FTAI Aviation Ltd. (FTAI) Earnings Call Transcript & Summary

Okay. Great. For those of you in the room, welcome. For those of you on the webcast, welcome also. A couple of housekeeping items. About 3 days ago, there was a water main break. So the authorities are suggesting that no one drink any of the water here at Lockheed Martin, because you will not enjoy the rest of the day if you do. Our General Counsel, [ Bo Hegan ] is with us today in proving that she can write disclaimers for any and all occasions. Let me read this to you. I would like to point out that certain statements made today will be forward-looking statements, including but not limited to potential future earnings. These statements by their nature are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our presentation regarding forward-looking statements and to review the risk factors contained in our most recent quarterly report filed with the SEC. Again, very quickly, the layout for today, Joe, Sam, David, are going to be doing the presentation. That's from 10 to 12. At 12 we'll break for lunch. For those of you who were at dinner last night, you'll get this joke. [ Juliano ] has started a rumor that lunch today will be a 12 course meal. That is inaccurate. It will not be a 12 course meal, but hopefully you will enjoy it. Lunch will go until about 1, then we will start 3 different groups for tours of the facility, 8 different stops. And we've seen it, it's really going to be cool. You're going to really enjoy this part of it. Then we're going to come back here at around 2:00 and it will be informal -- much more informal, then you can do Q&A, questions about the tour or any of the questions that were left over. And then buses between 02:45 and 3:00 will be leaving -- will be leaving to go to the airport. Some of you need to go earlier and it's very easy to get Uber up here and you just have them, they'll pick you up right outside that. With that, I think we're ready to go, and let me turn it over to Joe.

Thank you, Alan. That's probably an introduction you've never heard before, or didn't expect. I appreciate everyone coming today, who's here physically and all those on the webcast. We're very excited to be able to do a deep dive into the module factory and hopefully explain how we do things on the maintenance side in a very different way. And that's our primary goal with this Investor Day today. And we'll get some great visuals out on the floor for those of you who are here for the tour. So we're very excited about that and look forward to hearing what you thought about it. Since we are focused today really on the module factory, and we'll do a deep dive, David Moreno, who's the Chief Operating Officer; and Sam Hammoud, who's our head of the module factory will be taking you through a number of slides today on that topic and really doing it in more depth than we've ever done it before. So I thought I would start off with a few comments, overview about leasing, about PMA and about our potential engine part repair joint venture. So first of all, on the leasing side, the environment remains very strong as we've been saying over the last several months. It's flipped so that virtually everything is working in our favor. We have strong tailwinds, in that travel demand, as you've seen, is -- recovery is well underway. And now I think every major region of the world, domestic flying activity levels are above 2019 levels. You've seen new aircraft delays, which makes existing assets more in demand and more valuable. You've seen the new technology engines that have been put into service having some difficulty staying on wing as long as people thought they would. Inflation leads to price increases on parts and maintenance, supply chain delays lead to longer turn times for engines and repair. And so all of that is beneficial to us with our legacy assets and assets that are proven in significant demand and continued to tightening -- to tighten. So we're on track for $450 million to $500 million of EBITDA for leasing this year. And we expect that this environment will last absent any new shock, but will last for many years. This is not a short-term phenomenon. All of these trends actually are -- should very much continue for several years going forward. So we're very very happy with the leasing outlook. On the new deal side, we also are seeing pretty good activity. As we've mentioned, the best opportunities that we see are usually assets that are off lease. And so we have 2 portfolios that are closing this month that are of that nature, off-lease, very attractive prices. And since this is such a large market, and there's always something available, we expect to be able to find return -- good opportunities to invest at very high returns, probably some of the highest returning deals we've seen ever. And we're also in the process of completing a sale-leaseback with an airline that involves mostly engines, and it's both existing engines they own as well as additional engines that they need, since during COVID, they've used up all the green-time they had in their fleet [ and ] their short engines. So it's indicative of what I think the market opportunity is for us to invest on today's basis, and it remains very attractive. Second, turning to PMA, which is I know everybody is very interested in that topic as we are. But there's really no change to the existing schedule. The parts are progressing very well. We expect 4 parts to be approved and available around the end of this year. But we're not going to be talking a lot -- in a lot of detail about the process along the way. We'll simply announce when parts are approved and available. Turning thirdly to the engine repair business, partnership. We have made progress on that. We have a few alternatives that we've locked down or identified, and we're in discussions, advanced discussions about how to take those forward. So -- and it involves terrific counter parties and partners that I think would be a nice addition to our portfolio of capabilities and another example of us being able to vertically integrate into what is a very big and growing part of the engine business, the repair business. You'll see some of that today on the floor, and we'll walk through how much repair activity there is on an engine, both when it's torn down as well as when it's fully restored. So we hope to be able to conclude something with one of those partners, most likely by the end of this year, as we've discussed earlier. So good progress, and I think it's an area we definitely feel like would fit very nicely into our unique capabilities for the CFM56 engine. So with that, I will pass the baton to David Moreno.

Thank you, Joe. As Joe said, my name is David Moreno. I'm the Chief Operating Officer at FTAI Aviation. I've been with the company for 10 years, and joining me today is Sam Hammoud, the Head of the Module Factory in our CFM56 maintenance strategy. We're happy to host you today at the Lockheed Commercial Engine Center, which is the epicenter of our maintenance philosophy as well as the home of the module factory. Much of the innovation in the CFM56 maintenance is going to come out of this building, and we're very happy to show you that. The form for today is going to be a 2-hour presentation. Don't worry, it's meant to be very interactive. So we're going to pause at the end of each slide to answer any questions that you may have. We're going to address overall the engine platform life cycle, the CFM. We are going to teach you everything you need to know about the CFM engine itself, and then we're going to discuss modules in detail and explain why we believe this will disrupt the traditional way of maintenance. Followed by that presentation, we're going to take you through the guided tour, where you're going to be able to see a lot of the modules, the key machines, and of course, the people [ who have ] helped to put everything together. So we're going to start today's presentation from the top and talk about the engine platform life cycle, which is the foundation to the aftermarket and why folks can unlock value for customers. So at the top, Boeing and Airbus, they compete fiercely to deliver airplanes to new customers. They're very price conscious. And as a result, they exert downward pressure on suppliers. The main supplier here is going to be the jet engine manufacturer that has to produce the engine at a set price. This price oftentimes is a price they don't make money on, it usually actually leads in a loss. Which is what we call a razor-blade model. In this case, the razor is the sale of the engine upfront, and the blades are actually the servicing of that engine for its entire platform, which is 40 to 50 years. As a result, every year, on average, all the manufacturers escalate price about 7%, with some years being more depending on inflation and other economic factors. Every 5 years on average, every jet engine needs a heavy shop visit. That is very important because it -- airlines care about it because it's a significant expense. Aircraft maintenance is the third largest expense for airlines. And -- behind fuel and labor, and engine maintenance is the most expensive maintenance for all airlines. So let me walk you through a simple example here and show you how, if we take an engine platform we start off with $1 of replacement parts, how by the end of that life cycle, you're going to end up with $25. So let's take one aircraft type, the 737-800, which was first introduced in 1997. Let's say it's $1 to replace all the blades and vanes and all the parts of that engine. Every year, it's going to escalate 7%. So by year 10, that $1 becomes $2. The first 10 years are controlled by the manufacturer. The reason for that is because there is no aftermarket. There are no used parts. There's really nothing that you can do in the first 10 years of the engine since it's new-new, it's very new. Additionally, the engine goes through teething exercises and different iterations. So the manufacturer likes to keep close to that so they can improve the engine. I'm sure you've heard a lot about what's happening today with the LEAP and the GTF engine types. Afterwards, the engine are -- still produce and the typical platform life can be anywhere from 20 to 25 years of production. In this case, the 737-800 production life was 23 years until 2020 when the last airplane came out of the Boeing facility. At that time, the shop visit of $1 is now $5, so it's 5x fold. That last airplane has a useful life of 25 years, not including any cargo conversions, which will extend the life by 15 years. That means that airplane will be retired by the age -- by the year 2045. And in that case, that $1 replacement parts will now become $25, so multiply by a factor of 25x. That is the aftermarket opportunity, right? And the reason why the OEM opens up the network is because they want a long-lasting platform. They want to be able to have the engine last as long as possible, and they want to make maintenance accessible to their customer base. At the same time, their business model focuses really on selling parts. And they, at one point, want to transition to the new engine types and leave the maintenance and servicing to the other parts of the industry. The benefit to the aftermarket is quite clear. There's a pricing umbrella that goes up significantly year-over-year. And this is the opportunity for folks that can actually achieve savings and deliver those savings to customers. And that is the genesis of our business model, is we want to be the power for the aftermarket. Any questions? Now that we've discussed the engine platform life cycle, let's talk about the most exciting aftermarket opportunity. And of course, you would guess, it's our favorite engine, the CFM56. Why is it the most exciting opportunity in aftermarket history? There's 4 reasons for that. Number one, it's the largest market size ever produced. There's over 22,000 engines that were produced, 21,000 today are still in service. Number two, it's a very reliable engine. The engine was initially designed for military use, and it's very dependable and doesn't have much early removals, so airlines love it. Number three, it's a modular engine. This is what we call the legos. The reason it's a modular engine is the manufacturer CFM is a joint venture between GE and Safran. GE produces the core of the engine in Cincinnati. Safran produces the front and the back, or the fan and LPT, in France. The modules are shipped to one location. The engine is assembled and tested. So we're able to unlock a lot of arbitrage opportunities through this modular nature of the engine. Number four, it's an open aftermarket. So CFM prides themselves in having an open aftermarket, therefore having a very reliable engine. There's over 40 MROs worldwide that service this engine today. What do these 4 things equate to? They add up to a long platform life. And again, that is key for the aftermarket, and that's key for the OEM because that keeps the life of the engine flying as long as possible.

