Western Airlines Annual Report 1977

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WESTERN AIR LINES ROUTES
PROPOSED ROUTES
Western/Continental Alaska Interchange
Western/Continental Alberta Interchange
Western/Braniff Alberta Interchange
`Service suspended by order of the CAB through February 1979
Western Air Lines, lnc.,1977Annual Report
Table of Contents
0 Chairman's Letter
5 Financial Review
6 Management's Discussion
8 Shareholders, Stock and Financial Position
10 Flight Equipment
11 Marketing
12 Ground Properties and Facilities
12 Regulatory Matters
14 Fares and Rates
1 5 Pending Legal Proceedings
16 Management
16 Employees
17 Ten Years of Western Progress
20 Accountants' Report
21 Balance Sheets
23 Statements of Earnings
24 Statements of Changes in Financial Position
25 Statements of Shareholders' Equity
25 Notes to Financial Statements
Cover: A Western DC-10 at sunset in Los Angeles.
Inside: In recognition of the wide geographical repre
sentation Western's board of directors gives the company
the board members have been portrayed against a
backdrop of their home areas.
Description of Business
Western Air Lines, Inc., is a certificated air carrier en
gaged in scheduled air transportation of passengers,
cargo and mail over approximately 32,000 route
miles. The company serves 42 cities in 15 states,
Canada and Mexico. Western has competition from
other airlines on substantially all of its routes. It is
regulated by the United States and certain state and
foreign governments.
Chairman's Letter
Fellow Shareholders:
In 1977, Western achieved another year of profit
able operations, continuing a pattern of consistent
earnings which has been maintained with but one
exception for nearly three decodes. Net income was
$14,362,000, or $1.09 per shore, compared to
$14,965,000, or $1.10 per shore, in 1976.
For the sixth consecutive year, Western paid divi
dends on its common shores. In both 1977 and
1976 these payments produced the highest cosh
dividend yield of any trunk airline common stock.
On February 21, 1978, Western paid another reg
ular cosh dividend of 10 cents per shore. This marked
the 23rd consecutive cosh dividend paid to holders
of Western's common stock.
Although the industry generally reported higher
earnings for the year, much of this improvement
did not result from growth in operating income, but
related instead to non-operating items such as gains
on aircraft soles, profits from subsidiaries, debt retire
ment at o discount and flow-through of investment
tax credits.
I am pleased to report that our strong emphasis
on productivity in every division of the company
continued to show gratifying returns in 1977. Al
though it was the first full year of operation of our
two major new routes --Los Angeles-Miami and
Honolulu-Vancouver -- we were able to hold the
increase in number of employees to six percent,
notwithstanding our double-digit growth in traffic,
capacity and revenues. Total operating revenues
per Western employee improved by eight percent.
This gain in productivity, reflecting efforts and team
work of the entire organization, was one of the fac
tors which enabled us to hold our breakeven load
factor at 55.8 percent, the some level it had been
in 1976.
Constant striving for improved performance is
on essential response to the continuing inflationary
trend in the cost of labor, fuel and other supplies
and services. Our DC-10 utilization in 1977, for
example, was highest in the trunkline industry for
this type of jet. Western is also the notion's most
fuel-efficient airline, in terms of revenue passenger
miles flown with the fuel that we consume.
Our overall traffic growth was satisfactory, with
revenue passenger miles gaining 10 percent. This
compared to on industry overage for oil U.S. trunk
airlines of seven percent. Western's increase in cargo
ton miles was 17 percent, compared to six percent
for the industry. Our capacity, measured in available
seat miles, was up 11 percent; the industry overage
3
was six percent.
Combined with several small fore increases,
growth in traffic made it possible for Western to
attain o 14 percent increase in operating revenues
but increased expenses outpaced the increase in
revenues. Expanded operations, coupled with the
inflationary spiral, caused our operating expenses
to rise 16 percent over 1976.
Western was not the only carrier to be plagued
with inflationary pressures. Of every expense dollar,
the airlines now ore required to spend approxi
mately 60 cents for labor and fuel olone, and infla
tion in these two major cost areas will continue to
be one of the most formidable challenges facing
our industry.
Producers of goods and services normally con
pass cost increases through to the consumer. This
is not the cose with airlines, ond the prospects for
improvement ore uncertain. It is encouraging that
the new chairman of the Civil Aeronautics Board has
expressed the view that prospective costs should be
used to determine the need for fore increases. If this
concept is followed by the CAB, airlines could receive
some fore relief this year.
Meanwhile, "Super Saver" discounts of 30 percent
and more ore being made available on virtually
every domestic route. There is no empirical evidence
concerning elasticity of demand for our product, and
we connot accurately predict what effect these deep
discounts will hove on industry profits. But it is our
hope that they will begin to penetrate an untopped
moss market for air transportation.
Your company is not taking a wait-and-see pos
ture but has matched all competitive Super Saver
filings, initiated reduced fares in markets that need
generative assistance, such as Los Angeles-Miami,
and will do oil possible to maintain or improve its
market position and profits.
During 1977, high priority was given to aggressive
marketing strategies, cost control, regulatory
matters and fleet planning, all of which contribute
to both profitability and future growth.
We ore gratified with the success of our Honolulu-
Vancouver service which was inaugurated in June
of 1976 and produced a profit during 1977. Our
Los Angeles-Miami route has been much more dif
ficult to develop. Although our shore of the nonstop
traffic increased from 36 percent in January 1977
to 51 percent by October 1977, the route neverthe
less showed o loss for the year. We ore hopeful that
growth of the overall market through Western's in-
novalive promotional programs and new low fores
will improve our operating results on this segment
in 1978.
As a result of fhe new bilateral agreement be
tween the United States and Mexico, signed in
January 1978, we expect to receive approval to odd
Mexico's second largest city --
Guadalajara -- to
Western's route system. Inauguration of service be
tween Los Angeles and Guadalajara is planned for
June 00. An attractive tourism center, Guadalajara
has a strong community of interest with California.
We believe fhaf offer a reasonable period of
development this will be a profitable route.
Western has continued to move forward with its
fleet modernization program, taking delivery in
1977 of seven new Boeing 727s and ordering two
McDonnell-Douglas DC-lOs plus five additional 727s
for 1978 delivery. At the some time, we sold at
prices in excess of fheir book values four of our
aircraft that ultimately would hove hod to be retired
for environmental reasons. We also reached agree
ments for the sole of nine ofher aircraft for delivery
to purchasers in 1978 and 1979.
At its first meeting of 1978, your board ofdirecfors
approved a plan fo exercise options for the pur
chase of two more DC-1 Os and five 727s for delivery
during 1979. We hove negofiafed options for addi
tional delivery positions in 1980 and 1981.
As your company nears its 53rd year of operation,
it has o strong route system linking some of the most
dynamic areas of Norfh America, if has on aggres
sive managemenf feam and a well-controlled oper
ation which gives us confidence for an opfimistic
ouflook.
Bofh challenges and opportunities lie ahead of us
in an economic environment that may be different
from that in which we operate today. These eventu
alities ore being given coreful attention, and I believe
that we ore in a sound position to meet them,
l Your continued confidence ond support ore
appreciated and will assist us in making 1978
another successful year.
Arthur F. Kelly
Chairman and Chief Executive Officer
Arthur F. Kelly
Chairman and Chief Executive Officer
March 20, 1978
4
Financial Review
1977 1976 1975
Change
1977 1976
vs. vs.
1976 1975
Operating revenues:
Passenger $614,581 544,1 88 465,081 13% 17
Cargo 47,613 37,926 31,329 26 21
Other 29,270 23,091 22,563 27 2
691,464 605,205 518,973 14 17
Operating expenses:
Wages, salaries and employee benefits 263,083 226,367 201,661 16 12
Fuel 137,969 108,279 93,134 27 16
Depreciation and amortization 34,973 38,058 36,054 -8 6
Other 233,306 202,643 179,563 15 13
669,331 575,347 510,412 16 13
Operating income 22,133 29,858 8,561 -26 249
Other income (expenses):
Interest expense, net (7,058) (8,889) (8,524) -21 4
Gain on sole of equipment 4,549 1,809 379 151 377
Other --net 3,388 1,237 3,919 174 -68
Earnings before provision for
foxes on income and cumulative
effect of accounting change 23,012 24,015 4,335 -4 454
Provision for foxes on income 8,650 9,050 (825) -4 *
Earnings before cumulative effect
of accounting change 14,362 14,965 5,160 -4 190
Cumulative effect of accounting change . .
-- --
7,160 --
-100
Net earnings $ 14,362 14,965 12,320 -4% 21
Earnings per common shore:
Primary:
Earnings before cumulative effect
of accounting change $ 1.09 1.10 0.34
Cumulative effect of accounting
change -- --
0.47
Net earnings $ 1.09 1.10 0.81
Fully diluted:
Earnings before cumulative effect
of accounting change $ 0.95 0.98 0.33
Cumulative effect of accounting
change -- --
0.41
Net earnings $ 0.95 0.98 0.74
Passengers carried (000) 8,757 8,098 7,531 8% 8
Available seat miles (000,000) 14,964 13,450 1 1,696 1 1 15
Revenue passenger miles (000,000) 8,589 7,834 7,103 10 10
Passenger load factor --actual (%). . . .
57.4 58.2 60.7 -1 -4
--
breakeven(%).... 55.8 55.8 59.8 --
-7
Note: In thousands of dollars except per shore amounts.
*Not computed.
5
Management's Discussion
Western's net earnings for 1977 were $14,062,000,
compared to $14,965,000 for 1976. Net earnings
for 1977 included $2.4 million resulting from the
extension of depreciable lives of 727 and 737 air
craft and $2.1 million from gain on soles of aircraft.
Net earnings for 1976 included $600,000 ond
$930,000, respectively, from these items.
Items in the table on Page 5 which in the opinion
of Western's management need explanation ore
discussed in the following sections. A ten-year finan
cial ond statistical summary appears on Page 17.
Increases in operating revenues in 1977 over
1976 and 1976 over 1975 resulted from growth in
traffic, ond to a lesser degree, increases in passen
ger yield (overage revenue per passenger mile).
Passenger revenues constitute close to 90 percent of
Western's operating revenues and 93 percent of
passenger revenues come from coach ond econ
omy travelers.
The following fable shows increases ond de-
creases in operating revenues and traffic.
