From Jefferies, Adams, and Alan for being here. If you don't know Joe Adams, he's Chair and CEO of FTAI. It's one of my top three picks in the sector, and although it was up 100% over the last 12 months since we launched coverage, the performance has been quite stellar since June and all on EPS revisions. So, kudos to you, Joe. So thanks again for being here. A lot has happened at FTAI over the past decade, but even over the past three months and the start of the year, with new agreements, acquisitions, and internalization of yourself and the rest of the Fortress management team. Maybe if you could give us a run-through for the audience, just lay of the land on Fortress.
Yeah. So, the Fortress connection is no longer, so we retain the F-T-A-I, which originally stood for Fortress Transportation and Infrastructure, but we go by FTAI Aviation now, and we have no connections going forward to Fortress. So we're a independent, separately managed company. I'm the CEO, and Angela Nam is the CFO. She's here, and we're full-time employees of FTAI Aviation. That's all we do. So we're like every other independently managed public company, and it was the right timing, given changes at structural changes at the company, as well as the ownership of Fortress. So we're very happy to fly and be free.
Maybe if you could talk about aerospace products then. Your business is about aerospace products as EBITDA is poised to grow from $160 million in 2023 to $325 million -$350 million in 2024, and $700 million by 2026. You've done over 150 modules in the first half of this year and run rate well above 300, compared to the 178 in 2023. How do you assess the market opportunity today, as it seems like everything is going your way and in terms of larger set of customers and more work per customer?
Yes. We're. We originally set a goal of a billion dollars of EBITDA by 2026, and we sort of built that up, assuming that we would grow our customers from 25 - 50. We'd do more modules per customer, growing that from 4 to 8, and we're well ahead of those numbers. So we recently revised that aspirational goal of 2026 to $700 million, up from $500 million. And roughly to do that, I think we need about a 10% market share of the CFM56 market and a similar amount on the V2500. The CFM56 market, the way we think about the size of the addressable market is, you have 20,000 engines in the world's fleets today.
If we back out engines that are under OEM programs and also engines that are owned by American, United, Delta, those airlines that have their own independent, you know, large maintenance shops of their own and unions that don't like outsourcing, we would deduct about 6,000 engines from that 20. So you'd have about a 14,000 engine market. Roughly, that translates into about 2,500 shop visits per year. On average, you're doing work on about two modules, two out of three modules per engine, on average. So that translates into about 5,000 modules that need to be repaired during any year. In our 2026 revised number, we're assuming that we do between 450-500 modules, so a little less than 10% market share to achieve our new objective of $1.25 billion of aerospace products EBITDA in 2026.
Maybe just a quick follow-up on that, because we're often asked this question: What makes somebody choose FTAI for a module, and how do you think about the customer penetration per module increasing?
Yeah. The pitch to the airline is pretty simple. We basically allow an airline to save time and money, and we give them a lot of flexibility with their fleet. The time and money comes from several different aspects, but basically, it's the ability to avoid a lengthy shop visit for an engine that needs to have maintenance done on it. We would do that either through an engine exchange or a module exchange. We describe that as our sort of MRE model. We maintain, repair, have those assets ready and rebuilt so that we can exchange immediately, so the airline doesn't have to manage their own shop visit. Effectively, it's an outsourced play.
The time and money, if you can eliminate a 4 - 6 month shop visit, you eliminate the need for spares, you eliminate an engineering team, you don't have to ship the engine to Germany, you don't have to send your teams to go over there and sit in a hotel for two months watching what they do. All of those costs just go away, and you get a fresh engine, and you're on your way, and that translates into between $500,000 and $1 million per savings right off the bat. You also eliminate a lot of the negative surprise risk, which you can have, because typically, MROs are motivated to increase work scopes.
So once an engine is in a shop, you know, it often ends up, you know, being more things need to be repaired than you originally anticipated, so those go away, and virtually every owner or airline in the world has had shop experiences that went the wrong direction and are happy when somebody comes in and says, "I can eliminate, you know, your, your downside risk and your worries on that," and so that's basically the pitch, and the flexibility comes from the fact that what we do is we go out and we acquire run-out engines that need to be restored.
We then rebuild those engines, and then we go to the airline and say, "You can either lease it, buy it, or exchange it." We love all three, but we love the exchange the best because that gives us the ability to take a run-out engine and rebuild it all over again and do the same thing. So that's kind of in a nutshell, how we, you know, how we've built our business. We've vertically integrated in every way possible into the maintenance side through owning our own facilities, manufacturing parts through a joint venture, generating used serviceable material. We have a team of 50 engineers. We obsess about every line item in a cost of a shop visit every day. That's what we've done by focus.
