Prepared remarks
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.
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 at pace 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 3 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 3 years, we've now acquired 4 facilities across 3 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 2 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 more 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.
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.
Thank you, Angela. Brianna, you may now open the call to Q&A.
Questions and answers
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?
I will start by addressing the margin improvement opportunities, which are quite varied. We have been developing repairs in Montreal, and the acquisition of Pacific Aerodynamic could potentially contribute 1 to 2 percentage points. Additionally, we've been acquiring new serviceable material over the past few months that will positively impact the P&L with core restorations. Finally, we expect PMA to begin contributing as well. Overall, we anticipate a margin improvement of 5 to 10 percentage points by 2026 as a result of these initiatives. While PMA will be the largest contributor, all these factors will positively influence our improvement next year.
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?
We have been exploring the repair sector and have developed several repairs internally in Montreal. The compressor blades represent a specialized repair area, and only a few companies possess the necessary expertise. Pacific has impressive technology and products, but their marketing reach is somewhat limited. We recognized an opportunity to merge our volume with their expertise. Our ability to deliver significant volume makes us unique in this space. The company we are acquiring has an approximate acquisition price of $15 million. If we can enhance their operations to manage around 300 shop visits, we can save $50,000 for each visit, leading to annual savings of about $15 million. This results in a one-year payback period. Our capacity to generate volume has improved the economics, making this vertical integration highly beneficial for us. There are other similar opportunities we are exploring as well. We are analyzing every cost component of a shop visit to determine if we should build this capability ourselves or acquire it, and we will consider both options. This acquisition is a small first step for us, but we could also expand our collaboration with the Pacific Aerodynamic team on additional engine components. We have some research and development projects in the pipeline that we can pursue alongside this team organically.
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? I mean, 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? And can you expand more on the offering that you made for a major U.S. airline? What does that mean? And if they're happy with your service, what could that mean for growth in the long run?
Sure. I'll let David start on the production, and then we can take the other parts of the question as they come. So yes.
Kristine, this is David. So to start off with production, just kind of give you the story of Q2. So the majority of the increase in production was based on 2 things. Number one was the growth in Montreal. As we announced in previous quarters, we've focused that facility on 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. So we did close that transaction in the beginning of June. However, our transformation efforts started 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 3 initiatives.
Number one is focus, so focusing on CFM56 volume only. So in this case, there was CF6-80 work, and we prioritized the CFM over that. Number two is contributing our volume. So we started putting volume ahead of time before our actual acquisition and started turning engines. And then number three, we're going to copy the specialization that was done in Montreal at that facility in the back half of this year. So 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. So you're going to see a lot of increase in production is going to be from Montreal continuing the specialization, and continuing production turnaround time improvements, and then Rome coming online.
I believe the customer reception has been very positive. What we offer to airlines or engine owners is an alternative to them handling their own engine maintenance. We demonstrate that we can save them both time and money while providing significant flexibility in how they choose to receive their power. The advantages we present are substantial, and most airlines understand that managing their own engine maintenance typically offers little benefit and carries the risk of significant cost overruns, which many have experienced. We provide a solution that saves money and removes the risk of overruns, leading to positive reactions from customers who often express amazement at this offer. Our concept has reached a wide audience, and contrary to initial assumptions, we have successfully engaged with large airlines as well. These benefits apply to any customer. As we continue to expand, we have not encountered an unhappy customer; everyone appreciates the high quality of our products and tends to return for more.
Our goal is to grow alongside our customers and become an increasingly vital source for their engine needs, especially as aircraft platforms like the 737NGs and A320s age, leading to greater outsourcing of maintenance activities. Market share is dynamic, increasing as platforms mature. Once we gain entry into the system as a reliable alternative, we believe we become the preferred choice, leading to continuous growth in our usage.
Looking ahead to 2025, you're projected to reach 750 modules, which is quite impressive given that this initiative started only a few years back. With a capacity of 1,800 for the CFM56 module, could you explain how soon you might achieve that? What are the main obstacles, is it labor-related? I noticed you've initiated your university program. How quickly can you reach that capacity? Furthermore, once you attain the 1,800 capacity per year, what will the economics of that business model look like?
We expect to reach around 1,800 units of production in the next two years. The primary constraint we face is the availability of technicians, particularly younger technicians. While we have a highly experienced workforce at our facilities, it is crucial for us to continue hiring young talent. To address this, we have taken two proactive steps. First, we've established a training academy in Montreal, collaborating with local schools to take interns. This partnership allows us to teach alongside the schools, resulting in a high retention rate and the opportunity to offer full-time positions to the best students upon their graduation. Second, we have set up a training center where new hires participate in an immersive learning experience before starting on the production line. This includes the use of augmented reality technology, enabling technicians to assemble and disassemble engines through devices like iPads or Oculus devices, rather than relying on traditional text-based manuals. This simulation accelerates the learning process significantly, giving us a competitive edge. We feel confident in our ability to manage our future by hiring based on these initiatives we are implementing today.
