Earnings Call Transcript - FTAI Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Quarter 2 2025 FTAI Aviation Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alan Andreini, Head of Investor Relations.

Alan John Andreini, Head of Investor Relations

Thank you, Brianna. I would like to welcome you all to the FTAI Aviation Second Quarter 2025 Earnings Call. Joining me here today are Joe Adams, our Chief Executive Officer; Angela Nam, our Chief Financial Officer; and David Moreno, our Chief Operating Officer. We have posted an investor presentation and our press release on our website, which we encourage you to download, if you have not already done so. Also, please note that this call is open to the public in listen-only mode and is being webcast. In addition, we will be discussing some non-GAAP financial measures during the call today, including EBITDA. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements, including regarding 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 press release and investor presentation regarding non-GAAP financial measures and forward-looking statements and to review the risk factors contained in our quarterly report filed with the SEC. Now I would like to turn the call over to Joe.

Joseph P. Adams, CEO

Thank you, Alan. I'm pleased today to announce our 41st dividend as a public company and our 56th consecutive dividend since inception. The dividend of $0.30 per share will be paid on August 19 based on a shareholder record date of August 12. Angela will provide a detailed overview of the numbers. But first, I'd like to highlight a few key updates. Aerospace Products delivered another excellent quarter, reporting $165 million in adjusted EBITDA at a margin of 34%. We now estimate we are at 9% market share, approximately double where we were this time last year, with a strong focus on reaching our long-term goal of 25% market share. We feel confident in this goal due to our large expanding backlog of purchase orders for 2025 and beyond, supplemented by our Maintenance, Repair and Exchange agreement, or MRE, agreement with the Strategic Capital Initiative, or SCI, to support the portfolio's engine maintenance events over the life of the partnership. Our scale, asset ownership, and unique maintenance capabilities position FTAI as the long-term sustainable leader in engine aftermarket maintenance. Overall, market adoption of our unique MRE solution to engine maintenance continues to accelerate in the CFM56 and V2500 engine markets. There is continued and growing global demand for prebuilt engines and modules for owners and operators of all sizes as a flexible, cost-effective alternative to complicated, time-consuming, and expensive shop visits. To that end, in Q2, we had the opportunity to execute a sizable engine exchange program with a major U.S. airline, albeit at margins below our typical levels. We believe that offering attractive terms to showcase our capabilities with this customer will drive repeat business and higher volumes, ultimately leading to stronger margins. Furthermore, we're implementing several new programs, procurement programs, which we expect to contribute to margin expansion by the end of 2025. With these strategies and with the approval of PMA Part #3, we continue to expect Aerospace Products margins to expand to the 40% plus range in 2026. Turning to production. We refurbished 184 CFM56 modules this quarter between our three facilities in Montreal, Miami, and Rome, an increase of 33% versus last quarter. In Montreal, our largest facility, we have been expanding operations by focusing on developing talent through our newly established training academy as well as the use of specialization and technology to improve efficiency and throughput. We anticipate these measures will contribute to drive significant production growth over the next several quarters. We're also delighted to close on our 50% joint venture in Rome, now operating under the name QuickTurn Europe. We've been impressed by how quickly the team has scaled operations to meet FTAI's production pipeline, and we're excited for the plans we have to grow the facility over the coming months to support our regional base in Europe and the Middle East. In addition, we're excited by the opportunity it provides to sell directly to the Chinese market due to the CAAC license which QuickTurn Europe holds. Additionally, we're pleased to announce the acquisition of Pacific Aerodynamic, a piece part repair facility based in California, which focuses on highly specialized precision repairs of CFM56 compressor blades and vanes. Under FTAI ownership, this strategic purchase delivers an increase in cost savings, which will lead to further margin expansion. In addition, it will increase operational efficiencies, further expand our repair capabilities for CFM56 engines and further differentiate our offering. Over the past three years, we've now acquired four facilities across three countries in Europe and North America