Third Bridge 专家访谈讨论 Honeywell Aerospace 分拆后的长期供应链、NPI 与 OE 增长挑战

[[00:01:44]]
What did you see as Honeywell Aerospace's main products and services and its exposure to various end markets, given that it mostly dealt in the defence and commercial aftermarket? Could you talk to the history of Honeywell Aerospace under the broader Honeywell umbrella?

[[00:02:16]]
When we look at Honeywell, it's one of the larger aerospace leadership companies that's out there. Honeywell started its roots with Sperry Gyros all the way starting in like 1914. Then through various acquisition and divestitures, they have innovated, but also acquired various companies where it led them currently into a leadership position into three major segments. One is the electronic solutions where anything that's dealing with cockpit and the associated systems and then engines and APUs, and the third one would be control systems.

[[00:03:29]]
Honeywell Aerospace's spin-off was completed on 29 June 2026. What do you see as the larger takeaways or challenges with the spin-off as it relates to oversight from the parent company or organisational changes and the broader attrition and transition for the segment?

[[00:04:07]]
That's a very good question. The way it was structured previously, Honeywell Aerospace used to be one of the business segments within the bigger, larger Honeywell incorporate conglomerate. The way everything was structured within aerospace was, for example, when we look at the supply chain, anything that's operational from the supply chain standpoint, like owning the plants and operations within the plants, used to be within the control of Honeywell Aerospace. However, anything norms or standards associated with the supply chain used to be developed by the leadership and the resources that was at the Honeywell corporate. The corporate used to make those standards and norms that used to go across all of Honeywell different groups within the Honeywell. When Honeywell Aerospace was split or spun off, then there were two things that actually happened. One was it provided from the pros standpoint, it provided Honeywell Aerospace a greater flexibility to build the supply chain or the business structure or even SCA schedule executive approvals for various deals.

Honeywell Aerospace got the flexibility to mould some of the processes and standards that were more applicable to aerospace. However, at the same time, the broader knowledge and experience coming from corporate, from different learnings from other groups, that's going to be lost for the aerospace. There are both pros and cons associated with it. I believe in the longer run, Honeywell Aerospace will actually benefit from the spin-off because everything they are going to establish from now onwards, it will be specifically tailored to improve the efficiency and performance of the Aerospace division.

[[00:07:05]]
When would you expect Honeywell Aerospace's procurement and broader operations to be normalised? Would you expect this transition period to last 1-2 years?

[[00:08:02]]
Basically, from a procurement standpoint, I mean, Honeywell Aerospace has very strong tools and systems already in place where all the procurement processes are catered or adopted to what the aerospace needs. Even though some of the tools like ERP systems and forecasting tools, the BI tools, that are being used that came from corporate, they have been sufficiently modified to fit the aerospace. What Aerospace has right now is sufficient for aerospace to run in the same efficient manner as they used to run in the past. However, I expect Aerospace to make more changes to make those tools or processes that they currently have much more efficient in the next, I would say, 12-24 months.

[[00:09:14]]
You mentioned there were some parts that Honeywell Aerospace was buying from the parent company. Do you see the biggest challenge in terms of changes to operations, such as procurement, being some niche components?

[[00:09:48]]
Yes. The niche components, I don't think that would be a problem. The biggest challenge would be to establish anything, the processes, the standards, norms, that's associated with running various complex plants efficiently. Now all of those are coming into aerospace, and they have to continue running those processes and making those processes more efficient. That's where the learning curve would be, how Honeywell Aerospace is going to take what they have right now that came from corporate, modify those or take those and start enhancing them or even managing what they currently have because whatever was provided from corporate as (inaudible 10.46), all that responsibility is within Honeywell Aerospace right now. Previously, Honeywell Aerospace used to gain some from the learnings that corporate used to see from other divisions of Honeywell, where like SPS or HBT, Honeywell Building Technology Solutions. Those learnings used to come into aerospace as well. Now those learnings are not going to come anymore and Honeywell has to learn from within their own system.

[[00:11:23]]
What do you make of the timing of the Honeywell Aerospace spin-off within the context of the broader aerospace supply chain and through the volatility that we saw post-pandemic and more recently with tariffs and the supply chain concerns from the Middle East conflict?

