Western Airlines Annual Report 1984

WESTERN AIRLINES 1984 ANNUAL REPORT =
FIVE YEARS AT A GLANCE (in million
Operating revenues ........................... .. ..... . .. .. ...... $
Operating expenses . .. ...... . . . . . ...... . .............. . ........ .
Operating Income (loss) . .. . .. ... ................... .. ....... .
Other Income (Expenses):
Interest exp nse, n t ... . ... . .................... ........ . ... .
Gain on asset dispositions and oth r incom , n t .. . .. . ... ..... . . .
Loss before income taxes and extraordinary item . .. ..... .. . ... . .
Income tax (benefits) ........... ..... ............... ... .......... .
Loss before extraordinary item ........... .. .............. . ... .
Extraordinary item:
Gain on pen ion plan terminations ... . . ... . . ................. .
Net loss ............ . .... . ..... .. .. ... ..... ....... . . .... . .. .
Loss per common share:
Before extraordinary item .......... . . ... ... .. ... ............ . .
Extraordinary item ................... . . .. . .. .. . ... .......... .
Net Loss . . .. . .... ..... ... . . . . ........ . .. . .................. .
Average common shares outstanding (000) .. ................. . .... . .
Passengers carried (000) .... . . . . . ... . .... ... .. . .... . . .... . ....... .
Available seat miles (000,000) . . .... ...... ... . ... ... .. .. ... .. ..... .
Revenue passenger miles (000,000) .... . . . ....... . .. . .. . . . . . ..... . .
Passenger load factor - actual(%) ....... . .......... ... ..... . ....... .
- breakeven (%) ....... ....... ... ..... .. .... . .
In Recognition . . .
har am unt)
1984
1,181.9
1,170.5
11.4
(58.1)
17.5
(29.2)
(29.2)
$ (29.2)
$ (1.37)
$ (1.37)
24,104
8,307
16,318
9,417
57.7
59.9
1983
1,142.
1,199.0
(56.4)
(51.5)
11.6
(96.3)
(0.3)
(96.0)
41.5
(54.5)
(6.22)
2.62
(3.60)
15,821
9,134
16,654
9,416
56.5
62.5
(46.7)
14.0
(63.5)
(3.6)
(59.9)
15.9
(44.0)
(4.78)
1.22
(3.56)
13,044
8,441
15,125
8,893
58.8
63.1
1981
(66.0)
(45.0)
18.2
(92.8)
(19.4)
(73.4)
(73.4)
(5.81)
(5.81)
13,037
8,402
14,496
8,548
59.0
65.8
1980
995.7
1,041.5
(45.8)
(38:5)
35.1
(49.2)
(19.6)
(29.6)
(29.6)
(2.46)
(2.46)
13,031
9,130
15,516
8,832
56.9
62.0
The newest aircraft in Western's fleet, the new generation Boeing 737-300, i f atur d nth c v r f thi y ar'
The first 737-300 was delivered in March 1985. Inside this year's Report t Shar hold r , m
sands whose efforts make Western the quality airline of the Wi tar featur d.
Annual R port.
nting th thou-
Chief Executive Officer Gerald Grinstein,
Chairman Lawrence H. Lee and President Robin H. H. Wilson.
1
REPORT TO SHAREHOLDERS:
Western Airlines turned the corner in 1984. The
company reported its first full-year operating profit
in five years as well as a fourth quarter operating
profit of $6. 9 million, Western's highest fourth
quarter ever. Although the company still finished
the year with a net loss, it was reduced by $25 mil-
lion from 1983. Not counting an extraordinary gain
in 1983, the net loss reduction was $67 million. At
the same time, the company was positioned to
return to full profitability in 1985. These results
begin to demonstrate what many within the com-
pany have believed for some time - that Western
can operate profitably in the deregulated airline
industry.
The successes of 1984 did not _come about by
chance. They are the result of strategies designed
in the preceding year, and of management and
labor reaching the understanding that both sides
can cooperate in key areas to assure Western's
future success.
The prime example of this cooperation was the
development and successful implementation of
the Competitive Action Plan (CAP), which has
provided Western with a new, highly competitive
cost structure. Building on the foundation estab-
lished by the Partnership Program in 1983, the
company and its five domestic unions negotiated
new labor agreements, making Western the first
major airline to restructure its costs permanently
through the collective bargaining process. The
ben fit of this improved cost structur began to be
felt in the fourth quarter and will be even more evi-
dent in 1985.
Western's employees will share the benefits.
As a result of the Partnership and CAP efforts,
Western's employees now own nearly a third of
the airline's common stock, and four union repre-
sentatives have joined the company's board of
directors.
The company has significantly improved its
internal financial budgeting and reporting proce-
dures in order to keep all expenses at the lowest
possible level. The system provides for tight cost
accountability from first line managers to the office
of the Chief Executive.
MARKETING THE AIRLINE OF THE WEST
Management moved aggressively in 1984 to
position Western to be the dominant full service
carrier of the western United States by refining
schedules and strengthening connecting opera-
tions at Salt lake City and Los Angeles, the air-
line's primary hubs.
Western is by far the largest airline operating
at Salt lake City with over 70 percent of the air-
port's daily departures. The terminal capacity of
Western's domestic connecting complex was ex-
panded by 40 percent in 1984, with the opening
of Concourse D in October. Flights now operate
from 21 second-level boarding gates. A further 29
percent increase in departures in April 1985 will
give Western 108 daily flights serving 38 non-
stop destinations.
2
u tamer Seroi e' Th lma onklin,
Debbi B nnett, Denni Van ampen, Linda Ra mu en,
Bob L and Claudia Taylor.
WAD FAClOR-Actual Vs. Breakeven
66
64
62
.. 65.8
............
...........
.....
-
-
.
-
....
.......... ' 63.i .............................. 62.5
,,,.
~- -
62.0 -
.......

..
60
58 ,,
~
56.9
56
1980
_,
,,
58.8
,.
;9~0-------
,, .,
'~
1981 1982
.. ..
59.9
~, --
,, _____ 57.7
', ...
~-
56.5
1984
111111111111111
Breakeven Load Factor - Actual Load Factor
Fli ht ontrol' andy Han n, Dary Zu o and
Alan Nakao, Air raft Routin ' Leonard S ott and
Panny a tillo of Ii ht ontrol.
Maintenance's Robert Montgomery, Virgil Hans,
Dick Snyder, Tom Tiara and Frank Purkart.
The Salt Lake City hub is operating smoothly,
and it is an increasingly attractive alternative to
Denver for passengers throughout th western
United States. Western continues to be grateful for
the help and cooperation received from the people
of Salt lake City and the State of Utah in the devel-
opment of this important facility.
Western also boosted its schedule at Los Angeles
International Airport. The airline now operates the
most daily departures from Los Angeles. With
nonstop flights to 25 cities, Western serves more
points nonstop from Los Angeles than any other
airline. In addition, the Los Angeles operation is
scheduled as a connecting gateway, with service to
Canada, Hawaii and Mexico, all key pleasure travel
destinations.
With an unsurpassed mix of sun and snow des-
tinations and the combination of quality full ser-
vice at competitive fares, Western will continue to
attract a high percentage of discretionary travelers
in the West. The company is also taking action,
however, to gain a larger portion of the business
travel market through improved schedules and
service as well as a fleet-wide upgrade in the
design and configuration of the aircraft interiors.
We tern's current schedule provid s convenient
morning, midday and vening d partur , and
nabl same-daytrav ltoandfrommo tmark ts.
S rvic geared to th bu ine trav 1 r uch as
advanc eat a ignm nt and roundtrip ch ck-in
hav b n add d. In additi n, W t rn nrich d it
Travel Pass II frequent flyer program in 1984 to
maintain its competitive edge through a simple
structure and fast rewards.
WESTERN'S FLEET
McDonnell
Boeing Boeing Boeing Douglas
727-200 737-200 737-300 DC-10-10
Owned 36 11 7
Leased 8 10 3
Delivery
1985 3
1986 3
1987 6
1988 3
During this past year, the airline began a longer-
term program of redesigning its aircraft interiors.
First class sections, reflecting the commitment to
full service and providing a key incentive for the
frequent flyer program, will be available on all
Western flights. Equally important is the upgrad-
ing of coach sections throughout the fleet, adding
newly designed seats to give passengers additional
leg room without sacrificing capacity. Larger over-
head bins have been installed aboard 727 aircraft to
accommodate demand for carry-on space and the
same is being done on 737 aircraft.
Finally, all of Western's aircraft will be given a
face-lift, replacing the red, white and black paint
scheme of the last 15 years with a simple, bright
red Western "W" outlined in blue and white on a
4
In-Fli ht's llen Ru h and Jim Grime
with Pilots Dudley Moore and
John Billon and In-Fli ht's Pat Silva.
Payroll's Sumi Yodogawa, Susie Johnson, Arnold Binder,
Sue Endo, Mario Perez, Cheryl Kunis and Pat Heitz.
Telecommunication ' Elaine Shue, Dori Parrish,
Bob Yoder, Linda Guevara and Donn Smith.
OPERATING INCOME $ Millions
1980 1981 1982 1983 1984
5
gleaming aluminum fuselage. (One of the first
airplanes to sport this new design, a new genera-
tion Boeing 737-300, is pictured on the cover of this
report.)
All of these changes position Western to take
advantage of new opportunities in what is and will
be a rapidly changing competitive environment in
the western United States.
STRENGTHENING MANAGEMENT
Western continues to strengthen its manage-
ment and board of directors. Gerald Grinstein,
Western's president and chief operating officer
since January 1984, was elected chief executive offi-
cer in February 1985. He succeeds Lawrence H.
Lee, who remains chairman of the board. Robin
H.H. Wilson also joined the company in February
as president and chief operating officer after three
years as president and general manager of the
Long Island Rail Road where he is credited with a
major turnaround. He previously spent 17 years
with Trans World Airlines in operations, planning
and marketing. He was senior vice president-oper-
ations when he left TWA.
In connection with these appointments, West-
ern implemented a new organization involving
fewer layers of management, thus enabling the
company to respond more quickly to change in
the marketplac . Under the new organization, six
staff functions and th chi f op rating offic r
r port to Mr. Grin tein, whil nin p rating func-
tions report directly to Mr. Wilson.
The company was also fortunate to attract
Thomas J. Roeck, Jr., as senior vice president-
finance and chief financial officer. Mr. Roeck came
to Western from Global Marine Inc., where he
spent 18 years, most recently as vice president and
treasurer.
In addition to Mr. Wilson, Western has six new
directors who expand the expertise and broaden
the background of Western's board. The two new
outside directors are Archie R. Boe and Joseph T.
Casey. Mr. Boe is the retired president of Sears and
the former chairman and chief executive officer of
the Allstate Companies. Mr. Casey is executive vice
president and chief financial officer of Litton
Industries. Representing Western's employees on
the board are J.A. Kammermeyer of the Air Line
Pilots Association; Dr. Charles Levinson, an inter-
national trade unionist and economist who is
representing employees affiliated with the Interna-
tional Brotherhood of Teamsters and the Transport
Workers Union; Susan Edwards Pace, Chair-
woman of Western Airlines Master Executive
Council of the Association of Flight Attendants,
and James J. Shields, National President of the Air
Transport Employees.
Western's management is pleased with the com-
pany's progress in 1984 and believes that the far-
reaching changes of the last few years provide the
company with a new and stronger position ena-
bling it to compete and grow in the deregulated
6
Re eruation' Mar ie Lui , indy Avila, Jerry Wood,
Philip a kin, Carol John on and Avis John on.
Ramp Service's Bruce L. Cass, Luke Myles,
Laura Lee, Barry Smith, Randy Bates,
Jeff Sanborn, Frank Godfrey and Troy Coyle.
Fie t ervi e' Mi ha l 'Malley, Rilb rt Martin z,
Thom L mmon, Felix alaz:ar, Micha l D Ian y,
Jame Walker, Larry M arthy, Ni k Vella and andor Toth.
Computer Operations' Stu Koren,
Hal Healy and Susan Riemer.
7
environment. Western's passengers already are
responding to improvements the company has
been making: Western's load factor in recent
months has been among the highest in the indus-
try. Equally important, the investment community
is beginning to realize the significance of the
changes at Western, which can result in more
attractive financing opportunities for the company.
Western is grateful for the support of its share-
holders, passengers, travel agents, and most of all,
its employees, over the last few difficult years. The
company is confident that support will be
rewarded in the years to come.
Lawrence H. Lee
Chairman
March 20, 1985
Gerald Grinstein
Chief Executive Officer
BOARD OF DIRECTORS
Fred Benninger*
President
Tracinda Corporation
Las Vegas
Walter J. Hickel
Chairman of the Board
Hickel Investment Company
Anchorage
Susan Edwards Pace
Chairwoman
Western Air Lines Master
Executive Council
Assoc. of Flight Attendants
Los Angeles
Archie R. Boe
Retired President
Sears, Roebuck & Co.
Chicago
John A. Kammermeyer
Air Line Pilots Association
Los Angeles
Spencer R. Stuart*
Chairman of the Board and
Chief Executive Officer
InveQue t Incorporated
Dallas
Victor L. Brown*
Presiding Bishop
The Church of Je u Christ
of Latter-Day Saint
Salt Lake City
Bert T. Kobayashi Jr.
Kobayashi, Watanabe,
Sugita and Kawashima
Attorney-at-Law
Honolulu
James J. Shields
ational President
Air Transport Employees
Los Angeles
8
Joseph T. Casey
Executiv Vic President
Chief Financial Officer
Litton Industries
Beverly Hills
Lawrence H . Lee*
Chairman of the Board
Western Air Lines, Inc.
