Air Methods Corporation, a Delaware corporation, (Air Methods or the Company) was established in Colorado in 1982 and now serves as the largest provider of air medical emergency transport services and systems throughout the United States of America. We provide air medical emergency transport services under two service delivery models: Community-Based Services (CBS) and Hospital-Based Services (HBS). Rocky Mountain Holdings, LLC (RMH), FSS Airholdings, Inc. (FSS), Mercy Air Service, Inc. (Mercy Air), and LifeNet, Inc. (LifeNet) all operate as wholly-owned subsidiaries of Air Methods. FSS is the parent company of CJ Systems Aviation Group, Inc. (CJ).
As of December 31, 2009, our CBS Division provided air medical transportation services in 21 states, while our HBS Division provided air medical transportation services to hospitals located in thirty states under operating agreements with original terms ranging from one to eight years. Under both CBS and HBS operations, we transport persons requiring intensive medical care from either the scene of an accident or general care hospitals to highly skilled trauma centers or tertiary care centers. Under the CBS delivery model, our employees provide medical care to patients en route, while under the HBS delivery model, medical care en route is provided by employees or contractors of our customer hospitals. Our Products Division designs, manufactures, and installs aircraft medical interiors and other aerospace or medical transport products.
In 2008 we entered the voluntary Safety Management System (SMS) administered by the Federal Aviation Administration (FAA) and in the first quarter of 2010 successfully exited Level 1, the second phase of a five-phase program. SMS follows the International Civil Aviation Organization standard as a quality management approach to controlling risk by providing the organizational framework to support a sound safety culture. It also provides our management with a detailed roadmap for monitoring safety-related processes. As part of the SMS initiative, we established several FAA voluntary safety programs in 2009, including an Aviation Safety Action Program (ASAP) and Line Operations Safety Audit (LOSA) program. Each of these allows for greater communications from our field operations and earlier identification of areas of concern to enable us to devote resources and attention to issues on a proactive basis. Over the past several years, we have been in the process of equipping our fleet with Night Vision Goggles (NVG), Terrain Avoidance Warning Systems (TAWS), satellite tracking equipment, satellite weather information equipment, and wire strike kits. In 2009 we invested $7.9 million in equipment and training costs related to this initiative for aircraft already in our fleet. In addition, we took delivery of sixteen new aircraft which were already retrofitted with this equipment.
Community-Based Services
Services provided by our CBS Division include medical care, aircraft operation and maintenance, 24-hour communications and dispatch, and medical billing and collections. CBS aircraft are typically based at fire stations, airports, or hospital locations. CBS revenue consists of flight fees billed directly to patients, their insurers, or governmental agencies. Due to weather conditions and other factors, the number of flights is generally higher during the summer months than during the remainder of the year, causing revenue generated from operations to fluctuate accordingly.
The division operates 136 helicopters and three fixed wing aircraft under both Instrument Flight Rules (IFR) and Visual Flight Rules (VFR) in 21 states. Although the division does not generally contract directly with specific hospitals, it typically has long-standing relationships with several leading healthcare institutions in the metropolitan areas in which it operates.
In 2009 the CBS Division opened ten new bases, including two resulting from the conversion of an HBS customer to CBS operations, and closed six due to insufficient flight volume. The division also entered into service agreements in Georgia with another air medical service provider, allowing for base consolidations in the service area. Our aircraft are dispatched in response to requests for transport received by our communications centers from sending or receiving hospitals or local emergency personnel, such as firemen or police officers, at the scene of an accident. Communications and dispatch operations for substantially all CBS locations are conducted from our national center in Omaha, Nebraska, or from the regional center in St. Louis, Missouri. Medical billing and collections are processed primarily from our offices in San Bernardino, California.
Competition with the CBS Division comes primarily from three national operators (Air Medical Group Holdings, Inc.; OmniFlight, Inc.; and PHI, Inc.) and from smaller regional carriers and alternative air ambulance providers such as local governmental entities. We believe that our competitive strengths center on the quality of our patient care and customer service, the medical capability of the aircraft we deploy, and our investment in safety equipment and programs for our operations, as well as our ability to tailor the service delivery model to a hospital’s or community’s specific needs. Unlike many operators, we maintain in-house core competencies in hiring, training, and managing medical staff; billing and collection services; dispatch and communication functions; and aviation operations. We believe that choosing not to outsource these services allows us to better ensure the quality of patient care and enhances control over the associated costs.
