AerSale Corporation (ASLE) Earnings Call Transcript & Summary

My name is Gautam Khanna, Research Analyst at Cowen, privileged to have with us the CEO and CFO of AerSale, which was a recently minted public company. Nick Finazzo, he's going to go through some of the -- some slides, and then we're going to go to Q&A with Nick and with Martin Garmendia who is their Chief Financial Officer. So welcome, guys. Nick?

Okay. Thank you. Again, my name is Nick Finazzo, and I'm one of the co-founders of AerSale, which I'm going to tell you about in a minute. Thank you for listening in today. Okay. That's me. I've been in this industry for basically 3 decades. I've been dealing primarily in the aftermarket, meaning not new airplanes, but used airplanes and everything that it takes to keep the used airplanes flying. When we set up this business a dozen years ago, we set it up so that it was a -- that we purposely built a business so that we could do everything we needed to do to extract value out of midlife mid-technology equipment. And we'll talk about that in a second. When we created the business, we created it in 2 distinct segments. One is -- and we built that over a dozen year period. One is the Asset Management side of our business and the other one is our Technical Operations side of the business. On Asset Management, we buy fleets of aircraft. We sell aircraft. We do -- we actually do cargo conversions in our TechOps side that we manage to the process of taking a passenger aeroplane, converting it to freighter. We decide whether an aircraft has greater value as a -- as piece parts than it does as a whole aircraft, in which case, we will break it down into airframe parts and engines. Same thing with the engines. If the engines have greater value as full assets, we'll sell or lease them. If they have greater value as piece parts, we'll break the engines down as piece parts, and we'll sell the engine piece parts, we'll sell the engines as USM at the piece part level. So again, we're very focused. Our market is the mid technology, middle aircraft space. You can see looking at the bottom of this page, the kind of customers that we deal with. On the TechOps side of the business, we are doing work on aircraft and components of aircraft. So we've got on-airport, heavy MRO in our facilities, which I'll talk about in a minute. At Goodyear and Roswell, we've got component MRO capability for accessories, landing gear and electrical, mechanical components and structures. And the one part of our business that has come on over the last 5 years in response to requests from airlines to find a solution to a regulatory mandate, that's our Engineered Solutions group. And we've got 3 products that we've developed in our Engineering Solutions group, and I'm going to talk more about that in a minute in more detail, but the engineering side of our business basically takes an aircraft, a regulatory mandate comes out or a product improvement comes out, and we figure out how to comply with that regulatory mandate or to create the product improvement. As I mentioned, we focus on the mid technology, middle-aged aircraft. That's the largest installed base of aircraft out there. So we're focused on the center of this chart. We touched everything in this chart, except the one in gray, which is a GE90. It goes on -- it's a big engine that goes on a 777. We generally tend not to deal with the older flight equipment on the right side of the page. Eventually, everything in the middle of the page will move to the right side of the page, and we'll be -- and everything on the left side of the page will move to the middle, and that will be our product market. People in the mid-technology space are generally not top-tier airlines. They are the second-tier airlines. 70% of our business is international. So we're dealing with companies all throughout the world besides domestic. Those customers in the mid technology space are generally much [ needier ] than the customers in the in the top-tier space. They can do most of the goods and services or acquire the goods and services they need or do the repairs that they need internally. The mid-technology customers do not. Their -- They rely more on companies like AerSale to provide that service to them. On this page, I'm going to spend much time on it other than to show you that both the Asset Management side and the TechOps side of the business, we are pulling customers to and from both sides of the business. So as we continue to grow and the company matures -- we're only a dozen years old, we -- as we offer more products and services to our customers, we're finding that customers find out that we could do one thing that they needed. And then all of a sudden, they take advantage of other goods and services that we provide. So almost 70% of our total -- of our customer base right now takes advantage of both sides of the house. This is basically the geographical location, although it's overlaid with text, but we've got on-airport heavy MRO, we could do cargo conversions, heavy checks on aircraft anywhere from a 737 up to 747 at our facilities in Goodyear and Roswell. We have FAA-approved repair stations on airport. In Rio Rancho, we do structural. We do -- well, we used to do structural overhaul, but we repurposed that facility to do landing gear overhaul, so doing landing gear in Rio Rancho, close to Albuquerque. In Miami, we have 2 shops, one that does accessories. The other one does structural component repairs, structural being flaps, slats, nose cowls, thrust reversions, those type of things and accessories being wheels, brakes, hydraulic pumps, starters, generators, that type of thing. Memphis, Tennessee, we have both our distribution center, and we have component capability there also on the structural side. Okay. I told you I was going to tell you more about our 3 Engineered Solutions products. So again, each of these products either is a result of a regulatory mandate or a product improvement request, AerSafe and AerTrak complied with regulatory mandates. TWA flight 800 took off of Long Island, 747. But with people going overseas, fuel vapors in the center fuel tank got ignited by chafing wires and the aircraft was lost. And all souls on board were lost. FAA came out with a rule called the Fuel Tank Flammability Reduction Rule, basically said, "Hey, airlines, you've got to figure out a way to make sure that fuel vapors in the center fuel tank can't have another -- can't result in another catastrophe." The OEMs came up with a product, which basically -- they called it a nitrogen generator, but really, it just extracted oxygen out of the tank, so only left nitrogen, which can't burn. And we've developed a system that -- it's a follow-on military technology system. We put reticulated polyurethane foam inside the center fuel tank, which -- back in the Vietnam era days, airplanes were getting shot down by small arms fire with half-empty fuel tanks. And what they figured out is if we need to compartmentalize the oxygen, we put foam in there, reticulated foam, we compartmentalize the oxygen. A