Los Angeles
Robert H . Volk
Chairman and Chief
Executive Officer
Martin Aviation, Inc.
Santa Ana
Gerald Grinstein*
hi f Ex cutiv Officer
W tern Air Lines, Inc.
Los Angeles
Charles Levinson
International Trade
Unionist and Economist
Geneva
Robin H.H. Wilson
President and Chief
Operating Officer
We tern Air Line , Inc.
Los Angeles
* Ex cutive ommitte
CORPORATE OFFICERS
Lawrence H. Lee
hairman of the Board
Gerald Grinstein
Chief Executiv Offic r
Robin H. H. Wilson
President & Chief Operating Officer
Thomas J. Roeck, Jr.
Senior Vice President & Chief Financial Officer
Harold L. Achtziger
Vice President-Airport Operations
Jack W. Boisen
Vice President-Human Resources
Gregory P. Chambers
Vice President & Controller
Thomas J. Greene
Vice President, General Counsel & Secretary
Joseph C. Hilly
Vice President-Labor Relations
Robert L. Moore
Vice President-Market Planning
General Offices
Western Air Lines, Inc.
6060 Avion Drive
Los Angeles, California 90045
(213) 216-3000
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 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
Ronald D. Marasco
Vice Presid nt-Maint nanc & Engin ring
Seth M. Oberg
Vice Pr sid nt-Flight Op ration
Calvin L. Rader
Vice President-Information Sy tern
William Semos
Vice President-Corporate Communication
Glen L. Stewart
Vice President-Operations Administration
Douglas B. Swets
Vice President & Treasurer
Jorge Valencia
Vice President & General Manager-Mexico
C.F. Van Every
Vice President-Inflight Service
James R. Watson
Vice President-Passenger & Cargo Sales
Ticker Symbols
Common Stock WAL
Preferred Stock Series A-WALPRA
Preferred Stock Series B-WALPRB
5% Debentures WAL93
10% Notes WALDC98
14% Notes WALD98
Common Stock Warrants WALWS
Independent Accountants
Peat, Marwick, Mitchell & Co.
555 South Flower Street
Los Angeles, California 90071
Annual Meeting of Shareholders
Second Thursday in May
SECURITIES AND EXCHANGE COMMISSION
Wa hington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1984 Commission File Number 1-1521
WESTERN AIR LINES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
95-1360150
(1.R.S. Employer
Identification No.)
6060 Avion Drive, Los Angeles, California 90045
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (213) 216-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Cla
Common Stock-$1 par value
$2 Series A Cumulative Convertible Preferred Stock
$2.1375 Series B Cumulative Convertible Preferred Stock
5% Convertible Subordinated Debentures
10% Senior Secured Trust Notes
14% Senior Secured Convertible Notes
Warrants to Purchase Common Stock
Name of Each Exchange on Which Registered
New York and Pacific Stock Exchanges
New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has
been subject to such filing requirements for the past 90 days. Yes X No _
Registrant's Common Stock outstanding at March 27, 1985 was 24 151 ,157 share .
The aggregate market value of the voting stock of the Registrant held by non-affiliates of the
Registrant at March 27, 1985 was $144,906,942.
DOCUMENTS INCORPORATED BY REFERENCE
Title of Document
Definitive Proxy Statement Relating to
1985 Annual Meeting of Shareholders
Part Hereof Into Which Document i Incorporated
Part III
PART I
ITEM 1. BUSINESS
General
We tern is a commercial airline serving the continental United States, Alaska, Hawaii, Canada and
Mexico. It is the eighth largest domestic airline in terms of 1984 United States revenue pas enger miles.
We tern' operations serve principally the western portion of the United States where it provide service to
virtually all major cities. The Company's service is based on a "hub-and-spoke" system, with its principal
hubs in Salt Lake City and Los Angeles. The Company emphasizes the use of short-haul, narrow body
aircraft suitable for hub-and-spoke operations and focuses its scheduling and marketing to attract the
frequent business traveler.
Routes and Services
The Company provides air transportation services to 63 destinations, on routes extending from New
York and Washington, D.C. in the east to Honolulu and Anchorage in the west. Other principal cities on
Western's routes include Albuquerque, Chicago, Dallas/Ft. Worth, Denver, Houston, Kansas City, Las
Vegas, Los Angeles, Minneapolis/St. Paul, Oakland, Phoenix, Portland, St. Louis, Sacramento, Salt Lake
City, San Diego, San Jose, San Francisco and Seattle/Tacoma. Western's international certificates
authorize service to Canada and Mexico. Western serves Vancouver from Los Angeles, San Francisco and
Portland and Calgary /Edmonton from Denver, Los Angeles and Salt Lake City. Western provides service
from Los Angeles to six cities in Mexico including Mexico City, Acapulco, Guadalajara, Puerto Vallarta,
Mazatlan and Ixtapa/Zihuatanejo.
Western 's passenger traffic mix reflects the fact that, in addition to serving the principal business
centers in the western United States, it also serves most of the major vacation areas in western North
America. Western estimates that presently more than half of its passenger traffic is vacation or pleasure
oriented and believes that this portion of its business is particularly susceptible to changes in general
economic conditions. Marketing programs introduced by Western during 1984 are designed to attract
frequent business travelers.
The business of Western is seasonal in nature, with the highest revenues of the year normally being
recorded in the third quarter. This seasonality is attributable to the propensity of the public to take
pleasure trips during the summer months of the year. Western's new business traveler marketing programs
are designed to attract revenue throughout the year.
2
Revenue and Traffic Information
The following table set forth certain tatistics relating to We tern' operation during the five years
ending December 31, 1984:
Revenue Component a Percent
of Total Operating Revenue:
Passenger .......................................... .
Cargo ................................................ .
Contract service and other ............... .
Total .................................. .
Traffic:
Aircraft operated at end of period ....
Average daily utilization per aircraft
( block hours) ............................... .
Passengers carried ( 000,000) .......... .
Available seat miles ( 000,000) ........ .
Revenue passenger miles ( 000,000)
Passenger load factor
- actual ( % ) ............................. .
- breakeven (%) ...................... .
Passenger revenue per revenue pas-
senger mile ("yield") ................... .
Operating expense per available
seat mile ........................................ .
Average length in miles per passen-
ger trip ........................................... .
Available ton miles (000,000) ......... .
Cargo revenue ton miles ( 000,000) ..
Cargo tons carried ( 000) ................. .
Average number of employees ........ .
1984
88%
6
6
100%
76
8:22
8.3
16,318
9,417
57.7
59.9
$.1108
$.0717
1,134
2,090
156
106
10,264
Year Ended December 31,
1983
87%
6
7
100%
74
8:42
9.1
16,654
9,416
56.5
62.5
$.1055
$.0720
1,031
2,150
167
117
10,355
1982
87%
6
7
100%
72
8:09
8.4
15,125
8,893
58.8
63.1
$.1042
$.0725
1,053
1,964
156
114
9,670
1981
90%
6
4
100%
70
7:57
8.4
14,496
8,548
59.0
65.8
$.1113
$.0777
1,017
1,941
151
110
10,120
1980
89%
6
5
100%
71
8:24
9.1
15,5 16
8,832
56.9
62.0
$.1010
$.0671
965
2,071
163
121
10,657
Passenger load factor is the ratio of revenue passenger miles ("RPMs") to available seat miles
("ASMs"). The breakeven passenger load factor represents the approximate percentage of available seats
which must be occupied for revenues to cover all expenses except income taxes, assuming no changes in
yield and expenses.
Revenue Management
Concurrently with the route and capacity adjustments described above, the Company is improving its
system of revenue management so as to improve yields by capturing a higher percentage of full fare
passengers on flights with high demand by monitoring demand and adjusting the availability of discount
fares on such flights. For example, the percentage of full fare passengers carried by Western in the
continental United States and Canadian markets has increa ed from 12.0% for 1983 to 15.5% for 1984.
Cost Controls
The Company has instituted improved procedures for controlling costs, including measures to as ure
minimum but effective staffing level while still providing high quality pas enger service. The use of
computer modeling for manpower level was implemented by the Company in 1983 to help optimize field
and reservation taffing. A new sy tern of labor and material co t collection in the maintenance area was
implemented in early 1984. Thi y tern ha enabled co ts to be more readily identified with pecific
3
functions and provides information necessary for the development of standard costs and profitability
analyses. Improved methods of inventory control have been implemented for aircraft spare parts, which
should result in lower investment costs and better utilization of existing inventories. In addition, the
Company has improved its procedures for budgetary review of operating and capital expenditures.
Travel Agents
Western's business is substantially dependent upon sales made by travel agents. During 1984 and
1983 approximately 76% and 73%, respectively, of Western's passenger sales were generated by travel
agents. See "Risk Factors and Certain Recent Developments- Industry Conditions."
Recently the CAB eliminated the exclusivity held by the travel agent industry for the sale of airline
tickets. Consequently, airline tickets now may be distributed through any retail channel, and airlines are
free to reach individual agreements with such outlets. This decision by the CAB could have a substantial
impact on airline distribution methods in 1985.
Fuel
Western's arrangements with suppliers of aircraft fuel presently provide for substantially all of its
actual and anticipated needs.
Western purchases the bulk of its fuel from major oil companies under annual agreements which
guarantee supply but not price. However, the ability of Western's suppliers to furnish Western with fuel is
dependent upon a number of factors, including national and international petroleum supplies and
government regulation. Western expects fuel supplies to remain more than adequate for the foreseeable
future. In recent years Western has faced a tightening of credit terms by fuel suppliers.
Price of fuel, rather than supply, has been the major problem in recent years. For many years, prices
of fuel continued to escalate and the cost of fuel has become a major item of expense for Western and all
other airlines. In 1984 fuel costs were $300 million and accounted for 26 percent of Western's total
operating expenses compared to 20 percent in 1978. The difference was due entirely to the increased price
of fuel since the amount of fuel consumed actually declined between 1978 and 1984. During 1982 fuel
prices first leveled off and then began to decline somewhat, averaging six percent below 1981 levels. The
trend of lower fuel prices continued during 1983 averaging twelve percent below 1981 levels. Prices
through 1984 continued to decline, averaging seventeen percent less than in 1981. The impact of fuel
prices upon total operating costs is illustrated by the fact that based upon Western's fuel consumption
during 1984, a one cent per gallon change in fuel prices would have resulted in an increase or decrease of
approximately $3.5 million in Western's annual fuel costs.
Western's operating procedures are designed to keep fuel consumption to a minimum, primarily
through reduced airspeeds and elimination of excess weight.
The following table sets forth Western's fuel consumption and related information for the past five
years:
Consumption
(Millions of Average Price
Gallons) Per Gallon
1980 ............................................. 342 $0.87
l 981 ............................................. 315 1.04
1982 ............................................. 320 0.98
l 983 ............................................. 354 0.91
1984 ............................................. 348 0.86
Total
Fuel Cost
(Millions)
$296.4
326.6
312.0
320.0
300.2
Fuel Cost
Total Asa
Operating Percent of
Expense Operating
(Millions) Expense
$1 ,041.5 28.5
1,125.8 29.0
1,096.1 28.5
1,199.0 26.7
1,170.5 25.6
Western understands that the California State Board of Equalization, which is auditing variou of
Western's fuel suppliers for periods during 1978 through 1982, may challenge the qualification for
exemption from California sales tax of certain fuel sales by the suppliers to Western and other airlines. No
4
claim or demand ha yet been made upon We tern or, to We tern' knowledge, upon any of We t rn' fuel
supplier . In the event that deficience with re pect to fuel ale to We tern are impo ed again t We t rn'
uppliers, the uppliers could be expected to eek indemnity from We tern under their contract with
We tern. While any uch deficiences could be sub tantial, We tern believe that its fuel purcha e
qualified for exemption from the tax and plans to conte t vigorou ly any deficiencie that may be a erted.
Western believes that these matters will not have a material adver e effect on it financial po ition or
operations.
Competitive Action Plan
In September 1984 Western received approval from each of its major unions for a combination of pay
reductions and productivity improvements ( the "Competitive Action Plan" or "CAP") designed to
achieve substantial reductions in labor costs, effective September 1, 1984 through December 31, 1986. In
contrast to temporary concessions obtained by Western in the past, these new agreements have no
contractual provisions for reversions to higher wage levels in the future. Western began implementation of
CAP in September 1984. The full effect of the CAP provisions will first be felt in the first quarter of l 985.
Had the CAP cost structure been in effect during all of l 984, the Company estimates that breakeven load
factor would have decreased from 59.9% to 55.5% and that it would have recorded an operating profit of
approximately $84 million in lieu of actual operating profit of $11 .4 million and net earnings of
approximately $43 million in lieu of an actual net loss of $29.2 million, reflecting a reduction of $47. l
million in cash labor expense and $25.5 million in non-cash stock issuance expense for l 984. Such
estimates may not, however, be indicative of actual results under CAP in 1985.
In addition, CAP provides for an increase in profits subject to distribution annually under a profit
sharing plan adopted pursuant to the Company's 1983 Partnership Plan to 20% of the first $75 million of
annual profits and 35% of profits thereafter ( profits for this purpose are pre-tax profits exclusive of
extraordinary items and gains from disposition of property), for a reduction in the monthly management
budget by 12.5%, by a combination of pay and head count adjustments and for the nomination for election
to the Board of four union representatives ( rather than the two representatives to which the unions were
previously entitled). All of such directors have been elected.
