Honeywell Aerospace’s strengths in 2Q16
Honeywell’s (HON) lucrative commercial aftermarket business, which makes up 32% of its Aerospace segment’s revenue, saw an uptick of 6% in organic sales in 2Q16.
Lower oil (XOP) prices have allowed airline companies to increase the usage of older, less fuel-efficient aircraft without hampering profitability substantially. This continued use of older aircraft has boosted demand for spares and repair and overhaul services.
Flight hours, which are key indicators of demand for repair and overhaul services, are expected to edge higher and keep aftermarket business in good shape in the coming quarters.
Honeywell Aerospace weaknesses in 2Q16
Sales in the Defense and Space business fell by 10% on a core organic basis in 2Q16. This unit houses the commercial helicopter business, which has suffered due to the ongoing slump in oil (VDE) and gas end markets, wherein helicopters are used to transport personnel and equipment to distant oil platforms.
Around 26% of global commercial helicopters serve oil and gas platforms, and ~20% of this fleet has been idled due to overcapacity. Dana Fiatarone, vice president of Sikorsky’s (LMT) commercial business, stated that it could take three to five years to burn off excess capacity in the industry.
Improving safety standards, which call for pushing out non-compliant older helicopters, could become a mitigating factor to the ongoing oil and gas slump. Honeywell provides mechanical and avionics equipment to helicopter manufacturers such as Textron (TXT). It also provides aftermarket services to these manufacturers.