Air cargo company AirNet Systems [ANS] is faced with making changes to survive.

Based in Columbus, Ohio, with a fleet of more than 100 planes, AirNet is the nation's largest courier of canceled checks. The problem is that a new federal law which took effect last October, Check 21, paves the way for digital transmission of check data from one bank to another. The law effectively ends the need for couriers like AirNet to fly canceled checks overnight from bank to bank.

To diversify its revenue stream, AirNet has begun an express courier service, with its niche medical transports, and it has also begun a private passenger charter business, dubbed JetRide.

The way that AirNet has handled its diversification to date, particularly JetRide, has angered two major shareholder groups. The two groups collectively hold 14.7 percent of AirNet stock and have demanded the resignation of AirNet CEO Joel Biggerstaff.

Unable to push the AirNet board into firing Biggerstaff, Phillip Goldstein, managing partner of the New York-based Opportunity Partners, has already put forth a slate of candidates for the five-man board. Goldstein's group owns more than 1 million AirNet shares or 10.2 percent of the outstanding stock.

After accumulating 450,000 AirNet shares between Jan. 26 and March 18, James Chadwick, managing partner of the San Diego-based Pacific Coast Investment Fund sent a letter to AirNet's directors seeking the "immediate replacement of Joel Biggerstaff" for his "substandard performance" and "lack of leadership." He noted that during Biggerstaff's five-year tenure as chairman, CEO and president, there has been a "wholesale collapse" in the value of AirNet's stock.

"I have talked to Goldstein," Chadwick told Regional Aviation News. "I would support his slate. I would have additions to make if we're grouped in the future. We are not now working in tandem."

The company has not set the date for the annual meeting or filed a proxy. Three out of the last four years, the annual meeting had been May 8 or 9 with proxy statements released between March 27 and April 4.

Six investor groups control 55.6 percent of AirNet's stock. On the other hand, the 13 officers and directors of AirNet control 127,600 shares or 5.4 percent of the company. The largest insider shareholder is Biggerstaff with 20,000 shares.

When AirNet released its 2004 financial report, it reported a net fourth quarter loss of $4.1 million, or 41 cents per share. Its loss for the year, was $34.1 million, or $3.39 per share (RAN, March 28). The company posted the net loss because of a $47 million impairment charge it took in the third quarter and a $5.7 million fourth quarter charge for future tax obligations.

"This back-to-back write-down typifies Mr. Biggerstaff's mismanagement of our company as even the most inexperienced CFO or CEO certainly should have sought to include every possible write-down still to come in the third quarter," Chadwick wrote to the board.

Chadwick told Regional Aviation News that Biggerstaff and AirNet "panicked" when they took the impairment charge for the possible loss of business in 2006 and 2007. The write-down effectively made the existing fleet of planes worthless on the balance sheet.

AirNet would not comment to Regional Aviation News on either Chadwick's or Goldstein's requests.

"I don't deny that Check 21 will change their business. Will they be flying checks 10 to 20 years from now? I doubt it," Chadwick said. "There is still a very strong stream of cash that can be made from check processing."

In the fourth quarter - the first to be impacted by Check 21 - AirNet's sales from check courier flights increased 8.3 percent to $27.4 million. For the year, this unit generated $103.3 million in sales, or a 2.7 percent increase over 2003.

In a worst case scenario, Chadwick said AirNet should continue to fly the check runs as long as it can make money. When the business becomes unprofitable, then AirNet should sell the fleet and dissolve the company. This, he said, would be the responsible option.

A sensible alternative would be to further develop its express courier business, which utilizes the current fleet, Goldstein told Regional Aviation News. "There are other opportunities like in medical runs," he added.

Both men view JetRide as the unacceptable alternative.

"The big mistake they are doing is damaging the whole company by going hog wild into the passenger charter business," Goldstein said. "It has required a massive capital expenditure that is leveraging the company."

JetRide now has a fleet of 15 aircraft - nine owned by the company and six it manages. Last year the company doubled its capital expenditures to $51.2 million. The company purchased four new Learjets to be used for JetRide and invested $8.3 million in a new office-hangar facility as it shifts operations from Port Columbus International Airport to Rickenbacker International Airport, Columbus' all-cargo airport.

"I think they put the balance sheet in jeopardy by financing the passenger charter service," Chadwick said. "I don't think there is any place to go in passenger charters."

In this industry, he said, the big will get bigger and the smaller players will have a difficult time surviving.

>>James Chadwick, Pacific Coast, (212) 466-1892; Phillip Goldstein, Opportunity Partners, (914) 747-5262.<<