Transcript of Record — Anselmi v. Attorney General of the United States (No. 225)
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DP MO OD Sle Hse na T OTE Na ATC
INDEX TO JOINT APPENDIX.
Page
Tetitions for Review:
Petition for Judicial Review of the Postmaster Gen-
eral and the United States of America on Behalf of
the Postenmeter Gemerel .... cc ccccsccvccccsceses 1
Petition for Judicial Review of Western Air Lines,
De cus-ob bk beeedenthebh encddedssbases cevaseess i]
Proceedings before the Civil Aeronautics Board:
Petition of Western Air Lines, Inc. for an order fix-
ing the fair and reasonable rates of compensation
for the transportation of air mail over Air Mail
Routes 13, 19, 52, and 63. Filed: April 26,1944... 15
Amendment No.1. Filed: February 10,1947.... 21
Amendment No. 2. Filed: February 24,1947.... 24
Amendment No. 3. Filed: March 11, 1947 ...... 35
Order of the Board Fixing the Fair and Reasonable
Temporary Rate of Compensation for the Trans-
portation of Mail by Aireraft. Order E-484, April
TE GEE db acncnsuceescnndcecsncesevccconcecese 44
Amendment No. 4 to Western’s Petition. Filed:
PNET Bi, BOD voc cccccccnsscenencssecses 51
Statement of Tentative Findings and Conclusions of
the Board, adopted December 30, 1948........... 54
Order of the Board directing Western to show cause
why the Board should not adopt the findings set
forth in the Statement of Tentative Findings and
Conclusions end fix the rates set forth therein as
the fair rates of compensation to be paid to West-
ern for the transportation of mail by aircraft.
Order E-2333, December 30, 1948 ..............-. 124
Order of the Board Establishing Fair Temporary
Rates of Mail Compensation. Order E-2506, Feb-
SUEY Te, BOD ok eves cncedsrcccececusecsscceese 126
Order of the Board Amending Order E-2506 Estab-
lishing Temporary Rates of Mail Compensation.
Order E-2531, March 3, 1949................... 133
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REE nen endies nai ane aocicadst cares sted aaa
il
Index to Appendix Continued.
Page
Order of the Board Granting Motion of Western to
sever the future period from the past period for
mail rate determination. Order E-2641, March 28,
BEE Savuseethdesasecessesrstereevedeceseéeress 135
Order of the Board Granting Motion of Public
Counsel to consolidate the cases of Western and
Inland Air Lines, Inc. for mail rate determination.
Order E-2848, May 20, 1949 ..................-. 137
Amendment No. 5 to Western’s Petition. Filed: De-
SE Sinuvincenedupesddcouci eos veece 139
Motion of Public Counsel to Strike Amendment No. 5.
Pee GET Gh GONE vase cencecvedsseenceeess 141
Answer of Western to Public Counsel’s Motion to
Strike. Filed: January 26, 1950 .............. 146
Order of the Board Granting Motion of Public
Counsel to Strike. Order E-3972, March 9, 1951 .. 150
Exhibit No. W-12 of Western .................... 153
Exhibit No. W-14 of Western .................... 159
Exhibit No. WX-3 of Western .................... 161
Exhibit No. WX-4 of Western .................... 161
Exhibit PC-12 of Public Counsel .................. 165
Exhibit PC-14 of Public Counsel .................. 167
Opinien and Order of the Board Fixing and Deter-
mining the Fair and Reasonable Final Rates of
Compensation for the Transportation of Mail by
Aircraft of Western and Inland E-4870, November
SU. UU abe wensbsdedeceansiessneesssreesens ees 183
SE cdatowenetddeddennndédeceehedveneseseds 183
PE, KcdEneeeneeeenecreosn tere sidversetccees 234
EN tis ch bene culateemeebnbeanweaanires 237
Portion of Exceptions of the Postmaster General to
the Final Order (E-4870). Dated: January 22, ‘
54
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Me BA ONS ne ibe OEP GOO
. Index to Appendix Continued. iii
Page
Portion of Exceptions of Western and Inland to
the Final Order (E-4870). Dated: January 19,
OE co ccccccvcesdedetessvecerecesereeeeseerese 256
Opinion and Order of the Board Disposing of Excep-
tions. E-5467, June 26, 1951 ............-++0+: 258
| Petition of Postmaster General for Reconsideration.
| Dated: June 27, 1951 .........--e eee eeeeeeeee 282
| Petition of Western for Rehearing, Reargument, and
| Reconsideration. Dated: July 25, 1951 ........ 290
Opinion and Order of the Board on Petitions for
Reconsideration, E-5782, October 12,1951 ........ 333
Proceedings in the U.S.C.A. for the District of
Columbia Cireuit 340
Order allowing substitution of party petitioner 340
Opinion, Prettyman, J. 341
Coneurring opinion, Bazelon, J. 352
Judgment and decree 5
Order allowing consolidation of cases 35d
Designation of record ..._........ age 355
Clerk’s certificate ...... (omited in printing)
Orders granting certiorari - 357 .
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JOINT APPENDIX
Filed Dee 10 1951
IN THE
United States Court of Appeals
For Tue District or CotumBia Creculr.
No. 11259
Jesse M. Donatpson, Postmaster General of the United
States, and Tue Unirep Srares or America, on Behalf
of the Postmaster General, Petitioners,
Vv.
Crvm. Arronavtics Boarp, Respondent.
Petition for Judicial Review
To the Honorable, the Judges of the United States
Court of Appeals for the District of Columbia Circuit:
Jesse M. Donaldson, Postmaster General of the United
States, and The United States of America, on Behalf of
the Postmaster General, petitioners, by their attorneys, re-
spectfully present thi: petition for judicial review of orders
of respondent, Civil Aeronautics Board, and in support
thereof represent and allege the following:
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ST AERTS RRR EASTMAN RANE NES
2
I
Tue SratuTes anp THE Facts Upon Wuicu JURISDICTION Is
Basep
(1) This petition for judicial review of the Board’s or-
ders is filed pursuant to provisions of Section 1006 of the
Civil Aeronautics Act, 52 Stat. 1024 (1938), 49 U.S.C. § 646.
(2) This petition seeks review of two mail rate orders
of the Civil Aeronautics Board issued in the Board’s pro-
ceedings entitled Inland Air Lines, Inc., and Western Air
Lines, Inc., Mail Rate Proceeding, Docket No. 2870 et al.,
Order No. E-5467, dated June 26, 1951, and Order No. E-
5782, dated October 12, 1951.
(3) The Board’s proceedings were conducted under the
provisions of the mail rate section (Sec. 406) of the Civil
Aeronautics Act, 52 Stat. 998 (1938), 49 U.S.C. § 486.
(4) The Postmaster General, as head of the Post Office
Department of the United States, is a statutory party in all
mail rate proceedings before the Board, Section 406(a) and
(c) of the Civil Aeronautics Act, supra, and has been judi-
cially determined to be the protector of the public interest
in air mail rate proceedings. Seaboard & Western Air
Lines v. Civil Aeronautics Board (1949), 86 U.S. App. D.C.
64, 181 F. (2d) 515, 518-519, certiorari denied (1950) 339
U.S. 963. The Postmaster General participated in the par-
ticular mail rate proceeding out of which emerged the or-
ders sought to be reviewed. The Postmaster General is
required by the Act to pay, from appropriations for the
transportation of mail by aircraft, the air mail rates fixed
and determined by the Board, pursuant to the mail pay
section of the Act, Section 406(a) of the Civil Aeronautics
Act, supra. Accordingly, the Postmaster General has a
substantial interest in said mail rate orders sought to be
reviewed, within the meaning of the judicial review section
of the Act, Section 1006 of the Civil Aeronautics Act, supra.
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(5) This petition is filed within the statutory period of
60 days after entry of the Order of October 12, 1951, supra,
which was the final order of the Board denying the Post-
master General’s petition for reconsideration. Section
1006, Civil Aeronautics Act, supra.
I
Tue Nature anp Facts oF THE PROCEEDINGS AS TO WaicxH
Review 1s SouGHt
(1) The orders of the Board sought by the petitioners to
be reviewed arose out of the mail rate proceeding for West-
ern Air Lines, Inc. This rate proceeding was initiated un-
_ der the mail pay section (406) of the Act, supra, upon peti-
tion filed by Western on April 26, 1944. The proceeding
was later consolidated with the mail rate proceeding of
Inland Air Lines, Inc., a subsidiary of Western.
(2) While Western’s mail rate proceeding was pending,
Western, in a totally distinct proceeding, obtained approval
in 1947 from the Board to sell one of its route certificates,
namely, Route 68 extending from Denver to Los Angeles,
together with certain related operating equipment, for the
lump sum of $3,750,000. United-Western Acquisition Air
Carrier Property (1947), 8 C.A.B. 298.
(3) Thereafter, as finally adopted by the Board in the
orders to which this petition is directed, the Board fixed a
finel mail rate for Western for the past rate period, com-
mencing April 26, 1944 and ending December 31, 1948. The
rate so fixed was computed on the basis of a rate-making
principle which the petitioners believe to be unlawful, and
to which the Postmaster General objected in the proceed-
ings before the Board. The opinion of the Board accom-
panying the Order of June 26, 1951, supra, although recog-
nizing that the Board was fixing a “need” rate under the
subsidy provisions of the mail rate section of the Act and
that in fixing the rate the Board must ‘‘take into consider-
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a ee
4
ation’’ the profits Western received under the said sale, as
‘‘other revenue,’’ nevertheless ruled:
‘“While we are required by the Act to ‘take into con-
sideration’ the ‘need’ of the carrier for mail compen-
sation together with ‘all other revenue’, we do not un-
derstand the language of section 406(b) as requiring
us to reduce the carrier’s mail pay ‘need’ with any
part of such ‘other revenue.’ This is a matter within
our discretion. That is, we may take in ‘other revenue’
in whole, in part, or not at all.’’ Board’s Order E-5467,
June 26, 1951, Opinion, p. 5, supra. (Emphasis sup-
plied.)
(4) Thereupon the Board proceeded to allocate the de-
termined profit of $1,099,000 obtained from the sales trans-
action into profit from the sale of tangibles and profit from
the sale of intangibles. In determining the ‘‘need’’ of
Western for mail compensation, that part of the profit at-
tributable to the tangible elements of the sale, namely, the
operating equipment, was taken into account, but the Board
excluded from its computations the remaining $447,000 as-
signable to the profit from the sale of the intangibles,
namely, the route certificate.
(5) The administrative remedies of the Postmaster Gen-
eral before the Board are now exhausted.
Til
Points Reuiep On
(1) The Board exceeded its statutory power or, in the
alternative, abused its discretion in failing to apply the
entire net profits from the said sales transaction in evalu-
ating the carrier’s subsidy ‘‘need.”’
(2) The mail rate section (406(b)) of the Act, supra,
requires the Board to apply the entire net profit obtained
by Western from the said sales transaction when deter-
mining the true ‘‘need’’ of the carrier for subsidy mail
compensation.
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5
(3) To the extent that the carrier has obtained ‘‘other
revenue’’—the entire net profit of the sale—from other
sources during the rate period involved, the carrier has no
subsidy ‘‘need’’ under the Act for additional compensation
in the form of mail pay.
(4) The rate being fixed by the Board for Western is
based on the subsidy ‘‘need’’ of the carrier under the
unique subsidy feature of the Act; such rate is not a ‘‘serv-
ice’? rate. A service rate has been defined by the Board to
be a rate intended to cover only those operating expenses of
the carrier allocable to the mail services rendered by such
carrier, together with a net profit sufficient to yield an ade-
quate return only upon that part of the carrier’s invest-
ment allocated to the mail service.
(5) When fixing a subsidy rate the Board is required un-
der the Act to review and apply the financial results of the
carrier in order to determine the true subsidy ‘‘need”’ in
the light of all ‘‘other revenue’’ of the carrier; the Board
has failed in its statutory duty to apply such ‘‘other rev-
enue.’’
(6) The Board erred in splitting up the one-package
sales transaction and in failing to apply as ‘‘other rev-
enue’’ that portion of the net profit of such sales trans-
action attributable to the route certificate.
(7) The route certificate entitled the carrier to subsidy
mail pay to cover its financial needs; upon the sale thereof
by a going carrier, any profit accruing to such carrier
should be applied against the carrier’s ‘‘need’’ for sub-
sidy; failure to apply such profit is contrary to the public
interest and unlawful because nonapplication would result
in the payment of additional public funds to subsidize a
need already covered by profits accruing from the benefit
of such certificate.
(8) A route certificate received by the carrier from the
Government is a matter of free public grant. The Act
specifically provides that, “No certificate shall confer any
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ZIVIET A, BEEN YM IPE
6
proprietary, property, or exclusive right.’’ Section 401(j)
of the Civil Aeronautics Act, 52 Stat. 990 (1938), 49 U.S.C.
§ 481(j). The holder of a certificate holds it for the bene-
fit of the public. Any value of the certificate belongs to
the public. The public has made the sole contribution to
the value placed upon the certificate. By the ruling chal-
lenged herein, the Board in effect has determined that the
public must pay to Western, the seller, a premium for
transferring a certificate in which Western has no prop-
erty interest.
(9) Since the Board determined that the profit from the
tangible elements of the sales transaction—the operating
equipment in which the carrier had a vested interest—
should be included as ‘‘other revenue,’’ then by even
greater force and reason the profits from the intangible
elements of the sales transaction—the route certificate in
which the carrier had no vested interest—should also be
included and applied as ‘‘other revenue’’ against any
claimed ‘‘need”’ of the carrier for subsidy.
(10) The Civil Aeronautics Board, as well as other reg-
ulatory bodies, has definitely ruled against the inclusion of
franchise values in rate bases when fixing rates in other
proceedings. The orders of the Board challenged by this
petition not only recognize and place a net monetary value
of $447,000 on the said route certificate and find that West-
ern actually made that profit, but also disregard that profit
as ‘‘other revenue’’ with the result that Western can now
collect from the public treasury an additional $447,000 as
subsidy in the form of mail pay.
(11) Nowhere in the Act is there any permission for car-
riers to traffic in air certificates for private gain. It is only
in the public interest, as distinguished from the private
interests, that certificates may be transferred. Section
401(i) of the Civil Aeronautics Act, 52 Stat. 989 (1938),
49 U.S.C. § 481(i).
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7
(12) Failure by the Board to follow the stated policy of
Congress set forth in the Act as the guidepost for the
Board in fixing the proper mail rate subsidy, is not only
detrimental to the public interest in this particular pro-
ceeding, but if permitted to go unchallenged may permit
other carriers to ask the Board to ignore all sorts of rev-
enues when fixing the subsidy ‘‘need’’ of such carriers.
Unless it is judicially reviewed, the Board’s ruling would
permit, without any standard or limitation, the perpetua-
tion in air mail rate proceedings of a principle that car-
riers have a ‘‘need’’ for subsidy where no such ‘‘need”’
actually exists.
IV
Tue Revier Prayvep
Wuenrerorg, The petitioners pray:
(1) That a copy of this petition be served upon the Civil
Aeronauties Board;
(2) That said Board be required to certify and file in
this Court a transcript of the records of the proceedings
in which Orders Serial No. E-5467, dated June 26, 1951,
and No. E-5782, dated October 12, 1951, of the Board, were
entered, in accordance with the requirements of Section
1006 of the Civil Aeronautics Act, supra;
(3) That said orders of the Board be reviewed and de-
clared unlawful as beyond the statutory power of the
Board, or in the alternative, as constituting an abuse of
discretion, and that the said orders be set aside or so modi-
fied as to reduce the mail pay awarded to Western by the
appropriate aniount to reflect the inclusion of all the profits
from the sale . t Route 68 in the computation of Western’s
needs; and
(4) That the petitioners be given such other, further,
general, and different relief as the nature of the case may
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Fh ih Fe RE
8
require, and as the Court may deem just, proper, and ap-
propriate.
Dated December 10, 1951.
(Signed) Neweuu A. CLapp
Newell A. Clapp
Acting Assistant Attorney
General
Department of Justice
Washington 25, D.C.
(Signed) Louis J. Doytz
Louis J. Doyle
Acting Solicitor
Post Office Department
Washington 25, D.C.
(Signed) Arne C. Wiervup
Arne C. Wiprud
Associate Solicitor
(Signed) Freperick E. Batrrus
Frederick E. Batrus
Assistant Solicitor
(Signed) Evcrene J. Braum
Eugene J. Brahm
Chief, Air Mail Section
Office of the Solicitor
Attorneys for Petitioners
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Filed Feb. 23, 1952
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
No. 13195
Western Arr Lines, Inc., Petitvoner,
v.
Civ, Azronavtics Boarp, Respondent.
Petition of Western Air Lines for Review of Orders of the
Civil Aeronautics Board
To the Honorable Justices of the United States Court of
Appeals for the Ninth Circuit:
Western Air Lines, Inc., Petitioner, (to be referred to
as ‘‘Western’’) presents this petition for review of and to
set aside orders of the Civil Aeronautics Board (to be re-
ferred to as the ‘‘Board’’), dated December 30, 1948, Se-
rial No. E-2333; dated November 24, 1950, Serial No. E-
4870; dated June 26, 1951, Serial No. E-5467; and dated
October 12, 1951, Serial No. E-5782.
