By Kevin Harlin
The Investor’s Business Daily
ENGLEWOOD, Colo. — What a difference a year makes.
A slew of accidents made last year the deadliest on record for the civilian air medical transportation industry. And when companies weren’t dealing with tragedies, they faced more mundane pressures: record high fuel prices that minimized traffic accident calls while making expensive aircraft even more costly to fly.
But equipment upgrades and new operating procedures seem to have brought the industry’s accident rate way down. And fuel prices have fallen, too.
That makes for a strong tail wind for the nation’s largest air medical service provider, Englewood, Colo.-based Air Methods.
Its earnings per share contracted in each of last year’s quarters. But the company shot out of the gate this year with strong growth. Easy comparable quarters going forward should deliver more of the same.
“In recent months, we have seen a return to improving demand for these services,” said Air Methods Chief Executive Aaron Todd.
The company posted revenue of $499 million last year, a 26% jump from the year before. But EPS fell sharply to $1.35 from $2.13.
But in the first half of this year, EPS shot up. It climbed 242% in the first quarter and 84% in Q2. Analysts surveyed by Thomson Reuters now expect the company to post 2009 earnings of $2.32, a 72% gain over last year’s.
Air Methods, formed in 1982, has a fleet of more than 300 helicopters and fixed-wing aircraft, operating in 44 states. It flies under several names, including Mercy Air and LifeNet.
The company has three distinct lines of business.
A hospital-based services division provides medical helicopter and airplane services on mostly fixed contracts, paid by hospitals. That group generated 38% of last year’s revenue.
The slightly larger community-based services group operates independently of any hospital or medical center. It’s a more volatile business because Air Methods has to supply its own medical crews and do its own billing. It is also more directly subject to the vagaries of weather and fluctuating demand. When it doesn’t fly, it doesn’t get paid.
But the community-based side is a higher-margin business and accounted for 59% of 2008 revenue.
A third, small division outfits civilian and military aircraft for use as air ambulances. It sells kits that turn a military Black Hawk helicopter from a troop transporter to an air ambulance in minutes, for instance. The division was about 3% of last year’s sales.
Fuel prices don’t just make helicopters more costly to fly. Last summer and fall’s gasoline price spike kept many American motorists off the roads. That made for fewer traffic accidents and a reduction in need for air medical transport.
While the company’s overall flights increased last year, flights from its community-based centers open more than a year -- a sort of same-store comparison -- actually fell almost 10% in 2008. It wasn’t just the safer roads. The company says bad weather grounded more flights that year, too.
But with fuel prices back down, the company says the third quarter is strong with a modest 1% increase in same-base operations.
“In our view, this represents an important inflection point, as it represents the first time in roughly a year that the company has seen positive same-base volume growth,” William Blair analyst Ryan Daniels wrote in a client note.
Todd says the company projects reduced fuel costs bringing in $8 million to $10 million in pretax earnings in 2009.
And the industry has been accident-free for months now. That’s remarkable, considering that last year it saw 12 accidents with 29 fatalities, according to the National Transportation Safety Board.
Air Methods was involved in two of those tragedies.
A three-person crew died in a crash of one of the company’s twin-engine EC135 helicopters in Wisconsin in May 2008. The next month, the crew of a Bell 407 helicopter died in a midair collision with another air medical helicopter operated by a different firm.
Federal regulators responded with a slew of hearings and calls for more equipment upgrades and procedural changes.
Christopher Eastlee, president of the Air Medical Operators Association, says his group welcomes the input.
He says his members have been investing in massive fleet upgrades since 2006. For instance, three years ago, fewer than 5% of the roughly 750 air medical transport aircraft operating in the U.S. had night-vision equipment. Eastlee estimates that half of the fleet does now.
The industry has instituted other changes as well in how aircraft are dispatched and tracked in flight.
“So many of the changes we’ve made as a fleet, as an industry, over the last two to three years are really very new to helicopter aviation and new to commercial aviation,” Eastlee said.
Todd says Air Methods has instituted those and other changes that both increase safety and reduce maintenance costs.
The company has replaced 38 older-model aircraft with brand-new equipment since the start of 2008, the CEO said. And to keep maintenance costs down, it has swapped out costlier twin-engine aircraft with smaller single-engine models in places where demand didn’t warrant the larger ones.
Those changes helped the company knock maintenance costs down by $3 million, or 13%, in the second quarter.
One of the big question marks for the company now is possible federal action on health care.
Until the shape of a final plan is known, Todd says it’s too soon to predict the impact.
The company earns higher reimbursement rates from private market-rate medical insurance than it does from Medicare. So a public insurance option resembling a private plan may be better for Air Methods than one paying at Medicare rates, analysts note.
Air Methods could theoretically even be hurt by a health care overhaul if enough Americans switch from market-rate plans to a public one with Medicare-level reimbursements.
But Todd says any likely change will benefit his company.
“Anything that would bring coverage to those that don’t have it would be a positive for Air Methods because we provide coverage to all, regardless of their ability to pay,” Todd said.
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