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Morningstar | Upgrading Airbus' Moat to Wide; Boosting A320 Deliveries in Later Years of Our Forecast. See Updated Analyst Note from 12 Apr 2019

We’ve moved our moat rating for Airbus to wide from narrow and are maintaining our stable moat trend rating. Our moat upgrade was predicated primarily on governance changes that are proving durable even amid a management change. Unrelated to the moat upgrade, we believe the outlook for the company’s competitive position has improved slightly in the narrow-body market due to Boeing’s challenges with the 737 MAX. As a result, we’ve increased our delivery forecast for Airbus' A320 series slightly from 2024 to 2027. The moat upgrade and greater number of A320 deliveries pushed up our valuation by EUR 3 and EUR 2, respectively. Our fair value estimate is now EUR 119 but we continue to view the shares as fairly valued.

Despite our previously held view that qualitatively Airbus deserved a wide moat, we had constrained the rating to narrow because of the management’s spotty record of value creation and our desire to see how the A350 played out. These concerns were coupled with questions on whether governance changes were durable. The orderly transition to new management--Guillaume Faury recently took over as CEO--and the concomitant elimination of the superfluous commercial aircraft CEO role reinforces our view that management will protect the moat. In addition, the achievement of operating profit break-even for the A350 about 12 months ahead of schedule and the difficult (but much-needed) cancellation of the A380 bolstered our thesis that Airbus will generate excess returns over the long term.

Prompted by the 737 MAX groundings, we’ve revisited our A320 production forecasts from 2024 to 2027, boosting our per-month production to an average rate of 61 over this period from 60 previously, noting that these rates use the 11.5-month production calendar at Airbus. We continue to envision production peaking in 2022 at 67 and then drifting lower until our midcycle year of 2028, which assumes 58 narrow bodies per month. These figures exclude the A220.

Our production increase is based on our view that Airbus will capture slightly more of the narrow-body market over the next decade than we previously anticipated, which will enable production rates to move a bit higher. We haven’t reduced our Boeing delivery forecasts in the later years of our model and believe that the company should deliver most of the MAX deliveries missed in 2019 by the end of 2020. Using a 12-month production calendar for Airbus instead of its 11.5-month one, we arrive at an average monthly production rate of 61 narrow-body aircraft from 2020 to 2028 (we've excluded 2019 because of the distorting effects of the MAX grounding) compared with a rate of 60 for Boeing. However, we assume the same normalized level of 55 monthly narrow-body deliveries for Airbus and Boeing (again, on a 12-month production calendar) starting in 2028.

Airbus' wide moat is built on intangible assets and customer switching costs. Airbus enjoys significant intangible assets from the technically demanding and highly regulated industries that it operates in and customer switching costs emanating from the high cost of failure associated with commercial aircraft, helicopters, and military hardware. Airbus protects its intangible assets through research and development spending, which averaged about 5.5% of sales from 2008 to 2018. In commercial aerospace, barriers to entry are imposed by the technical knowledge required to design, assemble, and certify large commercial jet aircraft. These barriers should not be underestimated; they span everything from building a skilled engineering and blue-collar workforce to managing a complex supply chain. One can observe the complexities inherent in developing and marketing a new aircraft by observing the challenges that Bombardier faced on the C Series programs, which suffered from significant cost overruns, delays, and few orders before Airbus took control of it. Similarly, the Chinese have faced certification challenges and nonexistent sales outside China with their C919.