[[00:11:59]]
There are two things that Honeywell Aerospace had struggled in the last few years. One is from the innovation standpoint, where new product has to be innovated and those new products actually becomes NPI, new product introductions. That would aid the incremental organic growth for Honeywell, both on the OE side and the aftermarket side. That NPI, RMU pipeline has dried up post-COVID. That has to be improved in the next few years. The second thing is, like you said, there have been quite a few challenges on the supply chain standpoint because of the suppliers and sub-suppliers post-COVID where some of the suppliers went bankrupt and the production was reduced quite a bit during the COVID period and the ramp-up was very steep. Nobody expected that the ramp-up would be that steep from the production standpoint. The productivity gains Honeywell Aerospace wanted to see was not completely on par with the improvement in the flight hours and improvement in the deliveries from the OEMs. The way I strongly believe that spin-off is going to help Honeywell, both from the NPI standpoint and also from the improvement on the supply chain standpoint. I'll start with the explanation on why Honeywell Aerospace would benefit from the spin-off from the NPI standpoint.

When we look at the aerospace, for any new product introduction, the roots of the new product introduction starts from something called advanced technology team where this team consists of a lot of scientists where they're looking at the broader airline and business general aviation and defence market, looking at the problems that the customers are facing and they are trying to solve the problems. The way they solve the problems is by innovating new technology that would resolve the current issues. For this one, the advanced technology team needs funding that will aid for the development of the technology. Once the technology is developed, which is a long-cycle process, which may take anywhere from two years to four years, the technology goes into a product development and the product development cycle is another 2-3-year timeframe. Once the product is developed, it has to go into an aircraft as an STC, which is a supplemental type certificate, to modify the aircraft to introduce the new technology.

Once it's introduced and certified on the aircraft, it could be sold. The process is so long, which may take anywhere from four years to seven years to introduce an NPI. Honeywell Aerospace struggled quite a bit in the past with corporate, where Honeywell Building Solutions, Speciality Materials [sic], Honeywell Aerospace, all these divisions were competing for funding. When corporate is looking at ROS, for a quick ROS, the funding used to be inclined towards the divisions that was providing a faster turnaround. Now with the spin-off, Honeywell Aerospace has the autonomy to invest in this long-cycle development and to improve their NPI that will aid in the long-term revenue growth of Honeywell Aerospace. I know it's a long-winded answer, but I thought it's very important to explain why spin-off is going to help Aerospace.

[[00:17:00]]
In Honeywell Aerospace's 2026 Investor Day report, R&D spend was roughly 10% of sales, and over 50% of that was customer-funded. Is there any risk from customer R&D demand for Honeywell products? Is there any risk of that funding potentially not coming through on a yearly basis?

[[00:18:06]]
When we look at the funding source for Honeywell, there are various projects that Honeywell works on and more than 60% of the funding comes from projects that Honeywell works, for example, on the defence side, where based on if the project comes under FAR Part 12, FAR 15, Honeywell, it's called cost plus. That means if Honeywell is spending USD 1m, they would be paid 10% or 5% above the USD 1m. Most of the 60% funding is going or funding that's coming into Honeywell Aerospace is going into these kind of projects. These kind of projects don't usually support these NPIs, new product introduction. The remaining 40% where Honeywell is actually investing is the funding that actually supports the NPIs and Honeywell owns the IP. Usually in the aerospace, the client, customer or company that's funding owns the IP and the company that owns the IP owns the NPI.

The challenge that Honeywell has is how much funding Honeywell Aerospace is actually investing towards the development of this IP that would create the NPI vs the total R&D funding that Honeywell has on its financial statement that may not be supporting the new product introductions. I know Honeywell Aerospace is working to ring-fence some of these investments so that these NPIs would be developed because right now, there is a dip in the NPI, there is a dip in the RMUs and Honeywell Aerospace is struggling a little bit. It's a Catch-22 situation for aerospace because currently, if Honeywell Aerospace, not if, Honeywell Aerospace don't have enough RMUs to sell, that means the revenue and margin is not coming in and that margin, if it's not coming in, then there is not enough money to be used for R&D, which becomes an expense. That's the situation Honeywell Aerospace is going through at this point.

