Western Airlines Annual Report 1985

2
Gerald Grinstein, Chairman (left) , and Robin
Wilson, President
holders' equity nearly fourfold to $240 million
and reduced long-term debt to $ 3 79 million.
Our stronger balance sheet gives us greater
financial flexibility and enables us to finance
the acquisition of new equipment at substan-
tially lower cost.
o Increased our cash position to near! y $ 2 5 o
million from $ 5 7 million at year-end 1984.
During 198 5 , Western generated $ 139 mil-
lion in cash from operations compared with
$ 34 million in 1 984 . Western also achieved a
positive working capital position for the first
time since 197 8.
o Further strengthened our Salt Lake City
hub and our overall route system , increasing
daily departures from Salt Lake by 38 percent
to 1 1 7. We have also begun remodeling and
expanding Western's terminal at Los Angeles
International Airport, where we are the second
largest carrier in terms of daily departures.
o Continued both to expand our fleet and
rationalize it to our route system. Western took
delivery of six new Boeing 737-3oos during
1985 and replaced five 727-2oos with more
efficient 7 3 7-2oos. At year-end , the fleet
numbered 82 aircraft , the largest in our
history.
o D mon crat d t ur mp tic r -
in lud in l w- c omp cit r - chat Wi c rn
will n c b pu h d ff ur crac i ally .
imp r-
canc r uc . Lace in ch y ar, for xampl , w
uciliz d ag r s iv pri in , impr v d rv1 e,
and car c d adv rti ing to fi he ff an area k
by a low- o c n w ncranc n ur Los Angele -
actle rout .
o Mad signifi ant inv scm nts in upgrad-
ing the quality of our s rvi e. N w fir c class
sections hav b n install d in all air raft, and
we are well along in our program to r furbish
all coach sections with news ats providing
greater leg room and new, larger overhead
storage bins.
o Launched the company's first joint mar-
keting agreement with a commuter airline,
SkyWest, the roch largest commuter carrier in
the country. SkyWest will operate flights
under the name Western Express and connect
with Western flights at Salt Lake City and
Los Angeles, adding 19 cities to the Western
system.
o Built a strong management team and
simplified reporting relationships to allow for
greater flexibility and faster decisions in
response ro changes in the marketplace. All of
the line and staff functions now report directly
to either the chief executive or chief operating
officer.
o Implemented an aggressive cost control
program at all levels of the company, including
a rigorous budget process, consolidation of
ground facilities and leasing of excess space.
o Developed an effective yield management
system , en.abling us to monitor and control
the effect of discount fares on the overall
profitability of our system .
ucJ k fi r 1
6
Th ar tran fi rmin W, t rn int a
mp tit r. W, ar fi rtunat t hav
ompl t d th min r9 by 11
a unt , 19 6 will b a tou h y r for th
indu try. Traffi r wth i n t lik ly t k l
p in apa ity. W, ar alr ady
ein m r far war , rang in in v rity
fr m minor kirmi h co full- al battl .
Thi in reased volatility, l ading t
tion, is likely co hara t riz th industry for
at l ast the n xt y ar or tw .
The challeng for mana ement is thr fold:
1) tO take advantage of opportunities co gain a
OPERAT ING INCOM E
$ Millions
Bo
60
40
20
I
0 I
2 0 I
40
60
81
greater share of traffic in the West; 2) tO
remain flexible and opportunistic, with a low
cost structure, in a rapidly changing environ-
ment while avoiding the pitfalls of excessive fare
competition; and 3) to keep our eye firmly on
our long-term objectives-further strength-
ening of the balance sheet, building additional
liquidity, and maintaining a profitable balance
between yields and loads.
We expect our newly developed strength co
enable us to capitalize on competitive opportu-
nities. And while Western has the capability to
do battle with carriers that try to move in on
our route system and to combat temporary
adverse trends in traffic and pricing, we will
continue to manage ur human, financial and
m chanical re ourc in the same re p n ible
fashion we demon trat d in 1 9 5 .
nJanuary , , 1 8 , Lawr n H . L
r tir cl a W, t rn ' hairman aft r
m r than 40 y ar wi th th
L play d k y r l
and w ar fi rtunat
fth
any. Larry
turnaround,
d t
hairman
f
a t p-1 v 1 pr n in alt
Lak ity.
In May 19 5, Vi t r L. Brown r tir d from
Wi t rn' b ard , having rea h d th manda-
t ry r tir m nt age of 70. Wi will mi s hi
wi e counsel from whi h w b n fited for
many year .
We are plea ed t report that th profits of
1985 made po sible the fir t di tribution
und r th Western employees profit sharing
plan in February 1 9 6. The total amount of
the profit sharing pool was ro million, which
amounted to an average check per employ of
$1,100 .
Finally, Wi stern c lebrates its 60 th anniver-
sary on April 17, 1986. We are grateful t all
our shareholders, pas engers and travel agents
for their support during our first six decades,
and we look forward to continuing our rela-
tionships in the years to come. Most of all , we
are grat ful to our employees, who have kept
Western flying through good times and bad ,
who have made the company's cause their own,
and who are truly the reason why Western
Airlines is the only way to fly.
Gerald Grinstein
hairman and Chief Executive Officer
Robin H .H. Wilson
President and hief Operating Officer
5 IN R EVI EW
Wescern's re ord profits t lJ only part of the
cory for 1985 . Th year al o saw the O
m[ any
build on a numb r of th pr gram b gun in
1984 and make mark d pr re in virtually
very key area of th airlin ' op ration .
Op rating Statistics Rebound
4
Key operating statistics all showed strength.
Western carried 9. r million pass ngers IO -4
billion r venue mil s in 1985, up from 8. 3
million and 9 -4 billion, respectively, in 1984.
Load faccor was 59.8 percent for 1985, exc ed-
ing the company's break ven load faccor of
5 7 . 2 percent for the first time since 1978.
Even more significant, in a year in which fare
wars and excess capacity Jed co lower yields
among the major carriers , Western's yield (the
average revenue per passenger flown one mile)
in 1985 was r 1. 21 cents compared with
11 .08 cents in 1984.
A 29-day strike at United Airlines boosted
traffic in the second quarter, and gave the com-
pany the opportunity co introduce new passen-
BREAKEVEN vs. A CT UAL LOAD FACTOR
I Breakeven
I Actual
Percent
66
62
60
81
gers co the ease of making connections at
Western's Salt Lake City hub, compared with
Denver or Chicago. Results in the months
following the strike indicate that a number of
these travellers have elect d co stay with
Western.
ntr l
T PER AM
nc
7 . 20
2 8 5
Th omp titiv A ti n Plan ( AP), initiat d
in 19 4, br ath d n w lifi inco Wi tern .
Togeth r with the Wi t rn OP, through
whi h mployee own 16 p rcent f the
company's common scock, and the annual
profit sharing plan, AP has helped make cost
cutting a cop priority at all levels of the company.
COST P ER AM
I Labor
I Depre iacion & Flight Rene
I Fuel & Oil
I Com mi sions & Selling Fees
Cents
I Ocher
8.oo
7 .00
6. oo
5. 00
- - ~
4 .00
-
----
3.00
2 .00
1. 00
81
As a result of CAP and ocher cost cutting
measures, Western's cost per available seat mile
dropped to 7 .04 cents in 1985 , the lowest
level since _
1 980. The rigorous budget process
we undercook in 1984 was made even more
strenuous in 1985, and Western expects co
benefit from further cost reductions this year.
West m 's apitalization Turnaround
Western achieved a turnaround in its capitali-
zation as dramatic as that f its op rating
result . co kholder ' quity increased t 240
million from $62 million, and long-term d be
was reduc d t $379 million, de pite two
pu li d be ffi rin durin h y ar. W -
rn' d be-co- quicy raci c d at 1 . -t - c at
T 79
ch mpany' d be and
icy w r ch all
and
APITALIZATI N
l hareholders' Equity
$Millin
7 00
6 00
500
4 00
300
200
100
81
f pr -
Lon Term D be
ferred scock, notes and debentures. Western
called all of its outstanding $2. 13 7 5 Series B
Cumulative Convertible Preferred Srock and
the outstanding 14 % Senior ecured onverc-
ible Notes due 1998 for redemption on S p-
tember 18, 1985. Western called all of its
outstanding 5 1
//t% Convertible Subordinated
Debentures due 1993 for redemption on ep-
tember 27, 1985. Holders of all three securi-
ties were able co convert chem inco Western
common scock. The company's outstanding
12 % Convertible ubordinaced Debentures
WORKING CAPITAL AT Y EAR E D
Millions
120
9 0
6 0
30
0
30
6 0
9 0
du L 2 w r
Th
f
nv rt int 2, . ,4
milli n in annual divi-
c p ym nc w r liminac d.
u d 2 o. m illi n n w har
ult of ch cran
ti n , and acy ar- nd,Wi c rn had a c cal f
4 5 milli n har uc candin .