bullet can hit the field tank, and it won't take the airplane down. It won't explode. And so we've incorporated again. It's a military technology, and we've put that in commercial aircraft. We've got that for, I don't know, 737, A320 family, 757, 767, 777 and A318 through A321. AerTrak came about as a result of the FAA's next-generation air traffic control system, where the FAA said, "Hey, we're not tracking airplanes by radar alone. Today, our primary source of tracking aircraft will be by GPS technology." So what we did is we took antennas and transponders manufactured by other companies, and we integrated them in -- many of the aircraft I just described that we also serve the fuel tank flammability methodology. So that's a -- that was a requirement that went into effect in 2020. We have a system that complies with it. Again, both of those are regulatory mandates. AerAware is something different. AerAware is a technology that doesn't exist today in a large transport commercial aircraft like a 737 or larger. What that is, is that's an enhanced flight vision system, coupled with a head wearable display. Think of the head wearable display, if you know much about the F-22 and F-35, they have head wearable displays incorporated in a flight [ hauling ]. What we have is an offshoot of the head wearable display that's not part of a helmet. It's just a stand-alone head wearable display that our pilots put on both pilot and copilot and allows them to see through the weather. It allows them to put select flight deck instrumentation and put it on their flight vision goggle, allows them to overlay synthetic vision, which they can pick up from GPS satellites. And basically, it couples that with an enhanced camera. All of this hardware, by the way, is manufactured by Elbit that's our partner on this project. They're a military manufacturer. And we're doing the installation, modification, flight testing, and we'll own the rights to modify the aircraft. So it will be our IP. It will be our STC, but we'll be acquiring the hardware from Elbit. What that combined system allows is the pilots -- both pilot and copilot to be able to see in adverse weather conditions and land in visibility conditions that others can't and really give an enhanced vision, added safety dual system. Today, head-up displays might be something similar to what you have in your car exists. It's been around for 2 decades in commercial aircraft, but no head wearable displays in a commercial aircraft today operating as a primary flight display, meaning our pilots can fly the aircraft only looking through their head wearable display. They don't need to look at the flight instrument, their flight panel, instrument panel to fly the airplane. And that's basically what you would do when you would certify a new aircraft. So we're super excited about that. We've got a number of customers who are talking with potentially large customers. We're -- our focus on that is 737 and A320. It's the 2 largest installed fleet of aircraft, over 10,000 aircraft flying presently and growing. So we believe that as we get that product certified and launched, commercialized that, that will be transformational for AerSale. Our Engineered Solutions products are high margin, greater than 50%. We think this will be no different than all our other Engineered Solutions product. The market for this product is in the thousands. So that's why we're so excited about it. All right. What this slide depicts is kind of what do we do in different portions of the cycle? Now over time, we built the business so that -- so there are countercyclical elements of it, so that in one portion of a cycle, we may find certain of our business segments are performing very well and others are not. And they tend, as we've grown the business and expanded our capabilities and product offerings, we found that -- and this wasn't by accident. I mean, we've intentionally built it so that if we felt we were going to be in a down market, certain portions of our business would do well, others wouldn't. But we would offset however poorly might be performing due to a market dynamic in a down market versus in up market. So that's the way we designed the business, and that's not really what this page is showing you. What this page is showing you is when we typically do the heavy amount of invested -- investing in feedstock, what do we do? We buy fleets of mid-technology flight equipment from airlines. And then we figure out how to get the highest value out of that and sell it into the aftermarket. And it could be as whole aircraft, converted freighters, as I mentioned before, break it down into parts, engines and engine parts. So what this says at the bottom is that when we're generally investing in a market downturn. So we're coming out of a market downturn, a significant one. And we've made some significant investments there. And then when the market fully recovers, then we're in a cyclical peak, we tend to monetize those assets because we bought them right. We've worked them. We figured out their best and highest use, and we monetized at a peak. Now that's typical, okay, that's typical, but it doesn't matter anymore. We've gotten the business large enough and diversified enough that -- so that we're taking advantage of any portion of the market because of the different nature of the things that we do. We're very conservative when we buy assets. Our typical target IRR's minimum of 25%. Historically, if you look at this chart, what this chart is telling you in a 12-year history of the company on any significant transaction we've done in excess of $7 million as a specific purchase, we've made a 25.81% IRR on that transaction. If you looked at that -- and I don't know what the exact numbers is -- are, if you looked at that in the past 5 years, it's significantly higher than that, especially in view of some recent transactions that we've done. So we're conservative. We bid on a lot of stuff. We don't -- we generally do not overpay. And we know how to extract margin out of that. And all that's part of this ability to do on an integrated basis, offer multi-products and services. Okay. COVID hits. We're in early 2020. Airplanes are coming back off lease. Narrow-body engines are coming back off lease, nobody wants to buy parts. Nobody wants to overhaul components or structures, although structures didn't suffer as much. What happened? The on-airport MROs weren't getting any C check work, any heavy air framework. What happened? Well, one, storage picked up. We had over 500 airplanes in our storage facilities, which gave us the opportunity to acquire a significant amount of assets that we were maintaining for airlines parked at our facilities. So what popped up at that time was American was exiting at 757 fleet. So they were not going to flight anymore after COVID -- after the market recovers. And they put out for bid 24, 757s and 2 other ones that we ended up buying. We ended up -- we weren't the highest bidder, we were the third highest bidder, but we offered a really good package for American to be able to transition