Engine Shortages Have Grounded Airlines. This Company Has the Formula to Fix That.
It isn’t every day that a new business model promises to change the century-old commercial-aviation industry. FTAI Aviation might be doing so at just the right time.
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The stock of this jet-engine leasing and repair company is up more than 800% over the past five years, and the sky does seem to be the limit. During the same period, the U.S. Global Jets ETF, which includes carriers, manufacturers, travel agencies and airports, is down about 40%.
In the depths of the pandemic, it looked as if there were more planes and engines around than carriers would ever know what to do with. The opposite has turned out to be true: Fliers came back in force, while supply-chain shortages and Boeing’s quality-control snafus slowed production of new models.
To boot, the two big manufacturers of engines for state-of-the-art narrow-body planes, RTX-owned Pratt & Whitney and CFM—a joint venture between GE Aerospace and Safran—have reported durability issues. Pratt’s have led to hundreds of Airbus A320neo jets being grounded. This has pushed up demand for old aircraft and engines, shrinking the pool of available spare parts and further lengthening repair-shop visits. Low-cost carriers, including Spirit Airlines and Wizz Air, have been particularly affected.
The industry’s economic incentives are now in question, because manufacturers sell turbofans at a loss and make the real money through maintenance, repairs and overhauls, or MRO, performed either in-house or through partners. Usually, they lock in revenue for years through maintenance agreements with airlines. Once engines get too old to be within the scope of such programs, their manufacturers still benefit by selling replacement parts for them, which tend to become more expensive over time.
“Everyone conspires against the airlines and wants them to spend more money,” said FTAI Chief Executive Joe Adams. “We are trying to change the industry’s behavior.”
Three years ago, FTAI started vertically integrating its leasing business with maintenance and repair capabilities. FTAI still sells and leases to airlines, but these days a lot of its business involves taking in battered engines, swapping them for shipshape units and letting customers go on their merry way. It then fixes the engines, leveraging the use of parts that are second hand or built by companies other than the original manufacturer, and the process starts again.
Its new “aerospace products” division has expanded to make up 43% of the company’s earnings before interest, tax, depreciation and amortization—which has grown threefold during this period. On top of its two existing MRO plants, FTAI recently announced the purchase of Lockheed Martin’s 526,000-square-foot repair facility in Quebec.
Whereas other MRO operations don’t have the mandate or the capital to build a portfolio of engines in need of overhaul, FTAI’s roots as an investment firm frame them as highly fungible and durable assets. The company was founded in 2013 under the umbrella of Fortress Investment Group, the alternative-asset giant co-created by Wes Edens that was acquired by Japan’s SoftBank in 2017. After Fortress changed hands to Abu Dhabi’s state-owned investment company Mubadala last May, however, FTAI severed all remaining management ties with its former parent company.
Unlike a traditional repair shop, it doesn’t have an incentive to find as many issues to fix as possible. Indeed, FTAI has set up an online site where the three modules or individual pieces of the CFM56—the most-used turbofan in the world, powering older generations of the A320 and the Boeing 737—can be bought separately. An entire engine no longer needs to be sent to the shop whenever the module with the shortest life cycle needs maintenance.
The New York-based company recently expanded into other legacy engines that are now in high demand, namely International Aero Engines’ V2500. Eventually, it plans to move into newer models too.
For investors, the main risk is that FTAI’s big altitude gain could already be behind it, particularly if the industry’s supply problems start easing: Its enterprise value is currently 16.4 times prospective Ebitda, compared with less than 10 a year ago.
But Airbus’s recent downgrade of delivery targets underscores that the timeline for normalization is likely to keep being pushed back. Crucially, FTAI’s proposition is game-changing regardless, and has huge scope to reduce costs further as it gains economies of scale. It estimates that its costs for repairing a CFM56 engine will eventually be 50% lower than what other MRO shops charge.
There is a great stock with “AI” in its name, and it has nothing to do with ChatGPT.
Write to Jon Sindreu at jon.sindreu@wsj.com