UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-13025
AirNet Systems, Inc.
(Exact name of registrant as specified in its charter)
I.R.S. Employer Identification No. 31-1458309
3939 International Gateway
Columbus, Ohio 43219
(Address of principal executive offices) (Zip Code)
614-237-9777
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
AirNet Systems, Inc. common shares, $.01 par value, are registered on the New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Act ). Yes o No ý
The aggregate market value of the voting stock held by non-affiliates of the registrant based on the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second quarter was $67,407,695.
The number of shares of the registrant’s common stock outstanding as of March 20, 2003: 10,112,317.
Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 9, 2003, are incorporated by reference into Part III of this Annual Report on Form 10-K.
INDEX
2
General
AirNet Systems, Inc. is a specialty air carrier for time-sensitive deliveries, operating between 100 U.S. cities and delivering over 20,000 time-critical shipments each working day. AirNet’s Bank service, which generates approximately 68% of AirNet’s revenues, is the leading transporter of cancelled checks and related information for the U.S. banking industry, meeting more than 2,200 daily deadlines.
AirNet’s Express service, which generates approximately 29% of AirNet’s revenues, provides specialized, high-priority delivery services. In December 2002, AirNet was awarded a General Services Administration Federal Supply Schedule, Indefinite Delivery/Indefinite Quantity contract to provide domestic express delivery services to U.S. federal government agencies. This contract will allow us to provide specialized, highly sensitive, and expedited transportation solutions to various governmental agencies at pre-negotiated rates.
AirNet’s Aviation services product line, which accounts for approximately 3% of AirNet’s revenues, began offering a broader array of passenger charter services in 2002. Through the use of seven passenger-configured Learjets, passenger charters are offered 24 hours per day, seven days per week. This product line also offers on-demand cargo charters, retail aviation fuel sales and related ground services to customers in Columbus, Ohio.
In addition to the seven passenger-configured Learjets, AirNet operates a fleet of 122 aircraft (33 Learjets, 15 Cessna Caravans and 74 light twin engine aircraft), that fly approximately 120,000 miles per operating night, primarily Monday through Thursday. On-demand cargo charter services are offered 24 hours per day, seven days per week. AirNet also provides ground pick-up and delivery services throughout the nation seven days per week, using a combination of company personnel and a network of approximately 250 vendors and independent contractors. AirNet’s integrated air and ground network provides support for our base customers, primarily concentrated in the banking, medical and critical parts industries. AirNet also uses commercial airlines to provide same-day delivery service for some of our Bank service and Express service customers. Later pick-ups and earlier deliveries than those offered by other national carriers are the differentiating characteristics of AirNet’s time-critical delivery network. AirNet uses a number of proprietary customer service and management information systems to track, sort, dispatch and control the flow of checks and small packages throughout AirNet’s delivery system. Delivery times and selected shipment information are available on-line through the Internet.
AirNet Systems, Inc. was incorporated as a C-corporation under the laws of the State of Ohio on February 15, 1996. AirNet’s principal executive offices are located at 3939 International Gateway, Columbus, Ohio 43219, and our telephone number is (614) 237-9777. AirNet’s web site address is www.airnet.com (this uniform resource location (URL) is an inactive textual reference only and is not intended to incorporate our website into this report).
Business strategy
We will continue to pursue our multi-year strategy to transform AirNet into a company that maximizes utilization of its unique airline by responding to growth opportunities for our Express business, while also continuing to respond to the needs of our bank customers. This diversification will likely require significant changes in our route structure and a greater investment in sales and marketing during the transition.
We are adapting to changes in the banking industry by reconfiguring our operational structure and its associated costs to align it with the volume and revenue changes. We have also developed a new pricing model for our major bank customers to attract greater volumes and benefit both AirNet and our bank customers.
Our Express customers value our speed and customer service, and AirNet intends to focus on time-critical markets, and time-definite delivery markets such as medical, radioactive pharmaceutical, on-demand cargo charters and just-in-time inventories, in which our airline offers customers competitive advantages in their industries through our speed and customer service. We believe our flexible and reliable air network and demonstrated expertise in providing time-critical deliveries to the banking industry for over 28 years positions us to provide these expanded services to the Express market.