I believe the Montreal and Rome markets are excellent for attracting talent. We have acquired three maintenance facilities that were previously airline engine shops which closed down. In Montreal, it was Air Canada, in Miami, the former Pan Am facility, and in Rome, it was Alitalia. These locations had full operations and skilled workforces but were shut down. Our unique position allows us to bring volume, enabling us to acquire these facilities at a cost significantly lower than replacement value. This makes us an appealing option for mechanics in the area, especially since many prefer living in Rome over Northern Europe. We have considerable advantages to offer. I am confident that obtaining additional maintenance capabilities in a similar manner is quite feasible. If we determine the need for another facility, there should be several good options available to us.
Great. And if I could sneak in one last one. Joe, you already mentioned for the acquisition of the 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?
Yes. I think the answer is yes. And I think 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, what we decided is our first investment was in PMA manufacturing, then we acquired maintenance facilities. And then we entered into a carve-out venture. So we sort of approached all the various elements of the shop visit. And the last that we've been talking about most recently is piece part repair because a lot of parts go back into an engine, but before they can go back into an engine, somebody has to do something to it. And usually, those are a lot of third-party vendors. And so that's our focus for M&A. And as I said, because we have a significant advantage that we can deliver, if our goal ultimately 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, do you want to add any?
Yes. Just we've previously disclosed that in the Montreal facility, we have repair capability for 70% of the piece parts. So we're looking to fill the gap, right, the remainder of the 30%. So Pacific Aerodynamic is an example of that. And we think we can do targeted investments to continue to add capabilities, which increase margin and then give us control on the production side.
Congrats on just the continued incredible performance on the Aerospace Products side. One thing I wanted to kind of 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? And then along the same lines, I'm curious if there's any kind of trigger events out there in the industry that would help accelerate the growth or at least and/or continue the accelerated growth rate, whether it's transitioning mid-life aircraft from larger airlines to smaller airlines or rolling out the SCI vehicles or anything along those lines?
Yes. The main reason for adoption is that airlines or owners want to avoid maintenance visits, which can be unpredictable and costly. This motivates a lot of customer behavior initially. Once they make that choice, various positive outcomes follow, especially as aircraft age. Large airlines often sell older technology to smaller ones, leading to a more dispersed fleet. This results in decreased parts availability and less interest in full performance restorations, all of which benefit us because we are better positioned to handle maintenance than others. Our business thrives on scale; the larger we grow, the stronger we become. Establishing ourselves as the largest vendor, supplier, buyer, and owner enables us to continue winning more each year since fewer obstacles stand in our way.
Additionally, the strategic capital acts as a catalyst for increasing our market share. As communicated, it constitutes 20% of our aerospace sales. However, each of these sales must ultimately receive approval from an airline. Airlines observe the actual module exchanges and gain from them. Therefore, there is no stronger sales argument than successfully executing these exchanges. We are also witnessing a significant amount of cross-selling following these events. Currently, our strategic capital involves approximately 50 customers, and we estimate we are about halfway to our goal. Each vehicle could potentially correspond to around 100 customers, and we view this as a key driver of growth in our aerospace sector.
And if you look across our entire business, you count Leasing and Aerospace Products and SCI, we have over 250 customers today, which is a pretty significant number because if you think about the ecosystem of current generation aircraft and engines, that's a significant touch point for us. And as David said, once you're doing business with one side of the airline, they look at us as the same entity no matter what pocket the money is in. So to us, it just gets better and better.
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? And then maybe beyond, what's your sense on how the SCI model is evolving into a repeatable relationship at this point?
We couldn't be happier with our current position. Starting something new always comes with uncertainty, and it initially felt ambitious, but our execution has been strong. We currently have 145 aircraft either owned or under letter of intent, with 50 customers and a substantial activity pipeline. Our returns are meeting or exceeding expectations, so everything looks promising. We're likely to make a decision regarding SCI 2 in the third or fourth quarter of this year, and it seems to have a good chance of proceeding based on our current status. While we're not there yet, the outlook is very positive. If we project $4 billion annually with 250 aircraft each year, in 4 to 5 years we could own over 1,000 airplanes. Considering there are 14,000 around, that's a significant number, making us potentially the largest owner of current generation aircraft globally, surpassing any airline. This position would establish us as a major player in the market, allowing us to influence business operations and other aspects related to aircraft. We are excited about being on track to reach this goal, and we believe we can achieve it.