Hospital-Based Services
Our HBS Division provides hospital clients with medically-equipped helicopters and airplanes which are generally based at hospitals. Our responsibility is to operate and maintain the aircraft in accordance with Federal Aviation Regulations (FAR) Part 135 standards. Hospital clients provide medical personnel and all medical care on board the aircraft. The division operates 178 helicopters and nine fixed wing aircraft in thirty states. Under the typical operating agreement with a hospital, we earn approximately 76% of our revenue from a fixed monthly fee and 24% from an hourly flight fee from the hospital. These fees are earned regardless of when, or if, the hospital is reimbursed for these services by its patients, their insurers, or the federal government. Both monthly and hourly fees are generally subject to annual increases based on changes in the consumer price index, hull and liability insurance premiums, or spare parts prices from aircraft manufacturers. Because the majority of the division's flight revenue is generated from fixed monthly fees, seasonal fluctuations in flight hours do not significantly impact monthly revenue in total. We operate some of our HBS contracts under the service mark AIR LIFE®, which is generally associated within the industry with our standard of service.
In 2009 we began operations under a new three-year contract, representing two aircraft, with a customer in Alaska. Contracts with seventeen hospital customers were due for renewal in 2009, ten of which have been renewed for terms ranging from one to four years. Three other contracts have been extended into 2010, pending negotiation of final contract renewal terms. Five contracts were not renewed upon their expiration in 2009.
Competition with the HBS Division comes primarily from four national operators: Air Medical Group Holdings, Inc.; Metro Aviation, Inc.; OmniFlight, Inc.; and PHI, Inc. Operators generally compete on the basis of price, safety record, accident prevention and training, and the medical capability of the aircraft. Price is a significant element of competition because of the continued pressure on many healthcare organizations to contain costs passed on to their consumers. We believe that our competitive strengths center on the quality of our training, maintenance, and customer service; the medical capability of the aircraft we deploy; and our investment in safety equipment and programs for our operations.
Products Division
Our Products Division designs, manufactures, and certifies modular medical interiors, multi-mission interiors, and other aerospace and medical transport products. These interiors and other products range from basic life support to intensive care suites to advanced search and rescue systems. With a full range of engineering, manufacturing and certification capabilities, the division has also designed and integrated aircraft communication, navigation, environmental control, structural, and electrical systems. Manufacturing capabilities include avionics, electrical, composites, machining, welding, sheet metal, and upholstery. The division also offers quality assurance and certification services pursuant to its FAA Organization Designation (ODA) authorization, Parts Manufacturer Approvals (PMA's), and ISO9001:2000 (Quality Systems) certification.
We maintain patents covering several products. These include the Litter Lift System used in the U.S. Army’s HH-60L helicopter and Medical Evacuation Vehicle (MEV), and the Articulating Patient Loading System and Modular Equipment Frame developed as part of the modular interior concept. Raw materials and components used in the manufacture of interiors and other products are widely available from several different vendors.
As of December 31, 2009, projects in process included forty-eight HH-60L units, four commercial medical interiors, and a design contract for the U.S. Army. During the second quarter of 2009, the U.S. Army notified us that it intended to reduce the number of MEV units to be delivered under the current contract from 306 units to 81 units, plus a number of spares. Revenue and costs related to the termination process were fully recognized during 2009. During the first quarter of 2010, we received a purchase order reinstating the original MEV production contract value, including the impact of termination costs. In the fourth quarter of 2009, we received a contract from the U.S. Army for partial kits for twelve HH-60L units. Deliveries under all contracts in process as of December 31, 2009, including the reinstated MEV purchase order, are expected to be completed by the end of 2011, and remaining revenue is estimated at $15.1 million.
Our competition in the aircraft interior design and manufacturing industry comes primarily from three companies based in the United States and three in Europe. Competition is based mainly on product availability, price, and product features, such as configuration and weight. With our established line of interiors for Bell and Eurocopter aircraft, we believe that we have demonstrated the ability to compete on the basis of each of these factors.