THE YEAR AT A GIANCE (in millions of dollars) Operating revenues . .. . ............................... . Operating expenses . .................................. . Operating loss. . .................. . .... . ......... . Other Income (Expenses): Interest expense, net .. Gains on disposition of property and equipment . Gain on pension plan termination . Other, net . ....... . .... . .. .... .. . . .. . . . ... . ... . . . . Loss before income taxes . ......................... . Income tax benefits . . ..... . Net loss ..................................... ... . . Passengers carried (000) . . .. . .. . . .. . ... . .. ... . . . Available seat miles (000,000) ........ . . Revenue passenger miles (000,000). Passenger load factor-actual(% ). - breakeven (% ) . . COVERING WESTERN 1982 1,065.3 1,096.1 (30.8) ( 46. 7) 7.4 15.9 6.6 ( 4 7.6) (3.6) (44.0) 8,441 15,125 8,893 58.8 63.l 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 % Change 1 (3) (53) 4 (56) 408 (49) (81) ( 40) 4 4 (4) Route lines tell the Western story of 1982 and, as shown on our cover, will be a colorful part of Western's television advertising in 1983. Featured in Western's new "We've Got A Name" marketing campaign, the starburst route lines are a familiar part of all current television commercials. A detailed Western route map appears on Pages 10 and 11. DESCRIPTION OF BUSINESS Western Air Lines, Inc. is a commercial airline serving the continental United States, Alaska, Hawaii, Canada and Mexico. It is the tenth largest domestic airline in terms of revenue passenger miles in the United States. The company provides domestic air trans- WESTERN AIR LINES, INC. 1982 ANNUAL REPORT portation services primarily in the western portion of the United States with operations centered at its principal hub in Salt Lake City Western provides services to and from 63 airports, on routes extending from New York and Washington, D.C. in the east to Honolulu and Anchorage in the west. LETTER TO SHAREHOLDERS This 1982 report does not tell the story that all of us at Western wanted to bring to you; however, it does bring a story of progress and accomplishments. The fact that Western reported a loss of S4 4 million for 1982, its third consecutive year of losses, is a major disappointment even though these results are a substantial improvement over 198l's loss of S73.4 million. Early in the year, we had projected a profit by the third quarter-which we achieved. The improved performance is more satis- fying, however, when viewed in light of the changes and growth that took place at Western during 1982. Never in its long history has Western done so much growing in terms of flying and cities served. This was made possible by increasing the utilization of all available resources-men, women, machines and facilities. In human terms that meant sacrifice and determination on the part of all Western employees. Westem's Salt Lake City hub, which was put into operation on May 1, represented the greatest single achievement of 1982. Over- night your airline grew from a daily level of 29 flights at Salt Lake City to 59 flights (which increased to 7 5 in September and will be at 100 by June of this year). The hub provides convenient flight connections for approximately 300 city pairs daily. The airline's critics broadcast far and wide that Salt Lake City would never work as a hub ... that the local market was too small, the weather was too bad and whatever else they could find wrong. Most had never been to Salt Lake City, seen Westem's modem facility there or known about the hometown status Salt Lake City bestows on this airline. Western has proven them wrong as we knew we would - Utah has welcomed Westem's expansion and supports the new travel and shipping services we have brought to the community. Today, local boardings represent 2 44 percent of our Salt Lake City business, much higher than the 30 percent experienced at other major carriers' hubs. Weather has presented little problem to Western in Salt Lake City, but that is partially because we were prepared for most eventu- alities. All Western aircraft have been equipped with the most up-to-date low visibility landing systems available for each model. Moreover, at Salt Lake City we utilize a highly success- ful fog seeding operation. All of this means Western can operate in conditions some of our competitors can't. Using the Salt Lake City hub, Western has expanded into 17 new markets west of the Mississippi, and we now offer more flights to more cities in the west than any other .airline. To these new cities and the ones traditionally served by Western we bring the best possible connections to and from major eastern com- mercial and government centers-New York City, Chicago, Kansas City and all three Washington, D.C. area airports- plus Alaska, Hawaii and Mexico along with Western Canada. The hub-and-spoke concept of operation gives an airline on-line feed opportunities that were not possible in the old linear route sys- tems. In other words, when Western boards a passenger or shipment in one city, in many cases we now keep that business all the way to the destination, rather than turning it over to a competitor. This gives Western more control of its market. Western now has 58 percent of its domestic market availability in monopoly or one-other carrier markets. In April 1982, before the hub, that percentage of virtually exclusive markets stood at 21. Westem's operating costs in 1982 exper- ienced a decline from the 1981 fourth quarter level of 8.13 cents per available seat mile to 6.99 cents for the fourth quarter of 1982. At the same time, however, Western experienced a decline in its yield - or average revenue per passenger mile- from 11.38 cents in the fourth quarter of 1981 to 10.0 2 cents for the final quarter of 1982. These yield declines cost us more in lost revenues than we were able to achieve in expense reductions. Had we been able to hold the 1981 yield levels, Western would have been profitable in 1982. These conditions are the inevitable result of oversupply in a commodity market. In the airline industry, this has led to fare wars and emphasizes the necessity for an airline to continue reducing operating costs to live within this economic climate. Mature airlines that have grown up in the regulated era during the last 40 to 50 years became unproductive in terms oflabor efficiency and effective use of resources. In the past year, Western has worked diligently with the unions representing its labor force to reverse those trends which developed under the protection ofregulation. We consider steps toward reversal as essential to Western's profitability in the future. We expect that more low-cost operators may enter the marketplace as the economy improves, and we must be prepared to meet them head-on with cost efficiency in operations and supe- rior services. Western is only one of many "mature" airlines in this squeeze. Western has in operation one of the youngest aircraft fleets in the industry with an average aircraft age of 7.125 years, but even at that we have undertaken an appearance spruce-up program which will be completed for most of the fleet by late Spring. Aircraft interiors will be refurbished and those that need it will get an exterior paint job. At the same time all ground personnel who are in contact with the customer will graduate from newly developed training programs this Spring, and we will implement the latest improvements in our automated reservations/passenger service system by June. We call it the "new" Western, but as our advertising approach says "Western ... We've Got A Name To Live Up To'.' We are doing every- 3 thing in our power to keep Western on a course to full recovery and future growth. We appre- ciate your support and hope you will encourage your friends, relatives and neighbors to fly Western whenever possible. '(l_-_Q Neil G. Bergt Chairman of the Board and Chief Executive Officer April 4, 1983 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Despite improved operating results in 1982, Western reported a net loss for the third consecutive year. In December 1981 Western's new manage- ment embarked on a rebuilding program that resulted in an extensive route realignment and creation of a connecting center at Salt Lake City beginning May 1, 1982. The major objectives of the program were to create a system that would enable Western to control a greater share of the travel emanating from cities served and increase utilization of existing resources. During 1980 and 1981, the company had responded to its losses by reducing available seat miles (ASM's). From 1979 to 1981 ASM's decreased 13-percent, including a seven percent reduction from 1980 to 1981. Traffic, in terms of revenue passenger miles (RPMs ), declined only three per- cent from 1980 to 1981. This decrease in RPMs was more than offset by a 10 percent increase in pas- senger revenue per revenue passenger mile (yield). As a result, passenger revenue rose seven percent. However, this level of revenue growth was not adequate to support Western's cost base. Operating expenses were up eight percent in 1981, despite the reductions in ASMs and RPMs. Although fuel consumed dropped eight percent, fuel expense rose 10 percent due to price increases. Wages, salaries and employee benefits rose five percent due to rate increases which were not entirely offset by reductions in the number of employees. Other operating expenses were up 11 percent, primarily due to a 20 percent increase in commis- sion expense and a 34 percent increase in adver- tising. Because travel agency commission rates can no longer be established jointly by the scheduled airlines, increased competition for the agents' business caused the average commission rate paid by Western to rise from 8.9 percent in 1980 to 10.4 in 1981. In 1982 Western's total operating expenses decreased 2.6 percent from 1981 levels despite a 4.3 percent increase in ASMs and a four percent increase in traffic. Although the company lowered its unit costs through increased flying, the gain in passenger traffic was obtained in part from selling Western's product at a lower price. Yield declined to 10.42 cents in 1982, down 6.4 percent from 1981 and up only 3.2 percent from 1980. Passenger 4 revenue declined slightly as the four p rcent in- crease in traffic was more than offset by lower yield. The decline in yield resulted from a greater pro- portion of passengers traveling