3
Product lines
AirNet provides its services under 3 product lines: Bank services, Express services and Aviation services.
Bank services
Bank services primarily consist of cancelled check delivery. AirNet also transports items, such as proof of delivery reports and interoffice mail, for many of the same Bank customers. AirNet has historically priced its Bank services based on the tier of service, and by the pound, on a customer-by-customer basis. The U.S. banking industry, including commercial banks, savings banks and Federal Reserve banks, represents AirNet’s largest category of customers and accounted for approximately 68% of our revenues in 2002, 75% in 2001 and 74% in 2000. This customer list represents over 100 of the nation’s largest bank holding companies. AirNet’s time-critical cancelled check delivery service allows our banking customers to offer competitive products and pricing.
Express services
Express revenues accounted for 29% of AirNet’s revenues in 2002, 24% in 2001 and 26% in 2000. Within Express services, AirNet has several product offerings including Medical, Air Courier, Retail and Mercury Business Services.
Medical services are offered to customers requiring specialized handling, the transportation of which is often highly regulated by varying governmental authorities. Targeted markets within medical include producers and recipients of radioactive pharmaceuticals, diagnostic specimens, blood, human tissue and organs. AirNet also provides passenger charter services to organ transplant teams requiring time-critical travel to donor/recipient medical centers.
Air courier services provide transportation solutions to forwarders, integrators and courier companies. AirNet provides late-night services beyond most integrators’ and forwarders’ deadlines.
Retail services are provided to end consumers whose shipment needs are highly time sensitive or time definite. Target markets include just-in-time manufacturers and critical parts suppliers.
Mercury Business Services provides nationwide overnight delivery from the Boston, Chicago and New York metropolitan areas. Shipments are picked up by a Mercury courier, processed and then forwarded to a third party carrier to transport and deliver. Target markets include law firms and small professional services firms in dense business districts.
Aviation services
The Aviation services product line was expanded in 2001 to increase utilization of our airline beyond historical nighttime flights and to capitalize on our aircraft maintenance expertise. The Aviation services product line offers passenger charter services, on-demand cargo charters, and operates a fixed base operation from our Columbus, Ohio facility, offering retail aviation fuel sales and related ground services.
Delivery service offerings
AirNet provides the following types of delivery service: ANX (transported via the AirNet airline), AMC (AirNet Mission Critical), SDX (transported via third-party carriers), ground-only and on-demand cargo charter.
ANX service
AirNet’s ANX service is designed around three sets of deadlines. Basic deadlines, which have a hub time in Columbus between 9:30 p.m. and 10:00 p.m., provide delivery service between 12:01 a.m. and 2:00 a.m. to approximately the northeastern third of the nation. Premium deadlines, which have a hub time between 11:00 p.m. and 11:30 p.m. in Columbus and Charlotte, provide delivery service at approximately 3:00 a.m. to the eastern half of the nation. Finally, City deadlines, which have a hub time in Columbus between 4:00 a.m. and 5:30 a.m., provide delivery service at approximately 8:00 a.m. to all cities served by the network.
Bank ANX shipments are pre-sorted by bank personnel and packaged in AirNet-supplied bags color-coded to easily identify the final destination. ANX Express shipments are packaged in either AirNet-provided packaging or the customers’ packaging. An ANX shipment is typically picked up by an AirNet courier and transported to the local airport where the airbill is scanned using bar code technology, and information pertaining to the shipper, receiver, airbill number and applicable deadline is captured. This data is then downloaded into AirNet’s ComCheck or AirNet Connect computer system, where it is available to AirNet’s customer service representatives (“CSRs”).
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Upon arrival at AirNet’s Columbus hub or one of our mini-hubs, the shipment is off-loaded, sorted by destination and reloaded onto an aircraft. At the destination city, the shipment is off-loaded for the final time and delivered by courier to the receiver. When delivered, the airbill is once again scanned and delivery information is downloaded into AirNet’s computer system. Delivery information for all shipments is then available on-line to the customers and CSRs. AirNet’s customer service department is available to handle any inquiries, discrepancies or supply requests, as well as provide proof of delivery documentation, all of which are value-added features of AirNet’s service.