I
BACKGROUND OF THE OrpeRS UnpEer Rrview
Western is a commercial air carrier holding certificates
of convenience and necessity issued by the Board pursuant
to the Civil Aeronautics Act of 1938.
Section 406 of the Act (49 U. S. Code 486) vests in the
Board the power to fix the rate of compensation to be paid
to air carriers for the transportation of mail and sets forth
the elements which should be considered by the Board in
fixing the rate.
On April 26, 1944, Western filed a petition with the
Board for an order increasing the compensation to be paid
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al li
TOES VI 1g PRT EE ey
: EDEL TEENA LIT GN RFR LE EE ULT ON OER HMB OPP”
10
to Western for the transportation of mail. Subsequently,
five separate amendments to the petition were filed by
Western.
Following acceptable procedures, on December 30, 1948,
the Board issued its first order in the proceeding, which is
designated as Serial No. E-2333, the effect of which was to
decree that Western was entitled to additional compensa-
tion for the transportation of mail from May 1, 1944,
through December 31, 1948, in the sum of $975,000.00.
Western noted its objections to this order in the manner
permitted by the Act and by the rules and regulations of
the Board.
Thereafter, following acceptable procedures, on Novem-
ber 24, 1950, the Board issued its order, Serial No. E-4870,
the effect of which was to decree that Western had been
overpaid for the transportation of mail between May 1,
1944, through December 31, 1948, by virtue of the order of
December 30, 1948, Serial No. E-2333, in the sum of $671,-
474.00. Western noted its objections to this order in the
manner permitted by the Act and by the rules and regula-
tions of the Board.
Thereafter, following acceptable procedures, on June 26,
1951, the Board issued its order, Serial No. E-5467, the
effect of which was to decree that Western had been over-
paid for the transportation of mail between May 1, 1944,
through December 31, 1948, by virtue of the order of De-
cember 30, 1948, Serial No. E-2333, in the sum of $342,-
973.00. In the manner permitted by the Act and by the
rules and regulations of the Board, Western noted its ob-
jections in the form of a petition for reconsideration.
Thereafter, following acceptable procedures, on October
12, 1951, the Board issued its final order, Serial No. E-5782,
the effect of which was to decree that Western had been
overpaid for the transportation of mail between May 1,
1944, through December 31, 1948, by virtue of the order of
December 30, 1948, Serial No. E-2333, in the sum of $334,-
639.00, and otherwise denying a reconsideration.
Western’s grievance is based on the inequities of the
final order of October 12, 1951, but the relationship of the
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11
three preceding orders to the final order makes it appro-
priate that this petition for review include the four orders
in the proceeding which have been listed.
II
Issues For REVIEW
The issues to be resolved under this petition for review
are:
1. Did the Board commit legal error in including as other
revenue within the meaning of Section 406(b) of the Act
(49 U. S. Code 486(b)) the profit derived by Western from
the sale of its certificate of convenience and necessity for
Route 68 and related equipment and the proiit derived by
Western from the operation of restaurants, concessions
and coin machines as an element in fixing the compensation
Western was entitled to receive for the transportation of
mail?
2. Did the Board commit legal error in redetermining
Western’s mail pay compensation for the period from May
1, 1944, through December 31, 1948, instead of the period ;
from January 1, 1946, through December 31, 1948?
3. Did the Board commit legal error by ordering the
equivalent of a recapture of a portion of the compensation
paid to Western for the transportation of mail from May
1, 1944, through December 31, 1945, which compensation
Was on a service or compensatory basis without subsidy?
adopted for calculating the allowance for Western’s in-
come tax as an element in fixing the compensation Western
was entitled to receive for the transportation of mail?
III
ComMMENTs on Issues ror REVIEW j
Section 406(b) of the Act (49 U. S. Code 486(b)) re- ‘
quires the Board in fixing the mail rate of air carriers to .
) consider: :
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4. Did the Board commit legal error in the method it :
;
12
‘« |. the need of each such air carrier for compensa-
tion for the transportation of mail sufficient to insure
the performance of such service, and, together with all
other revenue of the air carrier, to enable such air ear-
rier under honest, economical, and efficient manage-
ment, to maintain and continue the development of air
transportation to the extent and of the character and
quality required for the commerce of the United States,
the Postal Service, and the national defense.’’
Issue 1 on this review seeks a judicial interpretation of
the term ‘‘other revenue’’ as used in this section. West-
ern took and still takes the position that the term ‘‘other
revenue’’ necessarily means revenue derived by the car-
rier from its air transportation operations. It does not
mean revenue derived from other sources. Otherwise, an
air carrier fortunate enough to own land producing oil in
goodly quantities would have sufficient other revenue to
preclude the need for any compensation for the transpor-
tation of mail,
It is important to the air transportation industry to have
a judicial interpretation of the term ‘‘other revenue’’ as
used in Section 406(b) of the Act in order that air carriers
may calculate with some degree of certainty the conse-
quences on its mail compensation of engaging in activities
wholly unrelated to air transportation and in activities
which may be indirectly related to air transportation. It
was Western’s position before the Board and it will be
Western’s position before this Court that the profit it de-
rived from the sale of its certificate of convenience and ne-
cessity for Route 68 and related equipment, as well as the
profit it derived from the operation of restaurants and
coin machines, should not be included as other revenue
within the meaning of that term as used in Section 406(b)
of the Act.
Issues 2 and 3, which are interrelated, concern the right
of the Board to redetermine Western’s mail compensation
from May 1, 1944, the approximate date of the filing of
Western’s original petition for that purpose, notwithstand-
ing the fact that:
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13
(a) The original petition sought only an increase, not a
decrease ;
(b) Prior to any action being taken by the Board, West-
ern disclaimed any desire to have its rate reconsidered back
of January 1, 1946, and objected to considering any period
back of that date;
(c) The effect of the order is to recapture compensation
already paid under an effective order, thus constituting an
ex post facto ruling; and that
(d) The effect of the order is to compel Western to re-
fund a portion of mail pay based on a compensatory or
service rate with no subsidy, and thereby to compel West-
ern to carry the mail at less than a fair and reasonable
rate, resulting in a taking of property rights without just
compensation.
Issue 4 relates to the method the Board employed to
calculate the allowance for Western’s income taxes in de-
termining the mail compensation to be allowed. The
method used was different than the method used in the first
order in this proceeding, dated December 30, 1948, Serial
No. E.-2333, and in effect amounted to an ex post facto
ruling. The new method is cloaked with legal improprieties
and injustices, and it was unjust and legally improper for
the Board to adopt a new method and apply it retroactively.
The four issues involved in this petition for review are
of great importance to Western and of major significance
to the air transportation industry.
IV
Basis FoR J URISDICTION
This petition is filed pursuant to Section 1006 of the
Civil Aeronautics Act of 1938, 52 Stat. 973, 1024, 49 U.S.C.
401, 646, and Section 10 of the Administrative Procedure
Act, 60 Stat. 237, 243; 5 U.S.C., 1001, 1009.
Section 1006 of the Civil Aeronautics Act provides in
part that any order issued by the Board shall be subject
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Set ea te nen
l4
to review by the Circuit Court of Appeals for the Circuit
wherein the petitioner resides or has its principal place
of business or in the United States Court of Appeals for
the District of Columbia.
The principal place of business of Petitioner is in Los
Angeles, California.
V
Rewtier REQUESTED
Western requests relief under this petition for review
in the form of an order of this Court:
1. Directing that the orders of the Board under review
be set aside or modified in such manner as may be necessary
to correct the legal errors committed by the Board;
2. Directing the Board to recalculate the compensation
to be paid to Western for the transportation of mail during
the appropriate period prior to December 31, 1948, in a
manner which will eliminate the errors of law and the
injustices appearing in the orders under review and in a
manner which will provide Western with the fair and rea-
sonable compensation contemplated by Section 406 of the
Act; and
3, Awarding Western such other redress as the law and
the record may justify.
Los Angeles, California.
December 7, 1951.
Respectfully submitted,
Gururie, Dartinc & SHATTUCK,
By Hues W. Dagune,
737 Pacific Mutual Building,
Los Angeles 14, California,
Attorneys for Western Air
Lines, Inc.
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oats OR Ne PSE TONE,
15
Filed April 26, 1944
BEFORE THE
CIVIL AERONAUTICS AUTHORITY
No. 1374
In the Matter of the Petition
of
WESTERN AIR LINES, INC., for an order fixing the
fair and reasonable rates of compensation for the
transportation of air mail over Air Mail Routes 13,
19, 52 and 63.
Petition
To Tue Honorasie, THe Crviz Arronavutics Boarp:
1. The Petitioner is a corporation duly organized and
existing under the laws of the State of Delaware, and has
operated as a common carrier by air and is now operating,
or is certificated to operate, over the following routes under
certificates of convenience and necessity for the transporta-
tion of mail, passengers and property:
a. Route 13, between the terminal point San Diego, Cali-
fornia, the intermediate points El Centro, Palm Springs,
San Bernardino, Long Beach, Los Angeles (Burbank) Cali-
fornia, and Las Vegas, Nevada, and the terminal point Salt
Lake City, Utah. (Inauguration of service to El Centro,
Palm Springs and San Bernardino has been deferred be-
cause of requirements of the National Defense).
b. Route 19, between the terminal point Salt Lake City,
Utah, the intermediate points Ogden, Utah, Pocatello and
Idaho Falls, Idaho, West Yellowstone, Butte and Helena,
Montana, and the terminal point Great Falls, Montana.
(Service has been temporarily suspended to Ogden, Utah,
Idaho Falls, Idaho and West Yellowstone, Montana).
c. Route 52, between the terminal point Great Falls,
Montana, the intermediate point Cut Bank-Shelby, Mon-
BLURRED COPY
16
tana, and the terminal point Lethbridge, Alberta, Canada.
(The Petitioner also is the holder of a franchise issued by
the Dominion of Canada, authorizing its operation of Route
52).
d. Route 63, between the terminal point Los Angeles,
California, and the terminal point San Francisco, Cali-
fornia. (Services on this route will be inaugurated on May
1, 1944).
2. This petition is filed pursuant to the provisions of
Section 406, among others, of the Civil Aeronautics Act of
1938, as amended.
3. On May 10, 1943, the Board amended Petitioner’s
certificate for Route 13 to include El Centro, Palm Springs
and San Bernardino, California as intermediate points be-
tween San Diego, California and Long Beach, California.
The amended certificate provides that service shall not be
inaugurated to any of the new intermediate points until the
Board shall have notified Petitioner that the National De-
fense no longer requires that the inauguration of
2 such service be delayed. Petitioner has received no
such notice from the Board, and therefore, has no
plans for immediate inauguration of service to these points.
When sufficient equipment is available that service may be
started, it is believed public convenience and necessity will
require a minimum of two round trips daily to these inter-
mediate points.
4. On August 13, 1943, the Board issued Petitioner a
certificate to engage in air transportation with respect to
persons, property and mail, between the terminal point
Los Angeles, California and the terminal point San Fran-
cisco, California. This certificate carried a provision that
the service should not be inaugurated until the Board
notified the Petitioner that the National Defense no longer
required that the inauguration of such service be delayed.
Petitioner recently received such notice from the Board and
will commence service on this route with three round trips
daily effective May 1, 1944.
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CEL RL iT SS OEE eee ee ~ ~- ne
17
5. On November 8, 1943, the Civil Aeronautics Board
issued an order fixing and determining the fair and reason-
able rate of compensation for transportation of mail by air-
craft, the facilities used and useful therefor, and the service
connected therewith between the points between which
Petitioner is authorized to carry mail by its certificates of
public convenience and necessity. Such rate was determined
to be 0.3 mill per pound mile of mail carried computed on
direct airport to airport mileage, and was made retro-
actively effective as of January 1, 1943.
6. The present rate does not provide a fair and reason-
able compensation for the Petitioner for its transporation
of mail by aircraft, its facilities used and useful therefor
and its service connected therewith between the points be-
tween which Petitioner is authorized to carry mail by its
certificates of public convenience and necessity. The income
derived therefrom together with all other revenues of the
Petitioner, is inadequate in connection with such transporta-
tion and services and does not pay a fair and reasonable
return on the value or cost of the facilities and property
owned and used by the Petitioner for the purpose of said
transportation and services or its investment therein.
7. On April 7, 1944, Petitioner received a letter from the
Post Office Department, a copy of which is attached hereto
and marked Exhibit A, advising Petitioner that because of
refusals at Salt Lake City by United Air Lines, the Post
Office Department finds it necessary to withhold dis-
3 patch of airmail for Chicago, New York and Wash-
ington, D. C. Gateways from Petitioner’s Route 13.
In view of the fact that Petitioner’s heaviest mail poundage
moves between Los Angeles and Salt Lake City on Route
13, Petitioner estimates that the withholding of the dispatch
of such mail from Route 13 will adversely affect Petitioner’s
mail revenue by an amount of $125,000.00 per year.
8. In its order of November 8, 1943, which was made
retroactively effective January 1, 1943, the rate was fixed
BLURRED COPY
PA TILES ERT. AE FR ORION at
18
‘“*bhetween the points between which Western Air Lines,
Ine. is authorized to carry mail by its certificates of public
convenience and necessity.’’’. Petitioner is not advised
whether this rate was meant to apply to Route 63 for which
it was awarded a certificate on August 13, 1943. If the
order of November 8, 1943 does not cover the service to be
rendered on Route 63, it will be necessary that the Board
establish a rate of compensation for the transportation of
mail over Route 63.
9. The fair and reasonable rate of compensation for the
transportation of mail by aircraft, the facilities used and
~seful therefor, and the services connected therewith as
performed by the Petitioner on said air mail Routes 13, 19
and 52 is a rate of twenty five cents (25c) per airplane mile
and on air mail Route 63 is a rate of 0.3 mill per pound mile
of mail carried.
Such rates are needed by the Petitioner as compensation
for the transportation of mail and the services in connection
therewith performed by it,
(a) in order to insure the performance by the Petitioner
of such service as is required under the certificates of public
convenience and necessity which Petitioner holds and under
which it operates.
(b) to insure the performance by the Petitioner of such
service as is required by the standards respecting the
character and quality of service to be rendered as pre-
seribed by or pursuant to law, and,
(c) in order to enable the Petitioner under honest, eco-
nomical and efficient management to maintain and continue
the development of air transportation on said routes 13, 19,
52 and 63 to the extent and of the character and quality re-
quired by the commerce of the United States, the Postal
Service and the National Defense.
The present rates of compensation and the income derived
by the Petitioner as a result thereof, and from all other
sources, are not adequate for the needs of the Petitioner in
said respects or any of them.
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19
4 Wuererore, the Petitioner prays that the Board
fix a date for a hearing on this application, giving
such notice thereof as is provided by law and that upon said
hearing the Board enter an order fixing the rates of com-
pensation at not less than the rates specified in Paragraph
9 hereof, and that the rates so fixed for mail schedules on
Routes 13, 19 and 52 be made effective as of the date of the
filing of this petition and that the Board establish said rate
of compensation for Route 63 to become effective as of May
1, 1944.
Respectfully submitted,
Western Ar Lines, Ino.
By Leo H. Dwer.xorre
Executiwe Vice President
Guthrie & Darling
737 Pacific Mutual Building
Los Angeles, California
Attorneys for Petitioner
5 EXHIBIT A
POST OFFICE DEPARTMENT
OFFICE OF ASSISTANT SUPERINTENDANT
AIR MAIL SERVICE
SAN FRANCISCQ 1, CALIF.
AOW :K
April 7, 1944
Sussect: Delay to air mail account refusals at Salt Lake
City, Utah
Mr. Ray Grant,
Western Air Lines, Inc.,
Los Angeles, 14, California
Dear Sir:
Because of the frequency and the amount of eastbound
air mail that has been delayed because of refusals at Salt
=
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20
Lake City by United Air Lines it becomes necessary to with-
hold dispatch of air mail for Chicago, New York and Wash-
ington, D. C., Gateways from your AM 13 until such time as
conditions warrant the return to such routing. This change
will become effective April 15th.
We find that during the month of March mail was refused
at Salt Lake City as follows:
Number Trips Passed Total
Refusals Cancelled Over Failures
AM 1-26 10 3 0 13
AM 1-12 11 2 3 18
AM 1-24 8 5 0 13
AM 1-2 21 1 1 23
AM 1-20 20 2 3 25
AM 1-10 18 4 0 22
AM 1-28 24 3 1 28
AM 1-6 23 1 0 24
Notwithstanding that refusals and cancellations have oc-
curred also on routes of other carriers, we find by actual
check that better service could have been rendered by with-
holding from AM 13 the mail referred to.
Consideration will be given the return of such mail as soon
as conditions warrant.
Very truly yours,
/s/ A. O. WitLoversy
Assistant Superintendent.
ec: Mr. R. M. Martin
Mr. A. C. Hodges
Mr. R. E. Pollard
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21
Filed Feb. 10, 1947
9 UNITED STATES OF AMERICA
CIVIL AERONAUTICS BOARD
WASHINGTON, D.C.