Each of the CAP proposals also provides that if, after September I, I 984, Western agrees to pay
increases or productivity reductions for any group of employees, then similar increases or reductions will be
afforded employees represented by other unions.
Employee Relations
The number of Western employees during 1984 averaged 10,264, down from an average of 10,355 in
1983. Labor unions represent approximately 92% of Western's employees. Western has not suffered a
significant work stoppage by its employees during the past fourteen years, and considers its relation with
its employees to be satisfactory. If Western were to suffer a strike or work stoppage, it could have a
material adverse effect on the Company. Western's business also can be adversely affected by strikes or
work stoppages by non-employees. For example, the air traffic controllers' strike during 1981 had an
adverse impact on Western's operations and earnings.
5
The following table sets forth Western's union-represented employees by classification a of
December 31 , 1984:
Employee Group
Agent and Clerical (U.S.)
Flight Attendants
Mechanics and Related
Employees
Pilots
Stock Clerks
Flight Operations Ground
School Instructors
Flight Superintendents
Agent and Clerical (Mexico)
Agent and Clerical (Canada)
* In conciliation.
Competition
Number of
Employees
4,491
1,783
1,396
1,196
81
30
29
150
137
Contract Open
Union for Amendment
Air Transport Employees December 31, 1986
Association of Flight Attendants December 31 , 1986
International Brotherhood December 31 , 1986
of Teamsters
Air Line Pilots Association December 31 , 1986
International Brotherhood December 31 , 1986
of Teamsters
International Brotherhood December 31, 1986
of Teamsters
Transport Workers Union December 31 , 1986
Sindicato N acional de January 19, I 986
Trabajadores de Aviacion
y Similares
Air Transport Employees Julyl , 1984*
Western is presently subject to multiple carrier competition on most major domestic routes that it
serves. Some of Western's competitors are larger with more extensive route systems and with greater
financial or other resources. Western's hub-and-spoke system centered in Salt Lake City competes with
similar systems of other carriers centered in other cities, such as Denver where three competing carriers
maintain hubs. Other competitors of Western are regional and newly-formed carriers, some of which have
lower cost structures or efficient hubs enabling them to compete effectively on particular routes.
Airlines are operating in an environment where price is a major and, in many instances, the most
significant element of competition. Since domestic fare reductions are no longer government-controlled,
the airlines are now free to offer lower basic fares and promotional fares involving virtually unlimited
discounts. Many airlines, including Western, have taken advantage of this freedom to offer low basic fares
or deep discounts on major routes. Carriers, including Western, generally have elected to match such fares
when offered by competitors. See "Risk Factors and Certain Recent Developments- Industry Condi-
tions."
Western's services to both Canada and Mexico are subject to competition by carriers of those
countries, but on most routes only one such airline has been authorized by each country. Fares between
United States points and Canada and Mexico are still controlled by the governments concerned, and the
International Air Transportation Competition Act of 1979, which authorized airlines to reduce inter-
national fares up to 50% or increase them up to 5% without justification for changes, has not had
substantial impact to date on the fare structures on United States-Canada and United States-Mexico
routes.
Economic Regulation of Air Transportation
From 1938 to 1978 the airline industry was subject to the comprehensive economic regulatory
jurisdiction of the CAB. Under that framework of regulation, authority to operate new services could be
obtained only by proving a public need therefor, 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.
6
The Airlin Deregulation Act of 1978 ( the "Deregulation Act" ) materia11y changed th tatutory
cheme of regulation of dome tic air tran portation. Under the Deregulation Act, the AB lo t it
authority with re pect to dome tic route on December 31 , 1981 , and it authority over fare and
intercarrier tran action , including merger , as of January 1, 1983. Under the Deregulation Act, the AB
went out of exi tence a of January 1, 1985, and certain of it functions were tran ferred to the Departm nt
of Tran portation. The Deregulation Act made no change in the law a it relates to authority to engage in
foreign air tran portation, except the CAB's power to grant exemption for temporary authority wa
liberalized. Nevertheless, the United State government has followed a practic of trying to convince
foreign governments that multiple carrier designation on international route hould be authorized by
intergovernment agreement. While many countrie have acceded to the po ition of the United States
government, Mexico and Canada have not.
The airlines presently operate in an environment of unrestricted competition in domestic air
transportation. 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 small community essential air service
requirements) and have complete freedom in pricing their products.
Western is unable to predict the ultimate effect of the Deregulation Act on its operations, but if the
increased competition that has resulted since the Deregulation Act became effective continues to result in
overcapacity and uneconomically low fares, the financial position of the Company could be materially
adversely affected.
Environmental Regulation
For a number of years the federal government has been tightening its controls over aircraft noise.
Pursuant to Congressional directive, the FAA in 1969 prescribed aircraft noise limits for all aircraft
designed after 1969. In 1973 and again in 1977 the FAA broadened the application of these noise limits
and promulgated a phased compliance schedule whereby essentially all non-complying commercial jet
aircraft must be replaced or modified by 1985 in order to meet the prescribed limits. All of the Company's
aircraft are in compliance at this time.
California authorities have promulgated noise standards in an attempt to limit the total noise impact
of airport operations on surrounding communities throughout the state. In connection therewith these
authorities have asserted jurisdiction over such matters as curfews at local airports, even to the extent of
attempting to override the decisions of airport proprietors. In addition, proprietors at several airports have
adopted or are considering noise regulations that are more stringent than the pertinent federal or state
standards. The stricter standards could hinder carriers, including Western, from commencing or
continuing operations at those airports.
ITEM 2. PROPERTIES
Flight Equipment
The following table summarizes the composition of Western's fleet of 75 jet aircraft and aircraft on
order:
Boeing
727-200 ................................. .
737-200 ................................. .
737-300 ................................. .
McDonnell Douglas
DC-10-10 .............................. .
Total ..................................... .
Seating
Configuration
First Class/
Coach
12/136
0/121
8/120
24/267
Owned*
36
11
7
54
Fleet Composition
at March 12, 1985
Leased* On Order
8
10
3
21
6
9
15
* See Note 2 to Financial Statements for aggregate lease obligations and lease terms, and Note 6 to
Financial Statements for information on pledged assets.
7
Western's system of hubs relies heavily on "feed" traffic which i be t erved by narrow-bodied
aircraft. The lower operating costs of the Boeing 737 make it particularly well- uited to We tern' routes, a
significant number of which involve markets where the smaller capacity of thi aircraft i adequate to meet
normal demand. This cost advantage is attributable, among other things, to the fewer pilot and flight
attendants required for the operation of this model aircraft as compared to the 727-200 and its two-engine
versu three-engine configuration, which results in lower fuel consumption and maintenance cost than the
727-200. The DC-10 aircraft is a high capacity, wide-body aircraft well-suited for medium to long haul
routes, such as Western's Hawaii routes, but is not well-suited for short haul routes. It is the Company'
current intention to dispose of a portion of its 727-200 and DC-10 aircraft as new 737 aircraft on order are
delivered. The Company has recently entered into an agreement for the sale of a DC-I 0-10 aircraft early
in the second quarter of 1985, from which the Company expects to receive proceeds, net of amounts
applied to release security arrangements, of approximately $9 million.
Western has on order three Boeing 737-300 aircraft scheduled for delivery in the spring of 1985, six
737-300 aircraft scheduled for delivery in 1986 and 1988, and six 737-200 aircraft scheduled for delivery in
1987. The total cost of all aircraft on order is approximately $394 million, of which approximately $43
million was on deposit at December 31, 1984. Western is currently negotiating terms for financing the
three aircraft scheduled for delivery in the spring of 1985; however, no commitments for financing the
aircraft have been obtained and no assurance can be given that financing will be concluded. Failure by
Western to complete the purchase of any of these aircraft could result in significant damages. If the
changes in investment tax credits and deductions for accelerated depreciation proposed by the Treasury
Department were to be adopted, the Company's ability to arrange lease financing for the acquisition of
aircraft could be adversely affected.
Ground Properties and Equipment
Western 's general offices and principal overhaul and maintenance base are located at Los Angeles
International Airport. These facilities, including a DC-10 hangar and a parking structure completed in
1975, 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 under certain
circumstances on March 31 , 1988, or any March 31 thereafter. Upon such termination or expiration, the
improvements revert to the city. Western also leases hangars at Seattle/Tacoma and San Francisco, 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.
Western expects to expend a total of approximately $5.4 million during 1985 in connection with
improvements in its passenger terminal facilities at Salt Lake City, modification of its Los Angeles customs
clearance facilities and expansion or remodeling projects at other airports in its system.
ITEM 3. 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 San Jose, Orange County and Burbank, California, 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 any airline's fleet which may continue to operate without
complying with specified noise standards. In general, enforcement of such re triction at a major airport
served by Western could have a material adver e effect on its operation .
8
Western is al o involved in variou other litigation, including cases alleging di crimination (including
age di crimination) in employment practice . In one uch action involving the ability of We tern pilot to
continue after age 60 a econd officer , a judgment was entered during 1981 directing the Company to
allow three pilots to continue working as econd officers after age 60, and awarding tho e pilots back pay
and attorney 'fees. That ca e was affirmed on appeal by a federal appellate court and Western' appeal to
the U.S. Supreme Court is pending. Additionally, at least one other similar action has been filed. Western
does not believe such claims will result in any material liability to Western.
In an action filed by Western in the Los Angeles County Superior Court for breach of contract arising
from the failure of defendants to pay for contract maintenance services performed by Western on certain
DC- lO aircraft, the defendants, International Air Leases Inc. and Capitol Air Inc., filed cross-complaints in
September and October 1983 seeking damages in excess of $37 million, plus punitive damages. The cross-
complaints allege that Western's maintenance services were not performed adequately, all of which
allegations Western has denied. Subsequent to the filing of the cross-complaints, Capitol Air Inc. was the
subject of an involuntary petition in bankruptcy and Western was advised that a mandatory stay of all
actions involving Capital Air Inc. had resulted. Western believes that these cross-complaints will not result
in any material liability to Western.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 1984.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
As of December 31, 1984, the 24,147,290 shares ofoutstanding Western Common Stock were held by
approximately 15,000 stockholders of record. There were 1,196,270 shares of Series A Preferred Stock
issued and outstanding and 979,500 shares of Series B Preferred Stock issued and outstanding held by
approximately 1,300 stockholders of record. The Common Stock and Series A Preferred Stock are listed
on the New York and Pacific Stock Exchanges. The Series B Preferred Stock is listed on the New York
Stock Exchange. The following table sets forth the high and low sale prices of the Common Stock on the
New York Stock Exchange ("NYSE") as reported by the National Quotation Bureau, Inc. for the periods
indicated:
1983
1st quarter ........................................................ .
2nd quarter ....................................................... .
3rd quarter ....................................................... .
4th quarter ........................................................ .
1984
1st quarter ........................................................ .
2nd quarter ....................................................... .
3rd quarter ....................................................... .
4th quarter ........................................................ .
Price Range
High Low
7
6
6
41/s
5
4
4
41/s
41/s
4
31/s
4
4
21/s
23/s
3
Because of continuing losses and restrictions in various loan agreements, the Company has not paid
dividends on its Common Stock since the third quarter of 1980. Resumption of dividends on the Common
Stock will depend upon the Company's earnings, financial condition, capital requirements and terms of
financings. The Company does not anticipate the payment of cash dividends on the Common Stock in the
foreseeable future.
9
ITEM 6. SELECTED FINANCIAL DATA
The following financial information should be read in conjunction with the Financial Statements and
Notes thereto contained elsewhere herein.
Income Statement Information:
( in millions except per share amounts)
Year Ended December 31,
1984 1983 1982 1981 1980
Operating Revenues:
Passenger ............................................... $1,041.4 $ 993.4 $ 925.8 $ 949.6 $ 887.9
Cargo ..................................................... 69.3 72.2 68.0 62.9 63.8
Contract service and other .................... 71.2 77.0 71.5 47.3 44.0
Total operating revenues ............... 1,181.9 1,142.6 1,065.3 1,059.8 995.7
Operating Expenses:
Wages, salaries, and employee
benefits ............................................... 412.1 422.7 368.5(a) 403.4 384.2
Fuel ........................................................ 300.2 320.0 312.0 326.6 296.4
Other ...................................................... 458.2 456.3 415.6 395.8( b) 360.9
Total operating expenses ............... 1,170.5 1,199.0 1,096.1 1,125.8 1,041.5
Operating income (loss) ............... 11.4 ( 56.4) ( 30.8) ( 66.0) ( 45.8)
Interest expense, net ...................................... (58.1) (51.5) ( 46. 7) ( 45.0) ( 38.5)
Gain on asset dispositions and other
income, net ................................................ 17.5 11.6 14.0 18.2 35. l
Earnings (loss) before mcome taxes
and extraordinary item ...................... (29.2) ( 96.3) ( 63.5) ( 92.8) ( 49.2)
Income taxes (benefits) ................................ (0.3) (3.6) (19.4) (19.6)
Earnings (loss) before extraordinary
item .................................................... (29.2) ( 96.0) ( 59.9) ( 73.4) ( 29.6)
Extraordinary Item:
Gain on pension plan terminations( c) 41.5 15.9
Net earnings (loss) ........................ $ (29.2) $ ( 54.5) $ ( 44.0) $ ( 73.4) $ ( 29.6)
Earnings (Loss) per Common Share( d):
Before extraordinary item ..................... $ (1.37) $ ( 6.22) $ ( 4. 78) $ ( 5.81) $ (2.46)
Net earnings (loss) ............................... (1.37) ( 3.60) ( 3.56) (5.81) (2.46)
Cash dividends paid per share of Common
Stock( e) .................................................... 0.25
Balance Sheet Information:
( in millions)
At December 31,
1984 1983 1982 1981 1980
Current assets .................................... $173.3 $197.2 $168.7 $167.2 $191.1
Property and equipment- net .......... 611.l 595.0 634.8 662.4 718.8
Total assets ........................................ 803.6 812.2 808.6 834.6 917.0
Current liabilities ............................... 277.6 262.7 284. l 278.4 246.5
Long-term obligations less current
installments .................................... 428.2 437.9 411.5 401.9 435. l
Shareholders' equity .......................... 62.5 86.7 77.6 121.7 197.3
(a) During 1982 actuarial assumption changes to pension plans were made reducing the net loss by $7.2
or $0.55 per share (primary) for the year 1982.