W, c rn als er n ch n d it liquidity- a
vital omp ciciv advanta - in 19 5
chrou h cwo d be offi rin and a pr ferr d
st k i su which rai d $ 154 million.
In Mar h, Wi stern mpleced a$ o million
offering of 14 1
/4 p r nt ni r Noc s. Th
notes are convertible at ch option of the om-
pany on April 1, 1988, inco either convertible
subordinac d d bentures due April 1, 199 , or
eries C umulacive onv rtible Preferred
A H PROVID ED FROM OPERATION
$ Millions
140
120
100
8 0
6 0
40
20
0 u
20
cock. In April, Western issued 24 million
worth of 2 -40 Series D Cumulative Convert-
ible Preferred cock. In ovember, Western
completed a new public offering of roo mil-
lion principal amount of 7 3/ % onvercible
ubordinaced Debentures due 2005. Western
used ch pr ceeds f these issue co repay cur-
rent maturities of long-c rm bligacion , co
fund partially ch ompany's equipment pr -
gram, and for gen ral corporate purpo
The mpany nd d 19 5 with $247 mil-
lion in ash, in ludin 139 milli n f ash
nerac d fr m op raci ns .
5
EAT YEAR END
250
22 5
200
175
150
t25
100
75
50 I
25 I I
81 85
Marketing Improvements
6
Western's two-hub system, based around Salt
Lake City and Los Angeles, serves two of the
fastest growing areas of the country. In addi-
tion, a significant portion of the population is
young and fairly affluent-and on the verge of
entering the high frequency traveller age group.
The company's latest in-flight survey indicated
that Western's passengers have an average
annual income of $4 5, ooo.
Western's hub and spoke system has proved
itself workable, defensible and profitable. The
company has steadily expanded the Salt Lake
City facility, from 29 departures a day in 1982
to 117 daily flights at year-end 1985. At the
geographic center of Western's system, Salt
Lake City serves 41 nonstop destinations,
which account for 7 5 percent of the airport's
daily departures. Four new gates were added at
Salt Lake City in 1985, giving Western a total
of 2 5 second-level enclosed boarding gates on
two conveniently connected concourses. The
company's strong secondary hub at Los Angeles
International distributes traffic to Hawaii,
Mexico, Canada and other western cities. The
company began remodeling its terminal at
LAX in r , with ch pr j t finan d by a
ful $94. milli n f rin f fa ilici
ubl as r v nu b nd by ch R ional Air-
p rt Impr v m nc rporacion.
In I 9 5 , s rvi e was al I nau urat d at
s veral n w de cinacions. From alt Lak icy,
Western added flights to Bo ton, an Antonio
and Austin. The company also add d dire t
flights co Puerco Vallarta and Mazatlan, M x-
ico, via Phoenix; to Honolulu via San Diego;
and to the Hawaiian island of Maui via Los
Angeles.
Overall competition in the West remained
intense during 1985, but Western more than
held its own, as the increases in revenues and
revenue passenger miles show. The company
made gains against established carriers in its
region and fended off some newcomers with
aggressive but prudent pricing and service
enhancements such as the steak, shrimp and
SALT LAKE CITY H UB: DAILY D EPARTURE
150
135
120
105
90
75
60
45
30
15
82
March
85 86*
All bars reflect December 3 I schedule, except the first.
*Projected
champagne service the airline offered on its Los
Angeles-Seattle route.
Western continues to focus many of its mar-
keting efforts on the business traveller. During
198 5 , the company further refined the Salt
Lake City and Los Angeles hub operations,
adding flights and improving schedules, to
enable more and more travellers to make round
trip business flights in the same day. The
Travel Pass frequent flyer program was simpli-
fied and enriched, and a door-co-door mini-van
rvt fully intr du d fi r ch
airlin ' full-far fir c lass and a h pas n-
rs in L s Ang l . Impr v m nt in ch
ervi s offi r d by Wi st m 's Horiz n lub
r ulced in 1 ,ooo new memb rs j ining in
January 1986 alone, more than hav join d ch
club in all of the lase cwo years.
Western also inaugurated an exciting and
creative new advertising campaign in 1985 .
Newspaper and magazine advertisements stress
ch convenience of Sale Lake City as a connect-
ing hub. In two of the television commercials,
the famous teams of Fred Astaire and Gene
Kelly and William Shacner and Leonard
Nimoy each emphasize the quality ofWescern's
in-flight service and the exciting people pas-
sengers are likely to meet in flight.
A More Efficient Fleet
Western made key improvements in its aircraft
mix during the year. Because the airline's route
system calls for smaller aircraft, well suited for
shore haul routes, Western is gradually replac-
ing some of its Boeing 727-2oos with more
efficient 737-2oos and 737-3oos.
In April, the company took delivery of the
first three of its new-generation 737-3oos.
They were put into service immediately. West-
ern also accelerated delivery of three additional
7 3 7-3oos, originally scheduled for delivery in
1988, and they arrived in November and
December.
Western replaced five of its 727s with used
737-2oos during the year, a move expected to
save several million dollars per year. The com-
pany also reduced the number of DC-rosin its
fleet from I r co 9, keeping enough wide-body
aircraft co cover the Hawaii commitment and
give Western seasonal flexibility in other
markets.
PR Jc T ED FLcET
ro -IO B-7 7-200
I B-727-200
I B-7 7- 00
Total Numb r 12, 199 l 2 I ,37 T ,2 0
of acs
r4 , 000
- - -- --- --- --- --
[2,000
I0,000
--- --
8,000
6,000
- --
4,000 -
2,000
' - - -
Year 85 86 7 88
D -IO 9 9 9 9
B-727-200 39 39 33 32
B-737-200 28 31 38 38
B-737-300 6 12 13 13
Total Number 82 9 t 93 92
of Aircraft
Finally, Western placed an order with The
Boeing Company during 1985 for 12 more
7 3 7 aircraft. This order is in addition co the
nine aircraft already scheduled for delivery in
1986 and r 987. The new order includes a mix
of advanced version 737-2oos and new-gener-
ation 7 3 7-3 oo aircraft.
7
BALAN E H T
Wi stern Air Lin , In .
In thousands of d Jlars
Assets
At December 3 1 ,
Current Assets:
ash and cash equivalents
Receivables (less allowance for doubtful accounts of$ 4, 805- 1985 and
$12,551 - 1984)
Aircraft held for sale
Flight equipment expendable parts at average cost (less allowance for
obsolescence of $18,858-1985 and $18,068- 1984)
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
8 See accompanying Notes to Financial tatement .
$
$
19 5 1984
246, 50 $ 57,476
95,914 81,486
7,414
28,404 18,652
3o,556 l l ,946
3,827 3,789
412,965 173,349
687,220 856 ,049
151,225 l 54,482
88 ,530 42 ,92 l
926,975 1,053,45 2
407,668 442,327
519, 307 6u ,125
19,251 19, 12 l
951,52 3 $ 803, 595
Liabilitie and har h ld r 'Equity
At D mb r 1,
urrent Liabiliti :
urrent installm nts of d be
urr nt inscallm nts of apical l ases
Notes payabl
Ac ounts payable
Airline traffic liability
alari s, wages and vacation benefits payable
A crued pension plan contributions
Ocher current liabilities
Total current liabilities
Long-term Obligations, Less Current Installments:
Debt
Capital leases
Deferred Credits and Other Liabilities:
Deferred taxes on income
Deferred gain on sale and lease-back of aircraft
Ocher
Shareholders' Equity:
Preferred stock-authorized 25,000,000 shares:
2 Series A Cumulative Convertible, 2 5 stated value per share. Liquidation
preference at stated value plus accrued and unpaid dividends, outstanding
1,196,270 shares-1985 and 1984
2. 13 7 5 eries B Cumulative Convertible, 1 stated value per share.
Liquidation preference at 15 per share plus accrued and unpaid dividends,
outstanding 979,500 shares- 1984
2 -40 eries D Cumulative Convertible, 1 stated value per share. Liquidation
preference at 20 per share plus accrued and unpaid dividends, outstanding
1,200,000 shares-19 5
Common stock- authorized 150,000,000 shares, 1 par valu per share,
outstanding 44,989,462 shares- 19 5 and 24,147,290 har - 1984
Additional paid-in capital
Retain d arning (defi it)
mmitm nt and ntin nt Liabiliti
inan ial tat m nt .