[[00:21:48]]
Circling back to Honeywell's overall exposure, how important and challenging do you see commercial OE [original equipment] exposure and the future growth of that being for the company? Aerospace is about 15% of its overall portfolio currently. How should that mix, either from a volume or revenue standpoint, look long term against Honeywell's exposure to defence and the aftermarket?

[[00:22:30]]
Yes. The OE business is extremely important. Right now, if I remember the numbers correctly, OE is about 15% of the total revenue. The OE, I would say, it needs to be around 20-25% because what happens is the OE business that Honeywell had coming from late 1990s, 2000s is the business that Honeywell is reaping… That's the OE business that was in 1990s, 2010s. Honeywell is reaping the benefits on the aftermarket side right now. Just to take an example, TFE731s. That's thousands of engines out there, and they were introduced in the 1990s, 2000s. When we look at the aftermarket on the engine side, which is a major contributor of the margins on the aftermarket, most of the revenue and margin is actually coming from the TFEs that were introduced on the aircraft in late 1990s, early 2000s and 2010s. However, if the OE business is shrinking now to 15%, and it could be even a little bit lower if Honeywell Aerospace doesn't have many wins right now. If the OE business shrinks, then the effect of the shrinking OE business would be seen probably in 2030 and beyond. That's the challenge right now from the OE business standpoint. It has shrunk a little bit, but Honeywell Aerospace has to find a way to win more of the OE business and make it a larger percentage of the portfolio to show the strength of the revenue in the long term.

[[00:25:11]]
What would be the factors for Honeywell's OE mix to actually be driven higher? 2025 and 2026 seem to be pretty pivotal years in terms of ramping production on new builds. How much of the mix – if it were to grow to 20%-plus – would be because of supply chain improving vs material strategic changes that the company is making?

[[00:26:05]]
When we look at the production rates, it has been increasing across a transportation segment, which is mostly coming from Boeing and Airbus. Also the production has been increasing from various business general aviation OE manufacturing companies as well like Gulfstream, Textron and so forth. Everybody, they have very strong backlog. As the production is ramping up, that means Honeywell is delivering more volume. There is sufficient revenue growth is coming from the increased volume. That's one. That's on the OE side. The second thing, the revenue on the aftermarket, it's coming from the increase in the flight hours. The airlines are flying more, the business general aviation operators are flying more as they fly more than on the aftermarket side, they buy more spares. There is more R&O, repair and overhaul and also the services programme where Honeywell calls it MSP, which is maintenance service plan, which is also called power-by-hour. That means more flight hours the customers fly. They pay more, I mean, the cost per flight hour would be the same, but the volume of the flight hours increases, so the revenue increases on the aftermarket side. However, the larger increment of the growth, if Honeywell Aerospace needs to grow faster than the market. They're growing at the same pace as the market because OE production rate is increasing, everybody is flying, it's the same thing. They're at the same pace.

Then they need organic NPIs, new product introductions. The new product introductions are nothing but new innovation, new leading and bleeding technology that differentiates Honeywell products, for example, like avionics system. Honeywell has thrived using Epic avionics system that's on all of the major business general aviation aircraft. Now they are working on Anthem, which would differentiate against the competition. However, the Anthem with all the technology that Honeywell wants to introduce, they have to mature enough so that the system becomes certifiable. Honeywell has been spending a lot of money on the Anthem avionics system. However, there has been a lot of technological challenges that aerospace is facing. By the time the Anthem certifies, then if it becomes, let's say, Anthem certifies in 2030, then that means Honeywell Aerospace has a gap from 2026-30, and they don't have a differentiated product to offer right now. That means if they're competing for Boeing next-generation single-aisle, Honeywell Aerospace will have a challenging time to differentiate the current offerings against the competition to win positions on the Boeing next-generation single aisle. That's where I go back to the NPIs where Honeywell Aerospace, I mean, has to gain a lot of momentum using the spin-off and focusing on getting these NPIs differentiated technologies to market faster.