( b) Effective January 1, 1981, Western revised its procedures for recognizing commission expense to more
closely identify the expense with the period in which the related revenue is recognized. This change
reduced the 1981 net loss by $3.3 or $0.26 per share (primary).
( c) See Note 4 to Financial Statements.
( d) Fully diluted earnings per share amounts are equal to primary because the inclusion of the assumed
exercise of stock options and warrants and conversion of convertible securities would be anti-dilutive.
( e) The Company does not anticipate the payment of cash dividends on its Common Stock in the
foreseeable future. See "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Years Ended December 31, 1984, 1983 and 1982
Although operating results for 1984 are significantly improved over 1983, Western incurred a net loss
for the year 1984. Western has not recorded an annual profit since 1979.
In 1984 Western produced an $11.4 million operating profit, the first in five years, as compared to
operating losses of $56.4 million in 1983 and $30.8 million in I 982. Western had a net loss of $29.2
million in 1984, compared to net losses of $54.5 million in 1983 and $44.0 million in 1982. The 1983 and
1982 net losses reflect extraordinary gains of $41.5 million and $15. 9 million, respectively, resulting from
terminations of certain pension plans.
The disastrous fare wars that began in mid-1982 continued into the first half of I 983. At the same
time, Western's operating costs increased, primarily due to the significant expansion begun in May 1982.
Higher traffic was obtained in part by selling Western's product at a lower price and therefore failed to
produce a revenue increase sufficient to cover the increased operating costs. The operating loss increased
from $14. l million for the first half of 1982 to $59.2 million in the same 1983 period.
During the second half of I 983, Western's management began to redirect the Company's efforts
toward the business traveler and took other steps designed to return the carrier to profitability.
Major areas of emphasis included: ( i) implementation of a partnership plan, including cash wage
concessions from each of the Company's domestic labor groups in return for establishment of an employee
stock plan, a cash profit sharing plan and the right to name two nominees for election to the Board of
11
Director ; (ii) trengthening the Salt Lake City hub and d veloping Lo Angele Int rnational Airport a a
more effective econd hub to feed Hawaii, Canada and Mexico; (iii) focu ing cheduling and marketing
efforts to attract the frequent busines traveler; (iv) adju ting capacity to meet ea onal fluctuation in
demand; ( v) emphasizing short-haul narrow body aircraft uitable for the hub-and- poke y tern; (vi)
establishing more effective revenue and yield management y terns; and (vii) in ti tu ting improved co t
control measures.
Certain of the e steps, combined with the general economic recovery, re ulted in a ignificant yield
increase in the second half of 1983 compared to the econd half of 1982 and the fir t half of 1983, with
only a slight decrease in load factor. Revenues rose eight percent from the 1982 second half, while
operating expenses were up only 4.4 percent, and Western recorded an operating profit for the second half
for the first time since 1978.
For the year 1983, Western's capacity (ASMs) rose 10.1 percent, while traffic ( RPMs) rose only 5. 9
percent. Load factor declined to 56.5%, the lowest level since 197 l. The significant yield increases in the
second half of 1983 resulted in a slightly higher yield for the year ( $.1055 vs. $. 1042 ). Revenue rose 7.3
percent. Although unit costs ( cost per ASM) declined from $.0725 to $.0720, total operating costs rose 9.4
percent due primarily to increased flying and higher labor rates. Some of the wage concessions obtained in
early 1982 expired in early 1983. New wage concessions were obtained from all domestic labor groups
beginning in October and November 1983.
Increased flying, combined with institution of service to several cities not previously served, required
additional employees in 1983. Fuel expense and other operating expenses also rose as a result of the
increased flying and higher traffic levels. Fuel expense rose only 2.6 percent, as lower prices substantially
offset a 10.6 percent increase in fuel used. Other operating expenses rose 12.2 percent, reflecting significant
increases in ground handling services purchased from other airlines, landing fees, rents, maintenance, food
and beverage, commissions to travel agents, and crew travel expenses.
Interest expense rose 10.4 percent, reflecting both higher debt levels and higher rates resulting from
the Company's refinancing activities.
In 1984, the improvement in operating results continued, primarily as a result of increased passenger
revenue, coupled with reductions in labor and fuel expenses. Western's passenger revenue for 1984
increased five percent from the 1983 level as a result of a yield increase of five percent. Capacity decreased
two percent, while traffic was relatively unchanged. Load factor for 1984 versus 1983 increased from 56.5
to 57.7 percent.
The yield improvement, which started in the second half of 1983, continued into the first half of 1984
and was partially offset by slight decreases in late 1984. Yield for the year 1984 was $.1108, an increase of
5.0 percent from 1983 and 6.3 percent from 1982.
Operating expenses decreased two percent, primarily in fuel and labor expenses. Fuel cost decreased
six percent as a result of a five percent price decrease, combined with a one percent decrease in
consumption.
Wages, salaries, and employee benefits decreased three percent as a result of Western's five labor
groups agreeing to new contracts effective September 1984, which contain lower pay rates and improved
productivity provisions. The contracts are open for amendment December 31 , 1986. The new contract
wage rates are lower than the rates in place since late 1983 under the partnership plan with employees as
described above. The amortization of the employee stock plan expense relating to the 1983 partnership
plan terminated in October 1984, and totalled $25.5 million for I 984. Excluding the employee stock plan
expense, labor cost would have decreased seven percent for 1984 versus 1983.
Interest expense rose 13% in 1984 primarily reflecting higher debt levels.
Gains on asset dispositions were $11.3 million, $9.0 million, and $7.4 million in 1984, 1983, and 1982,
respectively.
12
Liquidity and Capital Resource
We tern' ca h and ca h equivalent totalled $57.5 million at December 31 , 1984, up from $46.3
million at December 31 , 1983 and from $47.4 million at December 3 I, I 982. We tern' ca h balance
fluctuate ignificantly from day to day and have increa ed from December 31 , 1983, primarily a the r ult
of proceed from a et di po ition , drawing down under the Credit Agreement and operating profit ,
offset by intere t and debt repayment . The Company' working capital deficit wa $104.3 million at
December 31 , 1984, up from $65.5 million at December 31 , 1983, primarily due to the financing of
advance depo it related to aircraft deliveries, additional borrowing , and the amortization of the
employee stock plan. The Company anticipates refinancing the deposit in conjunction with delivery of the
aircraft. Because airlines typically have no product inventories and revenue are generated principally by
utilizing long term assets, minimal or negative working capital balances are not uncommon. Since mid-
1981 cash generated from operation has not been sufficient to fund debt repayment. However, We tern
has made all debt repayments by upplementing ca h generated from operation with other ca h re ource .
In order to maintain liquidity during 1982, 1983 and 1984, Western sold certain assets, terminated
certain pension plans, deferred progress payments on aircraft purchase contracts and in tituted new
borrowing and financing arrangements. The most significant of these transactions were as follows:
In April 1982 Western sold for $21 million the conditional sales contracts covering an
earlier sale of two DC-10 aircraft, and terminated a pension plan, receiving $ l 5. 9 million in
cash.
During December 1982 Western sold privately $12.5 million principal amount of 12%
convertible subordinated debentures due December 1992, and entered into a term loan and
security agreement to borrow $33.4 million from an affiliate of an aircraft manufacturer. At the
same time, Western placed an order for three 737-300 aircraft and utilized $3 million of the
proceeds as deposits for those aircraft. The term loan has been substantially repaid. The
outstanding balance at December 31 , 1984 was $2. 9 million.
In January 1983 the Company terminated a pension plan and received $33.4 million in
cash in 1983.
In June 1983 the Company completed a public offering of units consisting in the aggregate
of $90 million principal amount 10% Senior Secured Trust Notes due June 15, 1998,
3,240,000 shares of Common Stock and warrants to purchase an additional 9,000,000 shares of
Common Stock. The net proceeds of approximately $84 million were used in part to repay $78
million of debt.
In 1983 and 1984 Western obtained agreements from an aircraft manufacturer to finance
aircraft advance deposit payments through the manufacturer until after February, 1985.
In September 1983 Western entered into the Credit Agreement to provide it with a
revolving line of credit of $22 million through August 31 , 1984.
In December 1983 the Company completed a public offering of $65 million principal
amount of 14% Senior Secured Convertible Notes due December l, 1998 of which approxi-
mately $28.8 million of the net proceeds of $61.2 million were used to repay debt. In
conjunction with the December 1983 public offering, the Company's lenders agreed to allow
the Company to extend the Credit Agreement beyond August 31 , 1984, to provide an $11
million revolving line of credit through June 30, 1985.
In April 1984, Western issued one million shares of $2.1375 Series B Cumulative
Convertible Preferred Stock (" Series B Preferred Stock" ), convertible into Common Stock at
$5 per share, subject to adjustment. The net proceeds of $13.6 million were used to prepay $2.6
million of debt, and for payment of $5.4 million of dividend arrearages on the $2.00 Series A
Cumulative Convertible Preferred Stock (" Serie A Preferred Stock" ). In conjunction with the
is uance of the Series B Preferred Stock, the Company' lender agreed to extend the Credit
Agreement to provide a $20 million revolving line of credit through Augu t 31 , 1985. On April
2 7, 1984, We tern drew down $10 million under the Credit Agreement. In Augu t 1984,
Western drew down the remaining $10 million available under the Credit Agreement. In
13
March 1985 We tern repaid the full $20 million under the Credit Agreement, which remain
available. Subject to documentation, Western's lenders have agreed in principle to extend the
Credit Agreement through June 30, 1986.
During 1984 Western sold two Boeing 727-200 aircraft for $16.3 million.
The Company has recently entered into an agreement for the sale of a DC-10-10 aircraft
early in the second quarter of 1985, from which the Company expects to receive proceeds, net
of amounts applied to release security arrangements, of approximately $9 million.
Substantially all of Western'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.
Reference is made to Note 6 to Financial Statements for a discussion of Western's
covenants under debt agreements.
In November and December 1984, Western took delivery of six B737-200 aircraft and two
spare engines that were previously on order from the manufacturer. In that connection,
Western entered into 14-year operating lease agreements for the spare engines and four of the
aircraft and sold the remaining two aircraft to a foreign carrier. Western was reimbursed for
previously recorded capitalized interest and buyer-furnished equipment on the six aircraft and
spare engines.
In March 1985, Western issued $30 million of 14% Senior Notes due April 1, 1988. The net
proceeds of approximately $28.3 million will be used for general corporate purposes including working
capital.
In March 1985, Western also filed a registration statement with the Securities and Exchange
Commission for a public offering of up to 1,500,000 shares of Series D Cumulative Convertible Preferred
Stock.
Western has on order from the manufacturer three Boeing 737-300 aircraft scheduled for delivery in
the spring of 1985 at a cost of approximately $73 million, of which approximately $25 million is on
deposit. Western is currently negotiating terms for financing the aircraft; however, no commitments for
financing the aircraft have been obtained and no assurance can be given that financing will be concluded.
Failure to take delivery of these aircraft could result in significant assessments against Western for
manufacturer's damage claims. An additional 12 Boeing 737 aircraft are scheduled for delivery during
1986 through 1988 for which no financing has yet been arranged. If the changes in investment tax credits
and deductions for accelerated depreciation proposed by the Treasury Department were to be adopted the
Company's ability to arrange lease financing for the acquisition of aircraft could be adversely affected. See
Note 3 to Financial Statements.
14
ITEM 8. FINANCIAL STATEMENTS
ACCOUNTANT'S REPORT
The Board of Director
We tern Air Line , Inc.:
We have examined the balance heet of Western Air Lines, Inc. as of December 31 , 1984 and 1983
and the related statements of operation , hareholders' equity and changes in financial po ition for each of
the years in the three-year period ended December 31, 1984. Our examination were made in accordance
with generally accepted auditing tandards and, accordingly, included such te ts of the accounting record
and such other auditing procedure a we considered nece sary in the circum tance . In connection with
our examinations of the financial statements, we have al o examined the upporting chedules a li ted in
the index located elsewhere in thi Form 10-K.
In our opinion, the aforementioned financial statements pre ent fairly the financial position of
Western Air Lines, Inc. at December 31, 1984 and 1983 and the results of its operations and the change in
its financial position for each of the years in the three-year period ended December 31 , 1984, in conformity
with generally accepted accounting principles applied on a consistent basi . Also in our opinion, the
related supporting schedules, when considered in relation to the basic financial tatement taken as a
whole, present fairly in all material respects the information set forth therein.
Los Angeles, California
February 19, 1985, except for the twelfth
and thirteenth paragraphs of Note 6,
which are as of March 20, 1985.
PEAT, MAR WICK, MITCHELL & CO.
15
Current Assets:
WESTERN AIR LINES, INC.
BALANCE SHEETS
(In thousands of dollars)
ASSETS
Cash and cash equivalents ..................................................... : ....................... .