$
19 5
15,210
8,661
75,413
108,729
49,894
ll,121
27,99
297,018
294,838
84,02 l
378,859
9,038
2,802
23,311
35, 151
l,200
44,9 9
177,296
(12, 7)
19 4
$ 64,948
7,739
2,275
55,357
79,603
36,210
14,95
16,533
277,615
335,531
92,682
428,213
10,328
2,334
22,638
35 ,3oo
9
TATEMENT OF P RAT! N
\Xii seem Air Lin s, Inc.
In thou ands of dollar except per shar amount
Years Ended D cember 3 1 , 19 5 1984 1983
Op rating Revenu s:
Passenger $1' 168,255 $1,041,412 $ 993,428
Cargo 0,942 69,293 72, 195
Contract service and ocher 57,349 71,180 76,939
I ,306,546 1,181,885 1,142,562
Operating Expenses:
Wages, salaries and employee benefits 388,176 412,I08 422 '741
Fuel 300,005 300,198 319,980
Depreciation and amortization 57,363 59,565 59,379
Ocher 484,498 398,602 396,834
I ,230,042 1,17o,473 I, 198,934
Operating income (loss) 76,504 I I ,412 (56,372)
Other Income (Expenses):
Interest, principally on long-term obligations (5 2,094) (64,136) (54,542)
Interest capitalized 5,589 6,070 2,977
Interest income 12,074 3,642 2,480
Gain on disposition of property and equipment 29,142 I I ,279 8,956
Gain (loss) on foreign currency translation (2,714) 1,208
Other, net (I 54) 1,360 166
(8,157) (4o,577) (39,963)
Earnings (loss) before income taxes and extraordinary item 68,347 (29,165) (96,335)
Income taxes (benefits) 32,890 (33o)
Earnings (loss) before extraordinary item 35,457 (29,165) (96,005)
Extraordinary Item:
Utilization of operating loss carryforward 31,677
Gain on pension plan termination 41,520
Net earnings (loss) $ 67' 134 $ (29,165) $ (54,485)
Earnings (Loss) Per Common Share:
Primary:
Before extraordinary item $ o.86 $ (1.37) $ (6.22)
Extraordinary item 0.90 2.62
Net earnings (loss) $ 1.76 $ (1.37) $ (3.60)
Fully Diluted:
Before extraordinary item $ 0.71 $ (1.37) $ (6.22)
Extraordinary item 0.63 2.62
Net earnings (loss) $ 1.34 $ (1.37) $ (3 .60)
IO See accompanying Notes to Financial Statements.
T AT M N T F HAN , fN F IN AN IAL p ITI N
~ c rn Air Lin , In .
In ch u and f dollar
ash Pr vid d (U d)
~ ars End d De mber r,
From Op rations:
Earning (loss) befor extraordinary item
N on ash charges ( r dies):
D pr iacion and amortization
Employ sco k plan
Deferr d income taxes
Gain on asset sales
Och r- nec
C rcain Working Capital Changes:
Accounts receivable
Ocher current assets
Air traffic liability
Ocher current liabilities
Cash provided (used) by op rations, xclusive of extraordinary item
Extraordinary item
Portion of extraordinary item not affecting working capital
Total provided by extraordinary item
Cash provided (used) by operations
Financing Activities:
Debt and capital stock issuance
Deferred deposits for aircraft on order
Debt repayments
Conversion of long-term debt and preferred stock
O cher-nee
Investment Activities:
Capital acquisitions
Air raft deposits
R imbursement of depo its and capital expenditure upon leasing
aircraft
Pr eed from as er sale
Dividend on prefi rr d cock
In r ase (d r e) in cash and ash quivalent
ash & h equival nc at b innin f p ri d
h & h quival nc at nd of p ri d
a ompanyin Not t Finan ial ac m nc
19 5
$ 5,457
I, 191
62,933
(14,428)
(12,773)
29,126
41,502
43,427
106,360
31,677
646
32,323
13 ,683
152,255
23,251
(160,432)
(2,453)
(6,453)
6,16
(25,775)
(91,545)
60,57
106,793
19 4
$(29, 165)
(I I ,279)
(5,944)
38,639
9,533
(1,315)
781
(13,901)
(4,902)
33,737
33,737
5 I, 7 50
37,494
(56,601)
10,335
42 ,97
43, 4
22,7 I O
II, 140
19
59,379
32' 175
(4r9)
(8,956)
(3,7 2 4)
(17,550)
(8,352)
(22,146)
(ro,999)
8,208
(33, 2 89)
(50,839)
41,520
(7,897)
33,623
(17,216)
I 55,000
(I I 6, 7 I 6)
5
(15,995)
22,294
(r 6, 82)
(r ,0 14)
II
STATEMENT OF SHAR HOLD R ' EQUITY
Western Air Lines, Inc.
In thousands of dollars
Years Ended December 3 1 ,
1985, 1984 and 1983
Balance at December 31, 1982
Conversion of preferred stock
Conversion of debentures
Issuance of common stock
Issuance of warrants
Issuance of common stock
under employee stock plan
Net loss
Balance at December 3 1 , 198 3
Issuance of 1 , ooo, ooo shares
of preferred stock
Conversion of 2 o, 5 oo shares
of preferred stock
Cash dividends on preferred
stock
Net loss
Balance at December 3 1 , 1984
Issuance of 1 , 2 oo, ooo
shares of preferred stock
Conversion into
common stock of:
Series B preferred stock
14 % senior secured
convertible notes
1 2 % subordinated
debentures
5 % subordinated
debentures
Exercise of stock options
Cash dividends on preferred
stock
Net earnings
Balance at December 3 1 , 198 5
Series A
Preferred
cock
Series B
Preferred
Stock
$
1,000
(20)
Series D
Preferred
Stock
$
1,200
Common
Stock
l
7,800
24,086
61
24, 147
2,939
Additional
Paid-in
Capital
$ 3 l ,061
13
4
14,580
13,500
24,375
12,625
2 l ,05 5
(2 ,022)
9,912
16,2 11
108
Retained
Earnings
(Deficit)
$ 3,619
(54,485)
(50,866)
(29 ,165)
(80,03 1)
Total
Shareholders'
Equity
5
17,820
13,500
32,175
(54,485)
86,66o
(8,65 3)
(29 ,165)
62 ,467
22,255
62,600
67 ,134 67, 134
$ l ,200 $44,989 $r77 ,296 $(12,897) $240,495
*Includes payment of 1983 and 1982 preferred stock dividends which were in arrears.
12 S ac ompanying Notes to Financial tatements.
N T T FINAN JAL TAT MENT
Wi t rn Air Lin , In
In thou ands f d llar x pt p r share am unt
Not r. ummary of ignificant Ac ounting Poli 1 s
Property and Equipment
Owned property and equipment, exclusive of residual values, are d pre iated over the estimated useful liv s 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 Residual
Aircraft Type Useful Life Value
D -IO 16 years 10%
727 r 5 years 15 %
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.
Note 2. Lease Commitments
Western leases certain flight equipment and facilities and ground equipment. Lease terms for flight equipment are
two to I 5 years for 727 and 7 3 7 aircraft, and r 5 to 18 years for D -IO aircraft. Lease terms for facilities and ground
quipment range up to 40 years. Equipment und r capital leas s included in the balance sheets at December 3 r, r 9 5
and r 984 was as follow :
Flight equipment
L a umulat dam rtizati n
129, I IO
64,229
1 9 4
129, IIO
55,561
$ 7 ,549
1
Note 2. Lea e ommitm nts ( ontinued)
At D mber 3 1, 19 5, minimum l a e paym nts under l as
follows: apical
Leases
1986 $ 19,630
1987 19,55 2
1988 19,741
1989 19,9 15
1990 19,838
Thereafter 50,827
Total minimum lease payments $149,503
Less amount representing interest 56,82 I
Present value of capital lease obligations 92,682
Less current installments
of capital leases 8,661
Long-term capital lease obligations $ 84,02 I
xpiring after De mber 1, 19 6 wer as
Operating
Leas s
$ 87,286
78, IO
6 ,191
65,425
62,365
747 ,OIO
$1,108,587
Rental expense for operating leases amounted to $65,548, $38,497, and $38,165 in 1985, 1984, and 1983,
respective! y.
Note 3. Commitments and Contingent Liabilities
At December 31, 1985, Western had on order from the manufacturer 14 Boeing 7 3 7-200 aircraft and seven
Boeing 7 3 7-300 aircraft for delivery in 1986 and 1987. The cost of all aircraft on order is approximately
$403,000, of which approximately $83,000 is already on deposit.
