Western Airlines Annual Report 1978

Western
Airlines
1978
Annual
Report
WESTERN AIR LINES ROUTES -==========
PROPOSED ROUTES - - - - - - - - - - - - -
Western/ Continental Alaska Interchange
c:z====z::==
Western/ Continental Alberta Interchange=======
Western/ Braniff Alberta Interchange c:ci:11:1:cc::z=.a:i::c1.1:~i==ei
Service suspended by order of the CAB
Description of Business
Western Air Lines, Inc., is a certificated air carrier engaged in
scheduled air transportation of passengers, cargo and mail over
appro imately 34,000 route miles. The company was organized
in 1925 and currently erve 43 cities in 15 states, Canada and
M ico. Western has competition from other airlines on substan-
tially all of its route . It is regulated by the United States and
foreign governments.
WESTERN AIR LINES, INC.
1978 ANNUAL REPORT
HIGHLIGHTS Of 1978
(in thousands of dollars)
O perating revenues .
O perating expenses .
1978
. $834,513
779,657
Change
1977* 1978 vs.1977
691,464 21%
662,010 18
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,856 29,454 86
Other income (expenses):
Interest expense, net ...
Gain on sale of equipment .
Other-net .. . .. . ... .. . .
(20,179)
6,754
3,924
(17,530) 15
4,549 48
3,388 16
Earnings before provision for taxes on income and
cumulative effect of a change in accounting principle . 45,355 19,861 128
Provision for taxes on income . . ..................... . 6,808 7,137 -5
Earnings before cumulative effect of a change in
accounting principle ........... . ........... . . . 38,547 12,724 **
Cumulative effect of a change in accounting principle ..... . 16,201 **
Net earnin s . ...... .
Passengers carried (000) . . .
Available seat miles (000,000) . . .
Revenue passenger miles (000,000) .....
Passenger load factor-actual (%) ..
- breakeven (%) ...
*Restated. See Note 2 of Financial Statements.
**Not computed.
Notice to Stockholders.
A rule adopted by the Civil Aeronautics Board ("CAB") in July
1970, as amended n D cember 29, 1972, impo s obligations on
certain stockholders of air ~ar Any p rs n s as of
D c mber 31 of any year or s r bene-
ficially or a t tal st ck
fan air ca t
informati t -
la
D
by
aft p .
i
30 cl y
1
. $ 54,748 12,724 **
10,447 8,757 19%
16,255 14,964 9
10,635 8,589 24
65.4 57.4 14
61.1 56.1 9
after the nd of the quart r a report in accordanc with the pro-
visions of Part 245.14 of the CAB's Economic Regulations.
Any person required to rep rt under either Part 245.12, Part
245.13 r Part 245.14 f the AB's Ee nomic Regulations who
grants a ecurity inter st in m r than 5% f any class of capital
ck of an air arri r must within ch
urity interest fil with th f rma-
requir that h
yb r mati n
m
and
9200
8.
f th
riti
8 X
09.
LETTER TO SHAREHOLDERS
Dominic P. Renda Arthur F. Kelly
2
F llow Sharehold rs:
As indicated in th financial data
and descriptive text of this annual
report, the year 1978 was an impor-
tant one in the history of your com-
pany and the airline industry.
For Western, it was a record year
in every respect, with all-time highs
in net earnings, operating revenues,
passengers boarded, air freight car-
ried and many other categories.
N t arnings were a record $54.7
million, or $4.09 per share. And,
although these earnings included a
credit of $16.2 million ( or $1.27 per
share) from the cumulative effect of
an accounting change on prior years,
1978 earnings would have set a
record without the change.
Western carried 10.4 million pas-
sengers in 1978, the first time the
company has passed the 10 million
passenger mark in a single year, and
our load factor of 65.4 percent was
the highest of any U.S. trunkline.
Traffic grew dramatically on all
segments, reflecting the popularity of
new deep discount fares that were
introduced during 1978.
And while this was a year of great
achievement of which we are all very
proud,. it also ushered in a new era
in U.S. air transportation.
As detailed in the Regulatory
Matters section of this report, the
Airline Deregulation Act of 1978,
along with drastic and rapid changes
in the philosophy of the Civil Aero-
nautics Board, is bringing to the
airline industry the greatest change
since the first Civil Aeronautics Act
was passed in 1938.
During 1978, this new regulatory
climate was manifested largely in the
area of ratemaking as the CAB lib-
eralized its policies and permitted
carriers to introduce, almost at will,
the greatest array of discount fares
ever offered to the trav ling public.
Th se bargain rat s, along with a
high I vel of consum r sp nding
pow r, stimulated an enormous
amount of new travel.
During the fir t nin m nths of the
y ar in particular, r v nu s g ner-
at d fr m this up urg ind mand far
utgain d incr a in xp n s.
In th f urth quart r, h w v r, th
,...-
combination of low fares and con-
tinuing inflation began to have an
adverse effect on industry earnings.
In Western's case, the company
had an increase of 21.5 percent in
traffic, as expressed in revenue pas-
senger miles, on an increase of only
ll.O percent in available seat miles,
which produced the highest fourth
quarter load factor in Western's his-
tory. However, because 44 percent of
this traffic moved at a discount our
average revenue per revenue pas-
senger mile decreased five percent
from the same quarter of 1977. As a
result, the 21.5 percent increase in
traffic produced only a 15.5 percent
increase in operating revenues and
the company suffered a loss of $3.1
million during the fourth quarter.
Had we been able to hold our yield
at the same level as the 1977 fourth
quarter without any loss of traffic,
our fourth quarter would have been
profitabie.
The reversal of this fourth quarter
trend is our No. 1 priority for 1979.
However, the task will not be easy.
On the one hand, we are faced with
the continuing pressure of increasing
costs and on the other increased
competition on our routes and a
depressed passenger ticket yield.
On the expense side, we are hope-
fol that the Federal Wage and Price
Guidelines will be successful in slow-
ing the upward spiral in labor costs
and the prices of goods and services
we use. Western did an excellent job
of increasing productivity during
1978. Our 19 percent increase in the
number of passengers carried during
the year was accomplished with only
a 3.4 percent increase in airplane
miles flown and an increase of less
than five percent in the number of
employees. Nevertheless, our ex-
penses increased 18 percent for the
year. These increases and the reasons
for them are detailed in the Manage-
ment's Discussion section.
Our goal in 1979 will be to again
increase productivity with the help
of our employees, who have proven
amazingly resilient and resourceful
in meeting the challenges of our
rapidly changing industry.
Although our av rage pric of air-
craft fu 1 stabiliz d som what during
1978, we xp ct a much larger increase
during the coming year. Increases by
the Organization of Petroleum
Exporting Countries (OPEC), other
costs that oil companies are experi-
encing and competitive bidding for
reduced supplies brought on by the
interruption of production in Iran
will increase Western's per-gallon
costs significantly during 1979.
Of equal concern to us is the mat-
ter of supply. As a result of the reduc-
tion of supplies from Iran and the
increasing demand for jet fuel
brought about by the new services
authorized by the CAB, our industry
is faced with shortages that could
cause cutbacks in service.
Although one major feature of
deregulation - the freedom to lower
fares-was a major factor in 1978,
the other key feature-increased
competition through liberalized
market entry-had little actual effect
on 1978 results.
However, through the enactment
of deregulation legislation and a pro-
competition philosophy of the Civil
Aeronautics Board the groundwork
was laid for a substantial increase in
competition in 1979. As explained
in the Regulatory Matters section of
this report, carriers will have con-
siderable discretion in determining
what routes they want to fly.
This freedom to enter markets is
resulting in new competition and will
have an effect on airline revenues.
Also affecting revenues in 1979
will be the matter of our average
revenue per passenger mile, or yield.
While we will continue to provide
discount fares, one of our major
goals during 1979 is to reach an
improved balance in which we will
reduce the number of discount seats
available during peak periods and
increase them during off-peak
periods. In so doing, we hope to
stimulate travel and continue our
traffic growth but at the same time
rais our yield to a lev 1 that is mor
consistent with th cost of providing
such s rvic .
As an offs t against th incr a ing
pric s of fu 1 and oth r commodi-
ti s, w al o plan to s k su h far
incr as s as w f 1 can b ju tifi d
and whi h will b con i t nt with th
3
Wag and Pric guid lin s.
On Nov mber 15, 1978, your
board of directors approv d an
agr ement to consolidat with Conti-
n ntal Airlin s to form a n w com-
pany to b known as Western &
Continental Airlines, Inc. The details
of this proposal were submitted to
you for your approval in our proxy
statement of February 15, 1979, pre-
paratory to a special Shareholders'
Meeting set for March 22, 1979. While
awaiting approval of our proposed
consolidation with Continental by
the shareholders of both companies
and the CAB, we have continued to
operate Western as though no merger
were contemplated. We have ordered
new aircraft for future delivery and
have taken option positions for the
aircraft that will be needed with or
without the merger.
We are continuing to seek new
routes that will strengthen our sys-
tem, particularly international routes
that represent logical extensions of
the Western Airlines system. These
include routes to the West Coast of
Mexico, an Anchorage-London route
(which has been set down for a CAB
hearing) and a route between
Minneapolis/St. Paul and London,
which could be designated by our
government as its "wild card" selec-
tion for operation by a U.S. carrier
under the new U.S. - United Kingdom
air service agreement.
Although there are many uncer-
tainties facing the airline industry
and the U.S. economy, we believe
that 1979 should produce a reason-
able level of profits. We will continue
to maintain tight controls on costs
and will concentrate our efforts on
the two major ingredients of revenue
generation: continued traffic growth
and improved yield.
These are not new challeng s to
the managem nt and employe s of
W st rn Airlin s. With your con-
tinu d support we will me t them as
2
M r h 15, 979
YEAR IN REVIEW
Earnings
Net earnings in 1978 totaled
$54,748,000, compared to restated
earnings of $12,724,000 for 1977.
The company's decision to
change to the flow-through method
of accounting for investment credits,
effected in the first quarter of 1978,
increased the 1978 net by $29,107,000
of which $16,201,000 was the cumu-
lative effect of the change from
prior years.
For comparative purposes, 1978
earnings were $38.5 million before
inclusion of the prior years' cumula-
tive effect, exceeding the previous
record of $23.5 million for 1974.
The restatement of 1977 earnings,
as well as those for earlier years,
is in compliance with the Statement
of Financial Accounting Standards
No. 13 which requires that certain
leases, primarily on flight equip-
ment, be classified and accounted
for as capital leases. For financial
statement purposes, such assets are
accounted for as if they were owned,
rather than leased, and therefore the
ass ts and corr sponding liabiliti
app ar on the balanc sh et.
W stern's rat of return on
investment for 1978 was 14 p re nt,
compared to nine percent in 1977.
Operating incom for 1978
totaled $54. 9 million, up from $29 .5
million in 1977 as a result of a
21 percent increase in operating r v-
enues and an 18 percent increas in
operating expenses.
Aircraft sales accounted for
$6.7 million before taxes, compared
to $4.5 million in 1977.
Revenues
The company's operations gener-
ated revenues of $835 million, up
from $691 million in 1977.
Passenger revenues from sched-
uled service increased 19 percent to
$734 million. Cargo revenues in-
creased 20 percent t~ $57 million
and other revenues, including
charter operations, were up 49
percent to $44 million.
The passenger revenue increase
resulted from a 22 percent increase
in scheduled traffic. Coach and
economy passengers accounted for
93 f . .
I
xp di th
in m h
downward tr
the d valuati -
temb r 1976. Th n s-
Guadalajara route, ina n
30, account d for 44 perc nt of the
growth in this mark t.
Th company's 48 states and
Canada rout s provided 71 percent
of Western's passenger revenu s.
Cargo revenues for 1978 w re up
over 1977 as the result of a favorable
combination of increasing yield ( or
average revenue per ton mile) and
the amount of cargo transported.
Expenses
Western's operating expenses
increased to $780 million in 1978, up
from $662 million in 1977. Wages,
salaries and employee benefits,
which represent 40 percent of this
total, reached $309 million, while
fuel expenses-20 percent of the
total-were $155 million.
Revenue Dollar Percent
4
(dollars in thousands) of total
Charter .... ... . . ...... ..... .. $ 15,772 2%
Transport Related .... 19,886
Other ... .. ... .. ..... ....... . 7,914
Coach passenger service . . . . . . 681,664
Deluxe passenger servic . . . . . . . . . 52,341
Cargo . . . . . . . . . . . . . . . . . . . . . . . 56,936
$834,513
2
1
82
6
7
100%
Th mpl y cost incr a s w r
mainly attributabl to th impact
of coll tiv bargaining agre m nts.
Th incr ased 1 v ls of passeng r
traffic brought add d costs in th
areas of commissions to trav 1
agents, in-flight s rvice expenses,
and passenger and cargo claims.
Of the 12 percent increase in fuel
expense, 54 percent was caused by
higher average prices and 46 percent
b cause of increased consumption.
Depreciation and interest expense
increases were related to the acqui-
sition of the seven new aircraft.
Included in 1978 expenses was
$10 million paid to a struck carrier
under the Airlines Mutual Aid Pact,
an agreement which has been ter-
minated in accordance with provi-
sions of the Airline Deregulation Act
of 1978.
Shareholders, Stock and
Financial Position
Western's net earnings per common
share for the year 1978 were $4.09,
including $1.27 per share from prior
years' cumulative effect of a change
in accounting principle.
Hold rs of common sto k w r
paid 40 cents p r shar through
quarterly cash <livid nds of 10 c nts
per shar in F bruary, May, Au ust
and Nov mber.
