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, 2003 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File Number 1-13025
AirNet Systems, Inc.
(Exact name of registrant as specified in its charter)
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Ohio |
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31-1458309 |
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(STATE
OR OTHER JURISDICTION
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(I.R.S. EMPLOYER IDENTIFICATION NO.) |
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3939 International Gateway
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(Address of principal executive offices) (Zip Code) |
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614-237-9777 |
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(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class |
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Name of each exchange on which registered |
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Common Shares, $.01 par value |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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 common shares (the only common equity of the registrant) held by non-affiliates of the registrant based on the price at which the common shares were last sold as of June 30, 2003, of the last business day of the registrant’s most recently completed second fiscal quarter was $41,034,512.
The number of shares of the registrant’s common stock outstanding as of March 29, 2004: 10,063,167.
Document Incorporated by Reference:
Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on June 4, 2004, are incorporated by reference into Part III of this Annual Report on Form 10-K.
INDEX
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PART I |
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Item 1: |
Business |
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Item 2: |
Properties |
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Item 3: |
Legal Proceedings |
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Item 4: |
Submission of Matters to a Vote of Security Holders |
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Supplemental Item: Executive Officers of the Registrant |
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PART II |
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Item 5: |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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Item 6: |
Selected Financial Data |
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Item 7: |
Management’s Discussion and Analysis of Financial Condition and Results of Operation |
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Item 7A: |
Quantitative and Qualitative Disclosures About Market Risk |
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Item 8: |
Financial Statements and Supplementary Data |
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Item 9: |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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Item 9A: |
Controls and Procedures |
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PART III |
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Item 10: |
Directors and Executive Officers of the Registrant |
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Item 11: |
Executive Compensation |
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Item 12: |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13: |
Certain Relationships and Related Transactions |
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Item 14: |
Principal Accountant Fees and Services |
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PART IV |
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Item 15: |
Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
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Signatures |
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Exhibit Index |
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2
General
AirNet Systems, Inc. is a specialty air carrier for time-sensitive deliveries, operating between most U.S. cities and delivering over 20,000 time-critical shipments each working day. AirNet is the leading transporter of cancelled checks and related information for the U.S. banking industry, meeting more than 2,500 daily deadlines. AirNet also provides specialized, high-priority delivery services to customers, primarily those involved in the medical, critical parts and entertainment industries. AirNet also provides passenger charter services through its wholly-owned subsidiary, Jetride, Inc.
AirNet operates a fleet of approximately 120 aircraft (including 33 Learjets and 15 Cessna Caravan turboprops) that depart from over 100 cities and complete more than 420 flights per night, primarily Monday through Thursday. In addition, Jetride, Inc. operates nine Learjets that offer private passenger charter services. To supplement its air transportation network, AirNet uses commercial airlines during daytime and weekend hours when its aircraft are operating under a limited flight schedule. Approximately 70% of AirNet’s shipments are carried on AirNet’s own air transportation network.
In addition to regularly scheduled cargo services, AirNet offers on-demand cargo charter delivery services 24 hours per day, seven days a week. AirNet 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 450 vendors and independent contractors.
AirNet’s integrated air and ground network provides dependable, time-critical delivery services to its customers. Later pick-up and earlier delivery times than those offered by other national carriers is one of the primary differentiating characteristics of AirNet’s time-critical delivery network. AirNet’s flight schedule is designed to provide delivery times between midnight and 8:00 a.m., providing earlier delivery times than those available through other national carriers. AirNet uses a number of proprietary customer service and management information systems to track, sort, dispatch and control the flow of packages throughout AirNet’s delivery system. AirNet provides customer service 24 hours per day, seven days a week to handle any inquiries, discrepancies or supply requests, as well as to provide proof of delivery documentation, all of which are value-added features of AirNet’s service.
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 can be reached at (614) 237-9777. AirNet’s Internet web site address is www.airnet.com (this uniform resource locator (URL) is an inactive textual reference only and is not intended to incorporate AirNet’s website into this Annual Report on Form 10-K).
AirNet makes available free of charge on or through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after AirNet electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”).
Delivery Services
Bank services
Bank services, which generate approximately 69% of AirNet’s revenues, primarily consist of cancelled check delivery. AirNet’s time-critical cancelled check delivery service allows its banking customers to reduce their float costs and related processing fees. 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. AirNet’s bank customers represent over 100 of the nation’s largest bank holding companies.
Express services
Express services, which generate approximately 25% of AirNet’s revenues, focus on customers with time-critical delivery needs. Express services are primarily targeted at customers involved in the medical, critical parts and entertainment industries. In the medical industry, Express services are offered to customers shipping packages that require specialized handling, the transportation of which is often highly regulated by varying governmental authorities. Targeted markets within the medical industry include producers and recipients of radioactive pharmaceuticals, diagnostic specimens, blood, umbilical cord blood, human tissue and organs.
Express services are also marketed to customers whose shipment needs are highly time sensitive or time definite, including just-in-time manufacturers, critical parts suppliers and customers involved in the media and entertainment industries.
3
For those customers requiring time-critical delivery options not available on AirNet’s regularly scheduled routes, on-demand cargo charter services are available 24 hours per day, seven days a week. On-demand charters may be scheduled in advance or on an as-needed basis.
