As Honeywell prepares to deliver the second set of full-year results since it began the reorganisation of its aerospace business unit in July 2005, the company has many reasons to be confident.
For a start, the fundamentals are working in its favour, and strong aftermarket sales and ageing fleets mean this strength is set to continue. The company has seen growth in its business aviation segment, and the reorganisation, shifting the division's emphasis to make it more "customer-facing", seems to be paying dividends, increasing customer satisfaction and convincing investors that it has created a simpler way of interacting with customers.
But the reorganisation was widely recognised as a necessary step in the light of the struggles all aerospace manufacturers faced after 9/11 and the distraction that the possibility of being taken over by General Electric provided. Disappointment on the Boeing 787 programme was also a wake-up call. Hamilton Sundstrand and Rockwell Collins won most of the major avionics and systems contracts for the 787 while Honeywell was named only as supplier of the aircraft's navigation suite.
So has Honeywell done enough to ensure that history will not repeat itself on future commercial aircraft programmes? Robert Gillette, president and chief executive of Honeywell's aerospace division, certainly sees the reorganisation process as a success so far. And his confidence that all is proceeding according to plan is matched by robust results. Of Honeywell's $31.2 billion estimated sales for 2006, aerospace is set to account for $11.1 billion, with a profit of between $1.9 billion and $2 billion, when it releases full year results for 2006 at the end of the month. The company as a whole is forecasting growth to $32.6 billion sales for 2007, with $11.7 billion coming from aerospace. Howard Rubel, managing director of equity research at US investment bank Jefferies agrees: "Honeywell took [the contract losses] as a sign that it had some customer and product issues," he says, adding that it has now recognised the need to focus on strengthening its offering.
The most obvious indicator of whether the plan is achieving its short-term aims is customer satisfaction: "We've had lots of positive feedback from customers," says Gillette, citing improvements supporting scheduled airline services and responses to aircraft-on-ground situations. Honeywell has cut the number of points of contact customers have to deal with.
Gillette acknowledges that there may be more work to do in his division, which he joined in January 2005. "We had the right ideas out of the gate - now we continue to refine and tweak them," he says. Cost-savings in excess of $100 million, as some management presence was removed as part of the reorganisation, were an incidental benefit rather than a driver, Gillette says. For Rubel, the improvement of the ratio between direct and indirect labour has been an important step. Honeywell invested an initial $60-70 million in the plan, and crucially, the changes have allowed the company to "improve how we can interact with our customers".
The restructuring "has the seeds of success", says Rubel. "It is not perfect, but it is progressing in the right direction." He adds that customers are experiencing more consistency dealing with Honeywell.
Meanwhile, in the near term, the business will continue to benefit from the general strength of the aftermarket sector, as ageing fleets make for more maintenance contracts. There is also set to be encouraging growth in business jets. Demand for the Boeing 777, from which Honeywell benefits both through its avionics and mechanical sectors, is set to help too. And the company is increasingly looking towards other high-growth markets, including the Czech Republic and Russia, where it is participating in the Sukhoi-led Superjet project, to develop its customer base.
Rubel warns that "finding another avenue for growth will still prove a challenge". However, there is confidence that the group can meet this challenge: the supply of the auxilliary power unit for the A350XWB is a significant win - "a ladder into the programme", Rubel says. Its success on the future replacements for the Airbus A320 and Boeing 737 will be the real test for Honeywell though.
Less involvement than anticipated on the 787 may give Honeywell short-term breathing space when it comes to margins, as its competitors struggle with the costs of R&D in the development phase. But of course, the absence of longer-term revenues will offset this, Rubel says. It is clear that it cannot afford to lose out again.
Source: Flight International