Western Airlines Annual Report 1981

Our Cover:
On May 1, 1982, Western will launch a major
restructuring of its route system . The key feature
will be the establishment of a hub-and-spoke oper-
ation at Salt Lake City where arrival and departure
times of flights will be coordinated to provide
connecting services to a broad range of destina-
tions. This system will permit Western to "feed "
its flights with passenger and cargo from connect-
ing services and will increase fleet utilization .
Routes serving the new hub are shown in white.
Description of Business
Western Air Lines, Inc. is a certificated air carrier
originally organized in 1925. The company is
engaged in one industry - the scheduled air trans-
WESTERN
AIR LINES,
INC.
1981
ANNUAL
REPORT
portation of passengers, air cargo and mail . It
serves cities in the United States, Canada and
Mexico.
LETTER TO SHAREHOLDERS
1981 was a disastrous year for Western Airlines.
Capped by a fourth quarter loss of $56.1 million ,
the largest quarterly deficit in company history,
Western experienced a net loss of $73.4 million
for the year.
There were a number of reasons for this result:
a recession-related slowdown in air travel , excess
capacity in the marketplace, rate wars that diluted
revenues, and continuing inflation that drove up
costs. Hardest hit by these conditions were a
number of established carriers like Western that
had developed their route systems and their cost
structures in the regulated environment that ex-
isted prior to October 1978 and had not changed
them significantly since that time.
These systems, based almost entirely on point-
to-point linear routes, were generally profitable
during the era of controlled competition . However,
because this type of system does not produce
or control connecting traffic, linear routes are
vulnerable to competition and rate wars. Com-
2
pounding the problem for Western was the fact
that it had higher costs than many of its com-
petitors, which left the company in the position
of either matching competitors fare cuts at a loss
or abandoning markets.
When I came to Western Airlines on December
8, I found the company on the verge of collapse.
It had lost money for two years and monthly losses
had increased at a frightening rate. It was virtually
out of cash, and because it was not in compliance
with certain tests under its loan agreements, it was
unable to borrow additional funds. As a conse-
quence, Western had retained bankruptcy counsel ,
which the new management team decided was
premature. A thorough analysis of the problems
showed that in order to survive and prosper West-
ern would have to make major changes in its
structure and its way of doing business and that
it must develop a strategy that would be respon-
sive to the deregulated environment.
We determined that because of its sizeable
fixed costs the company would have great diffi-
culty becoming profitable by shrinking to a new
size or shape. Under-utilized aircraft and facilities,
which could not be disposed of at anywhere near
their true value, would have to be put to more
productive use along with Western's employees.
In short, we would have to fly our way back into
the black by doing more, not less. And in order
to do this and survive, we would have to control
our costs.
As essential elements of this plan we concluded
that we would have to:
develop a new marketing organization and a
more competitive marketing philosophy;
reduce overhead costs by eliminating excess
layers of management, by cutting salaries and
by getting more productivity out of those who
remain ;
obtain from unionized employees wage cuts
and changes in work rules that would increase
productivity;
convince our lenders that we have formulated
a workable short-term survival plan and a long-
term strategy for profitability in order to obtain
additional working capital and waivers of defaults
under existing loan agreements.
Programs to accomplish all of these objectives
are well underway.
On May 1, Western will launch the most dramatic
route realignment in its history. The new route
system will reflect our conviction that the proper
role for Western Airlines is as a strong regional
carrier serving the West through a strategically
located hub and a cohesive pattern of regional
service. Our objective is to develop a hub-and-
spoke system that will enable us to control a greater
share of the passenger and cargo travel that
emanates from cities we serve. Western's hub will
be at Salt Lake City, a city that is located in a rapidly
growing region , is near the center of our route
system and is an established Western city in which
we have excellent facilities and a long history of
service. Most flights from throughout our system
will be routed through Salt Lake City where con-
nections will be available to other Western cities.
We will strengthen the hub furth.
er by inaugurat-
ing service to new cities in the West and to New
York City, Baltimore and Washington , D.Cs Dulles
Airport. Our Seattle/Tacoma gateway to Alaska
and California gateways to Mexico and Hawaii
also will be strengthened by direct links with the
Salt Lake City hub.
Implementation of these changes will not
require additional aircraft or other major capital
expenditures. The realignment will be achieved
by increasing the use of existing resources. For
example, we will increase the average daily utili-
zation of our fleet by almost two hours per day
per aircraft. This figure will rise even more as
additional routes .and schedules are blended
into the new system .
Our marketing strategy will be very simple. We
will price our product competitively, prqvide good
schedules and service and make it easy for our
customers to do business with us by answering
our reservations phones promptly, simplifying our
fare structure and making ticketing easier.
In order to be a tough competitor we also must
reduce our costs to a level that will permit us to
make a profit from the low fares that now dominate
3
and will conti
nue to dominate high-density routes.
Since December, we have been taking the
necessary steps to lower Western's costs. We have
reduced annual payroll costs for the management
staff, have obtained wage concessions from some
of our unionized employees and we are attempt-
ing to obtain similar concessions from the re-
maining group. Although our new schedules and
contractual concessions from our pilots will pro-
vide some gains in productivity, we need more
and are working toward that end.
We are confident that the route realignment and
our marketing program will stimulate traffic over
the Western system and increase revenues. We
are not optimistic that we will receive any help from
an improvement in the economy in 1982 nor are
we relying on such an upswing to make Western
profitable, although such a development certainly
would be beneficial and welcome.
The key to 1982 and the future of Western
Airlines lies in our ability to control our costs and
increase the productivity of our work force. We
believe that Western can be a viable company.
Your management is doing everything possible
to ensure that this objective is achieved as soon
as possible.
Chairman and Chief
Executive Officer
April 22, 1982
The Year At A Glance
(in millions of dollars)
Operating revenues
Operating expenses
Operating loss
Other Income (Expenses):
Interest expense, net
Gain on disposition of equipment
Other-net
Loss before income taxes
Income tax
Net loss
Passengers carried (000)
Available seat miles (000,000)
Revenue passenger miles (000,000)
Passenger load factor - actual %
- breakeven %
1981
$1 ,059.8
1,125.8
(66.0)
(45.0).
16.9
1.3
(92.8)
(19.4)
$ (73.4)
8,402
14,496
8,548
59.0
65.8
4
1980 % Change
995.7 6
1,041.5 8
( 45.8) 44
(38.5) 17
32.1 (47)
3.0 (57)
(49.2) 89
(19.6) ( 1 )
(29.6) 148
9,130 (8)
15,516 (7)
8,832 (3)
56.9 4
62.0 6
MANAGEMENT'S DISCUSSION
Results of Operations
The last several years have been very difficult
for Western. The company reported net losses in
1980 and 1981 and a 24 percent decline in net
profits in 1979. Prior to December 1981, when
the company's new management embarked on a
rebuilding program , the company had responded
to this downturn by reducing its production of
available seat miles (ASM's) in 1981 and 1980.
Since 1979 ASM 's have decreased 13 percent;
however, revenues escalated 14 percent because
of fare increases. This level of revenue growth
was not adequate to support the cost base
Western had established in the regulated environ-
ment. Operating expenses increased 23 percent
from the 1979 level, more than offsetting the 14
percent increase in revenues and creating the
company's substantial operating losses.
The largest contributor to the rise in operating
expenses was fuel costs, which increased 45
percent since 1979. Consumption actually de-
creased du ring this period by 21 percent but the
average cost per gallon increased 82 percent,
from $0.57 in 1979 to $1.04 in 1981. Early in 1982
fuel prices dropped to slightly under $1.00 per
gallon. They are expected to remain at this level
or decline slightly throughout 1982.
Wages, salaries and employee benefits in-
creased by nearly $47 million from 1979 through
1981 despite the fact that the number of em-
ployees decreased by more than 1,100 during
that period . The company is currently negotiating
with its labor unions to reduce wage levels and
increase productivity during 1982. Labor costs
for the company in 1982 and subsequent years
depend in large part on these negotiations.
Other operating expenses, which are suscep-
tible to inflationary pressures, include costs such
as aircraft and ground equipment rentals, adver-
tising and commissions. Commission expense in-
creased 20 percent from 1980 to 1981 , reflecting
the impact of deregulation on the industry. Because
scheduled carriers are no longer permitted to
jointly establish travel agency commission rates,
competition for the agents' business has forced
commission rates up. This has resulted in increas-
ing the commission rate paid by Western to travel
agents from an average of 8.9 percent in 1980
to 10.4 percent in 1981. Also, higher fares and
increased ticket purchases through agencies
5
have contributed to the rapid growth in commis-
sion expense. These conditions are not expected
to change in 1982.
New equipment financed at higher interest
rates, as well as a higher level of interest rates
in general, have resulted in increased interest
expense of the company in 1979, 1980, and 1981.
Depreciation expense also has increased because
of significant equipment purchases. In 1981 ,
sales of aircraft helped maintain the level of depre-
ciation expense despite the acquisition of three
new aircraft.