The 25 years of additional longevity, is that with cargo factored in? Or what does the cargo add to that?

Yes. So when you -- the cargo conversions can -- Yes, sorry, let me repeat the question for the benefit of the folks on the webcast. So the question is, does the 25 years account for cargo conversion. So the answer to that question is no. The cargo conversion is going to add another 15 years minimum to the airframe. And in this case, the A321, which is the, it's the Airbus converted airplane that's going to be powered by the 5B. So that's going to be a market for that. But obviously, the larger market is the 737-800, which has been a lot of conversions. It's going to extend it 15 additional years.

And there's enough cargo volume such that all the passenger stuff is off a bit slight. So all those engines can find a home in cargo?

Yes. We've seen a lot of cargo conversion the last -- yes, sorry. The question is, is there enough cargo volume that the engines will have a life in the cargo world? And the answer to that is yes. We've seen a lot of cargo conversions the last few years, largely driven for a lot of demand in cargo and in rates for shipments. We expect that to continue as far as demand for converting airplanes, right? And most of the value when the airplane reaches a certain age is its engines. So people want to maintain engines and want to make sure that they're buying and servicing the right engines. So it's really an engine game as far as being able to build the right cargo airplanes. So we see a lot of demand from the customers on the cargo side. Yes. Yes. We're not as -- the question is, the math doesn't add up as far as cargo conversion. And what do you expect as far as the number of cargo conversions, right? We're not saying that every single airplane is going to be converted into cargo, right? There are going to be a handful of aircraft that are going to be converted to cargo. Today, the cargo fleets out there in the market are getting older and older. I mean the 737 Classic is still a workhorse for the cargo industry, and there's a lot of fleets transitioning from the Classics into the NGs. So you're going to start seeing more and more of that conversion plus e-commerce, and you have a lot of the big operators really growing their fleets on the 737-800s, for example, Amazon, so we do expect a lot of cargo conversionings to happen. Is every airplane going to get converted to cargo? No. But if you look at the life cycle of the CFM56 and we're going to talk about it in a bit of depth, the engine itself is very young. The average age of the engine is about 13 years. So it's really on its early part of its life cycle. There's many airplanes that were delivered at the end of the production life of the Boeing and Airbus cycle, which makes the aircraft very young and have a very long platform remaining. So the question is around -- what are you seeing as far as extensions of the NGs and COs due to delays in the MAXs and NEOs, and how does that impact cargo conversion? So that's a great question. We are seeing significant demand for extending all midlife and late-life airplanes right now. And as a result, what's happening is operators need to plan their fleet. What actually happens in principle, right, is airlines have, let's say, plan to phase out certain airplanes at certain times. Now that they're not getting replacement for that, they're not getting MAXs and NEOs, they're actually going ahead and doing heavy work on the airframe, right? So they're very smart about phasing aircraft out. They really try to phase them out when airframe-heavy maintenance is due. So they're investing in this airframe that is going to generate another 5 to 6 years of life. So we have customers coming to us wanting to extend for that duration. As a result, what that's doing is that's obviously bringing more demand for airplanes worldwide. And there's a shortage of capacity out there, which is going to drive up the prices of airframes. As a result, then cargo -- if you're looking to convert an airplane to cargo, you may not be able to get what you want to be at the airframe level. So temporarily, it may slow the amount of cargo conversions right now, which means that there's going to have to be a replacement of that in the future when there's going to be more retirements of airplanes. Yes. So when we look at engines, we look at green-time. By green-time, we mean how much serviceability is in the engines. And we try to understand, that's the key to understand kind of where the world's fleet serviceability is. During COVID, as we've talked about, a lot of the operators, they parked airplanes and they cannibalized engines. They didn't want to invest in the shop visit. So serviceability went down. And we have access to database. We have access to airline information, and they share that information with us. So we have really up-to-date detail on where the serviceability is of the entire engine platform. For us, what that means is maintenance is due and there's going to be a lot of demand for maintenance services and shop visit support.

So in the next 48 years, the life [ coupon ] , when you come off an engine OEM, the initial contract [ warranty area ] how are existing customers contracting out their MRO services and what are the opportunities for you to interject yourself to help those customers because they may be stuck with their existing contract provider, MRO provider until next years.

Yes. So these contracts are starting to expire. And a lot of these contracts are case by case. You may have airlines that are under [ a power ] by the hour that's expiring, and then they're going to come up to the aftermarket, right? The aftermarket, right, you have a few independent players that are bidding in this process. We're one of them, of course, and then typically, you may have the manufacturer also bidding. At this point, the manufacturer is focusing most of his attention on the newer engine types. But we are seeing competition, of course, from large independent providers. So we work with them. We're going to talk about this a little bit later how they are a partner to us. So we have many different forms of actually being able to service it, either directly ourselves through modules or through piece part support or through partnerships, similar to what we did since -- with Lufthansa and WestJet, right, where they're taking lead on the contract, and we're supporting them through module and selling [ flat ] use servicing and material. So we're very much involved in this entire process. And what we bring is obviously the cost savings, the turnaround time, right? But we really look to problem solve and bring creativity to these proposals, which is what sets us apart from any traditional maintenance.

A little early here, but just to chime in, one of the -- you asked a great question about how it changes when the OEM phase ends and you're into the aftermarket. In the first 10 years, the OEMs more or less are taking all the technical and cost risk on the shop visits. So you have a fixed flat hour rate and whether the engine has 2 shop visits or 5 shop visits, your out-of-pocket cost is fixed. But at that transition into the aftermarket, that risk transfers fully to the operator, to the engine owner. And so that creates a huge burden and lots of airlines generally tend to staff up to try to start to understand this a bit more and try to control that. So it's a very important consideration.

So at that point, I guess 5 years from now when 90% of the CFM engines are off the [ odometer ]. At that time like you have to start thinking about may be getting involved into, like the new engine type? Or is there still a lot more opportunity [ for them ] let's say 5 years from now?

Yes. So the question is, in 5 years, do you start thinking about the new engine type? And how long is the opportunity on the CFM56? Let me start off with the CFM56. As we mentioned here, the CFM56 is just at the beginning of the aftermarket, right? If you look at the chart here, you -- the longevity on the aftermarket has -- is going to be another 25 years. So we see a big opportunity with the sheer number of engines there are, with 22,000 engines. And there are operators looking to service them in a very creative and cost-saving ways. So that opportunity is going to be there, and it's going to be there for a very long time. As far as other engine type and new platform, of course, as the engine starts to mature and exit its initial PBH period, it starts going through all the iterations of parts and it starts becoming more dependable. Of course, we're going to be looking at it and finding ways how we can unlock value in that engine and deliver savings to our customers.

Do you feel like this is till strictly like CFM specialists? Like let's say you would see [ LEAP ] at some point, but probably not just yet. Would you look at other OEMs like...

We wouldn't look at any engine, and we've had in our portfolio different manufacturers, right, with Pratt & Whitney, Rolls-Royce engines. We like to focus on engines that have large markets that we can add a lot of value. And the CFM, in this case, happens to be the largest of that opportunity.