and have a proven track record of integrating each into our MRE ecosystem, creating significant value. We're actively reviewing other M&A opportunities in the global market and expect additional acquisitions in the near term are a strong possibility to once again further differentiate FTAI's offering. Next, let's talk about adjusted free cash flow. In the first half of the year, we generated $370 million in free cash flow, above our targeted $350 million. It was driven by over $1.4 billion in gross cash inflows. Included in this number was the sale of 37 of the 45 seed portfolio aircraft, which are being sold through the strategic capital initiative. The transition of these aircraft is almost complete with the sale of the remaining 8 expected to close during Q3. We also expect adjusted free cash flow to be in the range of $380 million in the second half of the year, which as a result, we are increasing our overall target from $650 million to now $750 million in adjusted free cash flow for all of 2025. With our pivot to an asset-light business model now nearly complete, we anticipate substantial growth in free cash flow in the coming years. For capital allocation, a first priority has been to manage debt in order to achieve a strong BB rating with the rating agencies, a goal we expect to reach by the end of this year, given our exceptional financial performance. Secondly, we will continue to invest in targeted growth opportunities in areas where we can expand our differentiated product offering and further widen our competitive advantage. However, it's very likely there will be a surplus above these two priorities, which means returning capital to shareholders will be part of our financial plan in the near term. As to our current estimates for EBITDA for all of 2025, we're raising our outlook for Aviation Leasing from $500 million to $600 million, which includes $54 million in insurance settlements received in the first half of the year. And based on the strength of our current pipeline, we are also increasing our estimated 2025 Aerospace Products EBITDA from the prior range of $600 million to $650 million to a new range of $650 million to $700 million. Overall, we're updating total estimated 2025 business segment EBITDA from $1.1 billion to $1.15 billion to the new numbers of $1.25 billion to $1.3 billion. For 2026, we're also seeing meaningful upside to our previous estimate of $1.4 billion and plan to provide an update later this year. For the SCI, we made great progress this quarter. We closed on additional equity partners and expect to have final closings completed by October this year. Our target is to invest $4 billion through the 2025 partnership, which will be approximately 250 on lease aircraft. Halfway through the year, we now have 145 aircraft either closed or in an LOI commitment and have good visibility from the SCI investments team on sourcing the remaining aircraft through a combination of lessor counterparties and direct sale-leaseback transactions with airlines. A key component to the SCI's investment strategy is the MRE agreement with FTAI. During the second quarter, we generated $70 million in Aerospace Products revenue by fulfilling orders to SCI, representing approximately 14% of our total sales in Aerospace Products or 20% for the entire first half of 2025. Fixed-price engine exchanges are a great source of enhanced return to our equity partners, providing greater predictable cash flows and lower residual risks compared to peer lessors, while also delivering meaningful value to airline customers who avoid the costs and risks of managing shop visits themselves. We continue to believe SCI will be a major additional driver of growth in aerospace products as well as providing a significant contribution to Aviation Leasing through management servicing fees, incentive fees, and our 20% minority ownership. Overall, in the industry, we see a very long horizon ahead for the life cycle of current technology aircraft and engines. Many airlines today recognize that the economic useful life of 737NGs and A320ceo aircraft has been extended to 30 years versus the previous assumption of 25 years. While industry issues of multi-year delays in new aircraft deliveries and the durability of new technology of engines are well known, advancements in CFM56 and V2500 engine maintenance, such as the availability of module swaps, and the development of new PMA parts is allowing more airlines to economically reinvest in their existing fleets for longer than they originally planned. Programs like FTAI's MRE engine exchanges provide predictable cost and offer airlines a simple, easy way to keep their current aircraft flying profitably. Thus, an average useful life extension of 5 years means 20% more engine shop visits, which means greater maintenance spend and a larger opportunity for FTAI to expand our market share and help sustainably support airlines in their long-term maintenance needs. With that, I'll turn it over to Angela.

