is detecting “modest improvement” in commercial aftermarket sales as 2013 wraps up, giving the company confidence that the stagnation of the last three years could be supplanted by a steeper uptick in demand.
The company is projecting 3%-5% organic growth in total 2014 aftermarket sales, driven by a bump in air transport and regional () flight hours and continued solid demand for business aviation retrofits, modifications, and upgrades (RMU). Honeywell provided the details during its 2014 outlook presentation to analysts Dec. 17.
The commercial aftermarket accounts for about 10% of Honeywell’s annual revenues, and the ATR segment generates about two-thirds of the aftermarket dollars. After a 16% jump to $2.8 billion in 2011, the ATR market has been all but flat, totaling $2.9 billion last year and a projected $3 billion in 2013. The bottom end of its 2014 projection would mimic the current growth rate, while a 5% return would show improvement not seen in several years.
Part of the recent drag has been the impact of surplus parts, which has held down spares demand below the rate of flight hour growth. Honeywell CFO David Anderson says that while fourth-quarter air transport spares demand is still weak, there is an indication that sales growth is starting to “recouple” with flight hours, setting the stage for a better 2014.
Honeywell is projecting a 4.5% increase in commercial transport flight hours in 2014 and a 6%-8% increase in large cabin business jet hours—both of which will help drive growth.
On the original equipment side, the air transport segment is on pace to deliver $1.7 billion in 2013 sales, up slightly from 2012. Sales in 2014 will struggle to improve on 2013’s figures, which are considered strong despite a lack of year-over-year growth.
The news is similar on the business aviation side, with 2013 aftermarket sales coming in at about $1.5 billion, up slightly over 2012’s total. Business jet market original equipment sales are expected to be flat at $1 billion.
“We’re seeing growth in that mid- to large-cabin segment of the market,” Anderson explains, noting that RMU work helped bolster business jet segment revenues.
“That’s going to continue at a lesser rate, as we’re lapping a very big year in 2013,” he adds. “But we are going to see a further increase in RMU sales in 2014.”
The cautiously optimistic commercial aerospace outlook helps offset gloomier news on the defense and space (D&S) side. D&S, which generated 42% of Honeywell Aerospace’s 2012 revenues of $12 billion, will end 2013 down 1%-3%, the company projects. A repeat performance is on tap for 2014, despite recent signs that Congress may agree on a budget deal that eases mandatory budget cuts via sequestration.
“At this time, the likelihood of any meaningful change in our outlook based on the recent U.S. budget developments is small,” Anderson says. “We think it’s much too early to do given the details of what needs to be worked out in terms of the line items of the budget.”
Honeywell generates most of its defense revenue from U.S. programs. The combination of a possible U.S. budget deal and a projected 3% increase in “rest of world” defense spending has the company confident that the D&S dip may not be as deep as projected.
Anderson says that the 2013 year-end D&S trends are encouraging.
“We’re expecting moderation in the rate of decline in defense in the fourth quarter, reflecting better execution and stabilization in demand,” he explains.
Honeywell expects 2013 revenues to come in at or just below $39 billion, while the projected 2014 revenue range is $40.3 billion-$40.7 billion.