on discount fares and greater discounts in those fares, both due to increased fare competition with other airlines. During early 1982 Western obtained pay cuts and/or productivity improvements from most of its employee groups and reduced the number of active employees. These actions caused a decrease in wages, salaries, and employee benefits, despite increased ASM production. Most of the wage concessions granted during 1982 expired or are scheduled to expire in early 1983. In late 1982 and early 1983 Western entered into negotiations with its labor unions for a contin- uation or reinstatement of the concessions granted in early 1982, as well as additional concessions from some unions. There can be no assurance that such concessions will be obtained. Certain actuarial assumptions were changed in 1982 for some of the company's pension plans, causing an additional S7 .2 million reduction in labor expense. Fuel expense declined four percent in 1982 due to price reductions that more than offset a two per- cent increase in consumption. Further price reduc- tions are anticipated in 1983. Western expects to consume more fuel in 1983 than in 1982 due to expanded operations. Other operating expenses include costs such as commissions, food and beverage, aircraft and ground equipment rentals, advertising, aircraft main- tenance and expenses related to contract services provided to other aircraft operators. Contract service expenses increased S13.9 million in 1982, while related revenues rose 126 percent from S20.5 million to S46.4 million. Other income (expense) includes gains on asset dispositions of S7.4 million, S16.9 million, and S32.1 million in 1982, 1981, and 1980, respectively. A gain of S15.9 million from termination of a pension plan is included in 1982 results. Improved operating results in 1983 and future years will depend in large part on an increase in load factor and/or yield and continued reductions in expense levels. Without these improvements Western, and the airline industy in general, may well be unable to return to profitability. IQUIDI1Y D CAPITAL RESOURCES W stem's cash and cash quivalents totall ct S4 7.4 millionatD cember31, 1982, upfromS24.l million at D cember 31, 1981. Westem's cash balances fluctuate significantly from day-to-day The company's working capital deficit increased slightly from S 111. 2 million at December 31, 1981 to S115.4 million at December 31, 1982. Because airlines typically have no product inventories and have substantial airline traffic liabilities due to advance ticket sales, minimal or negative working capital balances are not uncommon. Since mid-1981 cash generated from operations has not been sufficient to fund debt repayment. However, Western has made all sched- uled debt repayments by supplementing cash from operations with cash from other sources. In order to maintain liquidity during 1981, 1982 and to date in 1983, Western has sold certain assets, terminated certain pension plans, and instituted new borrowing and financing arrangements. The most significant of these transactions were as follows: In December 1981 Western sold two Boeing 737 aircraft for S 11 million and leased back the aircraft. See ote 10 to Financial Statements. In April 1982 Western sold for S21 million, with recourse, the conditional sales contracts arising from an earlier sale of two DC-10 aircraft. See Note 10 to Financial Statements. In April 1982 the company terminated a pension plan and received S15.9 million. It terminated another pension plan in January 1983 and received S20.6 million to date in 1983 and expects to receive an additional S5.5 million in 1983. During December 1982 Western sold S 12.5 million principal amount of 12 percent convertible subordinated debentures due December 1992. These debentures are convertible into common stock at S5.50 per share, subject to adjustment in certain cases. Interest is payable semi-annually In December 1982 Western entered into a term loan and security agreement to borrow S33.4 million from an affiliate of an aircraft manufacturer. At the same time Western placed an order for three 737-300 aircraft and utilized S3 million of the proceeds as deposits for those aircraft. The term loan requires quarterly payments of principal and interest with the final payment due December 1988. The interest rate is two percent above the London InterBank Offered Rate ("LIBOR"). otes under this agreement 5 ar s cur ct by thr 737 and thr e 727 aircraft and 15 ngin s. Effective January 18, 1983, W stem enter d into a S30 million revolving credit agreement with a group of financial institutions. The amount available under this line decreases to S25 million on June 30, 1983 and to S12.5 million on July 31, 1983. All amounts advanced must be repaid by August 31, 1983. The interest rate on funds borrowed is one- and-a-half percent per annum above a fluctuating interest rate based on the higher of Citibank's base rate or a computed rate based on various other interest rates. Upon signing the agreement, Western paid a fee of one quarter of one percent of the commitment and issued 550,000 warrants to purchase Western common stock at S5.625 per share. A borrowing fee is required and up to 250,000 additional warrants may be issued upon any draw under the line. In March, Western drew down S 10 million under this line. There are several conditions precedent to the company's ability to draw further, and thus there can be no assurance that such funds will be available. In addition, during 1982 Western sold other assets and obtained other financing which gener- ated approximately S14.6 million. With the exception of one 7 2 7 aircraft and 4 engines, all ofWestem's owned aircraft and engines are pledged as collateral for debt and other obligations. In addition, some of the Company's agreements require that collateral be maintained at specified levels. See ote 6 to Financial Statements. Although Western would be able to incur a small operating loss and still cover the S52.4 million of required debt repayments in 1983, an operating loss comparable to 1982 would result in insufficient cash to cover such repayments. If this were to occur, part of the company's scheduled debt repayments would have to be made utilizing cash from its line of credit, asset sales, additional new borrowings and/or sale of equity securities. o assurance can be given that sufficient cash could be generated from such sources. Western has on order three Boeing 737-300 aircraft scheduled for delivery in 1985 and six 767 aircraft and three 767 spare engines scheduled for delivery in 1986. The total commitment for the acquisition of these aircraft and spare engines is approximately S4 50 million. Long-term s cured debt or capital lease financing is expected to be utilized to finance these acquisitions, although no assurance can be given that such methods of financ- ing will be available. Western also holds options for the purchase of six additional 767 aircraft which would be delivered in 1987. Western would require waivers from its lenders to complete these trans- actions. See Note 3 to Financial Statements. Western's financial resources are not as great as those of certain of its competitors, and, therefore, whether the current economic recession continues or abates, adverse economic developments that can be absorbed by companies with greater resources might substantially affect the ability of Western, with its more limited resources, to meet its obligations. Financial Covenants: As a result of net losses, in the fall of 1981 Western's equity became insufficient to meet the covenant requirements of various loan agreements. In early 1982 Western's lenders waived the company's defaults under its loan agreements until August 31, 1982, and granted the company a S30 million line of credit, which was entirely drawn down during the first quarter of 1982. This loan was repaid in April 1982 with proceeds from the termination of a pension plan and the sale of certain receivables. As part of the agreement under which the defaults were waived and the line of credit was granted, Western secured the loans of its previously unsecured lenders with 29 of its aircraft and 7 7 of its engines. On August 31, 1982 Western and its creditors entered into a Master Credit Terms Agreement (Master Agreement) which contained new loan covenants based in part on forecasted results of operations. These covenants, as amended, require maintenance of certain levels of net worth, cash flow and debt-equity ratios ( all as defined in the Master Agreement). The Company has sought and obtained relaxation of these loan covenants on two subse- quent-occasions in order to avoid violating cove- nants and to provide additional cushion in 1983. Included in the Master Agreement are provisions which prohibit payment of dividends and redemp- tions of capital stock, and generally restrict additional borrowings, capital expenditures and rental com- mitments. The nature of the covenants is such that lender approval is required for nearly all significant transactions. 