Angela Nam, CFO

Thanks, Joe. The key metric for us is adjusted EBITDA. We continued the year positively with adjusted EBITDA of $347.8 million in Q2 of 2025, which is up 30% compared to $268.6 million in Q1 2025 and up 63% compared to $213.9 million in Q2 of 2024. During the first quarter, the $347.8 million EBITDA number was comprised of $199.3 million from our Leasing segment; $164.9 million from our Aerospace Products segment; and negative $16.4 million from Corporate & Other, including intersegment eliminations. Turning now to Leasing. Leasing continued to deliver strong results, posting approximately $199 million of EBITDA. The pure leasing component of the $199 million came in at $169 million for Q2 versus $152 million in Q1 2025. Included in the $169 million was a $24 million settlement related to assets in Russia written off in 2022, which is an additional settlement to the $30 million we announced we received last quarter and $11 million we received in Q4 2024. For gains on sales, we continue the year with $356.2 million of book value of assets sold or an 8% margin gain of $30.7 million as we closed on 33 additional aircraft of the seed portfolio to the SCI with 8 remaining, which we expect to close in Q3. Looking ahead, we're assuming Leasing EBITDA will be $600 million in 2025, including insurance settlements of $54 million as we pivot our focus towards an asset-light business model. Aerospace Products had yet another good quarter with $164.9 million of EBITDA at an overall EBITDA margin of 34%, which is up 26% compared to $130.9 million in Q1 of 2025 and up 81% compared to $91.2 million in Q2 of 2024. We continue to see accelerated growth in adoption and usage of our Aerospace Products and remain focused on ramping up production in each of our facilities in Montreal, Miami, and Rome as well as expanding component repair operations at our new acquisition in California. In 2025, we expect to generate Aerospace Products EBITDA of $650 million to $700 million, which is up from $381 million in 2024 and $160 million generated in 2023. With that, let me turn the call back over to Alan.

Alan John Andreini, Head of Investor Relations

Thank you, Angela. Brianna, you may now open the call to Q&A.

Operator, Operator

Our first question comes from Sheila Kahyaoglu of Jefferies.

Sheila Kahyaoglu, Analyst

Joe or Angela, maybe first question for you guys on EBITDA for Aerospace Products. Just looking at the first half versus the second half, the second half module increase is about 85 units, in line with the EBITDA increase of $85 million at the midpoint. So it seems the business normalizes to $1 million of EBITDA per module. How do we think about the margin improvements into '26, both including and excluding PMA to get to that 40% and as Montreal and Rome ramp?

Joseph P. Adams, CEO

I will start by addressing this. The potential for margin improvement is quite varied. We have been working on repairs in Montreal, and the acquisition of Pacific Aerodynamic could contribute an additional 1 to 2 percentage points. Additionally, we've been acquiring new serviceable materials over the past few months that will impact the P&L through core restorations. Ultimately, PMA will also have an effect. Therefore, we anticipate a 5 to 10 percentage point improvement in 2026 as a result of these various efforts. While PMA will have the most significant impact, all these factors will positively contribute to the improvement next year.

Sheila Kahyaoglu, Analyst

Okay. And maybe if I could ask more on that point, Joe, with Pacific Aerodynamics, that deal, $12 million purchase price for $50,000 of savings per shop visit suggests a return within half a year. So given it seems you're pushing more volumes through there, can you talk a little bit more about the business, how it further differentiates FTAI and how you're thinking about future inorganic opportunities?

Joseph P. Adams, CEO

We've been exploring the repair sector and have developed several internal repairs in Montreal. However, compressor blade repair is quite specialized, and only a few companies possess that capability. Pacific has impressive technology and products, but their marketing and customer reach are somewhat limited. We viewed this as a chance to merge our volume with their expertise, and our unique ability to deliver that volume is a significant advantage. The company we're acquiring has an estimated acquisition price of around $15 million. If we can scale their operation, they could potentially manage about 300 shop visits, which would save us $50,000 per visit, translating to approximately $15 million annually in savings. This results in a one-year payback period. Due to our capacity to generate volume, we believe we've created enhanced economic benefits, making our vertical integration with products like this very appealing. We're also considering other similar opportunities. Our goal is to fill in the gaps systematically by evaluating each line item of cost in the shop visits and determining whether we can build that capability in-house or acquire it. We will explore both options. Although this is a small initial acquisition, there are other areas, including potential collaborations with the Pacific Aerodynamic team on additional engine components. We have some R&D projects we can pursue with this team on an organic level.

Operator, Operator

Our next question comes from Kristine Liwag of Morgan Stanley.

Kristine Liwag, Analyst

Joe, you had 184 CFM56 modules in the quarter, so up 33% sequentially. You've talked about 750 for the full year, which implies that the second half would see another 33% growth versus the first half. So maybe taking a step back, can you talk about what the airline customer reception of the modules has been? Clearly, you're seeing some growth. What's been their opinion of your service? And what are their options? Are you seeing more repeat customers? Can you expand more on the offering that you made for a major U.S. airline? What does that mean? If they're happy with your service, what could that mean for growth in the long run?

