Air Methods Seen Fueling Financials With Latest Buy


What does an emergency air medical transport company have to gain from buying a helicopter tour operator?

Mike Allen, president ofAir Methods ( AIRM ), the largest provider of air medical transport services in the U.S., can tell you all about it.

In December, Air Methods closed on the $44 million-in-cash purchase of Sundance Helicopters, a helicopter tour operator focused mostly on Grand Canyon sightseeing.

Sundance, which posted $52.3 million in sales in its last fiscal year, also provides helicopters to support firefighting, natural resource agency operations, vertical lifts, aerial photography, news gathering, and aerial surveying.

Sundance brought a lot of value to Air Methods, Allen says. On the financial front, management knew it would be accretive to earnings, he says.

But with Sundance operating in a niche area, management also knew it wasn't going to be a multibillion dollar industry, Allen says.

"We didn't do the deal to have a tremendous growth story outside of air medical transport," said Allen. "It was more of an opportunistic deal where we analyzed it on the basis of the investment value."

Recruiting Challenge

The deal's greatest value and the biggest draw for Air Methods was the opportunity to bring more pilots and mechanics onboard. The pool of highly skilled people doing these jobs is not as robust as it once was, says Allen, and recruitment is a challenge.

Having an air transport company like Sundance in the mix gives Air Methods an opportunity to take young pilots and mechanics, cultivate them in a less complex operation at Sundance and then put them on a career path that leads to its air medical operations, he adds.

The buy brings other benefits. It modestly diversifies Air Methods' revenue stream with a new private pay segment, said William Blair & Co. analyst Ryan Daniels via email.

Another benefit is Sundance and Air Methods operate some of the same helicopters. Sundance has a fleet of 22 helicopters consisting of Eurocopter AS350s and EC130s. Air Methods uses both of these airframes in its fleet of more than 400 helicopters, most of which are Eurocopter and Bell Helicopter products. While most of the fleet consists of helicopters, it also operates several airplanes.

Daniels says since both companies use the same type of helicopter, the pilots at Sundance can accumulate some of the 2,000 flight hours necessary to do air medical transport.

Prior to the Sundance deal, Air Methods' most recent buy came in August 2011, when it closed on the $200 million purchase of Air Holdings Corp. and its subsidiaries, including Omniflight Helicopters.

Omniflight provides air medical transport services throughout the U.S. under both the community-based and hospital-based service delivery models. It uses a fleet of roughly 100 helicopters and fixed-wing aircraft.

Allen says the purchase of Omniflight was very significant.

It expanded Air Methods' market presence, especially in the Southwest, he says.

"It was a tremendously accretive deal for us," he said.

In 2012, Air Methods was able to drive growth in its core business and show accretion from the Omniflight deal, he adds, without giving more details.

Seeking Smaller Companies

In terms of future buys, Allen says Air Methods is always looking for acquisition opportunities in the air medical space. Its focus for growth for the next three to five years is continued acquisitions of smaller companies in the field.

But, he adds, making more buys in the tourism space isn't a part of the company's long-range strategic plan.

Daniels says Air Methods could look at foreign acquisitions or acquisitions in the ground ambulance space.

Air Methods is faring handsomely with its current lineup. Third-quarter earnings rose 44% to 75 cents a share. Revenue increased 20% to $221.3 million.

Analysts polled by Thomson Reuters expect fourth-quarter earnings to rise 38% to 44 cents share. They forecast full-year earnings will rise 88% to $2.28 a share. They see a 4% rise in 2013.

Among the growth drivers is the preferred provider agreement it has with acute care hospital operators Community Health Systems ( CYH ) to provide air medical transport services to CHS-affiliated hospitals, says Daniels. He says that's helping Air Methods' organic growth. Air Methods also has solid price power, he adds, and it's opening new bases.

Air Methods provides air medical emergency transport services under two service delivery models, community-based services and hospital-based services.

Its hospital-based services provide hospital clients with medically equipped helicopters and airplanes that are based usually at hospitals. Under a typical operating agreement, it earns 78% of its revenue from a fixed monthly fee and 22% from an hourly flight fee from the hospital.

Its community-based services provide medical care, aircraft operation and maintenance, 24-hour communications and dispatch, and medical billing and collection. Its aircraft are based typically at fire stations, airports or hospitals. Revenue from this arm consists of flight fees billed directly to patients, their insurers or governmental agencies.

Allen says the environment for its business is "stable."

"I'm optimistic about where we're heading," he said.

ObamaCare Lift Expected

On the health care regulatory front, Daniels says the Patient Protection and Affordable Care Act -- ObamaCare -- is very helpful for Air Methods.

The act mandates that all Americans maintain a minimum level of health care coverage. To meet that objective, it expands Medicaid coverage, provides federal subsidies to assist low-income individuals when they obtain health insurance and establishes insurance exchanges through which individuals and small employers can purchase health insurance.

Today, roughly 12% to 13% of patient transports are uninsured, from which Air Methods collects very little, if anything, says Daniels.

"As individuals gain more insurance coverage, the uninsured rate at Air Methods should drop, and the company will then be paid for transports which previously drove little, if any revenue," he adds. "All in all, we believe Air Methods is one of the companies best positioned to benefit from the health care reform. This, plus continued core business growth, positions the company quite well for future success and growth, in our view."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: AIRM , CYH

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