Passenger Charter Services
Jetride, Inc., a wholly-owned subsidiary of AirNet, provides private passenger charter services that offer customers a safe, fast, and convenient way to travel. Jetride’s private passenger charter service is available 24 hours a day, 7 days a week primarily within the continental United States and neighboring countries. Jetride provides charter services arranged through third-party charter brokers and, to a lesser extent, to retail customers. Jetride operates its nine passenger Learjets from various locations across the country. All passenger Learjets have been configured to comfortably carry seven or eight passengers. All passenger charter pilots are Airline Transport Pilot rated – the highest Federal Aviation Administration (“FAA”) rating possible. Jetride, Inc. is certified by both the Wyvern Network of Charter Operators and the Aviation Research Group/US, industry leaders in aviation rating. Jetride anticipates adding additional Learjets to its passenger fleet during 2004 as it continues to expand its passenger charter services.
Aviation Services
AirNet operates a fixed base operation from AirNet’s Columbus, Ohio facility, offering retail aviation fuel sales and related ground support services.
Business Strategy
AirNet believes that its Bank services revenue will decline in future periods as a result of the continuing evolution of electronic alternatives to the physical movement of cancelled checks. In October 2003, the Check 21 Act was signed into law. When it becomes effective in October of 2004, the Check 21 Act will require that all financial institutions accept either the physical cancelled check, or an image replacement document in lieu of a physical cancelled check. AirNet believes that this may accelerate the transition in the banking industry to the electronic clearing of cancelled checks.
In response to these changes in the banking industry, AirNet has been pursuing a multi-year strategy to transition and diversify AirNet by pursuing growth opportunities for its Express and Passenger Charter services. During this transition period, AirNet continues to respond to the changing needs of its bank customers. AirNet intends to focus on expanding its Express services to customers in time-critical markets, and time-definite delivery markets, such as medical, radioactive pharmaceutical, on-demand cargo charters and those that benefit most from just-in-time inventories. AirNet’s air transportation network offers customers in these industries competitive advantages through delivery speed, customer service, and custody and control throughout the delivery service. AirNet believes its flexible and reliable air transportation network and demonstrated expertise in providing time-critical deliveries to the banking industry for over 29 years positions it to provide these services to the Express market.
AirNet is also adapting to changes in the banking industry by reconfiguring its operational structure and associated costs to align with the expected volume and revenue changes. AirNet continues to refine its pricing model for bank customers by introducing pricing models that contain both fixed fee and volume-based components.
AirNet continues to invest in additional aircraft to expand its passenger charter operations. AirNet believes that demand for private charter services will continue to grow as commercial airlines continue to tighten schedules and require longer boarding times due to security concerns.
The diversification of AirNet’s business will likely require significant changes in its air transportation network, a greater investment in sales and marketing during the transition, and investment in additional service capabilities and technologies to serve a more diverse customer group.
Fast Forward Solutions
Fast Forward Solutions, LLC, a wholly-owned subsidiary of AirNet, was formed to explore growth opportunities associated with existing and emerging image replacement platforms and technologies. Fast Forward Solutions and NetDeposit, Inc., a developer of electronic check processing technologies, have signed a term sheet regarding their intent to finalize an agreement to provide a standard image replacement document check processing solution to the banking industry. While negotiations with NetDeposit, Inc. are continuing as of March 30, 2004, no agreement had been entered into between Fast Forward Solutions and NetDeposit, Inc. and there can be no assurances that such an agreement will be finalized.
4
Operations
Air operations
AirNet’s air 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 FAA 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. In addition to FAA requirements, pilots providing Passenger Charter services for Jetride, Inc. must also meet additional in-flight experience requirements specifically related to the types of Learjets operated by Jetride.
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 identify and minimize any potential delays in the delivery process. AirNet also uses commercial airlines, primarily to transport shipments during the daytime and weekend hours when its aircraft are operating under a limited flight schedule.
Capacity management is an important factor in achieving profitable growth of AirNet’s package delivery services. AirNet’s air transportation network 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 flexible route structure allows it to respond to the changing volume needs of its customers or to take advantage of emerging opportunities in its Express services business. AirNet’s primary hub in Columbus, Ohio, and several mini-hubs across the nation, 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.
AirNet employs approximately 80 aircraft and avionics technicians in eight separate locations across the country performing all levels of maintenance on AirNet’s fleet of aircraft. 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. AirNet’s aircraft maintenance center at its Columbus hub recently received ISO 9001:2000 certification.
Shipment processing
Bank shipments are pre-sorted by bank personnel and packaged in AirNet-supplied bags color-coded to easily identify the final destination. Express shipments are packaged in either AirNet-provided packaging or the customers’ packaging. Shipments transported on AirNet’s air transportation network are typically picked up by a courier and transported to the local airport where the airbill is either scanned using bar code technology or entered manually. Information on each airbill pertaining to the shipper, receiver, airbill number and applicable deadline is captured and downloaded into AirNet’s computer system, where it is available to AirNet’s customer service representatives (“CSRs”). Upon arrival at AirNet’s Columbus hub or one of its 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, information from the airbill is once again captured and downloaded into AirNet’s computer system. Delivery information for all shipments is then available on-line to the customers and AirNet’s CSRs.