Joseph P. Adams, CEO

Sure. I'll let David start on the production, and then we can take the other parts of the question as they come.

David Moreno, COO

Kristine, this is David. So to start off with production, just kind of give you the story of Q2. The majority of the increase in production were based on two things. Number one was the growth in Montreal. As we announced in previous quarters, we've focused that facility in specialization. So now we have specific lines focused on module production, so we're able to increase production from 77 in Q1 to 91 in Q2. What that means is turnaround times improved from 83 days in Q1 to 66 days in Q2. So we expect that to continue to improve. Our goal is to get to around 60 days turnaround time per module. The second catalyst was the introduction of our Rome facility. We did close that transaction in the beginning of June. However, our transformation efforts started at the beginning of this year. So we had a deal signed up at the end of last year, and we started our transformation as we've done with our previous shops, which really focuses on three initiatives. Number one is focus, so focusing on CFM56 volume only. In this case, there was CF6-80 work, and we prioritized the CFM over that. Number two is contributing our volume. We started putting volume ahead of time before our actual acquisition and started turning engines. Number three, we're going to copy the specialization that was done in Montreal at that facility in the back half of this year. We see that ramp-up being significant. 29 modules is what we produced in Q2. We feel very good about 100 for the entire year. A lot of the increase in production is going to be from Montreal continuing the specialization, and continuing production turnaround time improvements and then Rome coming online.

Joseph P. Adams, CEO

On the customer reception question, it's quite positive. We present to the airline or engine owner an alternative to managing their own engine maintenance. We demonstrate that we can save them time and money while offering flexibility in how they receive their power. The benefits are considerable, and most airlines recognize that handling their own engine maintenance often leads to minimal benefits and potentially significant cost overruns. Every airline we have encountered has faced this issue. We are offering a better solution that allows them to save money and eliminate the risk of overruns, which prompts them to respond positively, saying, "Wow, that's incredible. What am I missing?" The response is that they are not missing anything. We have successfully introduced this concept globally. Initially, there were doubts about serving the larger airlines, but we have proven that we can cater to them as well. Our advantages can be extended to any customer. So far, we have never had an unhappy customer; everything we deliver is of the highest quality and performs well. Customers consistently return for more. Our focus now is to encourage them to try our services, grow alongside them, and become a larger provider for their engine needs as they expand. As aircraft like the 737NGs and A320s age, there is an increasing tendency to outsource more maintenance activities. Market share is dynamic and tends to increase as aircraft age. Once customers are integrated into our system and have an alternative, we believe we become their preferred option, leading to increased usage.

Kristine Liwag, Analyst

In looking ahead to 2025, you'll reach 750 modules, which is quite an accomplishment considering this initiative began just a few years ago. With the capacity to produce 1,800 CFM56 modules, can you discuss how quickly you might achieve this? What are the main challenges you foresee? Is it related to labor? I noticed you've established your university. How fast can you reach that capacity? Additionally, once you achieve the 1,800 modules per year, what will the economics of that business model look like?

David Moreno, COO

Kristine, this is David. I'll take that. So we expect to get to around that 1,800 production in the next two years. The number one constraint for us is technicians, specifically, the young technicians. At each of the facilities, we have a really experienced workforce that has many, many years of experience. However, we do need to continue to hire young technicians. What we've done proactively is two things. Number one is we've developed a training academy in Montreal. This is a partnership with the local schools where we take internships, and we have the students graduate, and we teach alongside the schools. That provides us a high retention rate to be able to take the best students into offering them full time. The second piece is we've created a training center. New hires go into an immersive learning experience. With that, we've rolled out augmented reality. What technicians do is through an augmented reality device, they're able to assemble and disassemble engines. Historically, that was done through the manual, which is text-based and difficult to pick up the learning curve. Now with simulation, you're able to learn a lot faster. The curve of learning has improved significantly, and we believe that's a competitive advantage we have versus anyone else in the world. We feel very good about our ability to control our future by hiring based on the efforts we're doing today.

Joseph P. Adams, CEO

The Montreal and Rome markets are excellent for attracting talent. We've acquired three maintenance facilities that were previously airline engine shops that went out of business: one in Montreal from Air Canada, another in Miami from the Pan Am shop, and the third in Rome from Alitalia. These facilities had full operations at their peak, equipped with tooling and a skilled workforce, but were ultimately shut down. We are in a unique position to bring in volume, having acquired these facilities at significantly lower than replacement costs. By ramping up our operations, we create a highly appealing opportunity for mechanics in the region, especially since many prefer living in Rome over Northern Europe. Our ability to acquire more maintenance capacity in the future remains promising, and we believe there will be strong options available when the need arises.