For a detailed discussion of the impact of infla-
tion on operating results see Note 13 to financial
statements.
Western's operations have been affected in
these years by activities within the industry. In
1981 , revenues during the peak season of the third
quarter were reduced slightly by the walkout of air
traffic controllers on August 3. The grounding of
the DC-10 aircraft in 1979 affected operations in
that year, as did strikes against major competitors.
Liquidity
During the first six months of 1981 Western
was able to fund current operations and debt
repayment with cash generated from operations
and the sales of excess aircraft. In addition, $30
million of the $50 million outstanding at December
31 , 1980, on its revolving line of credit was repaid .
In the second half of 1981 , however, traffic and
revenues were significantly lower than anticipated .
Operations no longer generated enough cash
to meet operating requirements. The company
borrowed additional funds of $20 million from
two foreign banks and $7 million on its revolving
line of credit. During that same period the com-
p~ny also sold and leased back two 737s and sold
tax benefits under the provisions of the Economic
Recovery Tax Act of 1981 , generating cash of
approximately $11 million and $5 .6 million , re-
spectively. Throughout 1981 Western made all
scheduled debt payments and paid preferred
dividends regularly.
The effects of the losses on retained earnings
and equity resulted in Western's default of some
of the covenants of its various loan agreements.
Since these defaults allow certain of Western's
lenders to demand immediate payment of the total
amounts owed to them and because Western
has not obtained waivers for a period in excess
of one year, a portion of the long-term debt has
been classified as current. Decisive steps have
been taken by Western to cut its labor force ,
reduce the wages paid to remaining employees,
modify current labor contracts, negotiate the sale
of additional assets and negotiate additional loan
and security agreements with its various lenders.
Western entered into agreements in January
1982 with its lenders to waive the company's
defaults under its loan agreements until June 10,
1982. Western also entered into an agreement
with its previously unsecured lenders to secure
their loans with 29 of Western's aircraft and 77 of
its engines. In addition , the company obtained a
$30 million line of credit due April 30, 1982, all of
which had been drawn down as of March 15,
1982. (See Note 6 to financial statements.) The
company is continuing to negotiate with its lenders
to restructure a portion of its debt. This restruc-
turing is essential to the continuing operations of
the company. Western has entered into agree-
ments with third parties to sell certai n other assets,
which will generate approximately $31 million .
Western is required to use the proceeds from
asset sales to pay off any amounts outstanding
on the new line of credit. See Note 14 to financial
statements.
Capital Resources
Western has on order six 767 aircraft and three
767 spare engines, the deliveries of which have
been delayed until 1984 and 1985. The total com-
mitment for the acquisition of these aircraft and
spare engines is approximately $305 million . Long-
term secured debt or capital lease financing is
expected to be utilized to finance these acquisi-
tions although no assurances can be given that
su_
ch methods of financing will be available. West-
ern also holds options for the purchase of six
additional 767s which would be delivered in 1985
and 1986. (See Note 3 to financial statements.)
Shareholders and Stock
As of December 31 , 1981 , there were 13,043,621
shares of Western common stock outstanding
held by approximately 15,000 individuals and insti-
tutions. Holders of the common stock last received
a dividend in the t_
hird quarter of 1980. Because of
continuing losses, Western has not paid a dividend
on the common stock since that time. Retained
earnings available for payment of common stock
dividends are restricted by various debt agree-
ments. At December 31, 1981 , no retained earn-
ings were available for dividends on common or
preferred stock.
Western has 2,992,300 shares of common
stock reserved for issuance upon conversion of
its preferred stock and an additional 1,952,554
shares reserved for issuance upon conversion of
its 5% Convertible Subordinated Debentures.
At December 31 , 1981 , there were 1,196,920
shares of the $2.00 Series A Cumulative Con-
vertible Preferred Stock outstanding held by 1,353
individuals and institutions who have been paid
regular quarterly dividends. On January 29, 1982,
Western's board of directors voted to defer pay-
ment of the quarterly dividend payable at the end
of March 1982 on the preferred stock. This is the
first preferred stock dividend to be omitted since
the stock was issued in September 1977. If six
consecutive dividends are omitted , the holders of
the preferred stock have the right, voting as a
class, to elect two board members. See Note 6
to financial statements.
Western's common and preferred stock are
traded on the New York and Pacific Stock
Exchanges.
Market Prices
Common Stock Preferred Stock
1980 High Low High Low
First Quarter 11 % 6 29 19
Second Quarter ?'fa 6 23Ya 19
Third Quarter 8 6 24 21
Fourth Quarter 10 6 25 20%
1981
First Quarter 10 8 26. 21
Second Quarter 11 8 30 22Ya
Third Quarter 11 6 29 15%
Fourth Quarter 8Ya 4% 20 14
On December 8, 1981 , the Board of Directors
of Western elected Neil G. Bergt as Chairman
and Chief Executive Officer. Bergt is a principal
shareholder of Eagle International Corporation
(Eagle), a privately held corporation which agreed
in November 1981 to acquire Wien Air Alaska, Inc.,
(Wien) from Household International , Inc.
In connection with Bergt's selection as Chief
Executive Officer, Western , Eagle, and Mr. Bergt
6
signed an agreement in principle dated December
8, 1981, regarding (a) Eagle completing its
acquisition of Wien, and (b) the preparation and
execution of a definitive agreement pursuant to
which Western shall acquire Wien or a business
combination shall otherwise be accomplished
between Western and Wien .
The letter of intent indicates that in connection
with the acquisition by Western of Wien, 5,000,000
shares of a new series of preferred stock of
Western or the surviving corporation (the "Pre-
ferred Stock") will be issued to Eagle or its share-
holders. The Preferred Stock will be convertible
into 12,500,000 shares of common stock and will
be substantially equivalent to the outstanding
Western Series A Preferred Stock, except that it
will have voting rights equivalent to those of the
common shares issuable upon conversion and
no dividends will be payable in respect of the
Preferred Stock for the first year after it is issued .
The proposed acquisition will be subject to
approval of Western's shareholders, lenders, and
the Civil Aeronautics Board .
Regulatory Matters
The required filings in the Bergt-AIA-Western-
Wien Acquisition and Control Case have been
made with the Civil Aeronautics Board, and the
board's decision should be announced by the end
of July 1982. Details of this proposed acquisition,
which is subject to approval of Western's share-
holders and lenders, are contained in proxy mate-
rials being mailed to shareholders in connection
with the 1982 Annual Meeting of shareholders,
presently scheduled for June 1982.
The Civil Aeronautics Board has approved Air
Florida System, lnc.'s application to acquire
control of Western . Air Florida had filed its appli-
cation with the CAB in July 1981 and been given
permission to purchase up to 50 percent of
Western's outstanding common stock to be
placed in a voting trust pending the outcome of
the CAB's hearings. The final CAB decision in
the matter was announced January 29, 1982. Air
Florida, which holds approximately 12.6 percent
of Western's common stock, has not announced
its intentions.
Western's planned merger with Continental
Air Lines, Inc. was thwarted by the successful
takeover of that carrier by Texas International.
7
Western withdrew from the merger agreement in
September 1981 .
With the suspension of its services to Great
Britain in late 1981 and to Nassau, the Bahamas,
earlier in the year, Western now serves three
countries - the United States, Canada, and Mexico.
In its service to Canada and Mexico, Western is
subject to conditions of bilateral agreements be-
tween these nations and the United States as well
as to policies of each of the governments with
respect to air transportation and pricing.
Service within the United States has been given
increased flexibility since the passage of the Airline
Deregulation Act of 1978. Effective January 1,
1982, Western and other air carriers have author-
ity to fly between any points within the U.S. that
they desire. However, the air traffic controllers
strike has temporarily limited flights at 22 busy
airports in the U.S.
Under terms of the Deregulation Act, the Civil
Aeronautics Board will cease to exist January 1,
1985. Certain of the Board 's functions will be
transferred to other governmental departments,
primarily the Departments of Transportation and
Justice.
Western's Fleet
In Operation* 1984/1985 1985/1986
Owned Leased Delivery Options
DC-10-10 7 3
OC-10-30
727-200 33 14
737-200 10 2
767-20Q 6 6
*As of March 15, 1982.
Western's present fleet is in compliance with fed-
eral noise regulations with the exception of the
two-engine 737s. An undetermined number of
these aircraft will be retrofitted at a cost of approxi-
mately $275,000 each in advance of the 1985
deadline for compliance.
Schedule reductions in 1981 caused Western's
traditionally high level of aircraft utilization to drop.
The 727s, which represent more than half of the
company's available seat miles, flew a daily hourly
average of 7:58, down from 8:23 in 1980, while
DC-10-10 utilization was down to 9:18 from 10:46
in 1980. Average daily hours flown by all aircraft
during 1981 was 7:57, compared with 8:24 the
year before.
