The cases for buying stock in Airbus (EADSY -0.45%) and Boeing (BA -0.31%) are pretty similar. While the commercial aviation industry has been dealt a severe blow by the COVID-19 pandemic, it will surely recover over time, and investors are getting an opportunity to buy into the stocks at a significant discount. Let's take a look at which of the two stocks is a better buy on a risk/reward basis.

The case for buying both stocks

Many industry insiders are estimating that commercial aviation won't return to 2019 levels of activity until 2023. Indeed, Boeing CEO David Calhoun said as much on the last earnings call: "[W]e currently estimate it will take around three years for travel to return to 2019 levels. And it will be a few years beyond that for the industry to return to long-term growth trends." Meanwhile, Airbus CEO Guillaume Faury thinks it will happen "somewhere between 2023 and 2025."

Airplanes leaving contrails.

Image source: Getty Images.

The exact timing of a recovery is impossible to predict because it depends on a host of factors relating to the pandemic, not least of which are government restrictions on travel. Moreover, given the precedent set by the global reaction to COVID-19, it's possible that future outbreaks will be dealt with in a severe and pre-emptive fashion. That's something that would hurt the industry again.

It's still a pretty safe bet that the industry will recover, though, and if either stock can get anywhere near the kind of earnings/free cash flow (FCF) generated in 2018/2019, then they will look like a very good value. For example, Boeing generated $13.6 billion in FCF in 2018 (the year before the 737 MAX was grounded), representing over 15% of its current market cap. Similarly, Airbus generated 3.5 billion euros in adjusted FCF in 2019 and had expected 4 billion euros in 2020 before the pandemic struck. The latter figure represents 7.4% of Airbus's current market cap.

No shortage of headwinds in commercial aviation

Based on the numbers above and the assumption that commercial aviation will recover in a few years, both stocks look like a good value. However, there are numbers, and there is believing in the numbers. And frankly, the list of potential headwinds for both Boeing and Airbus is lengthy.

Aside from a second wave of the pandemic and associated travel restrictions, there's also the financial state of the airlines to consider. In addition, Boeing and Airbus will have to make financial concessions to customers, and services revenue can come under threat as older planes are retired. Finally, the pandemic may well have a lasting effect on the public's willingness to fly.

All of these considerations need to be made before buying either of these stocks, but if you are positive on the industry, which stock is the better buy?

Two reasons why Airbus is a better buy

On a risk/reward basis, investors will probably feel more comfortable buying Airbus. Boeing has endured a seemingly never-ending series of issues that raise questions about how the company is run. Boeing's prospects have also been more negatively affected by the COVID-19 pandemic, and that's likely to continue in the near future.

The 737 MAX debacle is a huge issue in itself, but there's also the problem of management's credibility, particularly regarding a return-to-service (RTS) for the 737 MAX. Widely criticized former CEO Dennis Muilenburg told investors a RTS would occur in October 2019, but the company is still waiting for it deep into 2020.

Aircraft control tower.

An aircraft control tower. Image source: Getty Images.

It doesn't stop there. Airlines have had to ground some 787 planes and manufacturing issues have been found. Meanwhile, the KC-46 tanker (a military aircraft) has had a raft of issues over the years. Simply put, investors can be forgiven for throwing in the towel on Boeing, and the company really needs a blemish-free period in order to restore confidence. 

Turning to the second point, the recovery in commercial aviation is widely seen as being led by domestic flights rather than international, and that means narrow-body demand is likely to recover quicker than wide-body. That's obviously a concern given that the 737 MAX is the aircraft intended to compete with the Airbus A320 NEO in the narrow-body market.

Moreover, the slowdown in the wide-body market couldn't possibly have come at a worse time for Boeing. Management had high hopes for the new 777X aircraft to spur a new round of wide-body replacement demand, while also benefiting from ongoing sales of the 787. Both aspirations will be severely challenged in the aftermath of the pandemic.

Looking ahead

All told, to buy either stock you will need to be bullish on commercial aviation. However, investors also need to consider the downside risks, and there appear to be more of them with Boeing than there are with Airbus right now. On that basis, Airbus is the better buy.