Kristine Liwag, Analyst

Great. If I could sneak in one last one. Joe, you already mentioned for the acquisition of Pacific Aerodynamic, it sounds like the return period there is actually a year or maybe even less. So does this mean that you plan to expand out more repair capabilities? Can you expand more regarding your M&A strategy and how we should think about potential deals?

Joseph P. Adams, CEO

Yes. I think the answer is yes. Filling in some of the holes on piece part and component repairs is a further vertical integration of our strategy. If you think back in the early days, our first investment was in PMA manufacturing, then we acquired maintenance facilities, and then we entered into a carve-out venture. We approached various elements of the shop visit. The last focus for us is piece part repair because a lot of parts go back into an engine, but before they can go back in, somebody must do something to it. Usually, those are third-party vendors. That's our focus for M&A. We have a significant advantage that we can deliver. If our goal is to do 600, 700 shop visits a year, we are the largest user of services in the world for that engine by far.

David Moreno, COO

We previously disclosed that in the Montreal facility, we have repair capability for 70% of the piece parts. We're looking to fill the gap, the remainder of the 30%. Pacific Aerodynamic is an example of that. We think we can do targeted investments to continue adding capabilities, which increase margin and give us control on the production side.

Operator, Operator

Our next question comes from Giuliano Bologna of Compass Point.

Giuliano Bologna, Analyst

Congrats on just the continued incredible performance on the Aerospace Products side. One thing I wanted to pick your brain about is the growth in the Aerospace Products segment is accelerating or reaccelerating at this point. I'm curious what you think is specifically driving that today and how durable those trends are? Along the same lines, I'm curious if there's any kind of trigger events in the industry that would help accelerate the growth or at least continue the accelerated growth rate, whether it's transitioning midlife aircraft from larger airline to smaller airlines or rolling out the SCI vehicles or anything along those lines?

Joseph P. Adams, CEO

Yes. I would say the underlying dynamic to the adoption is an airline or an owner avoiding a shop visit, having to manage a shop visit and invest in that maintenance activity when it can go very differently than they think at the beginning. That's what drives a lot of the customer activity at the front end. Everything that happens after that is positive for us in that as platforms age, as big airlines start to sell off older currents generation tech to smaller airlines, the fleet gets more spread out, the availability of parts goes down, the interest in investing in full performance restorations decreases. All those trends that happen as the platform ages will keep driving growth for us because all those trends favor us doing the maintenance as compared to anyone else. This is very much a scale business. The bigger you get, the better you get. If you can establish that you are the largest vendor, largest supplier, largest buyer, largest owner, you win and you keep winning more every year because there's less and less in your way.

David Moreno, COO

The strategic capital is an accelerant to capture market share. As we mentioned, the strategic capital represents 20% of our sales in aerospace. Behind every sale is an airline. The airline needs to approve the module or the engine. They're seeing the actual module exchange happen, benefiting from that. There's no better sales pitch than executing on that exchange. We have around 50 customers today, and each vehicle could represent around 100 customers. We see all that as being an accelerant to growth in our aerospace.

Joseph P. Adams, CEO

Across our entire business, you count Leasing and Aerospace Products and SCI, we have over 250 customers today, which is a pretty significant number. If you think about the ecosystem of current generation aircraft and engines, that's a significant touchpoint for us. Once you're in business with one side of the airline, they look at us as the same entity no matter what pocket the money is in. It just keeps getting better.

Operator, Operator

Our next question comes from Josh Sullivan of The Benchmark Company.

Joshua Sullivan, Analyst

Congratulations on the quarter. Joe, just following up on a strategic capital question. Now that the first one is off and running, how should we be thinking about SCI 2 at this point? What's your sense on how the SCI model is evolving into a repeatable relationship at this point?