Increases (Decreases)
1977 vs. 1976 1976 vs. 1975
Amount % Amount %
(000s) (000s)
Operating Revenues
Passenger $ 70,393 13% $ 79,107 17%
Cargo 9,687 26 6,597 21
Other 6,179 27 528 2
$ 86,259 14 $ 86,232 17
Revenue Passenger Miles
48 States and Canada 489,931 1 1 318,848 8
Hawaii 190,565 9 286,921 16
Alaska 30,946 6 98,859 22
Mexico (55,468) (9) 16,596 3
Charter (mostly Hawaii) 98,969 87 9,702 9
754,943 10 730,926 10
Cargo Revenue Ton Miles 22,336 17 26,336 24
Dominic P. Ren do
President ond Chief Operating Officer
Although revenue passenger miles on scheduled
flights increosed in 1977, the growth was smaller
than in 1976 because traffic on the company's Mexico
routes declined in 1977. This decline was caused by
the devaluation of the peso, which hod on unfavor
able effect on sales in Mexico. The Los Angeles-
Miami and Honolulu-Vancouver routes, added to
the company's system in the summer of 1976, con
tributed 69 percent of the increase in revenue pas
senger miles in 1977 compared to 21 percent in
1976.
Of the four major areas shown in the chart above,
the fastest growing area in 1977 wos the 48 States
and Canada. Although the Los Angeles-Miomi route
contributed significantly to this growth rate, the
remainder of the 48 States and Canada market
also experienced on increased rote of growth.
Most of the 1977 increase in traffic on Hawaii
routes come from the Honolulu-Vancouver segment.
The rote of growth on other Hawaii segments de
creased in 1977, os did the rote of growth of seats
offered for sole in this market.
Alaska routes, which experienced the highest
growth rote in 1976, continued to grow in 1977
but the rote of traffic growth decreased because of
the completion of the oil pipeline.
The four percent increase in overage revenue per
passenger mile in 1977 was caused by fore in
creases and, to o lesser degree, a reduced propor
tion in the use of discounted fores. Fare increases
were the reason for the improvement in 1976.
Cargo revenues for the post three years hove in-
6
Increases (Decreases)
Miguel M. Dlasquez
Member, Board of Directors
Mexico
creased primarily because of traffic growth. In addi
tion, 1977 revenues were increased by $2 million
from current and retroactive mail rate adjustments.
"Other" revenues increased principally from ex
panded charter business in 1977.
Operating expenses in both periods increased
largely because of inflation and expanded opera
tions with wages, salaries and employee benefits
and fuel having the largest dollar impact. Increases
in these categories represent 71 percent of the total
increase in operating expenses and of this roughly
two-thirds relate to inflation and one-third to ex
panded operations.
The following fable shows increases and decreases
in operating expenses and available seat miles.
1977 vs. 1976 1976 vs. 1975
Amount % Amount %
(000s) (000s)
Wages and salaries
(including paid vacations) $ 27,586 15% $ 20,389 12%
Employee benefits 9,130 24 4,317 13
36,716 16 24,706 12
Fuel 29,690 27 15,145 16
Depreciation (3,085) (8) 2,004 6
Other
Rentals 5,198 22 4,220 22
Materials and repairs 4,423 13 3,080 10
Commissions 4,391 16 5,007 23
Services purchased 3,044 17 1,567 9
Food and beverages 2,775 13 2,925 16
Property and fuel faxes 1,877 16 2,140 23
Advertising and publicity 1,582 14 488 4
Landing fees 468 4 2,063 21
Other 6,905 16 1,590 4
30,663 15 23,080 13
$ 93,984 16 $ 64,935 13
Available seat miles 1,510,367 1 1 1,753,917 15
Periodic wage increases in collective bargaining
agreements were primarily responsible for increases
in wages, salaries and employee benefits. Pilots,
flight attendants, and mechanics and related em
ployees and stock clerks reached amended agree
ments in 1977. The higher wage rates resulting from
these agreements had a significant effect on the sec
ond half of 1977. Scheduled periodic increases in
the amendments will continue to be reflected in
future periods. The company's agreement with agent
and clerical personnel was opened for amendment
in 1978 and is currently in mediation.
Employee benefit costs consist mainly of pensions,
group insurance and payroll taxes. Pensions increased
in 1977 from higher wages for all employees and
from improved benefits as provided for in the
amended agreements. Higher pension expense in
Revenue Dollar
(dollars in thousands)
Percent
of total
Charter
. . .
$ 7,178 1%
Transport Related 15,208 2
Other 6,884 1
Coach Passenger Service.... . . .
572,794 83
Deluxe Passenger Service . . .
41,787 6
Cargo 47,613 7
$691,464 100%
7
1976, os compared to 1975, reflected wage increases
and on increase in the number of employees par
ticipating in the plans. The cost of group insurance
benefits was higher in 1977, and payroll taxes in
creased in both periods because of legislated changes.
Fuel expense escalated in both periods because
of higher prices and greater consumption. Higher
prices represented 65 percent of the increase in
1977 with 35 percent coming from greater con
sumption. In 1976, 45 percent of the increase was
attributable to higher prices and 55 percent to
greater consumption.
The reduction in depreciation expense in 1977
primarily reflects the extension of the depreciable
lives of 727 ond 737 aircraft from 12 years to 15
years ond 14 years, respectively.
Rental expense was affected by the leasing of
additional aircraft: five 727s delivered in the spring
of 1977, one DC-10 in June 1976 and one in June 1975.
Materials and repairs expense reflects higher costs
for parts and scheduled airframe maintenance in
1977. The 1976 increase came from scheduled re
placements of engine components and higher costs
for parts.
Commissions to travel agents increased because
of traffic growth and a higher proportion of total
sales being made by travel agents.
Increases in food and beverage expense in both
1977 and 1976 resulted from more passengers
being carried and higher costs.
Operating income in 1977 decreased despite traf
fic growth and some fare increases because Western
was unsuccessful in offsetting inflated operating ex
penses that were coupled with expanded opera
tions. Traffic growth and fare increases had out
paced inflation in 1976 and thereby resulted in
higher operating income than in 1975.
"Interest expense, net" decreased in both periods
because of an increased level of capitalized interest
Victor L. Drown
Member, Board of Directors
Utah
related to deposits for aircraft on order for delivery
in 1977 and 1978. Gain on sale of equipment re
flects the disposition of four aircraft in 1977 and one
aircraft in 1976.
In 1975 "Other-net" included interest income of
$2.1 million related to a federal tax refund.
Provision for faxes on income is reconciled to the
tax rate of 48 percent in Note 6 of Notes to Finan
cial Statements.
Shareholders, Stock ond Financial Position
The company's net earnings per common share for
the year 1977 were $1.09 of which 40 cents was
paid to holders of common stock through quarterly
cash dividends of 10 cents per share in March, June,
Expense Dollar
Percent
(dollars in thousands) of total
Rentals
. . . .
$ 28,901 4%
Food and beverages 24,245 4
Other 88,808 13
Wages, salaries and
employee benefits . . . .
263,083 39
Fuel
....
137,969 21
Depreciation 34,973 5
Materials and services 59,744 9
Commissions 31,608 5
$669,331 100%
8
August and November; the remaining 69 cents per
share was retained to help pay for equipment on
order and for other corporate purposes.
At the Annual Meeting held on April 28,1977,
the shareholders voted to amend the company's
Certificate of Incorporation to increase the number
of authorized shores of common stock of the com
pany from 25 million to 35 million and to authorize
the issuance of a new class of preferred stock con
sisting of 25 million shores which may be issued in
one or more series.
Load Factor--Actual vs. Breakeven
Pursuant to this authorization, 1.2 million shares
of $2.00 Series A Cumulative Convertible Preferred
Stock without par value were offered to the public
in October 1977. These shores ore now held by
approximately 2,100 individuals and institutions.
This preferred stock has o stated value of $25 per
shore and is entitled to $2.00 per shore in dividends
each year, payable ot the rote of 50 cents per
quarter. The proceeds from the sole of the preferred
stock are to be used for general corporate purposes,
including financing the acquisition of new aircraft.
Net earnings after dividend payments and the
sole of preferred stock increased shareholders'
equity to $154.1 million ot the end of 1977 com
pared to $117.1 million at the end of 1976. Excluding
the $30 million item representing the stated value
of the preferred stock, equity per shore of common
sfock was $9.81 compared to $9.25 of the end
of 1976.
As of December 31,1977, fhere were oufstanding
12,659,000 shores of Western common stock held
by approximately 17,800 individuals and institu
tions. The common stock was traded on the New
York Stock Exchange at the following prices:
1977 High Low
First Quarter 10% 8
Second Quarter 9% 8%
Third Quarter 6% 7
Fourth Quarter
1976
7% 6%
First Quarter 1 ^7/e 9%
Second Quarter 1 1 9%
Third Quarter 12% 10
Fourth Quarter 10% 8%
An additional 3,000,000 shares ore reserved for
issuance upon conversion of the preferred stock and
2,429,000 shares ore reserved for issuance upon
conversion of the company's 5K% Convertible Sub
ordinated Debentures. Holders of the debentures
received interest payments on February 1 and
August 1. The debentures ore held by approximately
700 individuals and institutions.
Western's long-term debt was $ 100,661,000 at the
end of 1977, compared to $110,420,000 at the end
of 1976. The reduction resulted from scheduled
payments on notes to insurance companies, re
demption of subordinated sinking fund notes and
purchases of debentures which ore to be applied
to meet sinking fund payments in 1979. A complete
listing of long-term debt is contained in Note 7 of
Notes to Financial Statements.
The company has a bank loan agreement which
provides a $75 million revolving line of credit
available until December 31,1978, at which time it
can be replaced by a term note maturing on June
30,1983. The entire $75 million provided by this
agreement is available for the purchase of new
equipment or for other corporate purposes.
Sources of working capital totaled $106,250,000
for 1977, compared to $87,717,000 in 1976. In
addition to net earnings from operations, major
I im
70%
1974 1975 1976 1977
M Actual
p Breakeven
60%
9
sources of working capital in 1977 were issuance of
preferred stock for $30 million, reimbursement to
Western of $18,775,000 in advance deposits on air
craft which were leased and proceeds from the sole
of aircraft of $7,924,000.
Applications of working capital totaled $89,581,000
in 1977, compared to $102,471,000 in 1976. Pur
chases of property and equipment and advances
thereon totaled $74,151,000. Included were advance
deposits of approximately $38 million on five 727s
and two DC-lOs scheduled for delivery in 1978. The
total cost for the purchase of two 727s in 1977 was
$21.2 million. Reductions in debt required $9,800,000
and cash dividends used $5,630,000.
Flight Equipment
In
Operation*
1978
Delivery
1979
Delivery
1980/81
Options
DC-10 ~J ** 2 2 4
727-200 28** 5 5 10
737-200 23
720D 13
707-300C 5
76 7 7 14
`As of March 15, 1978
**Four DC-lOs and eleven 727s ore leased. (See Note 8 of Notes
to Financial Statements.)