So I think you and other CFM56 owners have benefited from some of the decisions around fuel economy in the more recent engines. As regulation becomes more stringent, are you're thinking that, that differential will come into traction later in life, like it will impact longevity of this engine as the fuel economy standards are maybe differing? Or do you think the globality of the market maybe [ keeps them ] around similar to what's happening...

Yes. The question is around fuel efficiency. And as standards for fuel efficiency become heightened, do we see that potentially being a risk for the CFM56's longevity. Look, as we're going to talk about today, the CFM56 has a diverse customer base all over the world. It's the workhorse of the industry today. It's about 40% of the entire world's fleet. So it's going to have a long life no matter what, right? And when you're an operator, fuel, of course, is the most significant cost, but also importantly, there is the cost of maintenance, right? So I think the cost of maintenance on the newer technologies is unknown yet. So I think there needs to still be that iteration of parts and trying to get reliability out of the new engines. And then I think operators can make an informed decision. Either way, the longevity of the CFM as far as sheer volume of size and work in it being a workhorse, it's going to continue. At the same time, there's still a lot of older airplanes and older engine types, right? The Dash-3, I think about 40% of that market is still active, right? And that's a platform that started 35 years ago. So you have older technologies that will retire way before the CFM. And I think that's a very important point is, the CFM, it's still a modern engine relative to what's out there today in the market. Yes.

Just a follow-up on that. From a fuel efficiency perspective, what's the sort of order of magnitude from a -- if it costs $5 million or $7 million to [ remaintain ] an engine, if you save 15% on your fuel is [ lead on Mac ] comparable, like how much consumption does an engine have annually [ delta ], is it $1 million a year of fuel savings, 200,000? What is the order of magnitude difference between those?

Yes. No, the question is about the order of magnitude on fuel versus maintenance and how we stack them up. We don't have these numbers right now, but I'm happy to schedule a call and then discuss those and walk you through that. Okay. Now let's dive into the numbers. A little more detail here. As we mentioned, the CFM 5B and 7Bs, largest market ever produced with over 22,000 engines and 21,000 today in service. If you look at the chart on the bottom left, it's what I've just discussed, right, the CFM56 is approximately 40% of the market today. It's the largest engine market by far. It is -- an important thing to highlight there is the third largest engine there is the LEAP, and the LEAP is going to continue to grow in market share as there's more deliveries of Max and NEOs, which is important because the OEM will then focus more of its attention to caring for those engines versus the CFM. Just to give you a little more data points. As you probably already know, the CFM goes on all 737 NGs, that's the 700, 800, 900 variant. And about 60% of all A320s. The average age of the 7B 5B, as I mentioned, is quite young. It's about 13 years, and we're going to talk about this a little bit later. But about 45% of all CFM engines have knock on, on their first shop visit. Typically, what you would expect in an engine platform is anywhere from 3 to 6 shop visits. So the engine itself has a very long trajectory. If you look at the chart on the right, as you can see, the aftermarket is growing despite engines are going to start being retiring or being parted out, right? This is an important concept because the peak of engines that hit the aftermarket is going to start peaking in about 2026 to 2028 as the engines come out of the power by the hour and as the OEM focuses its attention on the newer engine types, which is a larger addressable market for us. Let's take a closer look at shop visits. As I mentioned, 45% of engines have not undergone their first shop visit, which again speaks to the platform longevity and how much trajectory it has. If you look at the chart on the bottom left about shop visits quickly rising, you'll see that shop visits are going to -- we expect shop visits to peak by the year 2028, with about 4,000 shop visits. The number of aftermarket engines is going to -- shop visits is going to raise dramatically year-over-year. Another thing to point out is, as we mentioned, in 2022 due to COVID, there was much less shop visits as airlines were trying to save maintenance cost and cannibalize engines. As I mentioned, green-time overall in the for -- in the operator's world is very low. So we expect a large amount of shop visits to come in the next few years. If you look at the chart on the right, we specifically distinguish between heavy and hospital shop visit. This is an important concept. Heavy shop visits. What we mean by that is a shop visit that takes very long, typically 3 to 6 months, and is very expensive, $5 million plus versus a hospital shop visit, which takes less than a month and costs a fraction of the $5 million. As you can see here in the chart, the number of hospital visits is going to outpace the number of heavy shop visits. The reason for that, as the engine mature, operators get a lot smarter about the engine and they can become much more open to cost saving strategies. So our modular approach is going to fit into the hospital shop visit and how we deliver quick turnaround times for customers.

So a -- can a heavy hospital visit address the every 5 yearn overhaul that you need to do? As well as the hospital? Do they both address -- are they both 2 ways of addressing that need for...

Correct. So the way that we're -- sorry, to repeat the question. The question is about distinguishing between a heavy and a hospital, and can the hospital shop visit basically replace a heavy. And the answer to that is yes. So we are replacing them through module exchanges. So what a hospital -- the genesis of a hospital visit is it needs to be a very quick shop visit, which is typically under a month, and it needs to be a fraction of what a heavy shop visit costs. Why -- and I don't want to steal Sam's thunder because we're going to jump into modules and talk about how we're able to basically replicate a heavy shop visit through a hospital type environment, and how you're going to get all the advantages of the hospital visit and achieve a full restoration. But the answer to that question is yes, a hospital visit can replace a heavy through modules.

I am curious to know, if you had absolutely no constraints, if there was full awareness of the module swap offering and recognition of what it offers by customers. And you had no capacity constraints. Of the 3,109 heavy and hospital visits in 2024, how many of those -- how many modules would theoretically be involved and how many of those could actually be addressed through modules? Like what is the theoretical maximum number of module swaps that can be done in a given year in this market opportunity?

Yes. When you're thinking about replacing -- sorry, the question is about -- if you're looking at the number of shop visit, how do I translate that into a module equation and the specific unpacking that. So when you think about a heavy shop visit, right, you're replacing 1 or 2 modules, right? So that's kind of the rule of thumb is 1 to 2 modules is what you're targeting and replacing. So let's say 2 is per shop visit that you're going to replace on each heavy. So for us to address a market of 3,000, you would need 6,000 modules to be able to, more or less to maintain that.

But with every single one -- could every single one of those 3,000 address that need and choose to address that need through modules? Or is there a reason why you only do a certain fraction, maybe a quarter or a half through modules, but you don't do them all through modules?

The question is, is there a reason why the modules can't achieve 100% of those shop visits. The answer is they can, and we believe they will.

But you still have to rebuild modules to get them -- to restore them. So you're not [ removing ] any heavy shop visits.

Yes. So what Joe said is we're here at Lockheed, our focus is to build modules -- and we're still -- we're building modules ahead and delivering them through the hospital environment.

It's almost as though you guys are the heavy shop business before they get billed. So the customers don't have to wait in line because you've already done them waiting for them, and that's what they're paying for.

Correct. Yes. The point is we are building modules ahead of time -- and we're basically eliminating the part that makes shop visits so expensive, so risky, and the turnaround time so terrible. And effectively, our customers are paying for that service to save time and money.

So on that note, of the 3,109, how much of that is done by the majors, like Delta, Lufthansa or American Airlines that have their own module [ swapability ] versus what's the size of market that you can truly address?

Yes, some of these majors, right, are under total care. Some of them are open, right? So anything that's generally open are markets that we can work with and we can help address, right? We work with airlines that have MROs, they're one of our bigger customers so we have many different forms of being able to actually address this market and work with customer base. So for example, with -- if Delta, for example, becomes a customer, we can swap modules, right? We can give them more optionality on modules. We can buy some of their own service and modules. We can help them with turnaround times at the shop. So they are our customers, they're not -- they wouldn't be eliminated from, let's say, wanting our service because they have a shop in the facility. So it's pretty much everyone is in part of the addressable market unless you're under a total care that effectively prohibits you to be part of an open network. The folks that are under a total care, the way that it works is they send engines to a GE shop, and then GE takes care of everything, and the engines are returned. And that is going to take 3 to 6 months per engine and they usually have long-term contracts that they sign up for. StandardAero is an independent shop that has an affiliation with the OEM. So the OEM licenses shops around the world. Depending on the relationship with the OEM, they may have favorable repairs, they may have favorable arrangements, right? But yes, StandardAero is a type of independent shop that competes for the aftermarket, similar to what we do.

I guess what we're trying to get to is out of the 3,000, how much of that is fully addressable by you because of the 3,000, maybe some of them are owned by airlines that have their own swap module capability, right, versus what, versus what you can truly sell to them because they do not need to or want to buy from [ airtime ].