For banking customers meeting daytime banking deadlines and Express customers requiring next-flight-out timing, shipments are typically picked up by a courier and transported via commercial airlines or other integrators to destination cities where couriers accept the packages and deliver them to their final destinations.
Ground support
AirNet manages its ground delivery services through the combined use of employees and a network of approximately 450 independent contractors and vendor couriers. Independent contractors and vendors perform the majority of ground delivery services, allowing AirNet to better match its ground costs with its volume requirements. In some situations, employees are used for ground delivery services on scheduled routes where volume requirements economically justify employing full-time couriers. 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.
Mercury Business Services
On August 11, 2003, AirNet sold the assets of its Mercury Business Services division to Mercury Business Services, Inc., a Delaware corporation owned by a group that includes the original owners of the Mercury business. AirNet had acquired Mercury Business Services in August of 1998.
5
Regulation
AirNet holds an air carrier certificate granted by the FAA pursuant to Part 135 of the Federal Aviation Regulations. In addition, Jetride, Inc. holds its own air carrier certificate granted by the FAA pursuant to Part 135. These certificates are of unlimited duration and remain in effect so long as AirNet and Jetride maintain their standards of safety and meet the operational requirements of the Federal Aviation Regulations. The FAA’s regulatory authority relates primarily to operational aspects of air transportation, including aircraft standards and maintenance, personnel, and ground facilities.
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 higher volumes of time-critical radioactive pharmaceuticals than is allowed by the DOT for most carriers. Party status to DOT E-7060 is renewed every two years, with AirNet’s renewal due November 2004.
AirNet is also subject to Food and Drug Administration regulation of its 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 both AirNet and Jetride have all permits, approvals and licenses required to conduct their respective operations and that they are in compliance with applicable regulatory requirements relating to their operations including all applicable noise level regulations. Current noise level regulations require that AirNet modify its 3 Model 25 Learjets prior to the end of 2004. AirNet intends to retire the Learjet 25’s prior to the end of 2004. AirNet is working proactively with various local governments to minimize noise issues; however, future noise pollution regulations could require the modification or replacement of other AirNet aircraft.
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” of this Annual Report on Form 10-K for a discussion of the seasonal aspects of AirNet’s business.
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 of which AirNet believes have significant interstate market share. The two largest private sector air couriers, FedEx and United Parcel Service (“UPS”), both carry cancelled checks where the deadlines being pursued fit into their existing system. AirNet does not believe that FedEx or UPS represent significant competitors in the time-critical cancelled check market to date. AirNet provides customized service for its customer base, often with later pick-ups and earlier deliveries than the large, national couriers provide.
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 it is in an excellent position to leverage the use of its national air network system, AirNet’s proprietary information technology and its historically high on-time performance level to compete in this market.
In the passenger charter business, AirNet competes with other owner/operators and charter brokers of small business jets. AirNet believes its 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 intends to commence construction of a new corporate and operational headquarters on land leased from the Columbus Regional Port Authority in 2004. Portions of the leased land, as well as portions of the aircraft ramp, on which AirNet intends to conduct a significant portion of its Columbus operations, contain known pollution conditions. The
6
appropriate amended post closure plan and no further action letters addressing these sites are to be supplied to AirNet by the Columbus Regional Port Authority prior to beginning construction. AirNet has received the applicable no further action letters. Identification of additional pollution conditions on the leased land or attached ramp or the inability of the Columbus Regional Port Authority to provide the approved amended post closure plan could increase costs and have an adverse affect on AirNet’s ability to construct the Rickenbacker facility.
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, 2003, AirNet employed 895 persons, which includes approximately 225 pilots. 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 its relationship with employees is good.
Operating facilities
AirNet owns its corporate and operational headquarters at 3939 International Gateway in Columbus, Ohio (the “Port Columbus Facility”). The Port Columbus Facility has 80,000 square feet and sits on land owned by the Columbus Regional Airport Authority (the “Authority”). AirNet has a 25-year land lease with the 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 555 Morrison Avenue in Gahanna, Ohio. The space is used for administrative support personnel.
On January 20, 2004, AirNet entered into a Land Lease with the Authority to lease approximately 8 acres located within the Rickenbacker International Airport (“Rickenbacker”). Rickenbacker is located in Franklin and Pickaway Counties, Ohio, southeast of Columbus, Ohio, approximately fifteen miles from its current Port Columbus Facility. AirNet intends to construct a new corporate and operational headquarters at the Rickenbacker site (the “Rickenbacker Facility”). Construction of the Rickenbacker Facility is anticipated to be completed in the summer of 2005. Upon completion of the Rickenbacker Facility, AirNet’s current corporate and operational functions that are conducted at the Port Columbus Facility, and the administrative functions being conducted at 555 Morrison Avenue, will be consolidated at the new Rickenbacker Facility.
In anticipation of the AirNet’s move to its new Rickenbacker Facility, on January 20, 2004, AirNet entered into an agreement to sell its Port Columbus Facility to the Authority for $3,850,000. AirNet has retained the right to continue to occupy the Port Columbus Facility until construction and relocation to the new Rickenbacker Facility is complete.
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.
Fleet
Cargo aircraft
The following table shows information about AirNet’s cargo aircraft fleet as of December 31, 2003:
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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
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 will be phased out of scheduled operations in 2004.