Western's fleet planning department is continu
ously studying currently available and proposed
aircraft types in order to select the most suitable
aircraft for the company's routes. Operational effi
ciency and marketing desirability ore key factors in
these studies. The wide-bodied McDonnell Douglas
DC-10 and the Boeing 727-200 ore the best aircraft
available for fulfilling the company's present needs.
These aircraft also comply with federal noise
regulations that become effective on January 1,
1977. Aircraft which donot meet the noise standards
will hove to be replaced or modified on o timetable
which calls for partial compliance by certain dotes
and total compliance by January 1, 1985. Western
intends to meet this timetable by selling its 720B's
and 707s, by modifying an undefermined number
of 737s ond selling the balance of those aircraft.
The company plans to retain a number of these
737s for service on the routes for which they are
most suitable, if modification is economically and
operationally feasible. Cost of this modification can
not be precisely estimated.
Legislation has been introduced in Congress which
would provide financial assistance to the airlines in
the form of credits against a new excise tax on pas
senger fores and cargo rotes which will enable them
to use the proceeds of the tax to assist in financing
the cost of modification of noncomplying aircraft and
of acquisition of replacement aircraft. The amounts
and kind of assistance the airlines may receive will
depend upon the final form of the legislation. In any
event, these modifications ond replacements will
place a substantial financial burden on Western
with or without the legislation. The requirements for
additional capital expenditures undoubtedly will
Member, Board of Directors
Alaska
entail new lease, debt and/or equity financing.
In addition to replacing older aircraft, Western has
token other important steps to increase the capacity
and efficiency of its fleet. One of these steps has
been to increase coach seating capacity. The DC-10s,
for example, will undergo modifications in 1978
to reduce first class seating from 46 seats to 24 seats
per aircraft while coach seating will be increased
from 208 to 228.
In the third quarter of 1977, Western added 11
seats to each of its 727s. The additional capacity
produced by this modification was equivalent to
Western's purchasing 214 additional airplanes. Recent
adjustments of Western's all-coach 737s increased
seating capacity from 99 to 104 which in total was
equivalent to purchasing one additional airplane.
Aircraft scheduling also plays an important pah-
in overall fleet efficiency. Western is proud of its
record of aircraft utilization which in 1977 averaged
eight hours and 27 minutes per aircraft per day, up
from seven hours and 54 minutes in 1976. Western
leads all operators of the DC-10 Series 10 in average
daily utilization. These aircraft flew an average of
11 hours and 23 minutes per aircraft per day for
Western in 1977 while the average daily utilization
by all other operators was eight hours and 50
minutes.
During 1977 three 720B's and one 737 were sold
and one 720B was removed from operations in
connection with a sale in 1978. The company also
has agreements to sell eight additional aircraft in
1978 and 1979. All of these aircraft have been sold
at prices in excess of their net book values.
Western's excellent record of aircraft maintenance
has proven to be a valuable asset when aircraft
that are surplus to the company's needs are put on
the market for sale.
10
Marketing
The air travel marketplace is highly competitive.
Western faces head-to-head competition on nearly
every one of its route segments.
Evidence of this competition con be found in
promotional fores such as "Super Savers," which
Western and most carriers ore now offering on
nearly oil routes and in the fact that the customer
traveling between most major markets can choose
from two or more airlines.
Passenger Revenue 1970=100%
Passenger Revenue
Scheduled Revenue Passenger Miles
Yield
Western carried 8,757,000 passengers in 1977, on
8 percent increase over the 8,098,000 passengers
carried in 1976.
Western has developed worldwide and many-
faceted marketing programs on on aggressive basis.
These ore coupled with directing the attention and
talents of the entire company toward providing o
highly consumer-oriented product.
Recognizing the potential of connecting traffic
from cities throughout the world into the Western
route system and the fact that the devalued U.5.
dollar has stimulated "Visit USA" business, Western is
successfully marketing its product in many areas of
the world. The company is represented by soles
agents in Europe, South America, the Orient, Austra
lia and New Zealand and maintains its own off-line
offices in Tokyo, Toronto, New York, Chicago, Dallas
and Washington, D.C. In 1977, interline traffic con
tributed estimated revenues of $196 million.
In the United States, the travel agent continues
to be the primary distribution source for Western's
product and the company is a recognized leader
in the development of oir travel business by and for
the travel agent.
Major tour operators in the United States and
abroad also hove become volume sources of voca
tion package business.
Western, which serves oil of the major ski areas
in Utah, Colorado, Wyoming, Alaska, the Pacific
Northwest and Western Canada, suffered along with
ski resorts in these areas in early 1977 from the lock
of snow and resulting loss of business. The 1978
winter snows hove brought a substantial rebound
in ski travel and this has strengthened first quarter
traffic in these markets.
Triangle routings, which were created by Western
many years ago, continue to be promoted success
fully in the Hawaii, Alaska, British Columbia, Mexico
and Florida markets.
Charters, which hove appeal to large segments
of the public, were on increasingly important part of
Western's business in 1977 with revenues from this
source increasing 69 percent to $7.2 million. Plans
coll for continued evaluation of the market for addi
tional charter opportunities, although Super Saver
fares, which offer similar discounts with more individ
ual freedom, may erode this market.
Western's routes serve many leisure destinations,
but the most significant charter and tour markets
are Hawaii, Mexico, Alaska, Canada and Florida. In
order to participate in the Florida cruise business;for
example, Western must not only compete with the
other airline certificated to serve the Los Angeles-
Miami market on o scheduled basis, but also with
airlines which operate charters.
In addition to the varied opportunities Western's
routes offer for pleasure travel, the company oper
ates in fost-growing regions from the standpoint of
business traffic. Western's recent research indicates
on improved balance between business and vaca-
lion travelers in the West. Marketing programs are
underway to better identify and serve the frequent
traveler.
For both business and pleasure travelers, Western
offers dependable service. In 1977, Western's flights
averaged an 80.5 percent on-time record system-
wide and approximately 98 percent of scheduled
flights were completed without cancellation. On-
time operations are receiving still greater emphasis
in 1978.
Exclusive programs with major cruise lines off the
Florida coast have helped Western capture 50 per
cent of the Los Angeles-Miami market, which the
company has served since August 1976. An active
"off season'campaign to develop summer travel be
tween British Columbia and Hawaii helped the com
pany boost revenues on the Honolulu-Vancouver
route, which also was inaugurated in 1976.
Cargo marketing, including air freight, mail and
small package services, resulted in Western's
achieving a 17 percent growth in cargo ton miles,
the highest rate of any trunk carrier and almost
three times greater than the industry average.
Ground Properties and Facilities
Improved passenger facilities at Calgary and a new
air cargo terminal at Denver were among the most
significant facilities improvements completed in 1977.
Calgary International Airport's new passenger
terminal, which was opened in November, gives
Western the advantages of additional counter and
office space, improved frans-border arrival and
deparfure facilities plus enclosed second-level load
ing facilities and, for fhe firsf time, a Horizon Boom.
The Denver air cargo building, constructed by the
City and County of Denver and leased by Western,
was opened in May and will be used exclusively by
the company.
A number of construcfion projects under way in
1977 will be completed and opened during 1978.
Adjacent to Los Angeles International Airport,
where Western maintains its general offices and
principal maintenance base, a four-story office
strucfure will be complefed fhis year and leased to
Western.
Western is building a new air cargo terminal at
Seattle-Tacoma International Airport. This facility will
open this spring, giving the company expanded
freight handling capacity at this important gateway
to Alaska.
Salt Lake City, Phoenix, San Diego and Helena
have new passenger terminals under construction.
The Salt Lake City structure will be occupied exclu
sively by Western and will make the company the
first airline to provide Salt Lake City passengers with
enclosed second-level loading.
Regulatory Matters
Western operates its routes under certificates of
public convenience and necessity granted by the
Arthur G.Linkletter
Member. Board of Directors
Californio
Civil Aeronautics Board and is obligated to provide
safe and adequafe service, equipmenf and facilities
and to establish just and reasonable fares.
Legislafion was introduced in both houses of the
Congress during 1976 and again in 1977 which pro
poses a relaxation of CAB control over fare changes
and easier entry into and exit from markets. Enact
ment of fhis legislation, which has been popularly
termed "regulatory reform," could have a dramafic
impact on Western's operations but, at this stage
and with bills pending in both the House and Senate,
it is too early to assess the likelihood of any particu
lar bill being enacted or its precise impact if enacted.
In addition to CAB regulation, the Federal Aviation
Administration regulates the safety aspects of airline
operations and exercises jurisdiction over certain
personnel, aircraft, ground facilities and other tech
nical aspects of operations. The U.S. Postal Service
has jurisdiction over the transportation of mail.
During fhe past several years and continuing into
1978, Western has been active in a number of route
cases before fhe Civil Aeronautics Board.
CAB route case decisions frequently are appealed
to the federal courts. An appeal by several unsuccess
ful applicants in the Miami-Los Angeles Competitive
Nonstop Cose, in which Western was awarded (in
1976) its firsf transcontinental route, resulted in o
remand to the CAB for reconsideration of that part
of its decision which resulted in the selection of
Western over Pan American World Airways as the
carrier to serve fhe route.
Responding to the remand, fhe CAB has reopened
the case for the purpose of determining whether
Western or Pan American should temporarily
operate the route pending a decision in a new case
called the Miami-Los Angeles Low Fore Case. Western
12
John H.Myers
Member, Board of Directors
Minnesota
believes the CAB's attempt to grant only "temporary
authority" in the reopened proceeding is contrary
to the court's mandate.
In the Oklahoma/Denver-Southeast Points cose,
Western was unsuccessful in its bid to acguire Denver-
Atlanta and Denver-Tulsa-Florida authority. Western
and other unsuccessful applicants hove appealed
this decision to the U.5. Court of Appeals for the
District of Columbia Circuit and a decision is pending.
International route authority is dependent on a
Fuel Expense 1970=100%
350%
300%
250%
200%
150%
100%
50%
1973 1974 1975 1976 1977
Fuel Expense
Gallons Consumed
i Average Cost Per Gallon
number of steps in addition to the CAB regulatory
proceedings. Bilateral air transport agreements be
tween the U.5. and other countries define the scope
of the international authority which may be granted
to U.5. carriers. After appropriate proceedings the
CAB mokes a recommendation to the President,
who gives the ultimate approval os to the carrier
selected to operate a particular international route.
In the existing agreement between the U.5. and
Canada--signed in 1974 --provision was mode for
nonstop authority for a U.S. carrier between San
Francisco/Los Angeles and Calgary/Edmonton. The
California-Alberta Route Proceeding was instituted
by the board in August 1975 and in February 1978
the CAB decided to choose another carrier instead
of Western to operate the route. This decision
requires the approval of the President before if will
become effective.