6 Western's agreements with its lenders prohibit capital expenditures in excess of S12 million p r year, and prohibit lease obligations where th aggre- gate annual rentals under such leases would exceed four percent of the most recent 12 month revenues without the lenders' prior consent. These provisions may limit the ability of Western to acquire additional aircraft or exercise options to acquire aircraft. SHAREHOLDERS AND STOCK As of December 31, 1982, the 13,043,746 shares of outstanding Western common stock were held by approximately 15,000 individuals and insti- tutions. Holders of the common stock last received a dividend in the third quarter of 1980. Certain lending agreements to which Western is a party prohibit the payment of dividends by it, whether in cash or stock, and prohibit redemptions of capital stock, without the prior consent of the lenders. There were 1,196,870 shares of the preferred stock outstanding held by approximately 1,240 individuals and institutions as of December 31, 1982. The company has omitted payment of the quarterly dividends on the Series A Pref erred Stock since the first quarter of 1982. So long as dividends remain in arrears on the Series A Pref erred Stock, no cash dividends may be paid on the company's common stock The total amount of the dividends in arrears at December 31, 1982 was 52,394,000. If six dividends are omitted, the holders of preferred stock have the right, voting as a class, to elect two additional members to the company's Board of Directors at the next Annual Meeting of Shareholders. Various loan agreements currently prohibit payment of dividends on preferred stock Consequently, the dividend normally payable on March 31, 1983 was omitted. Wes tern's common and pref erred stock are traded on the ew York and Pacific Stock exchanges. Market prices for the past two years are listed below: S2 Series A Common Stock Preferred Stock 1981 High Low High Low First Quarter 10 8 261 t1 21 Second Quarter 1 l7/a 8 30 221 /a Third Quarter 11 3/t 6 291 /t 155/a Fourth Quarter 81/a 45/a 203/t 14 S2 Series A Common Stock Pref erred Stock 1982 High Low High Low First Quart r 55 ~ 31 /2 16 10 S cond Quart r 61 /4 33 /a 15 85/o Third Quart r 61/o 3 15 91/2 Fourth Quart r 6 3 15 10 From 1938 to 1978 the airline industry was subject to the comprehensive economic regulatory jurisdiction of the Civil Aeronautics Board (CAB). Under that framework of regulation, authority to operate new services could be obtained only by proving a public need therefore, competition was restricted, rates and fares were tightly controlled, intercarrier arrangements for cooperative purposes were closely supervised and mergers and consolidations between air carriers were carefully scrutinized. The Airline Deregulation Act of 197 8 ( the "Deregu- lation Act'1 materially changed the statutory scheme of regulation of domestic air transportation. Under the Deregulation Act, the CAB lost its authority with respect to domestic routes on December 31, 1981, and its authority over fares and intercarrier trans- actions, including mergers, as of January 1, 1983. Under the Deregulation Act, the CAB will go out of existence as of January 1, 1985, and certain of its functions will be transferred to other government departments. The Deregulation Act made no changes in the law as it relates to authority to engage in foreign air transportation, except the CAB's power to grant exemptions for temporary authority was liberalized. Nevertheless, the United States govern- ment has followed a practice of trying to convince foreign governments that multiple carrier desig- nations on international routes should be authorized by intergovernment agreement. A few countries have acceded to the position of the United States government; Mexico and Canada have not. The airlines presently operate in an environment of unrestricted competition in domestic air trans- portation. Carriers no longer have an obligation to provide service but can start and stop service on any route virtually at will, subject to slot and gate availability, and have complete freedom in pricing their products. However, the air traffic controller's strike has temporarily limited flights at 22 busy airports in the United States. 7 In December 1981 Western agreed in principle to acquire Wien Air Alaska, Inc. (Wien), a regional airline based in Alaska, from Eagle International Corporation (Eagle), a corporation owned by Neil G. Bergt. Eagle had previously agreed to pur- chase Wien from Household International, Inc. (Household). At the same time that Western had agreed to acquire Wien, Mr. Bergt became Chairman and Chief Executive Officer of Western. In July 1982 the Civil Aeronautics Board approved the combi- nation of Wien and Western, but imposed conditions upon Mr. Bergt and Alaska International Air, Inc., a cargo airline owned by Mr. Bergt, which Mr. Bergt and Eagle found unacceptable. After the ruling was reconsidered by the Civil Aeronautics Board, but without significant alterations to the conditions, Eagle terminated its agreement with Household, and Western and Eagle mutually agreed to terminate their agreement. Household subsequently filed suit against Eagle and Mr. Bergt seeking specific per- formance of the Eagle agreement to acquire Wien. Western is not a party to that action. Mr. Bergt has remained as Chairman and Chief Executive Officer of Western. Air Florida Systems, Inc., which in early 1982 had obtained CAB approval to acquire Western and held approximately 12.6 percent of Western's common stock, sold that stock in November of 1982. WESTERN'S FI In Operation* 1985-1986 Owned** Leased Delivery 198 7 Options DC-10-10 7 3 DC-10-30 1 727-200 33 14 737-200 10 4 737-300 3 767-200 6 6 *As of March 2, 1983 **See "Pledged Assets" below. Inauguration of services to small and medium-sized cities increased the importance to Western of the two-engine 7 3 7 s and, to a lesser extent, the three- engine 727s. At the end of 1982, Western acquired two new 7 37-200s in a lease arrangement with Alaska International Air and placed an order with Boeing Aircraft Company for three new 737-300s for deliv- ery in 1985. See ote 10 to Financial Statements. During 1982, Western moved delivery on its six Boeing 767 aircraft from 1984/1985 to 1986. Options held by Western for an additional six 767s were moved to delivery in 1987. Western's present fleet is in compliance with federal noise regulations with the exception of 12 of its 14 Boeing 7 3 7 s. These aircraft are expected to be retrofitted at a cost of approximately S300,000 each in advance of the 1988 deadline for compliance. GROUND PROPERTIES AND EQUIPMENT Western's general offices and principal overhaul and maintenance base are located at Los Angeles Inter- national Airport. These facilities, including a DC-10 hangar and a parking structure completed in 197 5, have been built by Western 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. Upon such termi- nation or expiration, the improvements revert to the city Western also leases hangars at Seattle/Tacoma, San Francisco, and Minneapolis/St. Paul, as well as terminal facilities at most airports served, plus ticket and administrative offices throughout its system. Public airports are utilized for flight operations generally under contractual arrangements with municipalities or agencies controlling them. During 1983 and 1984 Western plans to under- take certain improvements in its passenger terminal facilities at Salt Lake City to accommcxlate its growing hub operations and at Los Angeles to integrate with new second level roadways which are being con- structed. If these plans are consummated Western's share of the cost is estimated to be S12.5 million. PLEDGED ASSETS A substantial portion of Western's assets, including all but one of its owned aircraft and all but 4 of its owned engines, is pledged as collateral to secure debt and other obligations. For additional informa- tion, see Note 6 to Financial Statements. THE PEOPLE OF WESTERN Management: Western's Chairman and Chief Executive Officer Neil G. Bergt was elected to his post on December 8, 1981. The 4 7-year-old Western leader also is chairman and sole owner of Alaska International Industries, which has as its main subsidiary an Alaska cargo airline-Alaska Inter- 8 national Airlines. Bergt assumed th leadership role at Interior Airways, AIA's predecessor, in 1970 and bought out other shareholders of the company in 1979. The position of President and Chief Operating Officer was held by Ned P DeWitt from July 23, 1982 through January 6, 1983, at which time DeWitt resigned to pursue other interests. DeWitt came to Western from Six Flags Corp., Los Angeles, where he served as president and chief executive officer. Other principal officers of Western include: Andre C. Dimitriadis, Senior Vice President- Finance and Chief Financial Officer, joined the company in May 1982 after having served as Vice President-Finance and Chief Financial Officer at Air California for two-and-a-half-years. Dimitriadis, 4 2, was with Pan American World Airways from 1973 through 1979, serving as assistant treasurer from 1977 through 1979. George M. Kamats, Senior Vice President- Operations, joined Western in October 1982. Moving to Western from Capitol Air where he had served as Vice President and Chief Operating Officer since 1980, Kama ts, 4 7, started his airline career in 1961 and held senior executive posts with Alaska International Air, Great orthern Airlines and Inter- national Air Leases during the 1970s. Lawrence H. Lee, 55, Senior Vice President-Salt Lake City, has been a Western employee since 194 3 and held officer posts since 1968. He was elected a senior vice president in 1982 and was given responsibility for setting up Western's hub. George M. Sullivan, 60, Senior Vice President- Alaska, joined the airline in April of 1982 after completing 15 years as the Mayor of Anchorage. Craig B. Benedetti, 30, serves as Western's Vice President- Marketing. Prior to joining Western as director-economic forecasting in June 1981, Benedetti was with Trans World Airlines where he worked in business planning and forecasting func- tions from 1977. Thomas J. Greene, 45, is the company's Vice President, General Counsel and Secretary Greene has been with Western since 1969. Glen L. Stewart, 40, serves as Vice President and Controller and has been at Western since 1969. Employees: Western's employees made substantial contributions to the company's financial recovery efforts in 1982, which helped make possible the reduction in Western's cost per available seat mile. The number of active Western employees during 1982 averaged 9,760, down from an average of 10,120 in 1981. At January 31, 1983, Western had 10,066 active employees. Labor unions represent approximately 92 percent of Western's employees. These unions include the Air Line Pilots Association, Air Transport Employees, Association of Flight Attendants, International Brotherhood of Teamsters, Sindicato Nacional de Trabajadores de Aviacion y Similares; and the Transport Workers Union. Since December 1981, Western has obtained pay cuts and productivity improvements from most of its employees. It is estimated that such changes saved Western in excess of S50 million in 1982. The contractual status of each ofWestern's collective bargaining groups as of January 31, 1983 follows: Number of Employees Union Amendment Mechanics and Related Employees and Stock Clerks 1,788 IBT 7-1-83 Pilots 1,493 ALPA 5-1-84 Flight Attendants 1,983 AFA 1-1-83 (In mediation) Agent & Clerical U.S. 4,600 ATE 1-1-83 (In negotiation) Canada 122 ATE 7-1-82 (In conciliation) Mexico 212 S TA 1-19-84 Flight Superintendents 26 1WU 11-1-83 Ground School Instructors 34 IBT 7-1-83 LEGAL PROCEEDINGS During the last several years Western and other airlines have been parties to numerous