Ground Properties and Equipment
Western's general office and principal overhaul
and maintenance base are located at LosAngeles
International Airport. These facilities, including
a DC-10 hangar and a parking structure com-
pleted in 1975, have been built by the company
as improvements on leased land. The lease on
the land and buildings expires in 1993, subject to
the right of the City of Los Angeles to terminate
the lease on March 31 , 1988, or any March 31
thereafter.
The company also leases hangars at Seattle/
Tacoma, San Francisco and Minneapolis/St. Paul ,
as well as terminal faci lities at all airports served ,
plus ticket and administrative offices throughout its
system. A leasehold interest in a hangar at Denver
was transferred to another carrier in March 1982.
Public airports are utilized for flight operations
generally under contractual arrangements with
municipalities or agencies controlling them .
Western's Management
Major changes took place in Western's manage-
ment structure during the latter part of 1981 and
early 1982.
On December 8, 1981 , Neil G. Bergt was elected
chairman and chief executive officer of Western .
Mr. Bergt, 46 , is chairman and sole owner of
Alaska International Industries, Inc., which has
subsidiaries active in construction , energy devel-
opment and international air cargo . He also is
the principal shareholder of Eagle International
Corporation , a privately held corporation that
was formed in November 1981 to acquire Wien Air
Alaska Inc. from Household International, Inc.
Employees
The number of Western employees during 1981
averaged 10,120, down from an average of
10,657 in 1980. Labor unions represent approxi-
mately 92 percent of Western's employees. These
unions include the Air Line Pilots Association ,
Air Transport Employees, 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 Contract
Employees Open for
1-1-82 Union Amendment
Mechanics & Related
Employees and Stock
Clerks 1,810 IBT 1-1-83
Pilots 1,27 1 ALPA 5-1-84
Flight Attendants 1,677 AFA 1 2-31 -82
Agent & Clerical -
U.S. 3,740 ATE 7-1 -82
Canada 110 BRAC 7-1-82
Mexico 212 SNTA 1-18-83
Flight Superintendents 21 TWU 10-3 1-83
Ground School Instructors 30 IBT 1-1-83
Legal Proceedings
Western and other airlines are parties to numerous
actions in state courts wherein owners of property
located in the vicinity of major airports, primarily
Los Angeles International Airport, are seeking to
enjoin certain aircraft operations at the airport
and/or to recover damages because of aircraft
noise and engine emissions. Most of these cases
have been brought 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 indemnifica-
tion . The aggregate amount of damages sought
in cases against the city has been reported by the
city to be in excess of $57 million. 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,
O'Melveny & Myers of Los Angeles, believe that
the damages claimed are not a real istic 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 , which also represents most of
the other airlines, is of the opinion , based on the
current state of the law, that the airlines have sub-
stantial defenses to the imposition of any liability.
Moreover, in each case to date in which the issue
of the airlines' duty to indemnify the airport pro-
prietor has been tried , the airlines have obtained
favorable rulings. However, all the issues of law
involved in these matters have not been finally
settled, and , pending further judicial clarification ,
the relative rights and liabilities among such
owners of adjacent areas, the airport operators,
8
the air carriers and the federal, state, and local
governments are not entirely clear. Unfavorable
decisions against Western in these actions could
have a materially adverse effect on the company.
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. In light of
this litigation , operators of certain airports, includ-
ing those at Los Angeles, Orange County, San
Diego, Calif. , and Washington , D.C.'s National,
have imposed or are considering 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 specified noise standards. In the case of
Orange County, the local board of supervisors
adopted an airport access plan for John Wayne
Airport which would have the effect of denying
Western access to that airport. Implementation of
the plan was enjoined by a Federal District Court
and that decision presently is on appeal . Generally
speaking , enforcement of such restrictions at a
major airport served by Western could have a
materially adverse effect upon its operations.
A number of actions have been filed in both
federal and state courts against Western and other
defendants seeking damages for death or injury
suffered in the October 31 , 1979, crash of a
Western aircraft at the Mexico City airport. Western
has ample insurance coverage for this type of
accident, although insurance may not cover liabil-
ity for punitive damages which are sought in sev-
eral of the actions premised on bodily injury. Most
of the claims arising from the accident have been
settled , and Western does not believe that such
claims for punitive damages will result in any
material liability to Western .
Western is also involved in various other liti-
gation , including cases alleging discrimination
(including age discrimination) in employment
practices. In one such action involving the ability
of Western pilots to continue after age 60 as
second officers, a judgment was entered during
1981 directing the company to allow three pilots
to continue working as second officers after
age 60 and awarding those pilots back pay and
attorneys fees. That case presently is on appeal ,
and at least one other similar action has been
filed . Western does not believe such claims will
result in any material liability to Western .
9
(In millions except per share amou nts and other items indicated by*)
Summary of Operations
Operating Revenues:
Passenger . . . . . ........ .
Carg o, charter, and other .
Total operating revenues .
Operating Expenses:
Wages, salaries, and em ployee benefits . .
Fuel.
Othera .
Total operating expenses .
Operating income (loss) ..
Interest expense, net . . ...... .
Other income, net
Earnings (loss) before income taxes and cum ulative effect
of changes in accounting princi ples .
Income taxes .
Ea rning s (loss) before cumulative effect of changes in accounting principles .
Cumu lative effect of changes in accounting principles .
Net earnings (loss) ... . .. .... .
Preferred stock dividends .
Net earn ings (loss) available for common stock
Earn ings (Loss) per Com mon Share:
Primary:
Before cumulative effect of changes in accounting principles .
Net earnings (loss) .
Fu lly diluted :
Before cumulative effect of changes in accounting principles .
Net earn ings (loss) . . ... ... ..... .... ......... .
Number of Shares Used to Com pute Earni ngs (Loss) per Share:
Primary . . ............................. .. . .
Fully diluted. . ........ . . . . . . .. ..... . ........ . ....... . .
Other Financial Data
Cash dividends paid per share of com mon stock .
Total assets ........... ........ . ........... . . . .. .. ...... .
Property and equipment-net .
Long-term obligations .
Shareholders' eq uity ........ .
Operations
Ai rplanes operated at end of year* .
Passengers carried .
Available seat miles . . ............ .
Revenue passenger miles . . . . . . . . . . . . . . . . . . ............ .
Passenger load factor - actual (%)* ......... .. ..... . ..... .. .... .
- breakeven point (%)* ...................... . .
- profit marg in (point difference)* . . ....... .
Average revenue per passenger mile* . . .... .. ..... . ..... .. ....... . . .
Average length in miles per passenger trip* . . ...... .
Operati ng expense per available seat mile* . . .. . . . ..... .. . .... ... .
Cargo revenue ton miles ... ... .......... ... ..... ... .... . . .
Average number of employees* .
(in millions of dollars except per share amounts)
1981
$ 949.6
110.2
1,059.8
403.4
326.6
395.8
1,125.8
(66.0)
(45.0)
18.2
(92.8)
(19.4)
(73.4)
(73.4)
2.4
$ (75.8)
$ (5.81)
$ (5.81)
$ (5.81)
$ (5.81)
$
13.0
13.0
$ 834.6
$ 662.4
$ 248.5
$ 121.7
70
8.4
14,495.8
8,547.9
59.0
65.8
(6.8)
$ .1113
1,017
$ .0777
151.3
10,120
1980
887.9
107.8
995.7
384.2
296.4
360.9
1,041 .5
(45.8)
(38.5)
35.1
(49.2)
(19.6)
(29.6)
(29.6)
2.4
(32.0)
(2.46)
(2.46)
(2.46)
(2.46)
13.0
13.0
0.25
917.0
718.8
435.1
197.3
71
9.1
15,515.6
8,832.1
56.9
62.0
(5.1)
.1010
965
.0671
163.2
10,657
(a) C hanges in the estimated useful lives of certain aircraft were implemented in January 1978 and October 1976. These
changes increased net income in 1978 and 1977 by approximately $1 .5, or $0.12 per share (primary) , and $2.4 , or
$0.19 per share (primary) , respective ly.