Receivables ( less allowance for doubtful accounts of $12,551 - 1984 and
$8, 758- 1983)
Flight equipment expendable parts at average cost ( less allowance for
obsolescence of$18,068- 1984 and $17,073- 1983) .............................. .
Prepaid expenses ............................................................................................ .
Other current assets ........................................................................................ .
Total current assets ................................................................................. .
Property and Equipment at Cost:
Flight equipment ............................................................................................ .
Facilities and ground equipment ................................................................... .
Deposits on equipment purchase contracts ................................................... .
Less accumulated depreciation and amortization ........................................ .
Other Assets ........................................................................................................... .
See accompanying Notes to Financial Statements.
16
December 31,
1984 1983
$ 57,476 $ 46,336
81,486 91 ,019
18,652 21,238
11,946 34,957
3,789 3,648
173,349 197,198
856,049 851 ,83 1
154,482 144,9 15
42,921 35,108
1,053,452 1,03 I ,854
442,327 436,879
611 ,125 594,975
19,121 19,991
$803,595 $812,164
Current Liabilities:
WESTERN AIR LINES, INC.
BALANCE SHEETS
(Jn thou and of dollar )
LIABILITIES AND SHAREHOLDERS' EQUITY
Current installment of debt .......................................................................... .
Current in tallment of capital lease ............................................................ .
Notes payable ................................................................................................ .
Account payable ........................................................................................... .
Airline traffic liability ..................................................................................... .
Salarie , wage and vacation benefit payable ............................................. .
Accrued pension plan contributions .............................................................. .
Other current liabilities .................................................................................. .
Total current liabilitie ........................................................................... .
Long-term Obligation , Less Current Installments:
Debt ................................................................................................................ .
Capital leases ................................................................................................. .
Deferred Credits and Other Liabilities:
Deferred taxes on income .............................................................................. .
Deferred gain on sale and lea e-back of aircraft .......................................... .
Other ............................................................................................................... .
Shareholders' Equity:
Preferred stock-authorized 25,000,000 hares:
$2 Series A Cumulative Convertible, $25 tated value per share.
Liquidation preference at stated value plus accrued and unpaid
dividend , out tanding 1,196,270 shares-1984 and 1983 ............... .
$2.1375 Serie B Cumulative Convertible, $1 stated value per hare.
Liquidation preference at $15 per share plu accrued and unpaid
dividends, outstanding 979,500 shares-1984 .................................. .
Common stock-authorized 70,000,000 shares $1 par value per share,
out tanding 24,147,290 shares-1984 and 24,085,790 hare - 1983 ..... .
Additional paid-in capital .............................................................................. .
Retained earning (deficit) ........................................................................... .
Commitment and Contingent Liabilities
See accompanying ote to Financial tatement .
17
December 31,
1984 1983
$ 64,948 $ 30,958
7,739 12,353
2,275 3,642
55,357 63,890
79,603 78,822
36,210 43,090
14,950 7,387
16,533 22,584
277,615 262,726
335,531 337,424
92,682 100,429
428,2 13 437,853
10,328 l 0,328
2,334 4,667
22,638 9,930
35,300 24,925
29,907 29,907
980
24,147 24,086
87 464 83,533
(80031) ( 50 866)
62 467 86 660
$803,595 $812,164
WESTERN AIR LINES, INC.
STATEMENTS OF OPERATIONS
(In thousands of dollars except per share amounts)
Year ended December 31,
1984 1983 1982
Operating Revenues:
Passenger .................................................................................. $1,041,412 $ 993,428 $ 925,735
Cargo ........................................................................................ 69,293 72,195 68,020
Contract service and other ....................................................... 71,180 76,939 71,515
1,181,885 1,142,562 1,065,270
Operating Expenses:
Wages, salaries, and employee benefits .................................. 412,108 422,741 368,503
Fuel .......................................................................................... 300,198 319,980 311,999
Depreciation and amortization ............................................... 59,565 59,379 61,751
Other ......................................................................................... 398,602 396,834 353,815
1,170,473 1,198,934 1,096,068
Operating income (loss) .................................................. 11,412 (56,372) (30,798)
Other Income (Expenses):
Interest, principally on long-term obligations ......................... (64,136) (54,542) (49,195)
Interest capitalized ................................................................... 6,070 2,977 2,508
Interest income ......................................................................... 3,642 2,480 5,604
Gain on disposition of property and equipment.. ................... 11,279 8,956 7,385
Gain on foreign currency translation ...................................... 1,208
Other, net ................................................................................. 1,360 166 994
(40,577) (39,963) (32,704)
Loss before income taxes and extraordinary item .......... (29,165) (96,335) (63,502)
Income taxes (benefits) .................................................................. (330) (3,556)
Loss before extraordinary item ........................................ (29,165) (96,005) (59,946)
Extraordinary Item:
Gain on pension plan terminations ......................................... 41,520 15,930
Net loss ............................................................................. $ (29,165) $ (54,485) $ (44,016)
Loss per Common Share:
Before extraordinary item ........................................................ $ (1.37) $ ( 6.22) $ ( 4.78)
Extraordinary item ................................................................... 2.62 1.22
Net loss ..................................................................................... $ ( 1.37) $ ( 3.60) $ ( 3.56)
See accompanying otes to Financial Statements.
18
WESTERN AIR LINES, INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
(In thou and of dollar )
Year ended December 31,
Sources of Working Capital:
Loss from operations, exclusive of extraordinary item ................. .
Add (Deduct) Items Which did not Affect Working Capital:
Depreciation and amortization .............................................. .
Def erred income taxes ........................................................... .
Gain on disposition of property and equipment ................... .
Other ....................................................................................... .
Total provi.ded ( ~sed) by operations exclusive of
extraordinary item ...................................................... .
Extraordinary item ......................................................................... .
Portion of extraordinary item which did not affect working
capital ................................................................................. .
Total provided by extraordinary item ........................... .
Total provided (used) by operations ............................ .
Issuance of long-term obligations ................................................. .
Disposition of property and equipment ........................................ .
Issuance of common stock and warrants ...................................... .
Issuance of common stock to employee stock plan ...................... .
Issuance of $2.1375 Series B Cumulative Convertible Preferred
Stock, net of expense .................................................................. .
Reimbursement of deposits and capital expenditures upon
entering operating leases for B737-200 aircraft ........................ .
Reclassification of pension plan liabilities to long-term liabilities
Other, net ....................................................................................... .
1984
$(29,165)
58,256
(11,279)
(5,042)
12,770
12,770
33,125
22,710
13,625
43,884
9,434
Total sources.................................................................... 135,548
Applications of Working Capital:
Reduction .of l.o.n.g-term obligations including transfers to
current liabilities ........................................................................ .
Purchase of and deposits on property and equipment ................. .
Cash dividends on preferred stock ................................................ .
Debt issue costs .............................................................................. .
Other, net ....................................................................................... .
42,117
123,516
8,653
Total applications............................................................ 174,286
Increase (decrease) in working capital.......................... $( 38,738)
Summary oflncreases (Decreases) in Working Capital:
Cash and cash equivalents ............................................................. . $ 11,140
Receivables, net ............................................................................. . (9,533)
Flight equipment expendable parts, net ....................................... . (2,586)
Prepaid expenses ........................................................................... . (23,011)
Other current assets ........................................................................ . 141
Current installments of debt .......................................................... . (33,990)
Current installments of capital leases ............................................ . 4,614
Notes payable ................................................................................ . 1,367
Accounts payable ........................................................................... . 8,533
Airline traffic liability ..................................................................... . (781)
Salaries, wages and vacation benefits payable ............................. . 6,880
Accrued pension plan contribution ............................................... . (7,563)
Other current liabilities .................................................................. . 6,051
Increase (decrease) in working capital ......................... . $( 38,738)
See accompanying Notes to Financial Statement .
19
1983 1982
$( 96,005) $(59,946)
58,348 59,968
(419) ( 432)
(8,956) (7,385)
(2,977) (2,508)
(50,009) (10,303)
41,520 15,930
(7,897) (51)
33,623 15,879
(16,386) 5,576
123,928 62,986
10,290 9,269
31,325
32,175
7,218
181,332 85,049
97,623 53,349
16,382 30,933
7,735
9,748 4,898
131,488 89,180
$ 49,844 $ (4,131)
$ ( 1,014) $ 23,293
8,352 (26,856)
(124) 409
20,957 4,761
282 (41)
12,080 (16,388)
(2,947) (1,444)
9,467 6,891
(2,701) 15,315
10,999 (8,815)
(2,727) 1,475
2,745 (4,469)
(5,525) 1,738
$ 49,844 $ (4,131)
WESTERN AIR LINES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1984, 1983 and 1982
(In thousands of dollars)
Preferred Stock Additional Retained Total
Common Paid-In Earnings hareholdcrs'
Series A Series 8 Stock Capital (Deficit) Equity
Balance at December 31 , 1981 .. $29,923 $ - $13,044 $31 ,062 $ 47,635 $1 21,664
Other items .......................... (2) (1) (3)
Net loss ................................ (44,016) (44,016)
Balance at December 31 , 1982 .. 29,921 13,044 31 ,061 3,619 77,645
Conversion of
preferred stock ................ (14) 13
Conversion of debentures ... I 4 5
Issuance of common stock .. 3,240 14,580 17,820
Issuance of warrants ........... 13,500 13,500
Issuance of common stock
under Employee Stock
Plan .................................. 7,800 24,375 32,175
Net loss ................................ (54,485) (54,485)
Balance at December 31 , 1983 .. 29,907 24,086 83,533 (50,866) 86,660
Issuance of 1,000,000
shares of preferred stock 1,000 12,625 13,625
Conversion of 20,500
shares of preferred stock (20) 61 (41)
Cash dividends on
pref erred stock ................ (8,653) * ( 8,653)
Net loss ................................ (29,165 ) (29,165)
Balance at December 31, 1984 .. $29,907 $ 980 $24,147 $87,464 $( 80,031) $ 62,467
* Includes payment of 1983 and 1982 preferred stock dividends which were in arrears.
See accompanying Notes to Financial Statements.
20
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousand of dollars except per hare 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-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
Aircraft Useful Residual
Type Life Value
DC-10 16 years 10%
727 (New) 15 years 15%
727 (Used) 8 years
737 14 years 15%
Estimated useful lives of ground equipment range from four to ten years. Buildings and
improvements on leased property are generally 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.
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.
21
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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, 2 to 14 years for 737 aircraft, and 15 to 18 years for
DC-10 aircraft. Lease terms for facilities and ground equipment range up to 29 year . Equipment under
capital leases included in the balance sheets at December 31 , 1984 and 1983 was as follows:
Flight equipment ...................................... .
Less accumulated amortization ............... .
1984
$129,110
55,561
$ 73,549
1983
$159,306
75,570
$ 83,736
At December 31 , 1984 minimum lease payments under leases expiring after December 31 , 1985 were
as follows:
1985 $
1986 ........................................... .
1987
1988 .......................................................... .
1989 .......................................................... .
Thereafter ................................................. .
Total minimum lease payments ............... .
Less amount representing interest ... .
Present value of capital lease obligations.
Less current installments of capital
leases ............................................. .
Long-term capital lease obligations ........ . $
Capital
Leases
19,624
19,630
19,552
19,741
19,915
70,666
169,128
68,707
100,421
7,739
92,682
Operating
Leases
$ 33,899
31,682
28,823
27,987
26,699
227,703
$376,793
Rental expense for operating leases amounted to $38,497, $38,165, and $33,222 in 1984, 1983, and
1982, respectively.
Note 3. Commitments and Contingent Liabilities
At December 31 , 1984, Western had on order from the manufacturer six Boeing 737-200 aircraft for
delivery in 1987 and nine Boeing 737-300 aircraft for delivery in 1985, 1986 and 1988. The cost of all
aircraft on order is approximately $394,000, of which approximately $43,000 is already on deposit.
Western is currently negotiating terms for financing the aircraft scheduled for delivery in 1985; however,
no firm commitments for financing any of the aircraft have been obtained.
Payments due under existing purchase commitments for aircraft and ground properties and
equipment during the five years ending December 31 , 1989 are:
1985 ....................................................... .
1986 ....................................................... .
1987 ............. .
1988 ....................................................... .
1989 .............. ..
22
$ 72,321
96,541
127,698
68,603
$365,163
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 3. Commitments and Contingent Liabilitie - (Continued)
During 1984, Western took delivery of ix Boeing 737-200 aircraft under existing purcha e
commitments. The Company entered into 14-year operating lea e agreements for four of the aircraft and
sold the remaining two aircraft to a foreign carrier.
For information regarding the status of legal proceedings at December 31 , 1984, see "Legal
Proceedings" elsewhere in this Form IOK.
Note 4. Retirement Plans
Western has retirement plans 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 assumes an eight percent rate of return in determining the
actuarial present value of accumulated plan benefits.
Western participates in a collectively bargained multi-employer pension plan covering its
!BT-represented employees 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:
Actuarial Present Value of Accumulated Plan Benefits:
Vested ........................................................................ .
Nonvested ................................................................. .
Net assets available for benefits ....................................... .
1984
$38,631
3,883
$42,514
$45,065
January 1,
1983 1982
$31 ,301 $120,550
4,207 9,2 12
$35,508 $129,762
$38,208 $132,959
The amounts in the table above for 1984 and 1983 do not include information regarding a defined
benefit retirement plan for pilots, which Western terminated during the first quarter of 1983. The
termination allowed Western to recover that portion of excess funds in the plan which related to Company
contributions. Elimination of a deferred credit related to the plan of $8,115 and cash proceeds of $33,405
resulted in a gain of $41,520 ( $2.62 per share) for the year ended December 31 , 1983. The gain is
reported as an extraordinary item. In conjunction with terminating the defined benefit retirement plan,
Western made increased contributions to the defined contribution retirement plan for pilots in 1983 and
1984. Western has pledged certain assets to secure its obligations regarding other employee benefits for
pilots.