Yes. The question is, again, we're working with all airlines across the world, even if they have maintenance or modular, even in some cases, cannibalize some of their engine fleet, right? So for example, let's say, an engine becomes unserviceable and you need 2 modules, right? So they may choose one of their modules from within their fleet and they say, we actually are missing an LPT, we'd love to work with you to help provide that. So each of these is a different scenario, and it all depends on kind of case by case. But what we're giving them overall is more optionality, right? We're combining our fleet. We're combining our module inventory and giving those folks that have the capability internally, more optionality to deliver a better product.

And this is, I think, something like Joe addressed before, because if you're mixing cycle times but, maybe they have only the 10,000 cycles or 5,000 then you have the 5,000 or the 10,000 on you. So you can mix and match and -- that's why they need you, because they don't always have the same cycle parts.

We're going to cover a lot of this as far as the CFM and it's the way it's designed and inherently why there's so much arbitrage. And then you're going to understand kind of modules a little better and understand kind of why they're so liquid and what the value is, right? So I think if we can get through kind of the market and go through the specific modules, I think it's going to make a lot more sense overall.

Just on last question, so kind of what I was talking about. So in 2024, there was 2,500 aftermarket shop visits and an average of 2 modules, that's 5,000. You did 100 module swaps last year. Your goal is to in a year or 2 get to 400. So you're talking about getting 400 out of a opportunity of 5,000. Is that the way to think about it, 8% share?

That's a great way to think about it. Yes. Okay, I'm going to turn over the presentation to Sam, who's going to teach you more about the CFM than you probably have ever wanted to know.

Good morning again, everybody. It's been a pleasure to meet everybody and spend time with you last night, and I'm excited to show you the module factory. But while we're here at the factory, I think it would be remiss for us not to actually go through the basics, because you're going to see a lot of engines, you're going to see a lot of modules and you're going to see a lot of parts. And so let me start at the beginning. And by the way, David told me I got all the fun slides, but I'm an engineer by trade, and so you might see me smiling a bit during this part. So let me just switch. Okay. So here, let me make my engine rotate here real quick. There we go. Okay. So this is a CFM56 engine. But before we get to that, I want to at least start with, what is actually a jet engine? I think it's a good question. And so just it will add some context to the tour later. So basically, a jet engine is an engine that produces its propulsive force or pushing force by creating a jet of hot gas. And so that process centers and it does so by burning jet fuel. And so that process starts here in what is called the combustion chamber where air is mixed with fuel. And then that creates a flame and that creates an enormous amount of energy, and then that produces the hot jet that then pushes the engine forward. But in order to get the most out of the fuel, the air going into the combustor has to be at a very high pressure and temperature. And so this is achieved via successive compressor stages as you see here, and I'll turn this a little bit here. And essentially, what each compressor stage does is it uses air foils as it turns, to basically grab the air in front and push it further back into the engine. And as you can see here in the background that the engine passage is actually getting smaller. And so in the end, right before it mixes with the fuel, the air is compressed to a temperature of 450 degrees Celsius. And then it goes into the combustor and then it's burned with the fuel. Now in order to power this compressor, this machine here, a small percentage of the energy that is created in this process is extracted through what is called a turbine. And essentially, a turbine is a disk with many small airfoils. And these airfoils are impacted by the very hot gases coming out of the combustor. And because of their shape, they produce a lift force that then turns the wheel and then that wheel is connected to a shaft, which is connected to the compressor. And this is an important concept here to remember because we'll talk about it later, is this shaft here, all the OEMs really have to compromise between building a part that can last forever and wait. Everything in aviation comes down to wait. And so because they want to build a part that's light enough to fly, this part has a finite life. And that life is measured in a concept called a cycle, which is basically a flight: a takeoff and a landing. So this year, is what we call the core module of the engine. And for the first jet engine, this was the jet engine, hence the name Turbo jet that you may have heard. Now I'm going to step forward into the future a bit more. And so a very important -- sorry about that, a very important innovation in the jet engine is called the turbofan engine. And essentially what that is, is an engine that takes some more of the energy coming out of the hot gas jet in the back to actually power a very large fan. And what this fan does is now enables the engine to move a substantially larger amount of air producing a lot of thrust. So in essence, what this -- and by the way, this is now -- we're going to call this the fan module and this is important later on. So it's the fan module of the engine. And so what this innovation in the engine does is it allows this engine to produce a large amount of thrust and move a substantially larger amount of air for roughly the same amount of fuel as the jet engine. And to power this large fan, which essentially behaves like a propeller, an additional turbine is added to the back of the engine. This is called the low-pressure turbine. And as you can see here, to power such a large fan, there's actually multiple stages of airfoils, but they function exactly the same as the first turbine that I showed you. And then these are also connected to a shaft which is also a life-limited part or LLP, and then that connects to the fan which spins the whole engine. Now what makes the CFM56 unique is its modular architecture. And so I showed you the core of the engine, which is the heart, which is what produces all the energy to the engine, you just keep adding fuel and then you've got the fan and you've got the LPT. Well, the joint venture that formed CFM is between GE and Safran. So GE was a United States company, and then Safran is in France, and both were experts at aero-engines. And they decided to construct this engine. And they agreed on a work split where GE would build the core of the engine and then Safran would build the low-pressure turbine and the fan. And they each would build these modules at their manufacturing sites, both in Europe and the U.S. and then they would ship these modules across the ocean in containers. And so this engine really is a modular engine by necessity, all the way down to its DNA. And so what we've learned about this engine over the years is that the modular architecture really does permeate all the way through every aspect of this engine's ecosystem all the way down to the way it's maintained. So I present to you the CFM56 engine. Any questions?

That's correct. So this low-pressure shaft actually runs inside of the other shaft and it's connected directly to the fan. And specifically, this part of the fan. So the fan blades are mounted here. And then this is essentially just more rotors and compressor stages. Yes. And there's a complex system of bearings inside here, which you'll also see in the shop that keep everything in order. Question?

So is the module component to the engine, is that more efficient in terms of design now? If people think about engines going forward, they can think about one module side or is -- it came together because of the unique kind of corporate elements of Safran and GE in their production?

I think that aspect of it has had an enormous influence, right? So engines back in the day, right? Most engines were built by a single manufacturer. Who maybe had a subcontracted partner to build a certain component of the engine, maybe a few stages of a turbine or maybe even a subassembly. But generally, not much consideration was given to sort of the plug-and-play nature of being able to take 2 different modules that really weren't necessarily built for each other. They were built on a production line and then -- or 3 different modules and plug it in together. So other engines can come apart into smaller chunks, but it isn't as simple or straightforward whatsoever. And you could see that. No other engine in the industry is really handled or managed or maintained the way the CFM56 is.

And how much would the LEAP and GTF be as modularized modules or modular versus this...

Right. So I'll start with the GTF first. GTF is not a modular engine. They do have sub-tier partners who work on that engine, although that was not a modular consideration. The LEAP, however, is also fielded by the same exact joint venture, CFM International, with the same exact split of responsibilities. So on the LEAP, Safran design and produce the low-pressure turbine and the fan and then GE does the core in the same locations. The question is, are we working eventually to work on LEAP? And the answer is we're interested in the LEAP. We think that's probably, I would say, 3 to 5 years out. But just as an engineer and it's hard to see why this type of architecture and strategy wouldn't work because the engine is built the same way. But I think we obviously are really excited to learn about the engine. Questions?

Is the LEAP the only other modular? and if the CFM56 or LEAP and all the others don't have that feature.

So the question is, is the LEAP and the CFM56, the only modular engine. They're the only engines that are modular in this nature here, where you have essentially 3 sub engines within an engine, right? Other engines, like I said before, had different subassemblies, but the LEAP and the CFM and then the previous generations of the CFM are the only ones that were constructed this way.

So I know we're looking forward a lot to this question because there's so much ample opportunity, I guess with CFM56. But you on a couple of conference calls, presentations, you've talked about for the future planning, you're looking at other engines. Where do you have an opportunity -- do you have opportunities to add value when you don't have the modular design? Or do you need the modular in order to have the value proposition?

I'm going to pass this one to Joe.

So I mean the engine for us to add value and reduce cost, it does not have to be a modular engine. It happens to make life easier if it is. But there are other aspects of maintenance, PMA agreements and there are certain subassemblies that can also be -- every engine is in part modular but not to the same degree. So there are other engine types that we can apply similar know-how and expertise to in the aftermarket, but just not -- they're not going to be exact replicas of the CFM56.