The 1978 r cord n t earnings in-
er as d shar hold rs equity to $199
million at th nd of 1978, compared
to a r stated $147 million at th end
of 1977. Equity per share of common
stock (or book value) was $12.96,
compared to $9 .28 at the end of 1977.
As of December 31, 1978, there
were outstanding 13,010,000 shares
of Western common stock held by
approximately 18,200 individuals
and institutions. Western's common
and preferred stock were traded on
the New York Stock Exchange at the
following prices:
1978
First Quarter . . . . .. .. . .
Second Quarter .... . . . ....... . .
Third Quart r ..
Fourth Quarter .. ... . . . . .
1977
First Quarter .
Second Quarter ..
Third Quarter .
Fourth Quarter .... . .. . .. ...... .
W t rn has 2,992,000 har f com-
m n t k re rv d for i uanc
upon conv r ion of it pr f rr d
tock and an additional 2,ll9,000
har r serv d f r is uanc upon
conv rsion of its 51/11 percent Con-
vertible Subordinat d Deb ntur s.
Holders of the debentures receive in-
ter st payments on February 1 and
August 1; th debentures are held by
555 individuals and institutions. The
$2.00 Series A Cumulative Convert-
ible Preferred Stock was held by
1,935 individuals and institutions,
who are paid dividends quarterly.
Western's long-term debt was
$158 million at the end of 1978, com-
pared to $101 million at the end of
Common Stock
High Low
8 7
12 7Ys
14 lOY
s
11 8
103/s 8
9 81
/g
85/s 7
7 6
Preferred Stock
High Low
25
30
37
31
23
23
23
27
25
221
/s
Expense Dollar
(dollars in thousands)
Percent
of total
Rentals .................. . ... $ 15,239 2%
Food and beverages . 27,781 4
Other . . . . . . . . . . . . . . . . . . . . . . . 110,201 14
Wages, salaries and
employee benefits . . . . . . . . . . . . 309,445 40
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . 154,876 20
Depr ciation . . . . . . . . . . . . . . . . . . 47,094 6
Mat rials ands rvic s . . . . . . . . . . . 73,955 9
ommissions . 41,066 5
$779,657 100%
5
200%
175%
150%
125%
1977. The incr ase resulted from
Western's entering into an equipment
trust agreement in May 1978 in
which nine insurance companies
agreed to supply 80 percent of the
cost of six aircraft delivered during
1978 and one to be delivered in 1979.
Under these agreements, the trustee
receives a security interest in the
aircraft. When rental payments total
enough to pay both principal and
interest on the certificates issued
under the agreement, Western's title
to the aircraft will be free and clear.
A complete listing of long-term debt
is contained in Note 8 to Financial
Statements.
During 1978, Western entered into
a new bank loan agreement which
provides a $125 million revolving
line of credit until June 30, 1981, at
which time it can be replaced by term
notes which will mature on June 30,
1985. Funds provided by this agree-
ment are available for the purchase
of new equipment or for other cor-
porate purposes.
Sources of working capital totaled
$181 million in 1978, compared to
$147 million in 1977. Of the 1978
Passenger Revenue - 1974 = 100%
100%
1974 1975 1976
amount, op rations provid d $81
million, proceeds from is uanc of
long-term obligations $72 million,
reimbursements of advanc d posits
for aircraft and facilities $13 million
and proceeds from the sal of aircraft
provided $11 million.
Applications of working capital
totaled $179 million in 1978. Pur-
chases of property and equipment
and advance deposits required $151
million, reductions in long-term obli-
gations $21 million and cash divi-
dends $8 million. Included in the
advance deposits is approximately
$35 million for 727s and DC-lOs
scheduled for delivery in 1979.
Fares and Rates
Pricing attracted more public
attention in 1978 than any other
aspect of the airline business.
By mid-1978, Super Saver fares,
which were gaining momentum
in the early part of the year, were
available in some form over nearly
all of Western's routes . These fares,
which have had advance booking,
minimum/maximum stay and ca-
pacity limitation features, gave the
industry the opportunity to offer
bargain rates while controlling their
availability. In th f urth quart r,
ight p re nt of W t rn's total
pass ng r traffic mov d on Sup r
Saver far s.
In ord r to simplify discounts
for travel rs and at th sam tim
gather mpirical vid nee as to
whether or not r duced fares w re
economically sound, W stern intro-
duced two innovations to its far
structur in the early part of 1978.
On the Los Angeles-Miami/Ft.
Lauderdale route, W stern intro-
duced "No Strings" fares effectiv
April 13. This had the effect of
lowering far s across-the-board in
first class, coach and economy by
35 to 48 percent with no advance
purchase, stay or capacity require-
ments involved. As a result,
Western's load factors on the route
increased sharply and the company
made a small profit on this route
for the last nine months of 1978.
Using another concept, Western
began offering 30 percent discounts
on all flights operating during "off
peak" periods in the Las Vegas-Los
Angeles and Las Vegas-Portland/
Seattle markets effective June 30.
Because of an increase in the
percentage of Western's passen-
ger traffic that was sold at a
discount in 1978, passenger
revenue did not increase as fast
as RPM's.
Overhaul of the
engines for Westerns
76 jet aircraft is
performed at the
company's main main-
tenance base in Los
Angeles. Computer-
generated images of
terrain enhance the
realism of simulator
flight at Westerns pilot
training facility.
- - - - - - Passeng r r venu
- - - - - Sch dul d RPM's
Yi ld
- - - - - - - - - % of di ounted RPM' t
1977 1978 t tal chedul d RPM's
6
Th p ak/off-p ak pricin c nc pt is
esp cially suitabl for mark ts lik
Las V: ga which hav hi h d mand
on Fridays and Sundays and ar
les popular during oth r p riods
of th week. It also r sult d in a
profit r bound for th short-haul
Las Vegas-Los Ang l s rout , which
had op rat d at a loss in 1977. This
concept has sine been xpanded
to oth r Nevada markets and to
intra-California mark ts.
W stern also was fore d to m et
discount far s of other carri rs in
order to remain competitive. In
many markets there also were some
upward adjustments of basic fares
during the year; however, the net
effect on Western's yield, or average
revenue per passenger mile, was
downward, from 7.34 cents for 1977
to 7.20 cents for 1978.
Under the new regulatory climate,
Western and other airlines will be
allowed to establish fares on a
market-by-market basis free from
government restraint. The objective
is to stimulate price competition
irlin . Und r th n w rul ,
may incr a far 10 p r-
rtain mp titiv mark ts
and r du fares by 50 p re nt in all
mark t . Peak/off-p ak pricin wiJl
b ncourag d. M r ov r, first class
far s no long r must xc d coach
far s by a pr scrib d p re ntag .
Provisions of th Airlin D -
regulation Act of 1978 provid for
pre- mption of stat regulation
regarding rates, rout s and s rvices
of air carriers which also have int r-
state routes. However, the Public
Utilities Commission of California
has resist d federal pre-emption and
has indicated it will continue to
assert jurisdiction until such time as
a definitive ruling is obtained
through the courts.
The ultimate impact of the new
regulatory climate related to passen-
ger air fares is yet to be determined.
While early 1979 has seen a prolifer-
ation of free or reduced children's
and companion fares, it should
be pointed out that these are being
offered during light travel periods.
Indications are that the limited,
capacity-controlled discounts of
1978 will continue to be available
f r th for
Dom sti air car
bj ct to the juris
AB and arri rs ar
wn air fr i ht rat
without prior notification to any
r
ir
f d ral or stat ag n y. Th only
domestic cargo tariffs which r main
under CAB jurisdiction involv th
structur and 1 v 1 of mail rat s.
International passenger and cargo
rat s continue to be subj ct to CAB
and for ign government regulation.
Regulatory Matters
The regulatory climate under which
Western and other U.S. air carriers
operate has changed dramatically
within the past year.
While the Civil Aeronautics Board
remains the primary body responsi-
ble for airline routes and rat s, the
Airline D regulation Act of 1978,
which was enacted in October, and
changes in regulatory philosophy
which preceded passage of the Act
have resulted in a new environment
for the airlines.
The Airline Deregulation Act is
250%
200%
150%
designed to phase out the CAB's
regulatory authority over th airline
industry. After December 31, 1981,
the Board will no longer have author-
ity over route certification and effec-
tive January 1, 1983, it will be
deprived of authority over fares and
intercarrier transactions, including
mergers. Total abolishment of the
CAB is scheduled for January 1, 1985.
In the transition period, the legis-
lation calls for substantial changes in
the regulation of air transportation.
The nature and extent of airline ser-
vices offered and the pricing of those
services are to be determined largely
by market forces. Carriers are to be
given greater freedom of entry and
exit from markets and greater free-
dom for raising and lowering prices.
The evolution of this new philos-
ophy of regulation was evident in
CAB rulings in the months leading
up to the passage of the Deregulation
Act.
The CAB's initial step was a deci-
sion to favor carriers offering the
lowest fares in choosing among
applicants seeking new authority.
This approach evolved into a policy
Fuel Expense-1974 = 100%
100%
1974 1975 1976
of "op n ntry11 und r which multi pl
awards are b ing mad in most rout
cases. Limited and controlled compe-
tition, th rule for nearly 40 y ars,
has been replaced by free and open
competition. As a corollary, the
CAB has adopted a policy of mak-
ing new awards permissive inst ad of
mandatory as had been customary
in the past. Traffic diversion from an
incumbent carrier is no longer rele-
vant in deciding whether to grant
applications for new authority over
a route.
This presents a two-fold impact
on existing air carriers: a carrier's
opportunities to obtain route exten-
sions are increased, while its expo-
sure to new competition on existing
routes also is increased. Faced with
this situation, Western and most air
carriers have adopted a practice of
applying for new a~thority in almost
every case which the CAB institutes
in order to gain a potential offset
for the diversionary impact of com-
petitive authorizations.
In addition to the traditional route
proceedings, the Deregulation Act
provides for two other methods of
gaining new route authority: auto-
matic mark t ntry and cl im for
unu d authority of oth r airlin .
Under automatic market entry, each
carrier may enter one new domestic
market each year for the next three
years without CAB approval. In each
of these years, each carrier also can
protect one market from automatic
market entry by other carriers.
For 1979, Western selected the
Reno-Seattle/Tacoma route for
automatic entry. The Minneapolis/
St. Paul-Los Angeles route was
selected for protection against auto-
matic entry.
Because of its extremely high
levels of crew and equipment utiliza-
tion and evaluation of unused routes,
the company has not yet laid claim
to any dormant authority. However,
this opportunity under the Deregu-
lation Act may be exercised at any
time, and Western is continuing to
study potential markets.
While it is too early to fully deter-
mine the impact of new competition
and new opportunities provided by
the Deregulation Act, Western will
inevitably be subjected to increased
competition on most of its major
Jet fuel consumption increased
5.5 percent and the price per
gallon 6.3 percent, producing an
increase of 12.3 percent in fuel
costs during 1978.
Reservations and pas-
senger service person-
nel handled a record
number of passengers
in 1978. Aiding them
was the company's up-
dated computer and
new data processing
facility w hich gave
- - - - - - Fu
-----G um cl
1977 1978 p r gall n
8
Western one of the
finest data-handling
systems in the industry.
routes. Und r automatic mark t
entry, two trunk airlines selected
the nonstop Seattle/Tacoma-Los
Angeles market while routes from
California to Phoenix, Las Vegas and
Reno were the prime targets for car-
riers who were previously limited to
intrastate operations. Other carriers
have applied for and have been or
will be granted authority competi-
tive to Western in markets such as
Twin Cities-Las Vegas/Phoenix/San
Diego, San Francisco-Portland/
Seattle/Tacoma, and Denver-Salt
Lake City, Denver-Reno and Denver-
San Diego.
The Deregulation Act does not di-
rectly impact international air trans-
portation since these authorizations
are subject to government agree-
ments. However, the new philos-
ophy of competition is being carried
by the Administration into negotia-
tions for new and amended bilateral
agreements with other countries.
When more liberal agreements
permit, the CAB has implemented
them by granting multiple authoriza-
tions on individual routes.
During 1978, Western received
authority to serve Guadalajara,
Mexico's second largest city. Non-
stop flights between Los Angel sand
Guadalajara w re inaugurat d on
June 30.
The U.S.-M xico bilateral agree-
ment, signed in January 1978, also
provided for new U.S. carrier ser-
vices b tween the West Coast and
the Mexican cities of Mazatlan,
Puerto Vallarta, Zihuatanejo, Man-
zanillo and La Paz, Loreto and San
Jose del Cabo. Selection of the airline
or airlines to serve these routes is
currently before the CAB in the Cali-
fornia/Southwest-Western Mexico
Route Proceeding. Hearings before
the administrative law judge were
held in October 1978. His recom-
mendation to the CAB is pending.
Western is also an applicant in the
Florida-Mexico City Seroice Investi-
gation in which the route between
Miami/Tampa and Mexico City is at
issue. This route was dropped by Pan
American during 1978 and Eastern
Airlines was given exemption
authority to operate the route until
a final decision is made by the CAB.
Two other proceedings in which
Western is hopeful of receiving new
international authority involve
routes between Minneapolis/St. Paul
and London and between Anchorage
and London.
Whil th U.S.-Unit d Kingdom
Bil t ral Agr m nt conclud d in
1977 did not sp cifically nam
Minneapolis/St. Paul as a t rminal
point, it did provid for th nam-
ing of an additional U.S. city, call d
th "wild card" city, for servic by a
U.S. carri r to London by July 1980.