Docket No. 1374
In the Matter of the Petition
of
WESTERN AIR LINES, INC., for an order fixing the fair
and reasonable rates of compensation for the trans-
portation of air mail over its routes.
Amendment No. 1
To rue HonoraB_Le Crvit AERONAUTICS Boarp:
Petitioner respectfully amends its petition in the above
captioned proceeding in the following particulars:
I
Paragraph 1 of the petition is amended to read:
1. Petitioner is a corporation duly organized and existing
under the laws of the State of Delaware and is operating as
a common carrier by air and is now the holder of certificates
of convenience and necessity for the transportation of mail,
passengers and property.
II
Paragraph 9 of the petition is amended to read:
9. The fair and reasonable rate of compensation for the
transportation of mail by aircraft, the facilities used and
useful therefor and the services connected therewith as
performed by Petitioner is the sum of twenty-five cents
(25¢) per airplane mile flown by Petitioner over its certi-
fied routes, or the equivalent thereof based on such formula
or method of calculation as may appear to be desirable or
appropriate.
BLURRED COPY
ae
22
Such rate is needed by Petitioner as compensation for the
transportation of mail and the services in connection there-
with performed by it since the filing of this petition and to
be performed hereafter:
10 (1) in order to insure the performance by Peti-
tioner of such service as is required under the certifi-
eates of public convenience and necessity which Petitioner
holds and under which it operates;
(2) to insure the performance by Petitioner of such
service as is required by the standards respecting the char-
acter and quality of service to be rendered as prescribed by
or pursuant to law, and,
(3) In order to enable Petitioner under honest, economi-
cal, and efficient management to maintain and continue the
development of air transportation on its routes to the extent
and of the character and quality required by the commerce
of the United States, the Postal Service and the National
Defense.
Ii
A new paragraph is added numbered 10 and reading:
10. Events which have occurred since the date of filing of
the petition in the within proceeding and prevailing exi-
gencies make it imperative, in order to enable Petitioner to
fulfill its duties to the public, that a temporary rate or rates
be fixed ‘forthwith as compensation to Petitioner for the
transportation of mail by aircraft over its certificated routes
effective in the future as well as retroactively to the date
of the filing of the petition herein.
IV
A new paragraph is added numbered 11 and reading:
11. Problems confronting Petitioner require that a
permanent mail rate in response to this petition be deter-
mined and fixed as expeditiously as possible and be made
retroactive to May 1, 1944, the date of the filing of this
petition, subject to such adjustments as may be necessary
BLEED THROUGH— POOR COPY
23
or appropriate to compensate for the temporary rate or
rates requested herein to be fixed.
WueErerore, Petitioner prays
(1) That pending determination of the permanent rate
a temporary air mail rate or rates for Petitioner be fixed
forthwith in such manner and amount as may be just
11 and reasonable under the attending circumstances, to
be effective in the future as well as retroactively to
May 1, 1944, the date of the filing of the petition herein.
(2) That a hearing be called and held as expeditiously as
possible for the purpose of fixing and determining the
permanent air mail rate for Petitioner in the amount alleged
herein to be just and reasonable, or such greater amount as
may be found by the Board to be just and reasonable under
the circumstances, effective retroactively to the date of the
filing of the petition herein, and
(3) That such other, further and enlarged relief be ac-
corded Petitioner as may by the Board be deemed justified
in the light of the prevailing circumstances and the evidence
submitted.
Respectfully submitted,
Western Arr Lines, Inc.
By Ronatp C. Kinsey
Guthrie, Darling & Shattuck
737 Pacific Mutual Building
Los Angeles, California
Bl alae ee
BLURRED COPY
24
Filed Feb. 24, 1947
15 UNITED STATES OF AMERICA
CIVIL AERONAUTICS BOARD
WASHINGTON, D. C.
Docket No. 1374
In the Matter of the Petition
of
WESTERN AIR LINES, INC., for an order fixing the
fair and reasonable rates of compensation for the trans-
portation of air mail over its routes.
Amendment No. 2
To rHe HonorasB_e Crvi. AERONAUTICS Boarp:
Petitioner respectfully amends its petition in the above
captioned proceeding and represents as follows:
I
Petitioner filed its original application in this proceeding
on or about April 26, 1944, and filed Amendment No. 1
thereto on or about February 9, 1947.
II
Petitioner’s present cash position and the operating
losses which Petitioner has been experiencing and which
Petitioner estimates it will continue to experience, make it
imperative for Petitioner to obtain immediate relief through
the establishment of a temporary emergency airmail rate to
be reviewed at a later date after a full hearing is held and a
permanent mail rate is fixed for Petitioner’s system.
Ill
Petitioner’s present cash position is critical, and im-
mediate relief must be obtained if Petitioner is to continue
to provide the service required under Section 406 of the
Civil Aeronautics Act of 1938.
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25
16 IV
Petitioner’s operating losses have been occasioned
by a rapidly declining Passenger Load Factor since August
1946, and have been augmented by a severe decline in Oper-
ating Performance since October 1946. See Exhibit ‘‘A”’
attached hereto.
V
Petitioner curtailed schedules as the demand for seats
fell off, but Load Factors continued to decline even after
schedules were reduced. See Exhibit ‘‘B’’ attached hereto.
VI
Petitioner has experienced substantial Operating Losses
during the last four months. See Exhibit ‘‘C’’ attached
hereto.
vil
Petitioner has been unsuccessful in its attempts to obtain
additional Equity Financing or Cash Loans. See Exhibit
‘*1D)”’ attached hereto.
Vill
Petitioner has embarked on an extensive Cost Reduction
Program which includes a material reduction in personnel,
a curtailment of its advertising program, consolidation of
general offices, elimination of certain traffic offices, and con-
solidation of ground services with other carriers, and such
further Cost Reductions as can be effected without impair-
ing the safety of operations are under consideration. See
Exhibit ‘‘E’’ attached hereto.
Ix
Petitioner will be unable to carry on operations for the
length of time required for a routine hearing on its original
application as amended.
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26
16A Wuererore, Petitioner prays
(1) That an immediate emergency hearing be held
and a temporary emergency air mail rate be fixed and de-
termined.
(2) That such hearing be held and such emergency rate
be fixed and determined for the future and retroactive for
such period as the Board may deem appropriate without
prejudice to the later determination of a permanent air mail
rate prayed for in the original petition as amended.
(3) That such other further and enlarged relief be ac-
corded Petitioner as may by the Board be deemed justified
in the light of the prevailing circumstances and the evidence
submitted.
Respectfully submitted,
Western Arr Lives, Inc.
By Paul E. Sullivan
Guthrie, Darling & Shattuck
737 Pacific Mutual Building
Los Angeles, California
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- 1
Opereting Performance faster WO.
\ 98
\
\
\.
\ 908
a
a=
i
asx
S oH .
ae me \
X S- \
M4 \
\
\ 1%
70%
\
\
\
\ 6s
\ 60%
1947 FE from fentatjve Zan
780.
Se ee ee \ 55h
—_ = = = 50%
Mar. Apr. Ju Ju e ° Oct. . e - Fo.
BLURRED COPY COPY BOUND CLOSE IN CENTER
BLEED THROUGH-— POOR COPY |
+ ri ri r
Li. a
El en | a ee 3
a ——— ~ Passenger Revenue (in Dollars) =
= ———— ~ Revenue Miles Flown (in WN 7
: 4 \
- d
= “a
7 / 3
“4 q
2 Ps 3
= / -
a a
" >
- | on
- _
ar.¢ :
600,000 4 7
$00,000 =
= Hotes: December 1946 figures from tentative Dec.
“ January 1947 figures from tentative Jan.
. February 1947 figures from tentative Feb.
60,0004 | |
0 c a — + —— pe any ak = -
Jan. Feb. Mar. Apr. May June July ing. Sep. Got. Sov. Deco. Jan
11946 - ~1946} 1947-
: Civil Aeronautics Board, Form 2760, Schedule 3, Western Air Lines.
BLURRED COPY . COPY BOUND CLOSE IN CENTER
29
Exhibit C
21
WESTERN AIR LINES, INC.
StTaTeMENT OF Prorit anp Loss
For the Periods Indicated
(To the nearest thousand dollars)
November December* January February
1946 1946 1947 1947
(Actual) (Tenta- (Esti- (Esti-
tive) mated) mated)
ues:
~ $ 727,000 733,000 718,000 651,000
Mail 38,000 49,000 30,000 24,000
Other 39,000 55,000 19,000 17,000
Total transportation revenue 804,000 837,000 767,000 692,000
Total incidental revenue 7,000 13,000 5,000 y
Total operating revenues 811,000 850,000 772,000 697,000
rating expenses:
Ormtight operations ; 222,000 227,000 179,000 155,000
Direct Maintenance—Flight Equipment 177,000 273,000 150,000 130,000
Depreciation—F light Equipment 141,000 149,000 141,000 140,000
Total 540,000 649,000 470,000 425,000
Ground operations 189,000 246,000 175,000 162,000
Ground & indirect maintenance 97,000 72,000 82,000 82,000
Passenger service 75,000 87,000 68,000 65,000
Traffic and sales 106,000 110,000 112,000 112,000
Advertising and publicity 48,000 33,000 22,000 22,000
General and administrative 83,000 103,000 80,000 80,000
Depreciation—other property 12,000 12,000 12,000 12,000
Total 610,000 663,000 551,000 535,000
Total operating expenses 1,150,000 1,312,000 1,021,000 960,000
Net operating income (339,000) (462,000) (249,000) (263,000)
Non-operating income or (expense) 106,000 (29,000) (10,000) (10,000)
Net income before taxes , (233,000) (491,000) (259,000) (273,000)
Federal income tax provision or (credit) (93,000) (82,000 — —
Net profit or (loss) (140,000) (409,000)* (259,000) (273,000)
* No provision has been made herein for expenses of attempted financ-
ing which are presently estimated to be approximately $100,000.00. A
subsequent adjustment as of December 31, 1946 is anticipated.
BLURRED COPY
30
22 Exhibit “D”
WESTERN AIR LINES, INC.
Equity Frxancinc anp Caso Borrowincs ATTEMPTED
Prior to the end of the war, Petitioner began to formulate
an equipment and facilities program for the postwar years.
This program as ultimately developed contemplated the
expenditure of approximately $20,000,000.00 for new equip-
ment and facilities.
Early in 1946, negotiations were undertaken with a group
of Eastern banks which evidenced their willingness to make
available to Petitioner, until March 31, 1948, a credit of
$20,000,000.00 for the purpose of purchasing Flying Equip-
ment.
The loans were to be made as funds were required by
Petitioner against notes secured by chattel mortgages on
Flying Equipment. The notes were to be payable over
periods of five years from date, 20% one year after date and
the balance in eight equal semi-annual installments.
Terms of the proposed financing agreement were drafted
and submitted for consideration of the parties. In addition
to submission to Petitioner and the Agent Bank, the Loan
Agreement was studied by Counsel for Petitioner as well
as by Counsel for the Agent Bank and by Counsel for pro-
posed participating banks. This all required considerable
time and during the course of the negotiations the banks
loaned Petitioner a total of $3,000.000.00
When Petitioner required additional funds in August
1946, there was an apparent hesitancy on the part of the
banks to make such funds available until the loan agreement
had been signed. Representatives of the banks came to Los
Angeles late in September supposedly to execute the Loan
Agreement. At that time, they notified Petitioner that they
were unwilling to make any additional loans until after
Petitioner had obtained additional equity capital from the
sale of stock. Petitioner had sold Capital Stock in
23 January 1946 for which it had received approxi-
mately $2,200,000.00.
BLEED THROUGH- POOR COPY BLU
31.
In order to sell the amount of additional stock required,
it was necessary for Petitioner to have a Special Meeting
of Shareholders to amend its Certificate of Incorporation
and to file a Registration Statement with the Securities and
Exchange Commission.
Realizing that both of these procedures would take con-
siderable time, Petitioner continued its efforts to obtain
additional private capital either through investment or by
borrowing.
At that time, however, the stock market was continuing to
decline and airline stocks were particularly unattractive be-
cause of the poor earnings record established in the first
half of the year. The airlines were beset by a series of
unfortunate occurrences, including the grounding of the j
Lockheed Constellations, Pilots’ strikes, unfavorable and
wide spread publicity concerning crashes, both domestic :
and foreign, scheduled and non-scheduled, as well as gen-
erally adverse publicity concerning airline service. Petition-
er’s efforts to secure either equity or loan financing were :
without avail. :
During November a tentative arrangement was worked
out with a New York Investment House contemplating the !
sale of stock to net Petitioner at least $6,500,000.00 where- ;
upon the Banks were to loan Petitioner up to $7,500,000.00.
A Registration Statement was filed with the Securities
and Exchange Commission on November 27, 1946, with the
hope of making a public offering on or about December 18.
When that date arrived the proposed Underwriting Group
decided to postpone the public offering until after the first
of the year.
24 After standing by during the month of January,
Petitioner was advised by the Underwriters on
January 31, 1947, that they found it impossible to proceed
with a public offering of airline stock at this time.
Petitioner has continued its efforts to obtain private
funds without success.
During the course of all these negotiations, Petitioner cut
its new equipment program in half and arranged deferment
cA il
PERI
Na ee
SLURRED COPY .
32
of deliveries on the remaining half. It also converted most
of its major obligations to a secured basis and has arranged
short term extensions, from time to time, of the due dates
of these secured obligations. A cash borrowing of
$600,000.00 was obtained from a private source on a secured
basis. The principal stockholder of Petitioner pledged
70,000 shares of the stock of Petitioner owned by him as
security for an obligation of Petitioner and accepted a
second chattel mortgage on aircraft as security therefor.
Petitioner has submitted an application for a loan from
the Reconstruction Finance Corporation, which application
is presently being processed by that agency.
25 Exhibit E
Cost Repuction Procram
Western Air Lines, Inc. has made and is making every
effort to reduce expenses and costs wherever possible. Ef-
fective January 1, 1946, the Company established a new
department known as the budget and cost control depart-
ment. This department had developed an improved budget
and cost control system which has played a substantial part
in the recent economies which have been effected by the
Company. This department is engaged in extensive in-
dustrial engineering work and has effected considerable
savings through improved procedures and methods. Every
effort is being made by the company to eliminate all items
of expense or costs which are not absolutely essential to
present operations.
As of October 31, 1946, Western Air Lines, Inc. had 2,373
employes on its payroll. As of February 18, 1947 the
number of employes on the payroll had been reduced to
1,950. This represents a reduction of approximately 18 per
cent in the number of employes. Since February 18, further
reductions in personnel have been effected. The number of
employes in the advertising department have been reduced
to three, and likewise the number of employes in the pub-
licity department have been reduced to three.
BLEED THROUGH-— POOR COPY
BLU
33
The management of the Company has recently issued a
freeze order on the hiring of additional personnel, and even
replacements must have the approval of the president or
the executive vice president.
The Company is in the process of moving its main base
of operations from the Lockheed Air Terminal to a new
hangar and operations office at the Los Angeles Airport.
Due to the fact that this building will not be completed for
several months, the Company is faced with the unavoidable
cost of split operations. It is anticipated that when the main
base of operations is completely moved to the Los Angeles
Airport and the improved facilities at that point have been
made available to the Company’s personnel, substantial
savings in maintenance and ground operations costs will be
effected.
As one indication of the problem with which the Com-
pany is presently confronted at Lockheed Air Terminal, the
Company has found it necessary to maintain eight different
stock rooms because of the widely scattered mainte-
96 nance operations. All of these operations will be
combined in the new hangar, and it is estimated that
at least 50 to 60 per cent of present stock room personnel
will be eliminated.
For a period of many years, the Company has had its
engine overhaul work performed by an outside concern.
Concurrently with the move to Los Angeles Airport, the
Company had planned to establish its own engine overhaul
shops, anticipating thereby to effect substantial economies
in engine overhaul costs. In view of the Company’s critical
financial situation and the Company’s inability to secure
adequate financing, the establishment of the engine over-
haul shop has been postponed and all orders for equipment
and facilities for the engine overhaul shop have been can-
celled wherever possible. Although the Company is still of
the opinion that the establishment of an engine overhaul
shop is essential to the reduction of engine overhaul costs,
it is impossible to undertake the program until adequate
funds are available.
-.URRED COPY .
34
In November of 1946, the Company consolidated its
general offices in a war surplus building in Beverly Hills,
thereby enabling it to eliminate the high cost rental of office
space previously occupied in Los Angeles, Hollywood and
Burbank. The annual savings effected through reduced
rentals, increased efficiency, elimination of dual facilities
and personnel such as dual switchboard operators and mes-
sengers, telephone lines, etc. is estimated at approximately
$100,000.00 per annum. The Company has substantially re-
duced its advertising program and has eliminated certain
phases of advertising such as the photographic department,
the display and exhibits department, and the Company
house organ.
Further economies which have been or are in the process
of being effected include the closing of certain city traffic
offices and the consolidation of ground services with other
air carriers.
The Company is presently pursuing a policy of reducing
costs and expenses in every way possible without impairing
the safety of operations.