What's the difference between the turbines [ in the back where seems that you're replacing sofen that you ]

You want to talk about the [ central ]?

So the question is, what's the difference between the turbine blades in this section and the turbine blades in this section, correct?

The turbine blades at the end [ by the engine ] and the fan. [ That's how in the critical ] ...

Yes, yes, yes. So -- and that's actually an accurate statement. So let me zoom back in here. So these turbine blades here, they are subjected to the highest mechanical and thermal stresses in the engine. And because of that, they have a very high replacement rate. Oftentimes at a shop visit, you're losing most of them. The LPT, although they are also enduring -- they're enduring high-temperature stresses -- just because of their design, their geometry, they're longer, wider, they tend to have less wear and tear and loss due to wear and tear. So generally, the further back in the engine you go, the lower the temperatures are and then the less stress on the parts.

[ So that's not the approach you want. And then more ]

Right. And then our approach to the modules is unique, right? So the LPT major module in this case, and then I'm going to actually jump up to the fan module, right? Because when we talk about modules and we talk about our products, and you'll see this out in the shop, this is the product. The life-limited parts that need to be replacement, these are the ones that have the useful life that you have to replace. They're within this module and then they're also within this module. But these modules here are not generally performance driven. So they don't necessarily deteriorate the way the hot section of the engine does. The hot section, because it's near the combustion chamber, there's burning. There's all kinds of phenomenon that happen there, whereas with the LPT, generally, unless you have an incident, this module will more or less run its full useful life, and same with the fans. So we more or less maintain the LPT module on a light maintenance continued time sort of strategy because generally, the majority are able to continue operating. Whereas with the core, it's a different strategy. Here, you are doing heavier maintenance because you do need to replace these parts.

Where is your PMA sitting [ on the how and how far back that is approved ], where is it sitting?

So the question is the PMA part that's approved, where is that sitting? That's actually this part right here. And this part here specifically is actually a top unscheduled shop visit driver on the CFM fleet. These parts tend to crack. And then when they crack, there generally is no accepted industry repair. And so a PMA part actually is a very good opportunity. And so this is where it is, and it's already in use with quite a few of our customers as well.

[ The time this blade will crack won't it ]

No, it doesn't. This is a stationary part. So this doesn't move. Yes. So the blades -- so this is actually behind the turbine blade and it's called a turbine vane, right.

Before the [ remaining ] parts can be approved, where are they? Which one is the hardest one to be approved due to techno designs?

Yes, of course, absolutely. So we're not doing -- Yes, yes. As we mentioned before, we're not going to go into that detail [ extra ].

So maybe said another way, so GE is having to make different parts of the 3 modules. Do they have the same aftermarket opportunity, given the breakage and the frequency of repairs?

The question is, do they have the same aftermarket opportunity. I'm afraid I can't really speak to kind of how they view their individual aftermarket opportunities.

What's the failure rate difference between the 2 modules? The front, back [ in the 2 ]

The question is what's the failure rate. And I think I actually addressed that before, right? So for the fan and then for the LPT module in the back, generally, the industry term for them is on condition, meaning that unless there's a catastrophic failure or an ingestion of a foreign object like a bird -- it happens, it's sad -- generally, those modules don't fail. Whereas in the hot section, it's just the reality of the physics there that those parts do deteriorate. And ultimately, you do have to replace them on a tighter interval than the others. And no such deterioration really exists in the other modules.

Let me just add one thing. I mean the fan and the low-pressure turbine both have life-limited parts, however. So they do reach a point where they have to be rebuilt. So it's not to give you the impression that it's only the core that you have to rebuild. That's why a full performance restoration is from the front of the engine to the back of the engine, all 3 modules are fully restored. It just so happens that each of the modules might have different limiters, which also presents an opportunity for why module swaps and exchanges can save a lot of money.

When you talk about the $500,000 of EBITDA per module swap, it seems like it would be concentrated mainly in that center, mostly EBITDA comes from doing a central module. And the other 2 probably -- that generates a lot more and the other 2 probably a lot less. So I am right in thinking about it that way?

The question is the profit per module of $500,000 is it higher or lower in various modules. And the answer is it's not been that different, with the exception that the fan and the low-pressure turbine have been pretty consistent around that number. The core presents a bigger upside, I would say. So we've been probably just starting to get into the core in a bigger way. So I think that there's some upside to that number even without PMA. But it is -- there's more money in the core and therefore, I think there's more potential there. But it's been relatively consistent across the 3 modules to date.

Does only the core module get the increased profit from when you get PMA?

No, the low pressure turbine also. Not the fan. There's nothing in the fan.

How many cycles, when the engine is built [ with the fan ] how many cycles are in each of the 3 sections ...

The question is how many cycles are in each of the 3 sections, when it's rebuilt new? And so the fan will have 30,000 cycles. The core will have 20,000 cycles, and then the LPT will have 25,000 cycles. The part that's approved -- sorry, the question is the part that's approved. That's in the core. That's in the heart of the engine. Yes. The question is, does our restoration bring them back to the full life, the 20,000 cycles. And it really depends on the business case for that particular module. Using new parts, you will get it back to 20,000. We generally prefer to use used parts just because we don't want to waste any material. And so generally, we focus -- we could build something anywhere from 5,000 cycles all the way to 10,000, and it still makes sense. The question is what's the difference in the part. And I apologize. Like I said, we're really not going to go into the details on the PMA parts during this presentation, but I'm happy to follow up after.

So just in terms of the number of cycles, like it feels like there's a lot longer time than 5 years, if you assume twice a day 365 where you're only, you're talking about 10 years before you have to change something out. How many cycles are flown on average by a plane? I mean [ do you coordinate it ] day to day? How do you get to having to [ remand ] every 5 years? With 30,000 cycles [ would be a lot ]

So the question is, how do you get to every 5 years with 20,000 cycles? Again, that's a new engine. And so generally, these engines will run longest on their first run. So a run is basically a stint between a shop visit. But then after that, as you could see, due to the differences in life, decisions have to be made on a cost-benefit analysis of, do I rebuild just the core? Do I rebuild the core plus the LPT or the fan? And you wouldn't believe it, every airline has a different strategy to do this. And so that mismatch then results in continuous stream of shop visits to then go after the parts you didn't. And so in that sense, to cycle you'll do core once, than an LPT than the fan. And so generally, that's why that happens.

Is it possible with the modules you could extend the life asset average 5 years if you match all the cycles up correctly with correct -- based on the numbers you gave, 30, 20, 25 with the modules, could you get to a place where you could do 20,000 cycles on the remaining 3 parts on a [ prudent ] basis? You don't have to go in 8 years? Is that theoretically possible?

Yes. So the question is, could you conceptually extend the life to 20,000 using module exchanges? And the answer is yes, absolutely. In fact, that would be what we would call sort of the perfect engine run, is that we can keep you out of a heavy shop visit using modules for the full 20,000 cycles. And you can do that in 1, or you can do that in 2 module exchange visits or 3. And it really comes down to what is the -- how much capital does the operator want to invest at that given time. Do they want to overbuild the engine? There's risks associated with that as well.

Why don't you move on, because some of the those questions are answered.