Western has received financing commitments with respect to at least 12 of the aircraft on order. Financing has
not been arranged with respect to the remaining aircraft.
Payments due under existing purchase commitments for aircraft and ground properties and equipment
during the five years ending December 3 1, 1990 are:
1986 135,992
1987 186,282
1988
1989
1990
322,274
During 1985, Western took delivery of six Boeing 7 3 7-300 aircraft and three spare engines under existing
purchase commitments. The Company entered into 15-year operating lease agreements for the six aircraft and
three spare engines.
N c 4. R cirem nc Plan
Wi c rn has r cir m nc plans which over ub cancially all mpl ye s. Wi scern's ontribuci n c ch
ompany-sponsor d plan , cog cher with che parti ipancs' r quir d concribucions, are uffici nc c fund urrenc
s rvi e o cs annually and pri r servi e co cs ov r c n co cw ncy y ars. Actuarial gains and lo s s are amortized
ov r c n-year periods. Western assumes an ighc perc nt race of return in determining the actuarial present valu
of a cumulac d plan ben fies.
Wi stern participates in a collectively bargained multi-employer pension plan covering its IBT-repres need
employees and is, cher fore, subject co ch provisions of the Multi-employ r Pension Plan Amendments Ace of
1980. Under chis complex law, the union plan's Board of Trustees, as sponsor, is required co obtain an actuarial
valuation of the pr sent value of vested and nonvesced accumulated plan benefits. Western has been advised chat
its share of the liability for unfunded vested benefits in chis plan is not available. Accordingly, the cable chat
follows excludes data applicable co chis multi-employer pension plan.
A comparison of accumulated plan benefits and plan net assets for the Company-sponsored defined benefit
plans follows:
As of January I
Actuarial Present Value of Accumulated Plan Benefits:
Vested
Nonvesced
Net assets available for benefits
1985
$44,727
3,780
$48,507
$49,538
1984 1983
$38,631 $31,301
3,883 4,207
42,5 14 $35 ,5o8
$45,o65 $38,208
Western terminated a defined benefit retirement plan for pilots during the first quarter of r 98 3. The
termination allowed Western to recover chat portion of excess funds in the plan which related co Company
contributions. Elimination of a deferred credit related co the plan of 8, r r 5 and cash proceeds of 33,405
resulted in a gain of 4 r, 5 20 ( 2. 62 per share) for the year ended December 3 r, r 98 3. The gain is reported as
an extraordinary item. In conjunction with terminating the defined benefit retirement plan, Western made
increased contributions co the defined contribution retirement plan for pilots in r 98 3, r 984 and r 98 5. Western
has pledged certain assets co secure its obligations regarding ocher employee benefits for pilots.
The cost of the retirement plans, including the union-sponsored plan, charged co operating expense was
25,031, 25,883, and 27,578 for 1985, 1984, and 1983, respectively. These coses included amortization of
prior service coses over periods ranging from 10 co 20 years for certain of the plans.
In addition co 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 chose
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
ch ir expense is based on actual claims paid. Th annual cost of providing both life and health care b nefics was
approximately 2,567 for 1985 and $1, 06 for 1984.
N oce 5 . In ome Taxes
16
In ome tax s are ummarized as follow :
1985 1984 19
Current:
Federal $ 45 $ $ (II 1)
Scace 2,050 200
Tax effect of op rating loss
carryforward 31,677
34,180 89
Deferred:
Provision (1,936) 576 3,765
Tax effect of operating loss
carryforward 646 (576) (4,184)
(1,290) (419)
$32,890 $ $ (33o)
The Tax Equity and Fiscal Responsibility Act of 1982 allows application of investment credits against
85 percent of Federal income tax liabilities for 1983 and beyond.
Deferred income taxes arise from timing differences between financial and tax reporting. The effects of these
differences on income taxes are as follows:
1985 1984 1983
Depreciation and amortization $ (2,355) $ 3,890 $ 1,349
Capital leases (37o) 337 (416)
Interest capitalized 4,092 (1 '592) 1,334
Employee benefits (1 '529) (3,087) 326
Gain on sale and leaseback
of flight equipment (1,712) l ,821 1,074
Ocher (62) (793) 98
$ (1,936) $ 576 $ 3,765
Re n iliaci n fin m tax b n fie ac ch Unit d care cacuc ry rat C ch pr VJ J n for in m tax
11 ws:
19 5 19 4 19
Income taxes ac ch Unit d
car scacucory rat $31,440 $(1 ,416) $(25,2 15)
In reases (reductions) in
taxes resulting from :
Effect of operating loss
carryforward for
which no tax benefit
may be recognized 13,416 24,796
Scace income taxes nee of
federal income tax
benefit I ,107 200
Ocher- nee 343 (1 II)
Income tax provision
(benefit) $32,890 $ - $ (33o)
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 co 1983.
For 1985 , the tax provision is substantially offset by recognition of nee operating loss carryforwards of
$31,677 recorded as an extraordinary item.
Nee operating losses of $78,000 have nor been utilized on tax returns. For income tax purposes, they expire as
follows:
$50,000
28,000
For financial scacemenc purposes, $39 ,000 of the carryforward has nor been recognized.
Deferred income taxes remaining on the balance sheet represent the estimated tax impact of the cumulative
riming differences not expected co reverse for financial scacemenc purposes during the carryforward period.
lnvescmenc credits available co reduce future years' federal income tax expense for financial and tax purposes
amount co 62,800 at December 3 1, 198 5. For income tax purposes, available credi cs expire in the following
years:
1992 $ 3, 500 1997 1,300
1993 I 3,700 1998 1,600
1994 17,000 1999 3,000
1995 19,000 2000 1,700
1996 2,000
Not 6. D be and Pied d As t
18
At December 3 1,
Long-term debt is compris d of:
9. 55 % equipment trust certifi ates due May 1, 1993, with semi-annual
principal payments of$ 3,349
10% equipment trust certificates
Floating-rate equipment trust certificat s due June 30, 1994, (interest rate
9.0% at December 31, 1985) with semi-annual principal payments of
$2,609
13. 29% installment notes due May 1, 1995, with semi-annual principal
payments of$ 1 , 1 oo
10% senior secured trust notes due June 15, 1998, net of$25,199- 1985
and $30,494-1984 unamortized discount, (effective interest rate 17 .3%)
with an annual sinking fund requirement 0$9,000 starting June 15, 1989
14 % senior secured convertible notes
Floating-rate note payable to manufacturer
9. 2 5 % conditional sales agreement due May 1 , 1994
14 % senior notes due April 1, 1988
Floating-rate five-year term loan
Deferred deposits with manufacturer
Revolving line of credit
5 % convertible subordinated debentures
12 % convertible subordinated debentures
7% convertible subordinated debentures due November 1, 2005 with annual
sinking fund payments of $7,500 starting November 1, 1995
Less: Current installments
19 5
20,900
30,000
100,000
310,048
(15,210)
$294,838
19 4
23,100
59,5o6
64,520
2,850
11 ,535
25,000
18,181
20,000
19,500
12,500
335,531
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 December 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.
Western has purchased $8,400 and $5,500 (face amount) of 103/ % Senior Secured Trust ores in April and
August 1985, respectively.
In May 1985, Western prepaid $14,398 of 10% Equipment Trust Certificates and prepaid the remaining
outstanding balance of$ 2 1 , 5 9 5 in July 198 5.
In July 1985, Western prepaid the $ 19,130 outstanding balance under the five-year loan agreement.
In August 1985, Western called all of its outstanding 14% nior cured Convertible ores, and 5 L/ %
Convertible Subordinated Debentures for redemption, or conversion into ommon t k, if so ele red.
Western's outstanding 12 % onvertibl ubordinated Deb ntures were converted into mm n t k. Th
calls and conversions were completed by ept mb r 30, 19 5. If the above onver ion and the onver i n of
ri s B Pr rred t k ( N t 9) had urr d nJanuary 1, 19 5, primary n t arnrn p r har for 19 5
w uld hav b en $ 1 . 44 in c ad of ch r pore d $ 1 . 7 6.
In Nov mb r 1985, We c rn i u d $100,000 f7 //i% nvercibl ubordinac d Db ncure du
Novemb r 1, 2005. Th d b ntur s r quir annual sinkin fund payments, in a h or d b ncur ,
commencing Nov mb r 1, 1995, chat will r tire acleasc 7 5 o/c of the issue prior co maturity. Ac D c mb r 1,
1985, 11,111,111 shares of ommon co kw r reserv d for conversion of ch deb ntures at $9.00 per
common shar , subject co adjustment.