Th Twin Cities is one of eight U.S.
d stinations b ing considered for this
nonstop authority. Should the Twin
Cities be selected, the CAB has indi-
cat d it will consider Wes tern's appli-
cation along with that of another
carrier for these rights. Comments
relative to wild card city selection
were submitted in early 1978 and are
awaiting board action.
The U.S.-U.K. agreement also
contained authority for a U.S. carrier
to operate between Anchorage and
London, a route in which Western
has long expressed interest. An
Anchorage-London Service Case has
been instituted by the board to
consider applications of Western as
well as those of other carriers for
this route.
Western also is an active applicant
in the Transpacific Low-Fare Route
70%
60%
Investigation which covers authority
from all U.S. points to Hong Kong,
South Korea, Taiwan, Japan, Philip-
pines, Singapore, Thailand, Sri
Lanka, India, Indonesia and Malay-
sia and in the U. 5.-Benelux Low-
Fare Proceeding in which Western
seeks authority from Anchorage, San
Francisco and the Twin Cities to
Amsterdam and Brussels.
In addition to CAB regulation, the
Federal Aviation Administration
regulates the safety aspects of airline
operations and exercises jurisdiction
over certain personnel, aircraft and
ground facilities and other technical
aspects of operations. The U.S.
Postal Service has jurisdiction over
the transportation of mail.
Marketing
Western carried 10,447,000 passen-
gers in 1978, marking the first time
in its 52-year history that the airline
had topped 10 million passengers in a
year. The 1978 record represented a
19 percent increase over the 8,757,000
passengers carried in 1977 which had
been the previous all-time high.
Load Factor -Actual vs. Breakeven
50%
1974 1975 1976
Th availability of bargain dis-
count fares and th ir app al to an
inflation-weary public brou ht
about th surg in 1978 air trav l.
W st m's mark ting programs
were geared for th upsurg and its
adv rtising aim d toward th n w
mphasis. An up-dat d comput r-
ized r servations system, install din
May, gave the company add d capa-
bility for handling the incr ased
volume of traffic and its summ r
peaks. This reservations network
handles in excess of one million
messages a day from airport, sales
and reservations outlets.
Western achiev d a 65.4 percent
average load factor for 1978, which
was the highest load factor produced
by a U.S. trunkline in scheduled
service.
Travel agency sales contributed
more than 60 percent of Western's
passenger revenues during the year.
In order to improve the links be-
tween the travel agent and Western's
reservations system, the company
has entered into a program of auto-
mating travel agencies, thereby giv-
ing them the latest technology in
booking and ticketing customers and
r i
rbal m-
etw h
and airlin .
Th in uguration f th fir t n n-
top s rvic byaU.S.carri rb tw n
Los Ang l s and Guadalajara on
Jun 30 was h rald d by a hard-
hitting mark ting and adv rti ing
campaign which r sult din exc JI nt
passeng r r sponse. W st rn xperi-
nced an av rag load factor of over
70 perc nt during th first six months
of this op ration.
In its major leisure mark ts,
Western continued to hold th largest
share of the market against competi-
tors to Alaska and Mexico and, as it
has for the last several years, held
the No. 2 position in passenger
boardings to Hawaii in 1978.
Charter business, which waned
somewhat with the onslaught of
individual discount fares, neverthe-
less increased dramatically for
Western during the early months of
1978, with revenues from this source
growing more than 100 percent for
the year.
A /though breakeven load factor
increased in 1978, actual load
factor increased even more,
producing a profit margin of
4.3 points.
Westerns flight
attendants received
new uniforms in mid-
1978. The new look
has proven extremely
popular with the flight
attendants and
Westerns passengers.
- - - - - Actual
1977 1978 - - - - Brak v n
10
, which
xp ri nc d incr as d omp titi n a
a r sul t of air ar o d r gul tion in
arly 1978, maintained a h althy
growth with r v nue ton mil s grow-
ing approximat ly 12 perc nt, whil
r venu s g n rated wer up n arly
20 p re nt. Th Mexico air cargo
mark t attain d the gr at st traffic
increas , 39 p rcen t, r fl cting that
country's lifting of import restric-
tions on thousands of items and
Western1s successful efforts in
developing new cargo business to
and through M xico from Europe,
South America and the Orient.
Alaska cargo decreased almost three
percent as a result of new com-
petition.
While the new regulatory environ-
ment is increasing the level of com-
petition on most routes, new route
authorizations at the same time are
providing Western with the oppor-
tunity to expand its profitable con-
tract services with other carriers at
cities the company currently serves.
Such relationships also are beneficial
in adding to the volume of Western's
traffic. Airlines launching service for
th fir t tim in a city oft n ntra
with anoth r airlin f r s ntial
pa s ng r and ramp s rvice . This
r pr nts new busin s for W st rn
at many locations.
Flight Equipment
f thi typ
r v f ht ki
i
vi s to a num-
nd U.S. airlin s
In
Operation*
1979
D livery
1980
Delivery
1981/82
Options
D -10-10** ......... .
727-200**.
737-200 ........ .
720B.
707-300C ..
*As of March 15, 1979.
9
33
21
8
5
76
2
6**
8
2
5
7
4
10
14
**Four DC-l0s and eleven 727s are leased. One of the 727s that will be delivered in 1979 will be leased.
(See Note 8 of Notes to Financial Statements.)
Western made steady progress in
its fle t planning and acquisition
programs during 1978. As a result,
the company increased the efficiency
of its fl t and made significant
progress toward me ting fed ral
noise regulations.
During th year 1978, seven
three-engine jets were added to the
fleet while seven aircraft which do
not meet th noise r quirements
were sold at prices in excess of their
book values.
The three-engine DC-lOs and
727-200s now comprise more than
half of Western's total fleet. These
aircraft have been deemed best for
meeting the company's present route
and marketing needs while providing
improved fuel efficiency. They also
comply with the federal noise regu-
lations which became effective Janu-
ary 1, 1977. The company's plan for
complying with the regulations will
require the ultimate sale of 720B's
720B
707
737
727
DC-10
and 707s, modification of an undeter-
mined number of 737s and sale of the
balance of those aircraft.
While there had been indications
in 1978 that Congress might act to
provide some financial assistance to
the airlines for the purpose of retro-
fitting or replacing noncomplying
aircraft, no legislation was enacted
prior to adjournment.
The level of capacity offered by
any airline is not only determined
by the number and size of the air-
craft in its fleet, but also by the
utilization of those aircraft, or the
average daily hours flown. In 1978,
the average daily revenue utilization
for all aircraft types was 8 hours
38 minutes, up from 8 hours 27
minutes in 1977.
Western continued to lead all
DC-10 Series 10 operators in
average daily utilization with the
1978 figure of 11 hours 45 minutes
topping its own 1977 record of 11
hours 23 minutes.
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, pri-
marily 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 in the Los Angeles County
Superior Court 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. The aggregate amount of
damages sought in actions to which
Western is a party as cross-defendant
is in excess of $36 million.
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,
based on the current state of the law,
that th airlin s hav substantial
def nses to th imposition of any
liability. Moreover, in each cas to
date in which the issu of th airlin s'
duty to ind mnify the airport pro-
prietor has been tried the airlines
have obtain d favorable rulings.
However, all the issues of law in-
volved 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. Unfavor-
able decisions against Western in
these actions could have a materially
adverse effect on it. 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.
The California Supreme Court has
% of Total Fleet Output, Based on ASM's {system)
The company opened
a new terminal build-
ing at Salt Lake City
1974 1975 1976 1977 1978
30
20
10
0
30
20
10
0
30
20
10
0
30
20
10
0
30
20
10
0
12
An increasing percentage of
Westerns available seat miles
are being produced in our more
efficient three-engine DC-10s
and 727-200s.
in December 1978,
providing passengers
with functional check-
in facilities, a comfort-
able Horizon Club
and the city's first jet
bridges. In June,
Western inaugurated
service to Guadalajara,
a Mexican city noted
for its fountains and
flowers.
d cid d that j t noi damag liti-
ation i n t appropriat f r class
action d termination b caus of an
insuffici nt community of int rest to
sustain a cla s suit. This holding has
signif icanc with r sp ct to th Los
Ang 1 s situation wher s v ral of
th cas s purportedly are on behalf
of class s.
In light of this litigation certain
communities which own and operate
airports, including Los Angeles and
San Diego, have imposed or are con-
sidering imposition of limitations
on frequency and timing of airline
flights or upon the proportion of an
airline's fleet which may continue to
operate without complying with fed-
eral noise standards. Enforcement of
such restrictions at a major airport
served by Western could have a
materially adverse effect upon its
operations.
When the Los Angeles airport
authorities in 1976 adopted a noise
regulation similar to that now under
consideration, several airlines, in-
cluding Western, challenged the con-
stitutionality of that regulation in
federal court and subsequently the
Lo Ang 1 airp rt authoriti
direct d that nforcem nt of th Los
Angel s r gulation be withh ld
p nding such tim as it might b
approved by the City Council by
ordinance. As a result of this action
the litigation challenging the consti-
tutionality of the Los Angeles r gu-
lation was ordered dismissed but a
similar action may be instituted
should the regulation now under
consideration by the Los Angeles
airport authorities receive City
Council approval.
In the summer of 1978 the Califor-
nia authorities directed the propri-
etor of San Diego's Lindbergh Field
(the San Diego Unified Port District)
to extend the curfew hours then in
effect as a condition of approval of
the Port District's application for a
variance from noise standards
adopted by the California authori-
ties. The Port District refused to
comply and brought an action in
United States District Court for the
Southern District of California for
an injunction restraining California
authorities from enforcement of their
directive. Several airlines, including
Western, intervened in the action on
behalf of the Port District. On August
21, 1978, the court issued a prelimi-
nary injuncti n n round f f d-
ral pr mption. The d f ndant
hav fil d an app al fr m th d ci-
sion to th Unit d Stat Court of
App als for the Ninth Circuit.
W st rn and thre oth r airlines
ar def ndants in an action brought
in November 1973 by a defunct tour
operator-trav 1 ag ncy in the United
States District Court for the North-
ern District of California in which
the defendants are charged with hav-
ing conspired and attempted to
monopolize and with actually
monopolizing the group leisure tour
market in competition with said
agency by packaging their own tours
and appropriating tour packages de-
veloped by said agency. The com-
plaint seeks injunctive relief plus
three times actual damages accord-
ing to proof plus punitive damages.
In the opinion of Western's counsel,
the action will not result in any
material liability to Western.
Western is also involved in various
other litigation, including certain
cases alleging discrimination in
employment practices, that manage-
ment believes will not have a materi-
ally adverse effect upon Western.
Management
Western's management organiza-
tion is headed by a board of directors
which ably represents the business
and civic interests of the major areas
the company serves. Directors come
from Alaska, Hawaii, Mexico, the
Midwest, the Pacific Northwest and
the Rocky Mountain States, as well
as California.
Four Western officers are members
of the board of directors. They are
Arthur F. Kelly, chairman and chief
executive offo~:er; Dominic P. Renda,
president and chief operating officer;
Richard P. Ensign, senior vice
president-marketing, and Robert 0 .
Kinsey, senior vice president-finance
and administration. Mr. Ensign, 60,
and Mr. Kinsey, 62, were elected to
the board in 1978.
Mr. Kelly, 66, completed his 41st
year with Western and his 29th year
as a company officer in 1978. He has
served on the board of directors
since 1968. Mr. Renda, 65, completed
his 31st year in the industry in 1978,
having served as a Western officer
for 26 of those years and as a member
of the board of directors since 1973.
Other principal officers of Western
include Anton B. Favero, 65, senior
vice president-operations; James L.
Mitchell, 57, senior vice president-
corporate planning; Gerald P.
O 'Grady, 65, senior vice president-
legal and secretary; Richard 0.
Hammond, 49, vice president and
treasurer, and Roderick G. Leith,
50, vice president and controller.
Mr. Ensign, who previously served
Western as an 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's management staff
reflects a strong combination of ex-
pertise and experience. The officers
of Western have an average age
of 55 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 have an average of 19 years of
service with Western.
Complete listings of all company
directors and officers are detailed
starting on page 32 of this report.
The principal occupation of each
Western officer is his position with
the company.
Employees
Western employed an average of
10,787 people during 1978, com-
pared to 10,413 during 1977.
Wages and salaries for 1978
amounted to $253,188,000, up 17
percent from the $216,004,000 in
1977. Social Security and other taxes
plus company contributions to
group insurance and employee retire-
ment plans increased 19 percent to
$56,257,000 in 1978.
Western is committed to a policy
Employee Group
Mechanics & Related Employees
and Stock Clerks .
Pilots .
Flight Attendants .
Agent & Clerical-U. S . .. .. . .. .. . . .
Canada ...... .. ...... .
Mexico . . . .... . . .
Flight Superintendents .
Ground School Instructors .
of qual mploym nt opportunity
with hiring and advanc m nt b ing
det rmin d on th basis of merit and
ability. This company policy is the
basis for viabl , results-ori nt d
affirmative action plans which ar
submitt d annually to gov rnm nt
agenci s.
Labor unions repr s nt approxi-
mately 91 p re nt of W stem's
employees. These unions include
the Air Line Pilots Association,
Association of Flight Attendants,
Brotherhood of Railway and Airline
Clerks, International Brotherhood of
Teamsters, 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.
Number of
Employees Contract Open
1/1/79 Union for Amendment
2,150 IBT Jan.1, 1979
(In negotiation)
1,515 ALPA Sept. 1, 1979
1,917 ALPA/AFA Dec. 1, 1979
3,886 BRAC June 30, 1980
123 BRAC July 1, 1980
189 SNTA Jan.18, 1980
33 TWU Oct. 31, 1980
31 IBT *
*The IBT has recently been certified by the National Mediation Board as the representative of
this group.