[[00:31:03]]
Is it that Honeywell needs to be spending more? Is it just another approach to solving a different issue? Is it getting more into the business market or leaning more into defence? What would lead to better OE penetration? Is it just that the company needs to be spending more or be a little more agile? What materially needs to change other than just spending more?

[[00:31:57]]
R&D is an important factor. That's one. The R&D has to be ring-fenced. The R&D that Honeywell Aerospace is spending vs a customer-funded R&D, what Honeywell would be spending, that number would be critically important because that's the number that's going to drive the innovation side, IP side and becomes an NPI. That's one. The second thing is the resources. It's a well-known fact that during the COVID timeframe, a lot of aerospace companies has cut down on their R&D activities because everybody assumed or it was unprecedented times, so the companies did not know how long the COVID challenges would last. During that timeframe, Honeywell Aerospace did lose quite a bit of resources from the R&D teams, long-standing knowledgeable resources.

They have to keep those resources intact and they have to have those resources focused on the right projects because those resources that works on the R&D portion on the innovation is pretty important because the same resources could actually go into a regular product development vs innovation. That's a second thing, getting the right resources, working on the right projects. The third one is partnering. There are a lot of companies coming up. There is a lot of innovation that's happening. There is new markets coming up, for example, like autonomy, urban air mobility, electrification of the aircraft. Honeywell Aerospace has to choose which of these new segments would be a winner and that would provide Honeywell a longer-term opportunity. If they focus on the wrong one, even if they are spending R&D and they focus on the wrong segment, then the results, I mean, they would struggle with the innovation pipeline.

[[00:34:52]]
In terms of the growth between OE and aftermarket, OE is expected to grow about 6-8% and aftermarket is expected to grow mid-to-high-single digits. What would be the drivers for OE growth to continue to slow down while the aftermarket continues to in the near and long term? How would you grade Honeywell's ability to sustain these rates even through the company's current transition and spin-off period?

[[00:35:44]]
OE business is very straightforward. It's everything that Honeywell has a contract for different aircraft with different OEMs. The OEMs production rate times the deliveries. The OEM production rates are increasing. That's what Honeywell Aerospace is banking on the mid-to-high-single-digit growth. That's mostly coming from the increase in the production. However, there is also the value associated with the system that Honeywell sells to an OEM. For example, Honeywell sells Epic avionics systems for Gulfstream platforms like G700, G800, G600, G500. Now recently, Honeywell announced that they also won the G300 platform, which used to be G280 in the past. They displaced a competitor. That's actually a great win for Honeywell. Let's say, Honeywell is selling an avionics system at X dollars for Gulfstream G700 aircraft. The way Honeywell can increase the value and increase the price is by introducing additional new and differentiated functionality into the existing shipset that Honeywell delivers.

Honeywell announced Surf-A, Surf-A functionality. When Surf-A functionality is introduced into Gulfstream platform on the G700 aircraft, the value of the shipset increases. That means Honeywell can actually price the shipset higher. The price increase can contribute to some of the mid-to-high-single-digit growth Honeywell is expecting. Those are the two places where the growth is going to come from for the OE standpoint. Again, it goes back to the NPIs because there is no NPIs, the value of the price doesn't happen. The OE, I think, it will be a little bit challenging for Honeywell to get there. In my opinion, However, on the aftermarket, there are various avenues Honeywell can use because at the discretion of Honeywell, they can increase the prices, they can bring in a few more RMUs. They can bundle RMUs to increase the number of sales. There are new channels that they can create using the channel partners or the dealers. There are things that they can do in the aftermarket, they can achieve the level of growth that they have advertised.

[[00:39:36]]
In engines and controls, Honeywell mentioned earnings will be growing greater than 8%, with electronics growing slightly below that, given it's less exposed to the aftermarket in 2026. Do you see most of that earnings growth being due to pricing in the current environment, or just through larger operational changes or upselling? What improvement or growth do you see coming through pricing vs other levers in the aftermarket specifically?