those engines -- those airplanes to us. So we said, what would you guys be doing buying 26 757 passenger airplanes from American Airlines when all these passenger airplanes are parked all over the world? Well, that wasn't our intention. We weren't going to feed the passenger market. Our intention was some of them we would break down to parts. Some of them we would return to service as whole aircraft. Some of them we would sell or lease the engines. And the rest, we felt that we would either convert to freighter ourselves, using our own capability because we could do that at our Goodyear shop, or we would sell them to third parties that would get them converted in China. And that's exactly what we did. And I think we're -- of the 24 airplanes that we bought, I think we're up to #19 that we've either -- that we -- none of them, by the way, are being parted out. So we would ended up getting 2 additional airframes that did get parted up, but none of the 24 we bought are -- will have been parted out. They will either have been sold, leased and then sold with lease attached, converted ourselves and sold after conversion or sold to Chinese operators that got them converted themselves. I think we're up to 19. We'll hit the 24th this year. We've got -- so having done 19, we'll do another dozen more. So it is more aircraft than we actually bought in this one transaction. But now that we understand the market, that's a freighter market, so that didn't suffer post-COVID. So the opportunity there was recognizing that the market opportunity was on the freighter side of the business and having the infrastructure to be able to do conversions ourselves and manage third-party conversions to do the work for us, that basically gave us capacity and product to move it into a market that was just -- they had an insatiable demand for flight equipment. That may be waning a little bit right now, but 757 is a hybrid airplane. It's not a long range, it's not a short range, it has higher weight, higher capacity and longer range than the narrow-body aircraft and not quite the same on wide-bodies, but it fits a market niche that is very specific. And if you have 757s, there really isn't today a replacement. The A321 does not replace as a converted airplane to 757, it doesn't have the range or the payload that the 757 does. So we built the business to -- as I mentioned, we've built a business to capitalize on our current market conditions. Whether the market is up, down, it's kind of we're agnostic to it. We'll find the right opportunity to acquire equipment, flight equipment, hopefully, fleets of them, and we'll find the best and highest use for those, and that's where we'll put them. And we have all the infrastructure to monetize the equipment that we acquire. We're in a great financial position. We're sitting on $150 million of cash, $150 million undrawn credit facility. So we're in a good position to expand the business, whether it would be through feedstock acquisition or M&A acquisition of companies that would help us do the things that we do best. At a dozen years old and with the breadth of products and services that we've offered, we're at platform scale now. So it's easy for us to continue to grow the business. It takes -- believe it or not, it takes time to get approved at all the different airlines to be able to sell the products that you have or service their equipment. And we keep adding more capability with more airlines every day as they avail themselves of one of the goods or services that we offer. On this chart, as -- you guys have probably seen lots of this. What this is telling us is that the single -- the narrow-body A320, 737 is almost fully recovered from pre-COVID levels, and the wide-body side on the passenger is substantially recovered, but still has 20-plus percent to go. Does it -- not the same for freighters. And on this side, it kind of shows you the freighter side. The freighter side, dedicated freighters have continued to increase. Maybe there might be -- as far as requirements demand, maybe there's a slight diminishment now. I've heard that freight rose over 50% from pre-COVID levels through the peak of COVID. Now it's down maybe 30%. But it's not down -- we're not back to pre-COVID levels. We're still above pre-COVID levels. Bottom right of this chart just tells you something. It says that in '19, 33% of our business was cargo. In 2022, almost 50% of it was cargo. Well, what does that mean? Look, we sell parts and provide services and landing gear and do heavy checks and engines and engine leasing to -- it doesn't matter, anything I just described. You do it whether you're doing it on a passenger aircraft or on a freighter. So for us, it was just simply a matter of refocusing our energy on the freighter market, and we've not been able to satisfy the demand on the freighter side. I mean the freighter demand has been huge. The bottom of this chart really is the focus area for AerSale. These are all mid-technology middle-age flight equipment. We're going to update this chart. But as of the date that we put this together, this was a 20 -- this is a $20 billion opportunity for us to buy assets that fit the profile that I mentioned, mid-technology, middle aged, dealing with customers that are second tier. That's our target market. It's big. That's where we're going to feed off that on the feedstock acquisition side. I think I've covered some of this before, so let me just hit something that I haven't. Again, we're in a good position to continue to grow from where we're at. Traffic is recovering, we've got these engineered products that I'm telling you -- that I've told you about that could be transformational to the company's P&L. Big margin, big opportunity, proprietary IP belongs to AerSale. We will continue to focus on expanding the goods and services we offer to governmental agencies would -- that would be on aircraft, at our commercial aircraft that have military derivatives, take the KC-135 to 707 to P-8, the 737-800. And similar aircraft 757, I don't know what it's called in the military, government side, but there's also a government version of that. Everything we've done thus far is in -- other than sales distribution, is on -- is in the domestic U.S. So we feel that at the right time, in the right political environment, which I don't -- it varies a lot today as to where we should be, we will continue to expand geographically outside of the U.S. But we -- everything has been U.S. concentric, mainland concentric at this point. All right. We've done M&A acquisitions to build out this business, but not buying primarily good companies. We've bought companies that have been broken and we've had to fix them. I don't want to do that anymore. I don't have the bandwidth and the time and energy that to fix another broken company. What we want to do is we want to find the right M&A opportunity that actually helps us in the things that we do. And as I said, we've got the balance sheet for it. We've got the appetite for it. We just have to find the right thing at the right time for the right price.