200%
Wages, Salaries & Employee Benefits-1974 = 100%
Although
Western was
able to produce
nine percent
more seat miles
w ith less than
four percent
more employees 150%
in 1978, the cost
of wages, salaries
and benefits
increased 18
percent.
100%
50%
1974 1975 1976 1977
- - - - - - - Wag s & mployee b n fits
- - - - - Av er of mploy s
mile
14
1978
MANAGEMENT'S DISCUSSION
Year 1978 compared to year 1977
N t arnings for 1978 w re $54,748,000 compar d to
restat d arnings of $12,724,000 for 1977 (s Note (a)
to Summary of Op rations relating to r stat m nt
for capitalized leases). As a result of the change to
the flow-through method of accounting for invest-
ment credits, n t arnings for 1978 w r incr a:sed by
$29,107,000 of which $16,201,000 was the cumulative
effect of the change on prior years.
Operating revenues for 1978 were $834,513,000
compared to $691,464,000 for 1977, an increase of
$143,049,000, or 21 % over the previous year. Passenger
revenue amounted to 83% of this increase, cargo
revenue 7% and other revenue ( which includes
charter) 10%.
The following table shows the increases in oper-
ating revenues and traffic, 1978 compared to 1977.
1978 Versus 1977
Increase Percent
of Total
Amount Percent Increase
(000s)
Operating revenues
Passenger . $ 119,424 19 83
Cargo. ...... ...... 9,323 20 7
Other (including charter). 14,302 49 10
$ 143,049 21 100
Revenue passenger miles
48 States and Canada .. 1,057,860 21 58
Hawaii . . 371,988 16 21
Mexico .... . .. . .. . .. . 210,849 40 12
Alaska .. . . . . . ... 172,263 29 9
Total scheduled ... 1,812,960 22 100
Charter (mostly Hawaii). 233,102 109
Total system .. . 2,046,062 24
Cargo revenue ton miles . 19,028 12
The increase in passenger revenue was attributable
to a 22% growth in scheduled traffic over the previous
year. Average revenue per passenger mile decreased
1.9% from 7_
34q: for 1977 to 7.20q: for 1978. General
fare increases were more than offset by the increased
use of discount fares. Discount revenue passenger
miles for 1978 increased to 42% of the scheduled
revenue passenger miles compared to 33% for 1977.
Coach and economy passengers contributed 93%
of the scheduled passenger revenue for both 1978
and 1977.
While revenue passenger miles on scheduled flights
increased significantly over 1977, they were partially
impacted by a strike against a competing carrier
whos operations were substantially suspend d from
April 29, 1978, through August 15, 1978. Schedul d
available seat miles increas d by only 7% over 1977.
This, coupl d with a 22% increase in schedul d r v-
enu pa nger miles, resulted in a scheduled load
fa tor for 1978 of 65% compared t 57% for 1977.
Of th four major mark t ar as, the gr at tr t
15
of growth in schedul d s rvice was in M xico, a
reversal of a downward tr nd in traffic that had tak n
hold with the devaluation of the p o in S pt mb r
1976. The new Los Angel s-Guadalajara rout in-
augurated Jun 30, 1978, accounted for 44% of th
growth and 12% of total passenger miles in the
Mexico market.
The 48 States and Canada continues to account for
the greatest portion of the scheduled market growth
with 58% of the 1978 total.
Alaska routes, which had a slowing of traffic
growth in 1977, experienced a 29% rate of growth in
1978, the increase coming primarily from discount
traffic.
Scheduled revenue passenger miles for Hawaii had
the lowest growth rate of all the markets for 1978,
but with the inclusion of Hawaii charters, which
represent 80% of system charters in 1978, the overall
rate of growth for Hawaii equals that of the 48 States
and Canada.
Cargo revenue increased 20% over 1977 as a result
of the positive combination of a yield increase of 6.7%
and a 12.1% increase in revenue ton miles.
Other revenue increased principally from expanded
charter business in 1978. Charter traffic increased
109% and charter revenue increased 120%, accounting
for 60% of the growth in other revenue.
In the fourth quarter of 1978, average revenue
per passenger mile (yield) decreased 5% from 7.5M
in 1977 to 7,18q: in 1978.
A fourth quarter 2.5% fare increase in the 48 States
was offset by the increased use of discount fares and
a reduction in deluxe fares to 120% of coach fares.
Discount traffic represented 44% of total traffic com-
pared to 31% for the fourth quarter 1977. Total
scheduled revenue passenger miles increased 22%.
The combination of increased discount traffic, a
slowing in the rate of growth of revenue passenger
miles, and a yield decrease resulted in passenger
revenue rising by only 16% over the fourth quarter
of 1977.
Operating expenses for 1978 were $779,657,000
compared to $662,010,000 for 1977, an increase of
18%. Wages, salaries and employee benefits totaled
$309,445,000 and fuel expense totaled $154,876,000,
representing 40% and 20% respectively of total
operating expenses.
The following table represents increases in selected
operating expenses, 1978 compared to 1977.
1978 Versus 1977
Increase Percent
of Total
Amount Percent Increase
(000s
Wages and salaries . . . . . . . .
. $ 37,184 17 32
Employ e benefits . ........... 9,178 19 8
46,362 18 40
D preciation. 4,382 10 4
Fuel ... . . . . . . . .
. .
16,907 12 14
Other
Materials and repairs . 9,636 25 8
Commissions . 9,458 30 8
Services purchased ... .. . 4,574 22 4
Food and beverage . 3,536 15 3
Travel- flight crews. 2,668 25 2
Passenger service claims . 2,815 72 2
Communications ..... 1,123 15 1
Other. .. . . .. . . .. .. 16,186 20 14
49,996 23 42
Total operating expense . $ 117,647 18 100
Available Seat Miles . ... . . . .. . 1,291,117 9
Wages, salaries, employee benefits and fuel continue
to have the greatest dollar impact, accounting for
54% of the total operating expense increase over the
previous year.
Higher rates of pay resulting from scheduled
periodic increases in collective bargaining agreements
were primarily responsible for the increase in wages
and salaries. Of the $37,184,000 increase, 65% was
attributable to wage rate increases, 19% to increased
personnel and 16% to other work rules.
Employee benefit costs are comprised of pensions,
group insurance and payroll taxes. Pension costs
accounted for $4,698,000, or 51 % of the increase in
employee benefits, and were up 21 % over the previous
year. Of this increase, 75% was due to improved
benefits and higher wages while 25% was attributable
to the increased number of employees. The cost of
group medical, dental and life insurance rose by 15%,
primarily because of the impact of inflation on health
services. Payroll taxes increased 17%, due in the main
to legislated rate increases and higher wage rates.
Depreciation expense increased with the acquisition
of two DC-10 and five 727-200 aircraft during the
first seven months of the year. The depreciation on
this new equipment amounted to $4,027,000 for 1978.
Fuel increased 12% of which 54% was attributable
to higher average prices and 46% to increased
consumption.
Commissions to travel agents were higher as a
result of two factors: increased traffic and a higher
percentage of sales made by travel agents. Sales by
travel agencies were 60% of total passenger sales in
1978 compared to 57% in 1977.
The increase in materials and repairs reflects the
rise in the price of materials and in the cost of outside
labor required for aircraft and engine maintenance.
16
Servic s purchas d w r hi her than 1977 primarily
in two areas: er dit card servic fe s and costs of
security, janitorial, cleaning and oth r support ser-
vices. Service fees were related to increased traffic
and support services were related to higher rates.
Food and beverage expenses continued to increase
from the growth in passenger traffic and to a lesser
extent, from higher prices.
Flight crew travel expenses were up 25%, or
$2,668,000, primarily as a result of a new contract
provision to provide individual accommodations for
flight attendant personnel while away from their
home bases.
Passenger service claims were up because of
increased passenger traffic, weather problems and
changes in mandatory payments related to flight
interruptions and baggage claims.
Communications expense increased with the
installation of additional equipment, increased usage
of communications facilities and higher service rates.
Other expenses increased by $16,186,000, attribut-
able in the main to payments of $9,834,000 to a
struck carrier under the Mutual Aid Agreement.
Operating income increased to a record $54,856,000,
an improvement of 86%, or $25,402,000, over 1977.
This was caused by a 21 % increase in operating
revenues while operating expenses increased 18%.
Interest expense increased $2,967,000, or 15%, with
the issuance of equipment trust certificates to finance
the acquisition of one DC-10 and five 727-200 air-
craft. The gain on sale of equipment reflects the sale
of seven aircraft in 1978. This is part of Western's
continuing program to replace its older aircraft and
improve the overall efficiency of its fleet.
The fourth quarter of 1978 experienced a slightly
higher overall rate of increase in operating expenses
over the fourth quarter 1977. While labor and em-
ployee welfare increased at a lower rate, 15% compared
to 18% for the year, depreciation was 18%, fuel 15%
and other 24%. This, coupled with an increase of
only 15% in operating revenues, resulted in a loss of
$3,131,000 for the fourth quarter 1978 compared to
earnings of $1,397,000 for the fourth quarter of 1977.
Provision for taxes on income is reconciled to the
tax rate of 48 % in Note 7 to Financial Statements.
Year 1977 compared to year 1976
Western's net earnings for 1977 were $12,724,000
compared to $13,996,000 for 1976. Net earnings for
1977 included $2,400,000 resulting from the extension
of depreciable lives of 727 and 737 aircraft and
$2,100,000 from gain on sales of aircraft. Net earnings
for 1976 included $600,000 and $930,000, respectively,
from these items.
Increases in operating revenues in 1977 over 1976
~esulted f~om growth in traffic, and to a lesser degree,
increases m passenger yield. Passenger revenues
constitute close to 90% of Western's operating rev-
enues and 93% of passenger revenues came from coach
and economy travelers.
The following table shows increases and decreases
in operating revenues and traffic.
1977 Vi rsus 1976
Increase/O crease Per nt
of~ tal
Amount P rcent Increase
(000s)
Op rating revenues
Pass nger . . '
. . . . . . . $ 70,393 13 81
argo . . .. .. ..... 9,687 26 11
0th r (in luding charter) . 6,179 27 8
$ 86,259 14 100
Revenue passenger miles
48 States and Canada ... 489,931 11 75
Hawaii .. . . ........... 190,565 9 29
Alaska .. . .. .. .. ... 30,946 6 s
Mexico . ... (55,468) (9) (9)
Total scheduled . 655,974 8 100
Charter (mostly Hawaii). 98,969 87
Total system . 754,943 10
Cargo revenue ton miles. 22,336 17
Although revenue passenger miles on scheduled
flights increased in 1977, the growth was smaller than
in 1976 because traffic on Western's Mexico routes
declined in 1977. This decline was caused by the
devaluation of the peso, which had an unfavorable
effect on sales in Mexico. The Los Angeles-Miami and
Honolulu-Vancouver routes, added to the company's
system in the summer of 1976, contributed 69 % of
the increase in revenue passenger miles in 1977
compared to 21% in 1976.
Of the four major areas shown in the chart above,
the fastest growing area in 1977 was the 48 States
and Canada. Although the Los Angeles-Miami route
contributed significantly to this growth rate, the
remainder of the 48 States and Canada market also
experienced an increased rate of growth.
Most of the 1977 increase in traffic on Hawaii
.routes came from the Honolulu-Vancouver segment.
The rate of growth on other Hawaii segments de-
creased in 1977, as did the rate of growth of seats
offered for sale in this market.
Alaska routes, which experienced the highest
growth rate in 1976, continued to grow in 1977 but
the rate of traffic growth decreased because of the
completion of the oil pipeline.
The four percent increase in average revenue per
passenger mile in 1977 was caused by fare increases
and, to a lesser degree, a reduced proportion in the
use of discounted fares.
Cargo revenues for the past three years have
increased primarily because of traffic growth. In
addition, 1977 revenues were increased by $2,000,000
from current and retroactive mail rate adjustments.
"Other" revenues increased principally from
expanded charter business in 1977.
Op rating xpenses in both periods incr as d
larg ly b caus of inflation and expand d op rations
with wag s, salari s and mploy b n fits and fu l
havin th lar st dollar impa t. Iner as s in th
cat ri s r pr s nt 71% f th total in r as in p r-
atin xp n nd of this rou hly tw -third r l t s
t infl ti n nd n -third t xpand d p rati n .
17
incr a in tiv bar amm
a r m nt w r prim rily r sp nsibl f r in r a e
of $36,716,000 (16%) durin 1977 in wa s, salari
and mploy benefits. Pil ts, fli ht att ndants, and
m chanics and r lated mploy and tock cl rks
reach dam nd d agr em nts in 1977. Th high r
wag rates r sulting from th s a r m nts had a
significant eff ct on exp ns s starting in the s cond
half of 1977.
Employee b nefit costs, consisting mainly of pen-
sions, group insurance and payroll taxes, increased
$9,130,000 (24%) in 1977. Pensions increased in 1977
because of higher wages for all employees and
improved benefits as provided for in the amend d
agreements. The cost of group insurance benefits was
higher in 1977, and payroll taxes increased because
of legislated changes.
Fuel expense escalated by $29,690,000 (27%) in 1977
because of higher prices and greater consumption.
Higher prices represented 65% of the increase in 1977
with 35% coming from greater consumption.
The reduction in depreciation expense in 1977
reflects reductions from the extension of the depre-
ciable lives of 727 and 737 aircraft from 12 years
to 15 years and 14 years, respectively, partially offset
by added costs from the acquisition of seven 727-200
aircraft.
