FTAI Aviation: The High-Flying Stock Built on Shaky Foundations?

The Allure of AerospaceImagine a company that promises to revolutionize the aerospace industry. It’s not just leasing planes and engines — it’s building a cutting-edge Maintenance, Repair, and Overhaul (MRO) business, repairing engines, and selling spare parts. Sounds like a dream investment, right?Enter FTAI Aviation Ltd. (NYSE: FTAI), a company that has captured the attention of investors with its impressive growth story and sky-high margins. But what if I told you that this dream might be built on shaky foundations?Recent scrutiny of FTAI’s financial practices has raised serious questions about the company’s business model, accounting methods, and long-term sustainability. In this deep dive, we’ll explore the controversies surrounding FTAI, break down its business model, and ask the critical question: Is FTAI Aviation a high-flying success story or a ticking time bomb?

The Rise of FTAI Aviation

FTAI Aviation has been a darling of the aerospace industry. The company operates in two main segments:Leasing: Owning and leasing aircraft and engines to airlines.Aerospace Products (AP): A Maintenance, Repair, and Overhaul (MRO) business that repairs and sells engine modules and spare parts.On the surface, FTAI’s story is compelling. The AP segment, in particular, has been a growth engine, with reported EBITDA margins of 30–40%, far exceeding industry peers like Boeing and GE. Investors have rewarded FTAI with a premium valuation, believing it to be a leader in the lucrative MRO space.But beneath the surface, there are growing concerns about the sustainability of FTAI’s financial performance and the true nature of its business.

FTAI’s GAAP revenue per reported module is ~$2m per module. However, FTAI only charges ~$700k to ~$1.5m per module (see Appendix).

We believe this discrepancy illustrates that FTAI is categorizing revenue from whole engine sales as module sales.The Controversies — A Closer LookSeveral red flags have emerged regarding FTAI’s business practices.

Here are the key concerns:

1. Misrepresenting Whole Engine Sales as Module Sales

FTAI claims to sell individual engine modules (fan, core, and low-pressure turbine) as part of its MRO business. However, there are allegations that 70–80% of these “module sales” are actually whole engine sales. Why does this matter? Selling whole engines is far less labor-intensive than repairing and selling individual modules. By misrepresenting these sales, FTAI may be inflating the perceived size and profitability of its MRO business, making it appear more valuable to investors.

2. Accounting Practices — Depreciation and Margins

There are questions about how FTAI accounts for its engines. The company allegedly depreciates engines in its Leasing segment, even when they’re not on lease. These depreciated engines are then transferred to the AP segment at artificially low carrying values.When the engines are sold, the AP segment reports high gross margins because the cost of goods sold (COGS) is based on the depreciated value, not the actual cost. This accounting practice allows FTAI to report EBITDA margins of 30–40%, compared to peers like Boeing (18%) and GE (27%).

3. Revenue Recognition — Channel Stuffing Concerns

At the end of 2023, FTAI reportedly sold two on-lease aircraft to an intermediary, Aerolease, without receiving cash payment. Instead, FTAI booked the revenue based on a promissory note.The aircraft were later sold to a bona fide buyer, Setna iO, in June 2024. Critics argue that this transaction may have been recorded in 2023 to inflate year-end results — a practice known as channel stuffing.

4. Fundamental Weaknesses — Declining MarginsDespite FTAI’s impressive margins, there are signs that the company’s core MRO business is under pressure. The proportion of revenue from Used Serviceable Material (USM) — a higher-margin business — has declined, and margins in the core module business have fallen by ~600 basis points in Q3 2024 compared to H1 2024.Additionally, FTAI is increasingly reliant on the secondary market for engines, where prices have risen by 40–50% in the past 18 months. This could put further pressure on margins.

Maverick Aviation LinkedIn post from October 2024 indicates an A320 aircraft was sold by FTAI to Maverick Horizon — we understand this was a Perpetual Power agreement.

The Perpetual Power Program — A Double-Edged Sword?

One of FTAI’s key offerings is the Perpetual Power Program, where it promises lessees a serviceable engine throughout the lease term. Sounds like a great service, right?But there are concerns that this program is more akin to a leasing business than an MRO operation. Here’s why:FTAI sells airframes but retains ownership of engines, leasing them back to customers.The company must maintain a fleet of standby engines, which is capital-intensive.Revenue from these leases is recorded in the AP segment, allowing FTAI to present itself as an MRO business rather than a leasing company.This raises questions about FTAI’s true business model and whether it deserves the premium valuation it commands.

The Evidence — What Are the Red Flags?

The concerns about FTAI are backed by several pieces of evidence:Industry Experts: Former FTAI executives and aerospace insiders have raised questions about the company’s revenue recognition and accounting practices.Financial Disclosures: Analysis of FTAI’s financial statements reveals discrepancies in revenue per module, EBITDA margins, and cash flow.FAA Filings: Documents show that FTAI transferred aircraft to an intermediary in 2023 and later sold them to a bona fide buyer in 2024, raising questions about revenue timing.Public Data: LinkedIn posts and aerospace databases track FTAI’s asset sales and leasing activities, providing further insights into its business practices.

What Does This Mean for Investors?

If the concerns about FTAI are valid, the company’s stock could be in serious trouble. The high valuation is based on the perception that FTAI is a leader in the MRO space. If that perception crumbles, so could the stock price.Investors should ask themselves:Is FTAI’s revenue sustainable, or is it built on questionable practices?Can the company maintain its high margins in the face of rising engine costs?Is the Perpetual Power Program a strength or a liability?

A Cautionary Tale

FTAI Aviation’s story is a reminder that not everything that glitters is gold. While the company has painted a compelling picture of growth and profitability, there are serious questions about the sustainability of its financial performance and the true nature of its business.For investors, the key takeaway is to look beyond the headlines and dig into the details. As the old saying goes, “If it sounds too good to be true, it probably is.”So, is FTAI Aviation a high-flying success story or a ticking time bomb? Only time will tell — but one thing is certain: the stakes have never been higher.

*At the time of writing $FTAI is trading at $94.61*