And that's it. Great. Awesome. Let's grab a seat. Well, there are some million questions I'm going to ask. And I know it's a relatively new public company. So I wanted to ask some basic ones. We're staying away from financials because they haven't been reported yet. First of all, it's a company that does a lot of different things. And I'm just curious how you get the various P&L leaders and what have you to actually work together to figure out how best to monetize a given asset you acquire? So walk me through those type of discussions. How do you actually go about ..

That is the hardest thing I have to do. which is to take a bunch of -- we've got 5 divisional presidents here that have either run their own businesses or that could run their own businesses. And to get those 5 divisional presidents who all have egos, and they all have the way that they want to do things and to get them to think the way we think, and therefore, we culturize them, so that, "Hey, we all think the same way. We all know what the objective is. It's a corporate objective, not necessarily your individual business unit objective." We've motivated everybody for -- from a -- being a public company, that's really helped. So now we've got everybody motivated with stock grants. So guys, it's great if you do super well in your group. But if you pull from some other division, you're going to hurt the stock value, which is ultimately going to hurt you because your -- a significant portion of your incentive is going to come from your stock grants and stock performance. So look, it's been hard to do. It's taken a dozen years bringing in experienced people. It doesn't always work out. They use -- some of them you can't change. But ultimately, sitting down with everybody as a group and making them understand give this up in your group if we -- I don't care that we bought it for you on a parts side, this should be converted to a freighter. You're not going to get it from a parts point of view. Leasing guys, you're not going to get lease engines. We're putting them on airplanes we're converting to freighters. And that's where we get the highest value. Same thing with the landing gear. Hey, we're pulling your landing capability, and we're doing overhaul for landing gear and MRO and et cetera. It's sitting down with everybody and showing them how the greatest value of the company is you guys do your part, but you pitch in for a bigger asset that we're trying to remanufacture and monetize, where we'll get a much higher value out of the monetization. And it's just hard to do. Everybody has their own -- it's hard to break somebody from this attitude that I got to worry about my division. And at the end of the day, I said, look, all that matters is just trust me, I know what you guys have done. I know what you've sacrificed. When it comes time to your financial performance, if you don't hit your numbers, I'll understand why I have a lot of subjectivity in how to reward them on their bonuses. And it takes all of that and it's hard. And -- but I think I've got it right after a dozen years. We got the right people in place. Some of them have been with me now for a dozen years. Right?

