By Kevin Harlin
Investor’s Business Daily
Copyright 2008 Investor’s Business Daily, Inc.
ENGLEWOOD, Colo. — The shortest distance between two points is a straight line. In an emergency, the fastest way to cover that distance is often by air.
That’s Air Methods’ specialty.
The Englewood, Colo.-based company is the nation’s largest air-medical transport company. Its fleet of about 330 helicopters and fixed-wing planes operate as highly mobile emergency intensive care units, transporting patients from crash scenes or between hospitals.
Air Methods claims 22% of the about $2 billion air medical transport market in the U.S. That market is growing at 6% a year.
“It’s a terrific company. It’s a great management team,” said Robert Labick, analyst with CJS Securities. “We like the field they’re in. They’re independent of the economy.”
The company operates from 263 bases in 42 states. It has a duel business model.
It operates hospital-based helicopter and airplane services on fixed contracts. That’s the low-risk, but lower-profit reward side of the business.
But its community-based air ambulance business is growing faster. There, it is dispatched by emergency responders and operates similar to an independent ambulance service. The margins are higher. But so, too, are the costs. It must hire its own medical staff and conduct its own billing. If it’s grounded by weather or can’t fly for any other reason, it doesn’t get paid.
“It’s higher risk, higher reward,” said Air Methods’ chief executive, Aaron Todd.
Its community-based service revenue grew 12% in the third quarter from a year ago to $69.3 million. The hospital-based side grew just 6%, to $29.4 million.
The company has another division that outfits helicopters for air-medical service. It generated about $7.8 million in the quarter, up 12% from a year ago.
The concept of using aircraft to get the sick and injured quick medical attention goes back about 80 years. But it was the Korean War where the military first made extensive use of helicopters as ambulances. Those small, bubble-shaped Bell helicopters and their role were made famous by the movie and television series “M*A*S*H.”
Those copters and the abilities of their crews were further refined during the Vietnam War, according to the Foundation for Air-Medical Research and Education.
After the war, helicopters and fixed-wing aircraft slowly found use in civilian medical emergencies.
By 2005, there were about 800 medical aircraft in civilian use in the U.S., mostly helicopters, according to the foundation.
History
Air Methods formed in 1982 as a biotech company called Cell Technology. In 1991, it transformed into an air-medical company by buying the then-private firm, Air Methods. It has since grown, adding helicopters and crews and buying competitors in the fragmented air-medical service market.
It flies under various names, including Mercy Air, LifeNet and Arch Air Medical Service.
It closed its latest deal in October for Pittsburgh-based CJ Systems Aviation Group. The $25 million acquisition added more than 100 aircraft to the fleet and gave it a major repair facility in Pennsylvania. That helps the Denver company service its craft east of the Mississippi.
The deal also gives Air Medical a pipeline of new helicopters.
High demand in other sectors has created backlogs at helicopter manufacturers, Todd said. But Air Methods and CJ Systems combined have 130 aircraft on order. About 40 are expected to be delivered in 2008.
Despite the high upfront costs, newer helicopters cut down on maintenance expenses, one of the company’s biggest variables.
“The cost to maintain a brand new twin engine helicopter can literally be half of what it might cost to maintain a 20-year-old helicopter,” Todd said.
Weather, too, can and does ground aircraft.
The company won’t report fourth-quarter flight volumes until it releases year-end financial results, likely in March. But analysts think foul weather in December may have dampened that quarter’s results.
Fuel costs are rising, too, though Todd says the effect is minimal.
Fuel accounts for about 3% of the company’s expenses. More than half of the company’s fleet is attached to the hospital-based side of the business, where those costs are passed through.
Newer, more efficient helicopters save on fuel, too.
Kevin Campbell, analyst with Avondale Partners, lowered his expectations for the fourth quarter because of those fuel costs and the rougher weather. But in a research note, he said he thinks the CJ Systems acquisition and its pricing power will fuel long-term growth.
“We continue to believe the long-term prognosis for the company remains strong,” he wrote.
Analysts say the company has been able to raise prices on the community-based side. As hospitals consider contracting out their air medical services, Air Methods often is one of the first calls.
Total revenue climbed 12% in the third quarter. The company posted 89 cents per share, up 14% from a year earlier. Analysts surveyed by Thomson Financial expect 33 cents per share in the fourth quarter, which is historically its slowest. If it hits that mark, it would be up from 10 cents in the December 2006 quarter.
Uninsured patients
In addition to weather, the biggest vagaries affecting the company are maintenance and patient mix. On average, the company collects about $6,500 per transport on its community-based service.
But the company can’t prescreen patients for insurance. About 15% of its community-based service patients are uninsured. Todd says it typically collects only pennies on the dollar of costs there.
Patients with private insurance, which pays the most, make up 44% of the load. Medicaid and Medicare patients make up the rest.
So if the economy sours and unemployment rises, the number of uninsured patients could climb.
Also, the plans of some presidential candidates who are pushing for expanded health coverage could shrink that uninsured pool, boosting Air Methods’ collection rates.
So Todd says that while the company is not immune to the economy, it’s not tied tightly to its ups and downs.
“You don’t make a decision to take an air-medical helicopter ride based on the economic factors,” he said. “So we’re a very recession-resistant environment.”