The Cessna Caravan Super Cargomaster aircraft is a turbo-prop aircraft.
The Piper Navajo, Beech Baron and Cessna 310 are twin-engine piston aircraft.
Passenger charter aircraft
The following table shows information about AirNet’s passenger charter aircraft fleet as of December 31, 2003:
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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(4) |
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4 |
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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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2 |
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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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6 |
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3 |
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(1) Maximum number of passengers
(2) Maximum range in nautical miles, assuming zero wind, full fuel and full payload.
(3) Maximum speed in knots, assuming full payload
(4) Includes one model 35A and one model 60 aircraft operated under a management agreement
An inventory of parts is maintained for each type of Learjet.
The Learjet 60 is a midsize business jet with transcontinental range and meets all Stage Three noise requirements.
Vehicles
AirNet operates a fleet of approximately 90 ground transportation vehicles. Vehicles range in size from passenger cars to full sized vans. AirNet also rents lightweight trucks for certain weekend ground routes. In 2001, AirNet entered into a leasing agreement with a third party provider and began replacing owned vehicles with leased vehicles, as replacement became necessary. AirNet leased 62 vehicles as of December 31, 2003.
There are no pending legal proceedings involving AirNet other than routine litigation incidental to its business. In the opinion of AirNet’s management, these proceedings should not, individually or in the aggregate, have a material adverse effect on AirNet’s results of operations or financial condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2003.
8
Executive Officers of the Registrant
The following table identifies the executive officers of AirNet as of March 29, 2004. The executive officers serve at the pleasure of the Board of Directors and in the case of Messrs. Biggerstaff and Harris pursuant to employment agreements.
Joel E. Biggerstaff has served as AirNet’s Chairman of the Board since August 2001, Chief Executive Officer since April 2000, and President since August 1999. He also served as AirNet’s Chief Operating Officer from August 1999 to February 2004. He has also served as director of AirNet since May 2000. Prior to joining AirNet, Mr. Biggerstaff served as President of the Southern Region of Corporate Express Delivery Systems, a national expedited distribution service, from February 1998 through July 1999. From September 1996 through February 1998, Mr. Biggerstaff provided transportation consulting services and prior to September 1996, he held various positions, including regional vice president and general manager, with Ryder Systems, Inc., a company providing transportation and supply-chain management solutions.
Gary W. Qualmann has served AirNet as the Chief Financial Officer, Treasurer and Secretary since September 1, 2003. Prior to joining AirNet, Mr. Qualmann served as chief financial officer and treasurer of Metatec,Inc., a manufacturer and distributor of electronic media which filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code on October 17, 2003, from February 2002 through August 2003 . Mr. Qualmann provided financial consulting services to the Metatec from October, 2001 through February 2002. From March 1996 until June 2001, Mr. Qualmann was chief financial officer, treasurer, secretary and director of MindLeaders.com, Inc., an e-learning company based in Columbus, Ohio. From May 1988 until July 1995, Mr. Qualmann served as executive vice president and chief financial officer of Red Roof Inns, Inc., a lodging company based in Hilliard, Ohio.
Larry M. Glasscock, Jr. joined AirNet as Senior Vice President - Express Services in February, 2003. From February 2002 through February 2003, Mr. Glasscock served as senior vice president of Evercom Systems, Inc. a national provider of telecom services. From April 2001 through February 2002, Mr. Glasscock served as executive vice president of NextJet Technologies, a software and technology solutions organization. Mr. Glasscock served as chief executive officer of Expedited Delivery Systems, Inc., a time-definite trucking concern from August 1999 to September 2000 and as its president and chief operating officer from January 1998 through August 1999.
Jeffery B. Harris has served AirNet as Senior Vice President, Bank Services since May 2000. Mr. Harris joined AirNet in June 1996 as the relationship manager for Banking Sales and was appointed vice president, Sales in the banking division in October 1997.
Craig A. Leach has served as Vice President, Information Systems since January 2000. Mr. Leach established AirNet’s Information Systems Department in 1985 and was named director of Information Systems in 1996.
Stephen K. Lister was appointed Vice President, Aviation services January 2004. Prior to that Mr. Lister was vice president, Airline Operations since February 2001. Mr. Lister has served AirNet in a variety of capacities since 1982.
Wynn D. Peterson currently serves as Vice President, Strategic Planning and Analysis. Mr. Peterson has served as an officer of the company since February, 2000 when he was named Vice President of Corporate Development. Mr. Peterson joined AirNet in 1997 as manager of Corporate Development. Prior to joining AirNet, Mr. Peterson managed equity and fixed income portfolios from 1993 until 1997 at Desert Mutual in Salt Lake City, Utah. From 1988 until 1993, Mr. Peterson held various management positions in Finance, Corporate Development and Strategic Planning at AMR Corporation, the parent company of American Airlines, Inc., in Dallas, Texas.
Michael J. Snyder has served as Vice President of Airline Operations since February 2004. Prior to joining AirNet, Mr. Snyder consulted on various aviation and logistics projects since November 2001. From May through November 2001 he served as president and chief executive officer of Polar Air Cargo, a global express air freight company. From June 2000 through May 2001, Mr. Snyder was president and chief executive officer of TrafficStation, a leading traffic technology service. From June 1999 through May 2000, Mr. Snyder served as senior vice president of Operations and Marketing at Smartship and from April 1998 though November 1999 served as president of the Western and Midwestern regions of
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Corporate Express Delivery Systems. From October 1996 though April 1998, Mr. Snyder served as a vice president at FedEx Corporation, where he had also held various other position with increasing responsibility since 1981.
