I would like to introduce Joe Adams, CEO of FTAI, and thank you, everyone, for joining us today. So Joe, I think most investors here are familiar with your business, but for those that are not, could you give us a brief description of your business and, you know, talk about how you're different from traditional lessors and how you're different from traditional MROs?
Yes. Well, thank you very much. Thanks again for having us this year. It's a great conference, and happy to be here. Just to give you a recap, FTAI Aviation, our mission is to be the largest provider of aftermarket engine power for the commercial aviation industry, with two specific engines in focus: the engines that fly the workhorse of the industry, the current generation 737NGs and the A320ceos, which is the largest by fourteen thousand airplanes flying around the world every day. And so those two engines, we provide a full service product to the industry, where we effectively manage the entire asset class, including the maintenance activity. And what we've done is we've created a vertically integrated company that owns and maintains those airplanes.
What we provide to the end user, the customer, the airline, is a combination of time and money savings, as well as a great deal of flexibility. Effectively, think of us as the outsourced engine maintenance provider for airlines around the world who don't either want to be in that business or probably shouldn't be in that business. Our business model is essentially to go acquire run-out engines, so we own the engine. We rebuild those engines in our own facilities, facilities we own in Montreal, Miami, and Rome. We go to market and offer those either for outright sale, for an exchange for a run-out engine or for lease.
And therefore, the customer eliminates all the hassles and time requirements and expense of managing that shop visit, and they get a price certain at the time when they do that engine exchange. So it's a unique model in that, you know, what you mentioned is lessors and MROs. What we've done is combined the two functions together, and that. And the key to our business is that we both own the asset and maintain the asset, which is different. And so it's created a real success in terms of, you know, winning people over, because I like to say, very few times does anything good happen in a shop visit.
It's usually something either longer delay or a higher cost or both, and therefore, we can solve problems for the industry in what is an increasingly expensive and complex process. And so that's kind of, in a nutshell, what we do.
Yeah. I mean, it's a fascinating business model, and what's also fascinating is that you've been evolving, your business has been evolving, and the latest, I guess, business that you've introduced is SAI. And I guess, you know, for those of us, for those investors that are not familiar with what SAI is, if you could give an overview of that business, and, you know, how many aircraft you have in there currently, are you on track to deploy $4 billion of capital, which is equivalent to about 250 aircraft? And, you know, what progress you've made so far.
Yeah. So, sure. So the background of this was a little over a year ago, we realized that, oftentimes we're involved in end-of-lease discussions where there's a return compensation, difference between an airline and a lessor, or an airline can be bankrupt and doesn't have the money to, rebuild the engine, and we became a problem solver. And the problem solution ends up with a more well-defined engine exchange to meet the needs of the customer and the lease term. So you end up lowering the capital investment in that asset, which reduces the risk and increases the return.
So we started thinking about that and said, "Well, if we can do that, why don't we create our own leasing company for aircraft, and we can convey those benefits to our own investor base?" We'd also then manage that partnership. We'd have an ownership interest in that, and we would also lock in all of those engine maintenance events as engine exchanges with FTAI Aviation. So there's a tremendous amount of benefits. The first partnership we formed, our goal was to invest roughly about $4 billion this year, and by doing that, invest and own about 250 aircraft. And as of July 31st, we had either closed or under LOI, 145, so we're ahead of the, you know, the pace that we would have hoped for.
We expect by the end of this year to be very close, if not on target, for investing and owning 250 aircraft in this first partnership. It is, it's been a great. You know, it was an ambitious target when we set off doing it, but, it's a huge market. As I was saying, there's 14,000 737 and A320 aircraft, current generation flying around the world. Half of those are owned by lessors, and the other half are owned by airlines. So we often provide a value add product to the lease by buying or acquiring assets that have near-term engine events. You know, I talk about engines, you know, coming due for performance restoration within the next year or two years of that lease.