actions regarding the subjects of aircraft noise and engine emissions. Such actions have included both suits brought directly against the airlines and cross- complaints against the airlines in suits brought against airport proprietors. Unfavorable decisions in such actions could have a material adverse effect on the company While extensive in recent years, such litigation has substantially diminished during the last year and Western does not believe any material liability will result to Western. In light of this litigation, however, operators of certain airports, including those at Los Angeles, San Jose, Orange County and 9 San Diego, and Washington D.Cs National, have imposed or are considering imposition oflimitations on frequency and timing of airline flights or upon the proportion of any airline's fleet which may con- tinue to operate without complying with specified noise standards. In general, enforcement of such restrictions at a major airport served by Western could have a material adverse effect upon its operations. Western is also involved in various other litigation, 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 judg- ment 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 attorney's 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. A California firm which acted as a consultant for Western during part of 1982, filed a complaint in the Superior Court of the State of California for the County of San Francisco against Western, Neil G. Bergt and others for breach of contract, fraud, defamation and other claims. The total damages sought, including compensatory and punitive damages, exceed S 10 million. Western does not believe the action will result in any material)iability to Western. - -Chicago San Fr Orleans lxtapa/ Zihuatanejo Acapulco New York Baltimore Dulles W~shington, D.C. National Puerto Vallarta WESTERN TODAY Salt Lake City is the focal point of Westem's domestic U.S. route system today with 100 flights a day interconnecting cities of all sizes in the West with each other and with major centers in the Mid-West and on the East Coast. *Seasonal Service WESTERN YESTERDAY Before the May 1, 1982, launch of its hub- and-spoke system at Salt Lake City, Westem's market lines were linear and featured fewer on-line connecting opportunities. New York Chtc.ago Kansas City New Orleans Seasonal Service Arizona is on Mountain Standard Tune 11 (In millions except per share amounts and other items indicated by *) 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 Summary of Operations Operating Revenues: 925.8 949.6 465.l 437.3 376.7 Passenger . s 887.9 827.7 734.0 614.6 544.2 Cargo, charter, and other . . ... ' ' .. ' . 139.5 110.2 107.8 104.4 100.5 76.9 61.0 53.9 51.1 44.6 Total operating revenues . . . . .. ' . . ' .. 1,065.3 1,059.8 995.7 932.l 834.5 691.5 605.2 519.0 488.4 421.3 Operating Expenses: Wages, salaries, and employee benefits( c) .. 368.5 403.4 384.2 356.6 309.4 263.1 226.4 201 .7 182.3 165.4 Fuel . 312.0 326.6 296.4 225.7 154.9 138.0 108.3 93. l 71.4 44.5 Otherfa) _ . . '. .... 415.6 395.8(c) 360.9 331.6 315.3 260.9 235.l 211.1 192.5 168.3 Total opera ting expenses 1,096.1 1,125.8 1,041.5 913.9 779.6 662.0 569.8 505.9 446.2 378.2 Operating income (loss) (30.8) (66.0) (45.8) 18.2 54.9 29.5 35.4 13. l 42.2 43.1 Interest expense, net . (46.7) (45.0) (38.5) (24.9) (20.2) ( 17 .5) (16.3) (14.4) ( 15.3) (13.0) Gains on asset dispositions and other income, net . . . . . . . . . 14.0 18.2 35.1 46.1 10.7 7.8 3.1 4.3 13.8 4.2 Gain on pension plan termination . 15.9 Earnings (loss) before income taxes and cumulative effect of a change in accounting principle . (47.6) (92.8) (49.2) 39.4 45.4 19.8 22.2 3.0 40.7 34.3 Income taxes (benefits) . (3.6) (19.4) ( 19.6) (2.1) 6.9 7.1 8.2 (1.5) 17.2 14.4 Earnings (loss) before cumulative effect of a change in accounting principle (44.0) (73.4) (29.6) 41.5 38.5 12.7 14.0 4.5 23.5 19.9 Cumulative effect of a change in accounting principle(b) 16.2 7.2 Net earnings (loss) . ( 44.0) (73.4) (29.6) 41.5 54.7 12.7 14.0 11.7 23.5 19.9 Earnings (Loss) per Common Share: Primary: Before cumulative effect of a change in accounting principle . s (3.56) (5.81) (2.46) 2.99 2.82 0.96 1.03 0.30 1.55 1.32 Net earnings (loss) . . ..... . . s (3.56) (5.81) (2.46) 2.99 4.09 0.96 1.03 0.77 1.55 1.32 Fully Diluted: Before cumulative effect of a change in accounting principle . s (3.56) (5.81) (2.46) 2.31 2.15 0.85 0.92 0.29 1.38 1.18 Net earnings (loss) . s (3.56) (5.81) (2.46) 2.31 3.04 0.85 0.92 0.70 1.38 1.18 Other Financial Data: Cash dividends paid per share of common stock ... . ......... s 0.25 0.40 0.40 0.40 0.40 0.47 0.39 0.23 Total assets . s 808.6 834.6 917.0 821.4 710.1 574.9 515.1 488.3 448.8 431.7 Property and equipment - net . . . . . . . . . . . . . s 634.8 662.4 718.8 634.6 519.7 427.9 378.6 367.6 350.3 316.4 Longterm obligations- less current installments s 411.5 401.9 435.l 318.3 265.7 214.5 192.5 175.4 167.4 178.0 Shareholders' equity . . . . ... . . s 77.6 121.7 197.3 232.6 198.5 147.4 112.1 133.9 129.3 110.8 Operations: 70 Airplanes operated at end of year* .... 72 71 76 78 77 75 75 72 74 Passengers carried . 8.4 8.4 9.1 11.2 10.4 8.8 8.1 7.5 7.4 7.4 Available seat miles 15,124.6 14,495.8 15,515.6 16,630.5 16,254.9 14,963.8 13,450.4 11,696.5 11,123.5 11,175.5 Revenue passenger miles . . . . . . . . . . . . . . . ... 8,892.6 8,547.9 8,832.1 10,494.8 10,634.8 8,588.8 7,833.8 7,102.9 6,747.5 6,476.1 Passenger load factor- actual (% )* . 58.8 59.0 56.9 63.1 65.4 57.4 58.2 60.7 60.7 57.9 - breakeven point (0o )* . . . . . . . . . . . . . ...... 63.1 65.8 62.0 63.2 61.1 56.1 56.0 59.7 56.1 52.5 -profit margin (point difference)"' (4.3) (6.8) (5.1) (0.1) 4.3 1.3 2.2 1.0 4.6 5.4 Average revenue per passenger mile* . . . - . . .. s .1042 .1113 .1010 .0807 .0720 .0734 .0705 .0665 .0660 .0593 Average length in miles per passenger trip* . . .... 1,053 1,017 965 926 994 966 963 942 902 877 Operating expense per available seat mile*. s .0725 .0777 .0671 .0550 .0480 .0442 .0424 .0433 .0401 .0338 Cargo revenue ton miles . 156.1 151.3 163.2 162.0 176.3 157.3 135.0 108.6 95.2 76.5 Average number of employees* .. 9,760 10,120 10,657 l l,256 10,787 10,413 9,799 9,357 9,696 9,826 (a) Changes in the estimated useful lives of certain aircraft (b) Effective January 1, 1978, Western changed its method of (c) During 1982, actuarial assumption changes to pension (e) Effective January 1, 1981 Western revised its procedures were implemented in January 1978 and October 1976. accounting for post-1971 investment credits for financial plans were made reducing expenses by S7.2 or S0.55 per for recognizing commission expense to more closely These changes increased net income in 1978 and 1977 rep:::>rting purposes from the deferral to the flow-through share (primary). identify the expense with the period in which the related by approximately S 1.5 or S0.12 per share (primary), and method. The cumulative effect of the change amounting ( d) Cash dividends on Series A Pref erred Stock for 1982 are revenue is recognized. The effect of this change was to S2.4 or S0.19 per share (primary), respectively. to S16.2 or Sl.27 per share (primary) has been included in arrears. reduce the 1981 net loss by S3.3 or S0.26 per share (primary). in net earnings for 1978. 12 13 1 December 31, 1982 and 1981 (In thousands of dollars) ASSETS Current Assets: Cash and cash equivalents, including time deposits of S36,024 and commercial paper at cost of S7,221 which approximates market-1982 . . .... . Receivables (less allowance for doubtful accounts of S3,491-1982 and S2,959-1981) ......... . Receivable from sale of aircraft . . . . . . . . . . . . . . . Flight equipment expendable parts at average cost (less allowance for obsolescence of S 16,364-1982 and S15,422-1981) . . . . . . . . . . .. . .. . Other current assets . . . . . . . . . .. . .. . Total current assets. . . . . . . . Property and Equipment at Cost: Flight equipment. . . ...... . Facilities and ground equipment. Deposits on equipment purchase contracts . Less allowance for depreciation and amortization .. . ...... . . . . . Other Assets . . . . . . . . . . See accompanying Notes to Financial Statements. 14 1982 1981 s 47,350 82,667 21,362 17,366 168,745 850,957 140,471 27,017 1,018,445 383,691 634,754 5,137 S 808,636 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 LIABILITIES AND SHAREHOLDERS' EQUI1Y Current Liabilities: Current installments of debt . . . . . . . . . . . . . . . . . . . . . . . Current installments of capital leases . . . . . . . . . . . . . . Notes payable ..... . ....... . ... ... ............ .. ..... . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Airline traffic liability. . . . . . ....... . Salaries, wages and vacation benefits payable . . ..... . Other accrued liabilities . . . .. .......... .. .... . Total current liabilities . . . . . . . . . . . . . . . Long-term Obligations, Less Current Installments: Debt.......... . . . . . . . . ..... . Capital leases . . . . .............. . . . Deferred Credits and Other Liabilities: Deferred taxes on income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Def erred gain on sale and lease back of aircraft . . . . Other........ . . . . . . . . . . . ........ . Shareholders' Equity: Preferred stock-authorized 25,000,000 shares, S2 Series A Cumulative Convertible, S25 stated value per share. Liquidation preference at stated value plus accrued and unpaid dividends. Outstanding 1,196,870 shares-1982 and 1,196,920-1981 . . . . . . . . . .... Common stock-authorized 35,000,000 shares, Sl par value per share, outstanding 13,043,746 shares-1982 and 13,043,621-1981 . . . ............. . Additional paid-in capital . . ............... . Retained earnings ..................................... . Commitments and Contingent Liabilities 15 1982 1981 s 43,038 9,406 13,109 61,189 89,821 40,363 27,191 284,117 300,671 110,856 411,527 10,747 7,001 17,599 35,347 29,921 13,044 31,061 3,619 77,645 S808,636 26,650 7,962 20,000 76,504 81,006 41,838 24,460 278,420 302,700 99,184 401,884 11,002 9,335 12,265 32,602 29,923 13,044 31,062 47,635 121,664 834,570 Years ended December 31, 1982, 1981, and 1980 (In thousands of dollars except per share amounts) Operating Revenues: Passenger ..... . Cargo . . ....... . Contract service and other. Operating Expenses: Wages, salaries, and employee benefits . . . . . ..... . Fuel ... . .... . . . . . . . .. ..... . Depreciation and amortization .. Other. . . .. ......... . . .. .... . . . Operating loss . . . . . . . . . . 