BLEED THROUGH— POOR COPY
35
(Filed Mar. 11, 1947)
UNITED STATES OF AMERICA
CIVIL AERONAUTICS BOARD
WASHINGTON, D. C.
Docket No. 1374
In the Matter of the Petition
of
WESTERN AIR LINES, INC., for an order fixing the
fair and reasonable rates of compensation for the trans-
portation of air mail over its routes Nos. 13, 19, 52, 63
and 68.
Amendment No. 3
To tHE HonoraBie Civ Axrronavtics Boarp:
Petitioner respectfully further amends its Petition in the
above captioned proceeding in the following particulars:
I
Paragraph I of Amendment No. 2 is amended to read:
Petitioner filed its original application in this proceeding
on or about April 26, 1944, Amendment No. 1 thereto on or
about February 8, 1947 and Amendment No. 2 thereto on
or about February 24, 1947.
I
Paragraph III of Amendment No. 2 is amended to read:
Petitioner’s present cash position is critical and im-
mediate relief must be obtained if Petitioner is to continue
to provide the service required under Section 406 of the
Civil Aeronautics Act of 1938, as amended. See copy of
Affidavit of Treasurer, Balance Sheet at December 31, 1946,
Profit and Loss Statement for the year 1946 and Annual
Report to Stockholders for 1945 attached hereto.
UURRED COPY .
36
29 Wuenreror:, Petitioner prays
(1) That an immediate emergency hearing be held
and a temporary emergency air mail rate be fixed and de-
termined.
(2) That such hearing be held and such emergency rate be
fixed and determined for the future and retroactive for such
period as the Board may deem appropriate without preju-
dice to the later determination of the permanent air mail
rate prayed for in the original petition as amended.
(3) That such other further and enlarged relief be ac-
corded Petitioner as may by the Board be deemed justified
in the light of the prevailing circumstances and the evidence
submitted.
Respectfully submitted,
Western Arr Linzs, Inc.
By Paul E. Sullivan
Guthrie, Darling & Shattuck
737 Pacific Mutual Building
Los Angeles, California
a * * a a a _ * ae *
32 State oF CALIFORNIA,
County or Los ANGELES, ss:
Affidavit of J. J. Taylor
J. J. Taylor, Treasurer of Western Air Lines, inc., being
first duly sworn on oath, deposes and says:
1. That from an inspection of the books and records of
the Company as at the close of business, December 31, 1946,
the current assets amounted to $3,919,414.34; the current
liabilities amounted to $8,618,776.96 and the working capital
deficit as of that date was therefore $4,699,362.62.
2. That the cash in banks and on hand as of the close of
business December 31, 1946 amounted to $1,047,210.44, of
which $402,000.00 was held in trust by a bank as collateral
for a loan.
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BLU!
37
3. That cash in banks as of the close of business February
19, 1947 amounted to $320,123.82 exclusive of $402,000.00
held by a bank as collateral.
4, That for the year 1946, Western Air Lines, Inc. has
suffered a net operating loss before tax adjustments of
$1,073,557.67 and a net loss after tax adjustments of
$811,823.92, as reported on CAB Forms 2780. That said
loss for the year 1946 may be further increased by expenses
of attempted financing during the last quarter of 1946, the
amount of such expenses being presently unknown but
presently estimated at approximately $100,000.00.
5. That Western Air Lines, Inc. has suffered a net loss,
after tax adjustments, as reported on CAB Forms 2780, of
$139,926.56 for November, 1946, of $409,025.35 for De-
cember, 1946, and that the anticipated net loss for January,
1947 is estimated at approximately $259,000.00 and the
anticipated net loss for February, 1947 is forecast to be
approximately $273,000.00.
6. That Western Air Lines, Inc. net cash loss for No-
vember, 1646 was $80,983.40, for December, 1946,
$330,374.81, and the anticipated net cash loss from opera-
tions for January, 1947 is estimated at $97,000.00 and for
February, 1947 is estimated at $111,000.00.
33 7. That from an inspection of the books, records,
and contracts of the Company, he has forecast the
cash requirements of Western Air Lines, Inc. for the period
from and after December 31, 1946 to and including April
30, 1947; and that said forecast is as follows:
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38
WESTERN AIR LINES, INC.
Forecast or Cash REQUIREMENTS
January February March Apri
Estimated 1947 1947 1947 te
Operating expenses (less depreciation) $868,000 $808,000 $852,000 $ 863,00)
Less estimated revenue (passenger, mail,
express, freight and incidental) 771,000 697,000 825,000 891,00 F
ee
Cash loss from operations 97,000 111,000 27,000 = (28,000)
Other cash requirements: *
Notes payable due Feb. 10, 1947:
Tradesmens National Bank 3,000,000(a)
Douglas Aircraft Company 1,659,414(a)
Federal Engineering Corp. 600,000(a)
Purchase contract—8 C-54 aircraft from
War Assets Corp. 11,232 11,232 11,232 11,230
Austin Co., balance on construction of L.A.
Airport hangar 813,000(a) 100,000 100,000
Past due accounts payable:
October 1946 vouchers 26,000
November 1946 vouchers 226,000
December 1946 vouchers 606,000
Pacific Airmotive, engine overhaul costs
unaudited to date 183,000
Progress payment on 10 Convair “240”
aircraft 86,675 (a)
Total cash deficit $108,232 1,235,646 224,907 83,239
Cumulative cash deficit $108,232 7,343,878 7,568,785 7,652,017
Notes:
(a) Negotiations are presently in progress with these and other credi-
itors to obtain extensions of the due dates of these obligations. The Com-
pany also has made and is making every effort to cancel, defer or reduce
all orders and commitments for new equipment and other items which
are not essential to the immediate present operation. As later explained
in more detail, the Company has made extensive attempts to obtain equity
financing without success. Attention is directed to the fact that some
additional cash outlay may be necessary in addition to the above schedule
because of cancellation charges on orders, our inability to cancel such
orders, etc.
Obviously, an increased mail rate alone will not solve Western’s prob-
lem. A loan has been requested from the Reconstruction Finance Corpora-
tion until such time as permanent equity financing can be completed.
34 and that a statement of current assets and current
liabilities as of November 30, 1946 as reflected on the
books and records of Western Air Lines, Inc. is as follows:
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39
WESTERN AIR LINES, iNC.
Current Assets AND CURRENT LIABILITIES
As aT D=cemBer 31, 1946
Current Assets
0 101 Cash $1,047,210.44*
102 Working funds and special deposits
00 (a) Working fund advances 15,223.17
od 103 Short term securities
0) (a) U.S. Government securities —
104 Accounts receivable:
(a) U.S. mail pay 126,245.99
(b) U. S. Government departments 401,595.51
(c) Air travel plan 84,463.33
(d) Other accounts receivable 291,621.05
39 903,925.78
105 Airline traffic accounts receivable 979,758.54
00) 106 Net balances receivable from agents 11,502.31
107 Interest and dividends receivable —
110 Materials and supplies 923,666.70
111 Motor fuels 19,836.39
112 Lubricating oils 1,903.31
113 Other current and accrued assets 16,387.70
Total current assets $3,919,414.34
a Current Liabilities
39 201 Notes payable $3,830,785.36
11 202 Accounts payable 3,281,123.42
203 ~=—CAdiirline traffic accounts payable 582,114.24
204 ~=Air travel plan liability 238,850.00
206 Salaries and wages accrued 348,028.92
207 ~+Interest accrued 1,624.47
208 Taxes accrued 260,331.96
209 ‘Ticket refund liability 35,960.28
210 Other current and accrued liabilities 39,958.31
Total current liabilities $8,618,776.96
Excess of current liabilities over current
assets $4,699,362.62
* Includes $402,000.00 cash held as collateral by a bank.
Note—Subject to public auditor’s adjustments.
35 8. That from the statement of current assets and
current liabilities as of the close of business December
31, 1946, and from the forecast of cash requirements for the
period from and after December 31, 1946, it is apparent that
Western Air Lines, Ine. is momentarily in danger of being
unable to carry on its operations because of insufficient cash
and working capital.
9. That Western Air Lines, Inc. has made every effort
within its means to secure additional sources of cash; that
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40
all of said sources have been exhausted by previous
financing, and that unless said Western Air Lines, Ine. is
granted an increase in its rate of compensation for the
transportation of mail, will be unable to obtain the financing
which will be necessary in order to enable Western Air
Lines, Inc. to continue operations.
10. That the foregoing has been prepared under his
supervision and direction from the books and records of
the Company and to the best of his belief and knowledge
the statements contained herein and set forth in said state-
ments of assets and current liabilities and said forecast of
cash requirements fairly present the status of Western Air
Lines, Inc. as to the dates referred to in accordance with the
Uniform System of Accounts for Domestic Air Carriers
prescribed by the Civil Aeronautics Board.
J. J. Taytor, Treasurer
Western Arr Lines, Ino.
Subscribed and sworn to before me, a Notary Public in
and for said County and State, this 21st day of February,
1947
C. W. Kolling,
Notary Public
[Seal]
My Commission Expires March 18, 1950.
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36 CAB Form 2780
WESTERN AIR LINES, INO.
(Name of Air Carrier)
BALANCE SHEET (TENTATIVE) As at December 31, 1946
_ Assets
Current Assets:
101 Cash— : ;
102 | Working funds and special deposits:
(a) Working fund advances $ 15,223.17
(b) Special deposits eee
103 Short-term securities:
(a) U.S. Government securities
(b) Other short-term securities
104 Accounts receivable:
(a) U. S. Mail pay 126,245.99
(b) U.S. Government depts. 401,595.41
(c) Air travel plan 84,463.33
(d) Other accounts receivable 291,621.05
105 + Airline traffic accounts receivable —__—_
106 Net balances receivable from agents
107 Interest and dividends receivable
108 Notes receivable
109 Subscriptions to capital stock
110 Materials and supplies
111 Motor fuels
112 Lubricating oils
113 Other current and accrued assets
Investments and Special Funds:
121 Investments
122 Investments in and advances to affiliates
123 Net investment in separately operated divisions
124 Uninsured losses—funds
125 Other special funds
Operating Property and Equipment:
150 Flight equipment $5,734,594.84
250 Less: Accrued Depreciation 1,857,629.62
150 Other property and equipment 1,269,332.57
250 Less: Accrued Depreciation 396,557.68
150 Land
150 Construction work in progress
160 Nonoperating Property and Equipment
260 Less: Accrued depreciation
Deferred Charges:
171 Prepayments
172 Extension and development projects
173. Unamortized discount and expense on debt
174 Long-term operating property prepayments
175 Other deferred charges
Intangibles:
181 Property acquisition adjustment
182 Other intangibles
Capital Stock Discount and Expense:
Capital stock discount
Capital stock expense
Total Assets
Amount
$1,047,210.44
15,223.17
903,925.78
979,758.54
11,502.31
2,024.34
437,672.05
653,658.18
3,876,965.22
872,774.89
60,923.95
2,638,321.31
41,501.86
808.25
315,980.93
455.28
239,800.15
Schedule 1—Page 1 of 2
Total
3,919,414.34
1,093,354.57
7,448,985.37
40,693.61
556,236.36
1.00
1.00
13,058,685.25
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42
Schedule 1—Page 2 of 2
37 WESTERN AIR LINES, INC.
(Name of Air Carrier)
Bavance SHEET (TENTATIVE) As at December 31, 1946
Acct.
No. Liabilities and Capital Amount Total
Current Liabilities
201 Notes payable $3,830,785.36 $
202 Accounts payable 3,281,123.42
203 Airline traffic accounts payable 582,114.24
204 Air travel plan liability 238,850.00
205 Dividends declared —
206 Salaries and wages accrued 348,028.92
207 Interest accrued 1,624.47
208 Taxes accrued 260,331.96
209 Ticket refund liability 35,960.28
210 Other current and accrued liabilities 39,958.31 8,618,776.9%
Long-Term Debt:
221 Long-term debt 287,106.60 287,106.60
222 Advances from affiliates -—~
Deferred Credits:
231 Unearned transportation revenue 228,619.39
232 Installments on capital stock 18,212.03
233 Unamortized premium on debt —_
234 Other deferred credits 25,352.93 272,184.35
Operating Reserves
271 Reserve for tal overhaul 76,494.50
272 Reserve for aircraft engine overhaul 229,543.20
273 Reserve for pensions —
274 Other operating reserves 62,100.00 368,137.10
Capital Stock: |
281 Preferred stock—par value, $........... |
| TET ETI shares......
282 Common stock—par value, $1.00
Outstanding 525,164 shares............ 525,164.00
283 Preferred stock—no par value
| TANT shares........
284 Common stock—no par value
ES ea NE .. shares... 3
286 Capital stock subscribed and unissued ——— 525,164.00
Surplus:
291 Reserve for uninsured losses
292 Other surplus reserves
293 Capital surplus 2,768,247.10
294 Unappropriated earned surplus 1,030,892.46
Profit or loss—year to date (811,823.92) 2,987,315.64
Total Liabilities and Capital 13,058,685.25
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43
Schedule 3 Page 1 of 1
WESTERN AIR LINES, INC.
(Name of Air Carrier)
SrTaTEMENT oF Prorir anp Loss
TENTATIVE
Month of December 31, 1946
Current Month Year to Date
Cents Cents
Per Rev. Per Rev.
Acct. Account Amount Mile Amount Mile
No. (1) (2) (3) (4) (5)
REVENUE MILES FLOWN 716,694 8,613,585
OPERATING REVENUES
Transportation:
301 Passenger $732,950.41 102.27 $9,358,149.38 108.64
Mail:
= (a) United States Gov’t. 49,293.42 06.88 388,146.95 04.51
(b) Foreign governments — -— — ae
303 + Express and freight:
(a) Express 27,994.39 03.90 173,324.47 02.01
% (b) Freight 10,760.96 01.50 56,623.57 00.66
304 Excess baggage 5,923.48 00.83 67,756.02 00.79
y E305 Charter and special 9,522.20 01.33 19,598.66 00.23
306 Other transportation 112.56 00.01 307.51 —
300 Total Transportation 836,557.42 116.72 10,063,906.56 116.84
Incidental Revenues—Net:
351 Restaurant and food services—net 4,350.82 00.61 41,702.21 00.48
352 Service sales—net F 5,194.79 00.72 41,537.94 00.48
5 953 Rental from operating property—net 2,558.11 00.36 23,808.38 00.28
354 Limousine service—net —_ = om mie
355 Other incidental revenues——net 1,425.60 00.20 5,492.54 00.06
350 Total Incidental Revenues—Net 13,529.32 01.89 112,541.07 01.30
Total Operating Revenues 850,086.74 118.61 10,176,447.63 118.14
i OPERATING EXPENSES
400 Flying operations ‘ 227,012.53 31.67 2,092,779.44 24.30
500 Flight equipment mainterance—direct 272,594.65 38.04 1,731,819.07 20.10
850 Depreciation—F light equipment 149,152.52 20.81 1,126,514.45 13.08
Total / 648,759.70 90.52 4,951,112.96 57.48
450 Ground operations _— ‘ 246,544.76 34.40 2,025,280.59 23.51
550 Ground equipment maintenance—direct 19,669.95 02.74 141,116.23 01.64
600 Equipment maintenance—indirect 52,278.72 07.30 703,385.70 08.17
650 Passenger service 86,980.40 12.14 900,958.25 10.46
700 Traffic and sales sao 110,111.13 15.36 1,083,217.09 12.57
750 Advertising and publicity 32,880.84 04.59 448,329.16 05.20
J 800 General and administrative 103,028.64 14.38 896,965.02 10.41
850 Depreciation—ground equipment 12,068.45 01.68 99,640.30 01.16
Total Operating Expenses 1,312,322.53 183.11 11,250,005.30 130.60
Net operating income 462,235.79 64.50 1,073,557.67 12.46
900 Nonoperating income 305.75 x x x 150,944.36 xxx
4 Gross income d 461,930.04 xxx 922,613.31 xxx
» 950 Deductions from gross income 29,665.74 xxx 148,249.21 xxx
5 Net income before income taxes 491,595.78 xxx 1,070,862.52 xxx
960 Income taxes 82,570.43 xxx ,038. xxx
Net Profit or Loss for Period 409,025.35 xxx 811,823.99 xxx
Note: No provision has been made herein for expenses of attempted
financing which are presently estimated to be approximately $100,000.00.
A subsequent adjustment as of Demember 31, 1946 is anticipated.
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392 Order
Serial Number E-484
UNITED STATES OF AMERICA
CIVIL AERONAUTICS BOARD
WASHINGTON, D. C.
Docket No. 1374
At a session of the Civil Aeronautics Board
held at its office in Washington, D. C.
on the 29th day of April, 1947.