And Martin, I imagine from your seat then, do you have to kind of allocate attribution...

Yes. We spend a lot of time with the business. And the good thing is, as Nick has noted, it's created a culture where people are fairly integrated. So using tools, Power BI, different items, we've been able to break out the P&Ls, so they can see not just their third-party revenue, but what the intercompany amounts are. And then sometimes it's a little bit more of an art and science because you're kind of calculating what firm market value is, and you have 2 different kind of parties that have a different overall value. But we [ strike ] automating that so that they can see it. So almost kind of -- like in basketball, they can get in a fist, when there's a success on one side of the story, it's easy to kind of see and quantify how they contributed to that.

Yes, that makes complete sense. One other question that people often ask is, how are you guys different than AAR Corp, which is kind of a business that looks similar on paper, but with much lower margins in their MRO business? Could you talk a little bit about how you extract value in the repairs that you actually sell your part into the...

AAR has gone very heavy, very big into heavy aircraft maintenance. So heavy aircraft maintenance generally requires millions of man hours of labor. And airlines are squeezing you for -- they're squeezing you on a labor rate. So the margins that you'll make, if all you're doing is heavy labor and you're not providing other goods or services to the airline that you're doing work for, intend to give you a lot of revenue but a very narrow margin. That's not a business that we're interested in. If we bring in a large airline and an airline wants us to do work, we're generally -- I'm not saying always, but we're generally looking for an airline that needs other goods and services that we offer because we make a much higher margin supply in landing gear, rotable components, USM parts, engines, modifications that use our supplemental type certificates, our Engineered Solutions products. When we can find a customer that needs all of that, we get a 25%, 30% margin off of the MRO work. It's not necessarily the MRO, but it's the combined margin becomes -- because we're pulling from all the other divisions. But that's what we see. Now under certain circumstances, that is today, there's just no availability of labor, and we're able to get a premium labor charge when we're doing work on airlines that only have -- they're not -- we're not going to be supplying parts. We're only doing work on the flight equipment, but newer flight equipment doesn't require as much work. And we're able to keep the airline happy because we got to do to keep repetitive business and yet make a better margin than we would if we were just otherwise providing labor. So we're having to balance that all the time.

And could you talk a little -- I mean, so a couple of years ago, you acquired the 24 757s and then a couple of extra airframes. But it appears that there hasn't been a lot of retirements of aircraft in the last couple of years. And I wanted to ask if you just had a view on the USM market, how that might unfold over the next couple of years because it's been pretty dry?