1982 1981 S 925,735 949,576 68,020 62,983 71,5 I 5 47,282 1,065,270 1,059,841 368,503 311,999 61,751 353,815 403,428 326,606 63,632 332,129 1,096,068 1,125,795 (30,798) (65,954) =========== Other Income (Expenses): Interest, principally on long-term obligations ...... . . . Interest capitalized . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . Gains on disposition of property and equipment . Gain on pension plan termination . . . . . ....... . Other, net . . . . . . . . . . . . . ........ .. . .. . . Loss before income taxes . . . . . . . . . . . . . . . . . . . . Income tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . .. .. . Loss per common and common equivalent share . See accompanying Notes to Financial Statements. 16 (49,195) 2,508 5,604 7,385 15,930 994 (16,774) (47,572) (3,556) == S (44,016) S (3.56) (49,836) 4,805 4,641 16,869 (3,333) (26,854) (92,808) (19,408) (73,400) (5.81) 1980 887,901 63,821 44,033 995,755 384,201 296,365 61,310 299,640 1,041,516 (45,761) (43,507) 4,940 3,168 32,099 ( 178) (3,478) (49,239) (19,607) (29,632) (2.46) Years ended December 31, 1982, 1981, and 1980 (In thousands of dollars) Sources of Working Capital: Net loss . . ................... . Add (Deduct) Items Which did not Affect Working Capital: Depreciation and amortization. Def erred income taxes . Gains on disposition of property and equipment . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . ..... 1982 $(44,016) 59,968 (432) (7,385) (2,508) 1981 (73,400) 61,780 (18,617) (16,869) (4,005) = = = = = = Total provided ( used) by operations . . . . . . . . . Proceeds from issuance of long-term obligations . Proceeds from disposition of property and equipment . . .. Reimbursement of deposits and capital expenditures upon acquisition of flight equipment . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . Total sources . Applications of Working Capital: Reduction of long-term obligations including transfers to current liabilities . . . .. . . . . . ......... . Purchase of and deposits on property and equipment . Cash dividends on pref erred stock . Cash dividends on common stock. Total applications . 5,627 62,986 9,269 2,269 80,151 53,349 30,933 (51,111) 73,212 61,208 15,457 4,000 102,766 106,400 49,810 2,394 84,282 158,604 ===="""" =======~= ................................................... Decrease in working capital. . . . . . . . S (4,131) (55,838) ~~~~= Summary of Increases (Decreases) in Working Capital: Cash and cash equivalents . . . . . . . . . . Receivables, net . . . . . . .. . .. . ................ . Receivable from sale of aircraft . . ............ . Flight equipment expendable parts, net ...... . ... . . . Other current assets . . . . . . . . . . . . . . . . . . Current installments of debt . . ............ . Current installments of capital leases . . . ..... . Notes payable . . . . . . . . . .. .. . Accounts payable . . . . . . . . .. ...... . Airline traffic liability . . . . . . . . . . . . . . . ... . ... . Salaries, wages and vacation benefits payable . Other accrued liabilities ... .. ..... . Decrease in working captial . . . . . . . . . . . . . . See accompanying Notes to Financial Statements. 17 S 23,293 (6,644) (20,212) 409 4,720 (16,388) (1,444) 6,891 15,315 (8,815) 1,475 (2,731) S (4,131) (10,281) (32,548) 20,212 (5,955) 4,621 (2,894) (779) (20,000) (17,539) 9,052 1,786 (1,513) (55,838) 1980 (29,632) 60,146 (21,219) (32,099) (3,557) (26,361) 198,350 50,120 10,746 172 233,027 81,667 171,123 2,394 3,258 258,442 (25,415) (15,975) 16,568 6,887 2,256 (7,539) (803) (4,612) (19,044) (3,186) 33 (25,415) Years ended December 31, 1982, 1981, and 1980 (In thousands of dollars) Series A Preferred Stock Balance at December 31, 1979 .. S29,923 Conversion of debentures . Cash Dividends: Preferred stock. . Common stock . Net loss . . . . . . . . . . Balance at December 31, 1980. 29,923 Exercise of stock options . Conversion of debentures . Cash dividends on preferred stock. ... .. . . . . . . . . Net loss .. . . . . . . . . BalanceatDecember31, 1981 . 29,923 Other items. ... .. .. . (2) Net loss . . . . . ..... . . Balance at December 31, 1982 . . S29,921 See accompanying Notes to Financial Statements. (In thousands of dollars except per share amounts) Note I. Summary of Significant Accounting Policies Property and Equipment Additional Total Common Paid-in Retained Shareholders' Stock Capital Earnings Equity 13,030 30,959 158,713 232,625 1 4 5 (2,394) (2,394) (3,258) (3,258) (29,632) (29,632) 13,031 30,963 123,429 197,346 12 90 102 1 9 10 (2,394) (2,394) (73,400) (73,400) 13,044 31,062 47,635 121,664 (1) (3) (44,016) (44,016) 13,044 31,061 3,619 77,645 Owned property and equipment, exclusive of residual values, are depreciated over the estimated useful lives by the straight-line method. Assets recorded under capital leases are amortized 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 Useful Life Residual Value DC-10 . . 16 years lOqo 727 . 15 years 150 737 .. 14 years 15qo Estimated useful lives of ground equipment range from four to ten years. Buildings and improvements on leased property are depreciated over the life of the lease. Amortization 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 credits are accounted for by the flow-through method. 18 Obsolescence of Flight Equipment Expendable Parts An allowance for obsolescence of expendable parts is accrued over the estimated useful lives of the related aircraft types. Revenue Recognition Passenger sales are recorded as airline traffic liability, a current liability, until recognized as revenue as services are provided by Western, refunded, or billed by other carriers for transportation provided by them. Cargo and Contract service and other revenues are recognized as services are provided and billed. Reclassification Certain amounts in the 1981 financial statements have been restated to conform to the 1982 presentation. 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 to 12 years for 737 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 for capital leases on the basis of the outstanding obligations. Equipment under capital leases included in the balance sheets at December 31, 1982 and 1981, follows: 1982 1981 Flight equipment . S159,306 137,283 Ground equipment 2,006 2,006 161,312 139,289 Less allowance for amortization . 66,620 57,501 S 94,692 81,788 At December 31, 1982, minimum lease payments under leases expiring after December 31, 1983, were as follows: Capital Operating Leases Leases 1983 s 24,239 25,320 1984 23,809 24,067 1985 19,624 19,883 1986 19,630 15,883 1987 19,552 15,197 Thereafter l I0,321 140,467 Total minimum lease payments . 217,175 240,817 Less amount representing interest . 96,913 Present value of capital lease obligations . 120,262 Less current installments of capital leases 9,406 Long-term capital lease obligations . SI I0,856 Rental expense for operating leases amounted to S33,222, S25,967, and S20,050, in 1982, 1981, and 1980, respectively Note 3. Commitments and Contingent Liabilities At December 31, 1982, Western had on firm order flight equipment which included three 737-300 aircraft scheduled for delivery in 1985, six 767 aircraft scheduled for delivery in 1986 and three 767 spare engines scheduled for delivery in 1986. Western recorded deposits on these orders which amounted to S18,799 as of December 31, 1982. The balance of the purchase price on delivery will be approximately S430,000. Western has options to purchase six 767 aircraft for delivery in 1987. Deposits on these options amounted to S1,125 at December 31, 1982. Outstanding commitments for flight equipment modification and spare parts amounted to approximately S2,600 and for facilities and ground equipment amounted to approximately S2,300 as of December 31, 1982. The following schedule shows the amount of purchase commitments due in each of the next five years: 1983 1984 .. 1985 .. 1986 1987 19 s 5,891 32,328 120,579 276,102 S434,900 .. , (In thousands of dollars except per share amounts) In April 1982 Western sold certain receivables to Associates Commercial Corporation ('~sociates") which had been received in connection with the sale in 1981 of two DC-10 aircraft to a company controlled by George E. Batchelor. See Note 10 to Financial Statements. If the buyer of the aircraft defaults under the agreement with Associates, Western is obligated to make immediate payment to Associates of the full amount then due, after which Western would have the right under the agreement to take title to and possession of the related aircraft. The balance of the receivables at December 31, 1982 was S21,600. For information regarding the status of legal proceedings al December 31, 1982, see "Legal Proceedings" on page 9 of this report. Note 4. Retirement Plans Western has retirement plans which cover substantially all employees. Western's contributions lo the Company-sponsored plans, together with the participants' required contributions, are sufficient lo 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's 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 this plan is not available. Accordingly, 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-sponsored defined benefit plans follows: January 1, 1982 1981 1980 Actuarial Present Value of Accumulated Plan Benefits Vested . S120,550 140,331 137,246 Nonvested . 