10
1979
827.7
104.4
932.1
356.6
225.7
331 .6
913.9
18.2
(24.9)
46.1
39.4
(2.1)
41.5
41.5
2.4
39.1
2.99
2.99
2.31
2.31
13.1
18.2
0.40
821 .4
634.6
318.3
232.6
76
11.2
16,630.5
10,494.8
63.1
63.2
(0.1)
.0807
926
.0550
162.0
11 ,256
1978
734.0
100.5
834.5
309.4
154.9
315.3
779.6
54.9
(20.2)
10.7
45.4
6.9
38.5
16.2b
54.7
2.4
52.3
2.82
4.09
2.15
3.04
12.8
18.2
0.40
710.1
519.7
265.7
198.5
78
10.4
16,254.9
10,634.8
65.4
61.1
4.3
.0720
994
.0480
176.3
10,787
1977
614.6
76.9
691 .5
263.1
138.0
260.9
662.0
29.5
(17.5)
7.8
19.8
7.1
12.7
12.7
0.5
12.2
0.96
0.96
0.85
0.85
12.7
15.9
0.40
574.9
427.9
214.5
147.4
77
8.8
14,963.8
8,588.8
57.4
56.1
1.3
.0734
966
.0442
157.3
10,413
1976
544.2
61.0
605.2
226.4
108.3
235 .1
569.8
35.4
( 16 3)
3.1
22 .2
8.2
14.0
14.0
14.0
1.03
1.03
0.92
0.92
13.6
16.1
0.40
515.1
378.6
192.5
112.1
75
8.1
13,450.4
7,833.8
58.2
56 .0
2.2
.0705
963
.0424
135.0
9,799
1975
465 .1
53.9
5'19.0
20 1.7
93. 1
21 1 .1
505.9
13. 1
(14.4)
4.3
3.0
( 1 .5)
4.5
7.2
11. 7
11 .7
0.30
0.77
0.29
0.70
15.2
17.6
0.47
488 .3
367 .6
175.4
133.9
75
7.5
11 ,696.5
7,102.9
60.7
59 .7
1 .0
.0665
942
.0433
108.6
9,357
1974
437.3
51.1
488.4
182.3
71.4
192.5
446.2
42.2
(15.3)
13.8
40.7
17.2
23.5
23.5
23.5
1.55
1.55
1.38
1.38
15.1
17.6
0.39
448.8
350.3
167.4
129.3
72
7.4
11 ,123.5
6,747 .5
60.7
56.1
4.6
.0660
902
.0401
95.2
9,696
1973
376.7
44.6
42 1.3
165.4
44.5
168.3
378.2
43. 1
(13.0)
4.2
34.3
14.4
19.9
19.9
19.9
1.32
1.32
1.18
1 .18
15.1
17.5
0.23
431 .7
316.4
178.0
110.8
74
7.4
11,175.5
6,476.1
57 .9
52.5
5.4
.0593
877
.0338
76.5
9,826
(b) Effective January 1, 1978, Western changed its method of accounting for post-1971 investment credi ts for financial
reporting purposes from the deferral to the flow-through method . The cumulative effect of the change, amounting
to $16.2, has been included in net earnings for 1978.
11
1972
342.9
31 .1
374.0
147.3
40.1
160.8
348.2
25.8
(11 .8)
2.7
16.7
5.9
10.8
10.8
10.8
0.72
0.72
0.66
0.66
15.0
17.5
0.08
372.7
262.1
158.6
94.4
71
6.9
10,300.2
5,995 .9
58.2
54.6
3.6
.0578
865
.0338
76.2
9,383
December 31 , 1981 and 1980
(in thousands of dollars)
ASSETS
Current Assets:
Cash (Note 6) . . . . .. . ..... . . . . . .. .
Temporq.ry investments ..... . . . . . . . . .
Receivables (less allowance for doubtful accounts
of $2,959 - 1981 and $2,379 - 1980) . . .
Receivable from sale of aircraft (Note 11) . . .
Flight equipment expendable parts at average cost
(less allowance for obsolescence of $15,422 - 1981
and $14,062 - 1980) ... .
Prepaid expenses and other current assets .
Total current assets . . .. .... .
Property and Equipment at Cost (Notes 2, 3, and 6):
Flight equipment . . . . . . . . . . . . . . . . . . . ... . .. .
Facilities and ground equipment .. ... .... . . . ... .. . .
Deposits on equipment purchase contracts .. . . .... .. . . .. . . .. . .. .. .
Less allowance for depreciation and amortization .... .
Deferred Charges and Other Assets . .. . .. . .. . .. . .. . .. . . .. . . . . .
See accompanying notes to financial statements.
12
1981
$ 24,057
24,057
89,311
20,212
20,953
12,646
167,179
828,276
139,400
21,508
989,184
326,737
662,447
4,944
$834,570
1980
8,759
25 ,579
34,338
121,859
26,908
8,025
191 ,130
848,111
130,703
37 ,966
1,016,780
297,962
718,818
7,100
917 ,048
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of debt (Note 6) . . .... . ........... ... .... .
Current portion of capital leases (Note 2) . . ............. . .. .
Notes payable (Note 6) . . . . ..... . ..... . .... .
Long-term debt classified as current (Note 6) ..... . .... . .... . . .
Accounts payable .
Airline traffic liability . . . . . ....... . . .
Salaries, wages and vacation benefits payable . . . . . . . . ....... .
Accrued liabilities . . . . . .. . ...... .
Total current liabilities . .......... .
Long-term Obligations:
Debt (Note 6) . . . . . .. . . . .
Capital leases (Notes 2 and 6) ..
Deferred Credits and Other Liabilities:
Deferred taxes on income (Note 5). . .... .. ... . .
Deferred gain on sale and lease back of aircraft (Note 11).
Other . . . . . . . . . . . . . . . . . ... .
Shareholders' Equity (Notes 6, 7, and 9):
Preferred stock - authorized 25,000,000 shares
$2.00 Series A Cumulative Convertible
$25.00 stated value per share
Issued 1,196,920 - 1981 and 1,196,940 - 1980 ...
Common stock - authorized 35 ,000,000 shares
$1 .00 par valu_
e per share
Issued 13,043,621 - 1981 and 13,030,915 - 1980 .......... . ...... .
Additional paid-in capital . . . . . . . . . . . . . . . . . . ..... .
Retained earnings . . . . . .............................. .
Commitments and Contingent Liabilities (Notes 2 and 3)
13
1981 1980
$ 26,650
7,962
20,000
153,369
76,504
81 ,006
41 ,838
24,460
431 ,789
149,331
99,184
248,515
11 ,002
9,335
12,265
32,602
29,923
13,044
31 ,062
47,635
121 ,664
$834,570
23,756
7,183
58,965
90,058
43,624
22,947
246,533
353,525
81 ,526
435,051
29,067
9,051
38, 11 8
29,923
13,031
30,963
123,429
197,346
917 ,048
Years ended December 31, 1981 , 1980 and 1979
(in thousands of dollars except per share amounts)
Operating Revenues:
Passenger . . . . . . . . . . . . . . . . . .. ........ . .. .. . .
Cargo . . ..... . .... . . . . . . . . . . . . . . . . . ...... .
Charter and other . . . . . . . . .. . .... .
Operating Expenses:
Wages, salaries, and employee benefits (Note 4) . . ...... .
Fuel .... ........ . ... . ........... . . ........ ... .
Depreciation and amortization ....... ... .
Other . . . . . . . . . . . . . . . . . . . . . . ... . . ... . ..... .
Operating income (loss) . . . .. . . ................ .
Other Income (Expenses):
Interest, principally on long-term obligations ... .. ...... .
Interest capitalized . . . . . . . . . .. . . .... .
Interest income . . . . . . . . . . . ....... .
Gains on disposition of equipment . . . . . ..... .
Settlement with vendor ..
Other, net (Note 11 ) . .... . .... . ... .
Earnings (loss) before income taxes .
Income taxes (Note 5) ..... .
Net earnings (loss) . .. . . .. .
Earnings (Loss) per Common Share (Note 8):
Primary . . . . .. .. . . . . ...... . .. . . .
Fully diluted .. ..... .
See accom panying notes to financial statements.
14
1981
$ 949,576
62,983
47,282
1,059,841
403,428
326,606
63,632
332,129
1,125,795
(65,954)
(49,836)
4,805
4,641
16,869
(3,333)
(26,854)
(92,808)
(19,408)
$ (73,400)
$
$
(5.81)
(5.81)
1980
887,901
63,82 1
44,033
995,755
384,201
296,365
61 ,310
299,640
1,041,516
(45,76 1)
(43,507)
4,940
3,168
32 ,099
(178)
(3,47 8)
(49,239)
(19,607)
(29 ,632)
(2.46)
(2 .46)
1979
827 ,675
61,209
43,235
932, 11 9
356,62 1
225,682
50,058
28 1,522
913,883
18,236
(29,600)
4,706
4,957
31 ,332
10,000
(192)
21,203
39,439
(2,101)
41 ,540
2.99
2.31
Years ended December 31 , 1981, 1980 and 1979
(in thousand s of dollars)
Sources of Working Capital:
Earnings (loss) . . . . . . . . . . . ........ .
Add (Deduct) Items Which did not Affect Working Capital:
Depreciation and amortization . . . . . .. . .. .
Deferred income taxes . . .. . ..... .
Gains on disposition of equipment .
Other . . . . . .. . ...... .
Total provided (used) by operations . . . ..... .
Reimbursements of deposits and capital expenditures
upon acquisition of aircraft. . . .. . .. .
Proceeds from disposition of equipment .. .
Proceeds from issuance of long-term obligations ..
Other, net . . . . . . . . . . . . . . . . . . . ....... .
Total sources ....... .
Applications of Working Capital:
Purchase of and deposits on property and equipment .
Reduction of long-term obligations including transfers
to current liabilities .
Long-term debt classified as current (Note 6) ..