In the U.S.-Mexico bilateral agreement, signed in
January 1978, the cities of Son Francisco and
Guadalajara were added to Western's existing route
between Los Angeles/San Diego and Mexico City/
Acapulco. On January 27, Western asked the CAB
for permission to start initial Guadalajara-Los
Angeles service by June 30,1978. Inasmuch os the
required amendment to Western's existing certificate
is routine, it is unlikely that prolonged proceedings
will be involved.
Western also is on applicant for additional new
routes which hove been authorized in the new
agreement with Mexico. Included ore Los Angeles
to Mazatlan, Puerto Vallarta, Zihuafanejo, Manzanillo
and La Paz.
Another Mexico route currently involved in CAB
proceedings is Miami/Tampa-Mexico City. Pan
American has proposed to suspend its Mexico-
Florida operations and applications for certification
and exemption authority to replace Pan American
hove been filed by Western and three other carriers.
Undoubtedly a route cose will be instituted for the
purpose of selecting o replacement carrier to
operate the Miami-Tampa-Mexico City route.
In the Transatlantic Route Proceeding, com
menced by the CAB in 1973 ond ultimately con
cluded by Presidential approval in January 1978,
Western hod sought, unsuccessfully, to provide
service from Minneapolis/St. Paul to London, Paris
and Frankfurt. The London segments involved were
dependent on the U.S.-United Kingdom bilateral
agreement which was concluded in 1977 without
naming the Twin Cities os one of the 14 U.S. terminal
points. The agreement provides, however, for the
naming of an additional U.S. city, colled the "wild
cord" city, for service by a U.S. carrier to London.
Western is now attempting to hove the Twin Cities
named os that "wild card'' city and is seeking
authority to provide nonstop service between the
Twin Cities and London.
The U.S.-U.K. agreement also contains authority
for a U.S. carrier to operate between Anchorage
13
and London. Western has applied to operate this
route and will be a strong contender for it when the
CAD initiates a formal proceeding.
In the domestic route area, the company's request
in the Western Route Realignment Cose for realign
ment and consolidation of its interstate routes into
o single linear route, was granted by the CAD
effective February 15,1978. The realignment deci
sion serves to remove restrictions which in the post
hove impeded Western's operating flexibility. New
Reno-Twin Cities nonstop service, being inaugurated
April 30, was mode possible by this decision.
In the West Coast-Alaska Investigation, Western is
seeking nonstop authority between Anchorage and
the Californio cities of Los Angeles and Son Francisco.
Hearings were held in Portland, Anchorage and
Washington, D.C., in October. A decision by the
administrative low judge is expected in late June.
Western also is on applicant in the Phoenix-Las
Vegas-Reno Nonstop Proceeding in which the ad
ministrative low judge has found that other carriers
should be certificated to perform the service. Peti
tions for discretionary review hove been filed by
Western and several other carriers.
In the Las Vegas-Dallas/Ft. Worth Service Investiga
tion, Western is proposing to serve the Los Vegas-
Dallas/Ft. Worth route with three doily roundtrips.
The administrative law judge selected a Texas-
based carrier to operate the route and Western has
petitioned the board for discretionary review.
The company is also seeking Los Angeles-Colum-
bus and Los Angeles-Columbus-Philadelphia au
thority in another cose in which briefs hove been
submitted to the board.
Wages, Salaries & Employee Denefits 1970=100%
200%
150%
100%
50%
1970 1974 1975 1976 1977
Robert H. Volk
Member, Board of Directors
Californio
Other new route coses in which Western is on
applicant include:
The Southeast Alaska Service Investigation wos
instituted to determine whether service by an air
carrier or air carriers is necessary between Seattle,
Ketchikan, Juneau, Yakutat, Cordova and Anchor
age. This case arose out of the CAD's seven-year
suspension of Western's authority to serve Ketchikan
and Juneau (and Alaska Airlines' temporary author
ity to provide substitute service in these markets)
which will expire in February 1979. Darring a con
trary decision by the CAD, Western is anticipating the
resumption of Southeast Alaska service in 1979.
The California-Nevada Low-Fore Proceeding was
started in November 1977 in response to on appli
cation made by o Californio intrastate carrier. The
cose currently involves so-called "low-fore'' service
from both Los Vegas and Reno to 11 cities in Cali
fornio. Several other carriers also ore applicants for
similar authority.
The Twin Cities-Los Vegas/Phoenix/San Diego
cose was instituted to determine whether there is o
need for competitive service on these nonstop
routes which Western presently serves. Three local
service and three trunk carriers ore applicants.
Also awaiting CAD approval ore two equipment
interchange agreements. During 1977, Western op-
plied to the board for approval of these agreements
with Continental for one-plone service between Col-
gory and Houston via Denver and with Draniff for
one-plone service between Edmonton, Calgary and
Do I las/Ft. Worth also vio Denver. Western hopes to
begin these services in 1978.
Wages, Salaries & Employee Benefits
Average Number of Employees
Available Seat Miles
Fares and Rates
Western's passenger fores fall within six geograph-
14
icol areas --domestic U.S., Mainland-Hawaii, intra-
California, Pacific Northwesf-Alaska, Mexico and
Canada --with each area regulated separately by
the Civil Aeronautics Board, agencies of other
national governments, or, in the case of intra-
California markets, by the state public utilities com
mission.
During 1977 and early 1978, a great deal of
public attention was focused on discount fares such
as "Super Saver." While these fares initially were
limited to the transcontinental markets, early in
1978 they were expanded to many other routes.
Western which introduced Super Saver fares in West
Coast-Miami markets in January 1978 in an effort
to keep the market competitive and to stimulate
traffic will offer these fares on all Mainland routes
beginning April 1.
Basic passenger fares--those which do not involve
advance booking, minimum/maximum stays and
capacity limitations --increased in 1977. Domestic
U.S. (48 states) fares were increased a total of seven
percent during the year. Mainland-Hawaii fares were
increased two percent, as were Canada-U.S. fares.
Proposals to increase Mexico-U.S. fares an aver
age of five percent were approved by the CAB and
by Mexican authorities for effectiveness in March 1978.
In addition to these changes in 1977/78, Western
plans to propose a three percent domestic fare in
crease for effectiveness in May. The CAB also has
before it cases involving the structure and level of
Mainland-Hawaii and 48 Stafes-Alaska fares.
While fare increases have contributed to Western's
yield (average revenue per passenger mile)
improvement from 7.05 cents in 1976 to 7.34 cents
in 1977, the company still has the lowest yield in
the industry. The competitive necessity of meeting
new discount fares could serve to erode the yield
improvement experienced in 1977.
Air freight rates underwent increases averaging
11 percent during 1977 and additional increases
of approximately the same magnitude are antici
pated in the first half of 1978. The "de-regulation"
of air cargo service which was legislated through
the Omnibus Aviation Act in November 1977 has
raised many questions regarding the CAB's power
to approve or disapprove rate increases in this area.
While the Act would appear to give carriers the right
to adjust their fares without prior CAB approval, the
board still holds certain powers related to preda
tory or discriminatory rates.
Another important element in Western's airfreight
revenues, the income from carriage of the U.S. mail,
is subject to rates established by the CAB following
input from the carriers and the U.S. Postal Service.
During the course of the board's most recent investi
gation into mail rates, Western received a tempo
rary retroactive rate adjustment for the period 1973-
1977 which contributed $2 million in additional rev
enue to 1977 results.
15
Pending legal Proceedings
Western and other airlines are parties to numerous
actions in which property owners, especially in the
area of Los Angeles International Airport, seek to
enjoin certain operations at airports and/or to re
cover damages because of aircraft noise and engine
emissions. Most of these cases have been brought
against the airport proprietor (usually the City of
Los Angeles) which in turn has cross-complained
against the airlines for indemnification.
The amounts alleged to be involved are very
large. For example, the aggregate amount of dam
ages sought in cases against the City of Los Angeles
has been reported by the city to be in excess of
$3 billion, and the aggregate amount of damages
sought in actions to which Western is a party as
cross-defendant is in excess of $36 million. However,
Western and its counsel in these cases believe that
the damages claimed are in no way a realistic mea
sure of the airlines' exposure, and that in most cases
the request for relief is wholly out of proportion to
any actual damage which may have been suffered.
Western's counsel in these actions, which also
represents most of the other airlines, is of the opinion,
based on the current state of the law, that the air
lines have substantial defenses to the imposition of
any liability. Moreover, in each case to date in which
the issue of the airlines' duty to indemnify the airport
proprietor has been tried, the airlines have obtained
favorable rulings.
Nevertheless, all the issues of law involved in
these matters have not been finally settled, and the
relative rights and liabilities among such property
owners, airport proprietors, airlines and federal,
state and local governments are not entirely clear.
Unfavorable decisions against Western in these
actions, while not expected, could have a materially
adverse effect on the company. Further, any exten
sive liability of airport proprietors in these cases
could result in higher costs to airlines, for example,
through increased landing fees.
In light of this type of litigation, certain commu
nities which own and operate airports, including Los
Angeles and San Diego, have imposed or are con
sidering imposition of limitations on frequency or
timing of flights, or upon the proportion of an air
line's fleet which may continue to operate without
complying with federal noise standards. Enforcement
of such restrictions at a major airport served by
Western could have a materially adverse effect on
Western's operations.
Until recently, Western was a defendant, along
with Northwest Airlines, Inc., in an action brought
by Alaska Airlines, Inc. in the United States District
Court in San Francisco alleging that the defendants
attempted to restrain trade and monopolize com
merce by trying to eliminate the plaintiff as a com
petitor between Seattle and Anchorage in violation
of the anti-trust laws. The action has been disposed
of by agreement among the parties, at essentially
no cost to Western.
Western and three other airlines ore defendants
in on action brought by a defunct tour operator/
travel agency in the United States District Court in
Son Francisco in which the defendants ore charged
with having conspired and attempted to monop
olize the group leisure tour market in competition
with said agency. Also, in a civil action brought by
district attorneys of eight Californio counties in the
Californio Superior Court for Santo Clara County
against three airlines, including Western, the defen
dants ore charged with unfair competition and un
fair business practices involving the some defunct
tour operator/travel agency. Doth complaints seek
injunctive relief, plus in the first cose three times actual
damages according to proof plus punitive damages,
and in the latter cose civil penalties and restitution of
economic losses suffered by customers of said agency.
In the opinion of Western's counsel, these actions will
not result in any material liability to Western.