AMC service
AirNet Mission Critical service is available when customers require enhanced levels of special care in chain of custody, communications, or operating controls on their ANX shipments.
SDX service
AirNet’s SDX service provides cancelled check delivery services to Bank customers meeting daytime banking deadlines, and to Express customers requiring next-flight-out timing. These shipments are typically picked up by AirNet couriers and transported via commercial airlines or other integrators to destination cities where couriers accept the packages and deliver them to the destinations.
Ground only
Ground only services are provided to customers with specialized handling requirements that match AirNet’s unique delivery capabilities in select markets.
On-demand cargo charter
On-demand cargo charter services are provided to customers requiring the full use of an aircraft for dedicated deliveries. Charters may be scheduled in advance or on an as-needed basis.
Passenger charter services
AirNet’s private charter service provides travelers a safe, fast, and convenient way to travel. Private charter service is available 24 hours a day, 7 days a week primarily within the continental United States and neighboring countries. In addition to serving retail customers, AirNet provides charter services through third-party charter brokers. AirNet operates its private charter service from four locations across the country (Columbus, Dallas, Lancaster, PA and Bedford, MA). All passenger charter pilots are Airline Transport Pilot rated – the highest Federal Aviation Administration (“FAA”) rating possible.
Operations
Airline capacity management
Capacity management is an important factor in achieving profitable growth of the company. The airline is positioned around a flexible national route structure designed to facilitate late pick-up and early delivery times, minimize delays and simplify flight scheduling. AirNet’s hub-and-spoke system, with a primary hub in Columbus, Ohio and several mini-hubs across the nation (Atlanta, Chicago, Charlotte, Dallas, Denver, Des Moines and New York), allows AirNet to match the varying load capacities of our aircraft with the shipment weight and volume of each destination city and to consolidate shipments at our hubs. The hubs are located primarily in less congested regional airports. These locations, in conjunction with AirNet’s off-peak departure and arrival times, provide easy take-off and landings, convenient loading and unloading, and fast refueling and maintenance. Volume load factors by aircraft, departure city-pairs and lane segments are key contributors to profitability, as is the mix of aircraft and overall fleet utilization. Scales and scanners have been installed in some of our customer’s facilities in order to capture weight on an end-point basis. This data allows us to create point-to-point routes on specific lane segments, where appropriate, which reduces excess capacity in the hub-and-spoke route system.
Aircraft maintenance
AirNet employs aircraft and avionics technicians in eight separate locations across the country (Columbus, Dallas, Denver, Hartford, Minneapolis, New Orleans, Birmingham and Philadelphia), performing all levels of maintenance from 100-hour inspections on our light twin-engine aircraft to 7,200-hour/12-year inspections on our fleet of Learjets. AirNet has an in-house engine shop at the Columbus facility where some of the piston engines are overhauled on-site, thereby reducing aircraft downtime and controlling costs. AirNet also performs avionics troubleshooting and repair at the Columbus facility to provide for maximum efficiency and minimum aircraft downtime for the fleet.
5
Flight operations
AirNet’s flight operations are headquartered in Columbus, Ohio. AirNet utilizes an extensive screening process to evaluate potential pilots prior to hiring. These pilots meet stringent company qualifications, as well as all required Federal Aviation Administration requirements. All new pilots must satisfactorily complete a five-week training program conducted by AirNet’s flight training staff prior to assignment of pilot duties. This training program includes flight simulator training prior to any actual flight time in an aircraft, as well as intensive ground instruction. Additionally, new pilots gain operating experience in a structured setting prior to assignment in order to gain a familiarity with AirNet’s route system and the unique demands of the flight environment.
AirNet’s central dispatch system ties together all components of the air operation. Departure and arrival times are continuously updated, and weather conditions throughout the nation are constantly monitored. AirNet dispatchers remain in constant contact with pilots, out-based hub managers, fuelers, maintenance technicians and ground delivery personnel to ensure that no gaps exist in the delivery process. AirNet also uses commercial airlines, primarily to transport shipments during the daytime and weekend hours when our aircraft are operating under a limited flight schedule. Operations personnel utilize FlightTrax, a computerized flight tracking system that allows them to track the status of every AirNet and commercial flight in the country and schedule ground pick-up and delivery personnel appropriately.