Okay -- so we've talked about an engine, and we've seen that the parts endure an enormous amount of stress in a very extreme environment. And so they need maintenance, and they need maintenance every 5 years. But what actually is a shop visit? And so in the industry, when a shop visit is discussed, there's generally 2 words that come to mind. And you could call it words or complaints, and that is cost and turnaround time. And so -- and both those are bad and they're generally interdependent. So let me walk you through the turnaround time piece of it, because shop visits take a very long time and costs are difficult to control. And generally, there's always a surprise at the end. We have a saying in our world is that engine maintenance is usually a tragedy every day because of that. And so starting with the turnaround time. And so before I -- before we even actually get into the shop, there's trying to get an induction slot at an MRO. And so essentially, that's where you agree with the service provider and then you send your engine and then they say, I'm going to induct your engine at this date. But I'm going to rewind back to 2019 before COVID, there was such high demand for shop visits with limited supply of shop bays at capacity that folks are waiting up to 3, 4, 5 months for shop visit slots and even some MROs were collecting deposits in order to get the slots as well. And so, can you imagine what this is going to be like in 2028 at the peak of this, it's going to be chaos because -- there really isn't any new shop visit capacity going online around the world right now that's going to make a meaningful impact. But let's assume you get the shop visit slot. Every shop visit generally is broken down into 4 phases. Phase 1, the engine is disassembled into its parts. That's generally a few hundred to several thousand parts, depending on the work scope there. That generally takes 20 to 40 days, call it a month. Then we get to Phase 2. Phase 2 is truly the most painful of the phases. It's the only phase that's generally out of the control of the MRO and of the customer. And Phase 2 is where each and every part must be inspected and -- visually but also using some very advanced techniques to see inside the parts. And then a good amount of those parts are thrown away because they're no longer serviceable. And then the ones that can be salvaged are sent out to repair vendors. And then the last group are just replaced. Now going back to the repair vendors, generally, for some of the most complex parts, there's probably 5 or less repair vendors around the world. And for some of the most critical high-use parts there's 1 or 2. And generally, it's the OEM. And so the entire world's demand for repair on this one part, this expensive part that you really don't want to throw away, everybody is waiting in line for these facilities. And so those lead times can go up to 6 months, and we're seeing that today, and we're not even at the peak of the shop visit demand. Phase 2 is also very interdependent with the cost of the shop visit because ultimately, you're left with a choice of really 2 bad decisions. I'm either going to wait for my original part to come back because I want to save money, or I'm going to replace the part. And then generally, the market looks for that replacement part and they'd like to buy a used part, right? You could generally get that for half the price, more or less, but everybody is looking for that part. And the availability generally is pretty tight. And so you're either left with waiting the 6 months or you're buying a new part. So it's a pretty bad trade-off. But let's assume you get through Phase 2, then Phase 3, the engines are brought back -- the parts brought back and then Phase 4, the engines rebuilt and test. So a shop visit can take up to 6 months and potentially more. We're seeing that already happen today. Supply chain constraints is a very common word in vogue in the industry today. Now let me get to the cost aspect of it, right? On average, a shop visit costs $6.8 million, and that's comprised of primarily 4 categories. The airfoils, which you saw in the demonstration earlier, those are really -- they're bearing the brunt of the stresses and forces and the temperature [ and ] the engines. And so they represent 60% of the cost. Oftentimes, there's a limited availability of used parts so you're buying new parts there, then the LLPs, that's 23%. This is more of a binary decision you have to make: either if they're run out, you have to replace them. If you have a specific mission in mind, then you need to buy the right LLPs to achieve that mission. I'll get into more details there. And then the last 2 categories are the repair and the smallest category is labor. Now jumping back to the concept David mentioned earlier, which is the escalation. And so this -- all of these categories escalate. So the airfoils, again, that's purely parts-driven. That's going to escalate to the 7% per year or higher depending on inflation. LLPs, exactly the same. I'll skip repairs to labor. Labor generally escalates with inflation indexes and it's usually regional, but that's generally 3% to 5%. And then repairs, because they're a combination of material and labor, usually fall in the 5% to 7% range. Questions?

Can you talk about the variance, I think that 6.8 is the average of the full replacement, right? So can you talk about how different that is depending on what you draw for that specific job? Is it...

So the question is, can you explain the variance that really goes into how we determine the 6.8%. And so generally, it's an average. Some shop visits like a fan overhaul may be less, and then a core overhaul generally will be the highest cost, which could be upwards of $10 million when -- if you choose to replace the LLPs and all the other hot section airfoils. And so that really represents an average, similar to the sort of average time frame of 5 years, depending on what you're building, which module you're penetrating. So this was a pretty dark story. And you ask yourself why would you ever want to do this? So what if I told you, we have a product that solves this. And that's the module exchange. And there's 5 reasons why the module exchange is the way to go. And number 1, it's the cost savings. And so on average, we're saving our customers 40% on a module exchange versus doing an overhaul of the same module, and that's to achieve the same outcome, the same cycles going out of the door. We're delivering that every time. And then as we discussed earlier, the upside there is even higher on the core. The turnaround time. You can do a core module exchange in about a month, an LPT exchange in 2 weeks and you could do a fan module exchange in 2 days. And we've done it, and we've done it many times. That's compared to 4 to 6 months. And that is a substantial benefit for airlines, because generally, they're calculating their spare levels and all the engines that they have to keep on their balance sheet based on that one parameter alone, which is how long is it going to take for my engine to come back. Then the work scope creep. So as I mentioned before, every day in engine maintenance is a tragedy, this is true. Because generally, you get your engine back and then there's always a trailing invoice coming. There's never not a trailing invoice. And it's always a surprise and it's never a good one. And it's never the MRO's fault. This is just the reality. The -- you expect a certain work scope going in and they're going to find other things. And this is just a consequence of heavy maintenance, is that because they have to look at everything, things you didn't really care to go after that you need to go after, you're going to lose. And you'll see a couple of examples of how that can go badly on the tour and how we found ways to actually mitigate that. But in the modular exchange, we're taking that risk ourselves and the customer is getting a certified module. And so there's zero risk. It's there. It's ready to go, you install it. That's it. And then the mobility, the venue. Modules can be exchanged in field near the aircraft. This is a huge advantage. This saves hundreds of thousands of dollars moving engines, logistics costs are just getting higher and higher at this date. And so this also affects the spare levels that an airline has to carry. We've actually gone and done swaps with customers in their own hangars, in their warehouses. Not a lot of equipment is needed. These can be done with a field team. And so that mobility is important, and the venue is also important as well. Heavy maintenance shops, because of the nature of their business, generally are designed, incentivized to find other things to fix the engine, sort of gold plate the engine. And in a hospital environment or a mobile environment, teams are very mission-driven to focus solely on what they're here to do and leave, and we see that in practice. And then lastly is our zero-waste philosophy. We're harvesting modules off of engines that folks are selling, folks are retiring, folks don't see the value that we see in those engines. And the fans, LPTs and the cores. And because of the scale and the distribution channels we have, we can do that. We can absorb that and then we can offer that as a product to customers. Question?

So the benefit of [ less risk ] for work scope creep, how does that not create less safe engines?

The question is the benefits for work scope creep. That's a great question. So this has nothing to do to safety because our modular maintenance program, all the work that's done on the modules is done here via the OEM process. So there's no tricks to the trade here or anything like that. The real advantage is that we're taking modules, and we're performing the maintenance here. We're absorbing that and we're able to mitigate spikes in cost because we have material, we have our use of material coming from there, and then we also have experience with the module. And so when we offer a customer a price, that's a fixed price for them, but there's no compromise in safety. They're getting the same standard module, the same airworthiness certificates and it's all per the OEM process.

So the [ stuff ] that's in the 3 is always in those 3 modules, right, like let's say you're not replacing the fan, but the fan has an issue, that would be caught in a heavy maintenance cycle but it wouldn't be caught in your replacing just the LPT...

So the question is, if you have an LPT swap event and there is something wrong with the fan, would that get missed? The answer is no, absolutely not. So the teams, obviously, will do a full-on inspection. The worst scope creep comes when you disassemble the engine. When you're looking inside of the parts, these are parts that are unseen, and this is just the nature of the business. And so you're just exposing less at the visits and therefore, you're subjected to less stringent inspection limits. But everything is done by the book. And these are done by licensed MROs as well.

Just following that exact question. So like, if I understand correctly, basically, the risk of the work scope creep goes away from the engine owner and goes to you guys, because when you guys take the whole module, you may still have the -- you would still find whatever is wrong inside that module, but it will be on your dime, but you already have given your customer the other module and they're offline with the engine again. Is that correct?

Yes. That's exactly correct. So basically, you said that we're taking the risk upfront when we're doing the heavy maintenance on the modules here, at the module factory. When the customer gets the module, there is no longer any risk, and there's a warranty attached to it as well. So that's exactly right. And our scale and Lockheed's expertise allow us to actually make that process predictable. And that's the key to our business.

[ Are you able to generate revenue not only through new parts but also through the used parts that you're salvaging? ]

So the question is that we're able to generate revenue not only through new parts but also through the used parts that we're salvaging. And yes, absolutely, that's correct. And so that's either through used parts independently or used parts that go into the modules, which also generate a cost savings.

[ Can you do -- would you do 2 module changes on the same engine? Can you do them in series and in parallel? ]

Right. The question was, can you do -- would you do 2 module changes on the same engine? Can you do them in series and in parallel? And the question is you can -- the answer is you can do them in parallel. Absolutely. Yes.

You mentioned that different operators have different kind of philosophies and tolerances on when they'll swap out parts, and what they'll move along the line. I guess if you're saying that, that doesn't reflect a difference in safety risk, there's got to be some other risk tolerance that they're taking. What else are they weighing in having those different preferences, if it's not safety related?