Got it. And then maybe another forward-looking perspective. I guess what's your view on when you might entertain starting to really earnestly look into assets either around the LEAP or GTF engine?
I believe it will be around 2028 or 2029. Both engines have new parts that have either been introduced or are being introduced this year and next year. It's important to ensure those platforms stabilize before acquiring assets, as you're changing components. You'd prefer to avoid owning the earlier versions. Additionally, the number of engines coming off the power by the hour programs is a key metric. You need enough engines to manage our own shop visits effectively. Lastly, it will depend on the economics. You have to consider pricing and the optimal entry point, which typically occurs when a new engine is introduced or at least announced, often resulting in lower secondary market prices. Those are the three main factors we will be considering, but I believe it will be quite tight around 2028 or 2029.
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 and fourth and fifth parts to come out here. Is there anything you can talk about there?
Yes, I've always said it's worth the wait. Chromalloy has now publicly stated that the final application for the third part, which is the most expensive component in the shop visit, was submitted to the FAA by May 1. They noted that the previous approved hot section blade, the V2500 T2 blade, took six months from final application approval. They've suggested that we should expect approval around October. The third part is the most significant contributor to our savings, which is an important point. The fourth and fifth parts are set for 2026, but we have no specific guidance on those yet; while they are beneficial, they are less critical compared to the blade.
Okay. And then 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 like a recurring element to this and maybe a structure of a deal that you can replicate more globally?
We have various structures. This specific deal involved significant performance restorations and large ticket exchanges, making it just one aspect of our offerings. We also provide other products like module swaps and engine programs supported by ongoing power agreements, all of which are being considered. While this deal contributes a substantial amount of revenue, it has a lower profit margin. If our product mix shifts back to a more typical composition, we can expect margins to return to more standard levels.
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?
Yes. We expect to meet our goals with the rating agencies this year due to our financial performance. We aim to achieve that milestone soon. A debt to total EBITDA ratio under 3x is a comfortable level for us in terms of leverage and should help maintain that rating. Regarding growth capital expenditures, we have always prioritized growth as a company. If we can accelerate our goal of reaching 25% market share through strategic acquisitions or investments, we will focus on that as a priority. Share buybacks will be next on our list. The key question is how much cash and liquidity we need to retain in the company, which we believe is around our current levels. Any additional funds will be allocated for share buybacks.
Okay. 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?
Yes.
It sounds like you're managing a lighter capital portfolio. The SCI is functioning well, and the target for the CFM56 engine portfolio has been adjusted to 350 to 400 engines. This is similar to the level of engine activity or ownership you had when your company was considerably smaller. Is this target of 350 to 400 CFM56 engines based on a multiyear perspective, or is it a current year target that is expected to grow into 2026?
I think it feels sustainable in that we also have the benefit of the engines that are in SCI, which are effectively under management. So we thought about how many engines do you need to have available to show your customers that you can always deliver one. And we feel that because the SCI is managed by FTAI and those engines are under contract, once they run out to be turned, it effectively gives us more an extended inventory, one step removed from owned, but pretty close to own. So I think that's what's given us the opportunity to be even a little bit less capital intensive.
Okay. Just a follow-up on SCI. I'm curious what the feedback has been over the last quarter or so from the alternative asset management industry, given the early success of the vehicle? I'm assuming some of these managers took a wait-and-see approach in terms of investing in the vehicle. But given that they're all focused on delivering excess returns for their investors and that industry is really short high-quality assets. I'm curious what you're hearing from them in terms of FTAI's ability to drive excess returns for them, given your set of capabilities here and then what this could ultimately mean for demand for SCI longer term?
I think it's very positive. Every investor has their own timeline for approvals, and I don't feel like anyone is adopting a wait-and-see approach. They are essentially working within their system's limitations. Approval timelines vary widely among different investors. However, we have a strong group of investors, and to my knowledge, all of them are interested in continuing to invest. If we achieve the returns we have projected, they will likely participate in SCI 2, SCI 3, and SCI 4. Overall, we believe the environment is favorable, and there is a significant demand for capital, which is diverse and aligns with our expectations.
Okay. That's helpful. And then with respect to your debt capital, I know you don't have any maturities until 2028, but a few of the tranches of your notes still have coupons at or above 7%. Given that these are trading north of 100 today, I mean, is there an opportunity to refinance these in the coming quarters and further reduce the cost of capital? And then what could this ultimately mean for your bond ratings over time?
