FTAI Aviation Ltd.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

FTAI Aviation Ltd. is a unique capital provider that primarily invests in aviation assets and then leases them out.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

FTAI generates revenue from two segments: Aviation Leasing and Aerospace Products & Other.

Business Overview

FTAI Aviation Ltd. operates within the aircraft leasing and aerospace products industries. This unique business model of investing in aircraft assets and then leasing them out, allows them to play a role in the transportation of both people and goods globally.

  • Aviation Leasing: This segment involves acquiring aircraft and then leasing them to airlines. Revenue is earned through lease rentals. The leases themselves can be structured for a variety of terms and often cover the operating aspects of the airline’s business.
  • Aerospace Products & Other: This segment includes manufacturing and repair of aircraft components and related sales. FTAI has created a vertically integrated process in this department through its acquisitions.

The competitive landscape in both segments is constantly evolving:

  • Aircraft Leasing: This industry is competitive, with a mix of large established lessors and smaller players. It’s a capital-intensive business, and it is quite common to see rapid changes in terms of new players, consolidation and changes in strategies of current incumbents. The focus tends to be on maximizing asset utilization and minimizing downtime.
  • Aerospace Products & Other: This segment is defined by specialized manufacturing and engineering skills. Here competition comes from other manufacturers, repair providers, and those that offer integrated services.

FTAI strives to compete through its focus on narrow body aircraft and a large-scale operation. That provides good profitability. They also rely on their deep understanding of asset management and customer relationships.

Financial Analysis

Let’s take a closer look at FTAI’s financials, as reported in the company’s recent documents, such as their 10-Q reports.

Revenues:

  • Total revenues: $276.6M for the three months ended September 30, 2023. This is up from $253.9M in 2022. The aviation leasing revenues increased to $157.08M and aerospace products and other revenues increased to $107.34M for 2023 over the same period last year.
  • Aviation Leasing Revenue: Driven by lease income from aircraft. The revenue in this segment will be based on several factors such as the lease terms, lease rates, aircraft utilization, and the number of aircraft currently leased.
  • Aerospace Products Revenue: Driven by the demand of new parts, the number of engine overhauls that are performed, and various customer solutions that the segment provides.

Expenses

  • Operating expenses: $138M for the three months ended September 30, 2023 and $130M for 2022.
  • Other Income/Expenses: These include gains, losses, and interest income that are not related to the business operations, for the quarter, they were -$14.8M. This is down from $30.6M from last year due to a change in the fair value of some of the instruments.
  • Net Income/Loss Net income attributable to common shareholders was a loss of $12.7 million for the quarter which is down from 2022 when the income was 44.8 million.

A key concern for investors appears to be the potential volatility of quarterly earnings, primarily due to changes in fair value, but management has explained that they do not see any meaningful volatility in long term cash flow.

Balance Sheet:

  • Total Assets: $4.1B on Sept 30, 2023, as compared to $4B at the end of Dec 2022.
  • Total Liabilities: $3.07B on September 30, 2023, as compared to $2.94B on December 31, 2022.
  • Total Equity: $1.038B on September 30, 2023, down from $1.062B on December 31, 2022.

The company has a sizable amount of debt, but this is not unusual in a capital intensive business such as airline leasing. The net debt to adjusted EBITDA is around 6.9x. Management claims they are comfortable with leverage as it is needed to generate value.

Cash Flow:

  • Net cash provided by operating activities 124M in Q3 2023 compared to 146.7M in 2022 for Q3.
  • Net cash used in investing activities 340M in Q3 2023 compared to 230M in Q3 2022.
  • Free cash flow Is not stated but is a priority for management.

Moat Rating and Justification

Moat Rating: 2/5

  • Intangible Assets (Brand/Patents): While FTAI operates in the aviation industry, their business model does not heavily rely on brands or patents. They operate in somewhat of a commoditized niche, which limits their competitive advantage. However, the company has demonstrated it is able to create a competitive advantage through its relationships and capabilities.
  • Switching Costs: In some respects, there are customer switching costs. It would be painful for an airline to switch to another lessor due to complexity in contracts and relationships. The reverse is true in the products segment where customers can easily change parts suppliers.
  • Network Effects: This is not present for the business as a whole.
  • Cost Advantage: A significant cost advantage is the main driver of its business operations. FTAI has an expertise in identifying and purchasing used aircraft at low prices, and also in utilizing its supply chain to create manufacturing at a lower cost. These factors combine to provide some advantages, but competitors can easily replicate certain processes, leading to the moderate rating.

Risks to the Moat and Business Resilience

  • Industry Cyclicality: The aviation industry is highly cyclical and depends greatly on demand for air travel and freight. A recession can make a serious impact on FTAI’s revenues. There is always the risk of decreased utilization and defaults on lease agreements.
  • Technological Disruptions: The aviation industry is constantly evolving with new technologies. A newer, more efficient plane or engine platform may render current offerings obsolete or may reduce demand for their operations.
  • Management Expertise: Expertise of the management team is very important for the success of the business. The ability to find cheap assets and turn them into profitable operations is key to its business model. Any mistake at that level can drastically affect the whole operations of FTAI.
  • Financial Risks: The debt structure of the business is an important aspect to evaluate for risk. The management has been aggressively buying back shares and this can leave the company with limited capital if opportunities arise or there is a downturn in the market.
  • Geopolitical Risk: They have some operations in Russia, with the rest in many parts of the world that may have different laws and regulations as the world is in a state of change and uncertainty with many countries experiencing a significant geopolitical shift.

Understandability Rating and Justification

Understandability: 3/5

FTAI’s business model is somewhat complex due to its reliance on the nuances of aircraft leasing and its product business. It is not always simple to understand the different components of its balance sheet and its cash flows. An investor should spend some time to fully understand this aspect of the business. However, most of the information is available and is relatively easy to understand.

Balance Sheet Health Rating and Justification

Balance Sheet Health: 3 / 5

FTAI’s balance sheet is mixed:

  • Debt: The company has a significant debt load, but this is very common in the aviation industry and is expected to reduce over time. The net debt to EBITDA was 6.9x. They are operating with large amounts of leverage but they have a specific goal of reducing it. There are also large amounts of assets to counter that debt which means that the business is able to take on risk while managing risk properly.
  • Liquidity: Current cash levels are around $700M and they are not necessarily planning to increase this position further.

The overall balance sheet is a bit concerning because of the large debt that the company carries, and therefore it merits a rating of 3. A downturn in the industry can severely affect the debt ratios of the company. It’s something to be watched carefully, but the company seems to be managing it well.

Recent Concerns, Controversies, and Problems

  • Impact of Russia-Ukraine War: The recent war has had a major effect on the aviation industry. Russia and Ukraine are major hubs for maintenance. FTAI does not operate in those countries directly, but its business is impacted indirectly. Management has said that they will cover all potential losses related to the ongoing war.
  • Management Transitions: There have been some management changes over the past year but it has been viewed positively by the market.
  • Guidance: Management has decided to not provide guidance due to the market volatility, which is not liked by some analysts.
  • Recent earnings: Q3 2023 earnings were below analyst expectations, due to a fair-value write down.
  • Share Repurchases: As noted, they are buying shares back aggressively which is a bit concerning and goes against what Graham’s teaching as he suggests to pay dividends instead.