Because we have inventory, we own our own maintenance facilities, we can do that very, very efficiently, and so that's where we're seeing a lot of opportunities for investing, and, you know, the goal is, if we're successful this year, both in terms of return and investment program, to do another one next year and do one every year after that, ultimately, if you roll that forward, that would make us most likely the largest owner of current generation narrow bodies in the world, which also just confers a lot of other benefits on, you know, the ability to be a meaningful counterparty to airlines, to be able to predict and schedule our engine maintenance events, be a big buyer of material. It's a scale business, and definitely the bigger you get, the better you get.
Would the next SAI partnership, I guess, next year, would that also be for $4 billion or?
Most likely. I think that seems like a good number that we've, you know, been able to deploy smartly, without, you know, without being, you know, overly aggressive or, you know, making sure that we're doing good deals. And, as I said to the team, the key to, you know, raising the next partnership is make sure that the returns are good on the first partnership.
Mm-hmm.
So we most likely will make a decision on, going forward with that in the fourth quarter of this year. Right now, the indications are the returns are great, and the investment, you know, pace is very good. So as I said today, it looks likely that we will, but, you know, until you get there, you can't start the next one until you're finished with the first one.
Yeah. I mean, I could tell you, you know, some of the more skeptical investors would ask me, you know, "How are they gonna achieve the return hurdle in such a tight aircraft market where you might have to pay up a little bit to get your aircraft?" So, you know, could you talk about how you're achieving the return hurdle? I mean, I would assume it's probably through maintenance, right?
It's a lot of. You know, in my prior life, I was involved with Aircastle.
Mm-hmm.
My observation was most of the problems around the aircraft leasing industry occurred around the engine. It's always an engine, you know, problem here and there. It's a cost overrun that-
Mm-hmm
... you know, you thought it was gonna cost $2 million, and it costs you $8 million. Those things happen, and because we have our own inventory, our own capability, and vertically integrated, you know, we can manage that very, very efficiently. We also did a sale-lease-back with an airline that had, you know, five engines that were timed out today, you know, when we did the deal. So they had airplanes that were grounded, and there's not a lot of engines around in the industry, so we were one of the few, maybe the only party that could provide immediate engines to that customer. And a lot of it is, you know, it really comes down to, in many cases, that people want to avoid the shop visit.
You know, it could be a module exchange, that you have an engine that, you know, is timed out, because the low-pressure turbine has no hours and cycles on it. We could do a module swap and have that engine flying in 48 hours, as compared to taking that engine and sending it into an MRO shop, where it takes you 30 days just to get inducted. So those kinds of solutions are basically, you know, that's what we've built, is a machine that can actually have pre-positioned inventory available, which solves problems and creates higher returns.
And as I said, also, the other key is, if you have a five-year lease on an airplane, and you have a two-and-a-half-year engine event in the middle of that, the typical approach would be the airline would take that engine and build it for five years. Well, then you've put a lot of money into the engine, and then you have to sell that engine at the end of five years with two and a half years on it, which is not the easiest thing to monetize. What we can do is deliver an engine that has two and a half years on it, so you have a lower investment, less residual value risk, which means you get a higher return and have lower risk, which, in my history of investing, is always the box you're trying to get into-
Mm-hmm
... which is higher return, lower risk. So it's very customized, and it's because we own, you know, five hundred engines and three maintenance facilities and have invested hundreds of millions of dollars in parts inventory. We have PMA products available. We have repair businesses we bought and really have gone, you know, line by line item down the cost of a shop visit to be the most efficient in the world at that.
Mm-hmm.
Our goal is to be the lowest cost producer of aftermarket power for that engine, bar none.
So, you know, when I used to tell investors, you know, to pitch the business to investors, a lot of them would say, "Well, you know, it's green time. As you mentioned, green time utilization. Why can't other MROs kind of copy what you're doing and do your green time utilization? I mean, isn't that essentially being done by, you know, other airline, you know, tech ops and stuff, right?" So how would you answer that?