I believe that with our bond issuance, we aim to achieve a strong BB rating. While there is an argument that we could reach investment grade, we don't want to jeopardize our business operations to get there. We expect to trade close to investment grade. There may be chances to reduce our debt, but currently, none of it is callable, which means it’s a purely mathematical consideration. It might not justify the fees required at this time, but we will certainly consider it as the cost of our debt decreases.
Maybe a question for Joe or David. I'm just curious for the increased throughput and efficiency you saw in the shops in the second quarter. What are you seeing in terms of material availability or lead times on spare parts into the shop? And how much of an improvement was that in the efficiency or productivity?
Our inventory strategy is distinct from others globally. We're acquiring parts in advance, which allows us to kit modules before they are needed and provide replacement kits. The surplus parts are sent for repair and then reintegrated into our inventory. This proactive approach has enabled us to purchase the right parts at the optimal time. There's been a noticeable trend in the demand for core modules, and we expect this to continue into the latter half of this year and into next year. Over the past three to four years, we've strategically acquired specific core LLPs to facilitate engine assembly, and we are confident about our inventory levels, which are likely at their peak now but may decrease over time. We’re securing parts in advance for core module production expected in the second half of this year and into next year, especially as we enhance our core capabilities and anticipate our PMA to come online soon.
Was that turnaround time comment specific to Montreal? Or is that across the network?
That's specific to Montreal.
Okay. And if I could, just as a follow-up, one of the primary dynamics of the market over the last few years has been the surge in value of both the new generation and legacy generation engines. As you think about your business model over the next couple of years, as we see value on the CFM56 and the V25, maybe the rate of growth slow or even potentially start to come in a little bit. I can appreciate that will have a lot of impacts on your business. But how are you thinking about the value of the legacy engines in particular, over the next 1 to 2 years? And what does that imply for your business as we start to maybe see that rate of growth slow or certainly eventually start to come down?
We fully expect it to the rate of growth to slow and for it to come down. I think that's perfectly normal. And our business is really a spread relative value business. So what we do is we buy run out engines, we rebuild them and then we go to market to sell lease or exchange. And so we don't need an increase in price to keep generating the business and the growth that we're forecasting. It's perfectly normal that, that would happen. There are 2 mitigants to that. One is that OEMs tend to raise prices regularly. So even if you have the same build on an engine, it's going to cost 7% more every succeeding year. So we do have replacement costs of assets that tend to go up. And then secondly, what I mentioned is that market share isn't a static number. It goes up as platforms age. So we fully expect parts price increases and market share gains to drive our growth, not price increases in secondary markets.
Could you maybe break out a bit more what you're thinking around the Chinese opportunity through Rome?
Yes. This is David. I'll take that question. So we think that Chinese opportunity for us is a growth market. Just to give you some data around it. So as far as the current 737 and A320ceo fleet, they represent about 20% of the world's fleet. However, if you look at their order book, their order book is around 4% of the total order book today. So what that means is these aircraft are going to operate much longer. And what that means is there's going to be more engine shop visits. So we see this as a growth opportunity. We're very excited about having the license because that allows us to be able to perform engine exchanges within China. And we've already started capturing some customers. So we're very excited about this opportunity. And again, it's a growth market for us.
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.
Do you think you can maybe parse out exactly how material this could eventually be? Like are you targeting a specific percentage of mix overall? I mean, are the margins in any way accretive to overall mix? How should we think about that from the numbers?
I believe we likely need another quarter or two to effectively understand the market. We have just begun our business this year, and we have a solid list of potential clients. Rather than rushing to provide a figure too soon, waiting another quarter or two would be more beneficial for us. I think our margins are good and will be impressive since this market isn't particularly price-sensitive. However, understanding the market size better would help us identify which customers might contribute significantly. There are some major clients that require a substantial amount of engines, so it's not a trivial number; it’s just about determining the scale.
Yes. Yes. No, that makes sense. And then if I could squeeze in another. Looking at the margin step down at AP, I mean, it's very clear that this was associated more one-off with a large North American order. But how should we expect the progression moving forward for AP as we go through the second half of '25 and into '26? I mean, are the prior targets that you've outlined in terms of step-up there still in play?
Yes, I believe that for the remainder of this year, we'll continue to operate within the historical range of 34% to 38%. Looking ahead to 2026, as I mentioned earlier, we anticipate that the margin will exceed 40% next year, and we are quite confident about that.
I am showing no further questions at this time. I would now like to turn it back to Alan for closing remarks. Thank you, Brianna, and thank you all for participating in today's conference call. We look forward to updating you after Q3.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.