[[00:40:18]]
The price has been an important lever that Honeywell has used. When we look at the aftermarket, almost 30% of the aftermarket revenue comes from the power-by-hour programmes. The customers are usually locked in once they sign a contract because these contracts are five-year contracts. There is a clause in the contract that states the price increases that Honeywell can do. However, after COVID, Honeywell Aerospace was able to justify higher price increases, if we look at the market price in 2021 vs 2026, Honeywell has been able to achieve more than 20-22% price increases on the power-by-hour programme. They have a larger flexibility to do some of the price increases. I believe that's where the levers are for Honeywell. The other lever that Honeywell has used in the past few years where they have done, I would say, they have done some of the divestitures where they call it like licensing LTLs, where if a product line is falling to the bottom of the 80/20 analysis, those product lines are getting licensed out. When they get licensed out, the company that's buying these licences, they pay tens of million dollars to get these licences. That's contributing to some of these revenue growth as well in addition to the price increases.

[[00:42:43]]
In terms of expanding aftermarket specifically in electronics, avionics, sensors and so on, how feasible or capital intensive would expansion be for Honeywell – if the company mentioned it's less exposed to aftermarket compared to other aspects of the business?

[[00:43:18]]
The reason it's less exposed on the aftermarket is the customers, once they buy the aircraft, the systems that's on the aircraft are certified to a certain level. When the customer flies, they have to buy the products, either spares, R&O, power-by-hour. They have to buy from Honeywell. As long as the customer is flying, the revenue would come to Honeywell. That's the reason I believe Honeywell is less exposed on the aftermarket. However, on the OE side, if things don't go really well for any reason between the OE and Honeywell, then the OE can release an RFP and put the system out for bid and they can choose a different supplier. It's not easy to certify change systems. However, OE has the knowledge, experience and capability to change the systems, but individual customers that are in the aftermarket, they don't have the same kind of flexibility.

[[00:45:00]]
You don't see the company materially growing its aftermarket exposure in electronics at all. Is that correct?

[[00:45:09]]
Correct. Yes.

[[00:45:14]]
Where do you see Honeywell best and worst exposed by actual platforms or aircraft? It seems that the one glaring gap, at least, for engines and control systems would be the Boeing 787 and some wide-body programmes. What does the company have to do to limit that gap for future variants? Is there any reasonable expansion that Honeywell could do by platform in the near term?

[[00:45:54]]
It's very true that the positions that Honeywell had, let's say, on other Boeing fleets vs 787, it's not as strong as the other fleets. Some of the things Honeywell is doing right now is the systems or the new systems that they're developing using the R&D, they're ensuring those systems can go across multiple segments of the market. For example, when the RFPs would be released for the Boeing next-generation single-aisle platform, one of the RFP would be for displays. Honeywell, in the past, it had established displays on most of the Boeing. It got replaced by Collins displays. Now Honeywell would be aggressively fighting for the displays' position on the Boeing next-generation platform. The way I see they would be able to compete the position is when Boeing releases the RFP, some of the critical to quality… I'm just taking displays as an example.

Some of the critical quality for displays would be it has to be lower weight, higher resolution. It doesn't have to… Lower power consumption and so forth. Also price would be a major factor. Honeywell is developing Anthem avionics system. The displays that they're developing in the Anthem is like a Lego. The whole back-end electronics would be a system, but Honeywell is developing various size displays for Anthem. Those are lighter displays, higher-end displays, and the Anthem system has been primarily developed for business general aviation. However, the displays that they're developing, Honeywell Aerospace is developing, for Anthem could be used to compete against the Collins or other competitors in the market space on the next-generation Boeing platform. That's the philosophy Honeywell is adopting where they are looking at various broader segments and the technology they are developing could be applied across various segments, including defence and space as well. That's what Honeywell is working to develop a competitive position for the future pursuits.

[[00:49:31]]
Thinking about the overall aftermarket demand, what impact do you see in 2026 with elevated fuel costs and lower departures, and in some cases, extended retirements on aircraft? How does the new build environment impact pricing in the near and long term for the aftermarket?