The following schedule shows ch amount of long-term debt du in the fiv years ending D cember 31, 1990:
1986 $15,210
1987 15,3 14
1988 45,428
1989 l 5 ,5 5o
1990 l 5,685
In March 1985, Western repaid $20,000 drawn down under a $20,000 revolving credit agreement (the "Credit
Agreement"). The Credit Agreement remains available through June 30, 1986. A financial covenant under the
Credit Agreement (and the related Collateral Agreement) requires the maintenance of adjusted nee worth
(defined as tangible net worth plus the long-term portion of subordinated indebtedness) of not less than
$60,000, plus a portion of the net proceeds from any debt or equity offering that results in an increase in
adjusted nee worth, not to exceed $75 ,ooo prior to September 30, 1986. After September 30, 1986, the
required adjusted nee worth increases annually by $30,000 to $165,000 by Occober 1988 and to $200,000 by
October 1989. A second covenant requires chat the ratio of debt (defined to include lease obligations and ocher
liabilities but to exclude the long-term portion of subordinated indebtedness) to adjusted net worth not exceed
ten to one prior to September 30, 1986, declining to a ratio of three to one by October 1989. As of December
31, 1985, the Company had adjusted net worth of$326,419 and debt, as defined, of$442,787 and the ratio
described above was 1. 36 to one. The Credit Agreement also places certain restrictions on dividend payments.
The Credit Agreement is secured by liens on certain aircraft.
In May 1984, Western borrowed $13,125 under a conditional sales agreement to finance approximately 7 5
percent of the purchase price ofa B7 3 7-200 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. Western recorded a loss of $2,714 for 1985 and a gain of $r ,208 for 1984 as a result of the foreign
currency translation.
In January 1983, Western entered into a $30,000 revolving credit agreement with a group of financial
institutions. Upon signing the agreement, Western paid a fee of 1
/ of 1 % of the commitment and issued
550,000 warrants for the purchase of Common Stock. In conjunction with drawdowns under the agreement a
borrowing fee of $82 was paid and 146,774 additional warrants were issued. The exercise price and number of
warrants are subject to adjustment. Ac December 31, 1985, 709,921 shares of Common Stock were reserved for
exercise at a price of $5.30 per share. The warrants expire on January 18, 1993.
In June 1983, the Company completed a public offering of units, consisting in the aggregate of $90,000
principal amount roo/c enior Secured Trust Notes due June 15, 1998, 3,240,000 shares of ommon c k,
and warrants co purchase 9,000,000 shares of ommon cock. The warrants are exercisable at $9. 50 p r shar ,
subj cc co adju tment, and expire on June 15, 199 . The xercis price may be paid using IO /4% eni r
Nore 6. Debt and Pledged Assets ( ontinued)
Secured Trust Notes, which will be accept d at par. The xpiracion dace may be a eleraced by ch ompany c
no earlier than June 15, 1988 and the warrants may b call d on or after Jun 15, 19 6 if ch pri e of the
Common Srock xceeds 12 5 % of the then eff; ccive exercise price for thirty onsecuciv days.
Substantially all of Wescern's property and equipm nt is pledged a collateral for debt and ocher obligations.
Several of che agreements require chat collateral be maintained at specified levels.
Nore 7. Srock Options
20
Western has two stock option plans for officers and key personnel. The first plan was adopted in 197 4, and
provided for options co purchase a maximum of 1,030,000 shares of Common Srock at prices nor less than the
fair market value of the Common Stock at dace of grant. Options granted under the 1974 Plan are nor intended
co qualify as "Incentive Stock Options" under the Internal Revenue Code. The options under chis plan are
exercisable in equal annual increments over a five-year period and expire ten years after the dace of grant. No
options may be granted under the 1974 Plan after January 20, 1984. The second plan is the Executive Stock
Option and Srock 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 Srock may be issued under chis plan. Options granted under the 1982 Plan expire ten years from the
dace of grant and the purchase price specified in each option may not be less than the fair marker value of the
Common Stock at the dace of the grant.
The balances of options granted under the plans follow:
Options Granted and Outstanding at:
December 31, 1985
December 3 1 , 1984
Options Exercisable at:
December 31, 1985
December 31, 1984
1974 Plan
Number
123,780
152 '780
123,780
150,580
Average
Price
$8.33
$8.30
$8.33
$8.28
Number
692,500
612,500
527 ,500
500,500
Average
Price
$5.18
$5 .15
$5.o9
$5 .15
During 1985, 36,000 common shares were issued for options exercised under the 1982 Plan. Ac December 31,
1985 and 1984, 123,780 and 152,780 shares of Common Srock, respecci"."ely, were reserved for the exercise of
current and future grants under the 1974 Plan, and 1,718,000 and 1,800,000 shares were similarly reserved
under the 1982 Plan.
N t . Earnin (L ) p r mm n har
Earnings (l s ) b for extraordinary it m and n t earnin (l s) p r mm n har ar al ulat d as .
fi llow :
Years Ended De emb r 1 ,
Primary:
Earnings (Loss) B fore Extraordinary Item p r omm n Shar :
Earnings (loss) befor xtraordinary item
Adjustments:
Add interest applicable to assumed converted
common stock equivalents
Less profi~ sharing expense adjustment
Less preferred stock cash dividends
Earnings (loss) before extraordinary item applicable
to common stock, primary
Earnings (loss) before extraordinary item per
common share, primary
Net Earnings (Loss) per Common Share:
Net earnings (loss)
Adjustments:
Add interest applicable to assumed converted
common stock equivalents
Less profit sharing expense adjustment
Less preferred stock cash dividends
Net earnings (loss) applicable to common stock, primary
Net earnings (loss) per common share, primary
Adjustment of Shares Outstanding (in thousands):
Weighted average shares outstanding
Add shares issuable upon assumed exercise of common stock
equivalents
Less assumed treasury stock method shares purchased
Total average common shares, primary
4,939
(1,037)
(5,528)
$33,831
$ o.86
$67' 134
9,147
(1,921)
(5,528)
68 ,832
$ 1.76
31,375
10,526
(2,733)
39,168
19 4 19
$(29, 165)
* *
* *
(3,868) (2,393)
$(33,033) $(98,398)
$ (1.37) $ (6. 22)
$(29, 165) $(54 ,485)
* *
* *
(3,868) (2,393)
(33,o33) $(56,878)
$ (1.37) $ (3.60)
24,104 15,821
* *
* *
24,104 I 5 ,82 I
*The exercise of stock options and common stock warrants and the conversion of convertible securities into
Common Stock would be anti-dilutive.
21
Not . Earnin (L ) p r ommon har ( ntinu d)
Years End d D mber 1 ,
Fully Dilut d:
Earnings (Loss) Befor Extraordinary It mp r ommon har :
Earnings (loss) b fore extraordinary item
Adjustments:
Add inter st applicable to assumed conv rted ommon
stock equivalents and convertible securiti s
Less profit sharing expense adjustment
Less preferred stock cash dividends
Earnings (loss) before extraordinary item applicable
to common stock, fully diluted
Earnings (loss) before extraordinary item per common share,
fully diluted
Net Earnings (Loss) per Common Share:
Net earnings (loss)
Adjustments:
Add interest applicable to assumed converted common
stock equivalents and convertible securities
Less profit sharing expense adjustment
Less preferred stock cash dividends
Net earnings (loss) applicable to common stock, fully diluted
Net earnings (loss) per common share, fully diluted
Adjustment of Shares Outstanding (in thousands):
Weighted average shares outstanding:
Add shares issuable:
Upon assumed exercise of common stock equivalents
Upon assumed conversion of other convertible securities
Less assumed treasury stock method shares purchased
Total average common shares, fully diluted
19 5
$ 5,457
l I ,489
(2,413)
$44,533
$ 0.71
$67,134
2 l ,275
(4,468)
$83,941
$ 1.34
31,375
10,526
23,461
(2,586)
62,-
776
19 4 19
$(29, 165)
* *
* *
(3,868) (2,393)
$(33,033) $(98,398)
$ (1.37) $ (6. 22)
$(29, 165) $(54,485)
* *
* *
(3,868) (2,393)
$(33,033) $(56,878)
(1.37) $ (3 .60)
24,104 15 ,82 l
* *
* *
* *
24,104 15,821
*The exercise of stock options and common stock warrants and the conversion of convertible securities 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 red mption price of $2 5 .40 at December 31, 1985
decreases periodically until September 30, 1987 after which it remains at $2 5 per share. At D cember 31,
198 5, 2,990,675 shares of Common tock were reserved for conversion of ri s A Preferred t ck.
In April 1985, Western issued 1,200,ooo sharesof$2-40 eries D umulative nvertibl Preferr d to k.
