$ 1 -- --
1
22,474 2,976 207 25,243
391,543 79,113 54,035 416,621
21,903 2,706 492 24,117
45,931 7,134 1,421 51,644
4,752 9,447 (1) --
14,199
23,251 (9,025) (1) --
14,226
$509,855 92,351 (2) 56,155 546,051
$ 1 --
1 --
25,243 5,381 464 30,160
416,621 31,555 3,780 444,396
24,117 1,925 285 25,757
51,644 6,084 1,359 56,369
14,199 3,655 (1) 8,479 (3) 9,375
14,226 (6,988) 6,625 (3) 613
$546,051 41,612 (2) 20,993 566,670
Notes:
(1) Net of additions less transfers to other property classifications.
(2) Net of transfers to flight equipment expendable parts of $90 --1974 and $373 --1975.
(3) Reimbursements upon lease of property and equipment.
35
WESTERN AIR LINES, INC.
SCHEDULE VI --ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
For the years ended December 31,1974 and 1975
(in thousands of dollars)
Additions
Balance at
beginning
of period
MUUIUUIId
charged to
costs and
expenses Retirements
Balance at
end of
period
Year Ended December 31,1974
Buildings on and improvements to leased
property $ 10,069 1,294 197 11,166
Airplanes, engines and other flight
equipment 180,464 30,573 39,250 171,787
Spare parts for airplanes, engines and
other flight equipment 8,157 1,898 209 9,846
Furniture, fixtures, shop and other
equipment 30,291 4,670 1,315 33,646
$228,981 38,435 40,971 226,445
Year Ended December 31,1975
Buildings on and improvements to leased
property $ 11,166 1,761 462 12,465
Airplanes, engines and other flight
equipment 171,787 25,938 2,319 195,406
Spare parts for airplanes, engines and
other flight equipment 9,846 1,482 (175) 11,503
Furniture, fixtures, shop and other
equipment 33,646 5,183 1,218 37,611
$226,445 34,364 3,824 256,985
RECONCILIATIONS TO FINANCIAL STATEMENTS
1974 1975
To Statements of Earnings
Additions charged to costs and expenses $38,435 34,364
Amortization of preoperating costs 426 417
Depreciation of flight equipment expendable parts 1,617 1,273
Depreciation $40,478 36,054
To Statements of Changes in Financial Position
Additions charged to costs and expenses $38,435 34,364
Amortization of preoperating costs 426 417
Provision for overhauls of flight equipment, net 2,485 --
Depreciation of non-operating property (19) --
Depreciation, amortization and provision for overhauls of flight
equipment $41,327 34,781
36
WESTERN AIR LINES, INC.
SCHEDULE XII --
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the years ended December 31,1974 and 1975
(in thousands of dollars)
Balance at
beginning
of period
Additions
charged to
costs and
expenses
Deductions
from
reserves
Balance at
end of
period
Year Ended December 31,1974
Allowance for obsolescence of flight
equipment expendable parts $ 7,126 1,617 193(1) 8,550
Allowance for doubtful accounts 595 1,108 803(2) 900
Reserves for overhauls of owned
flight equipment 11,500 7,194 | 1,299(1)
5,096(3)
J 12,299
Reserves for overhauls of leased
flight equipment 1,099 1,410 1,023(3) 1,486
Year Ended December 31,1975
Allowance for obsolescence of flight
equipment expendable parts $ 8,550 1,273 170(1) 9,653
Allowance for doubtful accounts 900 1,381 1,331(2) 950
Reserves for overhauls of owned
flight equipment 12,299 --
12,299(4) --
Reserves for overhauls of leased
flight equipment 1,486 --
1,486(4) --
Notes:
(1) Charges upon sale.
(2) Bad debts deemed uncollectible.
(3) Costs of overhauls of airframes and engines.
(4) Cumulative effect of a change in accounting principle -- the elimination of reserves for
overhauls. (See Note (d) of Notes to Statements of Earnings.)
37
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.
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
James D. Garibaldi
Attorney-at-Law, Garibaldi & Sausser, Los Angeles, 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
Bert T. Kobayashi, Jr.
Attorney-at-Law, Kobayashi, Koshiba & Watanabe, Honoulu, Hawaii
Arthur G. Linkletter
Television Producer and Broadcaster
Chairman of the Board, Linkletter Enterprises, Inc. (investment and development company), Irvine, California
John H. Myers
President and Chief Executive Officer, Hoerner Waldorf Corporation, St. Paul, Minnesota
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
Hugh W. Darling
Attorney-at-Law, Darling, Hall, Rae & Gute, Los Angeles, California
Leo H. Dwerlkotte
Las Vegas, Nevada
Cary Grant
Director and Executive, Faberge, Inc. (cosmetics), Beverly Hills, California
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
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
RobertO. 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
Peter P. Wolf, Vice President--Communications
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
Richard P. Ensign, 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
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.
Genera! Offices Debenture Listing
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
Listed and traded on
New York Stock Exchange
General Counsel
Hugh W. Darling
Parlinn Hall Rap A
523 West Sixth 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
Independent Accountants
Peat, Marwick, Mitchell & Co.
555 South Flower Street, Los Angeles, California
Annual Meeting
Fourth Thursday in April J
iAmericas
First
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