Western is also involved in various other litigation,
including certain coses alleging discrimination in
employment practices or violation of the anti-trust
lows which management believes will not hove o
materially adverse effect upon Western.
Management
Western's management organization is headed by
o board of directors which includes representation
from Alaska, Hawaii, Mexico, the Midwest, the
Pacific Northwest and the Rocky Mountain States as
well as California.
Newly elected to the board of directors in 1977
was Seattle attorney Gerald Grinstein, 45, succeed
ing James D. Garibaldi, a Los Angeles attorney who
retired and was named a director-emeritus.
Two Western officers--Arthur F. Kelly, chairman
and chief executive officer, and Dominic P. Renda,
president and chief operating officer--are members
of the board of directors. Mr. Kelly, 65, completed
his 40th year with Western and his 28th year as a
company officer in 1977. Mr. Renda, 64, completed
his 30th year in the industry in 1977 having served
as an officer of Western for 25 of those years.
Other principal officers of Western include
Richard P. Ensign, 59, senior vice president-
marketing; Anton B. Favero, 64, senior vice president
--operations; Robert O. Kinsey, 61, senior vice presi
dent-finance and administration; James L. Mitchell,
56, senior vice president--corporate planning;
Gerald P. O'Grady, 64, senior vice president--legal
and secretary; Richard O. Hammond, 48, vice presi
dent and treasurer, and Roderick G. Leith, 49, vice
president and controller.
Mr. Ensign, who previously served as a Western
officer from 1963 to 1971, held senior officer positions
with Pan American World Airways, Inc., between
1971 and 1975 when he returned to Western. Mr.
Mitchell served as an officer of Western from 1965
to 1968 when he became a vice president of
Continental Air Lines, Inc. He returned to Western in
early 1977.
Western is proud of its management staff which
reflects a combination of expertise and experience.
The officers of Western have an average age of 54
years and an average of 25 years of service with
the company. Members of the second echelon of
management average 46 years of age and hove
on overage of 17 years of service with Western.
A complete listing of oil company officers and
their functions is detailed on Page 29 of this report.
The principal occupation of each Western officer is
his position with the company.
Employees
Western employed on average of 10,413 people
during 1977, compared to 9,799 during 1976.
Wages and salaries for 1977 amounted to
$216,004,000, up 15 percent from $188,418,000 in
the previous year. Social Security taxes and company
contributions to group insurance and employee
retirement plans increased 24 percent to $47,079,000
in 1977.
The company is committed to a policy of equal
employment opportunity with hiring and advance
ment being determined on the basis of merit and
ability. This company policy is the basis for viable,
results-oriented affirmative action plans which are
submitted annually to government agencies.
Labor unions represent approximately 87 per
cent of Western's employees. These unions include
the International Brotherhood of Teomsters, Air Line
Pilots Association, Association of Flight Attendants,
Brotherhood of Railway and Airline Clerks, Sindicato
Nacional de Trabajadores de Aviacion y Similares
and the Transport Workers Union.
Following is the contractual status of each of these
collective bargaining groups:
Employee Group
Number of
Employees
1/1/78 Union
Contract
Open for
Amendment
Flight Attendants 1,772 ALPA/AFA Nov. 30, 1979
Agent & Clerical 3,701 DRAC Jon. 1,1978
(In Mediation)
Canada 46 DRAC To be negotiated
after settlement
of U.S. Contract
Mexico 150 SNTA Jon. 18,1979
Pilots 1,479 ALPA Sept. 1,1979
Flight Superintendents
Mechanics & Related
31 TWU April 30,1978
Employees
Stock & Stores
1,842 IDT Jon. 1,1979
Employees 118 IDT Jan.l, 1979
16
Ten Years of Western Progress
(In thousands except per shore amounts and other items indicated by*)
Summary of Operations 1977 1976 1975 1974 1973 1972 1971 1970 1969k 1968
Operating revenues:
Passenger $614,581 544,188 465,081 437,345 376,722 342,851 295,807 274,792 220,530 205,753
Cargo0 47,613 37,926 31,329 27,662 23,040 20,819 20,231 18,745 16,472 13,459
Other 29,270 23,091 22,563 23,390 21,524 10,321 12,009 9,926 5,245 4,454
Total operating revenues 691,464 605,205 518,973 488,397 421,286 373,991 328,047 303,463 242,247 223,666
Operating expenses:
Wages, salaries and employee benefits 263,083 226,367b
t
201,661 182,334 165,363 147,282 127,075 113,116 97,156 78,535
Fuel 137,969 108,279 93,134 71,437 44,510 40,137 38,663 37,357 32,857 27,191
Depreciation 34,973C 38,058c 36,054c 40,478 38,304 36,224 35,144 36,583 34,821 25,051
Otherd. 233,306 202,643 179,563 155,788 132,987* 126,741 1 10,859 104,596 89,814 73,207
Total operating expenses 669,331 575,347 510,412 450,037 381,164 350,384 31 1,741 291,652 254,648 203,984
Operating income (loss) 22,133 29,858 8,561 38,360 40,122 23,607 16,306 1 1,811 (12,401) 19,682
Interest, principally on long-term debt (9,650) (9,675) (8,964) (11,495) (10,505) (10,240) (11,278) (14,589) (15,437) (8,634)
Interest capitalized' 2,592 786 440 1,161 1,489 1,453 116 3 689 2,098
Gain (loss) on sale of equipment 4,549 1,809 379 9,575 945 582 1,349 1 1 1 26 (73)
Other income and expense, net 3,388 1,237 3,919 4,222 3,235 2,1 14 3,1 14 1,009 (151) 88
Earnings (loss) before taxes on income and cumulative
effect of accounting change 23,012 24,015 4,335 41,823 35,286 17,516 9,607 (1,655) (27,274) 13,161
Taxes on income (tax credits)9. 8,650 9,050 (825) 17,725 14,900 6,300 3,150 (2,250) (15,075) 4,725
Earnings (loss) before cumulative effect of accounting change 14,362 14,965 5,160 24,098 20,386 1 1,216 6,457 595 (12,199) 8,436
Cumulative effect of accounting change* -- --
7,160 - - - - - - -
Net earnings (loss) $ 14,362 14,965 12,320 24,098 20,386 1 1,216 6,457' 595 (12,199) 8,436
Earnings (loss) per common share:h J
Primary:
Before cumulative effect of accounting change $ 1.09 1.10 0.34 1.59 1.35 0.75 0.43 0.04 (0.81) 0.56
Net earnings (loss) $ 1.09 1.10 0.81 1.59 1.35 0.75 0.43 0.04 (0.81) 0.56
Fully diluted:
Before cumulative effect of accounting change $ 0.95 0.98 0.33 1.41 1.21 0.68 0.41 0.04 (0.81) 0.54
Net earnings (loss) $ 0.95 0.98 0.74 1.41 1.21 0.68 0.41 0.04 (0.81) 0.54
Pro-forma amounts assuming the accounting change is applied
retroactively:
Net earnings (loss) $ 14,362 14,965 5,160 24,608 16,074 10,573 8,247 3,290 (10,664) 9,527
Net earnings (loss) per common share--primary"' $ 1.09 1.10 0.34 1.63 1.07 0.70 0.55 0.22 (0.71) 0.64
Net earnings (loss) per common share--fully diluted".' $ 0.95 0.98 0.33 1.44 0.96 0.65 0.52 0.22 (0.71) 0.60
Cash dividends paid per share on common stock1) $ 0.40 0.40 0.47 0.39 0.23 0.08 - -
0.16 0.33
Other Financial Data
Return on investmentm(%)* 9.4 9.7 8.0 13.1 12.3 8.5 6.7 5.4 1.1 7.6
Average common shares outstanding":' 12,659 13,601 15,163 15,125 15,050 15,030 15,012 15,01 1 15,010 14,981
Shareholders'equity $154,122 117,100 137,938 132,718 113,652 96,723 86,397 79,905 79,310 93,862
Long-term debt $100,661 110,420 107,617 114,917 124,387 130,487 152,040 174,184 197,150 183,718
Property and equipment--net $329,178 308,112 309,685 307,307 269,374 239,029 216,738 247,426 285,757 284,787
Total assets $462,644 431,133 420,093 396,825 377,457 342,531 340,352 355,168 367,588 349,039
Operations
Airplanes operated at end of year* 77 75 75 72 74 71 70 72 78 64
Passengers carrieddk 8,757 8,098 7,531 7,391 7,382 6,931 6,206 6,188 5,752 5,693
Available seat miles 14,963,762 13,450,395 11,696,478 11,123,544 11,175,518 10,300,178 9,776,869 9,839,299 8,509,441 7,096,229
Revenue passenger milesdk 8,588,786 7,833,843 7,102,917 6,747,451 6,476,087 5,995,925 5,251,989 5,159,081 4,021,296 3,841,864
Passenger load factor--actual (%)* 57.4 58.2 60.7 60.7 57.9 58.2 53.7 52.4 47.3 54.1
--breakeven point (%)* 55.8 55.8 59.8 56.0 52.4 54.4 52.2 52.2 53.1 50.7
--
profit margin (point difference)* 1.6 2.4 0.9 4.7 5.5 3.8 1.5 .2 (5.8) 3.4
Average revenue per passenger mile* $ .0734 .0705 .0665 .0660 .0593 .0578 .0577 .0542 .0551 .0537
Average length in miles per passenger trip* 966 963 943 913 877 865 846 834 699 675
Operating expense per available seat mile* $ .0447 .0428 .0436 .0405 .0341 .0340 .0319 .0296 .0299 .0287
Cargo revenue ton milesdk 157,291 134,955 108,619 95,239 76,474 76,233 73,249 68,646 60,514 47,446
Average number of employees* 10,413 9,799 9,357 9,696 9,826 9,383 8,951 8,961 9,286 8,052
17 18
Notes Applicable to Five fears Ended December 01,1977
(in thousands of dollars except per share amounts)
(a) See Note 13 of Notes to Financial Statements.
(b) Effective January l, 1976, Western amended certain plans to comply with 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 decreased expense in 1976
by approximately $1,200 and increased net earnings by $600 or $0.04 per share (primary).
(c) Effective October 1, 1976, the estimated depreciable lives of fifteen 727 aircraft and twenty-four 737
aircraft were extended from 12 years to 15 and 14 years, respectively. For 1977, depreciation expense
was decreased by approximately $4,800 ($1,200-1976); earnings before cumulative effect of accounting
change and net earnings were increased by approximately $2,400 or $0.19 per share primary ($600
or $0.04-1976).
Effective January 1, 1975, the estimated depreciable lives of eighteen 720D aircraft were extended to a
common expiration date of December 31,1978. For 1975, depreciation expense was decreased by
approximately $5,300; earnings before cumulative effect of accounting change and net earnings were
increased by approximately $2,600 or $0.17 per share (primary).