In the matter of compensation for the transportation of
mail by aircraft, the facilities used and useful therefor,
and the services connected therewith of
WESTERN AIR LINES, INC.
over Routes No. 13, 19, 52, 63 and 68
Order Fixing and Determining the Fair and Reasonable
Temporary Rate of Compensation For the Transportation
of Mail by Aircraft
Western Air Lines, Ine (hereinafter called Western)
having on April 26, 1944 filed a petition which as amended
on February 10, 1947, February 24, 1947 and March 11,
1947, requested the establishment over its entire domestic
system of a permanent mail rate of 25 cents per airplane
mile flown and a temporary emergency mail rate retroactive
for such period and in such amount as the Board may deem
appropriate, to serve as a provisional and immediate basis
of payment pending the determination of a fair and reason-
able final rate in this proceeding;
393 Public hearing having been held in the above-
entitled proceeding on March 17 and 18, 1947, and
the Board, upon consideration of the record, finding that:
1. Upon the bases of comparison set forth in Appendix
No. 1, attached hereto and made a part hereof, the inherent
characteristics of Western’s routes seem to indicate that
Western is basically comparable with other domestic car-
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45
riers in the class now being paid a mail rate of 60 cents per
ton-mile ;
2. As is shown by Appendix No. 2, attached hereto and
made a part hereof, the costs reported by Western are some-
what higher than the average reported costs of other car-
riers in this class for the calendar year, 1946;
3. Western, as is reflected in Appendix No. 2, appears to
have expanded substantially its equipment capacity by
acquiring large capacity four-engine aircraft to meet an
early post-war demand and has recently suffered a heavy
decline in traffic ;
4. Western’s relatively great number of four-engine large
capacity aircraft would appear to have introduced difficulties
in scheduling its operations so as to maintain reasonable
load factors for such aircraft ;
5. Certain conditions now prevailing in the air trans-
portation industry are of such complexity and recent origin
as not to permit an immediate and exact evaluation of the
extent to which costs related to the volume of Western’s
394 statutory standard of honest, economical and efficient
operations may reasonably be justified under the
management as applied during a period of such
abnormal character ;
6. The volume of mail carried by Western has declined
to such an extent that the petitioner’s total mail compensa-
tion at its existing rate has been seriously reduced in rela-
tion to the reasonable overall volume of services operated ;
7. Western apparently has a need for additional mail
compensation as measured by the standards established by
section 406(b) of the Act;
8. Western’s need for mail compensation for its opera-
tion conducted in reasonable volume is substantially less
than the temporary mail rates requested by the petitioner;
9. Western’s financial position is apparently critical and
the failure to increase immediately the rate of mail com-
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46
pensation may hamper the ability of the carrier to perform
the services which appear to be required in the public con-
venience and necessity ;
10. A final rate could not properly be established in time
to provide Western with the immediate relief required;
11. The establishment of a temporary rate of mail com-
pensation for Western to serve as a basis of payment until
such time as a fair and reasonable final rate is fixed and
determined, is in the public interest;
12. Western’s need for mail compensation can be met
over a limited period without any necessity for altering
indefinitely its status as a service rate carrier, and the mail
compensation provided herein does not permanently
395 supplant the basic mail rate of 60 cents per ton mile
now in effect ;
Ir 1s OrperED, That the fair and reasonable temporary
rates to be used as a basis of payment on and after October
1, 1946 for the transportation of mail by aircraft, the facil-
ities used and useful therefor, and the services connected
therewith, between the points between which Western Air
Lines, Inc., presently is or may hereafter be authorized to
transport mail over Routes No. 13, 19, 52, 63 and 68 is here-
by fixed, determined and published to be as follows:
(a) For the period October 1, 1946 through February 28,
1947, a total amount of $687,000."
(b) On and after March 1, 1947, a rate of 60 cents per
ton-mile, or fraction thereof, of mail carried, computed
monthly on the direct airport-to-airport mileage; provided,
however, that for the purposes of computing compensation
pursuant to this order in no event shall the ton-miles be less
than the ton-miles computed as follows:
1 The sum of compensation was derived by the application of the mail
rate of 60 cents per ton-mile to a minimum capacity factor as defined
in (b) (1) of 700 pounds per airplane mile flown during the three-month
period ended December 31, 1946 and of 600 pounds per airplane mile flown
during the two-month period ended February 28, 1947, on schedules desig-
nated by the Postmaster General for the carriage of mail.
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47
(1) For any month during which the average daily desig-
nated mileage does not exceed 21,000 miles, the ton-miles of
mail computed as though the average load per air-
396 plance mile flown was not less than the number of
pounds set forth below for the respective periods
indicated, which number of pounds will be known as the
minimum capacity factor:
oe ~ pSupeetty
a
March 1, 1947 through March 31, 1947 600 pounds
April 1, 1947 through June 30, 1947 500 pounds
July 1, 1947 through March 31, 1948 400 pounds
April 1, 1948 through June 30, 1948 300 pounds
On and after July 1, 1948 250 pounds
(2) For each month during which the average daily
designated mileage exceeds 21,000 miles, the ton-miles of
mail computed as though the average load per airplane mile
flown was a minimum capacity factor which bears the same
relation to the minimum capacity factor specified in (1)
above for the respective period as 21,000 miles bears to the
average daily designated mileage, except that in no case
shall the minimum capacity factor be less than 250 pounds.
The mail compensation derived by the application of the
aforesaid rates shall be inclusive of, and not in addition to,
the mail compensation heretofore received by Western for
mail transported on and after October 1, 1946.
397 The aforesaid minimum capacity factors per air-
plane mile shall be applied to the direct airport-to-
airport mileage between points served for the carriage of
mail on each trip flown on a schedule designated or ordered ;
to be established by the Postmaster General for the carriage
of mail; provided, however, that if any scheduled flight is
operated in two or more sections between any two points
served for mail and mail is transported on more than one
such section, the aggregate of the sections so used shall, for
all purposes of deriving compensation pursuant to this
order, be treated as a single flight, and the aggregate mail
load actually carried on all such sections or the minimum
ae
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48
capacity factor for one such section, whichever is greater,
shall be applied to the airport-to-airport mileage flown by
that section which covers the greatest airport-to-airport
mileage between points served for mail.
The average daily designated mileage shall include the
mileages of all scheduled trips designated or ordered to be
established by the Postmaster General for the carriage of
mail, and shall be computed as though the mileage of each
such trip were the airport-to-airport distance via all certifi-
cated intermediate points along the flight route between the
terminals of each trip. The average daily designated mile-
age for each calendar month shall be determined by taking
the average (computed to the nearest mile) of the daily
mileages of regularly scheduled trips for the seven days of
the week, without regard to any variations of scheduled
mileage on holidays;
398 Ir 1s FurtHer Orperep, That the aforesaid order
fixing fair and reasonable temporary rates shall be
effective as of this date, all parties to the above entitled pro-
ceeding having already waived all further procedural re-
quirements short of a final decision by the Board fixing a
temporary rate herein ;
Ir 1s FurTHER OrpereD, That this proceeding remain open
pending entry herein of an order fixing a final rate retro-
active to such date as the Board shall then determine, which
said final rate may be lower or higher than the temporary
rate fixed herein.
By the Civil Aeronautics Board:
/s/ M. C. Muuican
M. C. Mutuican
Secretary
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51
(Filed Jan. 13, 1948)
BEFORE THE
CIVIL AERONAUTICS BOARD
Docket No. 1374
In the Matter of the Petition
of
WESTERN AIR LINES, INC. for an order fixing the fair
and reasonable rates of compensation for the trans-
portation of air mail over air mail Routes 13, 19, 52,
63 and 68.
Amendment No. 4.
To tHe HonoraB.e, THE Civit Arronavtics Boarp:
1. On April 26, 1944, Applicant filed a petition with the
Civil Aeronautics Board which was amended on February
10, 1947, February 24, 1947 and March 11, 1947 requesting
the establishment over its entire domestic system of a
permanent mail rate of 25 cents per airplane mile flown and
a temporary emergency mail rate retroactive for such
period and in such amount as the Board may deem appro-
priate, to serve as a provisional and immediate basis of
payment pending the determination of a fair and reasonable
final rate in this proceeding.
2. On April 29, 1947, the Civil Aeronautics Board issued
its order No. H-484, fixing and determining the fair and
reasonable temporary rate of compensation for the trans- {
portation of mail by aircraft pending the fixing of a final ;
rate. :
3. During the past year, Petitioner has reduced its total
personnel by 867 or 36.2% and effected other substantial
economies as well as twice increasing its passenger fares. :
However, inflation with its upward spiraling trend of prices ,
has nullified the otherwise beneficial effect of these econo-
mies, and the rising cost trend is rapidly accelerating. Other
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52
factors over which Petitioner has no control, such as foreign
and domestic accidents and equipment grounding, have also
adversely affected passenger revenues.
404 4. Petitioner hereby amends its petition in the
above captioned proceeding in the following
particular:
Paragraph 2 of Amendment No. 1 filed February 10, 1947
and which amended paragraph 9 of the original petition of
April 26, 1944, is amended to read:
9. The fair and reasonable rate of compensation for the
transportation of mail by aircraft, the facilities used and
useful therefor and the services connected therewith as per-
formed by Petitioner is the sum of thirty-eight cents (38¢)
per airplane mile flown by Petitioner over its certificated
routes, or the equivalent thereof based on such formula or
method of calculation as may appear to be desirable or
appropriate.
Such rate is needed by Petitioner as compensation for the
transportation of mail and the services in connection there-
with performed by it since the filing of this petition and to
be performed hereafter
1. in order to insure the performance-by Petitioner of
such service as is required under the certificates of public
convenience and necessity which Petitioner holds and under
which it operates;
2. to insure the performance by Petitioner of such service
as is required by the standards respecting the character and
quality of service to be rendered as prescribed by or pur-
suant to law, and,
3. in order to enable Petitioner under honest, economical,
and efficient management to maintain and continue the de-
velopment of air transportation on its routes to the
405 extent and of the character and quality required by
the commerce of the United States, the Postal Service
and the National Defense.
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53
WueEnrerore, Petitioner prays
(1) That a hearing be called and held as expeditiously as
possible for the purpose of fixing and determining a per-
manent air mail rate for Petitioner in the amount alleged
herein to be just and reasonable, or such greater amount as
may be found by the Board to be just and reasonable under
the circumstances, effective retroactively to the date of the
filing of the Petition herein, and
(2) That such other, further and enlarged relief be ac-
corded Petitioner as may by the Board be deemed justified
in the light of the prevailing circumstances and the evidence
submitted.
Respectfully submitted,
Western Ar Linzs, Inc.
By Paul E. Sullivan
Guthrie, Darling & Shattuck
737 Pacific Mutual Building
Los Angeles, California
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54
Served: Dee. 31, 1948
408 UNITED STATES OF AMERICA
CIVIL AERONAUTICS BOARD
WASHINGTON, D. C.
Docket No. 1374
WesterRN Arrives, Inc.
In the matter of the compensation for the transportation
of mail by aircraft, the facilities used and useful therefor,
and the services connected therewith.
Adopted: December 30, 1948.
Statement of Tentative Findings and Conclusions !
By THE Boarp
Western Air Lines, Inc. (hereinafter referred to as West-
ern) filed a petition on April 26, 1944 for an order fixing and
determining the fair and reasonable rates for the transpor-
tation of mail over its routes. The petition was amended on
February 10, February 24 and March 11, 1947, to request
that the board set a rate of 25 cents per airplane mile
effective May 1, 1944, and provide immediately for
409 atemporary rate. In response thereto, the Board on
April 29, 1947, fixed and determined a temporary
rate by Order No. E-484. On January 13, 1948, Western in
a further amendment to its petition requested a rate of 38
cents per airplane mile.
In accordance with Section 285.13 of the Economic Regu-
lations, the Board has arrived at the tentative findings and
conclusions and has formulated the tentative mail rates set
forth herein. Concurrently, the Board has issued an order
directing Western to show cause why these tentative mail
rates should not be established as the final rates in this pro-
ceeding.
1 This Statement does not necessarily represent the view of all members
of the Board with respect to all issues.
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55
The following appendices are a part of this Statement:
Particulars Appendix No.
Traffic Statistics for the Past Period and as
Estimated for a Future Year 1
Operating Results for the Past Period, as
Reported and as Adjusted 2
Operating Results for a Future Year as Esti-
mated by Western and as Adjusted 3
Operating Expenses per Revenue Ton-Mile
and per Available Ton-Mile, as Reported
and as Adjusted 4
Reported and Recognized Investment for the
Period May 1, 1944 to December 31, 1948 5
Estimated and Recognized Investment for a
Future Period
Sliding Seale Mail Rates
Present Mail Rate
A service rate of 60 cents per mail ton-mile was made ef-
fective for Western on January 1, 1943.? In response to the
amended petition requesting a temporary rate, the 60-cent
per ton-mile rate was modified,® effective October 1,
410 1946, by applying it to mail ton-miles computed from
minimum capacity loads, and related to a daily base
mileage of 21,000 miles. The initial minimum capacity load
An
was set at 700 pounds per airplane mile and was gradually
reduced to 250 pounds, effective on and after July 1, 1948.
The order establishing this temporary rate provided that
| the proceeding remain open pending the entry of an order
fixing a final rate which would be retroactive to such date
subsequent to the date Western first filed a petition as the
Board should determine and might be lower or higher than
the temporary rate. Simultaneously the Board issued an
order* instituting an investigation and requiring a special
2 Western A. L., Mail Rates 4 C.A.B. 441 (1943).
3 Order Serial No. E-484 (April 29, 1947).
4 Docket No. 2911, Order Serial No. B-485 (April 29, 1947).
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56
report from Western to determine what factors were re-
sponsible for the increasing dependence on the Govern-
ment through need mail payments and in what manner this
dependence could be decreased. The carrier submitted a re-
port, and the investigation was carried out, the results of
which, insofar as they pertained to need for mail pay, have
been incorporated in these findings.
Routes Operated
Western holds certificates of public convenience and ne-
cessity authorizing it to engage in air transportation with
respect to persons, property and mail between the following
terminal points:
Route No.
13. San Diego, Calif., and Salt Lake City, Utah
19 Salt Lake City, Utah and Great Falls, Montana
52 Great Falls, Montana and Edmonton, Alberta, Can-
ada.
63 Los Angeles, Calif., and Seattle, Washington
Western also holds a certificate of public convenience and
necessity authorizing it to engage in air transportation
with respect to persons, property, and mail between Los
Angeles, California and Mexico City, Mexico. Service has
not been inaugurated on this route nor on the exten-
411 sion of Route 52 from Lethbridge to Edmonton, Can-
ada, pending approval of the respective foreign gov-
ernments.
Periods For Which Rates Will Be Fixed
The initial petition in this proceeding was filed by West-
ern on April 26, 1944. Accordingly, under section 406 of the
Act, Western’s mail rate for the period following that date
is open for review. For approximately a year and a half
following the filing of its petition Western earned a greater
return on its investment under the service mail rate fixed by
the Board on November 8, 1943, than the Board is currently
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57
providing carriers for past periods. During this period, the
petition, from the point of view of Western, was protective
in nature, since the mail rate as established was more than
adequate to provide a reasonable return. It would be more
advantageous to Western, therefore, if, as Western has in-
formally requested, the Board were only to revise West-
ern’s mail rate from January 1946, when it first started to
incur significant losses, since such a review would not re-
sult in offsetting relatively high profits earned from April
1944 to January 1946 against losses suffered subsequently.
Recently, the Board’s position that it has no legal power
to make an adjustment of a mail rate prior to the date on
which it is challenged has been attacked in court, with the
result that the Board’s position has been upheld by the U.S.
Court of Appeals for the District of Columbia, but one of
the cases is still pending before the Supreme Court.’ In
these eases it was argued before the Board that failure to
adjust rates retroactively would cause all carriers to keep
‘‘protective’’ petitions on file with the board at all
412‘ times.® We indicated that we did not anticipate such
a development, and pointed out that should a carrier
file a petition and ‘‘thereafter earn more than a fair and
reasonable return, our rate order, effective from date of
filing, would effect a reduction in mail pay from that date
forward.’’ The present case falls squarely within that prin-
ciple.
The effect of keeping the mail rate constantly in issue
through the device of ‘‘ protective’’ petitions, is to place the
carrier on a cost plus basis. It would obviously be inequita-
ble and contrary to the public interest to provide protection
to the carrier against losses without reciprocal protection
5 Transcontinental & Western Air, Inc. v. Civil Aeronautics Board, 169
F. (2d) 893 (1948), Cert. granted (December 6, 1948) ; Capital Airlines,
re v. Civil Aeronautics Board,—F. (2d)—(App.D.C., December 6,
1948).
6 Transcontinental & Western Air, Inc., Mail Rates, Docket No. 2849,
Order Serial No. 1033 (December 2, 1947); Pennsylvania-Central Air-
age Mail Rates, Docket No. 484, Order Serial No. E-1032 (Decem-
r, 2, 1947).
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58
to the Government against excess profits. Under all the
circumstances, we find that it will effectuate the policies of
the Act to make our rate order for Western effective from
May 1, 1944, the approximate date of filing of the initial
petition.
By the end of 1948, or shortly thereafter, Western will
have substituted Convair 240 aircraft for its DC-4 equip-
ment and a large part of its DC-3 equipment. Since a
marked change in the character of its operations will result
from the equipment changeover, we shall fix a fair and
reasonable mail rate for the past period from May 1, 1944,
up to and including December 31, 1948, and fix a separate
future rate from January 1, 1949. Our determination of the
rate for the past period will be based upon results on file
with the Board for the period since May 1, 1944, and esti-
mates filed by the carrier for the last few months of
413 1948.