Materials and repairs expense increased $4,423,000
(13%) in 1977. The 1977 increase reflects higher costs
for parts and scheduled airframe maintenance.
Commissions to travel agents increased $4,391,000
(16%) in 1977 because of traffic growth and a higher
proportion of total sales being made by travel agents.
Increases in food and beverage expense of $2,775,000
(13%) in 1977 resulted from more passengers being
carried and higher costs.
Operating income in 1977 decreased $5,992,000
(17%) despite traffic growth and some fare increases
because Western was unsuccessful in offsetting in-
flated operating expenses that were coupled with
expanded operations.
Gain on sales of equipment reflects the disposition
of four aircraft in 1977.
Provision for taxes on income is reconciled to the
tax rate of 48% in Note 7 of otes to Financial
Statements.
TEN YEARS Of WESTERN PROGRESS
Years prior to 1978 have been restated. See Note (a).
(In thousands except per share amounts and other items indicated by*)
Summary of O erations
Operating revenues:
Passenger ......... ............ . ......... . ...... . ..... .
Cargo ............ .... .......... . . . ..... . . .. .... .
Other ........................................... . ... .
Total operating revenues ............. . .............. .. ....... .... .
Operating expenses:
Wages, salaries and employee benefits ..... . ... .. ...................... .
Fuel ........ . ............. ... .... - -
Depreciation and amortization ........ ..... . .... .............. . ..... .
Otherd .... .. .... .. . .............. . ...... . ........ .. . . .......... .
Total operating expenses . ....... . . .. ......... .. .................. .
Operating income (loss) ....... ... ..... . ........................ .
Interest, principally on long-term obligations ................... . .. . ... . . . .
Interest capitalizedf . . . . . . . . . . . . . . . . . . . . ..... . .. . ... . ........ . .
Gain on sale of equipment . . .... .. ..... .. . . ..... .. ...... ............ . . .
Other income (expense) net . . . . . .. ....... .. ........... .
Earnings (loss) before provision for taxes on income and cumulative
effect of changes in accounting principles . . ... . . .... . ..... . .. .
Provision for taxes on incomeg ................................. .
Earnings (loss) before cumulative effect of changes in accounting principles ... .
Cumulative effect of changes in accounting principlese, g .. ... ... . .. .. ........ .
Net earnings (loss) .. .. . . ........................................ .
Preferred stock dividend requirement . . ............. .
Net earnings (loss) available for common stock ....................... . .
Earnings (loss) per common shareh:
Primary:
Before cumulative effect of changes in accounting principles ... . ...... . ... .
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... .. .......... .
Fully diluted:
Before cumulative effect of changes in accounting principles .............. .
Net earnings (loss) ..................... ......... ........... . ... . .
Pro-forma amounts assuming the accounting changes are applied retroactivelye,g:
Net earnings (loss) . . . . . . . . . . . . . . . . . . .. . . . .
Net earnings (loss) per common share-primaryh . ....................... .
Net earnings (loss) per common share-fully dilutedh ..................... .
Cash dividends paid per share on common stocki ........... . ............. .
Other Financial Data
Return on investment (% )* . . . . . . . . . . . . . . . . . . . .. . . . . .. ... . ...... .
Average common shares outstandingh .. ......... . ... .. ........... .
Shareholders' equity ............. .. ...................... . .... . ..... .
Long-term obligations ....................... ......... .......... .
Property and equipment- net .................. . ... ............. . .
Total assets . . . . . . . . . . . . ............. . . . ...... .
Operations
Airplanes operated at end of year* .. .
Passengers carried ......... . ..... . ........ . ... .
Available seat miles .. . . .. .. . ....... . .......... .. ... . . ..... ..... .. ... .
Revenue passenger miles . ...................... . .. ... . . ........ .
Passenger load factor - actual{%)* .................. . . . ............. .. . .
- breakeven point (% )* . . . .. .. ............. . ... . ... .
- profit margin (point difference)* .................... .
Average revenue per passenger mile* . . ... .. ............... . ............ .
Average length in miles per passenger trip* . . ....... .... .................. .
Operating expense per available seat mile* . . . . . . . . . . . . . . . . . . . . . . ..... .
Cargo revenue ton miles ........ . ....... ... ................. . ........ .
Averag number of employees* . . . . . . . . . . . . . . . . . . . ............... .
18
1978
$ 734,005
56,936
43,572
834,513
309,445
154,876
47,094c
268,242
779,657
54,856
(23,089)
2,910
6,754
3,924
45,355
6,808
38,547
16,201
54,748
2,397
$ 52,351
$ 2.82
$ 4.09
$ 2.15
$ 3.04
$ 38,547
$ 2.82
$ 2.15
$ 0.40
14.0
12,795
$ 198,502
$ 265,746
$ 519,737
$ 703,940
78
10,447
16,254,879
10,634,848
65.4
61.1
4.3
$ .0720
994
$ .0480
176,319
10,787
1977
614,581
47,613
29,270
691,464
263,083
137,969
42,712c
218,246
662,010
29,454
(20,122)
2,592
4,549
3,388
19,861
7,137
12,724
12,724
567
12,157
0.96
0.96
0.85
0.85
14,743
1.12
0.97
0.40
9.1
12,659
147,439
214,465
427,942
574,943
77
8,757
14,963,762
8,588,786
57.4
56.1
1.3
.0734
966
.0442
157,291
10,413
1976
544,188
37,926
23,091
605,205
226,3676
108,279
43,465c
191,648
569,759
35,446
(17,127)
786
1,809
1,237
22,151
8,155
13,996
13,996
~ 13,996
1.03
1.03
0.92
0.92
14,515
1.07
0.95
0.40
9.5
13,601
112,055
192,537
378,573
515,084
75
8,098
13,450,395
7,833,843
58.2
56.0
2.2
.0705
963
.0424
134,955
9,799
1975
465,081
31,329
22,563
518,973
201,661
93,134
40,239c
170,846
505,880
13,093
(14,788)
440
379
3,919
3,043
(1,445)
4,488
7,160
11,648
11,648
0.30
0.77
0.29
0.70
6,958
0.46
0.44
0.47
5.9
15,163
133,862
175,350
367,607
488,339
75
7,531
11,696,478
7,102,917
60.7
59.7
1.0
.0665
942
.0433
108,619
9,357
1974
437,345
27,662
23,390
488,397
182,334
71,437
44,085
148,367
446,223
42,174
(16,428)
1,161
9,575
4,222
40,704
17,188
23,516
23,516
23,516
1.55
1.55
1.38
1.38
28,980
1.92
1.69
0.39
12.4
15,125
129,314
167,404
350,313
448,832
72
7,391
11,123,544
6,747,451
60.7
56.1
4.6
.0660
902
.0401
95,239
9,696
1973
376,722
23,040
21,524
421,286
165,363
44,510
41,183
127,123
378,179
43,107
(14,457)
1,489
945
3,235
34,319
14,436
19,883
19,883
19,883
1.32
1.32
1.18
1.18
19,016
1.26
1.13
0.23
11.9
15,050
110,830
177,956
316,372
431,702
74
7,382
11,175,518
6,476,087
57.9
52.5
5.4
.0593
877
.0338
76,474
9,826
1972
342,851
20,819
10,321
373,991
147,282
40,137
38,376
122,433
348,228
25,763
(13,227)
1,453
582
2,114
16,685
5,901
10,784
10,784
10,784
0.72
0.72
0.66
0.66
12,549
0.83
0.76
0.08
8.5
15,030
94,404
158,621
262,095
372,743
71
6,931
10,300,178
5,995,925
58.2
54.6
3.6
.0578
865
.0338
76,233
9,383
19
1971
295,807
20,231
12,009
328,047
127,075
38,663
37,295
106,838
309,871
18,176
(14,372)
116
1,349
3,114
8,383
2,562
5,821
5,821
5,821
0.39
0.39
0.38
0.38
7,611
0.51
0.48
6.8
15,012
84,510
181,593
242,031
372,011
70
6,206
9,776,869
5,251,989
53.7
52.4
1.3
.0577
846
.0317
73,249
8,951
1970
274,792
18,745
9,926
303,463
113,116
37,357
38,639
101,566
290,678
12,785
(17,631)
3
111
1,009
(3,723)
(3,243)
(480)
(480)
(480)
(0.03)
(0.03)
(0.03)
(0.03)
2,215
0.15
0.15
5.5
15,011
78,654
205,028
275,505
389,272
72
6,188
9,839,299
5,159,081
52.4
52.6
(0.2)
.0542
834
.0295
68,646
8,961
I
1969
220,530
16,472
5,245
242,247
97,156
32,857
35,158
89,311
254,482
(12,235)
(15,939)
689
26
(151)
(27,610)
(15,235)
(12,375)
(12,375)
(12,375)
(0.82)
(0.82)
(0.82)
(0.82)
(10,840)
(0.72)
(0.72)
0.16
1.2
15,010
79,133
227,346
315,484
402,142
78
5,752
8,509,441
4,021,296
47.3
53.2
(5.9)
.0551
699
.0299
60,514
9,286
NOTES APPLICABLE TO FIVE YEARS ENDED DECEMBER 31, 1978
(In thousands of dollars xcept p r. har amount )
(a) As of August 31, 1978, W st rn chang d its method of ac ounting for 1 as s to conform to Stat m nt of
Financial Accounting Standards (SFAS) No. 13. Th H ct of this chang in accounting m thod was tor stat
the Summary of Op rations as follows:
Decreases in operating xpenses .. . .. .... .. .
(Increases) in interest expens . . . ....... . . .
Decreases in deferr d f deral income taxes .... .
(Decreases) in earnings before cumulativ effect of chang sin accounting
principles and net earnings .
(Decreases) in earnings before cumulative effect of changes in accounting
principles and net earnings per common share:
Primary .......... .
Fully diluted ...... . . .... . .. .... .
1977
$ 7,321
(10,472)
1,513
$ (1,638)
$ (0.13)
(0.10)
1976
5,588
(7,452)
895
(969)
(0.07)
(0.06)
1975
4,532
(5,824)
620
(672)
(0.04)
(0.04)
1974
3,814
(4,933)
537
(582)
(0.04)
(0.03)
Because Western capitalized leases, earnings before cumulative effect of changes in accounting principles
and net earnings for 1978 were decreased by $2,159 or $0.17 per common share (primary) and $0.12 per
common share (fully diluted).
See Note 2 to Financial Statements.
(b) Effective January 1, 1976, Western amended certain employee benefit 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 expenses for 1976 by
approximately $1,200; earnings before cumulative effect of changes in accounting principles and net
earnings were increased by approximately $600, or $0.04 per common share (primary) for 1976.
(c) Effective January 1, 1978, the estimated depreciable lives of five 707 aircraft were extended from 12 years to
15 years. For 1978, depreciation expense was decreased by approximately $1,800; earnings before cumulative
effect of changes in accounting principles and net earnings were increased by approximately $1,508 or
$0.12 per common share (primary).
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 and 1976, depreciation expense was
decreased by approximately $4,800 and $1,200; earnings before cumulative effect of changes in accounting
principles and net earnings were increased by approximately $2,400 and $600 or $0.19 and $0.04 per common
share (primary), respectively.
Effective January 1, 1975, the estimated depreciable lives of eighteen 720B 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 changes in accounting principles and net earnings were increased
by approximately $2,600, or $0.17 per common share (primary).
The changes in 1978, 1976 and 1975 reflected management's decision to continue using these aircraft beyond
the time at which they would have become fully depreciated.
(d) Mutual aid payments included in other operating expenses amounted to $9,834-1978, $899-1976,
$4,832-1975 and $1,203-1974.
(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. 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 1975. This change had no other
material effect on net earnings for 1975. The pro forma amounts reflect the retroactive effect of this change
on net earnings.
(f) If Western did not follow a policy of capitalizing interest related to deposits on aircraft purchase contracts,
earnings before cumulative effect of changes in accounting principles and net earnings would have been
decreased as follows: $2,078-1978; $1,088-1977; $198-1976; $28-1975; and $412-1974. Earnings before
cumulative effect of changes in accounting principles per common share (primary) and net earnings p r
common share (primary) would have been decreased by $0.16-1978; $0.09 -1977; $0.01-1976; and
$0.03-1974. Earnings before cumulative effect of changes in accounting principles and net earnings p r
common share would not have be n affected in 1975.
(g) The provision for taxes on income before cumulative effect of changes in accounting principles is summariz d
as follows:
20
1978 1977 1976 1975 1974
Provi i n . . '
............... '
'. $23,447 10,875 8,550 (7,980) 10,700
Inv stm nt credits appli d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . {23,447) (11,900) (4,145) 2,555 (5,375)
* (1,025)* 4,405 (5,425) 5,325
Stat \ 1,814 1,150 1,075 225 1,375
Deferred fed ral incom taxes:
Provision . . . . . . . . . . . . . . . . . {2,655) (2,063) 1,455 9,285 7,763
Investment credits:
Applied .. . . . . . . . . ' . . . . . . . . . . {15,240) (3,791) (1,925) (4,024) (5,934)
Transferred to (from) current . . . . . . . . . 23,447 11,900 4,145 (2,555) 5,375
5,552 6,046 3,675 2,706 7,204
Def rred investm nt credits . . ........ 3,791 1,925 4,024 5,934
7,366 9,962 11,080 1,530 19,838
Amortization of deferred investment credits . (558) (2,825) (2,925) (2,975) (2,650)
$ 6,808 7,137 8,155 (1,445) 17,188
*The Tax Reform Act of 1976 provides for 100% application of unapplied investment credits against federal income tax liabilities for 1977
and 1978. This 100% application is reduced 10% annually until 1980. Under the Revenue Act of 1978 the application remains at 80% in 1981
and returns to 90% in 1982 where it remains thereafter.