We are unique in that most of the industry is oriented towards getting airlines to spend more money on maintenance. Our pitch to the airline is: We can help you spend less on maintenance. That resonates because virtually every airline in the world is seeing, you know, outsized growth in maintenance costs, particularly engine costs.
You threw out some numbers out there on potential modules out there, but if you look at your available capacity today, I believe it's 1,350 modules. And you're targeting about 10% market share. So how do we sort of get to that full capacity, potentially?
We have about 1,350. If you take 300 engine shop visits here at Montreal capability, that's 900 modules to rebuild, and 150 in Miami, that's 450. So that's the 1,350 composition. As I said, we're looking 10% market share would require between 450 - 500 modules. So if you were to double the, you know, 10%, obviously easy math, we still have enough capacity to serve that market. And we also have other relationships in different parts of the world.
We did a, we're doing a sort of a partnership with Batam, which is a subsidiary of Lion Air in Indonesia, where we've done a number of low-pressure turbine module swaps with them, and we're now using their owned engine facility in Indonesia. They're very happy, ecstatic about this product, and we're also sort of co-marketing the service to airlines in the region. So it extends our marketing reach. The word-of-mouth endorsement from them is, you know, very helpful. They put it on their Instagram account, and they were talking about how great it was and how much money we saved them. So we love all of that, and we'll expand our, you know, reach in other areas of the world by doing that, and it's essentially no capital to us.
Another question we're asked often is, the uptime model seems so simple, but we know it's very actually quite difficult. You know, how much pushback do you get against the idea of, like, could other people replicate this model? And why don't people do it in-house?
Yes, we do get that question a lot, and I think about it a lot. I've thought about it for 10 years because every year I think, you know, somebody's gonna, you know, try to do what we do, and we try to make it harder every year for people to match what we do. And if you think about it, there's two different groups out there. What we've done is we've combined a leasing function with a maintenance function. So you could look at either one and say: Well, why don't leasing companies do this? Well, they would have to then build the maintenance capacity. And most lessors in my experience, and I have, having started one, have some experience, but they're in the maintenance avoidance business.
They typically, all their contracts are structured around forcing the airline to do the maintenance because they know how much risk there is in cost overruns and expenses, and they don't want uncertainty. So almost their whole orientation is to just make the airline do the maintenance event and not take that on themselves. We are the opposite. We went to people and said: We don't want you doing maintenance. We wanna do it for you. Just pay us a fixed fee in maintenance reserves, and you're done. So that's a structure, a big structural difference. Plus, the lessor community is highly diversified. Their orientation is usually around, as a financial institution, you wanna own some of everything, and you wanna have as, you know, as little concentration of any as possible.
So the portfolios aren't really oriented towards what we did, which was we became obsessed with the CFM56 engine seven years ago and said: We don't wanna do anything but that. We're. We just wanna be the best in the business of that engine. So very different mindset. The other side is the MRO world, which they have the capability to do the maintenance side. But one of the things we've decided to do is we do no third-party work in our shops. So the only work we do in our shops is our own engines, and the third-party MRO world is the opposite orientation. They're always going out trying to get someone else's engine to come in, and they don't own their own engines.
So we own 450 CFM56 engines today, which gives us a huge opportunity to be able to, to do the module swaps, have the inventory, have the capability. I'm sure you could go to a big MRO today and say, "If I send you my engine, will you do a low-pressure turbine swap?" And they'll say, "Sure." But then, and then it will take them 30 days to get, you know, inducted into the shop, and then they may say, "Well, we don't have a low-pressure turbine right now. You know, we'll have to go get one," and they'll probably call us. So. And they don't have asset management teams in place. So, you know, we've invested, you know, $2 billion of capital into assets at, at a pretty good time to do so.
So somebody would have to sort of do some of that and replicate that. And then lastly, we're not an OEM, and a lot of MRO shops either have extensive OEM relationships, or they are an OEM in some cases. So those complicate your ability to use to be flexible and use other people's parts, for example. So that, that's a structural impediment that a lot of MROs, you know, will wrestle with to figure out if they could actually copy or do what we do. But look, I'm very paranoid. I'm always paranoid about you know, anybody that, you know, thinks they can do it, and we're watching and. But as I said, we also don't do nothing. You know, we don't stand still. We'll keep, you know, putting barriers up and making it, you know, even harder.
Paranoid and obsessive. We like those two characteristics of you, Joe. You said it.