Maiu Rate For THE Pertop May 1, 1944
to Decemser 31, 1948
Nature of Operations in Past Period
During the first half of the period under review, Western’s
operations were for the most part directly affected by the
war-time demand for transportation. Approximately two-
thirds of Western’s fleet of 12 DC-3’s and Lodestars had
been transferred to the Government, leaving only five DC-3
aircraft to service its routes. As a result of the limited
number of seats available during a period of unprecedented
demand for air transportation, the passenger load factor for
the last eight months of 1944, which mark the beginning of
the review period, was 91 percent, and for the year 1945, 89
percent.
Beginning May 1, 1944, and during the remainder of 1944,
extensive changes occurred in Western’s operations. On
that date, service was inaugurated on Route 63 from Los
Angeles to San Francisco, destined to be the segment with
the highest frequencies and the greatest revenue yield of
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59
the system. By June 1, 1944, the purchase of the majority
interest in Inland Air Lines was consummated. Inland was
gradually integrated into Western’s system to a point where
Western’s management and facilities were employed in the
operation of Inland to the same extent as for Western.
During the year 1944, Western was also awarded Route 68
with terminal points at Los Angeles and Denver, on which
operations were not inaugurated until April 1, 1946.
At the end of 1945, the carrier inaugurated operations on
the extension of Route 13 into the Imperial Valley via Palm
Springs and Yuma. Also stops at Cedar City, Logan, and
Jackson were added to Routes 13 and 19 in 1946. On April
1, 1946, operations were begun on Route 68 to Denver
414 with an initial frequency of one round trip per day.
As soon as equipment was available, frequencies were
increased to four round-trips, which Western maintained
until the time when it was preparing to transfer the route
to United. Load factors were relatively high on this route,
and passenger traffic accounted for approximately 29 per-
cent of annual volume during the nine months of operation
in 1946 and eight and a half months in 1947. Operations
over Route 68 were conducted until September 15, 1947,
when, after approval by the Board, the route certificate to-
gether with DC-4 flight equipment and ground equipment
pertaining to the route were sold to United Air Lines for
the sum of $3,750,000." This action resulted from the de-
cision of Western’s management to withdraw from compe-
tition for transcontinental traffic and to confine itself to
development of regional operations.
On August 1, 1947, a short time prior to the transfer of
Route 68, operations were inaugurated on the extension of
Route 63 from San Francisco to Seattle. Round-trip fre-
quencies on the Denver route were reduced from four to two
in July, to provide equipment and personnel for the new
service to Seattle, which was inaugurated with three round-
7 United-Western, Acquisition Air Carrier Property, 8 C.A.B. 298
(1947).
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60
trip frequencies. Although the transfer of operations re-
sulted in no large variance in route miles, competition was
much greater on the coastal route where United had oper.
ated exclusively for a long period, and Western experienced
load factors during the first year or more considerably be-
low those realized on Route 68.
Western has been certificated by the Board to operate two
additional routes: an extension of Route 52 from Lethbridge
to Edmonton, Canada, and a route from Los Angeles to
Mexico City via La Paz. Inauguration of services has been
delayed pending approval of the respective foreign
415 governments. The operation of the Route 52 exten-
sion to Edmonton will be considered part of the
domestic system and as such will be covered by the mail
rates here established or as hereinafter revised when service
is ultimately inaugurated. Mail rates for the route to
Mexico City will be established in a separate proceeding
after operations are inaugurated on that route. At the end
of 1948, Western’s route structure had been stabilized ex-
cept for the possible transfer to Arizona Airways of part
of Route 13, extending from San Diego to Yuma, applica-
tion for which is now pending before the Board.
Scheduled Services Required
We have included in Appendix No. 1 a summary of the
significant traffic data for the past and future periods.
During the period under review, Western’s volume of
operations expanded at a rapid pace, largely influenced by
the inaugurations of operations on Route 68 on April 1,
1946. Available seat miles increased 365 percent from the
last six months period of 1944 to the same period of 1946,
At the same time passenger miles increased 250 percent to
115,339,000. The level of operations was also high in the
first half of 1947, although the passenger load factor had
dropped 17 percentage points from the same period a year
earlier when traffic was still influenced by the war-time de-
mand for transportation. The sale of Route 68 in September
1947, along with an overall decline in air travel, was ac-
companied by a substantial decline in passenger miles, so
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61
that in the last half of 1948, Western carried only about 50
percent as many passenger miles as during the last half of
1946 when its traffic volume reached the peak. The sharp ex-
pansion and contraction in volume of operations is readily
apparent from the following table.
416 Volume of Operations
1944-1948
(000)
Revenue Passenger
Six Month Revenue Available Passenger
Period Ended Plane Miles Seat Miles Miles Factor
December 31, 1944 1,842 36,621 32,960 90%
June 30, 1945 2,303 46,518 40,207 86
December 31, 1945 2,983 61,872 54,150 88
June 30, 1946 3,863 96,667 76,321 719
December 31, 1946 4,719 169,010 115,339 68
June 30, 1947 3,752 141,143 87,846 62
December 31, 1947 3,602 127,303 78,550 62
June 30, 1948 3,041 93,904 51,474 55
December 31, 1948 3,274 103,822 57,831 55
Despite the increase in volume of services, Western was
able to maintain passenger load factors which have been
consistently above the average of intermediate group car-
riers. The table below indicates only one twelve month
period in which Western was below the average of the group
of carriers with which it is compared. For the twelve
months ended September 30, 1948, Western was two per-
centage points above the group average, even though the
average for the year 1948 is estimated at 55 percent.
Passenger Load Factors
of Intermediate Group Carriers
Twelve Month Periods Ended 4
12-31-45 12-31-46 12-31-47 9-30-48
Average of 5 Carriers* 84% 73% 57% 53%
Western 87% 72% 62% 55%
Pee
8 Five carriers are Braniff, Capital, Chicago & Southern, Delta, and :
National, National is omitted from twelve months ended 9-30-48 because
of distorting effects of Strike.
Average daily round-trip frequencies operated by
Western ranged from a low of 2.8 round trips for the last
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62
eight months of 1944 to a high of 5 round trips in
417 1946. Operations for the recent route pattern have
been stabilized at 3.2 round trips for 1948 with the
same frequencies estimated for the future years. The follow.
ing table shows the round-trip frequency and load factor
for major route segments in 1948.
1948
Average Round- Passenger
Segment Trip Frequency Load Factor
Los Angeles—San Francisco 7.8 60.5 %
San Francisco—Seattle 3.0 43.7
Los Angeles—San Diego 4.0 60.4
San Diego—Yuma 0.5* 38.3
Los Angeles—Salt Lake City 3.3 65.4
Salt Lake City—Great Falls 2.0 58.2
Great Falls—Lethbridge System 1.0 45.5
3.2 59.1%
* Three days a week only.
It will be noted that all segments with frequencies over
two round trips had load factors over 60 percent except the
San Francisco—Seattle segment, which was only placed in
operation in August 1947, and was still in the development
stage in 1948. If this segment were eliminated from the
computation, the system load factor would be approximately
60 percent for the year.
Upon consideration of the foregoing, we find that all the
scheduled services operated during the past period from
May 1, 1944 to December 31, 1948, were reasonably re-
quired in the interests of one or more objectives of the Act.
Equipment
At the beginning of the review period Western was oper-
ating five DC-3 aircraft, having given up a major portion of
its fleet of DC-3’s and Lodestars to the armed services
418 during the war. By the end of 1945, twelve DC-3’s
were in operation. The DC-3 fleet was augmented in
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63
early 1946 by one passenger and two cargo aircraft. The
cargo equipment was used primarily in the DC-4 pilot train-
ing program and the training was spread fairly evenly over
the first nine months of the year. Approximately 2200 hours
were flown by the two cargo aircraft in 1946, all in non-
revenue service, resulting in an average daily utilization of
less than three hours each. The amount of training on DC-3
aircraft in any one month does not appear to have war-
ranted the use of more than one training plane, in addition
to time available from one spare passenger plane and turn-
around time of passenger equipment at terminal points.
We find therefore that one DC-3 cargo aircraft was in excess
of Western’s needs for the performance of scheduled
services required from the date placed in service until its
conversion for use in scheduled passenger service in July
1947.
Beginning in 1946, Western instituted a procedure of
allocating depreciation on DC-3 aircraft to Inland on the
basis of hours flown by Western’s aircraft on Inland’s
routes. Prior to 1946, Inland paid rental for the use of this
equipment. For the years 1946 through 1948 Inland used
an average of three of Western’s DC-3’s. Western owned
a spare aircraft throughout the period, which was used
primarily for a maintenance spare. It is appropriate there-
fore to pro-rate this spare on the basis of the ratio of
equipment used by the two companies. Accordingly, we con-
sider that a total of 3.25 of Western’s DC-3’s was attribut-
able to Inland’s operations, and we have used this factor
in our computations of allocated expense and investment
herein.
419 In 1946, Western received and placed in service 13
DC-4 aircraft, being one of the first domestic carriers
to operate this equipment on its routes. These aircraft were
used to operate Route 68 to Denver, on which service was
inaugurated April 1, 1946, and the coastal routes. Follow-
ing the rapid drop in traffic volume which began in the fall
of 1946 and extended into 1947, Western moved quickly to
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64
reduce its DC-4 fleet by selling three DC-4’s over the period
from November 1946 to July 1947, from which sales sub-
stantial profits were realized. Western had purchased one
C-54 cargo plane for transition training to DC-4 equipment,
but it was not placed in service until October 1946, when
most of the training had been completed. Since this aircraft
was not required for scheduled service, we have disallowed
it as excess equipment.
In equipping for DC-4 operations, Western overestimated
its requirements for spare engines, and as a result owned
92 R-2000 engines at the end of 1946, which provided over
100 percent spare coverage for installed engines. This
situation extended throughout most of 1947. We have con-
sidered therefore that an average of 15 R-2000 engines were
in excess of the carrier’s requirements from July 1, 1946
through December 31, 1947.
As early as 1945, Western had placed an order for ten
Convair 240 aircraft, being one of the first two domestic
carriers to contract for this equipment. Deliveries were not
commenced, however, until June 1948, and the first three
Convairs were placed in service on September 1, 1948,
420 Shortly after the end of the review period, the car-
rier plans to have all of its Convairs in operation,
replacing five DC-3 and five DC-4 aircraft according to the
following schedule:
As of First Total Convairs Equipment Retired
of Month in Operation DC-3 DC-4
September 1948 3 2 1
October 1948 5 2 1
November 1948 5 0 0
December 1948 7 1 2
January 1949 10 0 1
Western began receiving delivery on spare parts and en-
gines for the Convair fleet in 1947 and early 1948, although
the first aircraft were not to be placed in service until later
in the year. In accordance with previous Board policy in
such matters, we have disallowed this equipment as used
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65
and useful in scheduled operations until such time as the
new aircraft are placed in service. We have allowed the car-
rier to capitalize interest on the amount of such equipment
in the same manner as for equipment purchase funds. This
procedure is discussed in greater detail in a following
421 section.
Non-Mail Revenues
The non-mail revenues for the past period have been set
forth in Appendix 2, attached hereto, together with explana-
tions of adjustments which have been made for rate making
purposes.
In 1944 and 1945, Western had an equipment rental agree-
ment with Inland for the use of Stinson, Lodestar, and DC-3
aircraft owned and maintained by Western. After 1945,
Western received approval for the allocation of aircraft
operating expenses to Inland, which replaced the procedure
of rental payments by Inland. Since the Stinson and Lode-
star were disallowed as operating equipment for Western,
as well as all costs for maintenance and depreciation, it is
necessary that these costs be offset against the rental reve-
nues received from Inland. Accordingly. we have reduced
incidental revenues in the amounts of $32,000 and $72,000
for 1944 and 1945, respectively.
A similar situation existed in 1947, when Western rented
its DC-4 cargo aircraft to United Air Lines for the last six
months of the year. We have disallowed this aircraft as ex-
cessive equipment for the operation of the scheduled serv-
ices required, but have included in incidental revenues the
rental revenues received from United. We find it proper,
therefore, to offset against these revenues the amount of
depreciation and insurance expense which Western incurred
for this DC-4 in 1947. Accordingly, we have reduced inci-
dental revenues of $323,000 for the year 1947 by $54,000
representing expense incurred during the period the cargo
DC-4 was rented to United, and have included the balance of
$269,000 in non-mail revenues.
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66
In 1948, actual non-mail revenues have been included for
the first nine months through September 30, and we have
accepted the carriers estimate for the last quarter. Western
increased passenger fares 10 percent on September 1,
422 1948, at which time a general fare increase was insti-
tuted by the industry. At the same time, a 5% round.
trip discount was provided, resulting in an estimated effec.
tive fare increase of 8% for the last four months of 1948
The average yield per passenger mile was raised from 5.60
cents to approximately 6.04 cents as a result of the increase.
Other revenues for 1948 totaled $286,000, of which $206,-
000 represented incidental revenues and approximately
$80,000 charter revenues. Incidental revenues of Western
are greatly in excess of comparable carriers, because of the
large amount of services provided for others. These reve-
nues were 4.23% of non-mail revenues for the nine months
ended September 30, 1948, compared to an average of 1.0%
for four carriers in the intermediate group. *® The principal
reason for the high revenues was the failure to report only
the excess of fees and charges over costs incurred as pro-
vided for in the Uniform System of Accounts. These costs,
estimated by Western at $186,000, have been reported under
operating expenses. It is proper therefore that this amount
of incidental revenues be offset by an equal amount of oper-
ating expenses, and we will adjust operating expenses ac-
cordingly.
Adjusted over-all non-mail revenues for 1948 are $6,670,-
000, a decrease of 28% from the $9,241,000 received in 1947,
resulting largely from the elimination of the traffic gener-
ated by Route 68.
We have included in non-mail revenues for the past pe-
riod the amount of $131,247 of incidental revenues repre-
senting revenues from the operation of restaurants and
food service at airports served by Western. The car-
423 rier claims that the net profit reported consisted en-
tirely of profit from coin vending and slot machines
® The carriers are Braniff, Capital, C&S, and Delta.
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- Ve vr Ve. a a ae
ele SS
, ~~ ae we SF FF
67
located on the restaurant premises, and as such cannot rea-
sonably be included in non-mail revenues for the determina-
tion of need for mail pay. This position is inconsistent, how-
ever, with established Board policy with respect to inci-
dental revenues as set forth in past rate cases. *°
Total non-mail revenues for the past period are therefore
$33,216,000, equal to 110.90 cents per revenue plane mile.
Property Retirement Income
In 1946 and 1947, excess DC-4 aircraft were sold for a sub-
stantial profit. After taking into account the losses on re-
tirement of operating property in those years, the carrier
realized a net gain of $149,000. Losses on retirement were
incurred, however, amounting to $4,000 in 1944 and
424 $29,000 for the first nine months of 1948 which we will
allow the carrier to offset against the gain. We have
therefore taken into account as ‘‘other revenue’’ in deter-
mined mail pay need the net gain of $116,000 applicable to
the entire period.
Sale of Route 68
On September 15, 1947, after approval by the Board, ™
Western sold to United Air Lines its certificate for Route
68, with terminal points at Los Angeles and Denver, to-
gether with four DC-4 aircraft, certain spare parts, certain
ground and station equipment, and miscellaneous supplies.
The tangible property transferred by Western was valued
at $1,528,000. The total price paid to Western by United
was $3,750,000. After charges of approximately $98,000,
consisting of the cost of cancelling DC-6 purchase commit-
ments and miscellaneous expenses connected with the sale,
Western reported a net profit before taxes on the transac-
tion of $2,123,917.
10 Chicago and Southern Air Lines, Inc., Mail Rates, 3 C.A.B. 161
(1941). TWA Mail Rates, 2 C.A.B. 226 (1940).
mae Acquisition Air Carrier Property, 8 C.A.B. 298
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68
Section 406 (b) of the Act provides that in fixing fair and
reasonable mail rates the Board shall consider the ‘‘need”
of the air carrier for compensation which, ‘‘together with
all other revenue,’’ will enable it to achieve the statutory
objectives. Western realized a profit on its transaction with
United. The profit arose from the sale of flight and other
equipment and supplies and the certificate for Route 68,
which together constituted a portion of Western’s going
business. We find that the proceeds of the sale constituted
“other revenue,’’ within the meaning of section 406 (b) of
the Act. Accordingly, the proceeds of the sale will
425 serve to reduce Western’s ‘‘need”’ for mail compen-
sation. The amount by which Western’s ‘‘need”’ for
mail pay will be reduced remains to be considered.