(d) Operations of other carriers were substantially suspended from October 23 to November 16, 1976;
September 1, 1975 to January 4, 1976; December 6 to December 21, 1975; July 14 to October 30, 1974;
November 5 to December 18, 1973. Mutual aid payments included in "other" operating expenses,
amounted to $899--1976, $4,832 --
1975, $1,203 --1974 and $1,870 --
1973. Operations of a competing
intrastate carrier were partially suspended during the fourth quarter 1973.
(e) 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 this method is preferable
because if better reflects changes in the physical manner in which airframes and engines are maintained
and is the method followed by the other fen major U.5. airlines. The $7,160 cumulative effect of this
change on prior years ($13,785 less deferred income taxes of $6,625) 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.
"Other" operating expenses for 1973 were reduced by approximately $7,900 ($3,950 or $0.27 per
share (primary) after taxes), because of a reduction in reserves for engine overhauls caused by con
verting from a program of complete overhauls to one of regular inspections at shorter hourly periods
and overhauls as needed.
(f) If Western did not follow a policy of capitalizing interest related to deposits on aircraft purchase contracts,
earnings before cumulative effect of accounting change and net earnings would have been decreased
as follows: 1977 --$1,088, 1976-$198, 1975-$28, 1974-$412 and 1973-$607. Earnings before cu
mulative effect of accounting change per share (primary) and net earnings per share (primary) would
have been decreased by $0.09, $0.01, $0.03 and $0.04 for 1977, 1976, 1974 and 1973, respectively.
Earnings per share would not have been affected in 1975.
(g) The provision for taxes on income before cumulative effect of a change in accounting principle are
summarized as follows:
1977 1976 1975 1974 1973
Current income taxes
Federal
State
Deferred federal income taxes
Deferred investment credits
$(1,025)
1,150
(550)
1 1,900
4,405
1,075
2,350
4,145
(5,425)
225
9,905
(2,555)
5,325
1.375
8,300
5.375
5,775
1,700
4,050
5,800
Amortization of deferred investment
1 1,475 1 1,975 2,150 20,375 17,325
credits (2,825) (2,925) (2,975) (2,650) (2,425)
$ 8,650 9,050 (825) 17,725 14,900
In 1975 the Internal Revenue Service concluded examinations of Western's federal income fax 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 faxes on income for 1975 includes
reclassifications relating to timing differences (decreased current federal income taxes of $4,025 and
restored deferred investment credits of $1,130, which are offset by increased deferred federal income
taxes of $5,155).
19
(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 retroactive effect to 5% and
0% stock dividends paid in 1974 and a 3% stock dividend paid in 1973, as follows: 1977 --
12,659,000;
1976-13,601,000; 1975-15,163,000; 1974-15,125,000 and 1973-15,050,000. The fully diluted per
share data are based on the following number of shares: 1977 --
15,913,000, 1976 --
16,066,000; 1975
--
17,628,000; 1974--17,590,000 and 1973 --
17,516,000. Net earnings are reduced by dividends on
preferred stock to determine primary net earnings. Outstanding stock options have no material dilutive
effect on earnings per share.
(i) Cash dividends per share on common stock are stated on the basis of Western's shares outstanding at
the date such dividends were declared, adjusted when applicable for 5% and 3% stock dividends paid
in 1974 and a 3% stock dividend paid in 1973.
Notes Applicable to Ten Years Ended December 01, 1977
(j) Stock split was 2/2 for l in 1972. A stock dividend was 10% in 1971. Per share data are adjusted to give
retroactive effect.
(k) Operations of other carriers were substantially suspended from June 30 to October 2, 1972; December
15, 1971 to April 10, 1972; July 8 to December 14, 1970. Western's operations were suspended from July 29
to August 16,1969.
(l) Includes $560 from involuntary conversion of an aircraft.
(m) The methodology used to compute the rate of return is the CAB Corporate Return on Investment.
Report of Independent Certified Public Accountants
Peat, Marwick, Mitchell 8c Co.
CERTIFIED PUBLIC ACCOUNTANTS
555 SOUTH FLOWER STREET
LOS ANGELES, CALIFORNIA 00071
The Board of Directors
Western Air Lines, Inc.:
We have examined the balance sheets of Western Air Lines, Inc. as of December 31, 1977 and 1976 and
the related statements of earnings, shareholders' equity, and changes in financial position for the years then
ended. Our examinations were made in accordance with generally accepted auditing standards, and
accordingly included such tests of the accounting records and such other auditing procedures as we considered
necessary in the circumstances.
In our opinion, the aforementioned financial statements present fairly the financial position of Western
Air Lines, Inc. at December 31, 1977 and 1976 and the results of its operations and the changes in its financial
position for the years then ended, in conformity with generally accepted accounting principles applied on a
consistent basis.
YHJittJdULSL- * .
February 17, 1978
20
Balance Sheets
WESTERN AIR LINES, INC
December 31, 1977 and 1976
(in thousands of dollars)
ASSETS 1977 1976
Current Assets:
Cosh $ 6,748 1 1,476
Certificates of deposit
Commercial paper ot cost and accrued interest
14,710 7,748
(which approximate market) 27,459 25,91 1
48,917 45,135
Receivables (net of allowance for doubtful accounts
of $1,594-1977 and $1,845-1976)
Flight equipment expendable parts, at average cost
57,255 48,951
(less allowance for obsolescence of $11,914 --
1977
and $11,525-1976) 13,645 16,31 1
Prepaid expenses and other current assets 6,379 6,264
Total current assets 126,196 1 16,661
Properties and Equipment at Cost (Notes 2, 3 and 4):
Flight equipment
Facilities and ground equipment
Deposits on aircraft purchase contracts
474,700
102,607
40,641
480,136
94,137
19,418
Less allowance for depreciation and amortization
617,948
288,770
593,691
285,579
329,178 308,1 12
Deferred Charges and Other Assets 7,270 6,360
$462,644 431,133
See accompanying notes to financial statemenfs.
21
LIABILITIES AND SHAREHOLDERS' EQUITY 1977 1976
Current Liabilities:
Accounts payable $ 31,405 28,760
Salaries, wages and vacation benefits payable 27,783 23,345
Accrued liabilities (Note 5) 20,140 13,912
Income taxes payable (Note 6) 1,739 5,825
Advance ticket sales 32,704 29,563
Current portion of debt (Note 7) 8,300 27,800
Total current liabilities 122,071 129,205
Long-term Debt (Note 7) 100,661 11 0,420
Deferred Credits (Notes 6 and 8):
Deferred federal faxes on income 54,569 47,007
Unamortized investment credits 18,610 17,644
Other 12,611 9,757
85,790 74,408
Shareholders' Equity (Notes 7, 9, 10 and 11):
Preferred stock--authorized 25,000,000 shares
$2.00 Series A Cumulative Convertible
$25.00 stated value per share
Issued 1,200,000 shares 30,000
Common stock--authorized 35,000,000 shares
$1.00 par value per share
Issued 12,659,000 shares 12,659 12,659
Additional paid-in capital 27,227 28,937
Retained earnings 84,236 75,504
154,122 117,100
Commitments and Contingent Liabilities (Notes 3 and 8)
$462,644 431,133
22
Statements of Earnings
Years ended December 31, 1977 and 1976
(in thousands of dollars except per share amounts) 1977 1976
Operating revenues:
Passenger $614,581 544,188
Cargo (Note 13) 47,613 37,926
Other 29,270 23,091
691,464 605,205
Operating expenses:
Wages, salaries and employee benefits (Note 5) 263,083 226,367
Fuel 137,969 108,279
Depreciation and amortization (Note 2) 34,973 38,058
Other 233,306 202,643
669,331 575,347
Operating income 22,133 29,858
Other income (expenses):
Interest, principally on long-term debt
Interest capitalized
Interest income
Gain on sale of equipment
Other --net
(9,650)
2,592
2,302
4,549
1,086
(9,675)
786
1,941
1,809
(704)
879 (5,843)
Earnings before provision for taxes on income 23,012 24,015
Provision for taxes on income (Note 6) 8,650 9,050
Net earnings $ 14,362 14,965
Earnings per common share (Note 12):
Primary $ 1.09 1.10
Fully diluted 0.95 0.98
See accompanying notes to financial statements.
23
Statements of Changes in Financial Position
Years ended December 31,1977 and 1976
(in thousands of dollars) 1977 1976
Sources of Working Capitol:
Net earnings $ 14,362 14,965
Add (deduct) items which did not affect working capital:
Depreciation and amortization (Note 2) 34,179 36,132
Taxes (Note 6):
Deferred income taxes (550) 2,350
Deferred investment credits 11,900 4,145
Amortization of deferred investment credits (2,825) (2,925)
Gain on sale of equipment (4,549) (1,809)
Other (3,010) 1,949
Total from operations 49,507 54,807
Proceeds from issuance of preferred stock (Note 9) 30,000 --
Reimbursements of deposits and capital expenditures
upon leasing of aircraft and facilities 18,775 7,295
Proceeds from sole of equipment 7,924 3,771
Proceeds from issuance of long-term debt --
23,000
Other--net 44 (1,156)
106,250 87,717
Applications of Working Capitol:
Purchase of property and equipment and
advances thereon 74,151 42,362
Repurchase of common stock (Note 11) --
30,527
Reduction of long-term debt including
transfers to current liabilities 9,800 20,000
Cosh dividends 5,630 5,312
Preoperating costs related to route development --
4,270
89,581 102,471
Increase (decrease) in working capital $ 16,669 (14,754)
Summary of Increases (Decreases) in Working Capitol:
Cosh, certificates of deposit and commercial paper $ 3,782 7,751
Receivables 8,304 412
Expendable ports and prepaid expenses (2,551) 688
Accounts payable, advance ticket sales, accrued
and other liabilities 7,134 (23,605)
Net increase (decrease) $ 16,669 (14,754)
See accompanying notes to financial statements.
24
Statements of Shareholder^ Equity
Years ended December 31, 1977 and 1976
(in thousands of dollars)
Preferred
Sfock
$25.00
Stated
Value
Common
Stock
$1.00
Par Value
Additional
Paid-in
Capital
Retained
Earnings
Shareholders'
Equity
Balance at January 1, 1976 $ -
15,164 37,461 85,313 137,938
Exercise of sfock options --
4 32 --
36
Repurchase of common sfock . . .