Cash dividends. . . .... ..... .
Total applications ........ .
Decrease in working capital .
Summary of Increases (Decreases) in Working Capital:
Cash and temporary investments ........ .. ........ . . .
Receivables - trade . . . .................... .
- from sale of aircraft ......... . ... . .. . ... .
Expendable parts and prepaid expenses . . ....... .
Current liabilities - long-term debt classified as current .
- other . . ......... .
Decrease in working capital . .... . . . .. .. .. .. .
See accompanying notes to financial statements.
15
1981
$ (73,400)
61,780
(18,617)
(16,869)
(4,005)
(51 ,111)
15,457
61 ,208
73,212
4,000
102,766
49,810
106,400
153,369
2,394
311 ,973
$(209,207)
$ (10,281)
(32,548)
20,212
(1 ,334)
(153,369)
(31 ,887)
$(209,207)
1980
(29,632)
60,146
(21 ,2 19)
(32 ,099)
(3,557)
(26,361)
10,746
50,120
198,350
172
233,027
171 ,123
81 ,667
5,652
258,442
(25,415)
(15,975)
16,568
9,143
(35 ,151 )
(25,415)
1979
41 ,540
49,581
(4,788)
(31 ,332)
(4,706)
50,295
10,563
50,950
104,941
(5,097)
211 ,652
182,752
52 ,402
7,604
242,758
(3 1,106)
(2 1,147)
13,252
3,718
(26,929)
(3 1,106)
Years ended December 31 , 1981, 1980 and 1979
(In thousands of dollars)
Preferred Stock Common Additional Total
$25.00 Stated Stock $1.00 Paid-in Retained Shareholders'
Value Par Value Capital Earnings Eq uity
Balance at January 1, 1979 . ....... $29,923 13,010 30,792 124,777 198,502
Exercise of stock options . . 17 132 149
Conversion of debentures . 3 35 38
Net earnings ... ......... 41 ,540 41 ,540
Cash Dividends:
Preferred stock . . .. . (2, 394) (2 ,394)
Common stock ...... ........ (5,210) (5 ,210)
Balance at December 31 , 1979 ... 29,923 13,030 30,959 158,713 232,625
Conversion of debentures . 4 5
Net loss .. .. .. (29,632) (29,632)
Cash Dividends:
Preferred stock. (2,394) (2 ,394)
Common stock . (3,258) (3,258)
Balance at December 31 , 1980 ..... 29,923 13,031 30,963 123,429 197,346
Exercise of stock options . .
. . .
. . .
12 90 102
Conversion of debentures ... 1 9 10
Net loss ...... . ....... (73,400) (73,400)
Cash Dividends:
Preferred stock (Note 9) . (2,394) (2 ,394)
Balance at December 31 , 1981
(Notes 6, 7, and 9) . ... . .. . $29,923 13,044 31 ,062 47 ,635 121 ,664
See accompanying notes to financial statements.
16
(In thousands of dollars except per share amounts)
Note 1. Summary of Significant Accounting Policies
Property and Equipment
Owned property and equipment, exclusive of residual values, are depreciated over the estimated useful lives by the
straight-li ne method . Assets recorded under capital leases are depreciated over the life of the lease by the straight-line
method . The estimated useful lives and residual values of owned aircraft are as follows:
Estimated Residual
Useful Life Value
DC-10 . . . . . . . . . . . . . . . . . . . . . . . . . . 16 years 10%
727 .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 years 15%
737 . 14 years 15%
Estimated useful lives of ground equipment range from four to ten years. Bu ildings and improvements on leased
property are depreciated over the life of the lease. Depreciation expense for assets recorded under capital leases is
included in depreciation and amortization expense
Interest Capitalized
Certain interest costs, primarily related to deposits on aircraft purchase contracts, are capitalized and amortized
over the lives of the related assets.
Investment Credits
Investment cred its are accounted for by the flow-through method .
Obsolescence of Expendable Parts
An allowance for obsolescence of expendable parts is accrued over the estimated useful lives of the related 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 billed by other carriers for transportation provided by them .
Note 2. Lease Commitments
Western leases certain flight equipment and facilities and ground equipment. Lease terms for flight equipment are 11
to 15 years for 727 aircraft, 4 years for737 aircraft, and 15 to 18 years for DC-10 aircraft. Lease terms for facilities
and ground equipment range up to 29 years. Interest expense is accrued on the basis of the outstanding obligations
under capital leases. Equipment under capital leases included in the balance sheets at December 31 , 1981
and 1980, follows:
1981 1980
Flight equipment . $137,283 113,2 19
Ground equipment ................................... . 2,006 2,006
139,289 115,225
Less allowance for depreciation . 57,501 49,028
$ 81 ,788 66,197
At December 31 , 1981 , minimum lease payments under leases expiring after December 31 , 1982, were as follows:
Capital Operating
Leases Leases
1982 . $ 20,451 22,619
1983 .. . ....... . 20,399 21 ,429
1984 .. 19,969 19,588
1985 . 15,784 16,223
1986 . 15,790 12,784
Thereafter . 100,113 106,688
Total minimum lease payments . 192,506 199,331
Less: Amount representing interest 85,360
Present value of obligations - capital leases 107,146
Less: Current portion of capital leases 7,962
Long-term obligations - capital leases . $ 99,184
See the second and th ird paragraphs of Note 6 regarding defaults and potential payment acceleration.
Rental expense for operating leases amounted to $25,967, $20,050, and $17,384 in 1981 , 1980, and 1979, respectively.
Note 3. Commitments and Contingent Liabilities
At December 31 , 1981 , Western had on firm order flight equipment which included six 767-200 aircraft scheduled
for delivery in 1984 and 1985 and three 767 engines scheduled for delivery in 1984. Western recorded advance
deposits on these orders which amounted to $15,799 as of December 31 , 1981 . The balance of the purchase price
on delivery will be approximately $288,700.
17
Outstanding commitments for flight equipment modificati on and spare parts amounted to approximately $3,300
and for facilities and ground equipment amounted to approximately $1,100 as of December 31, 1981.
Western has options to purchase six 767-200 aircraft for delivery in 1985 and 1986 . Deposits on these options
amounted to $1,125 at December 31, 1981.
For information regarding the status of legal proceedings at December 31, 1981, see " Legal Proceedings" on
pages 8 and 9 of this report.
Note 4. Retirement Plans
Western has retirement plans, including a union-sponsored plan, which cover substantially all employees. Western's
contributions to the Company-sponsored plans, together with the participants' required contributions, are sufficient
to fund current service costs annually and prior service costs over ten to twenty years. Actuarial gains and losses are
amortized over ten year periods.
Western participates in a collectively bargained multi-employer pension plan and is therefore subject to the provisions
of the Multi-employer Pension Plan Amendments Act of 1980. Under this complex law the union plan Board of
Trustees, as sponsor, is required to obtain an actuarial valuation of the present value of vested and nonvested
accumulated plan benefits. Western has been advised that its share of the liability for unfunded vested benefits in thi s
plan is not available. According ly, the table that follows excludes data applicable to this multi-employer pension plan.
A comparison of accumulated plan benefits and plan net assets for the Company-sponso red defined benefit
plans follows:
Jan uary 1,
1981 1980 1979
Actuarial Present Value of Accumulated Plan Benefits:
Vested . $140,331 137,246 114,597
Nonvested . . . . '
. . . . 11 ,984 9,876 9,015
$152,315 147,122 123,612
Net assets available for benefits . $163,995 139,000 111 ,559
The weighted average assumed rate of return used in determining the actuarial present value of accumulated plan
benefits was six percent for all years.
The cost of the retirement plans, including the union-sponsored plan , charged to operating expense, was $34,711 ,
$34 ,193 and $30,304 for 1981 , 1980 and 1979, respectively, which included amortization of prior service costs over
periods ranging from ten to twenty years for certain of the plans.
Note 5. Income Taxes
Income taxes are summarized as follows:
1981 1980 1979
Current
Federal:
Provision .
i ,
Ii I I I I I 0 0 I
(3,647) 18,901
Investment credits applied . . . . . . . .... 5,75 1 (17,792)
2, 104* 1,109*
State. (791) (492) 1,578
Deferred :
Provision ... . . . . . . . . . . (12,974) (5 ,073) (5,597)
Operating loss carryforward recognized . (5,091) (15 ,533)
Investment Credits:
Applied . . . . . . . . . . .
. . . . . . . . . . . . . .