9,212 11,984 9,876 S129,762 152,315 147,122 et assets available for benefits . S132,959 163,995 139,000 The amounts in the table above for 1982 do not include information regarding a defined benefit retirement plan for non-union employees, which Western terminated during the second quarter of 1982. The termination allowed Western to recover that portion of excess funds in the plan which related to company contributions, and as a result reduce the net loss for the year ended December 31, 1982 by S15,930 (S1.22 per share). The Company subsequently adopted a new, defined contribution pension plan for non-union employees. The cost of the retirement plans, including the union-sponsored plan, charged to operating expense was 518,802, S34,711, and S34,193 for 1982, 1981, and 1980, respectively, which included amortization of prior service costs over periods ranging from 10 to 20 years for certain of the plans. Actuarial assumption changes to pension plans during 1982 decreased the retirement plan expense. Western adopted recommendations by its actuaries to revise the assumed rate of return used in determining the actuarial present value of accumulated plan benefits from six to eight percent. The effect of this and other changes decreased operating expense for the year by S7,200 (S0.55 per share). A further decrease of S6,500 (S0.50 per share) was caused by the termination of the retirement plan for non-union employees and a temporary reduction in Company contributions to a pilots' variable retirement plan. Termination of the fixed retirement plan for pilots was finalized during January, 1983. The termination allows Western to recover that portion of excess funds in the plan which relate to Company contributions. Elimination of a deferred credit related to the plan of S7,900 at December 31, 1982 and cash proceeds of approximately S26,100 (of which S16,600 was received in January) will result in a gain of approximately S34,000. The remaining S9,500 is scheduled to be received later in 1983. The gain will be reported in the first quarter of 1983. In conjunction with terminating the fixed retirement plan, Western has begun increased contributions to the variable retirement plan for pilots in 1983. Western has pledged certain assets to secure its obligations regarding other employee benefits for pilots. See ote 6 to Financial Statements. Note 5. Income Taxes Income taxes are summarized as follows: 1982 1981 1980 Current: Federal . S (3,124) 2,104 State . (791) [492) (3,124) (791) l,612 20 1982 1981 1980 Deferred: Provision (2,290) (12,974) (5,073) Operating loss carryforward 1,964 (5,091) (15,533) Jnvestmenl credits 71 (54) (255) (18,065) [20,660) Amortization of deferred investment credits (177) (552) (559) S (3,556) (19,408) [19,607) Under applicable law, investment credits could be applied against 80 percent of Federal income tax liabilities in 1980 and 1981 and 90 percent of the liability in 1982. The Tax Equity and Fiscal Responsibility Act of 1982 reduced the application to 85 percent for 1983 and beyond. Def erred income taxes arise from timing differences between financial and tax reporting. The effects of these differences on income taxes are as follows: Depreciation and amortization Sale of lax benefits Capital leases Jnterest capitalized Employee benefits Gain on sale and leaseback of flight equipment Other 1982 S (6,868) 72 1 1,464 7 17 1,074 602 S (2,290) 1981 (13,409) 2,560 (1,754) 1,183 (847) [707) (12,974) Reconciliations of income tax benefits at the United States statutory rate to the provision for income taxes follow: 1982 ===- 1981 Income taxes at the United States statutory rate S (21 ,884) (42,692) Increases (reductions) in taxes resulting from: Effect of operating loss carryforward for which no tax benefit may be recognized Amortization of deferred investment credits Reversal of investment credits previously recognized on flow-through method State income taxes net of federal income tax benefit Capital gains IRS audit adjustments Other Income taxes s (13,017) 24,490 (177) (552) 29,362 (427) 4,798 (2,452) (186) (227) (3,556) (19,408] 1980 (3,454) (1,084) 1,140 (718) (957) (5,073) 1980 (22,650) (559) 5,697 (266) (1,829] (19,607) et operating losses of S63,000 have not been utilized on tax returns. For income tax purposes, S34, 100 expires in 1995 and S28,900 expires in 1997. For financial statement purposes, S22,500 of the carryforward has not been recognized and expires in 1997. Investment credits available to reduce future years' Federal income tax expense for financial and tax purposes amount to S55,300 at December 31, 1982. For income tax purposes, available credits expire in the following years: 1992 1993 S 2,700 13,500 1994 1995 SI 7,300 19,000 1996 1997 S2,200 600 In 1981 Western intended to relinquish the right to carryback the 1981 net operating loss to offset prior years' taxable income, since the company's tax liability in those prior years had been substantially eliminated by application of investment tax credits. During 1982 Western decided to carryback the 1981 loss to prior years and obtain a refund of the tax that had been paid. As a result, 1982 amounts shown above reflect increased benefit of net operating losses, substantially offset by reversal of previously recognized application of investment tax credits. In November 1981 tax benefits were sold under the provisions of the Economic Recovery Tax Act of 1981. The gain resulting from this sale of S5,565 is included in Other income ( expenses) on the statements of operations. 21 (In thousands of dollars except per share amounts) Note 6. Debt and Pledged Assets At December 31, 1982 and 1981 long-term debt included: 9.55% equipment trust certificates due May l, 1993, with semi-annual principal payments of S3,458 . 10% equipment trust certificates due April l, 1994, with quarterly principal payments of s 1,000 . Floating-rate equipment trust certificates due June 30, 1995 (interest rate 10.5% at December 31, 1982) with semi-annual principal payments of S2,609 starting June 30, 1984 . 13.29% installment notes due May I, 1995, with semi-annual principal payments of Sl,100 . Installment note due October 31, 1987 . Floating-rate bank notes due September l, 1985 with quarterly principal payments of S2,000 . Floating-rate insurance installment notes due September l, 1984 (interest rate 8.50% at December 31, 1982) with annual principal payments of S7,000 . 7% installment notes due May 4, 1986, with semi-annual principal payments of S352 . Floating-rate not payable to manufacturer due December, 1988 with quarterly installments of Sl,392 . Deferred deposits with manufacturer, interest at prime rate plus % . 83/4% installment note due November 16, 1985 ... 5% convertible subordinated debentures due February l, 1993, with annual sinking fund payments of S 1,500 starting in 1984 . . .... .. . . . 12% convertible subordinated debentures due December 1992 . IO% subordinated sinking fund notes due April 15, 1984, with a sinking fund payment of S 1,631 in 1983 and a final payment of S6,890 in 1984 Less: Current installments . 1982 1981 s 72,609 79,525 44,992 48,992 60,000 60,000 27,500 29,700 2,752 22,000 27,000 14,000 21,000 2,461 3, 165 33,400 11,257 14,877 9,217 12,289 22,500 22,552 12,500 8,521 10,250 343,709 329,350 (43,038) (26,650) S300,67 l 302,700 On August 31, 1982, Western and certain of its creditors entered into a Master Credit Terms Agreement which con- tained new loan covenants based on forecasted results of operations. These covenants require maintenance of certain net worth levels, cash flows, and debt-equity ratios as defined. Also included in the agreement are provisions which restrict payment of dividends, redemptions of capital stock and may restrict additional borrowings, capital expenditures, and rental commitments. Because management believes that Western will be in compliance with all required covenants based on forecasted 1983 operations, the related debt is classified as long-term obligations. Certain 1981 amounts, which were reclassified to current liabilities at December 31, 1981 due to non-compliance with required covenants at that time, have been reclassified to long-term obligations to conform to the 1982 presentation. See "Llquidity and Capital Resources" and "Financial Covenants" on pages 5 and 6 of this report. During 1982 Western's Bank Loan Agreement was amended to replace the revolving credit notes with term notes. The term notes are due September 1, 1985 and require quarterly principal payments of S2,000. The interest rate is 105% of the prime rate plus 5 /a% until September 1, 1983, then increases by 1 /s% each year. 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 approximately S2,500. Since November 1981 no compensating balances have been maintained. During 1982 Western entered into a term loan and security agreement to borrow S33,400 from an affiliate of an aircraft manufacturer. This term loan requires quarterly payments of Sl,392 with the fmal payment due December 1988. The interest rate is the LIBOR rate plus 2 percent. These term notes are secured by three B737 and three B727 aircraft and 15 engines. In addition to the quarterly term loan payments, additional payments to the lender are required. Before March 28, 1989, a selection by Western of the amount of additional payment due will be made. The options for the 22 additional payments are a percentage of the proceeds from the sale of the aircraft or a percentage of the fair market value of the aircraft. The percentage of the aircraft sales proceeds or the fair market value that must be paid is 15 percent for the first year's borrowing increasing by 15 percent each year that a portion of the loan is outstanding until reaching 90 percent during the sixth year. This loan may be prepaid at any time without premium or penalty The net book value of the six aircraft and 15 engines was S15,212 at December 31, 1982. During December 1982 a private placement at par of S12,500 of 12% convertible subordinated debentures was made. These debentures are convertible into Common Stock at S5.50 per share, subject to adjustment in certain cases, and mature in ten years. Interest is payable semi-annually Equipment trust certificates and 13.29% installment notes outstanding at December 31, 1982, are secured by 17 aircraft and 51 engines with a net book V3lue of S238, 115 at December 31, 1982. The installment note due October 31, 1987 accrues interest at 21 % and is secured by an aircraft and four engines with a net book value of S2,84 9 at December 31, 1982. Western has provided security on certain other debt in the form of a chattel mortgage. The chattel mortgage grants a first priority security interest in 25 aircraft and 68 aircraft engines to certain lenders. The net book value of the aircraft and engines encumbered was S152,760 at December 31, 1982. Notes payable at December 31, 1982, consisted of S10,000 of notes with two banks and S3,109 of loans payable to two financial lending institutions. The notes payable to the banks are scheduled for repayment on September 1, 1983. The interest rates on these notes ranged from 12 to 19 percent during 1982. The loans from the financial institutions are secured by Western's Universal Air Travel Card and Western Travelcard receivables, which total S11,043 at December 31, 1982. Under these agreements Western can borrow, up to a limit, a percentage of the receivable balances. The interest rate is prime plus 3.25 percent on one loan and prime plus 4 percent on the other loan. Effective January 18, 1983, Western entered into a S30,000 revolving credit agreement with a group of financial institutions. The amount available for drawdown decreases from S30,000 to S25,000 on June 30, 1983 and further decreases to S12,500 on July 31, 1983. All amounts advanced must be repaid by August 31, 1983. The interest rate on funds borrowed is 1 % over an interest rate based on the higher of Citibank's base rate or a rate computed based on various other interest rates. Upon signing the agreement, Western paid a fee of of 1 % of the commitment and issued 550,000 warrants for the purchase of Common Stock at S5.625 per share subject to adjustment. A borrowing fee is required and up to 250,000 additional warrants will be issued upon drawdown under the revolving credit. Any amounts advanced under this agreement will be secured by the chattel mortgage described above. No amounts may be borrowed under this agreement unless Western's operating cash is below a specified level and certain other conditions are met. The following schedule shows the amount of long-term debt due in each of the next five years: 1983 543,038 1985 535,677 1987 533,937 1984 51,482 1986 . 