Can Two Small-Cap Aviation Holdings Fly Higher?
article 12-12-2023

Can Two Small-Cap Aviation Holdings Fly Higher?

Portfolio Manager Miles Lewis and Assistant Portfolio Manager Joe Hintz detail the investment thesis for 2 holdings in the aviation space.


We have been finding interesting opportunities within the aviation leasing space and think this is an industry with positive structural tailwinds. First, the airlines’ demand for planes is outstripping replacement supply from the original equipment manufacturers (“OEM’s”), which makes the planes owned by the leasing companies more valuable and desired. Second, while travel demand bounced back from COVID-induced lows quite a while ago, we think that there is still room for route normalization, particularly for international travel, which puts further demand stress on the existing plane fleet. Finally, we believe that leasing planes relative to outright ownership provides attractive opportunities for airlines to optimize their capital structure. We are invested in this opportunity set through two companies, Air Lease and FTAI Aviation.

“We have been finding interesting opportunities within the aviation leasing space and think this is an industry with positive structural tailwinds.”
—Miles Lewis

Air Lease is a more typical aviation leasing company in that its business is exclusively focused on whole plane leasing. Even more specifically, Air Lease focuses mostly on leasing narrowbody aircraft, with Airbus A320/321 planes representing more than a third of its existing fleet and more than half of future deliveries, while Boeing 737 planes represent another third of its existing fleet and around a quarter of future deliveries. We have seen lease rates for narrowbody aircraft move considerably higher relative to pre-pandemic levels, driven in large part by the supply/demand issues discussed above. Many airlines are also optimizing their fleets around narrow body planes for reasons such as passenger comfort and fuel efficiency. We think these trends will continue.

Air Lease has been challenged this year mostly due to lease rates resetting more slowly relative to funding costs in a rapidly rising rate environment. We view this as a transitory issue, however, as lease rate adjustments happen in contractually determined periods. As the company rolls into these updated leases, we should begin to see the true supply/demand dynamics that should allow the company to earn attractive returns on their coveted plane fleet.

We see this opportunity as one that could also offer some relative downside protection due to its valuation. Since Air Lease essentially operates on an asset financing business model, we think that using the price-to-book multiple is most appropriate. This metric reveals that Air Lease is currently trading at only 62% of book value, which implies severe distress and/or impaired asset quality. Since the company is so heavily skewed toward attractive and high demand aircraft, this valuation looks too bearish to us—while providing considerable potential asset protection to investors.

Air Lease Cl. A (NYSE: AL)

Russell 2000 vs. Russell 1000 Median LTM EV/EBIT¹ (ex. Negative EBIT Companies)

Past performance is no guarantee of future results.

FTAI AVAITION is a unique company within the leasing space. The company operates in two segments: Aviation Leasing, which leases aircraft and aircraft engines, and Aerospace Products, which develops, manufactures, repairs, and sells aircraft engines and aftermarket components for aircraft engines. While we like the leasing segment for many of the same reasons that we like Air Lease, we view the aerospace products segment as FTAI’s true gem.

Engine maintenance is an airline’s third-largest expense, after fuel and labor, and FTAI’s aerospace products segment is specifically built to offer attractive outcomes for airlines as they manage their fleet of engines. In particular, FTAI is focused on the CFM56 engine, which is the largest engine by market size with more than 21,000 engines in service, or roughly 37% of the engine market. FTAI focuses on both dramatically speeding up the turnaround time for shop servicing on engines and reducing the cost of parts. The company has created a service approach that essentially swaps modules within the engine as opposed to complete disassembly—which reduces the average shop visit time from four months to 15 days and reduces the cost by almost 40%. In addition, FTAI has slowly been building out its offerings within the aftermarket parts space for these engines, as well. The engine OEM’s have business models driven by huge annual markups for replacement parts, which makes this a very attractive space to compete for market share at an attractive price point for FTAI.

FTAI has performed well for us over the past year following their spinoff from Fortress Transportation and Infrastructure Investors LLC as the market has slowly started to appreciate the differentiated nature of FTAI’s business model. However, despite this outperformance, we think its valuation remains incredibly attractive. Due to FTAI’s mix of both a leasing business and a parts & services business, we think Enterprise Value to EBITDA (earnings before interest, taxes, depreciation and amortization) is the appropriate valuation metric for the company. On this metric the stock currently trades at only 9.8x next 12 months EBITDA consensus of $650 million of EBITDA, which is not demanding relative to the quality of the business. However, we think that FTAI could generate $1 billion of EBITDA within the next 2-3 years, which means that the company is trading at an attractive multiple of near-term potential earnings power. For this reason, we remain confident in this position despite the shares’ outperformance year to date in 2023.

FTAI Aviation (Nasdaq: FTAI)

Russell 2000 vs. Russell 1000 Median LTM EV/EBIT¹ (ex. Negative EBIT Companies)

Past performance is no guarantee of future results.

Important Disclosure Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses.

Mr. Lewis’s and Mr. Hintz’s thoughts and opinions concerning the stock market are solely their own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future.

Company examples are for illustrative purposes only. This does not constitute a recommendation to buy or sell any stock. There can be no assurance that the securities mentioned in this piece will be included in any Fund’s portfolio in the future.

Percentage of Fund Holdings As of 9/30/23 (%)

  Pennsylvania Mutual Dividend Value Global Financial Services Global Value Trust Small-Cap Opportunity Premier Small-Cap Total Return Smaller-Companies Growth Value Trust

Air Lease Cl. A










FTAI Aviation










The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

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