5,697 (16,420)
Transferred to current . ... . .. . . . (5,751) 17,792
(18,065) (20,660) (4,225)
Amortization of deferred investment credits . (552) (559) (563)
$ (19,408) (19,607) (2,101)
*The Tax Reform Act of 1976 provided for 90% application of unapplied investment credits against Federal income tax liabilities for
1979. This application was reduced to 80% for 1980. Under the Revenue Act of 1978 the application remains at 80% in 1981 and
retu rns to 90% for 1982 and beyond
Deferred income taxes arise from timing differences between fi nancial and tax reporting. The effects of these differ-
ences on income taxes are as follows:
1981 1980 1979
Depreciation and amortization . . ... . .. . . . $ (13,409) (3,454) (4,825)
Sale of tax benefits . . . ..... . 2,560
Capital leases . (1,754) (1 ,084) ( 114)
Interest capitalized . 1,1 83 1,140 1,903
Employee benefits . (847) (718) (1,626)
Other . (707) (957) (935)
$ (12,974) (5 ,073) (5,597)
18
Reconciliations of income taxes at the United States statutory rate lo the provision for incomo taxos follow:
1981 1
980 1
97
Income taxes at tho United States statutory rate . $ (42,692) (22,650) 18, 14 2
Increases (reductions) in laxes resulting from :
!feet of operating loss carryforward for which no tax credi l
may be recogni7ed .
Amortization of dGferred investment credits.
Investment cred its recogn ized on flow through method .
State income taxes net of federal income tax benefit ..
Capi tal gains .
Other .
Income taxes .
24,490
(552)
(427)
(227)
$ (19,408)
(559) (563)
5,697 (16,420)
(266) 85 2
(3, 800)
( 1 ,829) (3 12)
( 19,607) (2, 101 )
A net operating loss carryforward of $98,400 has not been utilized on tax returns. For income tax purposes, $34,100
expires in 1995 and $64,300 expires in 1996. For financial statement purposes, $53,200 of the carryforward has not
been recognized and expires in 1996.
Investment credits available to reduce future years' Federal income tax liability for financial and tax purposes amount
to $23,000 at December 31 , 1981 . For income tax purposes, $5,800 expires in 1994, $16,200 expires in 1995, and
$1,000 expires in 1996.
In November 1981 tax benefits were sold under the provisions of the Economic Recovery Tax Act of 1981 . The
proceeds from this sale of $5,565 are included in Other income (expenses) on the statements of operations.
Note 6. Debt
At December 31 , 1981 and 1980 long-term debt included :
9.55% equipment trust certificates due May 1, 1993, with semi-annual
principal payments of $3,458 . . ... .. ... .
10% equipment trust certificates due April 1, 1994, with quarterly
principal payments of $1 ,000 .
Floating-rate equipment trust certificates due June 30, 1995, with
semi-annual principal payments of $2 ,609 starting June 30, 1984 .
13.29% installment notes due May 1, 1995, with semi-annual principal
payments of $1", 1 00 .
Revolving credit notes ..
5% installment notes due September 1, 1981 .
6%% installment notes due September 1, 1984, with annual principal
payments of $2,000 on September 1 which will increase to $7,000 in 1982 .
7% installment notes due May 4, 1986, with semi-annual principal payments of
$352 starting November 4, 1981 . . ....... .. ..... .
Notes payable to manufacturers,% above prime and 8%, payable in
varying installments to 1985.
5% convertible subordinated debentures due February 1, 1993, with annual
sinking fund payments of $1 ,500 starting in 1983 .
10% subordinated sinking fund notes due April 15, 1984, with annual sinking
fund payments of $2,300 .
Less: Current portion .
Long term amounts classified as current ..
1981 1980
$ 79,525 86,440
48,992 52,991
60,000 60,000
29,700 31 ,900
27,000 50,000
4,000
21 ,000 23,000
3,165 2,869
27,166 29,844
22,552 23,562
10,250 12,675
329,350 377 ,281
(26,650) (23,756)
(153,369)
$ 149,331 353,525
The revolving credit notes represent borrowings under the 1978 Amended and Restated Bank Loan Agreement.
This line of credit was reduced to $27,000 in 1981 and extends to June 30, 1982, at which date it may be replaced
by term notes. The term notes are due June 30, 1990, with quarterly payments starting September 30, 1982. The
interest rate at December 31 , 1981 , was 105% of prime commercial rate on $15,000 (domestic loans) and 13.2% on
$12,000 (Eurodollar loans). Although the 1978 Bank Loan Agreement does not require compensating balances,
Western had on deposit with its banks until November 1981 non-interest bearing certificates of deposit of approxi-
mately $2,500. Since November 1981 , no compensating balances have been maintained .
Western's various debt agreements contain requirements pertaining to working capital , liquid assets, and net
worth levels, as well as restrictions on amounts of cash dividends and creation of rental liabilities and additional
debt. At December 31, 1981 , Western was not in compliance with some of these requirements. This non-compliance
resulted in technical non-compliance with certain other debt agreements. Western may not resume the payment
of cash dividends on its common stock, which were discontinued in 1980, nor may it pay dividends on its preferred
stock, until certain of the financial tests referred to above have been met.
The agreements with which Western was not in compliance at December 31 , 1981 , include provisions whereby
the lenders may, at their option , accelerate the scheduled maturities. Western has not obtained waivers of these defaults
for a period in excess of one year. Therefore, a portion of the long-term debt has been classified as current obligations.
All of Western's long-term obligations, including all capital leases, contain provisions by which the lenders may
accelerate scheduled maturities if Western fails to make any required payment on its obligations. As of December
31 , 1981 , and March 15, 1982, Western had met all required payments of its obligations.
19
In January 1982 , Western entered into ag reements with its revolving c redit note lenders and certain insurance
companies to create short-term loans of up to $30,000. As of March 15, 1982 , the entire $30,000 had been received
by Western . This loan is due no later than April 30, 1982 . The interest rate on fund s borrowed is equal to 105% of
the agent bank's prime commercial rate. As part of the new short-term loan ag reement, the interest rate on previously
issued 6%% installment notes was increased to 105% of prime while any part of the new short-term notes is out-
standing . The commitment fee under the new short-term loans is % per annum on the average daily unused
portion of the $30,000 .
As part of the January 1982 short-term loan, Western was granted waivers on its existing defaults until June 10,
1982. Also granted was forbea rance fro m acceleration and collection of previously unsecured debt. In connection
with these arrangements, Western provided security on existing and new debt in th e form of a chattel m ortgage.
The chattel mortg age grants a first priority security interest in 29 aircraft and 77 aircraft engines to th e previously
unsecured lenders. The net book value of the aircraft and engines encumbered was $141,467 at December 31, 1981.
The amount of collateral must be maintained at specified levels until substantially all of Western's debt has been
repaid . Western anticipates that following the lenders' evaluation in March 1982 of an appraisal of the existing collateral,
additional collateral may be required .
Equipment trust certificates and 13.29% installment notes outstanding at December 31, 1981 , are secured by
aircraft and engines with a net book value of $255 ,310 at December 31, 1981. In addition, two holders of equipment
tru st certificates who are also participants in the new short-term loa ns referred to above are also collateralized by
the c hattel mortgage as described above.
The following schedu le shows the amount of long-term debt due in each of the five following calendar years,
excluding such amounts, if any, which may be due on acceleration , as desc ribed above:
1982 . . ..... $26,650 1984 . . . . $50,977 1986 . . . . . . . . . . . . . $23, 56 1
1983 . 29,618 1985 . 31,771
During September 1981 , Western entered into agreements with two foreign banks for lines of credit up to $10,000
eac h. In connection with these credit lines, $20,000 was outstanding under demand notes at December 31, 198 1.
The interest rate on these demand notes, outstanding at December 31, ranged from 17.8% to 13.2% during the out-
standing period in 1981. These demand notes also became secured by the collateralization of loans referred to above.
Note 7. Stock Options
Western has a non-qualified stock option plan adopted in 1974 for officers and key personnel. This plan-provides for
options to purc hase a maximum of 1,030 ,000 shares of Western's common stock at prices not less than the fair
market value of the stock at date of grant. The options are exercisable in equal annual increments over a five-year
period The options expire ten years after the date of grant. A summary of activity in the plan follows:
Options granted and outstanding at December 31 , 1978 .
Options granted . . ............... .
Options exercised . . . . . . . . . . . . . . . . .. . .... .
Options cancelled or expired .......... . ..... . ....... . .. .
Options granted and outstanding at December 31 , 1979 .
Options granted ...
Options cancelled or expired ..
Options granted and outstanding at December 31 , 1980 .
Options granted . . ....... .
Options exercised . . .. . .... . .. .
Options cancelled or expi red ........ .
Options granted and outstanding at December 31 , 1981 .
Options Exercisable at:
December 31, 1981 ...
December 31 , 1980 .
.. .. . . . .
Number of Shares Average Price
790,835 $8.56
71 ,000 8.62
(17,630) 8.47
(6,550) 9.12
837,655 8.56
21 ,500 7.27
(12,500) 8.65
846,655 8.53
12,500 9.29
(12,050) 8.46
(84,430) 8.49
762,675 $8.55
697,319 $8.57
683,493 $8.63
At December 31, 1981 , 200 ,21 0 shares (128 ,280 shares at December 31 , 1980) were reserved for the issuance of
future grants.