Kendall W. Wright has served as Vice President, Operations since 2001. He served as Vice President, Sales from 1988 through 2000.
ITEM 5 - MARKET FOR REGISTRANT’S COMMON
EQUITY
, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
The common shares of AirNet Systems, Inc. trade on the New York Stock Exchange under the symbol “ANS”. The table below sets forth the high and low sales prices of the common shares reported for the periods indicated.
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2003 |
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2002 |
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Quarter ended |
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High |
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Low |
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High |
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Low |
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March 31 |
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$ |
5.35 |
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$ |
2.20 |
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$ |
11.05 |
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$ |
7.50 |
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June 30 |
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4.47 |
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2.05 |
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10.45 |
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7.50 |
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September 30 |
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5.18 |
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3.80 |
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8.92 |
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4.38 |
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December 31 |
|
4.16 |
|
3.23 |
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6.13 |
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4.05 |
|
||||
AirNet has not paid any dividends on its common shares and does not intend to pay any dividends in the foreseeable future. AirNet anticipates using future earnings to finance operations and future growth and development.
The payment of any future dividends on common shares will be determined by the AirNet Board of Directors in light of conditions then existing, including earnings, financial condition and capital requirements, restrictions in financing agreements, business conditions and other factors.
On March 29, 2004, there were approximately 2,000 holders of AirNet common shares, based upon the number of holders of record and the number of individual participants in certain security position listings.
AirNet did not purchase any common shares during the fourth quarter of the fiscal year. On February 18, 2000, AirNet announced a stock repurchase plan under which up to $3.0 million of AirNet common shares may be repurchased from time to time. These repurchases may be made in open market transactions or through privately negotiated transactions. As of December 31, 2003, AirNet had the authority to still repurchase approximately $0.6 million of AirNet common shares under this stock repurchase plan.
10
ITEM 6 - SELECTED FINANCIAL DATA
Statement of Operations Data
(in thousands, except per share data)
|
|
|
Years Ended December 31, |
|
|||||||||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|||||
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Bank services |
|
$ |
103,399 |
|
$ |
102,626 |
|
$ |
106,716 |
|
$ |
102,611 |
|
$ |
99,020 |
|
|
Express services |
|
36,963 |
|
33,958 |
|
26,252 |
|
26,272 |
|
21,768 |
|
|||||
|
Passenger charter services |
|
7,599 |
|
4,316 |
|
737 |
|
— |
|
— |
|
|||||
|
Aviation services |
|
1,261 |
|
1,044 |
|
1,499 |
|
751 |
|
975 |
|
|||||
|
Total net revenues |
|
149,222 |
|
141,944 |
|
135,204 |
|
129,634 |
|
121,763 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total costs and expenses |
|
142,991 |
|
134,236 |
|
121,313 |
(1) |
115,800 |
|
108,667 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income from operations |
|
6,231 |
|
7,708 |
|
13,891 |
|
13,834 |
|
13,096 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Impairment on investment (Note 2) |
|
— |
|
— |
|
1,744 |
|
— |
|
— |
|
|||||
|
Interest expense |
|
1,340 |
|
1,649 |
|
1,668 |
|
2,283 |
|
2,477 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income from continuing operations before income taxes |
|
4,891 |
|
6,059 |
|
10,479 |
|
11,551 |
|
10,619 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income tax expense, net |
|
2,103 |
|
2,429 |
|
5,035 |
|
4,690 |
|
4,322 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income from continuing operations before cumulative effect of accounting change |
|
2,788 |
|
3,630 |
|
5,444 |
|
6,861 |
|
6,297 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (Loss) from discontinued operations, net of taxes (Note 3) |
|
(8 |
) |
(259 |
) |
(251 |
) |
394 |
|
(25 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cumulative effect of accounting change, net of tax (Note 4) |
|
— |
|
(1,868 |
) |
— |
|
— |
|
(2,488 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net income |
|
$ |
2,780 |
|
$ |
1,503 |
|
$ |
5,193 |
|
$ |
7,255 |
|
$ |
3,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income per common share - basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Continuing operations |
|
$ |
0.28 |
|
$ |
0.36 |
|
$ |
0.51 |
|
$ |
0.62 |
|
$ |
0.55 |
|
|
Discontinued operations |
|
$ |
— |
|
$ |
(0.03 |
) |
$ |
(0.02 |
) |
$ |
0.04 |
|
$ |
(0.00 |
) |
|
Cumulative effect of accounting change |
|
$ |
— |
|
$ |
(0.18 |
) |
$ |
— |
|
$ |
— |
|
$ |
(0.22 |
) |
|
Net income |
|
$ |
0.28 |
|
$ |
0.15 |
|
$ |
0.49 |
|
$ |
0.66 |
|
$ |
0.33 |
|
Balance Sheet Data
(in thousands)
|
Total assets |
|
$ |
153,273 |
|
$ |
147,324 |
|
$ |
133,079 |
|
$ |
122,533 |
|
$ |
127,281 |
|
|
Total debt |
|
37,776 |
|
41,794 |
|
28,235 |
|
22,719 |
|
33,948 |
|
|||||
|
Shareholders’ equity |
|
84,280 |
|
80,796 |
|
78,946 |
|
78,845 |
|
73,751 |
|
|||||
Note 1 2001 includes a $1.0 million non-recurring charge related to the retirement agreement of Gerald G. Mercer (see Note 6 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.)