I mean, we didn't invent module swaps. It was created as part of the design of that engine.
Mm-hmm.
If you look at Delta, American, United, they do that internally, and so they will take modules, a fan, a core, and LPT, and recombine those so that instead of... You know, if you have twenty-five hundred cycles on a low-pressure turbine or five thousand cycles, you don't overbuild that and just waste those cycles. You recombine it to-
Mm-hmm
... to be able to be the waste nothing people. So they created that because that's the way the engine was designed. But prior to us sort of launching the Module Factory, you couldn't buy a low-pressure turbine in the market. If you put an ad on Google and said, "Does anyone have an LPT with this many cycles?" You'd get nothing. You know, there was nobody offering that to other airlines. And there's six hundred owners of CFM56 engines in the world, only five of them have the capability to do it themselves. So that five hundred and ninety-five is our market opportunity, to take a product that, you know, saves money, creates efficiency, and basically offer it to anybody.... So that's all we did.
It was just, you know, no one had sort of, you know, optimized and then offered that as an independent party to the rest of the world.
So you're essentially doing what, you know, let's say, Delta TechOps, you know, TechOps would do, but you're doing it for external clients?
Yes.
Okay.
Yes.
Got it, and you know, you're rapidly ramping up production in Montreal. Your you know, European facility is contributing to production. Could you go over your production goals and you know, like, what does that imply in terms of you know, your market share and where you want to get to? I know you want to get to-
Yes
... 25% market share. So, like, your production goal, how does that get to where you want it to be?
Yeah, so this year, our goal is to produce 750 modules across the three facilities. Rome is a contributor this year for about 100 of those, which we didn't have last year, so that's brand new, and we expect to grow that. We hope to grow that next year to 200 modules. The goal in 2026 is to produce around 1000 modules, so about a 33% growth in production. We have the physical capacity to do that. It's really training technicians and getting them productive, that is, you know, the part that takes some time, but we're working really hard on that.
So we've ramped up the production capacity very significantly, now have three different operations, and I think you know we have the physical capacity to double that number, you know, over the next few years. So to get to a 25% market share, we essentially have the capacity today, physical capacity, to do that. We are currently at about 9%, you know, of the market. If I talk about the addressable market spend on V2500s and CFM56 is about $22 billion a year in maintenance spend. And so we're at about a 9% market share, up from 5%, you know, a year ago. And you know we think the 25% is achievable, if not higher than that.
I mean, there's no scientific reason why it would stop there, particularly if we keep, you know, growing the SEI, because 100% of that business is committed.
To get to something above 25%, you will probably need to just buy another facility or something, right?
We expand the existing facilities or buy another one. I would say geographically, if you looked at where we would probably think about adding another facility would be Southeast Asia or Middle East, potentially, but those markets are growing extremely fast. We have a lot of customers out there. I mean, shipping an engine isn't that expensive, but having a, you know, another operation in that, in that part of the world might make sense for us. But we don't need to do that. I think we, you know, as I said, we're gonna double the capacity in Rome. We're expanding. We have a basement in Montreal that is essentially empty.
Okay.
We have 150,000 sq ft below grade that we could use. So we haven't really pushed hard on the existing facilities, which we could also do.
Mm-hmm. Got it.
But what we did is we essentially, we bought three former airline engine shops that had no business. It was, Montreal was Air Canada, Miami was originally Pan Am, and Rome was Alitalia. And these were once great engine shops that the airline had gone bankrupt, and they had good tooling, and they had a well-trained workforce. We bought them for way below replacement costs, and we're uniquely able to bring our inventory into those engines immediately, into those shops immediately.
Yeah. So talking about acquisitions, you've made, you know, a lot of interesting acquisitions, you know, buying facilities, buying businesses. The most recent one you bought was Pacific Aerodynamics, I guess-
Yes, that's right.