Effective January 1, 1978, Western changed its method of accounting for investment credits for financial
reporting purposes from the deferral to the flow-through method. The pro forma amounts appearing on the
Summary of Operations display the effect of retroactive application had the new method been in effect
in prior years. See Note 7 to Financial Statements.
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 taxes of $4,025 and restored deferred investment
credits of $1,130, which are offset by increased deferred federal income taxes of $5,155).
(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 3% stock dividends
paid in 1974 as follows: 1978-12,795,000, 1977-12,659,000, 1976-13,601,000, 1975-15,163,000 and 1974-
15,125,000. The fully diluted per share data are based on the following number of shares: 1978-18,215,000,
1977-15,913,000, 1976-16,066,000, 1975-17,628,000 and 1974-17,590,000. et earnings are reduced by
dividends on preferred stock to determine primary net earnings.
(i) Cash dividends per share are stated on the basis of Western's shares outstanding at the date such dividends
were declared.
ACCOUNTANTS' REPORT
P EAT , MARWI CK, MIT C H ELL & Co.
The Board of Directors
Western Air Lines, Inc.:
CERTIFIED PUBLIC ACCOUNTANTS
555 SOUTH FLOWER STREET
LOS ANGELES, CALIFORNIA 9007 1
We have examined the Balance Sheets of Western Air Lines, Inc. as of December 31, 1978 and 1977 and
the related Statements of Earnings, Shareholders' Equity, and Changes in Financial Position for th y ars th n
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 proc dur s as we considered n cessary
in the circumstances.
In our opinion, the aforementioned financial statem nts pres nt fairly th financial position f W t rn Air
Lin s, Inc. at D cemb r 31, 1978 and 1977 and the r sults of its op rations and th chang in its financial positi n
for the years then nd d, in conformity with g nerally ace pt d accounting principles c nsi t ntly appli d
during th p riods xcept for th chang , with which w concur, in th meth d f ac untin f r inv tm nt
er <lits as d scrib din N t 7 of Not to Financial Stat m nt ; and aft r r t t m nt f r th chan , with which
w con ur, in th m thod of accounting f r I s s a d crib din N t s 1 and 2 f N t t Fin nci I t t m nt .
L An l , alif rnia
F bru ry 2, 1979
21
-/1.ut; 'hf_~,~~ I ~ .
BALANCE SHEETS
WESTERN AIR LINES, INC.
December 31, 1978 and 1977
(in thousands of dollars)
ASSETS
Current Assets:
Cash ... ... . . .. ... . . ... .............................. .
Certificates of deposit .. . ................................ .
Commercial paper at cost and accrued interest
(which approximate market) ....... .. .. . . . ....... . . . .... .
Receivables (net of allowance for doubtful accounts
of $1,532-1978 and $1,594-1977) .. . ...... . ..... ........ . .
Flight equipment expendable parts, at average cost
(less allowance for obsolescence of $12,365-1978
and $11, 914-1977) . .. . ......... . ...... . . ... ...... . . . . . .
Prepaid expenses and other current assets .... . . . . . . .... .. . . .. .
Total current assets . . . .... . .. . . . ... .. .. . . . . . . .. .... .
Properties and Equipment at Cost (Notes 2, 3, 4 and 5):
Flight equipment ... . .. . ............ . .......... . .. . ..... .
Facilities and ground equipment . . . . . .... . ...... .... .... .. . .
Deposits on aircraft purchase contracts .. . . . ....... . . ... . . ... .
Less allowance for depreciation and amortization ........ . .... . .
Deferred Charges and Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
*Restated. Se Not 2.
S e accompanying not s to financial stat m nts.
22
1978 1977*
$ 6,306 6,748
10,268 14,710
48,686 27,459
65,260 48,917
92,039 70,790
14,263 13,645
7,809 6,379
179,371 139,731
694,908 601,010
117,833 105,574
36,820 40,641
849,561 747,225
329,824 319,283
519,737 427,942
4,832 7,270
$703,940 574,943
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable . .. ................................... .
Salaries, wages and vacation benefits payable ................. .
Accrued liabilities (Notes 6 and 7) .. . . . ... . . . .. . ..... . . .... . .
Airline traffic liability . . . .......... . . . ... .. ......... . . .. . .
Current portion of debt ....... ... .... . .......... . ........ .
Current portion of capital leases (Note 2) . ..... . . .. . . .... .. . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term Obligations:
Debt (Note 8) . . . . ......... . ... . . . ... . . . . . ........... . . .
Capital leases (Note 2) .. . ............. ... .......... .. .. . . .
Deferred Credits (Note 7):
Deferred federal taxes on income .............. . ...... . ..... .
Unamortized investment credits .... . ... . ............. .. ... .
Other ...... . ...... .. .......................... . ...... .
Shareholders' Equity (Notes 8, 9, 10 and 11):
Preferred stock-authorized 25,000,000 shares
$2.00 Series A Cumulative Convertible
$25.00 stated value per share
Issued 1,197,000 shares-1978 and 1,200,000 shares - 1977 ...... .
Common stock-authorized 35,000,000 shares
$1.00 par value per share
Issued 13,010,000 shares-1978 and 12,659,000- 1977 ....... . .. .
Additional paid-in capital .. . . .. . . ... . ...... . .... . ........ .
Retained earnings . . ............... . . . . . .. . .......... . .. .
Commitments and Contingent Liabilities (Not s 2 and 4)
23
1978
$ 41,330
32,819
20,005
66,588
10,864
6,647
178,253
158,043
107,703
265,746
53,952
1,851
5,636
61,439
29,923
13,010
30,792
124,777
198,502
$703,940
1977*
30,880
27,783
21,357
46,764
8,300
6,053
141,137
100,661
113,804
214,465
48,400
18,610
4,892
71,902
30,000
12,659
27,227
77,553
147,439
574,943
STATEMENTS OF EARNINGS
Years ended December 31, 1978 and 1977
(in thousands of dollars except per shar amounts)
Operating revenues:
Passenger ... .......... ... . .. .. . ........ . ......... . .... .
Cargo ........ . ....... . ...... ... ........... ....... ... .
Other .... . ............ .. . .. . . ...... .. ...... . ......... .
Operating expenses:
Wages, salaries and employee benefits (Note 6) ... . ............ .
Fuel . . . .................. .. ..... . ...... .... .. . .. . .... .
Depreciation and amortization (Note 3) .. . ...... . ... ........ .
Other ...... . . . . . . . . . . . . . . . . . . .... . . . . . .............. .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income {expenses):
Interest, principally on long-term obligations .. . .... . ......... .
Interest capitalized ....... .. .............. ........ .... . .. .
Interest income ..... .. ..... .... . . .. . ............. . ..... .
Gain on sale of equipment ........... . ... . ..... .. . . ....... .
Other-net ..... . . . ... ........ . .... . . . ................ .
Earnings before provision for taxes on income and
cumulative effect of a change in accounting principle . ... .
Provision for taxes on income (Note 7) . ...... . . ..... .......... .
Earnings before cumulative effect of a change in
accounting principle .... .... .. ..... .. .. . ........ . .
Cumulative effect of a change in accounting principle
(Note 7) . . ........ . ...................... ... ....... .. . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per Common Share (Note 12):
Primary:
Earnings before cumulative effect of a
change in accounting principle ..................... .
Cumulative effect of a change in
accounting principle (Note 7) ....... . . ............. .
Net earnings ..................................... .
Fully diluted:
Earnings before cumulative effect of a
change in accounting principle .............. . ...... .
Cumulative effect of a change in
accounting principle (Note 7) .. . .. ................ .
Net earnings ..................................... .
Proforma amount assuming the accounting
change is applied retroactively (Note 2):
Net earnings .. . .. ............. .......... ......... . . .. .
Per common share:
Primary .. . . .. ... .......... ... .................. .
Fully diluted ..................................... .
*Restat d. Se Note 2.
See accompanying notes to financial stat m nts.
24
1978
$734,005
56,936
43,572
834,513
309,445
154,876
47,094
268,242
779,657
54,856
{23,089)
2,910
3,666
6,754
258
{9,501)
45,355
6,808
38,547
16,201
54,748
$ 2.82
1.27
$ 4.09
$ 2.15
0.89
$ 3.04
$ 38,547
$ 2.82
2.15
1977*
614,581
47,613
29,270
691,464
263,083
137,969
42,712
218,246
662,010
29,454
(20,122)
2,592
2,302
4,549
1,086
(9,593)
19,861
7,137
12,724
12,724
0.96
0.96
0.85
0.85
14,743
1.12
0.97
STATEMENTS OF CHANGES IN FINANCIAL POSITION
Years nded Dec mber 31, 1978 and 1977
(in thousands of dollars)
Sources of Working Capital:
Earnings before cumulative effect of a chang in
accounting principle (Note 7) ... . . . .. .. . . . .. . . . . . . . .. .. .. .
Add (deduct) items w hich did not affect working capital:
Depreciation and amortization (Note 3) .. . .. . ...... ... .. .. . .
Taxes (Note 7):
Def erred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred investment credits .. .. .. .. ... . . . ... .... . .. ... .
Amortization of deferred investment credits . . .. . . ...... .. .
Gain on sale of equipment . . . . .... .. . .... ..... . . . . ... . .
O ther . . . . . .. .. . . . ... . ..... ..... . . . .... . . . ....... . .
Total from operations before cumulative effect
of a change in accounting principle .. .. .. . .. . . . . .... . .
Cumulative effect of a change in accounting principle
in 1978, amounting to $16,201, which did not
affect working capital (Note 7) . . . ..... . .. . ... . . . . . . . . . . . .
Total from operations . . ... . .. . . .. . .. .. . . .. . .. ... . .. .
Proceeds from issuance of preferred stock (Note 10) . . . . ........ .
Reimbursements of deposits and capital expenditures
upon acquisition of aircraft and facilities . . . . ..... . . . .. . . . .. .
Proceeds from sale of equipment . ... ...... . . .. . . . .. ... . .. .. .
Proceeds from issuance of long-term obligations ... . . .. .. ... . . . .
Conversion of debentures ... ... . . . ..... . ... . . . .. . .... . . . . .
O ther-net .... . . . . . ... . . . . . . . . . ... . .. .... .. .. . . . ... . . .
Applications of Working Capital:
Purchase of property and equipment and
advances thereon . . ... . .. . . .. .. . .. . . .... . ... . . .. . . . ... .
Reduction of long-term obligations including
transfers to current liabilities . . ... ... . . ... . . .. .. ..... .. . . .
Cash dividends . . .. ... . .. . .... . . .. . .. .... . . . ........ . . . .
Increase 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, airline traffic liability, accrued
and other liabilities .. ... . . . .. . . . . . . . . . . . .. . ... . ... . ... .
Net increase . . .. . . .... ... . . . . .. . . . . . . . ..... . .... . .
N t 2.
c mp nying n t
25
$
$
1978
38,547
46,715
5,552
(558)
(6,754)
(2,246)
81,256
81,256
12,633
10,794
71,785
3,550
1,317
181,335
150,747
20,540
7,524
178,811
2,524
$ 16,343
21,249
2,048
(37,116)
$ 2,524
1977*
12,724
41,918
6,046
3,791
(2,825)
(4,549)
(2,942)
54,163
54,163
30,000
18,775
7,924
38,292
(2,000)
147,154
110,193
16,404
5,630
132,227
14,927
3,782
8,349
(2,551)
5,347
14,927
STATEMENTS Of SHAREHOLDERS' EQUITY
Years end d D c mb r 31, 1978 and 1977
(in thousands of dollars)
Pref rr d
Stock
$25.00
Stated
Value
Balance at January 1, 1977, as
previously reported .. .. . ... . $
Adjustment to reflect
capitalization of leases~ ... . ..
Balance at January 1, 1977, as
restated~ ............. . . . ..
Issuance of preferred stock . ... 30,000
Net earnings~ . . .......... . .
Cash dividends
Preferred stock .... . .. . ...
Common stock ........ ...
Balance at December 31, 1977* ... 30,000
Exercise of stock options . .. ..
Conversion of debentures .... .
Conversion of preferred
stock ................ . .. (77)
Net earnings ... ...... .. .. . .
Cash dividends:
Preferred stock ...........
Common stock ...........
Balance at December 31, 1978
(Notes 8, 9, 10 and 11) ........ $29,923
*Restated. See Note 2.
See accompanying notes to financial statements.
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. Leases primarily for flight equip-
ment are classified and accounted for as capital leases
under SFAS No. 13. All financial data for periods
prior to 1978 have been restated to retroactively
reflect these capital leases from the inceptions of the
leases. FASB Interpretation No. 23, effective Decem-
ber 1, 1978, requires that leases of terminal space and
other airport facilities owned by governmental
authorities be classified as capital leas s unless all
conditions for ex mption are met. B cause of th early
adoption of SFAS No. 13, W stern has account d for
such leas s nter d into prior to D cemb r 1, 1978
as op rating 1 ases. (S e Note 2.) Maint nanc and
r pairs ar xp n d as incurred. Major ren wals and
bett rm nts ar charg d to prop rty and quipm nt
a counts.