Note 8. Earnings (Loss) per Common Share
Earnings (loss) per common share is calculated as follows:
Adjustment of Net Earnings (Loss)
Primary:
Net earnings (loss) ..
Preferred stock cash dividends .
Net earnings (loss) available for common stock .
Fully Diluted:
Net earni ngs (loss).
Preferred stock cash dividends
Reduction in interest expense, net of income
taxes, fo r the assumed conversion of 5%
convertible subordinated debentures
Adjusted net earnings (loss) assuming full dilution
20
1981
$(73,400)
(2,394)
(75,794)
$(73,400)
(2,394)
*
$(75,794)
1980
(29,632)
(2,394)
(32 ,026)
(29,632)
(2,394)
(32,026)
1979
41 ,540
(2,394)
39,146
41 ,540
653
42, 193
1981 1980 1979
Adjustment of Shares Outstanding (in thousands)
Primary:
Weighted average shares outstanding ....... 13,037 13,031 13,026
Assumed exercise of stock options . * * 58
Total average common shares for primary . 13,037 13,031 13,084
Fully Diluted :
Weighted average shares outstanding . 13,037 13,031 13,026
Assumed conversion of subordinated debentures . * 2,073
Assumed conversion of preferred stock .. * 2,992
Assumed exercise of stock options .. * * 146
Total average common shares assuming full dilution . 13,037 13,031 18,237
Earnings (Loss) per Common Share:
Primary . $ (5.81) (2.46) 2.99
Fully diluted . . . . . . . . . $ (5.81) (2.46) 2.31
*The exercise of stock options and conversion of the convertible subordinated debentures and/or the preferred stock into common
shares has not been assumed , since the effect of such an assumption would be anti-dilutive.
Note 9. Preferred Stock
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, and may be redeemed in whole or in
part at any time at the option of Western. The redemption price of $26 .20 at December 31 , 1981 , decreases peri-
odically until 1987 after which it remains at $25.00 per share. The preference on !iquidation is at the stated value
plus all accrued and unpaid dividends.
On January 29, 1982, the Board of Directors voted to defer payment of the preferred cash dividend of $0.50
per share payable at the end of March 1982 on the 1,196,920 shares of $2 Series A Cumulative Convertible
Preferred Stock outstanding .
Note 10. Regulatory Matters
Western has announced its intention to acquire Wien Air Alaska, Inc., an Alaska regional carrier, and merge it into the
Western system. The Civil Aeronautics Board has approved Air Florida System , lnc'.s, application to acquire control
of Western . Air Florida, which holds approximately 12.6 percent of Western's common stock, has not announced its
intentions. Western's planned merger with Continental Air Lines, Inc., was thwarted by the successful takeover of
that carrier by Texas International. Western withdrew from the merger agreement in September 1981. For additional
information see the first four paragraphs under Regulatory Matters on Pages 6 and 7 of this report.
Note 11. Other Matters
In May 1981 , Western sold two DC-10-10 aircraft to International Air Leases, Inc. for $2,000 of cash and $28,000
of 12% notes which are payable in monthly principal and interest installments of $480 over 50 months with the balance
payable in 1985. In December 1981 , Western decided to sell the notes receivable and has reached agreement in
principle to sell these notes with recourse. This transaction is expected to be consummated by April 30, 1982. During
the fourth quarter of 1981 , the notes were written down by $6,557 to their estimated net realizable value.
In December 1981 , Western sold two 737 aircraft for $11 ,000 to Batch-Air Leasing , Inc., and then leased back the
aircraft from International Air Leases, Inc. , under a four-year operating lease with monthly rental payments of $130
per aircraft. The gain on the sale of the aircraft is being recognized on a straight-line basis over the lease term .
The owner of International Air Leases, Inc., and Batch-Air Leasing , Inc., holds approximately 7% of the outstanding
common stock of Western .
In the opinion of Western's management, the transactions described above were at terms comparable to those
which would have been negotiated with unrelated parties.
Note 12. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data (unaudited) for 1981 and 1980 is as follows:
1981
Operating revenues ...
Operating (loss)
Net (loss) .
Net (Loss) per Common Share:
Primary
1980
Operating revenues . .
Operating income (loss) .
Net (loss) .
Net (Loss) per Common Share:
March 31
$262,159
(3,497)
( 1,692)
$ (0.18)
$232,153
(23,006)
(8,868)
Three Months Ended
June 30
270,844
(15,003)
(8,399)
(0.69)
237,707
(20, 1 77)
(5,379)
September 30
293,621
(3,753)
(7,255)
(0.60)
273,720
7,658
(6,397)
December 31
233,217
(43,701 )
(56,054)
( 4 34)
252, 175
(10,236)
(8,988)
Primary $ (0.72) (0 46) (0 54) (0.74)
Western revised its procedures for recording commission expense in the first quarter of 1981 to more closely identify
the expense with the period in which the related revenue is recognized . The effect of this change on the first through
the fourth quarters of 1981 was to reduce (increase) the net loss by $3,244 ($0.25 per share) , $504 ($0.04 per
share) , $(1 ,040) ($0.08 per share) , and $630 ($0.05 per share) .
21
The quarterly inco me tax benefits fo r the first, second , and third quarters of 1981 are based on the statutory rate.
The tax benefit available fo r the fourth quarter 1981 was limited fo r financial reporting purposes to approximately
5% of the pretax accounting loss because the tax benefits of the remaining net operating loss could not be recog ni7ed
currently. In the th ird quarter of 1980, previously recorded investment credits of $12,507 ($0.96 per share) were
reversed since they could not be utilized for fin ancial reporting purposes. No investm ent c red its were recog nized
during 1981.
Note 13. Description of Impact of Inflation (Unaudited)
Statem ent of Financial Acco unting Standard s No. 33 (SFAS No. 33) prescribes two supplemen tary incom e compu-
tations for estim ating the im pact of inflatio n. These co m putations estimate the effects of general inflation (constant
dollars) and the effects of changes in specific prices (current cost).
SFAS No. 33 defines co nstant dollar accounting as a method of repo rting fin ancial statem ent elements in dollars
each of wh ich have the same general purchasing power. Current cost accounting is defin ed as a m ethod of
measuring and reporting assets and expenses associated with the use or sale of assets at their current cost or lower
recoverable amo unt at the balance sheet date o r at the date of use o r sale. Both m ethods involve the use of
assumptio ns and estim ates. Therefore, th e resulting m easurem ents sho uld be viewed as esti mates rather than as
precise ind icators of the effects of inflation.
The amounts reported in the primary fin ancial statements have been adjusted fo r depreciation and am ortization
expense. Revenues and all other operating expenses are co nsidered to reflect the average price levels and have not
been adjusted.,Further, there have been no adjustm ents made to provisions for inco m e taxes.
Co nstant dollar values were determined by restating histo rica l costs, accumu lated depreciation and am ortization,
and depreciation expense of property and equipment into average 1981 dollars using the Consumer Price Index for
all urban consumers (C PI-U) published by the Bureau of Labor Statistics. Current costs for aircraft were determi ned
by using the direct pricing method. Current costs for spare engines and ca pital rotable spares and assem blies
were computed based on the ratio by which the c urrent cost of aircraft fleets exceeds the histo ric cost of such fleets.
Current cost for other prope rty and eq uipment were determined by indexation using the C PI -U.
An estimate of the net (loss) adjusted for changing prices for the year ended December 31, 1981, follows:
Net (loss) as repo rted in the statement of operations $ (73,400)
Adjustment to Restate Costs for the Effect of General Inflation :
Depreciation and amortization expense (32,706)
Net (loss) adjusted for general inflation .
Ad justment to Reflect the Difference Between General Inflation and Changes in Specific Prices (current costs):
Depreciation and amortization expense .
Net (loss) adjusted for changes in specific prices .
Gain from decli ne in purchasing power of net amounts owed .
Increase in specific prices (current cost) of properties and equipment held during the year* .
Effect of increase in general price level .
Excess of increase in specific prices over increase in the general price level .
(106,106)
(26,582)
$(132,688)
$ 41,716
$186,912
(108,810)
$ 78 ,102
*At December 31 , 1981 current cost of properties and equipment, net of accumulated depreciation and amortization , was $1 ,189,243.