26,369 At December 31, 1982, 2,012,522 shares of Common Stock were reserved for conversion of 51/cJii debentures at a conversion price of S11.18 per share; and 2,272,727 shares of Common Stock were reserved for conversion of 12% debentures at a conversion price of S5.50 per share. With the exception of one of its aircraft and 26 of its engines, all of Western's owned aircraft and engines were pledged as collateral for debt and other obligations at December 31, 1982. Several of the agreements require that collateral be maintained at specified levels. In addition to assets pledged as collateral for debt, Western has pledged a portion of its flight equipment spare parts, six spare aircraft engines, and fuel inventories, with an aggregate book value of approximately S24,000 to secure its obligation to provide employee benefits in conjunction with the termination of the fixed retirement plan for pilots. See Note 4 to Financial Statements. Note 7. Stock Options Western has two stock option plans for officers and key personnel. The first plan was adopted in 1974, and provides for options to purchase a maximum of 1,030,000 shares of Western Common Stock at prices not less than the fair market value of the stock at date of grant.Options granted under the 1974 Plan are not intended to qualify as "Incentive Stock Options" under the Internal Revenue Code. The options under this plan are exercisable in equal annual increments over a five-year period and expire ten years after the date of grant. No options may be granted under the 1974 Plan after January 20, 1984. The second plan is the Executive Stock Option and Stock Appreciation Right Plan (the" 1982 Plan'} The 1982 Plan provides for granting of incentive stock options, non-qualifying stock options, and stock appreciation rights. A maximum of 1,800,000 shares of Western Common Stock may be issued under this plan. Options granted under the 1982 Plan expire ten years from the date of grant and the purchase price specified in each option may not be less than the fair market value of the Common Stock at the date of the grant. 23 ., (ln thousands of dollars except per share amounts) The balances of options granted under the plans follow: Options granted and outstanding al: December 31, 1982 December 31, 1981 Options exercisable al: December 31, 1982 December 31, 1981 1974 Plan Number of Shares 832,4 15 762,675 661 ,11 5 697,3 19 1982 Plan Average Number Average Price of Shares Price S7.37 1,747,500 S4. 15 S8.55 S8.20 1,747,500 S4. 15 S8.57 At December 31, 1982 and 1981, 962,885 shares of Common Stock were reserved for the exercise of current and future grants under the 1974 Plan, and 1,800,000 shares were similarly reserved under the 1982 Plan. Note 8. Loss per Common and Common Equivalent Share Loss per Common and Common Equivalent Share is calculated as follows: 1982 et loss S44,016) Preferred stock cash dividends -:::,-=-,======== (2,394)* Loss applicable to Common Stock . Weighted average shares outstanding (in thousands) Loss per common and common equivalent share * 1982 pref erred stock dividends are in arrears. Fully diluted earnings per share are not presented due to net losses. S46,4 10) 13,044 S (3.56) 1981 1980 (73,400) (29,632) (2,394) [2,394) [75,794) [32,026) 13,037 13,031 [5.81) [2.46) The exercise of stock options and conversion of the convertible subordinated debentures and 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 S2 Series A Preferred Stock are convertible into Common Stock at the rate of 2.5 shares of Common Stock for each share of Series A 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 S26 at December 31, 1982, decreases periodically until 1987 after which it remains at S25 per share. At December 31, 1982, 2,992,175 shares of Common Stock were reserved for conversion of Series A Pref erred Stock. The Company has omitted payment of the quarterly dividends on the Series A Preferred Stock since the first quarter of 1982. The total amount of the dividends in arrears at December 31, 1982 was S2,394. If six dividends are omitted, the holders of the Series A Preferred Stock have the right, voting as a class, to elect two additional members to the Company's Board of Directors at the next Annual Meeting of Shareholders. Various loan agreements currently prohibit payment of dividends on preferred stock. Consequently, it is expected that the dividend normally payable on March 31, 1983, will be omitted. Note I 0. Related Party Transactions Since January 1981 Western has entered into several agreements with companies owned or controlled by George E. Batchelor, who is a holder of approximately 4.90 of the Company's outstanding Common Stock. In March 1981 Western sold two DC-IO aircraft toa company controlled by Mr. Batchelor. In April 1982 Western sold, with recourse, the related conditional sales contracts receivable to Associates Commercial Corporation for S21,000 in cash. In March and June 1981 Western entered into agreements with companies controlled by Mr. Batchelor, pursuant to which Western maintains the two DC-IO aircraft which were sold to a company controlled by Mr. Batchelor in March 1981. Under these agreements, Western is compensated for the services it performs at rates based on Western's direct main- tenance costs per flight hour as reported to the CAB, subject to renegotiation semi-annually on the basis of increases in such costs. The agreement is for a term of 50 months expiring in August 1985, but subject to termination by either party for "good cause'.' In April 1982 in connection with the transaction described in the preceding paragraph, Western agreed to provide maintenance under the terms of these maintenance agreements for two additional DC-IO aircraft then being purchased from Laker Airways. In December 1981 Western sold to, and leased back from, companies controlled by Mr. Batchelor two 737 aircraft for an aggregate cash price of SI 1,000. These leases extend over four years with monthly rental payments of S130 per 24 aircraft, with Western having the right to extend the leases for two additional one-year periods. In December 1982 Western leased two new 737-200 aircraft from a subsidiary of Alaska International Industries, Inc. ("All"). All is wholly owned by Neil G. Bergt, Chairman and ChiefExecutive Officer of Western. The leases are for a term of twelve years with options to extend for two years at fair rental value and/or purchase of the aircraft at fair market value subject to specified minimum amounts at the end of the fifth and each subsequent year. The liability for these capital leases at December 31, 1982 was 521,000. The rental is S160 per aircraft per month. In addition to amounts paid pursuant to the leases, Western paid Sl,150 to AIi and its subsidiaries during 1982 to reimburse them for expenditures incurred on behalf of Western for equipment, facilities and personnel. Approximately S 1,000 of this amount was paid for reimbursement of expenses billed by All in connection with Mr. Bergt's aircraft expenses while traveling for Western and personnel on loan to Western (Mr. Frank P Moolin, Jr., then President of All, served as Mr. Bergt's assistant at Western while receiving his salary from All). Note 11. Quarterly Financial Data (Unaudited) Summarized quarterly financial data for 1982 and 1981 is as follows: March 31 June 30 September 30 December 31 1982 Operating revenues S248,682 257,615 300,510 258,463 Operating income (loss) (6,381) (7,670) 12,627 (29,374) et earnings (loss) (10,840) 3,058 3,409 (39,643) et Earnings (Loss) per Common Share: Primary s (0.88) 0.19 0.21 (3.08) Fully diluted s (.088) 0.18 0.20 (3.08) 1981 Operating revenues S262, 159 270,844 293,62l 233,217 Operating income (loss) (3,497) (15,003) (3,753) (43,701) et earnings (loss) (1,692) (8,399) (7,255) (56,054) Net Earnings (Loss) per Common and Common Equivalent Share s (0.18) (0.69) (0.60) (4.34) Western terminated its defined benefit retirement plan for non-union employees. This termination produced a gain for the second quarter of 1982 of S15,930 (Sl.22 per share). Western revised certain actuarial assumptions, which increased the net earnings in the third quarter of 1982 by S4,200 (S0.32 per share) and reduced the net loss in the fourth quarter of 1982 by S3,000 (S0.23 per share). Western revised its procedures for recognizing 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 S3,244 (S0.25 per share), S504 (S0.04 per share), S(l,040) (S0.08 per share), and S630 (S0.05 per share), respectively The quarterly income tax benefit for the first, second, and third quarters of 1981 are based on the statutory rate. The tax benefit available for the fourth quarter 1981 was limited for financial reporting purposes to approximately five percent of the pretax accounting loss because the tax benefit of the remaining net operating loss could not be recognized currently No investment credits were recognized during 1981 or 1982. Note 12. Description of Impact of Inflation (Unaudited) Statement of Financial Accounting Standards No. 33 (SFAS o. 33) prescribes two supplementary income computations for estimating the impact of inflation. These computations estimate the effects of general inflation ( constant dollars) and