--
(2,509) (3,556) (19,462) (30,527)
Net earnings -- -- --
14,965 14,965
Cash dividends --common stock. -- -- --
(5,312) (5,312)
Balance at December 31, 1976.... --
12,659 28,937 75,504 1 17,100
Issuance of preferred sfock 30,000 --
(1,710) --
28,290
Net earnings -- -- --
14,362 14,362
Cash dividends
Preferred sfock (567) (567)
Common stock -- -- --
(5,063) (5,063)
Balance at December 31,1977
(Notes 7, 9, 10 and 11) $30,000 12,659 27,227 84,236 154,122
See accompanying notes to financial sfafemenfs.
Notes to Financial Statements
(In thousands of dollars except per share amounts)
Note 1. Summary of Significant Accounting Policies.
Property and Equipment: Property and equipment,
exclusive of residual values, are depreciated over
estimated useful lives by the straight-line method.
(See Note 2.) Maintenance and repairs are expensed
as incurred. Major renewals and betterments are
charged to property and equipment accounts.
Preoperating Costs: Significant costs, such as those
for traffic promotion and personnel training, related to
the inauguration of service over major new routes
and to the introduction of new types of aircraft are
deferred and amortized over five years.
Interest Capitalized: Interest related to deposits on
aircraft purchase contracts is capitalized and amor
tized over the useful lives of the aircraft.
Investment Credits: Investment credits generated by
acquisition of assets to the extent used to reduce
federal income tax liability are amortized to income
on a straight-line basis over the useful lives of the
related assets.
Obsolescence of Expendable Ports: An allowance
for obsolescence of expendable parts is accrued
over the useful lives of the related aircraft types.
Advance Ticket Soles: Passenger ticket sales are
recorded as a current liability until recognized as
revenues for services provided by Western, refunded,
or until billed by other carriers for transportation
provided by them. At December 31, 1977, $19,561
(1976 --
$17,220) was estimated to be related to
transportation to be provided by Western and $13,143
(1976 --
$12,343) was estimated to be payable to
other carriers.
Note 2. Depreciation and Amortization.
The estimated useful lives and residual values of air
craft are as follows:
Estimated Residual
Useful Life Value
DC-10 16 years 10%
727 15 years* 15%
737 14 years* 15%
707 12 years 15%
720B Common Retirement Date --
December 31, 1978$100
*Effective October 1, 1976 the estimated depreciable lives were
extended from 12 years. For 1977, depreciation expense was
decreased by approximately $4,800 ($1,200 --
1976); net earn
ings were increased by approximately $2,400 ($600 --
1976) or
$0.19 ($0.04 --
1976) per share (primary).
The estimated useful lives of ground equipment
range from four to ten years. For buildings and im
provements on leased property, the estimated useful
lives are generally the periods of the leases.
"Other" operating expenses included depreciation
and amortization expense of $334 in 1977 ($350 --
1976).
25
Note 0. Commitments and Contingent Liabilities.
At December 31, 1977 Western hod on order five
727 and two DC-10 aircraft for delivery in 1978. The
total purchase price is estimated to be $114,100 of
which approximately $38,100 has been paid in ad
vance deposits.
Outstanding commitments for flight equipment
modifications and spares amounted to approx
imately $7,800 and for facilities and ground
equipment amounted to approximately $4,700 at
December 31, 1977.
During January 1978, subject to lender approval,
Western exercisea options to purchase five 727 and
two DC-10 aircraft for delivery in 1979 at a cost of
approximately $129,000. External equity or debt
financing or a combination thereof will be required
to finance the acquisition of these aircraft.
For information regarding the status at December
31, 1977 of legal proceedings, see "Pending Legal
Proceedings" on page 15 in this Annual Report.
For discussion of the possible impact of environ
mental regulations, see paragraphs two through five
of "Flight Equipment" on page 10 in this Annual Report.
Note 4. Description of Impact of Inflation
(Unaudited).
Inflation is reflected in operating expenses in the year
in which the price increases occur except for the cost
of replacing capital assets. Historically, because of
the regulatory process, fare increases have lagged
behind these price increases.
Replacing capital assets, primarily aircraft and
ground property, with assets having equivalent pro
ductive capacity has usually required a greater capital
investment than was required to purchase the original
productive capacity. These higher acquisition costs
reflect the cumulative impact of inflation.
Western's annual report on form 10-K (a copy
of which is available upon request) contains informa
tion with respect to year-end 1977 replacement cost
of productive capacity and the approximate effect
which replacement cost would have had on the
computation of depreciation expense for the year.
Note 5. Retirement Plans.
The company has retirement plans which cover sub
stantially all employees. Western makes contributions
to the company-sponsored plans which, together with
the participants' required contributions, are sufficient
to fund current service costs annually and prior service
costs over 10 to 20 years. Actuarial gains and losses
are amortized over ten-year periods.
The cost of retirement plans charged to operating
expense amounted to $21,908 for 1977 ($18,211 --
1976), which included company contributions to a
union-sponsored plan for mechanics and related
employees of $2,498 ($1,929 --
1976). The increase
was caused by higher wages and improved benefits.
For one of the plans, the actuarially computed
value of vested benefits exceeded the pension funds'
assets by approximately $7,000 as of the most
recent valuation date during 1977.
Unfunded prior service costs of the plans amounted
to approximately $23,227 at the most recent valua
tion dates during 1977.
Note 6. Taxes on Income.
The provision for faxes on income is summarized as
follows:
1977 1976
Current income taxes
Federal
. .
$(1,025) 4,405
State 1,150 1,075
Deferred federal income taxes (550) 2,350
Deferred invesfmenf credits 11,900 4,145
1 1,475 1 1,975
Amortization of investment credits (2,825) (2,925)
$8,650 9,050
Deferred income faxes arise from timing differ-
ences between financial and fax reporting,
effects of these differences follow:
The tax
1977 1976
Depreciation . .
$(1,623) 464
Interest capitalized 679 (164)
Preoperating expense (668) 1,668
Employee benefits 792 146
Other 270 236
$ (550) 2,350
Investment credits unapplied on tax returns
amounted to $9,596 at December 31,1977 ($17,705 --
1976) with $3,808 expiring in 1982, $1,903 in 1983
and $3,885 in 1984.
Of the $18,610 unamortized investment credit
balance at December 31,1977 ($17,644 --
1976),
$10,548 ($4,170 --
1976) remains from investment
credits utilized by reduction of taxes paid and $8,062
($13,474 --
1976) is related to investment credits not
yet utilized for reduction of taxes paid.
The Tax Reform Act of 1976 provides for 100%
application of unapplied investment credits against
federal income fax liabilities for 1977 and 1978. This
100% application is reduced 10% annually thereafter
to a 50% application against federal income taxes
in 1983.
A reconciliation between the amount of reported
taxes on income and the amount compured by
multiplying earnings before provision for taxes on
income by the federal statutory tax rate of 48%
follows:
1977 1976
Taxes on income at 48%
Increases (reductions) in taxes resulting from:
Amortization of deferred invesfmenf
$1 1,046 1 1,527
credits
State income taxes, net of federal
(2,825) (2,925)
income fax benefit 598 559
Other (169) (1 ID
Taxes on income $ 8,650 9,050
The federal income tax returns for 1973 and 1974
are being examined by the Internal Revenue Service.
26
Note 7. Unsecured Debt.
At December 01,1977 and 1976 debt was as follows:
1977 1976
Current portion of debt:
Revolving bank line of credit $ 19,500
Current maturities of long-term debt. . . .
8,300 8,300
$ 8,300 27,800
Long-term debt:
Senior
5%% installment notes due September 1,
1981 with annual principal payments
on September 1 of $4,000 $ 12,000 16,000
6e% installment notes due September 1,
1984 with annual principal payments
of $2,000 on September 1 which will
increase to $7,000 in 1982 27,000 29,000
8%% installment notes due November 16,
1985 with quarterly principal payments
of $768 starting in 1981 15,362 15,362
54,362 60,362
Subordinated
5%% convertible subordinated
debentures due February 1, 1993, with
annual sinking fund payments of
$1,500 starting in 1979 28,055 29,555
10% subordinated sinking fund notes
due April 15, 1984, less unamortized
discount of $156, with annual sinking
fund payments of $2,300 starting
in 1977 18,244 20,503
46,299 50,058
$100,661 1 10,420
The Dank Loan Agreement provides Western with
a $75,000 revolving line of credit until December 31,
1978. On this dote the line of credit con be replaced
by o term note in on amount not to exceed $75,000
which will mature on June 00, 1980 with quarterly
payments of principal storting March 01, 1979. The
interest rote on funds borrowed is 14% over the bank's
prime commercial rate until June 00, 1979 when it
will increase to %% over such rote. The commitment
fee is 14% per annum on the unused portion. At
December 01,1977, $75,000 was available for future
drawdowns.
Although this Dank Loon Agreement does not require
compensating balances, Western has informally
agreed to maintain on deposit average balances
equal to 10% of the total credit available plus 10%
of borrowings.
The agreements relating to this line of credit ond
other long-term debt contain provisions which limit
retained earnings from which restricted payments
(cosh dividends and purchases of Western's common
stock) con be mode. The most restrictive of these
provisions limited amounts available for such pay
ments to $16,650 at December 01,1977.
These agreements also include, among other things,
requirements pertaining to cash and working capital
levels and provisions which may restrict additional
borrowings.
The following schedule shows the amount of long
term debt due in the five following calendar years:
1978 $8,300
1979 8,300
1980 9,800
1981 12,872
1982 13,872
At December 01, 1977, 2,429,000 shores of com
mon stock were reserved for conversion of debentures
at o conversion price of $11.55 per shore.
Nofe 8. Lease Commitmenfs.
Western leases flight equipment and facilities ond
ground equipment which ore presently accounted
for as operating leases. These leases ore classified
below as operating or capital leases by criteria set
forth in Financial Accounting Standards Board (FASD)
Statement No. 10.
Rental expense for 1977 and 1976 was os follows:
1977 1976
Capital leases $15,070 1 1,102
Operating leases 14,079 12,752
Total $29,149 23,854
Af December 01, 1977 minimum rental expense
under leases expiring offer December 01, 1978 was
as follows: Capital Operating
Leases Leases
1978 $ 16,901 8,961
1979 16,901 8,842
1980 16,857 8,412
1981 16,724 8,275
1982 16,724 7,876
Thereafter 117,594 83,888
$201,701 126,254
The rental expenses for certain leases included in
the above tabulations ore normalized on a straight-
line basis. At December 01, 1977 other deferred
credits in the accompanying balance sheets include
$5,201 ($5,000 --
1976) representing the excess of
normalized rental expense over cosh payments.
FASD Statement No. 10 is effective for lease agree
ments entered into on or after January 1, 1977, for
which there were no commitments prior to that date.