A five-yea r comparison indicating the effect of adjusting historical revenues, purchasing power gains or losses on
net m o netary items, cash dividends, and common stock market prices to dollar am ounts expressed in terms of
average 1981 dollars as measured by the C PI-U follows:
Year Ended December 31 ,
1981 1980 1979 1978 1977
Operating revenues . $1 ,059,841 1,095 ,330 1,165,149 1,159,973 1,037 ,196
Historical Cost Information Adjusted for
General Inflation
Net earnings (loss). (106,106) (62, 434) 26,162
Net earnings (loss) per common share . $ (8.32) ( 4.99) 1.77
Net assets at year-end . 384,364 483 ,525 524 ,169
Current Cost Information
Net earnings (loss) . (132,688) (78, 1.20) 13,904
Net earnings (loss) per com mon share . $ (10.36) (619) .84
Excess of increase in specific prices over
increase in the general price level 78,102 125,487 7,157
Net assets at year-end . 654,403 739 ,133 670 ,431
Gain from decline in purchasing power of
net amounts owed .. 41 ,716 51,532 45 ,947
Cash dividends declared per common share . $ .27 .50 .56 .60
Market price per common share at year-end . $ 4.87 10 04 12.97 11.47 11.44
Average Consumer Price Index . 272.4 246.8. 217.4 195.4 181 .5
Note 14. Continued Operations
Early in 1982, Western began to implem ent a new strateg ic plan designed to return the company to profitability
and to streng then its financial co nditio n. This plan includes, am ong other factors: (1) establ ishi ng a hub and spoke
system with operations centered at Salt Lake City, (2) introd ucing service to nine new cities and increasing service
to a number of cities presently on Western's system as a means to more fully uti lize the available capacity in Western's
fleet, (3) wage and/o r wo rk rule co ncessions fro m Western's organized labor groups, and ( 4) conti nued cooperation
from Western's lenders.
If this plan is not substantially achieved , Western may not be able to co ntin ue in existence.
22
Peat, Marwick, Mitchell & Co.
The Board of Directors
Western Air Lines, Inc.:
ertificd Public Accountants
555 South Flower Street
Los Angeles, alifornia 90071
We have examined the balance sheets of Western Air Lines, Inc. as of December 31, 1981 and 1980 and the related
statements of operations, shareholders' eq uity and changes in financial position for each of the years in the th ree-year
period ended December 31, 1981. Our examinations were made in accordance with generally accepted audi ting
standard s, and accordingly included such tests of the accounting record s and such other auditing proced ures as we
considered necessary in the circumstances.
As shown in the financial statements, the Company incurred net losses of $73,400,000 and $29,632 ,000 during
the years ended December 31, 1981 and 1980, respectively, and , as of December 31, 1981, certain of the Company's
long-term debt is subject to demand for accelerated payment after June 10, 1982 . These factors, among others, as
discussed in Notes 6 and 14, indicate th at the Company may be unable to continue in existence. The fina ncial statements
do not include any adjustm ents relating to th e recoverability and classification of record ed asset amou nts or to the
amounts and classification of liabilities that might be necessary should th e Com pany be unable to con tinue in existence.
In our opinion, subject to the effects on the 1981 financial statements of such adjustments, if any, as might have
been required had the outcome of the uncertainty abou t the recoverability and classification of recorded asset
amounts and the amounts and classification of liabilities referred to in the preceding paragraph been known , the
aforementioned financial statements presen t fai rly the financial position of Western Air Lines, Inc., at December 31 ,
1981 and 1980 and the results of its operations and the changes in its financial position for each of the years in the
th ree-year period ended Decem ber 31, 1981 , in conform ity with generally accepted accounting principles applied
on a consistent basis.
March 1, 1982, except for the fourth
and fifth paragraphs of Note 6, which
are as of March 15, 1982.
Notice to Stockholders.
A rule adopted by the Civil Aeronautics Board ("CAB") in July 1970, as amended on December 29 , 1972, imposes
obligations on certain stockh olders of air carriers. Any person who owns as of December 31 of any year or subse-
quently acquires.either beneficially or as a trustee, more than 5% of any class of capital stock of an air carrier must
file with the CAB a report containing the information required by Part 245.12 of the CAB's Economic Regulations
on or before April 1 as to the capital stock owned as of December 31 and/or a report containing the information
required by Part 245.13 of the CAB's Economic Regulations within 10 days after acquisition as to the capital stock
acquired, after December 31. Any bank or broke r which holds as trustee more than 5% of any class of capital stock
of an air carrier on the last day of any quarter of a calendar year must file with the CAB within 30 days after the
end of the quarter a report in accordance with the provisions of Part 245.14 of the CAB's Economic Regulations.
Any person req uired to report under either Part 245.12, Part 245 .13 or Part 245 .14 of the CAB's Economic Regula
tions who grants a security interest in more than 5% of any class of capital stock of an air carrier must within 30
days after granting such security interest file with the CAB a report containing the information required in Part
245.15. Any stockholder who believes that he may be required to file such a report may obtain further information
by writing to the Di rector, Bureau of Pricing and Domestic Aviation , Civil Aeronautics Board , Washington , D.C. 204 28.
Form 10-K: Stockholders may obtain free of charge a copy of the company's ann ual report on form 10-K as fi led
with the Securities and Exchange Commission by writing to the Secretary, P.O. Box 92005 , World Way Postal Cen ter,
Los Angeles, California 90009.
23
BOARD OF DIRECTORS
Fred Benninger
President
Tracinda Corporation
Las Vegas, Nevada
Neil G. Bergt
Chairman of the Board and
Chief Executive Officer
Western Air Lines, Inc.
Los Angeles, California
Miguel M. Blasquez
President
Inter-American Commercial
Arbitration Commission
Mexico City, Mexico
DIRECTORS EMERITI
Hugh W. Darling
Attorney-at-Law
Darling, Hall & Rae
Los Angeles, California
Leo H. Dwerlkotte
Las Vegas, Nevada
James D. Garibaldi
Attorney-at-Law
Los Angeles, California
Victor L. Brown
Presiding Bishop
The Church of Jesus Christ
of Latter-day Saints
Salt Lake City, Utah
Gerald Grinstein
Attorney-at-Law
Preston, Thorgrimson , Ellis
and Holman
Seattle, Washington
Walter J. Hickel
Chairman of the Board
Hickel. Investment Company
Anchorage, Alaska
Arthur F. Kelly
Los Angeles, California
Robert 0. Kinsey
Los Angeles, California
Dr. Donald H. Mclaughlin
Chairman of the Board
Homestake Mining Company
San Francisco, California
John H. Myers
Assistant to the President
St . .John's University
St. Paul, Minnesota
Dominic P. Renda
Los Angeles, California
24
Bert T. Kobayashi, Jr.
Attorney-at-Law
Kobayashi , Watanabe, Sugita
& Kawashima
Honolulu, Hawaii
Arthur G. Linkletter
Television Producer and
Broadcaster
Chairman of the Board
Linkletter Productions
Beverly Hills, California
John G. McMillian
Chairman of the Board and
Chief Executive Officer
Northwest Energy Company
Salt Lake City, Utah
Vernon 0. Underwood
Chairman of the Board and
Chief Executive Officer
Young's Market Company
Los Angeles, California
Harry J. Volk
Union Bancorp, Inc.
Los Angeles, California
George S. Suddock
Chairman of the Board
Alaska National Insurance
Company
Anchorage, Alaska
Capt. Roy G. Utter
Pilot
Western Air Lines, Inc.
Los Angeles, California
Robert H. Volk
Chairman/Owner
Martin Aviation , Inc.
Torrance, California
John M. Wallace
Walker Bank & Trust Company
Salt Lake City, Utah
Arthur G. Woodley
Bellevue, Washington
CORPORATE OFFICERS
Neil G. Bergt
Chairman of the Board and
Chief Executive Officer
Robert D. Heath
Senior Vice President -
Administration
Lawrence H. Lee
Senior Vice President -
Service
George M. Sullivan
Senior Vice President -
Alaska Region
Harold Achtziger
Vice President -
Airport Operations
Craig B. Benedetti
Vice President -
Marketing
Anthony Colletti
Vice President -
Maintenance & Engineering
General Offices
Howard L. Culver
Vice President -
Regulatory Affairs
Andre C. Dimitriadis
Vice President - Finance
Thomas J. Greene
Acting Vice President,
General Counsel & Secretary
Steven S. Lay
Vice President -
Passenger & Cargo Sales
Seth M. Oberg
Vice President - Flight Operations
Western Air Lines Building , 6060 Avian Drive
Los Angeles International Airport
Los Angeles, California 90045
(213) 646-2345
Registrar/Transfer Agent-Common & Preferred Stock
Bank of America National Trust & Savings Assn .
555 South Flower St., Los Angeles, California 90071
Debenture and Subordinated Note Trustee
United States Trust Company of New York
45 Wall Street, New York, New York 10005
Exchange Listing-Common & Preferred Stock
Debentures and Subordinated Notes
New York Stock Exchange
Pacific Stock Exchange
Marvin Rich
Vice President -
Data Processing & Communica tions
Ray Silvius
Vice President - Corporate Affairs
Glen L. Stewart
Vice President and Controller
C. F. Van Every
Vice President - Airport Services
Donald W. Vena
Vice President - Personnel Relations
George Varney
Assistant Vice President -
Flight Control
Ticker Symbols
Common Stock WAL
Preferred Stock WALA
5% Debentures WALK
10% Notes WAL.
Independent Accountants
Peat, Marwick, Mitchell & Co .
555 South Flower St., Los Angeles, California 90071
General Offices Western Air Lines Building, 6060 Avion Drive, Los Angeles International Airport, Los Angeles, California 90045