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How Used Aircraft Could Drive Honeywell’s Growth

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Used aircraft could drive higher growth for Honeywell Aerospace

Honeywell (HON) Aerospace was Honeywell’s largest business segment in 2015, constituting 39.5% of total company sales. The unit provides mechanical and avionics equipment to airplane manufacturers, the space and defense industry, and flight operators. In this part of the series, we’ll look into some industry trends that could influence the business’s earnings in 2Q16.

Airframers will continue to face challenges in production ramp-ups as orders are postponed due to cheap oil prices’ allowing airliners (IYT) to fly older, less fuel-efficient aircraft profitably. The weak economic backdrops in countries with high GDP growth are also likely to lead to slower production rate increases in the coming quarters.

While Honeywell could see fewer original equipment orders, it could also see benefits from the increased usage of older aircraft. Honeywell derives 4.1% of its revenue from Boeing (BA) and 3.7% from Airbus (EADSY).

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The company’s aftermarket business is extremely lucrative and offers high margins. The increased usage of older aircraft is likely to boost its repair and overhaul aftermarket services. Aftermarket sales are expected to rise in the mid–single digits, offseting a mid-single-digit fall in equipment sales in 2Q16. Aftermarket sales in commercial aviation are therefore likely to be a bright spot for the Aerospace (XAR) segment.

Poor corporate earnings means executives will fly less

Honeywell manufactures jet engines for medium to large business jets. Data released by the Federal Aviation Administration point toward a fall in business jet usage both in the United States and internationally.

Slower corporate profit growth is expected to lead a fall in business jet use within the United States. Since business jets are billed in dollars, a stronger dollar may impact business jet sales in countries where economic growth continues to be poor.

US GDP is expected to grow at 1.9% compared to previous expectations of 2%–3% growth. After the unexpected result of the Brexit vote, forecasts for GDP growth in the United Kingdom and Europe have also been trimmed. Diminished use and production cuts could impact pricing and revenue in Honeywell’s jet engine business.

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