— Igor Sikorsky
Aircraft engineer Igor Sikorsky designed, built and flew America’s first viable helicopter in 1939. The helicopter manufacturing company that he founded in 1925, Sikorsky Aircraft, is now a thriving subsidiary of the giant conglomerate United Technologies (NYSE: UTX) and generated more than $7 billion in annual revenue in 2012.
Igor’s greatest legacy is the emergency medical services (EMS) helicopter. First and foremost, he envisioned his newfangled flying machine as a lifesaving device.
Today, the largest publicly owned EMS helicopter operator in the US is Air Methods Corp (NASDAQ: AIRM). Based in Englewood, Colorado, Air Methods runs roughly 250 bases scattered across 42 states.
Helicopter EMS represents a $2.5 billion-a-year business in the US and it continues to grow. The US Federal Aviation Administration counts the EMS helicopter fleet (both rotorcraft and fixed-wing) at approximately 1,000 aircraft; about 850 are private sector enterprises and about 150 are operated by governmental entities.
Every year, Air Methods’ fleet of 400-plus rotary and fixed-wing aircraft flies more than 106,000 missions, for about 140,000 total flight hours. It typically transports about 100,000 patients a year. Supporting these aircraft are 3,150 employees nationwide, including pilots, medical personnel, mechanics, flight controllers, and administrative staff.
Considered the “gold standard” in EMS care, Air Methods is positioned for significant growth in 2013 and beyond, as the nation’s health care system experiences a huge influx of 32 million Americans newly covered under the Patient Protection and Affordable Care Act (PPACA), commonly called Obamacare.
Helicopter EMS operators don’t make money for being on call; they get paid for each patient transport, which can cost the payer as much as $20,000. Air Methods’ current payer mix for program services is private insurance 35 percent; Medicare 31 percent; Medicaid 21 percent; and the uninsured 13 percent.
The Association of Air Medical Services (AAMS) estimates that the EMS industry reached 400,000 patients flown in 2012, after flying about 192,000 in 2000, 159,000 in 1990 and 17,500 in 1980. AAMS expects similar if not greater growth over the rest of the decade.
Tailwinds from Health Care Trends
The US Department of Health and Human Services estimates that the number of persons worldwide aged 60 years or older will increase from about 605 million today to more than two billion by 2050.
This demographic shift is particularly pronounced in the US. The emergency medical needs of the country’s rapidly aging population is reflected in the growing rates of trauma and the increased occurrence of time-critical conditions such as heart attack and stroke. The first hour of treatment—known in the EMS industry as the “golden hour”—will take on greater importance.
As by far the largest for-profit helicopter EMS provider, Air Methods is best equipped to capitalize on this secular trend. The company is organized into three divisions: Hospital-Based Services (HBS), Community-Based Services (CBS) and the Products division.
Under an HBS contract with Air Methods, the health care facility hires EMS personnel and communications staff, to run its own air ambulance program. Air Methods leases its pilots, aircraft and mechanics, freeing the client to focus on medical care.
CBS is a “turnkey” model, whereby Air Methods provides a comprehensive EMS package: aircraft, pilot, mechanic and medical staff, as well as program management.
The Products division designs, builds and certifies air medical interiors for helicopters, providing an additional and steady revenue stream. Among the models it services are those made by Sikorsky.
For the third quarter of its fiscal 2012, Air Methods reported revenue of $221.3 million, an increase of 20 percent from the same quarter a year ago. Revenue for the first nine months of the year reached $634.5 million, an increase of 35.8 percent from the same year-ago period.
Third-quarter 2012 earnings leaped 44 percent year-over-year to $28.5 million; earnings for the first nine months doubled YoY to $73 million. The earnings increases largely stemmed from the company’s emphasis on its CBS segment, where profit margins are higher. CBS now generates roughly three-quarters of company revenue.
As the chart below clearly shows, Air Methods boasts a robust income statement:
Source: Thomson Reuters
To sustain its steady annual growth, Air Methods has pursued an aggressive strategy of expansion through the acquisition of rival helicopter operators. The company acquired Mercy Air in 1997; ARCH in 2000; Rocky Mountain Holdings in 2002; and CJ Systems in 2007. The company has quickly absorbed these companies and leveraged their fleets for greater economies of scale.
In late 2012, Air Methods acquired Sundance Helicopters for $44 million in cash. Sundance operates a fleet of 22 helicopters based out of Las Vegas; it generated revenue of $52.3 million for the fiscal year ended March 31, 2012.
Helicopters are complex machines that require considerable upkeep; operating them can be an expensive proposition. Air Methods keeps a lid on overhead by regularly replacing aging aircraft with state-of-the-art models that require less maintenance, burn less fuel and entail better safety features.
In December 2012, Air Methods unveiled plans to buy 42 new aircraft, 20 from Bell Helicopter, a division of Textron (NYSE: TXT), and 22 from Eurocopter, a division of European Aeronautic Defence & Space Co, or EADS (Paris: EAD). Delivery is slated to begin in 2013. The additional aircraft will allow Air Methods to fly more missions and support its expanding empire of bases.
Also in December, Air Methods declared a special cash dividend of $7.00 per share (on a pre-split basis) on the company’s common stock, payable on December 28, 2012 to stockholders of record, representing a 5.4 percent boost for its unitholders. In the same month, stockholders approved a three-for-one stock split.
For investors seeking reliable growth from long-term health care trends, this leading EMS helicopter operator is the right prescription.
John Persinos is managing director of Investing Daily and Personal Finance.