The amounts in the table above for all years 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 excess funds, and a a result recognize $15,930 ( $1.22 per
share) for the year ended December 31, 1982. The Company subsequently adopted a new, defined
contribution, pension plan for non-union employees.
23
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 4. Retirement Plans- (Continued)
The co t of the retirement plans, including the union-spon ored plan, charged to operating expen e
was $25,883, $27,578, and $18,802 for 1984, 1983, and 1982, respectively. The e costs included
amortization of prior service costs over periods ranging from IO to 20 years for certain of the plan .
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 u ed 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 $7,173 ( $0.55 per share). A further
decrease of $6,486 ( $0.50 per share) in 1982 was caused by the termination of the retirement plan for non-
union employees and a temporary reduction in Company contributions to a pilots' defined contribution
retirement plan.
In addition to providing pension benefits, the Company provides certain health care and life insurance
benefits for retired employees. Substantially all of the Company's employees may become eligible for
those benefits if they reach normal retirement age while still working for Western. The life insurance
premiums are expensed monthly based on the number of participants. The medical and dental benefits
are self-funded, and their expense is based on actual claims paid. For 1984, the annual cost of providing
both life and health care benefits was approximately $1,806.
Note 5. Income Taxes
Income taxes are summarized as follows:
1984 1983 1982
Current:
Federal ................................................ $ $ ( 111 ) $(3,124)
State ..................................................... 200
89 (3,124)
Deferred:
Provision .............................................. 576 3,765 (2,290)
Operating loss carryforward ............... (576) (4,184) 1,964
Investment credits ............................... 71
(419) (255)
Amortization of deferred investment
credits ...................................................... ( 177)
$ $ (330) $( 3,556)
Under applicable law, investment credits could be applied against 90 percent of Federal income tax
liabilities in 1982. The Tax Equity and Fiscal Responsibility Act of 1982 reduced the application to 85
percent for 1983 and beyond.
24
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 5. Income Taxes-( Continued)
Deferred income taxes arise from timing differences between financial and tax reporting. The effect
of these differences on income taxes are as follows:
Depreciation and amortization ........................................ .
Capital leases .................................................................... .
Interest capitalized ............................................................ .
Employee benefits ............................................................. .
Gain on sale and leaseback of flight equipment... ........... .
Other ................................................................................. .
1984
$ 3,890
337
(1 ,592)
(3,087)
1,821
(793)
$ 576
1983
$ 1,349
(416)
1,334
326
1,074
98
$ 3,765
1982
$ (6,868)
72 1
1,464
717
1,074
602
$ (2,290)
Reconciliations of income tax benefits at the United States statutory rate to the provision for income
taxes follow:
1984 1983 1982
Income taxes at the United States statutory rate ............. . $( 13,416) $(25,215) $(21 ,884)
Increases (reductions) in taxes resulting from:
Effect of operating loss carryforward for which no
tax benefit may be recognized .............................. . 13,416 24,796 (13,017)
Amortization of deferred investment credits ........... . ( 177 )
Reversal of investment credits previously recog-
nized on flow-through method ............................. . 29,362
State income taxes net of federal income tax benefit 200
Capital gains .............................................................. . 4,798
IRS audit adjustments .............................................. . ( 2,452 )
Other .......................................................................... . ( 111 ) ( 186)
Income tax benefits ........................................................... . $ $ (330) $ ( 3,556)
Minimal tax benefits have been recognized for 1983 and 1984 because, for reporting purposes,
virtually all benefits which could be recognized by offsetting deferred tax credits were recognized prior to
1983.
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 198 1
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.
Net operating losses of $148,000 have not been utilized on tax returns. For income tax purposes, they
expire as follows:
1995 .............................................. .
1996 .............................................. .
1997
1998
l 999 .............................................. .
$34,000
1,000
20,000
60,000
33,000
For financial statement purpo es, $106,000 of the carryforward has not been recognized.
25
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 5. Income Taxes-(Continued)
Inve tment credit available to reduce future years' Federal income tax expen e for financial and tax
purposes amount to $60,600 at December 31, 1984. For income tax purposes, available credits expire in
the following years:
1992 ..................................... .
l 993 ..................................... .
l 994 ..................................... .
1995 .................................... ..
Note 6. Debt and Pledged Assets
Long-term debt is comprised of:
$ 3,500
13,700
17,000
19,000
l 996 ..................................... .
1997 .................................... ..
1998 ..................................... .
1999 .................................... ..
$2,000
1,300
1,500
2,600
December 31,
9.55% equipment trust certificates due May l, 1993, with semi-annual
principal payments of $3,349 .................................................................. ..
l 0% equipment trust certificates due April l, 1994, with quarterly
principal payments of $1,000 ................................................................... .
Floating-rate equipment trust certificates due June 30, 1995, ( interest
rate 9. 75% at December 31, 1984) with semi-annual principal pay-
ments of $2,609 ........................................................................................ ..
13.29% installment notes due May 1, 1995, with semi-annual principal
payments of$1,100 ................................................................................... .
$90,000 face amount 10% senior secured trust notes due June 1998, net
of $30,494- 1984 and $31,053-1983 unamortized discount, ( effec-
tive interest rate 17.3%) with annual sinking fund payments of $9,000
starting June 15, 1989 ............................................................................... .
14% senior secured convertible notes due December 1, 1998, with annual
sinking fund payments of $6,020 face amount December 1, 1989, and
$6,500 annually thereafter ....................................................................... .
Floating-rate note payable to manufacturer due February 1985 with
payments of $1,500 in January 1985 and $1,350 in February 1985 ...... ..
9.25% conditional sales agreement due May 1, l 994 ................................. ..
Floating-rate five-year term loan due November 15, 1989, ( interest rate
13.25% at December 31, 1984), with quarterly principal payments of
$ l,250 ....................................................................................................... ..
Deferred deposits with manufacturer due upon delivery of aircraft ( See
Note 3), interest at prime rate plus 1 % .................................................... .
Revolving line of credit ................................................................................ .
5% convertible subordinated debentures due February 1, 1993, with
annual sinking fund payments of $1,500 ................................................ ..
12% convertible subordinated debentures due December 1992 ................ ..
10% subordinated sinking fund notes due April 15, 1984 ......................... ..
Less: Current installments ............... : ........................................................... ..
1984
$ 56,940
36,993
49,854
23,100
59,506
64,520
2,850
11,535
25,000
18,181
20,000
19,500
12,500
400,479
(64,948)
$335,531
1983
$ 63,638
40,992
55,073
25,300
58,947
65,000
7,350
11,750
20,995
12,500
6,837
368,382
(30,958)
$337,424
The 12% convertible subordinated debentures are convertible into 2,336,448 shares of Common Stock
at $5.35 per share, subject to adjustment in certain cases. Interest is payable semi-annually.
26
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 6. Debt and Pledged A ets-(Continued)
Not payable at D cemb r 31 , 1984, con i ted of loan payable to two financial lending in titution .
The e note are ecured by We tern' Univer al Air Travel Card and air freight receivable , which total
$11 ,867 at December 31 , 1984. Under the e agreements We tern can borrow, up to a limit, a percentage
of the receivable balance . The intere t rates are prime plu 3.25 percent.
Effective January 18, l 983, We tern entered into a $30,000 revolving credit agreement with a group of
financial in titutions. Upon igning the agreement, Western paid a fee of of 1% of the commitment and
is ued 550,000 warrants for the purcha e of Common Stock. In conjunction with drawdown under the
agreement a borrowing fee of $82 wa paid and 146,774 additional warrants were i ued. The exerci e
price and number of warrant are ubject to adju tment. At December 31, 1984, 709,921 hares of
common tock were reserved for exercise at a price of $5.30 per hare. The warrants expire on January 18,
1993.
The following schedule shows the amount of long-term debt due in the five years ending December
31 , 1989.
1985 .............................................. .
1986 .............................................. .
1987 .............................................. .
1988 .............................................. .
1989 .............................................. .
$64,948
25,934
25,577
25,669
38,127
At December 31 , 1984, 3,027,950 shares of Common Stock were reserved for conver ion of 5%
debentures at a conversion price of $6.44 per share.
In June 1983 the Company completed a public offering of units, consisting in the aggregate of $90,000
principal amount 10% Senior Secured Trust Notes due June 15, 1998, 3,240,000 shares of Common
Stock, and warrants to purchase 9,000,000 shares of Common Stock. The warrants are exerci able at $9.50
per share, subject to adjustment, and expire on June 15, 1993. The exercise price may be paid using 10%
Senior Secured Trust Notes, which will be accepted at par. The expiration date may be accelerated by the
Company to no earlier than June 15, 1988 and the warrants may be called on or after June 15, 1986 if the
price of the common stock attains specified levels.
Western entered into a new revolving credit agreement in September 1983 which provided a $22,000
line of credit through August 31 , 1984 ( the "Credit Agreement"). In April 1984, Western issued one
million shares of $2.1375 Series B Cumulative Convertible Preferred Stock ("Series B Preferred Stock")
convertible into Common Stock at $5 per hare, subject to adjustment. The net proceeds of $13,600 were
used to prepay $2,600 of debt, and for payment of $5,400 of dividend arrearages on the $2 Series A
Cumulative Convertible Preferred Stock. In conjunction with the issuance of this Series B Preferred Stock,
the Company's lenders agreed to extend the Credit Agreement to provide a $20,000 revolving line of credit
through August 31 , 1985. At December 31 , 1984, the entire $20,000 under the Credit Agreement was
drawn down. The Credit Agreement and a related agreement affecting other indebtedness of the
Company contain two principal financial covenants. One requires the maintenance of adjusted net worth
( defined as tangible net worth plus the long-term portion of subordinated indebtedness) of not less than
$45,000 prior to September 30, 1985, increasing $30,000 annually to $200,000 by October 1989. The
second requires that the ratio of debt, defined to include lease obligations and other liabilities but to
exclude the long-term portion of subordinated indebtedness, to adjusted net worth, cannot exceed eleven
to one prior to September 30, 1985, declining to a ratio of three to one by October 1989. A of December
31 , 1984, the Company had adju ted net worth of $80,400 and debt, a defined, of $471,200 and the ratio
described above was 5.86 to one. The Credit Agreement also places certain restriction on dividend
payment . The Credit Agreement is ecured by lien on certain aircraft.
27
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 6. Debt and Pledged Assets-(Continued)
At December 31, 1984, 12,503,875 shares of Common Stock were reserved for conversion of 14%
Senior Secured Convertible Notes at a conversion price of $5.16.
In May 1984, Western borrowed $13,125 under a conditional sales agreement to finance approxi-
mately 75 percent of the purchase price of a B737-200 aircraft. This loan is stated in Japanese yen and
requires semi-annual yen payments at a stated interest rate of 9.25 percent. Since the payments are in yen,
the outstanding United States dollar loan balance will fluctuate as a result of being translated at the
exchange rate in effect at the balance sheet date. At December 31, 1984, Western had recorded a gain of
$1,208 as a result of the foreign currency translation.
In November 1984, the Company entered into a five-year term loan agreement for $25,000. The
interest rate is prime plus 2.5 percent. The proceeds of this loan were used to finance the $35,500 purchase
price of six used B727-200 aircraft and three spare engines previously on lease.
In March 1985, Western issued $30,000 of 14% Senior Notes due April 1, 1988. On April 1, 1988,
the Senior Notes, at the election of the Company, will be converted into either Convertible Subordinated
Debentures due April 1, 1998 or Series C Cumulative Convertible Preferred Stock ( but not both). If on or
prior to February 1, 1988, the holder serves notice not to convert the Senior Notes, such notes will be
repaid at 100% of the principal amount plus accrued interest. At March 31 , 1985, 3,333,333 shares of
Common Stock were reserved for conversion of either the Debentures due 1998 or the Series C Preferred
Stock.
In March 1985, Western also filed a registration statement with the Securities and Exchange
Commission for a public offering of up to 1,500,000 shares of Series D Cumulative Convertible Preferred
Stock.
Substantially all of Western's property and equipment is pledged as collateral for debt and other
obligations. Several of the agreements require that collateral be maintained at specified levels.
Note 7. Stock Options
Western has two stock option plans for officers and key personnel. The first plan was adopted in
197 4, and provided for options to purchase a maximum of 1,030,000 shares of Common Stock at prices not
less than the fair market value of the Common 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 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.
The balances of options granted under the plans follow:
1974 Plan 1982 Plan
Average Average
Number Price Number Price
Options Granted and Outstanding at:
December 31, 1984 ........................................... 152,780 $8.30 612,500 $5.15
December 31, 1983 ........................................... 561,250 $8.49 802,500 $5.14
Options Exercisable at:
December 31, 1984 ........................................... 150,580 $8.28 500,500 $5.15
December 31, 1983 ........................................... 556,750 $8.48 505,500 $4.89
No options were exercised during 1984. At December 31, 1984 and 1983, 152,780 and 962,885 hare
of Common Stock, respectively, 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.