[[00:50:13]]
From the pricing ability standpoint, like I mentioned, Honeywell has a little bit more flexibility to increase or change the pricing on the commercial and the defence aftermarket. Also, Honeywell has flexibility to bundle some of the aftermarket products. If one is moving slower, they can bundle with a faster-moving product, make a value-added bundle and they can move the bundle that will aid in the additional revenue. From the premium standpoint, always the premium of the pricing comes from the value that the Honeywell provides to the end customer. For the end customer, it's the value and NBA, next best alternative. Unless Honeywell keeps up from the technology standpoint and it always offers better value against what competitors are developing, the price increase would be limited. I believe the price increases that Honeywell Aerospace has done in the last few years has, I wouldn't say it hit a ceiling, but further increases in pricing may offer diminishing returns unless they increase the value and the value increases the pricing in the aftermarket.

[[00:52:37]]
Honeywell's management stated that it's striving to have two-thirds adoption of customers upselling to RMU [retrofit, modification and upgrade] programmes and new products. What mix of the company's customers today do you think are actually upselling into new products? Is it reasonable that Honeywell could move towards two-thirds adoption with its existing customers on these new products?

[[00:53:21]]
The new products that Honeywell Aerospace, the new products would be coming out there are multiple opportunities for Honeywell to increase the penetration into the market, like you said, two-thirds at least. There is, obviously, value and price. The price has to be matching… It's a value-based pricing. I think Honeywell Aerospace is one of the few companies that does a great job with the value-based pricing. With the strong positions that Honeywell has with OEMs like Gulfstream, Dassault, Bombardier, Embraer, the customer segments are loyal customer segments. On the higher segment of the market, which Honeywell has positions on most of the higher segment aircraft, the price sensitivity of these customers, they're not price sensitive. The adoption, if the products are coming out at the right time, the adoption can be increased much higher than what Honeywell Aerospace has seen in the past.

[[00:55:12]]
Regarding additional bolt-ons or M&A, what makes sense for Honeywell to pursue now? How would those bolt-ons contribute to the portfolio either through operational efficiencies or other capabilities and new platforms, or just better margin or pricing opportunities?

[[00:55:48]]
From the bolt-on standpoint, from the M&A, there has been a lot of newer companies, newer innovation that's coming up, with the electrification of the aircraft, urban air mobility, where Honeywell hasn't traditionally played. Those new segments Honeywell has… There is a higher potential for Honeywell to do M&A and the new segments that's coming up, Honeywell can play a leadership role there. With respect to margin and pricing opportunities, the new NPIs, even though, in my opinion, Honeywell will see a dip in the new product introduction, introduction of the RMUs, in the next 2-3 years. If Honeywell focuses and they are able to bring new NPIs to market by 2029 and 2030 timeframe, that will aid in a higher margin and pricing opportunities. Honeywell also has to work towards the operational efficiency because even though there are a lot of different manufacturing plants that's trying to improve the efficiency to be on par with the increase in the demand, they're not able to catch up. That's another place where Honeywell can contribute, leverage.

[[00:57:58]]
What do you see as the biggest risk to Honeywell Aerospace through the spin-off? Do you have any final thoughts and questions to keep in mind for investors?

[[00:58:28]]
Honeywell Aerospace, it was and it has been and it will be a technology leader. It's a very well-respected company. They have very strong mind, resources, experienced engineers that would aid for the improvement of the aerospace in the future. Even though, in my opinion, Honeywell would see a little bit dip from the innovation standpoint because all the innovation, they're long cycle. The innovation for the NPIs to come out, it takes a longer cycle. That's where the dip would be in the next couple of years. However, I see a stronger long-term growth of Honeywell Aerospace with the projects that they have, with the products and positions that they have with the OEMs and the defence market that they are currently focusing on. I think in the longer term, Honeywell Aerospace would be very successful.

[[00:59:54]]
All right. Awesome. We will now conclude the Interview. I appreciate your time and input. Really enjoyed the conversation. I thought it was super helpful and super interesting. I appreciate you hopping on. Thank you again. We'll be in touch.

[[01:00:07]]
Okay. Thank you so much. Thanks for having me today.

[[01:00:09]]
Thanks. Have a good one.

[[01:00:10]]
You too. Thanks. Bye-bye.

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