Joseph P. Adams, CEO

We couldn't be happier about where we are right now. Obviously, when you start something new, there's a bit of an unknown. It felt like a big number and it felt ambitious, but we're executing very well. As we mentioned, 145 aircraft owned or under LOI, 50 customers, a big pipeline of activity, returns in line with what we hoped, if not better. It checks all the boxes. We'll most likely decide on SCI 2 in the third quarter or fourth quarter this year. As it sits today, it looks much higher probability that will happen. If you do the math, if you can do $4 billion a year, 250 aircraft a year, in 4 or 5 years, you're going to own over 1,000 airplanes. There are 14,000 out there in that universe. It doesn't seem like that's a huge percent, but that's a lot of airplanes, and that would make us the biggest owner of current generation aircraft in the world, including any airline that I can think of. You then become the largest counterparty for all that activity, which is phenomenal.

Joshua Sullivan, Analyst

Got it. When do you expect to start looking into assets around the LEAP or GTF engine?

Joseph P. Adams, CEO

I think it's still 2028, 2029. Both engines have new parts that have been either introduced or being introduced this year and next year. You want to see those platforms stabilize before you start acquiring assets. You'd rather not own the previous version.

Operator, Operator

Our next call is from Brandon Oglenski of Barclays.

Brandon Oglenski, Analyst

Joe, I was wondering if you could give us an update on PMA because I feel we've been waiting for a while for the third, fourth, and fifth parts to come out here. Is there anything you can talk about there?

Joseph P. Adams, CEO

Yes. I've always said it's worth the wait. I think Chromalloy has said publicly that the third part, which is the most expensive part in the shop visit, the final application was submitted to the FAA by May 1. When asked about their expectation of approval, they indicated that the previous hot section blade they had approved was a V2500 T2 blade that took 6 months from final application approval. They sort of guided to think October. The third part is the most significant contributor to savings for us. The fourth and fifth parts will be in 2026.

Brandon Oglenski, Analyst

Okay. I wanted to come back to the U.S. airline deal that you mentioned, Joe, because I think you commented that maybe it's a little bit lower margin. But is there a recurring element to this and a replicable structure of a deal globally?

Joseph P. Adams, CEO

We have several structures. This deal was primarily full performance restorations, large ticket exchanges. It's a high dollar contributor but a lower margin contributor. To the extent that the mix becomes a more normal mix, the margins will revert to more normal margins.

Operator, Operator

Our next question comes from Myles Walton of Wolfe Research.

Myles Walton, Analyst

Given the paydown of the revolver, the expectation for further positive free cash flow, Joe, you alluded to returning capital as something you'd look forward to. Can you maybe size how share repurchase fits in that scheme, where your leverage comfort levels are and what the quantum might be and timing?

Joseph P. Adams, CEO

What we indicated is we expect to achieve our goal with the rating agencies this year, given financial performance. Anything under 3x debt to total EBITDA is a perfectly comfortable level for us in terms of leverage. Looking at growth CapEx, to the extent that we can accelerate growth going from our goal of 25% market share, we will prioritize that. Beyond that, share buybacks would be top of the list. We would look at what cash and liquidity we need to maintain in the company, probably around the levels where we are right now. Anything incremental will become available for share buybacks.

Myles Walton, Analyst

So conceptually, the second half of the year's free cash flow is sort of unspoken for at this point and could be looked at in that regard?

Joseph P. Adams, CEO

Yes.

Myles Walton, Analyst

Sounds good. It sounds like you're running a lighter capital portfolio. The SCI is working. The CFM56 engine target portfolio has been reduced to 350 to 400 engines. Is this 350 to 400 CFM56 engines more of a multiyear look? Or is it a current year look that grows into '26?

Joseph P. Adams, CEO

I think it feels sustainable. We also have the benefit of the engines that are in SCI, which are under management. We thought about how many engines do you need to have availability to show your customers that you can always deliver one. We feel that because the SCI is managed by FTAI and those engines are under contract, it effectively gives us more inventory, one step removed from owned but pretty close to own. It gives us the opportunity to be less capital intensive.

Operator, Operator

Our next question comes from Brian McKenna of Citizens Bank.

Brian J. McKenna, Analyst

Just a follow-up on SCI. I'm curious about the feedback from the alternative asset management industry, given the early success of the vehicle. I assume some managers took a wait-and-see approach in terms of investing in the vehicle. What are you hearing from them regarding FTAI's ability to drive returns for them, and what this could mean for demand for SCI long term?

