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How FTAI plans to corner the CFM56 aftermarket
December 3, 2021
By Eduardo Mariz, Analyst at Ishka
Thomas Garbaccio FTAI Aviation President & chief commercial officer explains how the aftermarket engine lessor plans to leverage its scale and MRO partnerships to cut costs for customers.
FTAI Aviation, an aftermarket engine lessor focused on the CFM56 and a wholly-owned subsidiary of Fortress Transportation and Infrastructure Investors LLC (FTAI), has been an active buyer through the pandemic. The lessor currently owns approximately 300 CFM56 engines and recently acquired Airbus narrowbody portfolios from Alitalia (novated to ITA Airways) and Avianca.
Speaking with Ishka, Thomas Garbaccio, FTAI Aviation President & chief commercial officer, explains that the lessor is seeking to deepen its focus on the CFM56 market and provide cost synergies through its various MRO partnerships and sheer scale as it continues its transformation into a stand-alone entity.
FTAI went public in May 2015 and has since leveraged its capital raising and unsecured debt issuances to acquire (on the aviation side) mostly end-of-life aircraft and engines. Recently, FTAI Aviation announced it is working on charting its own path away from its FTAI’s infrastructure arm. FTAI’s infrastructure arm is to be spun as a C corporation – a US corporation taxed separately from its owners – while FTAI will retain the aviation business and all existing corporate debt.
FTAI’s portfolio is currently comprised of 90 aircraft (12 widebodies and 78 narrowbodies) and 435 engines (including those on aircraft). The firm has seen growth in recent months, with earnings (EBITDA) up by around 67% between Q1 and Q3 and the value of its aviation assets up 9% to $1.87 billion currently. For 2022, it hopes that third-party partnerships in aftermarket parts, Engine Parts Manufacturer (PMA) parts, and maintenance will provide an earnings (EBITDA) uplift.
Q: How do you see FTAI Aviation as a stand-alone company?
Garbaccio: We see FTAI Aviation as the leader of the CFM56 aftermarket. Our mission is to provide our customers with the lowest cost of maintenance and the highest flexibly to achieve their fleet performance. Our business strategy starts with our assets. Today we have a combined 435 engines, with approximately 300 of them being CFM56-7B and CFM56-5B. We use this pool of engines to offer customers leasing, exchanges, and shop visit avoidance programs.
However, what makes our business model truly unique is our CFM56 maintenance exclusive partnerships with industry maintenance leaders. Today, we are proud of our three partnerships which include used serviceable material with AAR, The Module Factory with Lockheed Martin, and LifeX Solutions with Chromalloy.
In our first partnership, in collaboration with AAR, we have established the independent industry leader for CFM56 used serviceable material. In support of shop visits, we offer airline and MRO customers a lower cost and more sustainable alternative to new parts. Our second partnership, The Module Factory, we have commercialized CFM56 modules with Lockheed Martin to offer our customers a more cost-effective, less risky, and quicker solution to traditional engine refurbishments. We unlock the value of a CFM56 engine by componentizing and workscoping at the module level (i.e., FAN, Core and LPT) and making them available for sale or exchange. Our final partnership is with Chromalloy, where we develop hot section alternative parts to save significant cost.
At FTAI Aviation, we combine all our proprietary products with our large inventory of CFM56 engines to deliver a complete vertical solution. We work with our customers to understand their specific requirements and provide targeted solutions.
Q: What assets and airline counterparties are you targeting in your acquisition strategy?
Garbaccio: We target investments with strong engine maintenance value. As a result, we buy engines through different forms, which include buying them through on-lease midlife aircraft, off-lease aircraft, or standalone serviceable or unserviceable engines.
To provide more colour, on aircraft investments, we target mid-life aircraft (typically 15 years+) to harvest its serviceable engines after the airframe reaches its useful life. A great example of this is a deal we did with TAP earlier this year – where we purchased 8 A320 aircraft to harvest strong CFM56-5B engines.
Furthermore, we often purchase aircraft by originating sale leasebacks directly with airlines. We have done number of these deals in the last couple years – some include Air France, Avianca, and ITA. In most of these scenarios, we retain the engine management services which adds significant incremental value as airlines can save cost and time on engine maintenance.
Overall, our investment strategy is to generate maintenance arbitrage in an engine’s lifecycle. As mentioned earlier, we accomplish this by running the CFM56 through its various lifecycles which include taking aircraft to engine, engines to modules, and modules to used serviceable material.
Q: How is your business model different from that of other engine lessors?
Garbaccio: Our business model is differentiated through our vertically integrated maintenance partnerships. All our partnerships are exclusive and have a minimum term of 7 years, which will allow us to be the leader of the CFM56 aftermarket. Our business is asset-focused so we continue to leverage new ways to acquire assets from airline, lessors, and investors around the world. We combine our maintenance advantages with assets to provide aftermarket solutions that other engine lessors are unable to duplicate.
Three Questions with Thomas Garbaccio
The used CFM56 market has been recovering over the past year, with demand for 5Bs but especially 7Bs (the Boeing 737 NG variants) seeing increasing demand. FTAI Aviation’s play in this space is more long-term – in the next 10 years, it expects 90% of current CFM56 engines to exit their initial OEM PBH maintenance contracts, increasing the demand for green-time leasing. The firm is also expecting the cost of CFM56 engine shop visits to double during that period, which will make its maintenance cost synergies even more relevant.
FTAI’s funding trajectory mimics in many ways that of Aircastle, a mid-life aircraft lessor founded by Joseph Adams, who is CEO and co-founder of FTAI. Aircastle, now privately owned by affiliates of Marubeni and Mizuho Leasing, took two years to its initial public offering (IPO) from 2004 to 2006 and a further 12 years to obtaining IG status by the three largest credit rating agencies in 2018.
The Ishka View