Without giving you the specifics of the numbers, we bought about 25% of what we expected to buy last year. And that's -- why is that? We looked at a lot of stuff. We're very conservative. So our hit rate was pretty low because we're not overpaying for anything. But the bow wave of retirements that we expected to happen pre-COVID when all these new aircraft were being delivered [ pre-MAX ] problem with FAA. We expect that all these airplanes were going to be delivered. They're going to push out all the older aircraft that's in our -- the mid-technology space. That didn't happen with COVID because I've discussed before how airlines didn't know what they were going to do, leasing companies have book value problems. Aircraft stayed on the ground for years. They had to write them down. And then when you added on top of that, the MAX problem and the FAA giving super high scrutiny to the 737 MAX new production and 787, saying, "We're not letting you put it in air without a certificate on an airplane. We're going to inspect every airplane that comes off the line," slowing down deliveries of those aircraft besides the 2-year certification delay. Airbus with the engine problems that it's had, where they can't keep engines on wing, what I've heard, more than 2,500 cycles, and they're having problems and supply chain, global issues regarding Russia, you've got all these events that have forced airlines to -- and a recovery about it, by the way, on the narrow-body side. So you've got a recovery. You've got now a demand, but there's no -- that there's no -- there's not a sufficient supply of new aircraft to meet the demand -- and so what's happening is airlines have been holding their flight equipment. If they're on lease, they lease them longer. If they haven't -- if they own them, they're holding them longer. And if they lease them, they may just be buying them because the cost of returning the airplane may be excessive. And what that -- that's a headwind for us and the whole industry on the USM side in that -- until the market, until the OEMs resolved their issues, it is going to push the -- our expected bow wave of -- midlife mid-technology equipment is going to keep pushing that to the right. Is that 2 years, 1.5 years, 3 years? I don't know. Lots of problems going on in the new OEM space.

And at one point, you actually sourced a number of -- that by a lot of 24 aircraft from your storage facility.

Correct.

Is that a viable source of potential acquisition, going forward? Or -- I know the numbers have come down in the storage but...

Yes. We are -- we have been buying airplanes, not so much out of Roswell lately, but out of Goodyear because leasing companies that brought airplanes into Goodyear because we tend to segregate. Roswell does airplanes that aren't going back into service, they'll be torn down or we might buy them and repurpose them. Airplanes that potentially will go back into service, we pushed into our Goodyear facility. We have more mechanics, got more capability. That's where we can do cargo conversions. And so as airplanes have now been there for 2-plus years, and there's no home for them, leasing companies put them up for sale. It's, again, a big advantage to be right there, have the airplane in your backyard, you've been maintaining it. You know everything there is to know about it on the buy side. And we have been buying. Unfortunately, it's not 24 airplanes. It's 2 here, one there, I don't even think we bought more than 2 at a time from anybody. There's a lot of onesies, twosies.

Have you guys -- what would you expect to deploy in capital over the next 24 months in terms of flight equipment buys? Do you guys have a sense for that? I'm talking, what's the ambition when it happens?

I would say -- I mean, capacity-wise, we have $150 million in cash. We have $150 million undrawn revolver, so we have $300 million of capital that we can deploy. As Nick noted, we're looking at the opportunities overall as the supply of new aircraft is limited. That means aircraft right now, temporarily for airlines, are getting a higher price than we think is a long-term view. So again, we'll continue to be opportunistic. We'll continue to look at our model. Nick noted in the chart, we target a 25% IRR. We've been good at that. We probably have done better in the last 5 years. We haven't taken any significant write-offs, probably around less than 2%, in that overall acquisition target. So we're going to continue to do what serves us well, continue to rely on the data and information that we have in our read of the market. But again, as hopefully, Airbus and Boeing are optimistic that they'll get production levels up. If they're able to do that and we start seeing deliveries and now they'll start displacing the older aircraft, and that will give us greater opportunity. So again, that will be a changing dynamic as those kind of issues get resolved.

And just let me just add one more thing to that. Because our target margins are in excess of 25%, rising interest rates have actually helped us because we've seen competitors -- we've bid on over $1 billion worth of assets last year, didn't buy anywhere -- well under 10% win rate because we're extremely conservative. But as interest rates have risen, the people we compete against it, don't -- they're not going to make a 25% IRR. They might be a low single -- low double digits or even high single-digit IRRs. When you start laying in a cost of capital of approaching 10%, if you're having a borrow plus a spread, it's eroding any margin that they're making. So the expectation is we're going to win more -- we expect it will be the same. We'll still look at $1 billion plus of the stock. Our expectation is we'll win more, because we're seeing it right now, than we did last year because the cost of capital is so high for people that have -- that are working on a very thin margin that they won't be able to make sense out of a lot of stuff. Now, it's really hard to know. Therefore, should we double, triple what we bought last year or not? I mean that's -- we'll see. I mean the opportunity is still there. And we have some -- the headwind is, again, the lack of delivery of the new aircraft. The tailwind is, believe it or not, interest rates don't affect us. We have no borrowing at this point. And even if we did, our margins can absorb the interest cost.