Prior to the sale, Western operated the route for about
18 months. During the first nine months of operation of
Route 68, from April 1 to December 31, 1946, Western real-
ized a profit of $640,000 therefrom. During the year ended
March 31, 1947, 27 percent of the passengers carried by
Western on Route 68 were exchanged with United at Den-
ver and traveled to or from Chicago and points east there-
of. *
Western incurred certain extraordinary costs in connec-
tion with the establishment, operation and disposition of
Route 68. But for the expenditure of these sums it would
have been unable, in large measure, to realize the profit it
did upon the sale of the route. We believe it proper, there-
fore, to charge these expenditures against the profit real-
ized on the sale of Route 68 in determining the amount of
‘‘other revenue,’’ within the meaning of section 406 (b) of
the Act, which Western received and which reduced West-
ern’s ‘‘need’’ for mail pay.
In establishing the route Western incurred preoperating
and training costs, including depreciation on flight training
equipment, and extension and development costs. In order
to avoid distortion of Western’s costs during the period
12Td., pp. 301-302.
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69
when the expenditures were made, these costs would ordi-
narily be capitalized and spread over a reasonable period
of years. Since, however, Western has sold Route 68, which
alone benefited from such expenditures, we find it appro-
priate to charge the unamortized portion of such expendi-
tures to the profit otherwise realized on the sale.
Likewise, Western incurred abnormal maintenance costs
during the period Route 68 was operated as a part of its
system. These high costs were incurred largely be-
426 cause the additon of Route 68 to Western’s system
greatly overburdened its facilities. Nevertheless, the
early addition of Route 68 gave rise to operating profits and
to the profit upon the sale of the route, which reduced West-
ern’s ‘‘need’’ for mail pay. Under these circumstances, it
is appropriate to charge the abnormal maintenance costs
against the profit realized on the sale of the route, to the
extent that such abnormal costs had their incidence in rela-
tion to the expanded operations of Route 68.
Finally, Western incurred certain costs after the sale of
Route 68 as a result of its inability immediately to curtail
its operating expenses to fit its reduced volume of opera-
tions. The sale of the route reduced Western’s operations
approximately 29 percent, just as its inauguration substan-
tially increased its volume. It is recognized that some period
of time must necessarily elapse before costs can be cut to
meet sharply reduced volume. In part, the profit to Western
on the sale of the route is a recognition of the continuing
nature of certain operating expenses beyond the date of dis-
position of the route. We find that these continuing ex-
penses, which we shall term ‘‘divestment costs,’’ should be
charged to the profit on the sale of the route.
We shall discuss these adjustments to the profit on the
sale of the route below. They may be summarized as
427 ~— follows:
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70
Profit realized from sale $2,124,000
Charges Against Profit
Unamortized balance of pre-operating and
training costs 123,000
Unamortized balance of extension and
development costs 26,000
Depreciation on flight training equipment 85,000
Abnormal maintenance costs directly related
to Route 68 170,000
Abnormal loss estimated on retirement of DC-4
non-rotatable spare parts 145,000
Divestment costs 781,000
$1,330,000
Net profit from sale included as ‘‘other revenue’’ $794,000
On the basis of the foregoing, we shall consider the sum
of $794,000 as the net ‘‘other revenue’’ to Western from the
sale of Route 68. Accordingly, we find that the mail pay
which Western ‘‘needs’’ for the past period is reduced by
that amount.
428 Operating Expenses
Recognized operating expenses and the adjustments
we have made thereto for rate-making purposes are
shown in Appendix No. 2. As a result of these adjustments
reported operating expenses and the carrier’s estimates for
the last six months of 1948, amounting to $39,339.000, have
been reduced to a total of $36,405,000, equal to 121.54 cents
per revenue plane mile. A detailed explanation of the ad-
justments follows.
Flying Operations
The total adjustment for flying operations exnense for
the past period is $131,000. The greater part of this amount
represents training cost of $88,000 incurred in 1946 for tran-
sition pilot training for DC-4 equipment, most of which was
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71
operated on Route 68. This amount was capitalized along
with other training costs as of April 1, 1946, the date service
was inaugurated on the new route, and amortized over a
five-year period. The unamortized portion at September 15,
1947, the date of the route sale to United, was charged
against the profit received from the sale since the amortiza-
tion was applicable to the operation of that particular route.
The remainder of the adjustment, amounting to $41,000, rep-
resents excess of Western’s estimate over our allowance for
the last six months of 1948. We have based our estimates on
the actual experience for the first six months of 1948, which
results in costs for the DC-3 and DC-4 of $38.61 and $66.73,
respectively, per hour flown. The carrier has not provided
any reasonable basis for higher costs in the ‘ast half of
1948, and we have accordingly not recognized the amount of
$41,000 in excess of our allowance.
429 Direct Maintenance—Flight Equipment
Adjustments ‘to direct maintenance expenses total
$762,000 for the period. A large part of this total, however,
represents elimination of reserve accruals or expense which
is charged against the profit on the sale of Route 68.
In 1946, when operations were expanded on a large scale
and service on Route 68 was inaugurated, total DC-3 direct
and indirect maintenance expense increased significantly,
reaching a total of $38.24 per hour in 1946, and $36.52 per
hour in 1947. These costs were 48 percent above the indus-
try average of $25.81 in 1946, and 37 percent above the in-
dustry average of $26.64 in 1947.
The carrier claims that high maintenance costs were due
to a number of reasons, the one most capable of measure-
ment being the shorter overhaul periods than the average
for the industry. Other reasons advanced by the carrier
which are not as susceptible of exact measurement are as
follows: (1) the inadequacy of facilities at the maintenance
hase at Burbank, California, where maintenance operations
for approximately 25 aircraft owned at the end of 1946 were
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72
carried on in an area that was hardly sufficient for the war-
time fleet of five DC-3’s; (2) the necessity for engaging an
outside contractor to perform engine overhauls because of
lack of shop space to set up its own overhaul shop; and (3)
the relative inefficiency of personnel because of the rapid ex-
pansion of operations and the inefficient arrangement of
maintenance facilities. We find that the carrier did make an
attempt to obtain space at the Lockheed Air Terminal in
order to establish its own engine overhaul shop just prior
to the war, and that plans had to be postponed because of
the need for all available space at the terminal for the armed
services. Consequently, during the war period and through-
out the period under review the carrier has farmed out all
engine overhauls. It is clear that some added costs
430 were incurred due to the necessity of maintaining a
separate stock room, of paying a handling charge on
parts furnished, and of paying for overhead and profit of
the contractor. The carrier took action to remedy this situ-
ation by planning in 1945 to construct a modern hangar at
the Los Angeles Municipal Airport. The hangar was com-
pleted and maintenance activities were transferred to Los
Angeles in the middle of 1947 thus relieving the over-
crowded conditions at Burbank. The engine overhaul shop
is expected to be completed and in operation by the end of
1948, effecting a saving on overhauls estimated by the car-
rier at 25 percent.
It appears that the difficulties encountered at the Burbank
base were compounded by the addition of DC-4 aircraft to
the fleet, principally for the operation of Route 68. It be-
came necessary for the carrier to maintain mechanics at
Salt Lake City and San Francisco to perform inspections
and routine maintenance on DC-3’s during layover time at
those points. Maintenance expense for DC-4 aircraft does
not appear to be unreasonably high, however, in compari-
son with other DC-4 operators, due in part to the absence of
necessity for performing overhauls on the DC-4’s even
though Western was accruing a reserve for this purpose.
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73
This fact decreases the significance of the contentions rela-
tive to the inadequacies of the maintenance plant.
Western claims that the length of its overhaul periods
prescribed by CAA operation specifications for various
components of DC-3 aireraft and engines is considerably
shorter than for most other domestic operators and has pre-
sented comparative data for six domestic carriers which it
feels are representative of the industry i.e., Braniff, Chi-
cago & Southern, Continental, Delta, Northeast, and North-
west. In comparison with Delta, which operates mostly in
the southeast, Western’s engine changes were 25 percent
more frequent, the reason for which is claimed to be the
longer periods of engine operation at high power setting
during climbs to minimum operating altitudes. In
431 addition, during most of the review period, inspec-
tions were performed by Western either daily or
every 35 hours, whereas most of the other carriers per-
formed inspections at less frequent intervals. Check periods
for major DC-3 and DC-4 aircraft and engine assemblies
were usually more frequent for Western than for the other
carriers in the comparison except Northeast, which had ap-
proximately the same inspection and check periods as West-
ern. Although length of overhaul periods and frequency of
maintenance checks are governed to large extent by the effi-
ciency of the carrier based on past experience, it appears
that in this instance the predominating factor was the haz-
ardous terrain over which the carrier operated, particularly
with respect to DC-3 aircraft.
In view of the foregoing considerations and recognizing
the impracticability of measuring the influence of the above
factors in terms of specific costs, we believe that an allow-
ance of approximately 15 percent above the average of the
industry will reasonably compensate the carrier for the
shorter overhaul periods due to circumstances beyond man-
agement control, for higher engine overhaul costs incurred
by the necessity of contracting for engine overhauls outside
of its own shop, and to a limited extent only for the inade-
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74
quate facilities available for maintenance activities. On this
basis, the average allowance for DC-3 direct and indirect
maintenance expense for the years 1946 and 1947 is $30.00
per hour flown. Expenses incurred by the carrier above this
figure are believed to have been subject to management con-
trol to such an extent as to warrant their exclusion from
operating expenses recognized for rate-making purposes,
The disallowance amounts to $291,000 in 1946, and $161,000
in 1947, applicable to direct maintenance expense in those
years.
Direct flying costs incurred for pilot training in 1946 in-
cluded $38,000 of direct maintenance expense. This amount
has been eliminated from reported expense and capitalized
as of April 1, 1946, along with flying operations ex-
432 pense, making a total of $126,000 direct flying cost
capitalized.
As we indicated above in the case of flying operations ex-
pense, the carrier estimated expenses for the last half of
1948 which varied from the costs used herein, based on ac-
tual experience for the first half of the year, by $65,816. We
have accordingly not recognized this expense in 1948.
Western has followed the practice of accruing aircraft
and engine overhaul reserves during the past period. As
we have stated in previous decisions, '* however, the concur-
rent accrual of overhaul and depreciation reserves from the
date aircraft are placed in service tends to burden current
operations with costs which are greater than those actually
incurred. Since the benefits of a major overhaul will accrue
to a carrier subsequent to the overhaul, when the restored
life will be used, that part of the original cost which is the
value of the ‘‘built-in’’ overhaul should be amortized
over the hours remaining to the next overhaul by charges
to maintenance expense, while the remainder of the original
cost in excess of the residual value should be depreciated
13 Southwest Airways Company, Mail Rates, Docket No. 2653, Order
Serial No. E-1478 (April 27, 1948).
American Overseas Airlines, Inc. Mail Rates, Docket No. 1666, Order
Serial No. E-2247 (November 29, 1948).
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over the service life of the equipment to provide recovery
of that value not related to overhaul. In accordance with
this principle, we have eliminated DC-3 aircraft overhaul
expense as charged by the carrier and allowed the amortiza-
tion of the cost of the ‘‘built-in’’ overhaul and of each sub-
sequent overhaul over a two and a half year period, the
average length of time between overhauls. In the instant
case this adjustment results in a net disallowance of $2,197
in the past period, which amount has been allowed as amor-
tization in the future period.
433 Because we are allowing amortization of overhaul
expense after the performance of the overhaul, we
have adjusted the overhaul reserve account at the close of
the past period. For DC-3 aircraft, this adjustment
amounted to $64,000. Western has not performed any over-
hauls on the DC-4’s, nor are any anticipated before the air-
craft are retired at the end of 1948. The carrier accrued de-
preciation on the total amount of the original cost less 10
percent residual value, without a reduction for the value of
the ‘‘built-in’’? overhaul. We estimate that DC-4 deprecia-
tion reserves at the actual date of retirement of the equip-
ment should be sufficient to insure against the likelihood of
any appreciable gain or loss on retirement. Under these
circumstances, we shall not adjust for ‘‘built-in’’ overhaul
and shall eliminate accruals to the reserve for DC-4 aircraft
overhauls in the amount of $80,000.
We have not provided for the amortization of engine over-
haul costs subsequent to the overhaul for practical reasons,
since the overhaul period on an engine is usually shorter
than the annual accounting period, and the average amount
of amortization would not extend into another period so as
to distort the results for rate-making purposes.
The carrier reported direct maintenance expense on the
Lodestar and Stinson which it owned in 1944 and 1945 but
which were rented to Inland during this period. As we indi-
cated above in discussing incidental revenues, we have al-
lowed the amount of direct flying costs incurred by Western
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76
during the period through December 1945, as an offset
against incidental revenues. Accordingly, we have elimi-
nated the amount of $61,000 from maintenance expense.
Route 68 Developmental Expense
We have indicated in our discussion of maintenance ex-
pense that Western incurred certain costs which were unrea-
sonably high, due in part to the addition of Route 68 opera-
tions with DC-4 aircraft to a maintenance plant which
434 was already inadequate for DC-3 maintenance. It ap-
pears improbable that the excess in costs would have
been as great if the route had never been placed in operation,
for the route was sold in September, 1947, and results for the
year 1948 indicate that DC-3 maintenance expenses will be
below the $30.00 per hour which we have allowed for 1946
and 1947. Consequently, a large portion of the excessive
costs may be considered directly attributable to Route 68.
It is appropriate, therefore, in view of the reduction in ex-
pense level after the sale of the route, to consider one-half
of the total excess direct maintenance expense incident to
the operation of Route 68.
We have allowed Western to capitalize the amount of
$226,000 and to amortize this amount over a five-year pe-
riod. Approximately $145,000, representing one-half of the
disallowance in 1946, has been amortized from April 1, 1946,
the date service was inaugurated on Route 68, and $81,000,
or one-half of the 1947 disallowance has been amortized
from January 1, 1947. At the time of the sale of the route
on September 15, 1947, the unamortized balance of develop-
ment expense was $170,000, which has been applied as an
offset to the reported profit from the sale.
DC-3 Depreciation
Western had depreciated all owned and leased DC-3 air-
craft to a 5 percent residual value at December 31, 1947, ex-
cept for one passenger and one cargo aircraft, which were
depreciated over a service life to December 31, 1948. En-
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77
gines were depreciated over a service life to December 31,
1947.
In accordance with the Board policy set forth in recent
cases '* we have established a common retirement
435 date of June 30, 1949, for all DC-3 flight equipment,
and a uniform residual value on owned equipment of
$5,000 per aircraft and $500 per engine. The recomputation
of depreciation expense on the above basis from May 1, 1944,
the approximate date of petition, resulted in a disallowance
of expense in the past period of $225,000, of which $142,000
has been allowed in the future period, leaving a net disallow-
ance due to the extension of the service life of $83,000. The
major part of this adjustment is the result of retirement of
three aircraft in 1946 due to accidents, the allocation of de-
preciation to Inland subsequent to the filing of a petition
by that carrier on March 28, 1947, and substitution of Con-
vair 240’s for five DC-3’s in 1948.
Beginning in January 1946, depreciation expense had
been allocated to Inland on the basis of hours flown by type
of equipment. The amount so allocated was equivalent to
depreciation on approximately three aircraft. Because of
the joint use of equipment between the two companies and
the necessity of Western having a maintenance spare, it is
believed appropriate to allocate a portion of this spare DC-3
to inland on the basis of the ratio of Western’s equipment
used by Inland to the total number of passenger aircraft.
We have added one fourth of Western’s spare to the three
aireraft regularly used by Inland for a total of 3.25 aircraft
and have allocated depreciation on all DC-3 flight equipment
on this basis for the years 1946 and 1947 and the first eight
months of 1948. After September 1, 1948, when Western
began to retire five DC-3’s during the period to December 1,
1948, the proportion of allocable depreciation expense to In-
land was revised upward to reflect the increased ratio of
DC-3’s used on the Inland routes.
14 Braniff Airways, Inc. Mail Rates, Docket No. 2680, Order Serial No.
E-2129 (October 28, 1948); Delta Air Lines, Inc. Mail Rates, Docket No.
3119, Order Serial No. E-2130 (October 20, 1948).
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78
Since Inland’s petition was not filed until March 28, 1947,
we have made no change in the amount of depreciation al.
ready allocated to Inland prior to that date. Although the
spreading of depreciation forward to June 30, 1949,
436 had the effect of decreasing the amount of allowable
depi vciation expense in 1946, the increase in the ratio
of allocation to Inland, tended to offset the amount of the
decrease, so that the net effect was negligible.
As we have indicated previously, the net book value of the
DC-3 aircraft at the time of acquisition has been reduced for
depreciation purposes by an amount equal to the cost or
estimated cost of the first overhaul. We have allowed amor.
tization of the ‘‘built-in’’ overhaul under maintenance ex.
penses, and have disallowed the accrual of depreciation on
the value so eliminated, amounting to $59,000 applicable to
the equipment placed in operations during the review pe-
riod.
In accordance with our findings as to excess equipment,
we have made a disallowance of $63,000 depreciation ex-
pense for the past period, applicable to the DC-3 cargo air-
craft and related equipment.
In conjunction with the inauguration of. service with the
Convair 240 aircraft, Western retired five DC-3 aircraft
during the period from September 1 to December 1, 1948.
Depreciation on this equipment has therefore been elimi-
nated in the amount of $35,000.
