Morningstar | Safran report
As a leading aerospace engine supplier, Safran is well positioned to benefit from favorable growing air transport demand; IATA predicts passengers’ numbers could double by 2037. The Asia-Pacific region is the key driver to global air travel spurred by economies in the region experiencing solid growth and middle-class expansion. Technology improvements are another demand driver for Safran’s engines--higher fuel efficiency and lower emissions encourage engine upgrades. Safran, with its main joint venture partner GE, has introduced the latest generation of engines, the LEAP program, which delivers more economical and environmentally friendly powering options for aircrafts. The firm has secured presence in the latest commercial narrow-body aircraft (single-source Boeing 737 MAX, single-source Comac C919, and dual-source Airbus A320neo series) and participates in the wide-body engine segment, via its exposure to GE90 and GE9X powering the B777 and B777X. The high margin aftermarket business is expected to flourish in the upcoming years, with large maintenance activity ahead for the CFM56 fleet. Traffic growth and high aircraft utilization rate will also secure growth in the other business divisions--Aircraft Equipment, AeroSystems, and Interiors. These divisions are more sensitive to competitive pressures; however, Safran’s reputation, cross-selling capabilities, and direct exposure to the final customer via the ex-Zodiac businesses should help it to defend market share.We see potential headwinds for Safran: the B737 Max grounding, vertical supply chain integration ambitions from Boeing, and increased regulatory scrutiny in the maintenance market. We believe the last two headwinds do not pose a significant risk to the moat protected engine business, which is also the main driver to Safran’s long-term ROIC driver due to the long engine program lives generating decades of lucrative spare parts demand. However, we estimate B737 Max represents around 60% of LEAP current backlog. Thus, airframer’s increasing delay in fixing the current trust crisis can negatively affect Safran’s top-line growth (please see our Risk and Uncertainty section for more details).Safran designs, develops and manufactures high technology electronics through three businesses: Aerospace, Defense and Security. Aerospace includes Aerospace Propulsion (propulsion systems for commercial aircraft, military transport, training and combat aircraft, rocket engines, civil and military helicopters) and Aircraft Equipment (mechanical, hydromechanical and electromechanical equipment); Defense (optronic, avionic and electronic systems); and Security (biometric technologies for fingerprint, iris and face recognition, identity management products, access management and transaction security, including tomographic systems for detection of dangerous or illicit substances in baggage).
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