The shares of eries D Preferred Stock ar convertible into ommon t k at th rat f 2 2/ har of mm n
22
c kfi rah har of en DPr firred c k. Th r dempcionpri of$ 20. o acMar h r, I
p riodi ally until 1992 aft r whi hit r mains at $20 p r shar . West rn may, pri r c Mar h I , 19 , r d m
ch ri s D Pr fi rr d c k at $20 p r har if ch pri of ch mm n co k ex e d I o~ of ch
uciv days. Ac De mb r 1, 1985 ,200,000 har of
ommon cock were r rved for onv r ion of ri s D Preferr d co k.
In August 19 5, Wist rn all d for red mpcion on pt mb r 18, 19 5 of ch ene B Preferred co k.
The hold rs of ch Prefi rr d co k had the right co onv rt co ommon cock prior co pcember 4, 1985.
Preferred co knot converted was redeemed at$ 15 per share, plus accrued dividends up co ch redemption dace.
As of September 30, 1985, all 979,500 shares of Series B Preferred Stock outstanding w re converted or
redeemed. Common shar s of 2,938,500 wer issued in this exchange.
Dividends of $2, 392, $1,057, and $2,079 were paid in 1985 for the Series A, Series B, and Series D
Preferred Srock, resp ccively.
The Company had omitted payment of the quarterly dividends on the Series A Preferred Srock beginning the
first quarter of 1982. In April 1984, in connection with the issuance of the $2. 13 75 Series B Cumulative
Convertible Preferred Srock, all covenants restricting the payment of dividends on preferred scock were lifted.
From the net proceeds of this offering, $4,785 was used co bring current the dividend arrearages on the Series A
Preferred Srock.
Note IO. Quarterly Financial Data (Unaudited)
March 31 June 30 September 30 December 31
1985
Operating revenues $30 1,063 $3 57,911 $3 53,22 8 $294, 344
Operating income (loss) 23,008 34,451 29, 383 (10,338)
Earnings (loss) before extraordinary item 6,916 17,699 I 5, I 34 (4,292)
Net earnings (loss) 13,338 31,668 29,630 (7 ,502 )
Earnings (Loss) per Common Share:
Primary:
Earnings (loss) before extraordinary item $ 0 .21 $ 0.52 $ 0.37 $ (0. l 3)
Net earnings (loss) $ 0 -44 $ 0 .97 o.75 (o. 20)
Fully Diluted:
Earnings (loss) before extraordinary item $ 0. 15 $ 0.3 2 $ 0.28 (0. l 3)
Net earnings (loss) $ 0 .31 $ 0 .58 $ 0.54 (o. 20)
1984
Operating revenues $287,344 $293,888 $322,293 278 ,360
Operating income (loss) (1 2, 9 03) (5 ,843) 23,235 6,923
Net earnings (loss) (23 ,0 18) (13,65 3) 13,013 (5 ,5o7)
Earnings (Loss) per Common hare:
Primary $ (0 .98) $ (0.61) $ 0-44 $ (0.27)
Fully Diluted $ (0.98) $ (0. 61) $ 0.32 $ (0.27)
During the quarter nded June 30, 1985 , a major comp cicor was on trike fi r 29 day .
The extraordinary item refl ted in the 1985 quarters repres nts utilizaci n foperatin lo arryforward
tax r dies.
2
N c 1 I. Pr fie harin
Th pr fie haring plan, ad peed in 19 pare f ch parcn r hip plan, was han d in 19 4 und r ch
omp ciciv A cion Plan co in r as the pr fie ubj cc discribuci n co 20 per nc f ch fir c $75 ,ooo of
annual profits and 35 p r enc of profits ch r aft r (profits are pretax profits x lusiv of xcraordinary item and
gains from disposition of property). A ordingly, wag s, salari sand mploy ben fies for 1985 in lud
$10,000 accrued for profit sharing. The $10,000 was distributed co employees during February 1986.
Note 12. Impact of Current osc Data (Unaudited)
24
Current cost accounting is defined by Statement of Financial Accounting Standards Nos. 3 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 ac the balance sheet dace or at the dace of use or sale. Current cost m chodology
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 co provision for income taxes.
Current coses for aircraft were determined by using the direct pricing method. Current costs for spare
engines, parts, and assemblies included in property and equipment were computed based on the ratio by which
the current cost of aircraft fleet exceeds the hiscoric cost of such fleets. Current costs for other property and
equipment were valued at their historical cost.
Earnings before extraordinary item as reported in the statement of operations
Adjustment to restate costs for the effect of specific prices (current cost):
Depreciation and amortization expense
Earnings before extraordinary item 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
* At December 31, 1985, current cost of property and equipment, net of accumulated depreciation and
amortization was $750,304.
$ 35,457
(31,997)
3,460
$ 14,45
12,541
(33,392 )
(20,85 l)
A fiv -y ar mpan n iodi acin ch ffi c f adju tin hi c ri al r v nu , pur h m p w r am r l s
n n cm n cary tt m , h divid nd , and mmon t k mark t pri
f avera 19 5 dollar a measur d by PI-U fi 11 w :
Years End d D emb r 1,
Op rating revenues
urr nt osc Information:
Earnings (loss) before
xcraordinary item
Earnings (loss) before
extraordinary item per
common share
Nee assets at year-end*
Gain from decline in purchasing
power of net amounts owed
Excess of increase in specific
prices over increase in the
general price level
Cash dividends per common share
Markee price per common
share at year-end
Average Consumer Price Index
19 5
$1, 06,546
322.2
19 4
$1,229,160
1 31 ,779
31 I. l
*Based on current appraisals of Wes tern's existing fleet.
A OU TA T ' REPORT
The Board of Directors
Western Air Lines, Inc.
(115,740)
239,002
6,490
19 2
$1,182,450
(6.68)
220,187
20,597
7,753
dint rm
49,22 5
92,160
We have examined the balance sheets of Wes tern Air Lines, Inc. as of December 3 1 , 1985 and 1984 and the
related statements of operations, shareholders' equity and changes in financial position for each of the years in
the three-year period ended December 31, 1985. Our examinations were made in accordance with generally
accepted auditing standards and, accordingly, included such tests of the accounting records and such ocher
auditing procedures as we considered necessary in the circumstances.
In our opinion, the aforementioned financial statements present fairly the financial position of Western Air
Lines, Inc. at December 31, 1985 and 1984 and the results of its operations and the changes in its financial
position for each of the years in the three-year period ended December 31, 1985, in conformity with generally
accepted accounting principles applied on a consistent basis.
Peat, Marwick, Mitchell
L An el , alifi rnia
February 2 1 , 1 9 6
MANA M NT' DI U I N AND ANALY I OF FINAN JAL ON ITJ N AND R ULT FOP RATI N
~ stern Air Lines, Inc.
Years Ended December31, 19 5, 1984 and 198
Results of Operations
The operating income and net earnings achieved by Western in 1985 represent the most profitable year in the
Company's history. In 1985 ,Western produced a $76. 5 million operating profit as compared to an operating
profit of$ 11.4 million in 1984 and an operating loss of $56-4 million in 1983. Net earnings were $67. 1 mil-
lion in 1985 compared to net losses of $29.2 million in 1984 and $54.5 million in 1983.The 1985 and 1983
results include extraordinary items of$31. 7 million and $41. 5 million, respectively, for utilization of operating
loss carryforward tax credits in 1985 and gain on pension plan terminations in 198 3.
In the second half of 198 3, Wes tern's management began to redirect the Company's efforts toward the busi-
ness traveller and took other steps designed to return the carrier to profitability. The 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 Directors; (ii) strengthening the Salt Lake City hub and
developing Los Angeles International Airport as a more effective second hub to feed Hawaii, Canada and Mexico;
(iii) focusing scheduling and marketing efforts to attract the frequent business traveller; (iv) adjusting capacity to
meet seasonal fluctuations in demand; (v) emphasizing short-haul narrow body aircraft suitable for the hub-and-
spoke system; (vi) establishing more effective revenue and yield management systems; and (vii) instituting
improved cost control measures.
The significant improvements in 1984 and the Company's profitability in 198 5 are the direct result of the
efforts described above and the implementation of the Competitive Action Plan in the fall of 1984. The Com-
petitive Action Plan (CAP) called for a combination of additional pay reductions and productivity improvements
designed to achieve a substantial reduction in labor costs. In contrast to the temporary wage concessions
obtained by the Company in the past, this agreeement included no provisions for a return to previous wage levels.
The CAP agreement wage rates are lower than the rates in place since late 1983 under the partnership plan.