Note 2 Represents 2001 non-recurring charge related to the impairment of Float Control, Inc.’s investment in The Check Exchange System Co. partnership (see Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.)
Note 3 In August 2003, AirNet sold the assets of its Mercury Business Services unit, resulting in discontinued operations.
Note 4 See Notes 1 and 2 of the Notes to the Consolidated Financial Statements included in Item 8 for discussion of the 2002 charge related to the impairment of goodwill in accordance with the adoption of SFAS No. 142. In 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) No. 98-5, Reporting on the Costs of Start-Up Activities, which requires that costs related to start-up activities be expensed as incurred. Prior to July 1, 1998, AirNet Systems, Inc. capitalized start-up costs associated with its premium products line of business. Effective July 1, 1998, AirNet ceased capitalizing such costs and began amortizing the previously capitalized costs over five years. The Company adopted the provisions of the SOP in its consolidated financial statements as of January 1, 1999 which resulted in the write-off of unamortized start-up costs at that time.
11
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
General
AirNet’s Bank revenues continue to decline as a result of the continuing evolution of electronic alternatives to the physical movement of cancelled checks and other market forces. The decline in Bank services requires that AirNet restructure its existing transportation network which was originally established to service its bank customers. AirNet is taking steps to expand its Express and Passenger Charter services businesses to offset the expected decline in Bank services revenue. In addition, AirNet is evaluating and adjusting its aircraft mix and fleet size in response to these changing business conditions. AirNet introduced the Caravan and eliminated the Aerostar from its fleet in recent years and, barring new route requirements, intends to eliminate additional piston aircraft and its Learjet 25’s in 2004. AirNet is reviewing its ground operations for efficiencies and cost reductions and will continue this review throughout 2004. The security surcharge and modified fuel surcharge will continue in 2004. Changes in AirNet’s regional sales and operational structure, increased marketing efforts and adaptation of its fleet to changing market conditions are all critical to achieving AirNet’s goals.
The following management’s discussion and analysis describes the principal factors affecting the results of operations, liquidity and capital resources, as well as the critical accounting policies of AirNet. This discussion should be read in conjunction with the accompanying audited financial statements, which include additional information about AirNet’s significant accounting policies, practices and the transactions that underlie its financial results.
Results of Operations
Net Revenues
|
In ‘000’s
|
|
2003 |
|
2002 |
|
2001 |
|
$ Increase
|
|
% Increase
|
|
$ Increase
|
|
% Increase
|
|
|||||
|
Delivery Services Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Bank Services |
|
$ |
103,399 |
|
$ |
102,626 |
|
$ |
106,716 |
|
$ |
773 |
|
1 |
% |
$ |
(4,090 |
) |
-4 |
% |
|
Express Services |
|
36,963 |
|
33,958 |
|
26,252 |
|
3,005 |
|
9 |
% |
7,706 |
|
29 |
% |
|||||
|
Total Delivery Services Revenues |
|
$ |
140,362 |
|
$ |
136,584 |
|
$ |
132,968 |
|
$ |
3,778 |
|
3 |
% |
3,616 |
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Passenger Charter Services Revenues |
|
7,599 |
|
4,316 |
|
737 |
|
3,283 |
|
76 |
% |
3,579 |
|
486 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Aviation Services Revenues |
|
1,261 |
|
1,044 |
|
1,499 |
|
217 |
|
21 |
% |
(455 |
) |
-30 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total Revenues |
|
$ |
149,222 |
|
$ |
141,944 |
|
$ |
135,204 |
|
$ |
7,278 |
|
5 |
% |
$ |
6,740 |
|
5 |
% |
AirNet has experienced overall net revenue growth each of the last three years. This can be attributed to several factors including increased Express shipment volume, growth in Passenger Charter services, the implementation of a security surcharge program in August 2002 and, increased revenues from the fuel surcharge program resulting from increased fuel prices and changes to the surcharge program implemented in 2002.
AirNet assesses its customers a fuel surcharge which is based on the Oil Price Index Summary – Columbus, Ohio (OPIS-CMH index). As index rates increase above a set threshold, surcharge rates increase. In August 2002, AirNet modified its fuel surcharge program for its bank customers to help offset timing differences between market prices and the OPIS-CHM index used to determine surcharge rates. In 2001 and through January 2002, AirNet’s Express customers paid a 4% temporary fuel surcharge on most revenues under a separate program. In February 2002, AirNet rescinded this 4% temporary surcharge on Express services revenues and implemented the program described above based on the OPIS – CMH index.
