Honeywell sees aerospace supply chain improvements in electronics for planes

Honeywell reports that aviation electronics production is a bright spot in the aerospace supply chain, showing significant improvement due to fewer raw material constraints, while engine component manufacturing remains challenging amid broader labor and material shortages. These disruptions are projected to cost airlines $11 billion this year, even as major suppliers like Honeywell Aerospace report robust margins, with its division achieving 25.5% in Q2, prompting scrutiny from IATA regarding supplier pricing power. This context is particularly relevant as Honeywell proceeds with its planned spin-off of the aerospace business.

Analysis

Honeywell's aerospace division reports a bifurcated supply chain recovery, with avionics and navigation equipment showing significant improvement due to lower raw material dependency. Conversely, critical components like castings and forgings for engine manufacturing continue to face challenges, exacerbated by persistent labor and material shortages across the broader aerospace industry. This uneven recovery highlights ongoing operational complexities for aerospace manufacturers.

The International Air Transport Association (IATA) projects over $11 billion in additional costs for airlines this year due to these supply disruptions. Despite airline operating margins forecast at 6.7%, major aerospace suppliers, including Honeywell Aerospace, are reporting robust profitability, with Honeywell's division achieving a 25.5% margin in Q2. This margin disparity has drawn scrutiny from IATA regarding supplier pricing power.

Amidst these market dynamics, Honeywell is proceeding with its plan to spin off its aerospace business into an independent entity, a move influenced by activist investor Elliott Management. This restructuring aims to unlock value, potentially allowing the aerospace unit to operate with greater focus and agility in navigating the complex supply chain and pricing environment, contributing to the positive sentiment observed for HON.

Key Decisions for Investors

• Investors should closely monitor the impending spin-off of Honeywell's aerospace business, as an independent entity could offer a more focused investment opportunity in a high-margin segment.
• Evaluate aerospace portfolio companies for their specific exposure to raw material-intensive components versus electronics, as supply chain recovery remains uneven and impacts operational efficiency.
• Analyze the long-term implications of supplier pricing power and its potential impact on airline profitability and the broader aerospace value chain, as highlighted by IATA.