Description

Summary: FTAI is a jam-job of an Aviation leasing business and an Infrastructure business with few natural synergies besides Fortress access to capital markets. We believe each part of the business is materially undervalued (Aviation especially) and that the upcoming Infrastructure spin and K-1 -> C-Corp conversion in Q1 ’22 will serve as a catalyst for more price discovery. PT $75/sh

Technical unlock:

FTAI is spinning out it’s Infrastructure business into a standalone company in Q1 ’22, creating a pure play aviation engine leasing company, and a pure play infrastructure company. As part of this conversion, FTAI will switch from a K-1 generating company to a C-Corp. Currently, most passive index tracking funds (~50% of market flows) cannot invest in FTAI, and neither can some retail investors (i.e. Robinhood). From our analysis on prior C-Corp conversions, these tend to generate 20% alpha over the S&P and increase liquidity by 100%.

Business:

FTAI Aviation: FTAI owns a fleet of ~450 engines (majority CFM56 engines), which are leased to airlines. FTAI primarily buys older engines towards the end of their maintenance life (average purchase price of $3.25mm), overhauls the engine, and returns them to service. The CFM56 engine is the most widely used aviation engine in the world with over 22,000 in service today, primarily in narrowbody aircraft (Airbus A320 and Boeing 737) designed for domestic or shorter haul flights. 

FTAI’s engine fleet saw decreased utilization during COVID as airlines cut back on flights and flew fewer miles. However, FTAI’s leasing value proposition for cash-strapped airlines is more compelling than ever since it offers airlines a more capital efficient means to pay for thrust. We expect FTAI’s fleet to return to more normal utilization levels (~80%) by the end of 2022.

In 2019, FTAI generated ~$1.35mm EBITDA/leased engine/yr. With the larger fleet of 450 engines, this would suggest the existing engine fleet could generate ~$485mm in EBITDA at ~80% utilization with no contribution from incremental savings discussed below.

FTAI is currently working on 3 initiatives to take advantage of the scale benefits of the CFM56 fleet to realize savings on maintenance, parts, and salvage values. In total these 3 initiatives will contribute ~$220mm of incremental EBITDA (excluding third-party sales on PMA parts).

• PMA parts: FTAI has invested in a JV with Chromalloy to build 5 hot-section aftermarket parts for the CFM56 engine. FTAI is able to source these parts at cost and receives 25% of all profits on third-party sales. These parts would yield $2mm of savings per shop visit (a 33% reduction in costs). These replacement parts are expected to generated $120mm EBITDA/yr on parts savings alone (not including third-party sales).

• Third party sales at 5% penetration of the CFM56 market would generate ~$200mm of EBITDA of which FTAI owns ~25%

• MRO factory: FTAI has partnered with Lockheed Martin on an MRO facility for CFM56 engines in Montreal. The MRO will repair engines on a module basis (fan, core, exhaust) instead of an entire engine overhaul basis. FTAI has the unique ability to do this given the size of their fleet and the spare capacity available. MRO is expected to reduce the cost of overhauls by 0.5-1.5mm per visit, and significantly reduce service times. In total MRO will generate ~$60mm EBITDA at $1mm per shop visit.

• Salvage values: FTAI has partnered with AAR to recycle 20-30 engines per year and sell the parts on consignment. FTAI expects this to generate an incremental $1-$2mm per scrapped engine vs. selling the entire engine to AAR at the end of its life. In total the AAR partnership will generate ~$40mm of EBITDA / yr.

FTAI Infrastructure: FTAI owns 4 infrastructure assets, 2 are producing (Transtar and Long Ridge) and 2 are inflecting (Jefferson and Repauno).

• Transtar ($80mm -> $100mm EBITDA): Six short line railroads primarily serving US Steel (purchased from US Steel for $640mm in July 2021). FTAI entered into an exclusive rail partnership with US Steel for 15 years with minimum volume commitments. FTAI plans to expand service to new customers.

• Long Ridge ($120mm -> $130mm EBITDA on 100% basis): 50% interest in a 485MW gas fired power plant on the Ohio River. Turned on in late 2021 and signed a fixed-price power sales agreement for 7-10 years starting in 2022

• Jefferson Terminal ($8mm -> $140mm EBITDA): Multi-modal crude logistics hub in Port of Beaumont, TX next to Motiva and Exxon refineries. Jefferson Terminal has heat-assisted heavy crude unloading capability which makes it uniquely suited to process Canadian crude by rail. Canadian crude volumes have been negatively impacted by spread compression (WCS-WTI) between Canadian and US crude.

• Repauno ($0mm -> $55mm EBITDA): East coast logistics hub on the Delaware River in New Jersey to process bulk liquids and gasses. Repauno loaded 30 handy-sized bulkers with butane in 2021 and intends to add more storage capacity and the ability to load VLGCs.

Financials & Valuation:

* Note: We expect FTAI Infra to issue an $800mm note to FTAI Aviation at spin (consisting of $500mm debt and $300mm Preferred), consistent with management’s comments.

Risks:

History of overpromising and under-delivering on Jefferson Terminal. Latest hiccup related to oil volumes from Canadian rail. We expect to see volumes grow over the course of 2022, but Jefferson has not yet delivered meaningful EBITDA. We would note that recent transactions for energy infrastructure assets (Sempra Infra Partners) have transacted at 13.5x EBITDA and we value Jefferson at 10x EBITDA.

Aviation business is underearning while airlines have reduced schedules and total miles flown. If aviation is slower to come back then expected then engine utilization will be lower. This is counterbalanced by the fact that CFM56 engines skew towards domestic/shorter flights and that FTAI’s Aviation value proposition for airlines is stronger than it was pre-pandemic.

Chromalloy FAA PMA approval. Chromalloy has only achieved FAA approval on their 1st replacement part for the hot section of the CFM56 engine. If subsequent parts were to be denied this would make the savings and third-party sales targets harder to achieve. Chromalloy has an excellent track record of receiving FAA approval

Catalyst

Infrastructure spin (Q1 ’22)

K-1 elimination (Q1 ’22)

Strategic investment in FTAI Infrastructure (Q1 ’22)

Jefferson Terminal volumes ramping (2022)

Aviation miles flown return to more normal levels (2022)