Common
Stock Additional
$1.00 Paid-in Retained Shareholders'
Par Value Capital Earnings Equity
26
12,659 28,937 75,504 117,100
(5,045) (5,045)
12,659 28,937 70,459 112,055
(1,710) 28,290
12,724 12,724
(567) (567)
(5,063) (5,063)
12,659 27,227 77,553 147,439
33 256 289
310 3,240 3,550
8 69
54,748 54,748
(2,397) (2,397)
(5,127) (5,127)
13,010 30,792 124,777 198,502
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 d posits on aircraft purchas
contracts is capitaliz d and amortized over th useful
lives of the aircraft.
Investment Credits
Effectiv January 1, 1978, inv stm nt er <lits are
r fl ct d as a r duction ff d ral incom tax xp ns ,
subj ct t tatutory limitations, in th y ar during
whi h th er dit arise or is allowabl bas d on
fin nci 1 tat m nt . F r p ri ds,
n fas t
to th xtent used tor duce f d ral incom tax liability
wer amortiz d to incom on a straight-lin basis
ov r the us ful lives of th relat d assets. (S Note 7.)
Obsolescenc of Expendable Parts
An allowanc for obsolescence of expendabl parts
is accrued over the useful lives of the r lated aircraft
types.
Airline Traffic Liability
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.
The related receivable and payable accounts for prior
years have been reclassified to conform with the
financial statement presentation in 1978.
Note 2. Lease Commitments.
Western leases flight equipment and facilities and
ground equipment. Lease terms for flight equipment
range from 11 to 15 years for 727 aircraft and from
15 to 18 years for DC-10 aircraft. Lease terms for
facilities and ground equipment range up to 29 years.
As of August 31, 1978, Western changed its
method of accounting for leases to conform to State-
ment of Financial Accounting Standards (SFAS)
No. 13. The effect of this change in accounting method
was to decrease retained earnings at January 1, 1977
by $5,045 and to restate the Statement of Earnings
for 1977 as follows: decrease operating expenses by
$7,321, increase interest expense by $10,472, decrease
deferred federal income taxes by $1,513 and decrease
earnings before cumulative effect of a change in
accounting principle and net earnings by $1,638 or
$0.13 per common share (primary) and $0.10 per
common share (fully diluted).
The effect of capitalizing leases on 1978 was to
decrease earnings before cumulative effect of a change
in accounting principle and net earnings by $2,159 or
$0.17 per common share (primary) and $0.12 per
common share (fully diluted).
The assets and related obligations for capital
leases were initially recorded at an amount equal to
the present value of future minimum lease payments
using incremental borrowing rates at the inceptions
of the leases. The assets are amortized over the life
of the lease by the straight-line method. Interest
expense is accru d on the basis of the outstanding
obligations und r capital 1 as s. Leased equipment
under capital leases is includ d in the balance sheets
at Dec mber 31, 1978 and 1977 as follows:
1978 1977
Flight quipm nt .. $126,310 126,310
Fa ilities and gro und equipment . . . 3,278 2,967
129,588 129,277
L ss all wance f r depreciati n
and amortization . 38,944 30,513
$ 90,644 98,764
At D c mb r 31, 1978, minimum leas paym nts
und r l a s xpiring aft r D c mb r 31, 1979 w r
f II ws:
27
1979 ............... .
1980.
1981 .
1982 ..
1983 .......... .
$ 17,038
16,994
16,860
16,860
16,860
10,955
11,641
11,432
10,970
10,697
Thereaft r . 105,786 115,788
Total minimum I as paym nts . 190,398 171,483
L ss: Amount repr senting
int rest*.
Present value of obligations -
capital leas s . ... . .... .
Less: Current portion of
capital leases.
Long-term obligations -
capital leases .
76,048
114,350
6,647
$107,703
*Amount necessary to reduce minimum lease payments to present
value calculated at Western's incremental borrowing rates at the
inceptions of the leases.
Rental expense for operating leases for 1978
amounted to $15,239 ($14,079-1977).
Note 3. Depreciation and Amortization.
The estimated useful lives and residual values of
aircraft are as follows:
Estimated Residual
Useful Life Value
DC-10 . . . . . . . . .
. .
16 years 10%
727 . ........ 15 years 15%
737 . 14 years 15%
707 .. 15 years 15%
720B. . . . . . . . . . .
. .
Fully depreciated
at December 31, 1978 $100
Effective January 1, 1978, the estimated depreciable
lives of five 707 aircraft were extended from 12 years
to 15 years. For 1978, depreciation expense was de-
creased by approximately $1,800; earnings before
cumulative effect of a change in accounting princi-
ple and net earnings wer increased by approximately
$1,508 or $0.12 per common share (primary). This
change reflected management's decision to continue
using these aircraft beyond the time at which they
would have become fully depreciated.
The estimated useful lives of ground equipment
range from four to ten years. For buildings and im-
provements on l ased property, the estimated useful
liv s are generally the periods of the leases.
"0th r11 operating xpenses included depr cia-
tion and amortization of $725 in 1978 ($334 - 1977).
Note 4. Commitments and Contingent Liabilities.
At Dec mb r 31, 1978 W st rn had on firm ord r six
Boeing 727-200 aircraft which ar ch dul d for
d livery i m r of 1979 (including
on aircra ning in July, 1979),
and two h
also s
adv i t
appr t
pure t
will
pti n t diti - o
aircraft and four additional McDonn 11 Douglas
DC-10 aircraft ford livery in 1980 and 1981 at a
cost stimat d to aggregat $294,600 of which $1,550
had b en paid.
In January 1979 W stern ex rcised options to
purchase fiv Bo ing 727-200 aircraft and two
McDonnell Douglas DC-10 aircraft for delivery in
1980 and at the same time obtain d options to pur-
chase the same number of both types of aircraft for
delivery in 1982.
Outstanding commitments for flight equipment
modifications and spares amounted to approximately
$10,610 and for facilities and ground equipment
amounted to approximately $4,901 at December 31,
1978.
For information regarding the status at December
31, 1978 of legal proceedings, see "Legal Proceedings"
on page 12 in this Annual Report.
For discussion of possible impact of environ-
mental regulations, see "Flight Equipment" on pages ll
and 12 in this Annual Report.
Note 5. 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 1978 replacement cost
of productive capacity and the approximate effect
which replacement cost would have had on the com-
putation of depreciation expense for the year.
N ote 6. Retirement Plans.
Western has retirement plans which cover substan-
tially 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 including the
union-sponsored plan charged to operating expense
amounted to $26,606 for 1978 ($21,908 -1977). The
increase was caused by increases in wag s, higher
enrollments and improv d ben fits.
For sel cted plans, the actuarially computed
value of v sted benefits xceeded the pension funds'
assets by approximately $2,343 at the most recent
valuation date during 1978.
Unfund d priors rvic costs of the plans
amounted to approximately $20,078 at the most
r c nt valuation dat during 1978.
Note 7. Taxes on Income.
Th provision for tax s
ff ct of a chang in ac
n incom b for umulativ
unting principl is um-
28
mariz d as follows :
Current income taxes:
F-ederal :
Provision ..... . .. . ........ .
Inv stment credits applied ... . .. .
State ........... . . .
Deferred federal inc me taxes :
Provision . . . . . . . . . . . . . .
Investment credits:
Applied . . .. . ... .. . .
Transferred to current . . .... .. . .
Deferred investment credits .
Amortization of deferred
investment credits .. . . . . . . . . .
1978 1977
$23,447
{23,447)
*
1,814
( 2,655)
{15,240 )
23,447
5,552
7,366
558 )
$ 6,808
10,875
(11,900)
( 1,025)*
1,150
( 2,063)
( 3,791)
11,900
6,046
3,791
9,962
( 2,825)
7,137
*The Tax Reform Act of 1976 provides for 100% application of
unapplied investment credits against federal income tax liabilities
for 1977 and 1978. This 100% application is reduced 10% annually
until 1980. Under the Revenue Act of 1978 the application remains
at 80% in 1981 and returns to 90% in 1982 where it remains
thereafter.
Effective January 1, 1978, Western changed its
method of accounting for investment credits for
financial reporting purposes from the deferral to the
flow-through method. Investment credits generated
during 1971 and prior years remain on the deferral
method. Under the flow-through method, investment
credits are reflected as a reduction of federal income
tax expense, subject to statutory limitations, in the
year during which the credit arises or is allowable
based on financial statement earnings. Under the
deferral method, no recognition had been given to
investment credits until utilized to reduce tax liabili-
ties, at which time they were deferred in the accounts
and amortized over the useful lives of the assets giving
rise to the credit. Western believes the newly adopted
accounting principle is preferable because it is the
method used by the majority of publicly-held
companies in the United States and the change will
improve the comparability of Western's results of
operations with other companies utilizing the
flow-through method (particularly those in the air
transportation industry). Western has received the
consent of the Secretary of the Treasury to change to
the flow-through method of accounting for invest-
ment credits for financial reporting purposes, which
cons nt is required by the Revenu Act of 1971.
The cumulative effect of the chang on years
after 1971, amounting to $16,201, has b n includ d
in net arnings for 1978. The effect of the chang on
the results for 1978 was to increase arnings befor
cumulative effect of a chang in accounting principle
by $12,906, or $1.00 p r c mmon shar (primary)
and n t arnings by $29,107, or $2.27 p r common
shar (primary). Th proforma amounts app aring
on th Statements of Earnings di play th ff ct of
retroactiv application had th n w m thod b n
in ff ct during 1977.
Of th $18,610 unam rtiz d inv tm nt er dit
balan t D mb r 31, 1977, $10,548 r main d fr m
inv tm nt r dit utiliz d by r du ti n f tax
p id nd $8,062 r l t d t inv stm nt r dit n t y t
util.iz d f r r du ti n f tax paid. Th $1,851
un m rtiz d inve tm nt r dit balanc at D mb r
31, 1978 r pr nt inv
1971 and priory ars.
Inv tm nt credit unappli d on tax r turns
amount d to $1,389 and $9,596 at D c mb r 31, 1978
and 1977, respectively.
Deferred income taxes arise from timing dif-
ferences between financial and tax reporting. The tax
effects of these differences on the provision follow:
1978 1977
D pr ciation . .......... . $ 109 (1,623)
apitalized 1 as s . {1,108) (1,513)
Interest capitalized . 1,124 679
Pr operating expense . {502) (668)
Empl y e benefits . {2,201) 792
0th r . ..... . .. .. ..... . . . . . . . . . .. . . {77) 270
$(2,655) (2,063)
A reconciliation between the amount of reported
taxes on income and the amount computed by multi-
plying earnings before provision for taxes on income
and cumulative effect of a change in accounting
principle by the federal statutory tax rate of 48%
follows:
Taxes on income at 48%.
Increases (reductions) in taxes
resulting from :
Amortization of deferred
investment credits .... .. ........ .
Investment credits recognized on
flow-through method .
State income taxes net of federal
income tax benefit.
Other ........ . ..... . .. .
Taxes on income ..
1978
$21,770
(558)
(15,240)
943
(107)
$ 6,808
1977
9,533
(2,825)
598
(169)
7,137
The federal income tax returns for 1973 through 1976
are being examined.
Note 8. Debt.
A December 31, 1978 and December 31, 1977 debt
(excluding amounts maturing within one year) was:
Secured:
9 .55% equipment trust certificates
due May 1, 1993 with semi-annual
principal payments starting
ovember 1, 1979 . . . . ....... .
Unsecur d:
Senior
5 1/4% installment notes due
Septemb r 1, 1981 with annual
principal payments on
S ptemb r 1 of $4,000 . .
65/so/o installm nt note du
Sept mb r 1, 1984 with annual
prin ipal payments of $2,000 on
S pt mb r 1 which w ill in rea
t $7,000 in 1982 ............ .
8% in tallm nt n t du
N v mb r 16, 1985 with
quart rly prin ipal paym nt
f $768 tarting in 1981 .
1978 1977
$ 69,221
8,000 12,000
25,000 27,000
15,362 15,362
48,362 54,362
29
Sub rdinat d
fund p ym nt
1980 ....
10 in fund
984, 1
LI nt f $]19,
with annual sinking fund
paym nts f $2,300 .
24,480 28,055
15,980 18,244
40,460 46,299
$158,043 100,661
As of July 1, W st rn ent r d into th 1978 Bank Loan
Agreem nt with an agent bank and twenty-one other
banks supers ding the 1976 Bank Loan Agr em nt.
The 1976 Bank Loan Agr ement dat d July 1, 1976
provided West rn with a $75,000 revolving lin of
credit. The int rest rate on funds borrowed was o/c
over the lead bank's prime commercial rate.
The new agreement provides Western with a
$125,000 revolving line of credit until June 30, 1981.
At this date th line of credit can be replaced by term
notes not to exceed $125,000 which will mature on
June 30, 1985 with quarterly payments of principal
starting September 30,1981. The interest rate on funds
borrowed is equal to the agent bank's prime com-
mercial rate until June 30, 1980 when it will increase
to % over such rate. The interest rate on the term
notes is equal to % over the agent bank's prime
commercial rates. At December 31, 1978, $125,000
was available for future drawdowns.
The commitment fee is % per annum on the
unused portion for both agreements.
Although the bank loan agreements do not
require compensating balances, Western has infor-
mally agreed to maintain on deposit average balances
equal to 10% of the total credit available plus 10%
of borrowings. Accordingly, during 1978 the average
balance maintained amounted to approximately
$10,500 ($7,800 during 1977) and an average of $13,000
would have been maintained on deposit based on
available credit at December 31, 1978 ($6,300-1977)
after adjustment for the estimated float of $3,500
during 1978 ($3,200 during 1977).
