HoneywellsAerospace segment accounts for 40% of Honeywells revenues and forms around 43% of our $106 price estimate for Honeywell. The segment manufactures aircraft engines and equipment, and offers services such as maintenance, repair and overhaul for commercial and defense sectors. In 2014, Honeywells Aerospace segment has been performing well on the commercial front, but its sales to the Defense and Space sector have been facing downward pressure due to low U.S. defense spending.

The Aerospace segment has undergone some restructuring of late, resulting in the consolidation of its turbochargers business, which was earlier a part of the Transportation Systems segment. Turbochargers have been gaining a lot of popularity in automobiles due to their high efficiency and low emissions, leading to mid-single digit growth in 2014. In this article we take a look at the factors impacting Honeywells Aerospace segment in the coming years.

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Commercial Original Equipment and Aftermarket

Honeywells Aerospace segment generates around 46% of its revenues from sales to commercial original equipment manufacturers (OEMs) and aftermarket components. In the past few years, the segment has benefited from higher consumer spending driven by a recovery in the global economy. With an increase in air travel, aircrafts have had to endure more wear and tear, raising the need for maintenance and repairs. For Honeywells Aerospace segment, this has translated into higher sales of aftermarket components and maintenance, repair and overhaul services. Sales of aftermarket equipment have also benefited from aircrafts being regularly upgraded with latest equipment so that they remain efficient. The trend is likely to continue to have a positive impact on Honeywells Aerospace aftermarket equipment and components in the coming years. Honeywell forecasts its Aerospace aftermarket sales to grow at an average rate of 5.7% through 2018.

Sales to OEMs are largely dependent on supply contracts and growth in aircraft demand. According to Boeing, around 36,770 aircrafts will be delivered over the next 20 years, amounting to $5.2 trillion.The demand for more fuel efficient aircrafts and expansion of fleets will drive this growth. Given that Honeywells clientele in the commercial aircraft sector is comprised of major players such as Boeing, Airbus, Lockheed Martin and COMAC, who have a significant lineup of deliveries through 2018, Honeywells commercial OEM sales are well positioned for future growth. Some of Honeywell?s supply contracts for aircrafts that are scheduled to be delivered through 2018 are Bombardier Lear 70/75, Bombardier CL350, Airbus A350, Embraer 450/500, Embraer E2, Boeing 737 Max and COMAC C919.

Defense and Space

The Defense and Space sector forms 30% of Honeywells Aerospace revenues and its primary customer is the U.S. Department of Defense, which accounts for 75% of Aerospace defense and space sales.In 2013, Aerospaces defense and space revenue declined 4.7% as a result of a 6.6% decline in the U.S. defense outlay.U.S. defense spending declined 4.7% in FY 2014and will likely decline in FY 2015 as well, though with some moderation, which will likely continue to impact Aerospaces defense and space revenue. Despite the decline in U.S. defense spending, Honeywell expects its defense and space sales to grow in the low single digits, primarily due to growth in defense spending across the world, especially developing countries.For example, the new government in India increased defense spending by 12% to $38 billion.China also increased its defense budget by 12%, to $132 billion.According to Honeywells estimates, global defense spending (excluding the U.S.) is expected to increase 2.5% in 2015, which will drive positive momentum in its defense and space sales.

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What's Driving Honeywell's Aerospace Segment Going Forward?