The profit sharing plan established under the partnership plan was increased to 20 percent of the first $75 mil-
lion of annual pre-tax profits (exclusive of extraordinary items and gains from disposition of property) and 35
percent of pre-tax profits thereafter. Western expensed$ IO million in 1985 for the profit sharing plan. This
amount was distributed to employees in February 1986. The CAP agreement also provided for a 12. 5 percent
reduction in the non-contract payroll budget and for the designation by Western's domestic unions of four nomi-
nees (increased from two nominees previously agreed to under the partnership plan) to the Board of Directors.
The CAP agreement became effective September 1, 1984 and becomes amendable December 3 1, 1986.
The 1984 improved operating results were primarily due to increased passenger revenue coupled with reduc-
tions 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. Capacity decreased two percent while traffic (measured in revenue passenger miles)
was relatively unchanged. Load factor increased from 5 6. 5 percent in 198 3 to 5 7. 7 percent in 1984. Operating
expense per available seat mile decreased to $. 07 17 from $. 07 2 o.
The yield improvement, which started in the second half of 1983, continued into the first half of 1984; how-
ever yield decreased slightly in late 1984. Yield for the year 1984 was$.1108, an increase of five percent from
1983.
Op racing xp n d r as d cw p r nc, primarily in fu land labor exp ns s. Fuel co c d er as d six p r-
oe a a result of a five p re nc pric d r as , ombin d with a one per nc de lin in onsumpcion.
Wages, salaries, and employ e b nefics in 19 4 d r as d chr e p r enc a a r sulc of ch impl mencacion of
AP Th amortization of the employee cock plan xpense relating to the partnership plan (which terminated in
Occob r 19 4) cocall d $25 . 5 million for 1984. Ex luding the employ stock plan exp nse, labor cost would
have decreas d sev n percent for 1984 versus 198 3.
Interest expense rose 13 percent in 1984, primarily reflecting higher debt levels.
Wi stem's passeng r revenue increased 12 percent for 1985 over 1984 as a result of a traffic increase of 11
perc nt combined with a slight yield increase. The 11 percent traffic increase was the result of the increase in
capacity, a higher load factor, and the 29-day work stoppage of a major competitor during the second quarter of
1985.
The full effect of CAP on expenses was felt in 1985 . Wages, salaries, and employee benefits decreased$ 2 3 .9
million or six percent from 1984 despite an 11 percent increase in traffic. For 1985, wages, salaries, and
employee benefits included$ 10.0 million reserved for the employee profit sharing plan and$ 1 .o million paid
as a bonus of$ 100 co each employee.
Fuel cost for 1985 remained relatively unchanged from 1984 as a result of a price decrease of four percent
offset by a consumption increase.
Ocher operating expenses (excluding depreciation) increased $85 .9 million or 22 percent for 1985 over 1984.
This increase reflects primarily the following: (i) a $ 27. o million increase in rental expense as a result of an
increase in the number of aircraft under operating leases; (ii) a $ 16. 5 million increase in commissions due co
higher revenues and increased travel agency sales; (iii) increases of $ 1 5. 2 million in purchased services and $ 2. 8
million in food coses primarily due co the increased traffic levels; (iv) an $ 11. 7 million increase in direct mainte-
nance and service costs associated with increased engine maintenance and flying requirements; and (v) a $ 5. 7
million increase in advertising expense related co additional marketing efforts.
As a result of the increase in ocher operating expenses, partially offset by lower labor and depreciation
expenses, total operating expenses for 1985 increased $59.6 million, or five percent, from 1984. However,
operating expenses per available seat mile for 1985 declined co $.0704 from $.0717 in 1984.
Interest expense decreased 20 percent in 1985 . Western prepaid or converted several debt issues in 1985 , as
discussed below.
Gains on asset disposition were $29.1 million, $I 1. 3 million, and $9.0 million in 1985 , 1984, and 1983,
respectively.
Liquidity and Capital Resources
Western's cash and cash equivalents totalled $246.9 million at December 31, 1985 up from $5 7. 5 million at
December 3 1, 1984 and up from $46. 3 million at December 3 1, 198 3. Wes tern's cash balance has increased
from December 31, 1984 as the result of operating profits, proceeds from asset dispositions, and issuance of
debt, offset by interest and debt payments. The Company's working capital was$ 116 million at December 31,
1985, the highest in the Company's history, and up from a deficit of$ 104. 3 million at December 31, 1984
primarily due co the increase in cash and cash equivalents. Because airlines typically have no product inventories
and revenues are generated principally by utilizing long-term assets, minimal or negative working capital bal-
ances are not uncommon. Although cash generated from operations in recent years has not been sufficient to
fund debt repayment, Western has made all debt repayments by supplementing cash generated from operations
with other cash resources.
In ord r ro maintain liquidity in 19 and 1 4 and i nifi antly str n th nth ompany's finan ial ondi-
tion in 19 5, Wist rn sold ertain a t , terminated ertain p nsion plans, in tituted new borr win and
finan ing arrangem nts, and call d rtain d bt and preferr d ro k for r d mption r sulting in signifi ant on-
version of such i sues into ommon ro k.
In January 19 3, the ompany terminat d a pension plan and r ceiv d $ 33.4 million in cash in 1983.
In June 198 3, the ompany com pl t d a public offering of units consisting in th aggregate of$ 90 million
principal amount ro /4% Senior S cured Trust Notes due June 15, 1998, 3,240,000 shares of Common Srock
and warrants ro purchase an additional 9,000,000 shares of Common Srock. The net proceeds of approximately
$84 million were used in part ro repay $78 million of debt.
In 198 3 and 1984, Western obtained agreements from an aircraft manufacturer ro finance aircraft progress
payments due on aircraft purchase contracts.
In September 1983, Western entered into a Credit Agreement (the "Credit Agreement") ro provide it with a
revolving line of credit of$ 2 2 million through August 31, 1984. The Credit Agreement was subsequently
extended at various amounts until June 1986. The limit during 1985 and the first half of 1986 is $20 million.
Western intends ro negotiate a new credit agreement which provides for additional borrowings.
In December 1983, the Company completed a public offering of $65 million principal amount of 14 % Sen-
ior Secured Convertible Notes due December 1, 1998 of which approximately $28.8 million of the net proceeds
of $61. 2 million were used ro repay debt.
In April 1984, Western issued 1 , ooo, ooo shares of$ 2. 1375 Series B Cumulative Convertible Preferred
Stock ("Series B Preferred Srock"), 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 divi-
dend arrearages on the $2 .oo Series A Cumulative Convertible Preferred Srock ("Series A Preferred Srock").
In April 1984, Western borrowed $10 million under the Credit Agreement. In August 1984, Western drew
down the remaining $Io million available under the Credit Agreement.
During 1984, Western sold two Boeing 727-200 aircraft for $16.3 million.
In March 1985, the Company completed a public offering of $30 million principal amount of 14 % Senior
Notes due April 1, 1988. On April 1, 1988, the Senior Notes will be converted inro either Convertible Subor-
dinated Debentures due April 1, 1998 or Series C Cumulative Convertible Preferred Stock (but not both). The
net proceeds of$ 2 8. 3 million were used for general corporate purposes.
In March 1985, Western repaid $20 million borrowed under the Credit Agreement.
In April 1985, Western issued 1,200,000 shares of $2 -40 Series D Cumulative Convertible Preferred Srock
("Series D Preferred Stock"), convertible into Common Stock at $7 . 50 per share, subject to adjustment. The net
proceeds of $22. 3 million were used for general corporate purposes.
The Company purchased $8-4 million and $5. 5 million (face amount).of 10% Senior Secured Trust Notes
in April and August 1985, respectively.
In May 1985, Western prepaid$ 14-4 million of 10% Equipment Trust Certificates and prepaid the remain-
ing outstanding balance of $21 .6 million in July 1985.
In July 1985, Western prepaid the$ 19. 1 million outstanding balance under the five-year term loan agree-
ment.
In August 1985, Western called for redemption its outstanding $2. 1375 Series B Cumulative Convertible
Preferred Stock, 14 % Senior Secured Convertible Notes, and 5. 2 5 % Convertible Subordinated Debentures.
Most holders elected to convert those issues into Common Stock. Wes tern's outstanding 12 % Convertible Sub-
ordinated Debentures were converted into Common Stock. Those calls and conversions were completed by ep-
tember 30, 1985.
In N ov mb r l , ch ompany om pl c d a publi offerin of$ 100 million prin ipal am unt of7 -/ ~
onvercibl ub rdinac d D b ncur du N ov mb r I, 200 . Th n c pr f $97 -4 milli n w r u d 6 r
. Th d bencur ar onv rcibl inco ommon co k at $9.00 p r har , ubje c co
ad ju cm nc.