So the question is, airlines who are making different decisions on what modules they rebuild at each shop visit, if it's not a safety-driven decision, what is it? So just to reiterate, it's never a safety consideration, because all of this is done within a very tight regulatory framework. It's generally on the one hand, how much cash do they want to outlay at that moment, right then and there for that shop visit versus how much life will they get to that next run. So that there's a calculus there. And then the second piece is, well, how many shop visits do they want to build into their plans. So if -- for instance, if they decide to just go after the LPT and leave the fan alone, then that fan is going to run out sooner than the LPT, and then that will create another shop visit. Whereas if they shop both modules then the engine can conceptually run longer, right? So it's a calculus of what do they want to spend now versus how many shop visits they want to do. And it's different for each airline.

Understanding the preference of that airline, is that actually some value add that you provide, and then you can give them something tailored to what they want to [ bid ]

Yes, absolutely. So the question is understanding -- does understanding that help us add value to airlines, and absolutely. In fact, that's one of the first questions we generally ask when we meet an airline is, tell us about how you manage your fleet. We obviously do a lot of research ourselves, but hearing it from them also, how do they manage it in a steady-state environment, but then if they're considering a phaseout or if they're considering a fleet growth campaign, these are all factors we take into consideration. And that can drive the type of module exchanges we offer, the size of the modules, et cetera. Question?

I've got a followup to that, so are you able to oversell the number of modules, then? If each airline has a different cycle as engines move around different customers are you able to actually sell more modules than [ you find your cycle ] ...

So the question is, are we able to sell more modules because of the differences in airlines' build goals? And the answer is yes, and I could actually use the example of our biggest customer, WestJet Airlines. They -- their mission is to build a 10,000-cycle engine. But all of their engines come off on their first run looking exactly the same. They have 10,000 cycles left in the fan, zero in the core 5,000 in the LPT. So when we give them the 10,000 cycle LPT, we buy back their 5,000 cycle LPT and then that 5,000 cycle LPT itself has its own very large market that we can then sell into or use in our own engine as well. So in essence, one WestJet shop visit creates 2 module opportunities for us.

So does a customer relationship build a backlog [ and understand customers' forecast versus doing an ad hoc kind of drop in? ]

So the question is, is our business model to build backlog and understand a customer's forecast versus doing an ad hoc kind of drop in? And the answer is both. We have a preference that we would rather do programs where we have backlog, we have a forecast because then that allows us to actually get closer and closer to their targets on module build goals. We can also deliver value through volume discounts, et cetera. But some airlines and even lessors operate in a different way where they don't have contracts. They don't know what they're necessarily going to get back from lessees and so we'll deal with them generally on an ad hoc basis. And then there's many different variants in between.

How much of that business today ...

I would say -- the question is how much of that business is [ say]. I would say, as far as booked program business, we're probably around 30% to 40% of the modules we do, and that's growing because we're obviously in active campaigns with other airlines as well. The question is, how much do we make on a module swap? So generally, using average of all 3 modules, we can save a customer $0.5 million, and we make $0.5 million on a module swap.

Next page.

So moving to the next page, where I can actually get into the details of an engine. So I'm going to walk you through an example of an engine, and this is a very real scenario. Many engines come in to shop with this cycle remaining as you see here on the left, and I'm going to walk you through the parallel paths of doing a traditional overhaul shop visit versus a modular shop visit. So let me start with the traditional overhaul shop visit. This engine has a run-out fan, 10,000 cycle core and a 5,000 cycle LPT. The customer desires 10,000 cycles. And so this engine will go into the shop visit process that we just described, and it will go through all the phases, including the infamous Phase 2. And then the fan will be fully disassembled, all its parts replaced, Same with the LPT. There's something to note here about the LPT is that this 5,000 cycles of LLP life will actually be lost because when you open this module, these parts come out and then they no longer have any value. Typically, they are found to be scrapped. So in the end, the engine comes back together, it's about $2.75 million in 4 months. And then, in addition to exposing the core, you've got an additional work scope creep risk, but you get your 10,000-cycle engine in the end. Now going to the modular shop visit, you take the same engine. I want to start first with the LPT, and this is exactly the example I gave earlier about WestJet. Rather than disassembling this module, we buy the 5,000 cycle LPT from the customer, and we provide them the 10,000-cycle module. And in addition to just the savings from the exchange, there's additional value and savings for the customer because we value this 5,000 cycles. We have a use for it. And so -- and then for the fan, it's a simple fan swap, 10,000 for zero. So in the end, this visit is $1.75 million. We were able to do this in 15 days because we can do both modules in parallel and so that's a savings of $1 million and roughly 3 months, 3.5 months. And then in the end, to your point, we'll make the $1 million on those 2 modules as well. And then the outcome is exactly the same as the traditional shop visit. Any questions?

The $1 million that you make is the $1.75 million of what the customer is paying you for the modules, less what it cost you to obtain those modules and get them in shape? Is how to think about it?

No. So the question is, is the $1.75 the $1 million we make. So to be clear, the $1.75 million is the cash out of pocket for the customer. So that assumes the price of buying our module plus the credit we give to buy their module. And all in, that saves them $1 million versus the original. Does that answer your question?

I didn't mean the savings for the customer. I meant the EBITDA per module that you made at FTAI. How does that come into play? Is that the $1.75 that the customer is paying you to get those modules, the cost of the modules.

Yes. And we make the $1 million on that as well. That's right.

So [ you get ] buy the fans, so like by $1 million and you guys are sourcing it for $600,000. How are you sourcing it for 500..

That's a net number.

So to your question, how are we sourcing the fan for $500,000, that's actually a net exchange number. So the real number, the gross number is 0.9, just for an example. And then the credit we give back to the customer for their module, which has value to us, is $300,000, so that gets you to the $600,000.

So a fan with fewer cycles has $300,000 in value to you?

Roughly, yes. Because we've got our -- so we have another partnership with AAR, which is our USM program and we've set up a huge infrastructure and a distribution channel to sell used parts, and we feed these modules into that. And so the 40 engines per year also includes modules coming back from our customers as well. And so these modules are essentially the same exact type of material that would go into that teardown program, then they're torn down, repaired and then they're sold to the market as well. So there's additional accretive value there coming out of that.

And then, real quick. What's the gross number for the LPT?

The LPT? What's the gross number for the LPT? For a runout module, it would be about the same with the 5,000. It's about $500,000 total, about $0.5 million. Question?

Just following up on that, the credit that you're talking about, it goes to [ the buffer ]. Is that done on a speculative basis? Or is it done once you actually assess it on an assessed [ statistic ] basis?

No, that's a great question. Is the exchange credit that we give, is that speculative? Or is that based on data? And the answer is the latter. Through our teardown program, we've gained enormous experience on taking a run-out module like an LPT and fan and what's actually going to yield out of it. And so we use that to come up with an average, and then that's how we price it back to the customer. And so if that changes, then we can adjust that accordingly and we usually adjust that annually along with our pricing as well. Question? So the question is how do the economics with PMA change. In this particular example, which is very common, PMA really has no effect on this scenario whatsoever because those are primarily in the core. So this is something we are doing today regularly. The question is, would we be able to source the parts cheaper? The answer is yes, absolutely. So it will be accretive to our margins as well.

Just a quick question. When you put the PMA [ parts ] in there, from an economic standpoint do you consider you buying it for yourself? Or is that selling as a 75/25 JV [ would band ]? When you put in your own money would you divide the cost...

So the question -- yes, so the question is that the PMA calculus basically, is that us buying and then selling to the customer? Or is that the JV split? And the answer is the former. We would buy them at cost and then we sell them to the customer and then there's the spread for us and the savings for the customer as well. So we talked about the turn time. We talked about the mobility and the cost savings. And so I want to show you a real example that we did last month with one of our European customers that we have a program with on a fan swap. And so I will show you the video here. And so essentially, what we did is we worked with the customer and with a field team to go perform a fan module swap in field. This is near the aircraft. So this is a scenario where the customer did not obtain a spare engine, they parked the aircraft. We were able to get this job done in 2 days. So let me press Play. There we go. They're quite fast. So you could see the fan module coming out. So this is the second part of the fan module, and we'll show you that in detail in the shop. And then this is the replacement module going in. The question is, do you need to put this through the test [ cell ], the answer is no. And then. All right. So I'm going to turn it back over to David to take you through our zero waste philosophy. The airline came back to us after that one and ordered 7 more modules this year and 8 more next year.