It's worked. It works well, yeah.
And maybe on the CFM56, where you, you know, you did really focus on that, I think what's interesting is the profitability per module, even before PMA gets approved. So the Q2 results would suggest $700,000-$800,000 of EBITDA per module, and thanks for continuing to give us that data, by the way-
May not last that long.
Before we get back into it. I know, Alan told us. Versus the historical $500K per module. So how do we think about that? Is that 'cause customers are giving you an upfront premium because you're the only ones that could do it quickly enough, or what's going on there?
I think it's us being lowering our costs, for the most part, just being better. As I said, we always go down line by line item in a cost, in a shop visit, and keep finding things every time we look. So people have asked me, like, "How do you maintain this?" And I said, "Well, we're not done yet." We just keep going through the engine and finding other ways to save money. There's huge amount of cost out there. Piece part repair, for example, is one I've been talking about, where you can have a single part, a $300,000 part, that if you can repair it, it costs $30,000. To buy it new is $300,000.
So if you can figure out how to repair that, you save $270,000 immediately on one part. So there's opportunities like that that we're gonna continue to pursue. Lockheed Martin will give us the ability to continue to reduce the costs. We talked about increasing our margins up over 40%, and most of that will come from, you know, the efficiencies gained by owning that facility and also by increasing the output per person. What we did in Miami was fairly basic in that we said no third-party work, so we got rid of a lot of, you know, noise and customers that were, you know, that caused distraction.
We also simplified people's life and said, Henry Ford years ago said: "You're just gonna do one thing every day, and by God, you get better at it, you know, if you do it every day." So we did that, and then we put in some incentives that, you know, have allowed us to reduce our turnaround times by half. So we think the same process will work in Montreal, but it's a bigger facility, so we have more upside, and we think we can get more output per person, which is the highest return, you know, you could ever get from a investment, and we think we can do that in the next 6-9 months. So that's kind of our focus. But I think it, it's largely on us, you know, just getting better at controlling costs and expenses.
Maybe just one more follow-up on the profitability per module. How do you think about pricing playing into it at all, given tightness in the MRO market? Are you seeing any benefits from that?
Yes. I mean, it's going to get tighter in that turnaround times, as you've seen and I've seen some of the things you've written of, you know, are getting longer for third-party MRO work. So that gives us the ability to present more. It's more savings we can present to the customer. Because if you can do a module swap in two weeks, or you do an engine exchange in two days, if you're comparing that with a six-month shop visit instead of a three-month shop visit, you can price that, you know, better. So I think turnaround times are high. They haven't probably peaked, and that just gives us the ability to accelerate.
What we're trying to do is get people to do something different, and once you get them to, you know, converted, we don't think they'll go back to doing it the old way. We think once you say, a lot of airlines have told us they worry they're becoming an engine maintenance shop, that they wanna be an airline, they wanna sell seats, and they're spending all their time worrying about engine maintenance over the next few years. And we come in and say, "We can do all of that for you, and you don't have to worry about that." And so that I think is gonna accelerate, you know, the transition.
Yep, and it doesn't necessarily help their valuation, having their MRO networks, 'cause they can't monetize it.
Right.
You alluded to Montreal a little bit with the Lockheed Martin site. Just, can you walk us through that cost savings element one more time and the opportunity to realize better labor efficiency there?
Yeah, so we said about $30 million of savings in year one, which, roughly $15 million of that will come from just the profit that we would have otherwise paid Lockheed Martin for doing the work for us, and the other half will come from having the same headcount doing more volume. And we feel very good about those numbers, that they'll be. There's upside after that, that's not gonna stop there. We think we'll continue to increase efficiencies. And then beyond that, we've indicated piece part repair will save an additional $10 million -$15 million, which we think would start sometime in next year, where we also think have very, very high expectations that that will, you know, will exceed our expectations on that front, as we're only really just into it.
It's sort of like when we started originally with the CFM56 engine, there were a lot of things we didn't know. And once you get into it, and you realize, you know, where the money is spent and where the money can be saved, you know, we think that number is only gonna go up. And we'll do that organically. We spent a lot of time in the last year and a half talking to sort of everybody in the piece part repair business and felt that doing it ourselves in our own facility is the best.
Makes sense. You launched the V2500 program a few quarters ago, which is unique because it's not modular like the CFM56, and the MRO network is closed. So then you recently signed a deal with the OEM for over a 100 engines over five years. So how did that agreement come about, and how do we think about the timing of that revenue realization?