28
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 8. Lo s per Common Share
Lo before extraordinary item and net los per common hare arc calculated a follow :
Primary:
Year Ended December 31 ,
1984 1983 1982
Loss Before Extraordinary Item per Common Share:
Loss before extraordinary item .............................................. . $(29,165) $(96,005) $( 59,946)
Preferred stock cash dividends ............................................... . (3,868) (2,393) (2,394)
Loss before extraordinary item applicable
to Common Stock ............................................................... . $( 33,033) $( 98,398) $( 62,340)
Loss before extraordinary item per common share, primary . $ (1.37) $ ( 6.22) $ ( 4. 78)
Net Loss per Common Share:
Net loss .................................................................................... . $(29,165) $( 54,485) $( 44,016)
Preferred stock cash dividends ............................................... . (3,868) (2,393) (2,394)
Loss applicable to Common Stock ......................................... . $( 33,033) $( 56,878) $( 46,410)
Net loss per common share, primary ..................................... . $ (1.37) $ ( 3.60) $ ( 3.56)
Weighted average shares outstanding ( in thousands) .......... . 24,104 15,821 13,044
Fully Diluted:
Fully diluted earnings per share are not presented, as the exercise of stock options and Common Stock
Warrants and the conversion of convertible subordinated debentures and preferred stock into Common
Stock would be anti-dilutive.
Note 9. Preferred Stock
The shares of $2 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 at any time at the option of Western. The redemption price of $25.60 at
December 31 , 1984, decreases periodically until 1987 after which it remains at $25 per share. At
December 31 , 1984, 2,990,675 shares of Common Stock were reserved for conversion of Series A Preferred
Stock.
The Company had omitted payment of the quarterly dividends on the Series A Preferred Stock
beginning the first quarter of 1982. In April 1984, in connection with the issuance of the $2.1375 Series B
Cumulative Convertible Preferred Stock, all covenants restricting the payment of dividends on preferred
stock were lifted. From the net proceeds of this offering, $4,785 was used to bring current the dividend
arrearages on the Series A Preferred Stock.
The shares of $2.1375 Series B Preferred Stock are convertible into Common Stock at the rate of three
shares of Common Stock for each share of Series B Preferred Stock, subject to adjustment under certain
conditions, and may be redeemed at any time after March 1, 1986 at the option of We tern. The
redemption price of $16. 71 at March 1, 1986, decrea es periodically until 1994 after which it remain at
$15 per share. At December 31 , 1984, 2,938,500 hares of Common Stock were re erved for conver ion of
Series B Preferred Stock.
29
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 10. Related Party Transactions
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, who was Chairman and Chief Executive
Officer of Western from December 1981 to April 1983. The leases are for a term of 12 years with options
to extend for two years at fair rental value and/or purchase 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, 1984 was $19,509. The rental is $160 per aircraft per month. In addition to
amounts paid pursuant to the leases, Western paid $1,150 to All and its subsidiaries during 1982 to
reimburse them for expenditures incurred on behalf of Western for equipment, facilities and personnel.
Approximately $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 1984 and 1983 is as follows:
March 31
1984
Operating revenues .......................................... . $287,344
Operating income (loss) ................................. .. (12,903)
Earnings (loss) before extraordinary item ..... . (23,018)
Net earnings (loss) .......................................... . (23,018)
Earnings (Loss) per Common Share:
Primary:
Earnings (loss) before
extraordinary item ........................ . $ (0.98)
Net earnings (loss) .......................... . $ (0.98)
Fully Diluted:
Earnings (loss) before
extraordinary item ....................... .. $ ( 0.98)
Net earnings (loss) .......................... . $ (0.98)
1983
Operating revenues .......................................... . $257,259
Operating income (loss) ................................. .. (38,706)
Earnings (loss) before extraordinary item .... .. (51,845)
Net earnings (loss) ......................................... .. ( 17,845)
Earnings (Loss) per Common Share:
Primary:
Earnings (loss) before
extraordinary item......................... $ ( 4.02)
et earnings (loss) .. .. .. .. .. .... .. ........... $ ( 1. 41 )
Fully Diluted:
Earnings (loss) before
extraordinary item......................... $ ( 4.02)
Net earnings (loss) .... .. .. .. .. .. ... .... .. .... $ ( 1. 41 )
June 30
$293,888
(5,843)
(13,653)
(13,653)
$ ( 0.61)
$ ( 0.61)
$ ( 0.61)
$ ( 0.61)
$281,518
(20,462)
(25,438)
(23,723)
$ ( 1.97)
$ (1.84)
$ ( 1.97)
$ (1.84)
September 30
$322,293
23,235
13,013
13,013
$ 0.44
$ 0.44
$ 0.32
$ 0.32
$323,004
20,653
10,980
16,736
$ 0.50
$ 0.73
$ 0.42
$ 0.60
December 31
$278,360
6,923
(5,507)
(5,507)
$ (0.27)
$ (0.27)
$ (0.27)
$ ( 0.27)
$280,781
(17,857)
(29,702)
(29,653)
$ ( 1.46)
$ ( 1.46)
$ ( 1.46)
$ (1.46)
During the first quarter of 1983 Western terminated a defined benefit retirement plan for pilot . This
termination produced extraordinary gains of $34,000, $1,715, $5,756 and $49 recorded in the first, econd,
third and fourth quarters of 1983, respectively.
30
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 12. Competitive Action Plan
In September 1984 We tern received approval from each of its major union for a combination of pay
reductions and productivity improvements ( the " Competitive Action Plan" or " AP") de igned to
achieve substantial reductions in labor co t , effective September 1, 1984 through December 31 , 1986. In
contra t to temporary concessions obtained by Western in the pa t, these new agreements have no
contractual provisions for reversions to higher wage levels in the future. Western began implementation of
CAP in September 1984.
In addition, CAP provides for an increase in profits subject to distribution annually under a profit
sharing plan adopted pursuant to the Company's 1983 Partnership Plan to 20% of the first $75 million of
annual profits and 35% of profits thereafter ( profits for this purpose are pre-tax profits exclu ive of
extraordinary items and gains from disposition of property), for a reduction of 12.5% in the monthly
management budget by a combination of pay and head count adjustments, and for the nomination for
election to the Board of four union representatives ( rather than the two representatives to which the unions
were previously entitled). All of such directors have been elected.
Each of the CAP proposals also provides that if, after September 1, 1984, Western agrees to pay
increases or productivity reductions for any group of employees, then similar increases or reductions will be
afforded employees represented by other unions.
Under the Company's 1983 partnership plan, 7.8 million shares of Common Stock are held by an
independent trustee. All shares held by the trustee will be voted in proportion to the vote of all other
shares voted except that on any question regarding the merger or acquisition of the Company, the creation
by the Company of another airline, the sale of all or substantially all of the Company's assets or the
liquidation of the Company, the trustee will vote in accordance with employee instructions. Voting on all
matters will be passed through to individual employees if the Company's intention to qualify the plan as an
Employee Stock Ownership Plan under the Internal Revenue Code is realized.
Note 13. Impact of Current Cost Data (Unaudited)
Current cost accounting is defined by Statements of Financial Accounting Standards 33 and 82 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. Current
cost methodology involves the use of assumptions and estimates; therefore, the resulting measurements
should be viewed as estimates, rather than as precise indications of the effects of current prices.
The amounts reported in the summary 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 provision for
income taxes.
31
WESTERN AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 13. Impact of Current Cost Data (Unaudited)-(Continued)
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 the aircraft fleet exceeds the historic cost of such fleet. Current costs for other
property and equipment were valued at their historical cost.
Net (loss) as reported in the statement of operations ......................................... .
Adjustment to restate costs for the effect of specific prices ( current cost):
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 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 ..................................................................................................... .
$(29,165)
(19,569)
$( 48,734)
$ 19,640
$158,687
(31,976)
$126,711
* At December 31 , 1984, current cost of property and equipment, net of accumulated depreciation and
amortization was $893,488.
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 1984 dollars as measured by CPI-U follows:
Year Ended December 31,
1984 1983 1982 1981 1980
Operating revenues ............................ $1 ,181 ,885 $1,188,264 $1,150,489 $1 ,208,2 19 $1,254,651
Historical Cost Information Adjust-
ed for Current Cost Information:
Net earnings (loss) .................... (48,734) (68,282) (64,931) ( 151 ,264) (89,483)
Net earnings (loss) per com-
mon share ............................... ( 2.38) ( 4.32) ( 4.98) (11.81) ( 7.09)
Net assets at year-end* .............. 401,481 230,150 214,236 260,280 846,643
Gain from decline m purchasing
power of net amounts owed .......... 19,640 6,249 20,040 47,556 59,027
Cash dividends paid per common
share ............................................... .32
Market price per common share at
year-end ......................................... 3.25 4.42 5.67 5.55 11.50
Average Consumer Price Index ........ 311.1 298.4 289.1 272.4 246.8
* Prior to 1981 , direct prices were based on selling prices for new aircraft provided by the Air Transport
Association of America. For 1981 forward , current appraisals of Western's existing fleet were available
for determination of current cost.
32
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no di agreement on accounting and financial di clo ure matter in 1984.
PART Ill
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's definitive proxy statement to be filed pur uant to
Regulation 14A not later than 120 days after December 31, 1984.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after December 31, 1984.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after December 31, 1984.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after December 31, 1984.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)( 1) Accountants' Report
Balance Sheets at December 31, 1984 and 1983
Statements of Operations for Years Ended December 31, 1984, 1983, and 1982
Statements of Changes in Financial Position for Years Ended
December 31, 1984, 1983, and 1982
Statements of Shareholders' Equity for Years Ended
December 31, 1984, 1983, and 1982
Notes to Financial Statements
(a)( 2) Schedule V
Schedule VI
Property, Plant, and Equipment
Accumulated Depreciation and Amortization of Property,
Plant and Equipment
Schedule VIII
Schedule X
Valuation and Qualifying Accounts
Supplementary Income Statement Information
Schedules not included above have been omitted because they are not applicable or
the required information is shown in the Financial Statements or otes thereto
included in Item 8 of this Form 10-K.
( a)( 3) Exhibits
3(a)*
3(b)*
- Composite Certificate of Incorporation of the Company, as amended ( filed
as Exhibit 3(a) to Form 10-K for fi cal year ended December 31, 1983, File
Number 1-1521)
- By-Law of the Company, as amended ( filed a Exhibit 3( b) to Form 10-K for
fiscal year ended December 31, 1983, File umber 1-1521 )
33
I 0( a)( I) * - A ignment and Amendment and Re tatement of hattel Mortgage and Security
Agreement dated a of Augu t I, 1983 (filed a Exhibit I0(a)(5) to Regi tration
No. 2-87623)
I0(a)(2)* - Collateral Agreement dated a of Augu t I, 1983 (filed as Exhibit l0(a)(4) to
Regi tration No. 2-87623)
IO( a)( 3) * - Amendment No. l dated as of November I, 1983 to Collateral Agreement dated a
of August l , 1983 (filed a Exhibit I0(a)(3) to the Annual Report on Form 10-K
for year ended December 31 , 1983, File No. 1-1521)
I 0( a)( 4) * - Amendment No. 2 dated as of April I, 1984 to Collateral Agreement dated as of
August I, 1983 ( filed a Exhibit I0.3 to Regi tration No. 2-95812)
10(a)(5)* - Amendment No. 3 dated as of October 17, 1984 to Collateral Agreement dated as of
August l, 1983 ( filed as Exhibit l 0.4 to Registration No. 2-95812)
l 0( a)( 6) * - Supplemental Chattel Mortgage No. l dated as of November l, l 983 between
Western and Union Bank as Collateral Agent ( filed as Exhibit IO( a)( 4) to the
Annual Report on Form IO-K for year ended December 31 , 1983, File No. 1-1521)
IO( a) ( 7) * - Supplemental Chattel Mortgage No. 2 dated as of January 30, 1984 between
Western and Union Bank as Collateral Agent (filed as Exhibit l0(a)(5) to the
Annual Report on Form 10-K for year ended December 31 , 1983, File No. 1-1521)
l0(a)(8)* - Supplemental Chattel Mortgage No. 3 dated as of April 18, 1984 between Western
and Union Bank as Collateral Agent ( filed as Exhibit IO. 7 to Registration No.
2-95812)
IO(a)(9)* - Supplemental Chattel Mortgage No. 4 dated as of May 29, 1984 between Western
and Union Bank as Collateral Agent ( filed as Exhibit I0.8 to Registration No.
2-95812)
l0(a)( 10)* - Supplemental Chattel Mortgage No. 5 dated as of November l, 1984 between
Western and Union Bank as Collateral Agent (filed as Exhibit 10.9 to Registration
No. 2-95812)
l0(a)( 11 )* - Amendment No. l dated as of November 1, 1983 to Revolving Credit Agreement
dated as of August 1, 1983 ( filed as Exhibit 10( a)( 6) to the Annual Report on
Form 10-K for year ended December 31, 1983, File No. 1-1521)
l0(a)( 12) * - Amendment No. 2 dated as of April 1, 1984 to Revolving Credit Agreement dated
as of August 1, 1983 ( filed as Exhibit I0.11 to Registration No. 2-95812)
10( a)( 13) * - Revolving Credit Agreement dated as of August 1, 1983 among certain lenders and
Western ( filed as Exhibit 10( a)( 6) to Registration No. 2-87623)
l0(a)( 14)* - Warrant Agreement dated as of January 18, 1983 between certain lenders and
Western ( filed as Exhibit 10( a)( 35) to Annual Report on Form 10-K for year
ended December 31 , 1982, File No. 1-1521)
l0(a)( 15)* - Warrant Agreement dated as of June 15, 1983 between Western and The Bank of
New York as Warrant Agent (filed as Exhibit 10(a)(7) to Registration No.