Thank you, Sam. So the final benefit of the module is our commitment to zero waste, which is key in a lot of the examples we discussed. So intrinsically, our business model is aligned with sustainability goals of the company. And what we do as a company is we focus at each level of disassembly of the engine, and we try to reuse or recycle as much of that as possible. Let me take you through an example where we have -- when engine becomes unserviceable and we have one engine -- one module that cannot be repaired and two, that we can reuse its modules. The first thing that we do is we always try to keep modules alive that have life. So that is step 1. That is our philosophy, to reuse the modules regardless of the build, even if the module itself has 3,000 cycles, we can have access to that. We can put it on our engine, or we can find a customer that will use that module. That, we've talked about generating on average about $0.5 million per module. So in this scenario, there's 2 modules, which equates to $1 million of profit potential in that scenario. At the same time, you are saving by being able to reuse that module. In this case, you're saving 0.5 tons in that process. As you further disassemble the modules, you're going to start losing parts based on scrap, right? You're going to have to disassemble it, take a module into piece parts. That process, you start losing efficiency. So step 2 is in certain scenarios, we can't save the module. We then have our program with AAR, where we're taking these modules and we're tearing them down for piece parts. Our approach here is we want to be able to repair as many parts as possible to bring them back to life, as obviously we are going to be then selling these parts and generating a profit. On average, we've talked about $1 million per engine on profit potential. So one module would equate to 330,000. We also work with other PMA houses to leverage what they call DERs. What these are, are complex salvage repairs that are able to bring down parts that you would normally scrap. We actually have policies and procedures here where we share with them our scrap and they're able to actually bring a lot of that back and reuse that back in our engines or customers. That process, we're saving about 0.2 tons in that scenario. The third part is if you have parts that you can't repair, what you're going to end up doing is recycling them. These parts, as Sam has talked about, are hot section parts that have very complex metal, super alloys that have metals that are expensive, but also a lot of them in potential areas of conflict. So our commitment is to be able to recycle these parts and be able to harvest those metals back into manufacturing processes. Today, we're not currently monetizing that process. However, in order to close the loop and to commit to zero waste engine maintenance, it's a process that we have in place. We are saving about 0.1 ton in that example. So altogether in that one engine example, it has a profit potential of $1.3 million, and it has a waste savings potential of 0.8 tons. So in the scenario where you service 300 engines, that equates to an EBITDA potential of $400 million and a saving about 240 of ton, which equates to about 2.3x the Statue of Liberty. Yes.

Is PMA assumed in that $400 million for the [ communal ] visits? Or how would that change that?

Yes. We've talked about PMA doubling the profit potential per module. So -- and this is a different scenario that we talk about just reusing these modules in the scenario of PMA, our profit potential, as we talked about doubles. So instead of $0.5 million, we can generate $1 million per module. So it would be, in this case, $800 million under this scenario. So we've talked about the value proposition of modules and why we believe it's a no-brainer for the industry. Let's talk about how do we scale the business. The key to scale the business, the first part is you have to have a lot of inventory. They come from 2 sources. Source number 1 is we leverage our large fleet today. We have over 335 engines and growing. And every time they become unserviceable, what we do is we take those engines and we break them down into modules through that process. We always strive to have modules on the shelf. It's important to have a float of inventory for the exact reason that if a customer comes in and needs a module as soon as possible, we can actually meet that requirement. We -- our commitment is to have 150 modules on the shelf at all points in time. Today, we have about 100 modules today that you're going to see at the facility. And the rest are in transit or out at our hospital partners or within our new shop at Quick Turn. We strive for various limits, that way there's a match. We talked about a lot of unlocking arbitrage between cycle life. It's important to have the right cycle life and an appropriate amount of each cycle remaining in order to meet that demand. The second, which is very important to scaling the business, is you need modules coming back in order to be able to scale it. So about 80% of our transactions on modules are via exchange. This is very important because it allows us to then rebuild modules and continue to grow the business. We do module exchanges, but we also do engine exchanges where we prebuild an engine and therefore, offer the complete engine with zero turnaround time and then take an unserviceable engine back. And we have long-term programs with customers to continue to build that feedstock and grow the business. Number 3 is we have a very wide customer base. This includes airlines, lessors, and maintenance shops. Airlines, obviously, are an important customer for us. We work hand in hand, trying to work through their scheduling, as Sam has talked about. We also have a great emphasis on lessors. Lessors own about 60% of the CFM fleet, that will likely increase as the engine becomes older. They are very conscious on trying to save maintenance cost because that would increase their return on investment. So we have, lessors actually represent a significant part of our business. And that's a market that continues to grow as they become more hands-on on the management of their fleet and trying to find ways to add more profit potential. It also does help that we have a great relationship with lessors, and we're buying a large amount of aircraft from them in the secondary market, which then creates the relationship and the ability for us to be able to sell modules and maintenance programs into them. And then the final customer are maintenance repair and overhaul shops, which we do compete with, but we do partner with at many times. They are looking for customer base for their shops. So there's times we work with them where we do a module. They do one module fully and then we provide you with serviceable material. There are many different ways to work with them. As turnaround time continues to get worse, which we expect it to get significantly worse and remain significantly bad for a long time. They're going to look for ways to increase throughput in their shop. Modules are going to help them lower turnaround time. So this is a very important initiative for a lot of independent shops we talk to. The fourth key is the distribution channels that we've built. We've obviously acquired iAero and rebranded that as QuickTurn. In Miami, that will be our hospital and test facility. So now we have the ability to do the full module exchange ourselves and test it. We also have partnerships with other MROs in their hospital facilities as well as their field team. As Sam's video that he showed was done in partnership with another major MRO on the field that we have an excellent relationship, and we work together to go distribute our modules. And the last is, as I mentioned, major independent MROs are distributors -- they sometimes have customers already in place. They'll buy a module and they're able to then mark it up and make money, so they're incentivized to take it as well. So they are part of the distribution channels. Overall, it's a business that we can scale very rapidly with a product that's very sticky, and we have a very high repeat customer basis that we talked about. And on the final slide, I'll pass it over to Sam, who's going to give you a little more information about what makes this facility so special before we go ahead and do the guided tour.

So what you're going to see today is a state-of-the-art maintenance facility. It's a facility that we're very happy to call our home. And if I could summarize what makes the module factory special, via Lockheed Martin, it's really 3 things. It's the capacity. They've got over 500,000 square feet of capacity and 2 test cells. And so what we're doing today is definitely scalable to 2 to 3x and potentially more than that as well for module volumes. So there's a lot of upside there on the capacity side. Also, the capability. Unlike the majority of the shops who service the CFM, I think there's about 40, Lockheed has capability that goes all the way from a surgical strike repair to a full overhaul as well. And so that capability is very important. And then in addition to being able to repair engines and modules, they also have robust in-house piece part repair capabilities. So that tricky Phase 2 is something that they brought a significant portion of that in-house, which not only lowers your turn time but also lowers your cost. And then their piece part repairs are advanced as well. They perform repairs on life-limited parts on the hot section, including the combustor and then also on the engine accessories as well. And then the last piece, which I think is very important for the future, is the innovation and the repair development. And so together as a team with the volume that we put through the shop, we've created an enormous amount of data on findings, on what engines look like after operating in a variety of environments where we've designed repairs that are ultimately reducing our scrap and therefore, saving money. And also preventing us from having to send parts outside and therefore, lowering our turn time. And Lockheed just recently gained their DAO certification, which essentially is a repair design house and certification body that's in-house. I think it's called the DER in the FAA. And so that DAO now is fully self-contained and able to review and develop advanced parts that are licensed and approved by Transport Canada for use in the field. And that DAO is already paying dividends for our business. And so all of these things combined present us enormous future opportunity. We're interested in looking at the LEAP as well. And then lastly, I'll end it by saying Lockheed Martin, the brand. This shop here brings the heritage of the largest aerospace company in the world into the commercial engine maintenance business. And we benefit from that day in, day out through the brand, through the robust processes they have and through the engineering know-how. And so we're happy to call Lockheed our partner, and we can't wait to show you the shop. So thank you very much for your time.

So thank you very much for staying with us, and I hope you enjoyed that. I hope you learned something about engines. And as opposed to a cool 3D virtual model, we actually have a real one that we'll show you on the floor that's broken into a fan a core and a low-pressure turbine. So you can see the actual engine itself divided into the modules. So with that, I'd just like to end the presentation. We'll be around obviously here for any additional questions and answers and look forward to seeing you on the floor. Thanks.