Sure. It was a really good experience we had with Pratt, and it started. We had owned V2500s for six years, and we had experience with the engine, so it wasn't brand new. I think we owned about sixty of them. When the GTF problem surfaced roughly about a year ago, we started getting calls from airlines, saying they needed, desperately needed engines. And we called Pratt and said, "I assume you're getting the same phone calls," and they said, "We are." And they're like: "Why don't we work together to figure out how we can help?" P eople help, people helping people.
Mm-hmm.
Right? So we started talking to them in December of last year, and basically, the way we thought about it is we had already bought 15 engines, and we were doing performance restorations at two maintenance shops in Europe, and we were using, you know, a variety of techniques that we've used on the CFM56 engine. But the Pratt alternative was better in every aspect, in that we get a brand-new engine, 20,000 cycles, all new parts, we get thrust upgrades, we get the ability to upgrade from Pre-Select to Select on some engines. It was something only Pratt could deliver to this, and it was a superior, you know, proposal to anything else we could do on, you know, on our own.
So the way we divided up the world was, we said: Look, we'll go buy run-out engines. We'll aggregate those engines. We'll put them into your system, Pratt system, and you do the restoration, and then when they come out, we'll lease them, sell them, or exchange them. And they liked that. Pratt said they liked several aspects of it. One is that we're an aggregator. It's not. It sounds easy to go find a 100 run-out engines, but it actually isn't that easy, and they don't all come in the same flavor at the same time. So having the ability to aggregate, and do deals like we did with LATAM, makes us, you know, ideal for that function. Then the performance restoration, I says, Pratt, was the only party that could do that.
And we gave them great flexibility to put that engine wherever they want in their system, which actually turned out valuable to them because there are some shops that have V2500 capability but do not have GTF capability. So there's room in the system to accommodate that, and it's a big order, you know, 100 shop visits, it moves the needle there. And then lastly, they don't finance shop visits, so we can go to an airline and say: We'll finance it through a lease, if you want, and you can tell me how many years do you want it? Do you want three, five, six years? And that flexibility is very helpful because these airlines are facing very large engine, you know, shop visit bills, and they don't want to spend the money on that.
They would rather spend it on, you know, operations. So it really fit nicely together. We will induct, I think, 40 engines out of the hundred this year, probably another 40 next year. We should start getting engines out in maybe this month or early October, and they seem on track for their turnaround time. So all's good, and then we'll talk about extending, you know, increasing the program. We've offered Montreal as a V2500 shop to do restorations there. But given that we're the only player doing this in the V2500 market, I think we'll be the dominant player for this engine for the rest of its life.
Just maybe talk to us about the fact that you've said it's not dilutive to aerospace products, EBITDA, 40% margin. What, what drives the profitability of the program?
So all of the above. You know, the ability to source engines, run-out engines at attractive prices, the price that we get from Pratt, and also the ability for us to put those engines out in a variety of structures, either leasing or exchanges. So it all, you know, blends together. It's each one of the pieces of those, you know, that three-part chain, you know, is a contributor.
Great, and let's talk about PMA, 'cause it's been an imminent catalyst for quite some time. You're seeking four PMA part approvals. On the Q2 call, you said that the first part, the low-pressure turbine stage one vane, is on 15 engines and flying with no issues. So maybe any color on what customer conversations look like, what's going on with the FAA testing process, and what's left?
Yeah, we haven't really updated any specific timing guidance. We just say we're, you know, it's making great progress, and we're close, but that's the extent. And I know you've talked to Chromalloy directly as well, but no specific timing guidance on the next four parts, but good progress, and we're. Chromalloy has never not gotten approval of any of the hot section parts that they've put through. So we And we always say we think it's worth the wait. It's gonna be very a very good program, and will be very successful.
So the first part is actually on more than 15 engines, so it continues to be acceptance, and people have asked me what, how much, how many parts out of the 5 do you, you know, do you need before a number of airlines will go more fully into it? And I think it's probably 3 out, 3 parts. So we see that as, you know, still, you know, further upside for our story that, you know, we've been able to do a lot with, without much PMA, and we still think that, you know, that that provides, you know, further upside for us.
So when we take the Q2 EBITDA module of $750,000, add on the $500K savings from PMA, is it fair to say about $1 million per module is what the EBITDA generation could look like?
That's what we've been assuming, yes, and it, you know, and obviously, it could have some upside based on those numbers.
Okay, got it. And you talked about three exit routes for an engine: a lease, a sale, or an exchange, exchange being the most preferable, so it creates like the flywheel effect. How do you navigate customer preferences? How do you steer them towards the one you want them to choose?