Ground operations
AirNet manages its ground services through a combined use of employed team member couriers and approximately 250 outside independent contractor and vendor couriers. Team members are typically utilized on the scheduled routes that occur each operational day. Independent contractors and vendors are typically used for ad hoc pick-up and delivery services, allowing us to better match our ground costs with our volume streams. Dispatching functions related to ground delivery services occur at both the Columbus, Ohio hub and on a regional basis in some of the major cities served.
Shipments are typically picked up by a courier and delivered to the originating airport where AirNet ground support personnel load the shipments into aircraft. Upon arrival at the main hub in Columbus, Ohio, packages are off-loaded, sorted by destination and reloaded onto aircraft. During the thirty to forty minute sort period, AirNet ground support personnel refuel the aircraft. Fueling operations in Columbus include trained fuelers and ground support equipment, including seven fuel trucks and approximately 86,500 gallons of fuel storage capacity. Contracted fixed base operators at local airports typically perform out-based fueling of aircraft.
Regulation
AirNet holds an air carrier certificate granted by the FAA pursuant to Part 135 of the Federal Aviation Regulations. This certificate is of unlimited duration and remains in effect so long as AirNet maintains its standards of safety and meets the operational requirements of the regulations. The FAA’s regulatory authority relates primarily to operational aspects of air transportation, including aircraft standards and maintenance, personnel and ground facilities.
In August 2002, the FAA issued rules mandating repairs on certain Piper Navajo aircraft. The ruling, in response to incidents experienced by other owners involving the aircraft’s crankshaft, immediately grounded the aircraft until the mandated repairs were made. AirNet’s airline fleet currently includes two such grounded aircraft (seven as of December 31, 2002), which will remain grounded until replacement engines or repair parts become available.
The U. S. Department of Transportation (“DOT”) and Transportation Security Administration (“TSA”) have regulatory authority concerning operational and security concerns in transportation, respectively, including safety, insurance and hazardous materials. AirNet holds various operational certificates issued by these agencies, including party status to DOT E-7060, which permits AirNet to transport specific volumes of time-critical radioactive pharmaceuticals.
AirNet is also subject to Food and Drug Administration regulation of our transportation of pharmaceuticals.
In addition to federal regulations, AirNet’s operations are subject to various state and local regulations, and in many instances, require permits and licenses from state authorities.
AirNet believes that we have all permits, approvals and licenses required to conduct our operations and that we are in compliance with applicable regulatory requirements relating to our operations including all applicable noise level regulations. AirNet is working proactively with various local governments to minimize noise issues; however, future noise pollution regulations could require the replacement of several of our aircraft.
6
Seasonality
See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Seasonality and Variability in Quarterly Results”.
Competition
The air and ground courier industry is highly competitive. AirNet’s primary competitor in the transportation of cancelled checks is the Federal Reserve’s Check Relay Network. The actions of the Federal Reserve are regulated by the Monetary Control Act, which requires the Federal Reserve to price its services at actual cost plus a set percentage private sector adjustment factor. AirNet believes that the purpose of the Monetary Control Act is to curtail the possibility of predatory pricing by the Federal Reserve when it competes with the private sector. No assurance beyond the remedies of law can be given that the Federal Reserve will comply with the Monetary Control Act.
In the private sector, there are a large number of smaller, regional carriers that transport cancelled checks, none with a significant interstate market share. The two largest private sector air couriers, Federal Express Corporation (“FedEx”) and United Parcel Service (“UPS”), both carry cancelled checks where the deadlines being pursued fit into their existing system, but this has not represented a significant market share of this industry market to date. AirNet provides customized service for our customer base, often with later pick-ups and earlier deliveries than the large, national couriers provide. Both FedEx and UPS utilize AirNet’s transportation network for certain situations where they require customized service.