Western had included in its accrual of depreciation, a
total of $178,000 applicable to estimated loss on retirement
of DC-3 non-rotatable spare parts. After spreading depre-
ciation to June 30, 1949, $158,000 of this expense would have
been accrued in the past period. We have stated in recent
cases *°, however, that it is believed appropriate un-
437 der ordinary conditions to accrue such a reserve over
a period at least two and a half years in advance of
the estimated retirement date of the related aircraft. In this
15 Braniff Airways, Inc. Mail Rates, and Delta Air Lines, Inc. Mail
Rates, supra.
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79
instance the carrier plans to retire almost one half of its
DC-3 fleet eight months prior to the common retirement date
we have allowed herein, which should allow the carrier to
reduce appreciably the inventory and, therefore, the loss on
retirement. We will allow a reserve of $100,000 to be ac-
erued over the two and a half year period prior to June 30,
1949, a proportionate share of which has been allocated to
Inland. Accordingly, the accrual allowable in the past pe-
riod amounts to $51,000, and we have eliminated $107,000
charged in the past period. Of this amount, $38,000 has been
transferred to Inland, $5,000 allowed in the future period
and $64,000 disallowed as applicable to equipment retired
or disallowed from used and useful investment.
The total amount of the adjustment of DC-3 depreciation
expense as a result of the foregoing is $489,000.
438 DC-4 Depreciation
The carrier established a four-year service life and
a residual value of 10 percent for its DC-4 equipment. Since
this policy is in accordance with the Board’s allowance in
the past for this type of equipment, we have accepted the
computation of the carrier in this instance.
We have disallowed depreciation applicable to equipment
which we have found in excess of reasonable requirements,
amounting to $176,728 for the past period. Of the total $32,-
000 represents depreciation expense on excess R-2000 en-
gines. The carrier claims, with some reason, we believe,
that the total number of engines reported was necessary be-
cause of the abnormal failure rate experienced in the opera-
tion of Route 68. We regard this expense therefore as in the
nature of a developmental expense. A contributing factor
to the finding of excess engines was the sale of four DC-4
aircraft to United in 1947 in addition to three sold previ-
ously, two without engines. According to the carrier, the
three DC-4’s sold prior to the route sale were originally ac-
quired for operation of the route. It is appropriate there-
fore to apply the engine depreciation removed from operat-
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80
ing expense as an offset to the profit from sale of the route.
Although the Convair 240’s will have replaced five DC-4’s
by December 31, 1948, or shortly thereafter, the carrier
claimed depreciation expense on the DC-4’s through March
31, 1949, since this equipment would be retained until that
date as insurance against temporary withdrawal of the Con-
vairs from service. We have maintained before ** that such
a contingency is one of the risks of doing business which js
reflected as a normal cost of capital rather than as a
439 normal cost of operations. It is not proper to allow
the accrual of depreciation expense therefore on du-
plicate equipment, and we have disallowed $62,000 applica-
ble to DC-4 aircraft and engines replaced by Convair 240’s
in the past period.
The carrier estimated that it will experience a loss on the
retirement of DC-4 non-rotatable spare parts of $345,000,
even though the DC-4’s are being retired approximately a
year and a half in advance of the retirement date originally
estimated. These inventories were accumulated for a fleet of
13 DC-4’s, which has been reduced to a fleet of five required
for scheduled operations after disposing of Route 68. A
proportionate amount of non-rotatable spare parts was not
sold with the route or with the aireraft sold prior to the sale
of the route. Accordingly we will allow the carrier to accrue
a reserve amounting to approximately 25 percent of the de-
preciated cost less 10 percent residual value of non-rotatable
spare parts at the date of the route sale, September 15, 1947,
or $200,000, and charge off this amount over the three year
period prior to the actual retirement date of December 31,
1948. The carrier had accrued $281,000 during the past pe-
riod, of which $81,000 will be disallowed for rate-making
purposes. Since the loss estimated by the carrier over our
allowance of $200,000 is the result of the disposal of DC-4
equipment purchased for the operation of Route 68, it is
16 Braniff Airways, Inc., Mail Rates, supra.
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81
proper that the disallowance of $81,000 be treated as an off-
set to the profit from the sale of Route 68.17
440 Convair 240 Direct Flying Costs
We have based our estimate of Convair 240 direct
flying costs on results which it is expected the carrier will
attain in the future year, and have discussed these in detail
in our consideration of future year expenses. This estimate
of $126.63 per hour flown has been applied to the last four
months of 1948. On the basis of 4,438 hours estimated for
the last four months of 1948, we have allowed direct flying
costs of $562,000 for the Convairs.
Ground and Indirect Expenses
The carrier reported a total of $22,167,000 of ground and
indirect expenses for the entire past period. We have made
adjustments to tuis total of $1,123,000, leaving a balance
of recognized expenses amounting to $21,044,000, equal to
70.25 cents per revenue plane mile.
Reported expenses include amounts expended for charit-
able contributions and entertainment totaling $52,000 for
the years 1945 through 1947. We have consistently held
in accordance with the general practice of rate-fixing bodies,
that expenditures for charitable purposes as distinguished
from payments to business and trade organizations should
be eliminated from operating expenses in determining need
for mail pay.’* With respect to entertainment expenses, the
carrier has provided no basis for determining the necessity
or reasonableness of such expenditures. As we have stated
before in a recent case '*, ‘‘the very nature of enter-
441 tainment expenses is such as to make it virtually im-
possible to ascertain the extent of their need in an
17 The carrier had improperly accrued depreciation on non-rotatable
spare parts rather than a reserve for loss on retirement. As a result, it
had understated its accrual in relation to its estimated loss on retirement
of $345,000. Since only the amount of $200,000 has been allowed herein,
we have applied the balance of $145,000 as an offset to the profit from the
sale of Route 68, which amount includes the actual disallowance of $81,000
of depreciation accrued.
18 Delta Air Corp., Mail Rates, 4 C, A. B. 5(1, 504 (1943).
19 American Overseas Airlines, Inc., Mail Rates, supra.
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82
enterprise, and we are of the opinion that it is our duty
under the Act to reject them for rate-making purposes,”
We have disallowed therefore the total of $52,000 of ex-
pense in the past period.
In the twelve months ended September 30, 1947 Western
realized the lowest ton-mile cost in its operating history,
However, subsequent to the sale of Route 68 on September
15, 1947 the carrier’s reported ton-mile cost rose sharply.
The decreased scale of operations after the route sale is
indicated by the 24 percent decline in available ton-miles in
the calendar year 1948 from the previous year and the 32
percent decline in revenue ton-miles in 1948. Although the
increase in unit cost may be attributable in part to the loss
in economies related to size in general, a substantial part
of the increased unit cost is believed to be related to the
necessary lag involved in cutting back indirect cost to a
proper level in relation to the reduced scale of operations,
We believe that that portion of the increase in unit cost
which is attributable to the lag in cutting back cost should
be regarded as a cost of divestment of the route and ac-
cordingly, for rate making purposes, should be eliminated
from operating expenses and charged against the profit
realized from sale of the route. As set forth in Appendix
No. 2 by individual control accounts, we have accordingly
eliminated the amount of $281,000 from reported operating
expenses for the fourth quarter of 1947 and the amount of
$500,000 for the year 1948, and the total amount of $781,000
of divestment cost has been charged against the profit real-
ized from the sale of Route 68.
442 For the year 1946 we eliminated pre-operating and
training expenses of $48,000 applicable to DO-4 pilot
training and inauguration of service on Route 68. We have
allowed the carrier to capitalize this amount and to set up
amortization over a five-year period from April 1, 1946,
the date of inauguration of service. The unamortized bal-
anced of $34,400 as of September 15, 1946, has been charged
to the profit from the route sale.
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83
Prior to the sale of Route 68, Western had been allocating
15 percent of certain general and administrative expenses
to Inland based on the ratio of volume of services performed
by the two carriers. After the sale of the route, the ratio
of cash operating expenses of Inland to the total increased
to 23 percent. We have made an additional allocation there-
fore to Inland from October 1, 1947, amounting to $18,000
and $68,000 for 1947 and 1948, respectively. General and
administrative expense has also been reduced by $98,000
in 1947 and $136,000 in 1948, which are part of the divest-
ment costs applied against the profit from the route sale.
As we discussed previously with respect to incidental
revenues, we have reduced operating expenses in 1948 by
$186,000, which represents the carrier’s estimate of ex-
penses incurred in producing the abnormally high incidental
revenues. A large portion of expenses are station expenses
‘neurred in the performance of services for others under
joint agreements. We have accepted the carrier’s estimates
and have eliminated expenses from various accounts as
follows: ground operations, $100,000; traffic and sales,
$50,000; and general and administrative, $36,000, such
amounts being treated as a charge to net incidental
443 revenues..
After making the foregoing adjustments, the total
ground and indirect expenses on the basis of revenue ton-
miles and available ton-miles for the years 1945-1948 be-
come as follows:
Cents per Revenue Ton-Mile Cents per Available Ton-Mile
Reported Adjust Reported Adjusted
Expense Expense Expense Expense
Although we have made adjustments in reported ground
and indirect expenses of $706,000 in 1948, expense per
revenue ton mile is still considerably higher than in the
preceding three years. Measured on an available ton mile
basis, however, adjusted expense is approximately the aver-
age of 1946 and 1947, the period of operation of Route 68.
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Pre-Operating and Training Costs
As we indicated in the above discussion, direct flying
costs of $126,000 for Route 68 pilot training and pre-
operating costs of $48,000, making a total of $174,000, were
eliminated from operating expenses and capitalized. We
have allowed Western to amortize these expenses over q
five-year period, which we have found to be reasonable for
other carriers in the past *°, and which would not burden any
one year with non-recurring costs of this nature. Amor.
tization of the total from April 1, 1946 to September 15,
1947, the date of the route sale, provides an additional
$51,000 of expense.
Western has been accumulating deferred charges relating
to the acquisition of and inauguration of service with the
Convair 240 aircraft. It estimates that total expense
444 of this nature will amount to $150,000, of which ap-
proximately $100,000 is applicable to pilot training
and familiarization flights. In view of the large scale sub-
stitution of Convairs for DC-3 and DC-4 aircraft, the neces-
sity of having all pilots checked out on the new equipment
for flexibility of scheduling crews, and the training of main-
tenance crews, as well as engineering and miscellaneous
expenses related to purchase of the equipment, it appears
that the carrier’s estimate is reasonable. Accordingly, we
have allowed the capitalization of $150,000 as of September
1, 1948, the date service was inaugurated. Amortization ona
five-year basis amounts to $10,000 for the last four months
of 1948.
Miscellaneous Credits
The carrier earned cash discounts income of approxi-
mately $23,000 for the past period, which we have taken into
account as a credit against operating expense in accord-
ance with established Board policy.
20 Braniff Airways, Inc., Mail Rates, supra.
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85
Break-Even Need
In consideration of the foregoing, total operating ex-
penses recognized for rate-making purposes amount to $36,-
405,000 for the 56-month period. After deducting non-mail
revenues of $33,216,000, the net operating loss before mail
pay is $3,189,000. Western’s need for mail pay, however, has
been reduced by ‘‘other revenue’’ of $116,000 from sale of
operating property and of $794,000 which we have found
is the net gain to Western from the sale of Route 68. After
giving effect to ‘‘other revenue’’ of $910,000, break-even
need before mail pay amounts to $2,279,000, equal to 7.61
cents per revenue plane mile.
445 Investment
The average investment on a reported basis and
the adjustments we have made thereto for rate making pur-
poses are shown in Appendix No. 5. Explanation of the
major items of adjustments are included in the following
discussion.
Working Capital
After the purchase of Inland in May 1944, the two compa-
nies were gradually integrated to the point where Western
performed most of the purchasing functions for Inland and
maintained most of the inventories used by the two com-
panies. Because of the large number of inter-company trans-
actions, it is appropriate to make an allocation of the com-
bined working capital in accordance with the ratio of cash
operating expenses. The average working capital has been
computed in this manner for the years 1946-1948, and the
results are shown in the attached appendix.
Western reported a negative working capital position
from the quarter ended June 30, 1946, until September 30,
1947, due to the abnormal amount of notes payable included
in current liabilities. These notes represented amounts due
the Douglas Aireraft Corp. for conversion costs and de-
posits on new equipment, and borrowings from banks on a
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86
short term basis for later conversion into long term debt.
Because of the large losses incurred in the winter 1946-1947
as a result of the falling off of traffic demand and untavor-
able flying conditions, and the resulting deterioration of its
financial condition, the carrier was no longer able to finance
its obligations through normal credit channels, and in con-
sequence, made application for a loan from the Re-
446 construction Finance Corporation in the spring of
1947. This loan was approved and was received by
Western in December 1947, in the amount of $3,800,000,
which together with the funds received from the sale of
Route 68, enabled Western to redeem all of its short term
notes outstanding. The amount of notes payable reached a
total of more than $5,000,000 at August 31, 1947, and ae-
counts payable included approximately $1,800,000 to the
Austin Company for construction of the new hangar.
Recognizing that a major portion of the notes payable
reported by Western as current liabilities was in substance
long-term capital and was ultimately converted into long
term debt, we have eliminated from current liabilities an
average of $1,652,000 in 1946 and $2,833,000 in 1947 in mak-
ing our computation of working capital.
447 In spite of this adjustment, however, average
working capital for the year 1946 amounted to a
minus $67,000, and for the year 1947, to a minus $816,000.
After giving effect to the pro-rate with Inland and adding
in retroactive mail pay beginning at the first of the year
1946, average working capital becomes a plus $139,000
for 1946, and a minus $469,000 for 1947.
Western also reported negative working capital in the
last six months of 1948 because of payments on its RFC
loan which were due within one year. However, in comput-
ing working capital, we have eliminated from current lia-
hilities an average of $227,000 of notes payable which be-
came current in this period. These notes are considered ap-
plicable to DC-4 equipment which has been replaced by Con-
vairs and accordingly eliminated from the rate base. Since
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87
this equipment is shortly to be sold, the carrier has on hand
assets which are to be converted into cash or its equivalent.
We have discussed in greater detail in the future period the
treatment of negative working capital under such cireum-
stances. After reflecting retroactive mail pay of $567,000
after taxes, and allocation of working capital to Inland of
$90,000, average working capital for 1948 becomes $446,000.
This and other computations of working capital have been
set forth in Appendix No. 5.
Investments and Special Funds
Western’s investment in Inland has been eliminated from
the rate base, since mail rates are fixed separately for that
carrier, and including this investment for Western would ¢
result in duplicating the rate of return provided on Inland’s 4
investment. :
448 Equipment Purchase Funds ‘
;
In a previous opinion” we have aliowed the cap- ;
talization of interest expense on equipment purchase funds
prudently and properly set aside for major expansion pro-
grams requiring substantial capital outlays. In the instant
ease, Western made deposits on Convair aircraft and Pratt F
& Whitney engines in the first quarter of 1946. In 1947 and
1948, Western also reported Convair spare parts and en-
gines in its flight equipment investment, which we have
eliminated as indicated previously. The amounts of de-
posits and investment in equipment for the period up to
September 1, 1948, when Convairs were placed in revenue
service, averaged $600,000. Because of a shortage of work- ;
ing capital during the period when funds were initially
advanced and up to inauguration of operations, Western
found it necessary to secure additional capital through short
and long term loans. At no time during the time that de-
posits were outstanding was the indebtedness less than the
deposits. In determining the amount of interest which
SOME NEES
21 Braniff Airways, Inc., Mail Rates, supra, Pan American Airways,
Inc., Transatlantic Mail Rates, 8 C.A.B. 267 (June 9, 1947). 2
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88
should be capitalized, we have therefore used the rate paid
by Western, amounting to 3 percent to December 1947, and
4 percent to September 1948, rather than a rate of 5 percent
which would be appropriate in the event there was no out.
standing debt. The interest so computed amounts to $52,
069, which we will add to the investment in Convair equip.
ment and allow Western to amortize over the seven-year
estimated service life from September 1, 1948. Although
the period over which deposit funds were outstanding ap.
pears long, the low price at which the carrier was able to
acquire the equipment compared to the subsequent
449 price increases justifies considering the full amount
of funds invested over the entire period.
Operating Property and Equipment
The carrier owned certain miscellaneous types of aircraft,
which it either rented to Inland or operated in non-revenue
service. The Lodestar and Stinson, which were rented to
Inland in 1944 and 1945, have been eliminated from invest-
ment, but the direct flying costs disallowed from operating
expenses have been offset from non-mail revenues as we
indicated above. Three AT-6 aircraft were acquired by
Western in 1946, primarily for training. Very little training
was accomplished with these aircraft, and they were sold to
Inland in 1947. They have accordingly been removed from
Western’s recognized investment as not used and useful
investment.
The carrier included one DC-3 aircraft in its investment
at December 31, 1944, which was not placed in scheduled
service until 1945. The net book value of $37,739 has been
eliminated from investment on that date.
The carrier had construction work in progress of approxi-
mately $200,000 at the end of 1945, representing conversion
costs on DC-3 aircraft. Since these aircraft were not placed
in service until 1946, this amount has been eliminated from
the investment at December 31, 1945.
In accordance with our previous finding as to excess
equipment, we have eliminated from investment DC-3 cargo
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