We don't really. I mean, you're better off winning the business than trying to navi-- you know, force people into somewhere they don't wanna go. So we say we like that the best 'cause we get a replacement engine to do it all over again, but we also like the other two, and they're very profitable. The lease opportunity is one where I think, you know, we have the ability to sell. Once we put it on a long-term lease, we have the potential to sell that lease to a financial partner, who they wanna buy engines from us. They don't have maintenance capability, so we could sell the leased asset and retain the management contract, which is also another great outcome for us to then recycle the capital and go back and do it all over again.
Great. Back to our pricing question. You've said the CFM you could do a CFM56 shop visit with a little over $3 million, which is about a 50% discount to the OEM shop visit price. We just had the HEICO guys here yesterday. You know, should we sort of see the same sort of delta, that 50% stick? And can you get more or can you get more price escalation? 'Cause that's quite a steep discount compared to a normalized PMA provider, let's say.
That's, that's our savings based on cost.
Sorry.
Typically, you know, when you. HEICO will say, and Chromalloy will say, "We'll sell PMA to a third party at 65% of OEM list price," or something like that. But our price, given that we funded the development costs, is basically more of a manufacturing cost. So, so we have vertically integrated really into the manufacturing of those pieces, so we have a bigger savings than you would have to be able to offer to third parties. I mean, the irony of it is, when people hear PMA, they always associate, well, it's cheaper, right? It's a discount.
And in fact, Chromalloy spends more money manufacturing that part than the OEM spends. And our experience in the CF6-80 engine is that it's a more durable part. So you're actually getting a part that costs more to make and lasts longer, and so my question is always: Why a discount? Why should you sell that part at less than OEM list? So I think it's just, historically, that's how people got, you know, incentivized to use it, but it's actually not justified by the performance.
That makes sense. And then maybe how do you think about the durability of the business model? When might the peak happen? I don't know if you have a total available module market by, like, 2030, and, like, just to get an idea of the tightness the market could have throughout the.
Yeah
Next ten years.
Yeah, we do, and actually, I can use actually my slides. It's great. There.
With two minutes to go, we're going on the slides now.
This chart, if you look at the numbers we care about are the light blue lines, and you can see through 2030, we're going from roughly 20,000 engines down to about 18,000, but the number that are under OEM care also reduces, so the number of available engines on the CFM stays very relatively constant through 2030. This was before a lot of the disruptions that have happened, so my guess is those numbers are gonna be pushed even further to the right.
But also, even if the numbers stay the same, the price paid for maintenance is gonna go up by 7% because that's what the OEMs do on piece part price increases every year, and our opportunity for market share goes up as the platforms age. So we think it's a growth market, even though the number of engines is flat probably for the next six years. But I think that these historically are typically engines tend to fly a lot longer than people expect.
So you're on the CFM56 V2500. Obviously, that begs the question: What happens with the LEAP and GTF? Could you see sort of the same relative value there?
Yes, and, you know, it's on the radar. First of all, you wanna wait till there are enough engines that are off OEM maintenance programs to make it worthwhile. But, as I said, I think you've put out numbers that by 2027, 2028, there'll be more LEAP engines in service than CFM56 or somewhere around that number. So, and then you'll see the roll-off start to happen on OEM programs. And then secondly, you wanna wait to invest until they stabilize the platforms and stop. They're currently coming out with new generation parts next year, both Pratt and GE, for those engines. So you wanna, you wanna wait till those parts have been stabilized and accepted.
And as just off warranty, you mean six years, when they roll off the first maintenance program?
Usually longer, 10-12.
Okay, got it.
Mm-hmm.
Then, just the last question to wrap it all up. Talking about the balance sheet capital deployment, your leverage is in the range of 3-3.5 times. You define free cash flow a little bit differently than others, which is EBITDA as a proxy, less corporate and maintenance CapEx, which would suggest you could have several hundred million dollars of free cash flow and growing. How do we think about potential capital deployment from here?
Yeah, the first priority is to achieve and maintain a strong double B rating from the agencies, and we have indicated we want to operate between three and three and a half times debt to total EBITDA. And we believe that that will get us to that goal relatively soon, and I think our bonds actually trade like a double B anyway right now. So we're well on course to do that. Second is investments, and, you know, sometimes there's opportunistic investments, but we don't have anything budgeted on that front. And then third would be dividends or buybacks.
Got it. Well, thank you. Thanks, Joe.
Thank you.
Thanks, everyone.