AirNet competes with commercial airlines and numerous other carriers in its Express delivery business. AirNet estimates its market share in this industry at less than 1%. AirNet believes that this market represents a significant expansion opportunity for ultra time-critical shipments requiring later pick-ups or earlier deliveries than are typically provided by major integrators and freight forwarders. AirNet believes that we are in an excellent position to leverage the use of our unique air network system, our proprietary information technology and our historically high on-time performance level to compete in this market.
In the passenger charter business, AirNet competes with other owner/operators of small business jets and charter brokers. We believe our nationwide network of maintenance and related support facilities provides added flexibility in deploying and servicing the passenger charter aircraft fleet to meet customer demands.
Environmental matters
AirNet believes that compliance with applicable laws and regulations governing environmental matters have not had, and are not expected to have, a material effect on AirNet’s capital expenditures, operations or competitive position.
Employees
As of December 31, 2002 AirNet employed 1,045 persons. AirNet’s employees are not represented by any union or covered by any collective bargaining agreement. AirNet has experienced no work stoppages and believes that our relationship with employees is good.
ITEM 2 - PROPERTIES
Operating facilities
AirNet owns its corporate and operational headquarters at 3939 International Gateway in Columbus, Ohio. The complex has 80,000 square feet and sits on land owned by the Port Authority of Columbus. AirNet has a 25-year land lease with the Port Authority, which expires on December 31, 2009 and contains a 20-year renewal option. AirNet’s headquarters is currently used for operations, training, aircraft maintenance, vehicle maintenance and general and administrative functions.
AirNet leases additional space at 4700 East Fifth Avenue, also located on Port Authority of Columbus land. The space is used for administrative support personnel.
AirNet operates at approximately 40 additional locations throughout the country. These locations, which are leased from unrelated third parties, generally include office space and/or a section of the lessor’s hangar or ramp.
7
Fleet
Cargo-airline aircraft
The following table shows information about our cargo-airline aircraft fleet as of December 31, 2002:
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Aircraft Type |
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Owned |
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Leased |
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Payload(1) |
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Range(2) |
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Speed(3) |
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Learjets, Model 35/35A |
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30 |
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3,800 |
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1,700 |
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440 |
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Learjets, Model 25 |
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4 |
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3,000 |
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1,000 |
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440 |
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Cessna Caravans |
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7 |
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7 |
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3,400 |
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825 |
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170 |
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Piper Navajo(4) |
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18 |
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1,500 |
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800 |
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170 |
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Beech Baron |
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40 |
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1,000 |
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800 |
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170 |
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Cessna 310 |
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16 |
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900 |
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800 |
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170 |
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Total |
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115 |
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7 |
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(1) Maximum payload in pounds for a one-hour flight plus required fuel reserves.
(2) Maximum range in nautical miles, assuming zero wind, full fuel and maximum payload.
(3) Maximum speed in knots, assuming maximum payload
(4) Includes aircraft grounded until replacement engines or repair parts become available (seven as of December 31, 2002).
An inventory of spare engines and parts is maintained for each aircraft type.
The Learjet 35 is among the fastest, most reliable and most fuel-efficient small jet aircraft available in the world and meets all Stage Three noise requirements currently being implemented across the country. The Learjet 25 is a smaller jet aircraft with slightly smaller payload and range capabilities. The Learjet 25 is not Stage Three compliant and likely will be phased out of scheduled operations in 2003.
The Cessna Caravan Super Cargomaster aircraft is a turbo-prop aircraft that travels at a similar speed to the Piper Aerostar aircraft previously in the fleet, but with over four times the payload of the Aerostar.
The Piper Navajo, Beech Baron and Cessna 310 are twin-engine piston aircraft.
Passenger charter aircraft
The following table shows information about our passenger charter aircraft fleet as of December 31, 2002:
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Aircraft Type |
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Owned |
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Leased or |
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Seating(1) |
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Range(2) |
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Speed(3) |
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Learjets, Model 35A |
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3 |
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1 |
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8 |
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1,700 |
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440 |
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Learjets, Model 60(4) |
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1 |
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2 |
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8 |
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2,300 |
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440 |
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Total |
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4 |
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3 |
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