the effects of changes in specific prices ( current cost). SFAS o. 33 defines constant dollar accounting as a method of reporting financial statement elements in dollars each of which have the same general purchasing power. Current cost accounting is defined as a method of measuring and reporting assets and expenses associated with the use or sale of assets at their current cost or lower recoverable amount at the balance sheet date or at the date of use or sale. Both methods involve the use of assumptions and estimates. Therefore, the resulting measurements should be viewed as estimates, rather than as precise indicators of the effects of inflation. The amounts reported in the primary financial statements have been adjusted for depreciation and amortization expense. Revenues and all other operating expenses are considered to reflect the average price levels and have not been adjusted. Further, there have been no adjustments made to provisions for income taxes. Constant dollar values were determined by restating historical costs, accumulated depreciation and amortization, and depreciation expense of property and equipment into average 1982 dollars using the Consumer Price Index for 25 (In thousands of dollars except per share amounts) all urban consumers (CPI-U) published by the Bureau of Labor Statistics. Current costs for aircraft were determined by using the direct pricing method. Current costs for spare engines, parts, and assemblies included in property and equipment were computed based on the ratio by which the current cost of aircraft fleets exceeds the historic cost of such fleets. Current costs for other property and equipment were determined by indexation using the CPI-U. Net (loss) as reported in the statement of operations . Adjustment to Restate Costs for the Effect of General Inflation: Depreciation and amortization expense . Net (loss) adjusted for general inflation . Adjustment toReflect 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 decline in purchasing power of net amounts owed . Increase in specific prices ( current cost) of property and equipment held during the year*. Effect of increase in general price level . 5(44,016) (34,495) (78,511) 18,390 5(60,121) 5 18,556 5 35,865 (28,880) Excess of increase in specific prices over increase in the general price level . 5 6,985 *At December 31, 1982 current cost of property and equipment, net of accumulated depreciation and amortization was 5724,501 . A five-year comparison indicating the effect of adjusting historical revenues, purchasing power gains or losses on net monetary items, cash dividends, and Common Stock market prices to dollar amounts expressed in terms of average 1982 dollars as measured by CPI-U follows: Operating revenues . Historical Cost Information Adjusted for General Inflation: Net earnings (loss) . Net earnings (loss) per common share . Net assets at yea~end . Current Cost Information: Net earnings (loss) . Net earnings (loss) per common share . Excess of increase in specific prices over. increase in the general price level . Net assets at yea~end . Gain from decline in purchasing power of 1982 Sl,065,270 s (78,511) (6.02) 349,250 (60,121) ( 4.61) 6,985 198,367* Year Ended December 31, 1981 1,123,431 (112,472) (8.82) 407,425 (140,649) (10.98) 82,788 242,015''' 1980 1,165,033 (66,407) (5.31) 514,295 (83,091) (6.59) 133,472 786,169 1979 1,239,718 27,837 l.89 557,715 14,793 .89 7,615 713,339 net amounts owed . 18,556 44,219 54,811 48,888 1978 1,235,079 Cash dividends paid per common share . S .29 .53 .59 Market price per common share at yea~end . S 5.2 5 5.16 10.68 13.80 12.21 Average Consumer Price Index . 289.1 272.4 246.8 217 .4 195.4 *Prior to 1981 direct prices were based on selling prices for new aircraft provided by the Air 'Iransport Association of America. For 1981 and 1982 current appraisals ofWestern's existing fleet were available for determination of current cost. 26 I I The Board of Directors Western Air Lines, Inc.: Peat, Marwick, Mitchell & Co. Certified Public Accountants 555 South Flower Street Los Angeles, California 90071 We have examined the balance sheets of Western Air Lines, Inc. as of December 31, 1982 and 1981 and the related statements of operations, shareholders' equity and changes in financial position for each of the years in the three-year period ended December 31, 1982. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our report dated March 1, 1982, except for certain matters which were as of March 15, 1982, our opinion on the 1981 financial statements was qualified subject to the ability of the Company to continue in existence. The qualification was considered necessary at that time primarily because of the substantial net losses during the years ended December 31, 1981 and 1980, the certain long-term debt which was, as of December 31, 1981, subject to demand for accelerated payment, and certain other factors disclosed in the 1981 Notes to Financial Statements. Since the issuance of our aforementioned report, the Company has concluded new long-term loan agreements, as more fully described in Note 6, which permitted the Company to reclassify as long-term S 153,369,000 of debt which was previously classified as current debt at December 31, 1981. In addition, the Company has arranged additional financing, effected various operating cost reductions, and realigned its route system with flight operations now centered at Salt Lake City to more fully utilize its aircraft. These developments mitigate the conditions that required a qualified opinion for the year ended December 31, 1981 and, therefore, a qualification is no longer considered necessary. Accordingly, our present opinion on the 1981 financial state- ments is different from that expressed in our previous report. In our opinion, the aforementioned financial statements present fairly the financial position of Western Air Lines, Inc. at December 31, 1982 and 1981 and the results of its operations and the changes in its financial position for each of the years in the three-year period ended December 31, 1982, in conformity with generally accepted accounting principles applied on a consistent basis. March 2, 1983 27 BOARD OF DIRECTORS Fred Benninger President 'Iracinda 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 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 Western Air Lines, Inc. Los Angeles, California DIRECTORS EMERITI Hugh W. Darling Attorney-at-Law Darling, Hall & Rae Los Angeles, California Leo H. Dwerlkotte Las Vegas, evada James D. Garibaldi Attorney-at-Law 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 28 Bert T. Kobayashi, Jr. Attorney-at-Law Kobayashi, Watanabe, Sugita and Kawashima Honolulu, Hawaii Arthur G. Linkletter T elevision 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 & '!rust Company Salt Lake City, Utah Arthur G. Woodley Bellevue, Washington CORPORATE OFFICERS Neil G. Bergt Chairman of the Board and Chief Executive Officer Andre C. Dimitriadis Senior Vice President- Finance and Chief Financial Officer George M. Kamats Senior Vice President- Operations Lawrence H. Lee Senior Vice President- Salt Lake City George M. Sullivan Senior Vice President- Alaska Region Harold Achtziger Vice President- Airport Operations General Offices Western Air Lines, Inc. 6060 Avion Drive Los Angeles, California 90045 (213) 646-2345 Craig B. Benedetti Vice President- Marketing Gordon M. Bethune Vice President- Maintenance & Engineering Jack W Boisen Vice President- Personnel Relations Howard L. Culver Vice President- Regulatory Affairs Thomas J. Greene Vice President, General Counsel & Secretary Steven S. Lay Vice President- Passenger & Cargo Sales Registrar/Transfer Agent-Common & Preferred Stock Bank of America National Trust & Savings Association 555 South Flower St., Los Angeles, California 90071 Debenture and Subordinated Note liustee United States Trust Company of New York 4 5 Wall Street, New York, New York 10005 Exchange Listing-Common & Preferred Stock Debentures and Subordinated Notes New York Stock Exchange Pacific Stock Exchange Notice to Shareholders. Seth M. Oberg Vice President- Flight Operations Cal Rader Vice President- Data Processing and Communications Glen L. Stewart Vice President and Controller C.F. nEvecy Vice President- Administration Ticker Symbols Common Stock Preferred Stock 5 % Debentures 10% Notes WAL WAIA WALK WAL. Independent Accountants Peat, Marwick, Mitchell & Co. 555 South Flower Street Los Angeles, California 90071 A rule adopted by the Civil Aeronautics Board ("CAB'1 in July 1970, as amended on December 29, 1972, imposes obligations on certain stockholders of air carriers. Any person who owns as of December 31 of any year or subsequently acquires, either beneficially or as a trustee, more than 5% of any class of capital stock of an air carrier must file with the CAB a report containing the information required by Part 245.12 of the CAB's Economic Regulations on or before April 1 as to the capital stock owned as of December 31 and/or a report containing the information required by Part 245.13 of the CAB's Economic Regulations within 10 days after acquisition as to the capital stock acquired, after December 31. Any bank or broker which holds as trustee more than 5% of any class of capital stock of an air carrier on the last day of any quarter of a calendar year must file with the CAB within 30 days after the end of the quarter a report in accordance with the provisions of Part 245.14 of the CAB's Economic Regulations. Any person required to report under either Part 245.12, Part 245.13 or Part 245.14 of the CAB's Economic Regulations who grants a security interest in more than 5% of any class of capital stock of an air carrier must within 30 days after granting such security interest file with the CAB a report containing the information required in Part 245.15. Any stockholder who believes that he may be required to file such a report may obtain further information by writing to tl1e Director, Bureau of Domestic Aviation, Civil Aeronautics Board, Washington, D.C. 20428. Form 10-K: Shareholders may obtain free of charge a copy of the company's annual report on form 10-K as filed with the Securities and Exchange Commission by writing to the Secretary, PO. Box 92005, World Way Postal Center, Los Angeles, California 90009. I l General Offices: Western Air Lines Building, 6060 Avion Drive, Los Angeles International Airport, Los Angeles, California 9004 5