And anything that's available now is usually unserviceable. And a lot of operators can't deal with that because we have the infrastructure to monetize that, that's also giving us an advantage.

What do you typically run up against on the bids for used flight equipment?

The ones -- the companies that we typically will lose to would be a small company that's funded by an investor or a hedge fund that gives them access to a pool of capital and says, you go out and spend it, figure out a way to make us a 15% IRR on our investment. And those people who have very little of their own money in it, I mean we've seen a lot of failures of that. And the sad part of that is we can't gloat over there failure because it's just they took an opportunity from us. Now there is -- we can pick up the pieces later, but there's a lot of money being lost by overzealous people who don't really understand the market or have the infrastructure to properly monetize it. And they just -- they overpay. That's why we -- that's why our hit rate was so low last year.

I know you can't talk too much about AerAware because you haven't reported earnings yet, but could you tell us a little bit about the market potential for AerAware, which seems pretty promising, whether there's anything like it in the marketplace today? Just sort of the context behind that product launch.

Sure. So this technology exists, in part, on the F-22 and F-35. It's a head wearable display. Think of it as an enhanced flight vision goggle. It's not coupled with a helmet like on the military applications, but it's a head wearable display, pilot puts it on. It's coupled with a camera that sees through the weather basically. You can overlay synthetic vision on it, meaning you can see what synthetic version that comes from GPS data, which overlays what you're seeing through the camera or with your naked eye with a digital image of what's out there, based on GPS data. So it gives -- and it's both a pilot and a copilot system. So we've got dual redundancy there. We compete with a head-up display. Head-up displays, you may have them in your car, projects your speed and direction or whatever your radio station on your windshield. Similarly, a head-up display, which is decades old technology, okay, we have a head wearable display, head-up display, a pilot can select flight deck instrumentation, you can see through the camera. But he has like basically a sun visor that pulls down in front of his pilot window. That's all he sees through. So if he looks left, he loses whatever was on that display. He looks right, looks down, he's lost all the flight data information that he needs to be aware of, especially when you're landing and your terrain is getting low and you're dealing with air speed and you've got all these parameters you want to know. And you have to -- you can't look forward, and now you've lost all that data. Now you've got to look down here, but you've got to scan the instrument panel. Our guys can -- it's always there in front of them. And when -- and they can look up, they can see straight ahead. They can look to the left. They can see what's out there, look to the right, see what's out there, land and see through whether that the naked eye can't say through. They can see infrared, signature of airplanes 20 miles out in the future. That is a huge market. That technology that I just described doesn't exist today in commercial aviation. The only airplane that has that system in it, there's some -- Falcon puts it in some of their small jets. Cessna put it in some of their small jets, very small scale. It's not a primary flight display, meaning our pilots can fly the airplane solely using their head wearable display. They put it on. They don't need to see anything else to fly the airplane. Yes, there are warning signals that would pop up, that would draw their attention if something happens. Yes, they got to put the landing gear down manually. But as far as everything they need to see, they can see it in their head wearable display. It's a huge market. We think that that's between the 737 and the A320, that's 10,000-plus airplanes. It's a higher-margin business for us. We expect this to be a typically 50% plus margin. So big population advanced technology, original military application, our IP, our supplemental type certificate. We've taken all of its products and we have commercialized them at aviation. Airplane has been flying around 737-800 and 700, and we are basically in the final stage of getting FAA certification.

And this is part of the FAA's next-generation flight control system. So this is something that they have an interest in. It's going to reduce congestion overall, which will allow more aircraft to land, that has greenhouse emission savings. And as Nick noted, this is a huge safety kind of aspect to it. It will enhance reliability and predictability of landings. So -- and the economics, we've already looked at it. Just the overall being able to avoid those diversions, makes a very good economic case as well.

So basically, you can fly through very inclement weather, land in tough weather, where other aircraft that don't have this head wearable display would have to be diverted to another airport or what have you. So you're saving the airline money by having better cycle times, having people in the right position the pilots at the right airport, the aircraft in the right airport.

Correct.

And then there's also the safety element where ...

Safety is the primary element. They can just -- airlines can justify it from a cost point of view, but the safety improvement is substantial.

I really appreciate your time, gentlemen. Thank you so much.

Thank you.

Thank you for listening.

Thank you.