2-87623)
l0(a)( 16)* - Warrant Agreement dated as of November l, 1983 between Western and certain
lenders ( filed as Exhibit l0(a)( 10) to the Annual Report on Form 10-K for year
ended December 31 , 1983, File No. 1-1521)
10( a) ( 17) * - Agreement between Western and Associates Commercial Corporation dated June
14, 1983 (filed as Exhibit l0(a)( 13) to Registration No. 2-87623)
l0(a)( 18)* - Equipment Trust Agreement dated as of June 15, 1983 between Western and The
Bank of New York, Trustee (filed as Exhibit 4 to Quarterly Report on Form 10-Q
for the quarter ended June 30, 1983, File No. 1-1521)
lO(a)( 19)* - Equipment Trust Agreement dated as of November 30, 1983 between Western and
NCNB National Bank of North Carolina, Trustee ( filed as Exhibit 4 to Registration
No. 2-87623)
10(a)(20)* - Purchase Agreement No. 1165 dated December 22, 1982 between Western and
Boeing Company, as supplemented ( filed as Exhibit 10( a)( 14) to Annual Report
on Form 10-K for year ended December 31 , 1983, File No. 1-1521)
l0(a)(21 )* - Purchase Agreement No. 1190 dated as of January 27, 1983 between Western and
Boeing Company, as supplemented ( filed as Exhibit 10( a)( 15) to Annual Report
on Form 10-K for year ended December 31 , 1983, File No. 1-1521)
l0(a)(22)* - Airport Use Agreement dated as of July 1, 1978 between Salt Lake City Corporation
and Western, as amended (WAL Contract No. 6235) (filed as Exhibit lO(a)( 16) to
Annual Report on Form 10-K for year ended December 31 , 1983, File No. 1-1521)
10(a)(23) * - Lease Agreement dated as of September 13, 1961 , as amended, between the City of
Los Angeles and Western (filed as Exhibit l0(a)( 44) to registration No. 2-82762)
34
I0(a)(24)* - Lea e Agreement dat d a of November 12, 1973 between the ity f L Angele
and We tern ( fit d a Exhibit 20 t Annual R p rt on F rm 10-K for the year ended
December 31 , l 974, File No. l- 152 l)
I0(a)(25)* - Term Loan Agreement dated a of November 16, 1984 b tween We tern and
Midlantic National Bank ( filed a Exhibit 10.24 to Regi tration No. 2-95812)
I 0( a)( 26) * - Security Agreement and Chattel Mortgage dated a of November 16, 1984 in favor
of Midlantic Nati nal Bank ( filed a Exhibit 10.25 to Regi tration No.2-95812)
IO(a)(27)* - Lea e Agreement dated as of November 19, 1984 between We tern and UT Credit
Corporation ( filed as Exhibit I0.26 to Regi tration No. 2-95812)
IO(a)(28)* - Lease Agreement dated as of November 27, 1984 between Western and UT Credit
Corporation ( filed as Exhibit 10.27 to Regi tration No. 2-95812)
10( a)( 29) * - Lease Agreement dated a of November 28, I 984 between Western and UT Credit
Corporation ( filed as Exhibit I0.28 to Registration No. 2-95812)
I 0( a) ( 30) * - Conditional Sales Agreement dated as of April 20, 1984 between C. Itoh & Co.,
Ltd., Century Leasing System, Inc. and Showa Leasing Co., Ltd. and Western ( filed
as Exhibit 10.31 to Registration No. 2-95812)
10( a)( 31) * - Purchase Agreement dated as of January 8, 1985 between Western and James W.
Smith ( filed as Exhibit I0.31 to Regi tration No. 2-95812)
10( b) * - Western Employees Stock Plan, dated as of December 6, I 983, as amended ( filed as
Exhibit I 0( b) to Annual Report on Form I 0-K, for the year ended December 31 ,
1983)
l0(c)( I)* - Employment Agreement dated as of January 9, 1984 between Western and
Lawrence H. Lee ( filed as Exhibit IO( c) to Annual Report on Form 10-K, for year
ended December 31 , 1983, File No. 1-1521)
10(c)(2)* - Amendment to Employment Agreement dated as of January 17, 1985 to Employ-
ment Agreement dated as of January 9, 1984, between We tern and Lawrence H.
Lee ( filed as Exhibit 10.34 to Registration No. 2-95812)
IO( c )( 3) * - Employment Agreement dated as of May 29, 1984 between Western and Andre C.
Dimitriadis ( filed as Exhibit I0.35 to Registration No. 2-95812)
IO( c )( 4) * - Employment Agreement dated as of November 13, 1984 between Western and
Thomas J. Roeck, Jr. ( filed as Exhibit No. 10.36 to Registration No. 2-958 I 2)
10(c)(5)* - Employment Agreement dated as of January 8, 1985 between Western and Ronald
D. Marasco ( filed as Exhibit I0.37 to Registration o. 2-95812)
10(c)(6)* - Employment Agreement dated as of January 22, 1985 between Western and Robert
(Robin) H. H. Wilson ( filed as Exhibit 10.38 to Registration No. 2-95812)
24 - Consent of Independent Certified Public Accountants
* Incorporated by reference.
The foregoing list omits instruments defining the rights of holder of long-term debt of the Company
and its consolidated subsidiaries where the total amount of ecuritie authorized thereunder does not
exceed 10% of the total assets of the Company and its consolidated ubsidiarie . The Company hereby
agrees to furnish a copy of each such instrument or agreement to the Commi ion upon request.
( b) Reports on Form 8-K. o reports on Form 8-K were filed during fourth quarter of 1984.
35
ITEM 14(d)(3). FINANCIAL STATEMENT SCHEDULES
WESTERN AIR LINES, INC.
SCHEDULE V-PROPERTY, PLANT AND EQUIPMENT(!)
For the Years Ended December 31, 1984, 1983, and 1982
( In Thousands of Dollars)
Year Ended December 31, 1984:
Balance at
Beginning
of Period
Flight equipment.................................................. $ 851,831
144,9 I 5
35,108
Facilities and ground equipment ........................ .
Deposits on equipment purchase contracts ......... .
$1,031,854
Flight equipment not used Ill operations and
reflected under "Other assets" on the balance
sheet .................................................................. $ 3,380
Year Ended December 31, 1983:
Flight equipment .................................................. $ 850,957
Facilities and ground equipment ......................... 140,471
Deposits on equipment purchase contracts .......... 27,017
$ l,0 18,445
Flight equipment not used in operations and
reflected under "Other assets" on the balance
sheet .................................................................. $ 3,794
Year Ended December 31, 1982:
Flight Equipment. ................................................. $ 828,276
Facilities and ground equipment ......................... 139,400
Deposits on equipment purchase contracts .......... 21,508
$ 989,184
Flight equipment not used in operations and
reflected under "Other assets" on the balance
sheet .................................................................. $ 4,401
Additions
at Cost Retirements
$ 66,339 $ 62,121
14,628 5,06 l
48,619 40,806(2)
$129,586 $107,988
$ $ 222
$ 2,108 $ l,234
9,287 4,843
8,091
$19,486 $ 6,077
$ $ 414
$ 23,822 $ l, 14 l
4,107 3,036
5,509
$ 33,438 $ 4,177
$ 22 $ 629
Balance at End
of Period
$ 856,049
154,482
42,92 l
$1,053,452
$ 3,158
$ 851,831
144,9 I 5
35,108
$1,031,854
$ 3,380
$ 850,957
l 40,47 l
27,017
$1,0 l 8,445
$ 3,794
( 1) For disclosure of the methods and lives used in computing the provision for depreciation see Note 1 of
Notes to Financial Statements.
( 2) Reimbursements upon financing of aircraft.
Reconciliation to Statements of Changes in Financial Position
Additions to property and equipment... ......................................... .
Interest capitalized .......................................................................... .
Other- net ...................................................................................... .
Purchase of property and equipment and advances thereon ........ .
36
1984
$129,586
(6,070)
$123,516
1983
$19,486
(2,977)
(127)
$16,382
1982
$33,438
(2,508)
3
$30,933
WESTERN AIR LINES, INC.
SCHEDULE VI-ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT, AND EQUIPMENT
For the Year Ended December 31, 1984, 1983 and 1982
(In Thousands of Dollar )
Year Ended December 31 , 1984:
Flight equipment ...........................................................
Facilities and ground equipment.. .................................
Flight equipment not used in operations and reflected
under " Other assets" on the balance sheet ...............
Year Ended December 31 , 1983:
Flight equipment ...........................................................
Facilities and ground equipment... ................................
Flight equipment not used in operations and reflected
under " Other assets" on the balance sheet ...............
Year Ended December 31 , 1982:
Flight Equipment ...........................................................
Facilities and ground equipment... ................................
Flight equipment not used in operations and reflected
under " Other assets" on the balance sheet ...............
Reconciliation to Statements of Operations
To Statements of Operations:
Additions charged to costs and expenses ..................... .
Depreciation of flight equipment expendable parts .... .
Deduct amounts charged to other operating expen e
Depreciation and amortization ................................. .
37
Balance at
Beginning
of Period
$337,138
99,741
$436,879
$ 2,817
$289,038
94,653
$383,691
$ 3,181
$239,654
87,083
$326,737
$ 3,763
1984
$58,256
1,309
59,565
$59,565
Additions
hargcd to
Costs and
Expenses Retirements
$48,395 $48,612
9,861 4,196
58,256 52,808
$ - $ 189
$48,698 $ 598
9,650 4,562
$58,348 $ 5,160
$ - $ 364
$49,826 $ 442
10,142 2,572
$59 968 $ 3,014
$ - $ 582
1983
$58,348
1 054
59,402
23
$59 379
Balance
at End
of Period
$336,921
105,406
442,327
$ 2,628
$337,138
99,741
$436,879
$2,817
$289,038
94,653
$383,691
$ 3,181
1982
$59,968
1,805
61 ,773
22
$61 ,751
WESTERN AIR LINES, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1984, 1983, and 1982
(In Thousands of Dollars)
Year Ended December 31 , 1984:
Allowance for obsolescence of
flight equipment expendable parts .............. .
Allowance for doubtful accounts .................... ..
Year Ended December 31, 1983:
Allowance for obsolescence of
flight equipment expendable parts .............. .
Allowance for doubtful accounts .................... ..
Year Ended December 31 , 1982:
Allowance for obsolescence of
flight equipment expendable parts ............. ..
Allowance for doubtful accounts ..................... .
( 1) Charges upon retirement.
( 2) Bad debts deemed uncollectible.
Balance at
Beginning
of Period
$17,073
8,758
$16,364
3,491
$15,422
2,959
38
Additions
Charged to
Costs and
Expenses
$1,309
6,554
$1 ,054
8,225
$1,805
2,673
Deductions
$ 314(1)
2,761(2)
$ 345( 1)
2,958( 2)
$ 863(1)
2,141(2)
Balance
at End
of Period
$18,068
12,551
$17,073
8,758
$16,364
3,491
WESTERN AIR LINES, INC.
SCHEDULE X- SUPPLEMENTARY INCOME STATEMENT INFORMATION
For the Year Ended December 31, 1984, 1983, and 1982
(In Thou ands of Dollar )
Charged to Operating Expen es:
Maintenance and repairs ........................................................ .
Taxes other than payroll and income taxes:
Property taxes .................................................................. .
Fuel and other ................................................................. .
Advertising and publicity ....................................................... .
39
1984
$93,740
5,716
9,046
23,247
1983
$9 1,122
6,296
7,397
24,289
1982
$77,889
6,98 1
7,705
23,503
SIGNATURES
Pur uant to the requirements of Section 13 or 15( d) of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WESTERN AIR LINES, INC.
By Isl LA WREN CE H. LEE
Lawrence H. Lee
Chairman
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
Isl LAWRENCE H. LEE Chairman and Director March 26, 1985
Lawrence H. Lee
Chief Executive Officer
and Director
Isl GERALD GRINSTEIN ( Principal Executive Officer) March 26, 1985
Gerald Grinstein
Isl ROBERT H. H. WILSON President and Director March 26, 1985
Robert H. H. Wilson
Senior Vice President and
Chief Financial Officer
Isl THOMAS J. ROECK, JR. ( Principal Financial Officer) March 26, 1985
Thomas J. Roeck, Jr.
Vice President and
Controller ( Principal
Isl GREGORY P. CHAMBERS Accounting Officer) March 26, 1985
Gregory P. Chambers
Director March , 1985
Fred Benninger
Isl ARCHIE R. BOE Director March 26, 1985
Archie R . Boe
Isl VICTOR L. BROWN Director March 26, 1985
Victor L. Brown
Isl JOSEPH T. CASEY Director March 26, 1985
Joseph T. Casey
Director March , 1985
Walter J. Hickel
40
ignature Title Date
I I Director March 26, 1985
Director March , 1985
Bert T. Kobayashi, Jr.
Isl CHARLES LEVINSON Director March 26, 1985
Charles Levinson
Isl s USAN Eow ARDS p ACE Director March 26, 1985
Su an Edwards Pace
Director March , 1985
James J. Shields
Isl SPENCER R. STUART Director March 26, 1985
Spencer R. Stuart
Dire~tor March , 1985
Robert H. Volk
41
Honolulu
Seasonal Service Only
Edmonton
-------- Minneapolis/St. Paul
Sioux Falls
~---'71-------------------.. Dulles
>-----,A~+-----------+---------- Washington
Omaha National
St. Louis
Dallas/Ft. Worth
~ - - - - - Puerto Vallarta
~------ lxtapa/Zihuatanejo
...., ______ Acapulco