... a repair specialist. So could you talk about your, you know, how does that business benefit you? And, you know, just your acquisition strategy broadly, and I guess, what are you looking for in your next, you know, acquisition target?
Yes, and so I, if you remember, I've been talking about piece part repairs for almost two years now. And it's another area of vertical integration because when you do a performance restoration on an engine, you take it down to a piece part level, and a lot of those parts can be reused if you repair them. So we spent over $50 million last year to third-party vendors on repairs, and one of them we're spending a lot of money on is compressor blades. Because compressor blades is where, if you ingest a rock or debris, the first thing it's gonna hit is that compressor blade. It's before the combustor. So you have a lot of damage, and it's a very thin blade, very light. So we started looking around, and I was like: Who does that?
How can we get in that business? And we found a company in Southern California that was essentially an entrepreneur who had built a company, and his son was running it. And they had a specialized technology that they patented and had a great repair process. But they only had, you know, a handful of customers. And so we looked at it and said, "Well, we instead of spending $300,000 to repair a set of blades, we could if we owned it, we would pay $250,000 to, you know, the mechanics and the people in the shop.
So we'd save $50,000, and we would, if we can run 300 shop visits through that facility, we'd save $15 million a year, which is essentially what we paid for the whole company. You pay for it every year. So that's the kind of math that we see on the repair side because it's a good business, high margins, intellectual property, and we can deliver a substantial amount of volume. So we're looking at other. We can also take that team and say there's other parts in that engine which they also could apply that technology to do repairs also. So there's a lot of growth in that space, and it's, again, it's another barrier to entry. It's another way we can, you know, reduce our cost structure further.
and differentiate our product because we have capability that's really unique.
And so, you know, I guess the module exchange business has been up and running for a couple of years. Could you just talk about the customer reception? You know, what kind of general commentary are you getting from them? And I'm assuming your customers are all becoming repeat customers, right?
That's a good assumption.
Yeah.
They are. And it's, you know, it's funny because in most cases, when you go propose a fan swap or a low-pressure turbine swap, people didn't know that that was possible. And so when we introduced it, you had a customer like Lion Air, Volotea, and their sort of engineering team was, "Well, we have to induct that engine into a shop," and then that engine's gonna sit there for potentially three, four months waiting, you know, for that process to end. And in the meantime, you have people walking around that engine, finding things that they, you know, could fix if they had, you know...
So we went to them and said, "You know, you can do this in the field, and you can do it in one to two days." And they were like, "That you can't be kidding me, right?" And it's like, "No." And so we started doing it, and people loved it. I mean, it saves them literally... It probably saved Lion Air millions and millions of dollars-
Mm-hmm
... not having to ship those, all those engines in to swap the low-pressure turbine. So it's one of those things where, again, we're sort of, we're problem-solving, and the, and the sort of our pitch to the customer is, "Avoid the shop visit," you know? That's the end goal. That should be your goal, our goal, and we'll help you do it. And so they, people love it.
People love it. Okay, and I guess, you know, turning to PMA, you know, I'm assuming you probably have no update, but if you could talk about... It seems like the module exchange is a very popular biz, you know, business that airlines like, and I, I assume the same for PMA in terms of acceptance. But I think in terms of PMA acceptance, I think the lessors are a little, you know, less willing. I, you know, I'm just wondering, in this tight market, has that changed at all? Or, you know, what, what's your-
Yeah, I feel very good about it. Well, first of all, on the timing, Chromalloy did indicate to people they thought October approval, and as I say to people today, "No in- no update is a good update," right?
Yeah.
It means it's possible it could come sooner than that, and things are, you know, on track, so it's very much near the end of the process on that, on the next part, which is great. In terms of receptivity, you know, what I always do is I talk to people, not about the CFM56, because we don't have the parts approved yet. Talk about the CF6-80 engine-
Mm-hmm
... which is the engine where we really had a lot of experience putting the hot section parts in, and that's the engine that flies 747s and 767s. And we found that that product had universal acceptance across all airlines around the world. And then, when we went to sell those engines, it also had universal acceptance. And so while people will tell you that, "Oh, I don't put PMA in my engine, I don't... You know, that's not my process," almost everybody in the business owns engines with PMA in them because everyone accepts that engine. And it, it's also market share on PMA is not a static number. It tends to go up as platforms age. So, you know, I look at it and say, "Well, we had this great experience with the CF6-80.