12
Bank Services Revenues
|
In ‘000’s
|
|
2003 |
|
2002 |
|
2001 |
|
$ Increase
|
|
% Increase
|
|
$ Increase
|
|
% Increase
|
|
|||||
|
Bank Revenues |
|
$ |
101,914 |
|
$ |
103,872 |
|
$ |
107,646 |
|
$ |
(1,958 |
) |
-2 |
% |
$ |
(3,774 |
) |
-4 |
% |
|
Fuel Surcharge |
|
3,939 |
|
1,602 |
|
1,939 |
|
2,337 |
|
146 |
% |
(337 |
) |
-17 |
% |
|||||
|
Federal Excise Tax |
|
(2,454 |
) |
(2,848 |
) |
(2,869 |
) |
394 |
|
-14 |
% |
21 |
|
-1 |
% |
|||||
|
Total Net Bank Revenues |
|
$ |
103,399 |
|
$ |
102,626 |
|
$ |
106,716 |
|
$ |
733 |
|
1 |
% |
$ |
(4,090 |
) |
-4 |
% |
Consistent with AirNet’s expectations, Bank revenues (excluding the impact of fuel surcharge and federal excise taxes) continue to decline year over year. This decline slowed as AirNet continues to focus on additional services for banks beyond cancelled check transportation, such as proof of deposit and interoffice mail delivery services. From 2002 to 2003 weekday shipment volume decreased 1.3% per flying day and weekend shipment volume per flying day was down by 9.8%. The decrease in weekly shipment volume was offset by increased fuel surcharges in 2003 as compared to 2002. Lower check delivery volume as a result of historically low interest rates and the declining use of checks, contributed to the reduction in revenues, as did increased competitive factors from regional carriers and transportation cost reduction initiatives by AirNet’s Bank customers. AirNet believes that this decline will continue as the Check 21 Act becomes effective in October 2004; however, at this time AirNet is unable to predict the ultimate impact of this Act on future years.
Weekday shipment volume decreased 4.8% from 2001 to 2002. A portion of the relative lost volume was attributed to additional volume in 2001 that was transported during the days immediately following the September 11, 2001 tragedy, during which AirNet transported checks for several of its bank customers who relied on AirNet for services their normal or secondary vendors could not provide at the time. The decrease in weekday volume was partially offset by a 17.0% increase in weekend shipment volume, rate increases implemented in January 2002 averaging approximately 2.2% and the implementation of the security surcharge program related to Bank customers in September 2002.
Express Services Revenues
|
In ‘000’s
|
|
2003 |
|
2002 |
|
2001 |
|
$ Increase
|
|
% Increase
|
|
$ Increase
|
|
% Increase
|
|
|||||
|
Express Revenues - Non Charter |
|
$ |
28,035 |
|
$ |
25,100 |
|
$ |
19,635 |
|
$ |
2,935 |
|
12 |
% |
$ |
5,465 |
|
28 |
% |
|
Express Revenues - Charters |
|
9,046 |
|
9,534 |
|
6,431 |
|
(488 |
) |
-5 |
% |
3,103 |
|
48 |
% |
|||||
|
Fuel Surcharge |
|
1,007 |
|
369 |
|
954 |
|
638 |
|
173 |
% |
(585 |
) |
-61 |
% |
|||||
|
Federal Excise Tax |
|
(1,125 |
) |
(1,045 |
) |
(767 |
) |
(80 |
) |
-8 |
% |
(278 |
) |
-36 |
% |
|||||
|
Total Net Express Revenues |
|
$ |
36,963 |
|
$ |
33,958 |
|
$ |
26,253 |
|
$ |
3,005 |
|
9 |
% |
$ |
7,705 |
|
29 |
% |
AirNet’s Express services a variety of markets with its time-critical shipping solutions through a combination of AirNet’s scheduled air and ground system, commercial airlines and dedicated charter services. The 2003 increase in Express revenues is primarily the result of AirNet’s efforts to diversify its revenue base and continue its penetration of the medical market. Revenues from medical and related companies increased 6.8% in 2003 as AirNet continues to expand its services for transportation of radiopharmaceutical drugs, diagnostic specimens, umbilical cord blood for cryogenic storage and human blood and tissue. AirNet also increased its revenues for services in the media and entertainment market by 13.1% in 2003 compared to 2002; a market where customers demand a reliable and secure transportation system for the distribution of film screenings and tape distribution. While AirNet experienced a 5% decrease in revenues from dedicated charters from 2002 to 2003, the decrease was offset by growth in the scheduled nightly volume of non-charter shipments, approximately 70% of which are transported via the AirNet air transportation network.
The increase in revenues from 2001 to 2002 was primarily due to increased shipment volume due to increased market penetration in select markets such as medical, as well as a 5% rate increase to most customers in February 2002 and an increase in security surcharge in August 2002.
