Deep|FTAI: Aviation Aftermarket Meets AI Power

Executive Summary

• We initiate coverage of FTAI, an independent aviation aftermarket platform focused on the CFM56-5B/-7B and V2500 engine families. It is expanding into power generation by converting CFM56 engines into aeroderivative turbines. FTAI is the second BTM solution provider we have covered, after Bloom Energy. We remain bullish on off-grid power providers. As estimated in our AIDC Deep Dive, North America could face a ~15GW power shortfall in 2027. Securing grid power could take ~5 years, while traditional gas turbine OEMs such as GEV are booked out to 2032 with cash commitments. We are therefore looking for alternative BTM providers with reliable technology and confirmed orders.
• FTAI trades at ~10.5x forward EV/EBITDA and has yet to receive the re-rating seen at other BTM providers, despite the $1.465b Power order announced in late July. We see two reasons. Its traditional Leasing and MRE businesses face pressure on margins and industry demand. Its Power business has yet to deliver Mod-1 units to customers, making future earnings harder to assess. Bears still view Mod-1 as a prototype rather than a mature commercial product.
• In short, we believe that margin compression in its MRE business does not prevent it from maintaining earnings growth, supported by expanding market share from ~15% to ~26% based on our proprietary supply-demand industry model; and Power could deliver ~10 Mod-1 products in 26Q4 vs LSD consensus; ~80 in 2027 vs ~70 consensus and ~100 company maximum target. Management were guiding $450-750mn Adj. EBITDA in Power, suggesting a range of ~60 to 100 Mod-1 deliveries as guidance in 2027.
• We see the first batch of Mod-1 delivery in Q4 as the next rerating catalyst, and do not think the execution bar for Power is that high in the near term. Successful delivery and acceptance from customers should be enough for the street to catch up as it clears ambiguity at current valuation. Our reverse SOTP suggests that the market is paying nothing for Power, and we estimate it should be worth $82/share in our base case of 80 Mod-1 delivery in 2027.

Why Now

FTAI has yet to receive the valuation re-rating seen at other behind-the-meter (BTM) power providers in the current power shortage cycle. It trades ~30% below its two-year historical average and ~37% below peers, despite the launch of FTAI Power and management’s expectation of ~$450–750m in incremental EBITDA in 2027. We see this as a timely opportunity to examine the company’s fundamentals and quantify its position in the market.

Key Debates & Our Views

1）Does AP margin compression in 26Q2 signal a de-rating, or is the market focused on the wrong issue?

Debate

Aerospace Products (AP) EBITDA margin declined from ~35% in 25Q4 to ~29% in 26Q2. Bears worry that FTAI is prioritizing market share among large Tier-1 customers over profits and cash flow, to the detriment of shareholder value. As the CFM56 fleet ages and its installed base eventually declines, they also question the durability of MRE demand and whether Power will compete with Aerospace MRE for the same feedstock.

Our View

We believe AP can maintain earnings growth through market-share gains even as margins weaken and the CFM56 aftermarket declines. Power could consume some of AP’s feedstock over the longer term, but its higher margins should still add to earnings: ~35–40% for Power versus ~30% for the company overall. We do not expect feedstock competition to become a constraint over the next three to five years. The greater risks are capacity expansion and coordination across Montreal, Miami, Rome and New York.

Our Reasoning

Margin compression mainly reflects a shift in mix toward Tier-1 customers requiring heavier repairs. We expect margins to hold at ~30% over the next two years. Channel checks put gross margins on heavy restorations at ~23–24%, versus ~30–31% on standard engine sales, but with substantially more revenue per project. Heavier work requires more parts and forces FTAI to procure inventory ahead of demand. We also see a timing mismatch between costs and revenue recognition as a contributor to margin pressure.

CFM56 retirements reduce future MRE demand but also increase feedstock for AP and Power Mod-1. Our proprietary supply-demand model examines both effects. We assume the CFM56 installed base declines at a five-year CAGR of ~4% through 2031E, while FTAI module output grows at ~9%, implying market share rises from ~15% to ~25%. More retirements and SCI engine returns expand available feedstock, although FTAI’s required share of total supply rises from ~23% today to ~45% as AP and Power grow. Gross feedstock coverage tightens from 4.4x in 2026E to ~2.2x from 2028E onward, without becoming a constraint in our base case. AP also has growth opportunities beyond CFM56. V2500 should support earnings as its restoration program expands, while LEAP offers the next source of growth in 2028–2029. We believe FTAI can apply much of its CFM56 sourcing and MRE expertise to other engine platforms.

On Power, channel checks also suggest early Mod-1 production relies largely on existing inventory and lower-green-time material with limited aviation value, making one-for-one cannibalization of AP unlikely. The more meaningful overlap appears to be in shop capacity, selected modules, test-cell time and skilled labor, rather than in engines.

Exhibit 1: FTAI Aerospace Products Supply-Demand Model