A a I arc fit f1 t plan, Wi t rn s Id I B ing 727-200 air raft and on D -10-10 air raft in I 85 and
re eived nee pr ce d of $ 104. 7 million. Under a cw -year l aseba k agre m nt, th mpany will c ncinue co
op rat six of ch 727-2oo's sold. In addition, five of ch air raft w r repla d with l ased 7 7-200 aircraft.
The ompany cook deliv ry of six Bo ing 7 3 7-300 air raft and chr spar ngin s in 1985 chat were previ-
ously on order from the manufa curer. These aircraft ar b ing finan d by 15-y ar l ase agre ments. Western
was reimbursed for pr viously r ord d capicaliz d interest and buyer-furnished equipm nt on ch six aircraft
and spare eng ines und r the leas agre ments.
In Occober 1985 , the Regional Airports Improvement Corporation ("RAI "), a non-profit corporation orga-
nized co f1nance improv mencs at airports op rat d by ch City of Los Angeles, issued facilici s sublease rev nue
bonds. The proc eds of $94 million from chis issu will be used co finance additions and improvements at
Wescern's facilities at the Los Angeles International Airport. Western will make rental payments over the next
40 years sufficient to pay the principal and interest on these bonds.
In January 1986, Western sold ten non-advanced Boeing 737-200 aircraft for $67 million and will lease
back the aircraft under an approximate two-year lease agreement. Rental payments for these aircraft will
aggregate $ 2 7. 2 million over the leaseback period .
Western has on order from the manufacturer 21 Boeing 7 3 7-200 and 7 3 7-300 aircraft scheduled for delivery
in 1986 and 1987. The Company has received financing commitments with respect to at least 12 of these air-
craft , but has not arranged financing with respect to the remaining aircraft. The approximate aggregate pur-
chase price for all 21 aircraft is $403 million, of which approximately $83 million is currently on deposit.
Failure to take delivery of such aircraft could result in significant damage claims against the Company. If certain
changes in investment tax credits and deductions for accelerated depreciation proposed by the Congress were to
be adopted, the Company"s ability to arrange lease financing for the acquisition of aircraft could be adversely
affected.
Substantially all of Wes tern's owned aircraft and engines are pledged as collateral for debt and other obliga-
tions. In addition, some of the Company's agreements require chat collateral be maintained at specified levels.
2
T 0
NY AR IN REVI EW
We t rn Air Line , Inc.
In millions except p r shar amounts and other items indicated by an asterisk
ummary of O perations 1985 19 4 r98 1982 r981 19 0 1979 1978 1977 1976
Operating Revenu s:
Passenger $ 1,168. 3 1,041.4 99 -4 925- 949.6 8 7-9 27-7 734.0 614.6 544- 2
argo, charter, and oth r 138. 2 14o. 5 I49-2 l 9-5 l 10.2 107. 104.4 100.5 76.9 61.0
Total op rating r venues 1,306.5 1,181.9 1,142. 6 I ,065.3 1,059.8 995 -7 9 32. l 834.5 691 -5 605. 2
Operating Expenses:
Wages, salari s, and employee benefits(a) 388.2 412. l 422 .7 368.5 403.4 384. 2 356.6 309.4 263.1 226.4
Fuel 300.0 300.2 320.0 12.0 326.6 296.4 225 .7 154.9 138.0 108. 3
Other 541.8 458.2 456.3 415.6 395 .8 360. 9 331.6 315.3 260.9 235.1
Total operating expenses 1,230.0 1,170.5 l, 199.0 I ,096. l 1,125 .8 l ,041.5 913 .9 779.6 662. o 569.8
Operating income (loss) 76.5 11.4 (56.4) (30.8) (66.o) (45 .8) 18.2 54-9 29-5 35-4
Interest expense, net (46. 5) (58. 1) (5 r. 5) (46 . 7) (45 .o) (38. 5) (24.9) (20 .2) (17.5) (16. 3)
Gains on asset dispositions and other income, net 38.3 17-5 I r.6 14.0 18.2 35- 1 46.1 10.7 7.8 3.1
Earnings (loss) before income taxes, extraordinary items and cumulative
effect of a change in accounting principle 68.3 (29.2) (96.3) (63. 5) (92 .8) (49. 2) 39-4 45-4 19.8 22.2
Income taxes (benefits) 32-9 (0.3) (3.6) (19.4) ( 19. 6) (2. 1) 6.9 7 .1 8.2
Earnings (loss) before extraordinary items and cumulative effect
of a change in accounting principle 35-4 (29.2) (96.0) (59.9) (73 .4) (29.6) 41.5 38.5 12. 7 14.0
Extraordinary items:
Utilization of operating loss carryforward 31.7
Gain on pension plan terminations 41.5 l 5-9
Cumulative effect of a change in accounting principle(b) 16.2
N et earnings (loss) $ 67 .1 (29 .2) (54 . 5) (44. 0) (73-4) (29.6) 41.5 54-7 12 .7 14.0
~
Earnings (loss) per common share:
Primary:
Earnings before extraordinary items and cumulative effect
of a change in accounting principle $ o.86 (r.37) (6.22) (4 . 78) (5.81) (2-46) 2-99 2.82 0.96 1.03
N et earnings (loss) $ 1.76 (1.37) (3.60) (3. 56) (5 .81) (2-46) 2-99 4.o9 0. 96 1.03
Fully Diluted:
Earnings before extraordinary items and cumulative effect
of a change in accounting principle $ 0.71 (1.37) (6.22) (4. 78) (5 .8 l) (2 .46) 2.31 2. 15 0.85 0.92
N et earnings (loss) $ 1.34 (1.37) (3 .60) (3. 56) (5.81) (2 .46) 2.31 3.o4 0. 85 0.92
Other Financial Data:
Cash dividends paid per share of common stock $ 0.2 5 0-40 0.40 0-40 0.40
Total assets $ 951.5 803.6 812.2 808.6 834.6 917.o 821.4 710. 1 574-9 5 l 5 .1
Property and equipment- net $ 519-3 61 I. l 595.o 634.8 662.4 718.8 634.6 519-7 427-9 378.6
Long-term obligations- less current installments $ 378.9 428.2 437-9 411.5 40 1.9 435- 1 318.3 265.7 214.5 192.5
Shareholders' equity $ 240.5 62.5 86.7 77.6 121.7 197- 3 232.6 198.5 147 -4 l 12. l
Operations:
Airplanes operated at end of year* 82 76 74 72 70 71 76 78 77 75
Passengers carried 9.1 8.3 9.1 8.4 8.4 9.1 l I.2 10-4 .8 8. l
Available seat miles 17,462.8 16,318.4 16,654.0 15,124.6 14,495.8 15,515.6 16,630.5 16,254.9 14,963.8 13,45-4
Revenue passenger miles 10,441.0 9,417.o 9,416. 0 8,892.6 8,547.9 8 ,832. l 10,494.8 10,6 4.8 8,588.8 7,833.8
Passenger load factor
actual(%)* 59.8 57 -7 56.5 58.8 59.o 56.9 63 .1 65.4 57-4 58.2
breakeven point (%)* 57- 2 59-9 62 .5 63. 1 65 .8 62.o 63.2 61. l 56. l 56.0
profit margin (point difference)* 2.6 (2.2) (6.o) (4. 3) (6.8) (5. l) (0. I) 4-3 I. 2.2
Average revenue per passenger mile* $ . II2l . 1108 . 1055 . 1042 . l I l 3 . 1010 .0807 .0720 .0734 .0705
Average length in miles per passenger trip* l, l 52 I' 134 I, O l l ,05 l ,017 965 926 994 966 96
Operating expense per available seat mile* $ .0704 .o717 .0720 .0725 .0777 .0671 .0550 .0480 .0442 .0424
argo revenue ton miles 153.0 156.3 167. l 156. l 151. 3 163.2 162.0 176.3 l 57- 135.0
Average number of employees* 10,247 10,264 I O, 55 9,760 10, 120 10,657 rr, 256 10,7 7 10,41 9,799
(a) During 1982, actuarial assumption changes co pension plans were made reducing expen es by $ 7. 2 or $0. 5 5 per share (primary). (b) Effe tiveJanuary 1, 1978, We tern chang d it method fa uncin for pot- c97 r inve cm nc r die fir fin n ial r rein
purpo e from the de erral c the flow-through method. Th cumulativ effi c of the han e am uncin t $ 16.2 r $1. 27 per
share (primary) has be n in luded in nee earning fi r 1978.
30 I
W T RN AIRLINE
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