Joseph P. Adams, CEO

It's very positive. Every investor has a different timeline for approvals. No one is taking a wait-and-see approach; they're operating under system constraints. We have a great group of investors, all of them want to be repeat ones. If we deliver the returns we've forecast, then they'll be here for SCI 2, 3, 4. The backdrop is great. The demand for supply of capital is significant, diversified, and exactly what we hoped for.

Brian J. McKenna, Analyst

With respect to your debt capital, you have no maturities until 2028, but a few of the tranches of your notes have coupons at or above 7%. Is there an opportunity to refinance these to reduce the cost of capital? What could this ultimately mean for your bond ratings over time?

Joseph P. Adams, CEO

I think the bond raise, as we've said, we want to get to a strong BB. We could argue that it could be investment grade, but we won't compromise the way we run our business to get there. We could reduce debt, but nothing is callable right now. It might not be worth the fees to do it at the moment, but we will look at it as the cost of debt comes down for us.

Operator, Operator

Our next question comes from Ken Herbert of RBC CM.

Kenneth Herbert, Analyst

A question for Joe or David. What are you seeing in terms of material availability or lead times on spare parts into the shop? How much of an improvement was that in efficiency or productivity?

David Moreno, COO

Our inventory strategy is unique, where we're procuring parts in advance, and we're not idling for parts to return from shops. What that means is that we're effectively kitting modules ahead of time, and then we're providing the replacement kits. The off parts go for repair and then return to inventory. We've seen a lot of demand for core modules. We're very opportunistic in buying specific core LLPs to build engines. We feel positive about our inventory levels. This will probably be the highest it will be; we expect it to come down over time.

Kenneth Herbert, Analyst

Was that turnaround time comment specific to Montreal? Or is that across the network?

David Moreno, COO

That's specific to Montreal.

Kenneth Herbert, Analyst

As a follow-up, one of the primary dynamics of the market has been the surge in value of both new generation and legacy generation engines. How are you thinking about the value of legacy engines in the next 1 or 2 years? What does that imply for your business as we start to see that rate of growth slow or come down?

Joseph P. Adams, CEO

We fully expect the rate of growth to slow and for it to come down; that's perfectly normal. Our business is really a spread relative value business. We buy run-out engines, rebuild them, and go to market to sell lease or exchange. We don't need an increase in price to keep generating the business and the growth we forecast. It’s normal for that to happen. Two mitigants are OEMs tend to raise prices regularly and as platforms age, market share grows.

Operator, Operator

Our next question comes from Andre Madrid of BTIG.

Andre Madrid, Analyst

Could you maybe break out a bit more what you're thinking around the Chinese opportunity through Rome?

David Moreno, COO

The Chinese opportunity for us is a growth market. As for the current 737 and A320ceo fleet, they represent about 20% of the world's fleet. However, their order book is around 4% of the total. These aircraft are going to operate much longer, leading to more engine shop visits. We're very excited about having the license because it allows us to perform engine exchanges within China. We've already started capturing some customers.

Joseph P. Adams, CEO

It's a perfect market for engine exchanges and module exchanges because they're going to want replacements on a regular basis, and there's not the capacity to do those shop visits locally. So it's a perfect setup for our model.

Andre Madrid, Analyst

Do you think you can quantify how material this could eventually be? Are the margins in any way accretive to overall mix? How should we think about that from the numbers?

Joseph P. Adams, CEO

We probably need another quarter or two to be able to intelligently address the market. We've just started doing business this year, and we have a good list of prospects. Margins are fine; they're going to be great. It’s not a price-sensitive market. I think that’s easy. But the size of the market — we’d be better served if we have more granularity about which customers can do what. There are some very big customers there that need lots of engines.

Andre Madrid, Analyst

Looking at the margin step down at AP, it’s clear this was associated with a large North American order. How should we expect the progression moving forward for AP through the second half of '25 and into '26? Are the prior targets for step-up still in play?

Joseph P. Adams, CEO

For the rest of this year, I would think we'll continue to be around, historically, between 34% and 38%, somewhere in that range for the remainder of 2025. For 2026, we expect that margin to go to the 40% plus next year and feel very good about that.

Operator, Operator

I am showing no further questions at this time.

Alan John Andreini, Head of Investor Relations

Thank you, Brianna, and thank you all for participating in today's conference call. We look forward to updating you after Q3.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.