Leases primarily for flight equipment, os shown be
low, will be classified and accounted for as capital
leases under FASD Statement No. 10.
Aircraft
Type
Number
of
Aircraft
Acquisition
Date
Lease
Expiration
Date
727 6 1969 1984
5 1977 1992
DC-10 2 1973 1991
1 1975 1991
1 1976 1991
If the company accounted for those leases os capital
leases, the following increases would be reflected in
the balance sheets ot December 01, 1977 and 1976:
Assets 1977 1976
Flight equipment $126,310 90,268
Facilities and ground equipment.... 2,967 2,967
Allowance for depreciation and
amortization
129,277
30,513
93,235
22,775
$ 98,764 70,460
27
Liabilities
Obligations under long-term leases:
Current portion of debt
Long-term debt
$ 6,053
. ..
113,804
4,265
82,1 17
$1 19,857 86,382
Net earnings for the year 1977 would have been
reduced by $1,638 or $0.13 per share (primary).
The company used incremental borrowing rates
in these computations.
Note 9. Issuance of Preferred Stock.
On October 6, 1977, 1,200,000 shares of $2.00 Series A Cumulative Convertible Preferred Stock were issued
at o stated value of $25 per share. The shares of preferred stock are convertible into common stock at the rote
of 2.5 shores of common stock for each shore of preferred stock, subject to adjustment under certain
conditions.
Note 10. Stock Options.
Western presently has a qualified stock option plan adopted in 1964 for officers and a nonqualified stock
option plan adopted in 1974 for officers and key personnel.These plans ore summarized os follows:
1974 Plan 1964 Plan
Number Number
of Average of Average
Shores Price Shores Price
January 1, 1976 384.770 $ 9.12 1 15,576 $1 1.45
Options granted 4,000 9.56 - -
Options exercised (4.120) 8.80 - --
Options cancelled and expired (2.575) 10.74 (18.103) 1 1.28
Balance December 31, 1976 382.075 9.14 97,473 1 1.48
Options granted 378.500 8.28 - -
Options cancelled and expired (45,405) 9.15 (21,862) 13.36
Balance December 31, 1977 715,170 8.69 75,61 1 10.93
Shores exercisable of:
December 31, 1977 343,886 8.95 75,61 1 10.93
December 31,1976 224.645 9.15 81,737 1 1.59
Options outstanding under the 1964 stock option plan will expire on April 30, 1978. No additional options
may be granted under this plan. At December 31,1977, 310,710 shores were reserved under the 1974 stock
option plan for the issuance of additional options.
Note 11. Repurchase of Common Stock.
On April 28, 1976, Western repurchased 2,508,832 shares of its common stock from a shareholder for $7,307
in cash and $23,000 in principal omounf of 10% subordinated sinking fund notes. (See Note 7.) These notes
were sold to the public on April 29,1976 at 99% of principal amount.
Note 12. Earnings per Common Shore.
1977 1976
Adjustment of net earnings:
Primary:
Net earnings $14,062 14,965
Preferred dividends 567 --
Net earnings available for common stock $13,795 14,965
Fully diluted:
Net earnings $14,362 14,965
Reduction in interest expense, net of provision for foxes on income, for the assumed
conversion of 5%% convertible subordinated debentures 742 756
Adjusted net earnings assuming full dilution $1 5,104 1 5,721
Adjustment of shores outstanding (in thousands):
Weighted overage shores outstanding 12,659 13,601
Adjustment assuming full dilution:
Assumed conversion of subordinated debentures 2,539 2,465
Assumed conversion of preferred stock 71 5 --
Total average common shores assuming full dilution 1 5,913 16,066
Earnings per common shore:
Primary $ 1.09 1.10
Fully diluted 0.95 0.98
Outstanding stock options hove no material dilutive effect on earnings per common share.
28
Note 13. Quarterly Financial Data (Unaudited).
Summarized quarterly financial data for 1977 and 1976 is as follows:
Per Shore
Operating Operating Net Fully
Revenues Income Earnings Primary Diluted
1977
First quarter $164,748 4,257 1,993 0.16 0.14
Second quarter 165,181 226 1,780 0.14 0.13
Third quarter 188,825 16,623 8,811 0.70 0.59
Fourth quarter 172,710b 1,027b 1,778b 0.10 0.10
1976
First quarter 139,485 1,056 1,423 0.09 0.09
Second quarter 146,273 8,031 3,812 0.28 0.25
Third quarter 166,325 16,842 7,821 0.62 0.53
Fourth quarter 153,122 3,929 1,909 0.15 0.14
See Note 2.
bOperafing revenues and operating income include $2,000 from current and retroactive mail rate adjustments, which increased net
earnings by $1,000.
Corporate Officers
Executive Officers
Arthur F. Kelly
Chairman of the Board and Chief Executive Officer
Dominic P. Renda
President and Chief Operating Officer
Corporate Planning Division
James L. Mitchell
Senior Vice President--Corporate Planning
Walter Bambrick
Vice President--Data Processing and Systems
Charles S. Fisher
Vice President--Schedule Planning
Peter P. Wolf
Vice President--Communications
W. Jeffrey Terrill
Assistant Vice President--Regulatory Proceedings
Finance and Administration Division
Robert O. Kinsey
Senior Vice President--Finance and Administration
Paul V. Donahue
Vice President--Procurement
H.S. Gray
Vice President--Financial Planning
Richard O. Hammond
Vice President and Treasurer
Roderick G. Leith
Vice President and Controller
J.S. Neel
Vice President--Personnel Relations
Carl M. Anderson
Assistant Vice President--Special Projects
Legal Division
Gerald P. O'Grady
Senior Vice President--Legal and Secretary
Henry M. deButts
Vice President--Regulatory Law
Howard L. Culver
Assistant Vice President--Regulatory Law
Thomas J. Greene
Assistant Vice President--Corporate Law and Assistant
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
Jack M. Slichter
Vice President--Field Management
John I.Good
Assistant Vice President--Cargo Sales and Service
Operations Division
Anton B. Favero
Senior Vice President--Operations
Robert V. Johnson
Vice President--Flight Operations
Edwin W. Mitchell
Vice President--Maintenance and Engineering
Corporate Affairs
Roy Silvius
Vice President--Corporate Affairs
Wayne B. Lichtgorn
Assistant Vice President--Consumer Affairs
Government and Industry Affairs
Neil S. Stewart
Vice President--Government and Industry Affairs
Regional Officers
William J. Grant
Regional Vice President--Denver
Paul R. Harding
Regional Vice President--San Francisco
Allen F. Hoss
Regional Vice President--Hawaii
Grant G. Murray
Regional Vice President--Salt Lake City
Lawrence A. Nichols
Regional Vice President--Seattle/Tacoma
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
29
Doord of Directors
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
Gerald Grinstein
Aftorney-at-Law, Preston, Thorgrimson, Ellis,
Holman & Fletcher, Seattle, Washington
Walter J. Hickel
Chairman of the Board, Hickel Investment Company
Anchorage, Alaska
Arthur F. Kelly*
Chairman of the Board and Chief Executive Officer,
Western Air Lines, Inc., Los Angeles, California
Bert T. Kobayashi, Jr.
Attorney-at-Law, Kobayashi, Koshiba & Watanabe
Honolulu, Hawaii
Arthur G. Linkletter
Television Producer and Broadcaster
Chairman of the Board, Linkletter Enterprises, Inc.
Irvine, California
John H. Myers*
Assistant to the President, Saint John's University
St. Paul, Minnesota
Dominic P. Renda*
President and Chief Operating Officer,
Western Air Lines, Inc., Los Angeles, California
Robert H.Volk*
Chairman of the Board, Westmor Corporation
Long Beach, California
'Member. Executive Committee
Directors Emeriti
Hugh W. Darling
Altorney-at-Law, Darling, Hall, Rae & Gufe
Los Angeles, California
Leo H. Dwerlkotte
Las Vegas, Nevada
James D. Garibaldi
Aftorney-at-Law, Garibaldi & Sausser
Los Angeles, California
Cory Grant
Director and Executive, Faberge, Inc.
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 and Chief Executive Officer,
Young's Market Company, Inc., Los Angeles, California
Harry J. Volk
Chairman of the Board, Union Bancorp, Inc.
Los Angeles, California
John M. Wallace
Walker Bank 0 Trust Company
Salt Lake City, Utah
Arthur G. Woodley
Bellevue, Washington
Richard W. Wright
President, Mountain States Employers Council, Inc.
Denver, Colorado
Notice to Stockholders.
A rule adopted by the Civil Aeronautics Board ("CAB") in July 1970, as amended on December 29, 1972, imposes obligations on certain
stockholders of air carriers. Any person who owns as of December 31 of any year or subsequently acquires, either beneficially or as a
trustee, more than 5% of any class of capital stock of an air carrier must file with the CAB a report containing the information required
by Part 245.12 of the CAB's Economic 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 calendar year must file with the CAB within 30 days after the end of the quarter a report in
accordance with the provisions of Part 245.14 of the CAB's Economic Regulations.
Any person required to report under either Part 245.12, Part 245.13 or Part 245.14 of the CAB's Economic Regulations who grants a
security interest in more than 5% of any class of capital stock of an air carrier must within 30 days after granting such security interest
file with the CAB a report containing the 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 Pricing and Domestic Aviation, Civil Aeronautics
Board, Washington, D.C. 20428.
Form 10-K: Stockholders may obtain free of charge a copy of the company's annual report on form 10-K as filed with the Securities
and Exchange Commission by writing to the Secretary, P.O. Box 92005, World Way Postal Center, Los Angeles, California 90009.
General Offices
Western Air Lines Building, 6060 Avion Drive
Los Angeles International Airport
Los Angeles, California 90045
Registrar/Transfer Agent--Common Stock
Bonk of America National Trust & Savings Assn.
Ill West Seventh Street, Los Angeles, California 90014
Registrar/Transfer Agent --Preferred Stock
Bank of America National Trust & Savings Assn.
Ill West Seventh Street, Los Angeles, California 90014
Debenture and Subordinated Note Trustee
The Chase Manhattan Bank
1 Chase Manhattan Plaza, New York, New York 10015
Stock Listing--Common Stock
New York Stock Exchange
Pacific Stock Exchange
Stock Listing--Preferred Stock
New York Stock Exchange
Pacific Stock Exchange
Debenture and Subordinated Note Listing
New York Stock Exchange
Pacific Stock Exchange
General Counsel
Hugh W. Darling
Darling, Hall, Rae & Gufe
523 West Sixth Street, Los Angeles, California 90014
Independent Accountants
Peat, Marwick, Mitchell & Co.
555 South Flower Street, Los Angeles, California 90071
Annual Meeting
Fourth Thursday in April