“What would be different about the CFM56 engine that would make it different than that engine?” And I have never gotten anybody giving me a good answer other than they say, “It's bigger.” And it's like, “Hey, I'm aware of that. You know, it's ten times the size.”
Right.
I don't, you know, profess, you know, to predict, but I think that the history indicate that if the products are good and perform well, the acceptance will be there.
I think, you know, in the past couple of quarters, you know, we've seen OEM production rates improve. How does that impact the value, in your view, and demand for mid-life aircraft? I guess, as a result, you know, demand for CFM56 and, you know, does that affect the value of that?
Yeah. So I don't see any impact. And, you know, there's such a deficit that has been established of deliveries over the last few years that it's gonna take a long time, A, for that to catch up. But also, you know, aircraft don't stop flying for technological reasons. They stop flying for economic reasons. So when I go visit airlines or customers, I say, "How... You know, what are you thinking about, and would you put in an order for new technology and when?" And they say, "Well, I can't get one until twenty thirty, and then if it is, it's gonna be potentially north of $60 million. And I love my NG at $14 million, and I know exactly what the maintenance cost is gonna be.
The reliability is tremendous." One airline told me they need 20% more new technology to fly the same schedule as the old technology. So, to me, it's the economics that drive it, and it's been true with the 757 and the 767. You had new competitors that didn't displace those airplanes, because if the operators are making money, they're gonna keep flying it. And people have consistently underestimated the useful remaining life of those platforms. And I think the 737-800 and A320ceo are tremendous money makers for airlines.
Yeah.
You have cargo market, which is another life extension. But as we mentioned in the last call, we, you know, when talking to airlines, they all tell us that thirty is the new twenty-five, you know?
Yeah.
If you thought, you know, an airplane was gonna fly for twenty-five years, now you're saying thirty, and who knows? You know, it still takes. It's gonna take years to replace what has not been delivered.
Yeah. And I guess, is it 40% of CFM56 have never gone through-
Have not gone through the first shop, is it?
Yeah.
Yeah. And one of the things about that engine is it's so reliable and dependable, it stays on wing for a long time.
Yeah.
Which makes it very, very efficient to operate, because maintenance cost is one of the things that will drive, you know, operators to retire the asset. And as we introduce more and more ways to reduce the engine spend, we will extend the longevity of that fleet as well.
Yeah.
We had one operator tell us before they were doing module swaps, they expected to retire their fleet by 2026, and they extended it to 2030, which is what you'd love to hear because you're like, we're making it more cost effective to operate that-
Mm-hmm.
and then therefore, they're gonna fly it longer.
Yeah. I mean, I've heard people say CFM56 will, you know, go down in history as the best engine.
It, it's-
- ever.
I would agree with that.
Yeah, yeah.
I'm a bit biased, but I...
Heard that. But let me take a question, audience question, if there's any.
Hi, Paul. There was a big announcement yesterday about a bunch of private equity guys taking over a leasing company. Any implications for your business?
No, I think that the... I mean, it was really-- to me, it was a, you know, transfer from public markets to private markets, and we did that a year ago with SEI. I mean, I think that the public markets, asset-based leasing companies are always hard to, you know-- And I was talking about that with Hillary, you know, the history. We took Aircastle public in 2005, and it traded to three times book, and then five people came in and copied the business model, and then it traded at one and a quarter times book. And it's like, there's nothing you can do that-- You can't really argue that you have a unique operation. And so in the end of the day, you're buying a bunch of metal. So I think it's really more that.