The agreements relating to this line of credit
and other long-term debt contain provisions which
limit retained earnings from which restricted pay-
ments ( cash dividends and purchases of Wes tern's
common stock) can be mad . The most restrictiv of
these provisions limited amounts available for such
paym nts to $40,415 at D cember 31, 1978 ($16,653 -
1977). Th se agr ements also contain, among oth r
things, r quir m nts pertaining to cash and working
capital levels and provisions which may restrict
additional borrowings.
As f May 1, 1978 W t rn ent r d int an
quipm nt tru t agr m nt wh r by nin in uranc
compani s a r ed to 1 nd t a bank, a trust , 80%
of th c t f v n aircraft (tw D -10 and fiv
727 ) but n t t d $99,190 in th r t
W t rn agr d t upply th r m inin fund t
n bl th tru t t pur h th ir r ft . Th l
vid n d by
by the trustee and guaranteed by West rn. Under
these agr ments the trustee rec ives a security inter-
est in the aircraft. When rental paym nts sufficient
in amount to pay the principal and int rest on th
certificates have been mad , Western's title to th
aircraft will be fr e and clear.
During 1978 certificates in th amount of
$71,785 were issued by the trustee in connection with
the delivery of one DC-10 and five 727 aircraft. An
additional DC-10 aircraft will be financed pursuant
to this agreement in the spring of 1979.
The following schedule shows the amount of
long-term debt due in each of the five following
Note 9. Stock Options.
cal ndar y ar , in ludin th additional quipm nt
tru t c rtificat s but ex luding borrowings und r th
r volving lin fer dit:
1979 .
1980 .. . .. .. ...... . . .... .
1981 .. ..... . .
1982 .
1983 .
$11,843
16,885
19,957
20,957
20,957
At D cember 31, 1978 and D cember 31, 1977,
2,119,000 and 2,429,000 shares of common stock
were reserved for conversion of debentures at a con-
version price of $11.55 per share.
Western had a qualified stock option plan adopted in 1964 for officers. This plan expired April 30, 1978.
The company presently has a nonqualified stock option plan adopted in 1974 for officers and key personnel.
These plans are summarized as follows:
1974 Plan 1964 Plan
Number
of
Shares
January 1, 1977 ............. . 382,075
O ptions granted ...... . ....... . 378,500
O ptions exercised .......... .
O ptions cancelled and expired . (36,155)
Balance December 31, 1977 . 724,420
O ptions granted . . . 116,280
O ptions exercised ................ . (33,315)
Options cancelled and expired . (16,550)
Balance December 31, 1978 ....... . 790,835
Shares exercisable at:
December 31, 1978 ....... . 484,261
December 31, 1977 ...... . ... .. ....... . 353,136
Average
Price
$9.14
8.28
9.30
8.68
7.81
8.69
8.54
$8.56
$8 .82
8.94
Number
of
Shares
97,473
(21,862)
75,611
(75,611)
75,611
At December 31, 1978, 201,730 shares were reserved under the 1974 stock option plan for the issuance of
future grants.
Note 10. Issuance of Preferred Stock.
Average
Price
$11.48
13.36
10.93
10.93
$ -
$ -
10.93
O n O ctober 6, 1977, 1,200,000 shares of $2.00 Series A Cumulative Convertible Preferred Stock were issued
at a stated value of $25 per share. The shares of preferred stock are convertible into common stock at the
rate of 2.5 shares of common stock for each share of preferred stock, subject to adjustment under certain
conditions.
Note 11. Proposed Consolidation.
Western has entered into an Agreement of Consolidation with Continental Air Lines, Inc. calling for the con-
solidation of the two companies into a new company. The agreement has been approved by the respective
boards of directors, and is subject to approval by the stockholders of both corporations, by certain of their
lenders, and by the CAB.
Note 12. Earnings per Common Share.
Earnings per common share are based on the weighted average number of shares of common stock outstanding
during the respective periods.
Adju tm nt of net earnings:
Primary:
Net earnings .....
Preferred dividends .
Net earning availabl for common st k .. . .. .
Earnings Before Cumulative
Effect of a Change in Accounting Principle
30
$38,547
2,397
$36,150
1978
Net
Earnings
54,748
2,397
52,351
1977
Net
Earnings
12,724
567
12,157
Fully diluted:
N t earnings . . . . . . . . . . . . . . . .
R ducti n i t expens , net of provi m , f r the
a sumed ion of 5 % convertibl ntures ......... .
Adjustm nt of shares outstanding (in thousands):
W ighted average shar s outstanding .
Adjustm nt assuming full dilution:
Assumed conversion of subordinated debentures ........ .
A sumed conversion of preferred stock . . . . . . . . . . . . ...... .
Assumed exercise of stock options . . .... . .. . .
Total average common shares assuming full dilution . . .
Earnings per common share:
Primary . ... .. ........ .
Fully diluted .
$38,547 54,748
680 680
$39,227 55,428
12,795 12,795
2,312 2,312
2,997 2,997
111 111
18,215 18,215
$ 2.82 4.09
2.15 3.04
Note 13. Summarized {unaudited) quarterly financial data for 1977 and 1978 is as follows:
1977
Operating revenues .
Operating income .
Net earnings .
Net earnings per common share:
Primary .. .. .......... .
Fully diluted .
1978
Operating revenues .
Operating income (loss) .
Earnings (loss) before cumulative effect of
changes in accounting principles ..... . . ..... . . . . . .
Net earnings (loss) . . ........ ... .. . ... . . . . .
Earnings (loss) before cumulative effect of a change
in accounting principle per common share:
Primary . . . . .. . ... . ......... .
Fully diluted .. ...... . . .. . ......... . ... . .. .. . . .. . . .
et earnings (loss) per common share:
Primary .
Fully diluted .. . . . .. . .... . . .. ... .
March 31
$164,748
5,806
1,678
0.13
0.12
192,200
11,072
10,486
26,687
0.78
0.59
2.06
1.49
Three Months Ended
June 30 S ptember 30
165,181 188,825
1,942 18,610
1,278 8,371
0.10 0.66
0.10 0.56
201,870 241,023
11,541 33,226
5,513 25,679
5,513 25,679
0.39 1.95
0.31 1.41
0.39 1.95
0.31 1.41
12,724
742
13,466
12,659
2,539
715
15,913
0.96
0.85
December 31
172,710
3,096
1,397
0.07
0.07
199,420
(983)
(3,131)
(3,131)
(0.29)
(0.29)
(0.29)
(0.29)
Western extended the depreciable lives of certain aircraft which had the following effects on quarterly results:
for each quarter in 1977, operating income was increased by approximately $1,200; net earnings were increased
by approximately $600 or $0.05 per common share (primary). For each quarter in 1978 operating income was
increased by $450; earnings before cumulative effect of a change in accounting principle and net earnings were
increased by approximately $422-first quarter 1978, $350-second quarter 1978, $366-third quarter 1978 and
$370-fourth quarter 1978, or $0.03, $0.03, $0.03 and $0.03 per common share (primary).
Western changed to the flow-through method of accounting for investment credits which increased
(decreased) earnings before cumulative effect of a change in accounting principle for the first, second, third and
fourth quarters of 1978 by approximately $4,337, $235, $9,816 and ($1,482), or $0.34, $0.02, $0.76 and $(0.11)
per common share (primary).
Fourth quarter 1978 operating revenues and income include $870 from current and retroactive mail rate
adjustments, which increased net earnings by $729. Fourth quarter 1977 operating revenues and income include
$2,000 from current and retroactive mail rate adjustments, which increas d net earnings by $1,000.
Estimates of the annual effective tax rate are made quarterly. Had each of the 1978 quarterly estimates
been made on the basis of the year's actual effective tax rate, earnings and per common share (primary) amounts
before cumulative effect of a change in accounting principle would have b en:
Earning (I ss) .
Per mmon har (primary) .
31
Mar h 31
$9,401
0.69
Jun 30
7,823
0.57 1.95
mber 31
(4,368)
(0.38)
BOARD OF DIRECTORS
Miguel M. Blasquez
President,
Inter-American Commercial
Arbitration Commission,
Mexico City, Mexico
Walter J. Hickel*
Chairman of the Board,
Hickel Investment Company,
Anchorage, Alaska
Victor L. Brown*
Presiding Bishop,
The Church of Jesus Christ
of Latter-day Saints,
Salt Lake City, Utah
Arthur F. Kelly*
Chairman of the Board and
Chief Executive Officer,
Western Air Lines, Inc.,
Los Angeles, California
Arthur G. Linkletter John H. Myers*
Television Producer and Broadcaster, Assistant to the President,
Chairman of the Board, St. John's University,
Linkletter Management, Inc., St. Paul, Minnesota
Costa Mesa, California
DIRECTORS EMERITI
Hugh W. Darling
Attorn y-at-Law,
Darling, Hall, Rae & Cute,
Los Angeles, alifornia
Leo H. Dwerlkotte
Las Vega , Nevada
James D . Garibaldi
Att rney-at-Law,
aribaldi & Sauss r,
L Ang I , alif rnia
Cary Grant
Director and Executiv ,
Faberge, Inc.,
B v rly Hills, alifornia
Dr. Donald H. McLaughlin
hairman f th B ard,
H m stak Mining mpany,
San Franci , alif rnia
Edwin W. Pauley
hairman f th B ard,
P ul y P tr I um, In .,
L An le , alif rnia
Richard P. Ensign
Senior Vic:e President-Marketing,
Western Air Lines, Inc.,
Los Angeles, California
Robert 0. Kinsey
Senior Vice President-
Finance and Administration,
Western Air Lines, Inc.,
Los Angeles, California
Dominic P. Renda*
President and
Chief Operating Officer,
Western Air Lines, Inc.,
Los Angeles, California
Vernon 0 . Underwood
hairman of th Board and
hi f Executive Officer,
Young's Mark t mpany, In .,
L s Ang I s, alif rnia
Harry J. Volk
hairman f th B ard,
Uni n Ban
L Ang I
32
Gerald Grinstein
x
Attorney-at-Law,
Preston, Thorgrimson, Ellis,
Holman, and Fletcher,
Seattle, Washington
Bert T. Kobayashi, Jr.*
Attorney-at-Law,
Kobayashi, Watanabe, Sugita,
and Kawashima,
Honolulu, Hawaii
Robert H. Volk*
Attorney-at-Law,
Los Angeles, California
*M mb r, Executive Committee
John M. Wallace
Walker Bank & Trust Company,
Salt Lake ity, Utah
Arthur G. Woodley
B 11 vu , Washingt n
Richard W. Wright
Pre id nt, M untain State
Empl y r un ii, Inc.,
D nv r, I rad
CORPORATE OFFICERS
E cutiv Officers
Arthur F. Kelly
f th B ard and
tiv Offi r
Dominic P. Renda
Pr id nt and
hicf Operating Offi r
Corporate Planning Division
James L. Mitchell
Seni r Vi Pre id nt -
rp rat Planning
Walter Bambrick
Vice Pr id nt -
Data Processing and Systems
Charles S. Fisher
Vic Pr sident -
Schedule Planning
Peter P. Wolf
Vice President-Communications
Thomas F. Miller
Assistant Vice President-Pricing
W. Jeffrey Terrill
Assistant Vice President-
Regulatory Proceedings
Finance and Administration Division
Robert 0. Kinsey
Senior Vice President-
Financ and Administration
Paul V. Donahue
Vice President-Pr cur ment
Richard 0. Hammond
Vic President and Treasurer
Roderick G. Leith
Vice President and Controller
Jordan S. eel
Vice Pr sident-
Personn I Relations
Legal Division
Gerald P. O'Grady
Seni r Vice President-
Legal and S cretary
Howard L. Culver
Assistant Vice President-
R gulat ry Law
Donald F. Drews
A sistant Vice Presid nt -
Properties and Facilities
Thomas J. Greene
As i tant Vice President-
orp rat Law and
As istant Secretary
Marketing Division
Richard P. Ensign
S ni r Vi e Pr sident - Marketing
Willis R. Balfour
Lawr nee H. Lee
Vi Pr id nt - Inflight S rvi
Bert D. Lynn
Vi Pr id nt -
Adv rti in nd Pr m ti n
Jack M. Slichter
Vi Pre id nt - Fi Id Man m nt
John I. Good
Assistant Vi e Pr ident -
arg Sales and S rvi
Operations Div ision
Anton B. Favero
Senior Vic Pre ident - Op rations
Robert V. Johnson
Vice Pr sident-Flight Op rations
Corporate Affairs
Ray Silvius
Vice President-Corporate Affairs
Wayne B. Lichtgarn
Assistant Vice President-
nsumer 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 Vic 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 Vic President-Minneapolis/St. Paul
General Offices
We t rn Air Lin s Building, 6060 Avi n riv
L Ang I Int rnati nal Airp rt
Lo Angel , alifornia 90045
Registrar/Transfer Agent -Common Stock
Bank f Am ri a Nati nal Trust & Saving Assn.
555 S . Flow r St., Los Ang I s, alif rnia 90071
Registrar /Transfer Agent - Preferred Stock
Bank f Am ri a National Trust & Savings Assn.
555 So. Fl wer St., Los Ang 1 , alif rnia 90071
Debenture and Subordinated Note Trustee
The hase Manhattan Bank
1 New York Plaza, New York, New York 10015
Stock Listing - Common Stock
N w York Stock Exchang
Pacific Stock Exchange
Stock Listing - Preferred Stock
New York Sto k Exchange
Pacific Stock Exchange
Debenture and Subordinated Note Listing
ew York Stock Exchange
Pacific Stock Exchange
Ticker Symbols
Common Stock
Preferred Stock
5 % Debentures
10% Notes
General Counsel
Hugh W. Darling
WAL
WALA
WALK
WAL.
Darling, Hall, Rae & Cute
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