13
Passenger Charter Services Revenues
|
In ‘000’s
|
|
2003 |
|
2002 |
|
2001 |
|
Increase (Decrease) 2002 to 2003 |
|
% Increase (Decrease) 2002 to 2003 |
|
Increase (Decrease) 2001 to 2002 |
|
% Increase (Decrease) 2001 to 2002 |
|
|||||
|
Passenger Charter services revenues |
|
$ |
7,599 |
|
$ |
4,316 |
|
$ |
737 |
|
$ |
3,283 |
|
76 |
% |
$ |
3,579 |
|
486 |
% |
|
Average annual number of jets |
|
7.2 |
|
5.9 |
|
2.0 |
|
1.3 |
|
22 |
% |
3.9 |
|
195 |
% |
|||||
|
Average revenues per jet |
|
$ |
1,055 |
|
$ |
732 |
|
$ |
368 |
|
$ |
324 |
|
44 |
% |
$ |
363 |
|
99 |
% |
Passenger Charter services revenues have shown the largest percentage growth for AirNet in recent years. As AirNet commits additional investment in this area, it expects revenue growth to continue as it widens the distribution of its Passenger Charter aircraft in the United States. AirNet’s Passenger Charter services allow customers greater control and flexibility in air travel than commercial airlines. AirNet has increased its Passenger Charter fleet from three aircraft at December 31, 2001 to seven at December 31, 2002 and nine at December 31, 2003. AirNet’s Passenger Charter fleet includes owned aircraft as well as leased and managed aircraft. AirNet will continue to invest in the Passenger Charter business with the anticipated addition of four aircraft in 2004, all of which are expected to be midsized Learjet 60 aircraft.
Aviation Services Revenues
These revenues primarily relate to the AirNet’s fixed base operation and maintenance services provided in Columbus, Ohio. While these services will continue, no significant future growth is expected.
Operating Expenses and Income from Continuing Operations
|
In ‘000’s
|
|
2003 |
|
2002 |
|
2001 |
|
$ Increase
|
|
% Increase
|
|
$ Increase
|
|
% Increase
|
|
|||||
|
Wages and benefits |
|
$ |
25,755 |
|
$ |
24,182 |
|
$ |
19,715 |
|
$ |
1,573 |
|
7 |
% |
$ |
4,467 |
|
23 |
% |
|
Aircraft fuel |
|
19,227 |
|
17,582 |
|
15,486 |
|
1,645 |
|
9 |
% |
2,096 |
|
14 |
% |
|||||
|
Aircraft maintenance |
|
12,242 |
|
12,305 |
|
10,961 |
|
(63 |
) |
-1 |
% |
1,344 |
|
12 |
% |
|||||
|
Contracted air costs |
|
9,929 |
|
9,069 |
|
10,941 |
|
860 |
|
9 |
% |
(1,872 |
) |
-17 |
% |
|||||
|
Ground courier |
|
25,698 |
|
24,292 |
|
23,171 |
|
1,406 |
|
6 |
% |
1,121 |
|
5 |
% |
|||||
|
Depreciation |
|
17,535 |
|
17,699 |
|
14,668 |
|
(164 |
) |
-1 |
% |
3,031 |
|
21 |
% |
|||||
|
Insurance, rent and landing fees |
|
9,054 |
|
7,352 |
|
5,540 |
|
1,702 |
|
23 |
% |
1,812 |
|
33 |
% |
|||||
|
Travel, training and other |
|
7,597 |
|
8,325 |
|
7,079 |
|
(728 |
) |
-9 |
% |
1,246 |
|
18 |
% |
|||||
|
Total operating costs and expenses |
|
$ |
127,037 |
|
$ |
120,806 |
|
$ |
107,561 |
|
6,231 |
|
5 |
% |
13,245 |
|
12 |
% |
||
The increase in Passenger Charter services from 2002 to 2003 accounted for $2.2 million, or 34%, of the overall increase in operating expenses. The remainder of the increase is primarily due to increased hours flown and service and support costs associated with the increase in Express shipment volumes. Flight hours for the cargo fleet increased 10% from 2001 to 2002, but remained flat from 2002 to 2003.
An increase in pilots to support the Passenger Charter operation accounted for 32.9% of the increase in wages and benefits from 2002 to 2003. Additional customer support center staff to service the increase in Express shipment volume and an increase in health benefits costs resulted in a 10.5% increase in wages and benefits. The increase from 2001 to 2002 is also attributed primarily to the increase in Passenger Charter pilot staff and Express support staff.
14
Aircraft fuel expense has increased year over year as a result of the increase in the number of hours flown as well as the increase in fuel prices. The average price per gallon of aircraft fuel has increased 11.5% in 2003 compared to 2002 and decreased 1.5% in 2002 compared to 2001. Increased operational efficiencies allowed AirNet to reduce fuel burn per hour in 2003 by 7% compared to 2002 and 2001. AirNet continues to maintain its fuel surcharge program to offset these increases in fuel expense. The amounts related to the fuel surcharge program are classified as revenue.
While overall hours flown from 2002 to 2003 increased only slightly (1.5%), maintenance expense remained flat as AirNet began to experience the benefits of phasing out the Aerostar aircraft in 2001 and 2002 and replacing them with the more operating efficient Cessna Caravans. The increase in maintenance expense from 2001 to 2002 was directly related to the increase in flight hours.
Contracted air expense includes costs associated with shipments transported on the commercial airlines and costs to third party air operators for subleased air routes and back-up charter services. Commercial airline costs decreased 4% from 2002 to 2003 and 10% from 2001 to 2002 as AirNet was able to secure better rates with the commercial carriers it utilizes most often. Back-up and sublease charter expenses decreased 26% from 2001 to 2002 as AirNet decreased its reliance on outside providers as a result of adding aircraft and pilots. However, the expense increased 31% from 2002 to 2003 as AirNet, once again, began to experience pilot shortages and elected to outsource more routes.