It's private credit, is huge influx of capital, huge amount of money wants to invest in private credit. Public markets don't really love, you know, the, you know, "I have to buy $5 billion and finance it every year," model. And at the end of the day, it's a bunch of assets. So it's kind of like, you know, to me, that's really what I took from that, is, you know, it's probably a better way to organize capital for that sector than in the public markets. And, you know, you have, you know, Japanese investors and private credit investors and, and you've got, you know, Middle Eastern investors coming. So it's gonna gravitate. The money will go to whoever has the lowest cost of capital for those assets, I think. And we're doing that as well.
We've got a bunch of private credit on the side that is buying those aircraft, and then we're managing it and getting all the engine exchange business, so, you know, it's great.
Any other questions from the audience? I do have a question on product, a new product. Is the LEAP your next most, you know, logical product to come into the mix? And when would that happen, if so?
Most likely. It's gonna be a huge market. There'll be, by 2028-2029, there'll be more LEAPs in operation than CFM56. A lot of those will be off of the Power by the Hour programs with OEMs. The product will have stabilized, so they, they won't have introduction of new parts. So at that point, I would expect it will be investable for us, and it is a huge market. It's the same architecture as the CFM56, so I very much expect, around 2028-2029, we'll be investing in that space, and the GTF as well, I think.
Oh, GTF as well?
Yeah.
But GTF is not modular, right?
It's not, but, you know, it's just a different process. There's still. It's a higher cost. The V2500 shop visit costs is a higher cost than the CFM56, but it's not necessarily because of, you know, the architecture, it's just because of the structure of the aftermarket, the way they set it up. So the idea is the same, is that you have an opportunity to save money for the owner by doing the maintenance more efficiently, and if you spend your entire life focusing on nothing other than that maintenance event, you should be better than anybody else.
Okay, got it. And then, oh, we have an audience question.
Hi there, Ashley McCarthy, Aviation's, JP Morgan Asset Management. You mentioned that you will have an interest in the GTF eventually. What's your view on the introduction of the Advantage engine, and is there a danger that will get into a DAC engine versus subsequent variant type of situation, value-wise?
Well, I think the Advantage solution was designed to solve a lot of the problems that existed with harsh environments with that engine operating before the powder metal, you know, problem came up. And as I understand, it's. I don't have a lot of data on that, how that's performing yet, but Pratt seems to think it's gonna answer a lot of those questions on durability, which is great. I mean, I think ultimately, all of the kinks in the, you know, the new technology will ultimately be worked out.
I'm just saying from an investment point of view, I would wait for the Advantage and not buy the older model, because at some point in time, you're gonna have an older model, which people are gonna look at and say, "I don't want that, I want the new one." And who's gonna pay for the upgrade? So, I think it, you know, from our experience, it pays to wait until you know the, you know the answers.
Any other audience questions? Okay, I think we're. Well, actually, I do have one more question. Now that you're with the SEI, you know, you expect to generate significant cash flow. Could you just talk about your capital allocation strategy? I think you've mentioned maybe returning some capital to shareholders, what your priority is.
Yes. Our estimate for the year is, and we're on track to produce about $750 million of free cash flow this year. And we have had as a priority to obtain a strong double-B rating from all agencies, and we hope our numbers would argue that we should be there because we're under three times debt to total EBITDA. And so we hope that happens in the next, you know, couple of months. That's number one. Number two is growth initiatives, and I mentioned piece part repair and maintenance capacity investments also, areas that are adjacent to the engine, that are connected to the engine, are things that we're looking at as well. So we like to look at all, you know, avenues for growth, for acquisition or organic.
And then thirdly, I would, based on the size of the acquisitions that I expect we would be looking at, we will have excess above that, you know. And at that point, we will look to, most likely stock buybacks, which would most likely happen around the end, the fourth quarter of this year.
Of this year?
Yeah.
Okay. That's great. Okay, sounds good. I think we're out of time. Thank you so much, Joe.